NetSuite tops Wall St estimates, claims cloud ERP tipping point

SUMMARY:

It’s still making a loss, but NetSuite’s cloud ERP revenue growth is enough to keep Wall Street on side.

In a week when SAP found the transition to the cloud to be sapping (sorry!) its bottom line, ERP rival NetSuite is making hay today after beating analyst expectations with its own third quarter numbers.

zachNetSuite’s still making a loss, this time of $29.3 million on total revenue of $143.7 million.

But Wall Street had been looking for four cents a share on $141.6 million in revenue. So posting 11 cents a share on a non-GAAP basis on revenue of $143.7 million made the market happy and sent NetSuite’s share price upwards.

Never one to hold back when it comes to rattling the sabre in the direction of the German giant, CEO Zach Nelson was quick to suggest that the contrast between SAP and his own firm was telling:

The changing of the guard from software design to address the challenges facing companies 20 years ago to NetSuite’s cloud software designed to run a modern business is starting to play out publicly for all to see in the financials of companies.

SAP announced their cloud business is now not only causing a hit to revenues but it’s also negatively impacting their margins. Declining revenue and declining profitability does not sound like the cloud has been good for SAP.

Other NetSuite numbers of note:

  • Total revenue of $143.7 million was up 9% sequentially and up 34.4% over Q3 of 2013.
  • This was the ninth consecutive quarter with a year-over-year growth rate and total revenue of more than 30%.
  • Recurring revenues from subscription and support grew 9.4% sequentially and 35% over the year-ago quarter to $115.8 million.
  • Non-recurring revenue was $27.8 million for the quarter and grew 32% year-on-year
  • 380 customers moved to NetSuite across various verticals including retailing, manufacturing, technology and wholesale distribution.
  • The company saw a record number of $1 million deals.

Nelson argues that cloud ERP has reached a tipping point in terms of market awareness:

If possible, [customers] want to choose cloud first and they also, I think, understand the difference between what a real cloud solution is and what a non-real cloud solution is.

You see many people advertise about how they’re all-in on the cloud yet they’re selling products that require you to manage them, maintain them, upgrade them and all those sorts of things.

[Customers are] actually pretty savvy now on the difference between cloud and non-cloud. I think that’s been very, very helpful for us.

He adds:

Customers actually understand now the value that we’re delivering versus managing your own software. In the old days, they would discount the fact they had to run their own applications, believe it or not. They’d say, “Oh, I already got John here and he does a lot of stuff.” So you can’t really count that in the cost of ownership.

Well, now they’re starting to count that into the cost of ownership as well as the other thing they’re really valuing – the increased productivity they’re getting because these applications can do so much more than an application designed 20 years could do in terms of automating their business.

Go vertical, go international

Addressing the vertical needs of those customers remains critical, adds Nelson:

The great thing is getting really smart about how we go to market in [vertical] industries and how we build products for those industries. Because at the end of the day, our sale almost immediately becomes a vertical sale or an industry sale.

If we go to sell a software company or an Internet company, they say, “Don’t show a John Deere dealership. I want to see another software Internet company running NetSuite because I need complex rev rec and other things.”

I think we are so far ahead of the curve in terms of not just delivering cloud solutions, not just delivering complex cloud solutions but really delivering cloud solutions designed to run many different businesses.

NetSuite’s play in e-commerce got a shout-out as well after a recent Forrester Research report listed the firm in the top five e-commerce vendors, but didn’t include rival Demandware. This leads Nelson to propose that:

probably by the end of next year, we will have more customers on SuiteCommerce than Demandware has in total.

What’s exciting is this is really the first and only cloud-based omnichannel machine on the planet and that’s what our customers are buying it for. When you see us in a deal, it’s about point of sale and phone and website and call center on a single system.

And the other thing that’s also going on, obviously, is this notion that it’s not just a B2C machine, it’s a B2C and a B2B machine, right? And many of these retailers have B2B angles to their business as well as B2C.

Coming up, more investment in international expansion. For the year to date, only 25% of revenues come from outside the US. NetSuite recently purchased UK firm Venda to boost its footprint in Europe. This is likely something we’ll see more of. Nelson explains:

[Venda] brought a relatively small number of customers compared to us, they have some incredible customers. So again, to get the local feedback of companies like Laura Ashley and boohoo and Fat Face, I mean, really big brands in the UK that are now part of the NetSuite family, really helps us understand what’s going on the ground, what companies like that are facing and it makes us even more excited about the opportunity that we have in the UK and throughout Europe.

While you sit in America, you think, we can figure out the UK or we can figure out Asia, but it’s really nice when you have a couple of hundred people sitting there figuring it out who are local. I think they’re helping us enormously to figure out how we’re going to go to market, not just in the UK but throughout Europe.

My take

There’s much to like here – and Wall Street clearly did. OK, the losses are wider than they were a year ago, but deferred revenue numbers are up nicely which bodes well for future performance.

We’ve yet to see the benefits of the Venda acquisition come into play of course. Doubtless there will be a lot more to say on that subject after NetSuite’s SuiteConnect conference touches down in London in a few weeks.

Disclosure: at time of writing, NetSuite and SAP are both premier partners of diginomica.