NetSuite beats Wall Street expectations as customer uptick increases

SUMMARY:

NetSuite’s adding new logos at an increased rate of knots and tops Wall Street expectations. Next stop – $1 billion run rate.

Zach Nelson CEO NetSuite speaks on stage
Zach Nelson

Some big name customer wins helped NetSuite to top expectations for its fourth quarter and full year.

For the fourth quarter, the firm reported a net loss of $32.4 million on revenues up 31% to $206.2 million, while for the full year, the net loss was $124.7 million – up $27 million year-on-year – on revenue of $741.1 million.

The firm added 616 new customers during the fourth quarter and at a higher average selling price, according to CEO Zach Nelson:

The dream is to add lots of customers at a higher average sales price. We saw that dream in Q4. It’s a beautiful dream. But given our druthers, we’d rather get as many customers as we can at the same average sales price rather than go to 10 customers at some gigantic sales price. That’s our philosophy.

Nelson was in typically upbeat form talking to analysts after the results were released. declaring that 2016 would see the firm pass the $1 billion run rate:

We will join an elite group of software companies that have reached this level. We are making history here at NetSuite. While $1 billion is a milestone of sorts, it never has really been the goal.

The goal is to enable as many companies as possible to realize their business vision with a modern next-generation business application platform. That goal is what gets us excited to go to work every morning and has driven everything we have done since before we had $1 million in revenue, and it will continue to be the driving force behind everything we do well beyond $1 billion in revenue.

He added:

I’ve always said there are four elements of intellectual property we have developed over the past decade that are required for success in this new world. First, you have to develop a rich suite of applications that spans many industries. Our discussions with customers first and foremost center around product capabilities and the fit with their business today and where they want to take their business tomorrow.

Next, you have to solve the nontrivial problem, how to deliver those goods over the cloud. It’s especially nontrivial for some software companies whose primary business model and expense structure revolve around putting the burden and cost of managing applications on their customers’ shoulders.

Third, beyond the technical challenges, there are substantial go-to-market problems to solve. Firstly, how do you sell business suites not just to the Fortune 500, but to the Fortune 5 Million?

And finally, implementing complex business applications is not a simple process. Small and midsize customers often face the same business model complexity of large organizations, but they don’t have the technical or financial resources to manage the historically complex applications required to solve such problems.

Unicorns

One characteristic of NetSuite’s customer base is the hefty presence of unicorn companies, such as Snapchat or GoPro, which has renewed with NetSuite for another three years. That’s a major asset to date, but if there’s a downturn in Silicon Valley, will it remain so? Nelson argued:

If you look at the unicorns or what may now formerly be known as unicorns, the vast majority of those guys run on NetSuite. We’re the platform that these companies build these ideas on.

If venture capital investment turns down, it’s probably more of an issue for the smaller companies than it is for us. We’re still going to be the platform for that innovation.

I recall talking to one such company that grew up to be a very large company, and he said, ‘NetSuite is one of the most important things that has happened to the startup community in the last decade’.

So, our technology provides the most efficient way to run those startups. It also provides great visibility from the venture community, from the private equity community into what’s going on in those businesses. It’s not a black box. They can actually see what’s happening in those companies with a log into NetSuite. So I don’t think that particular element will have an effect on churn.

Nelson also addressed the seeming defection of Fitbit from NetSuite to SAP which emerged from the latter’s own financial report last week:

I can just say categorically that for the next year and certainly the year after that, I believe Fitbit is going to be a customer. Some companies make decisions not so much based on technology but based on internal dynamics of where they might be going and where their people are most comfortable.

He added:

In the quarter we replaced SAP 17 times.

My take

Steady as you go. Some nice new logos and a happy rate of those signing up.

 

Disclosure – at time of writing, NetSuite is a premier partner of diginomica.