NetSuite had a trend setting blow out Q3 (PDF download) ahead of analysts expectations. See below for the GAAP numbers:
A couple of things stand out. During the earnings call, the company was long on selling the NetSuite story but short on important detail. As a company that is forecasting top line revenue on the $525-535 million range for 2014, I would for example, like to see how each of the main geographies are progressing. We heard for instance that:
In Q3, Shaw Carpets, a Berkshire Hathaway Company and the largest carpet manufacturer in the world, showed the power of this new suite product by going live with NetSuite in China. And I hear China is pretty strategic to manufacturers these days. Rather than taking their existing SAP infrastructure to China, Shaw did an in-depth analysis of their options and went with NetSuite. They were live in China and 11 other Asian subsidiaries in just under a year.
We also heard that:
On the top line, our revenue grew by 34% year-over-year to a record $106.9 million for the quarter. Deferred revenue grew 40%. Calculated billings, defined as quarterly revenue plus the change in deferred revenue, grew 35% year-over-year.
This latter point about 'calculated billings' is something of a magic number that NetSuite pulls out but which has always been a tad troubling. This quarter, Ron Gill, CFO de-emphasized this measure but again, we don't see hard numbers quoted in notes to the financial statements release. I'm reckoning that measure will wither over time - as it should.
Finally, in probably the most telling point, we also heard that:
In the quarter, we added more than 320 new customers in software, manufacturing, services, retail/e-tail, wholesale distribution and many other industries. While many of these new wins were mid-sized companies, we had a tremendous quarter in terms of moving upmarket. So while SAP failed to deliver in the mid-market, we are having amazing success moving into their core enterprise space. In fact, this quarter, we closed 1 multiyear transaction that was just shy of 8 figures and 2 others with recurring revenue of more than $1 million per year. Our average selling price during the quarter grew well in excess of 20% year-over-year.
Taking those numbers on their face, it looks like NetSuite average deal values are now north of $50,000 per annum. The fact the company exceeded expectations is almost certainly due to the very small number of very large (by comparison) deals it pulled into the quarter. Without those, it would have missed. This suggests to me that while NetSuite is continuing with its endeavors to move upmarket - emphasized by its SI relationship, the impact of those larger deals remains disproportionate to the whole.
It does not therefore surprise that despite the longer term bullish view, the company remains cautious going into the final and biggest quarter. On the other hand, NetSuite is building out a portfolio of industry verticals that help it spread market risk while keeping the growth engine primed for the future.
One surprise from the earnings call is that NetSuite is not anticipating a significant top line impact from the TribeHR acquisition over the next year. I'm guessing it needs to evaluate best fit in customer sites before adding anything substantial into the sales mix forecast. The mid-market has been notoriously slow at adopting HR systems. As one exec told me - if your company has less than 500 employees then there's not much you need beyond payroll. NetSuite sees it differently and I think rightly so.
Talent acquisition and management is difficult for every business. Having good tools to manage those processes, the ancillary processes that sit around them and the analytics that inform decisions is not a trivial matter.
One final point. In discussing the results, Zach Nelson, CEO made much of the recent SAP announcement that sees ByDesign pretty much on life support. He added:
I'm not telling this story to dance on the grave of Business ByDesign. I detailed it because SAP's failure tells you all you need to know about how hard it is to duplicate our offering. If anyone had the experience to build a product to compete with the NetSuite vision, you would think it would be SAP. And while we may have made it look easy, it is anything but.
A fact check here: SAP never built ByDesign as a NetSuite competitor. It doesn't think that way...and to some extent that was SAP's undoing. In future calls, I'd like to hear how NetSuite fares in picking up ByDesign customers because for all the rhetoric, that's where the rubber hits the road.
Disclosure: SAP is a premier partner.