Intuit undertook major product changes in 2014, resulting in an accounting shift to “ratable” revenue recognition for the company’s desktop products.
Looking back, it was a bold move, and that’s how we framed it: To further accelerate Intuit’s shift to cloud-based services, we’d make changes to our desktop software products to permit us to recognize revenue over time, instead of upfront at the time of purchase.
For 32 years, we had navigated technology platform shifts — from DOS, to Windows, to the web. Through each, we had seized the opportunity to reimagine our offerings and extend our market leadership. We knew at some point the move to a recurring revenue model would be the right one for our customers and the company.
But timing is everything. After years of considering the move to a recurring revenue model, the timing seemed finally right.
Historically, the developers and designers who built the software fashioned the products to enable us to take all of the revenue upfront, according to standard GAAP accounting guidelines. This led to product design and a universal license agreement with customers that required us to deliver software code upon shipment and limited the period of time in which customers could get certain enhancements and support for free. That, in turn, limited our ability to provide ongoing services and product enhancements between purchases. Essentially, for accounting purposes, we had to meet a fairly rigid set of criteria in the product to enable us to take revenue upfront.
On the other hand, if a vendor is committed to providing ongoing services and product enhancements, it must follow accounting rules requiring it to recognize the revenue ratably, or over the time the enhancements and services are delivered. Since our product mix had begun to shift more steadily toward online offerings anyway, the move made more and more sense.
Indeed, our product offerings had already started to move in that direction: If a customer chose QuickBooks Online instead of QuickBooks Desktop, rather than taking $300 or so when the customer purchased the software at retail, we would take around $10 to $20 a month over the life of the relationship. We calculated that the trend probably cost us a couple of points of reported revenue growth a year in the near term.
We also began to find that when we talked to analysts and investors, on the surface they we’re seeing revenue growth that was perhaps slower than they expected. Internally, we knew it was because of the growing shift from desktop to online, but it was hard for an outside person like an analyst to see, understand, and verify.
For those reasons, the timing was right — the move would allow us to focus more as a company on software-as-a-service, with accounting aligned strategically for Intuit’s future. And it would let our desktop software look and feel more like software-as-a-service, with ongoing services and enhancements provided year round.
We laid the change out for our board of directors in July 2014, a time when we traditionally present our annual plan. Some directors thought it was the right thing to do, but were concerned that the change might be too complicated to understand. Others felt that because we were also making organizational changes at the time, the accounting change would add undue complexity to the message.
After a few hours of tough conversations, CEO Brad Smith went to each director for their input, feedback, and the criteria needed for their support. One request was that we reach out to external parties for their reaction. As a result, we spoke to a number of experts in the technology and investment spaces.
Each person said the move made sense; it was complex but we could explain it. It helped that a few other big companies had gone through similar changes — Adobe and Autodesk, for example.
There were different points of view about what might happen to Intuit’s stock price. Some said it could go down 10%. I don’t think anybody predicted it would go up, which is what happened. But even those who predicted it would come down 10% said it would be short-term — that investors would understand it, they would adjust, and the stock would later come back just fine.
How do you know if a move of this nature is right for your company? We were convinced the changes would prove to be a “delighter” for our customers, our employees, and our stakeholders. For us, it had to be good for all three key constituents. Otherwise it would have just felt like financial engineering. Here are some of the lessons I learned:
Timing matters. We had reviewed an analysis of this potential change every spring for several years. But just because it was a good idea in 2014 doesn’t mean it would have been a good idea five years ago. What had changed? A number of things converged — our own transition to software-as-a-service, the organizational realignments that we made to align with that strategy, and other companies having gone through it before us.
Communicate well, and listen. Don’t underestimate the amount of communication you need to do. You can get so close to a situation you just assume your choice is right. Your board or advisers may not have the same context. I underestimated how hard it would be for others to grasp. In hindsight, we should have done a lot better job preselling and helping others get context. A key turning point for us was when the board saw that we were open to their feedback and suggestions. Seeking outside advice when the directors asked for it wasn’t a check-the-box exercise. If the people we talked to had expressed doubts, we would have taken a different approach.
Let them see in. Analysts have a hard job. They don’t have the context we have and yet they are expected to have a point of view about our performance. You need to offer as much information as you possibly can to help them evaluate the company’s performance. In our case, we added a new metric and forecasted the subscribers we expected on QuickBooks Online along with some information around revenue per customer. But it really wasn’t granular enough. If I had to do it over again, I’d probably spend more time quantifying the lifetime value of a customer, or the lifetime revenue.
In the end, though, the keys to success were straightforward: transparency, trust, and timing.
Neil Williams became Intuit’s senior vice president and chief financial officer in January 2008. He is responsible for all financial aspects of the company, including corporate strategy and business development, investor relations, financial operations, and real estate. Before joining Intuit, Williams was the executive vice president and chief financial officer for Visa U.S.A. Williams is also a member of the board of directors of RingCentral, a provider of cloud business communications solutions, and Amyris, an integrated renewable products company.