NetSuite passes halfway stage to $1 billion run rate

Stuart Lauchlan Profile picture for user slauchlan January 29, 2015
A confident end to the year for NetSuite with e-commerce breaking out and international expansion on the cards for 2015.

Zach Nelson

NetSuite ends 2014 on a confident note with its seventh consecutive quarter of 30%+ recurring revenue growth and a symbolic passing of the halfway mark on the road to becoming a $1 billion run rate company.

Some numbers of note:

  • Fourth quarter revenues grew at 37% year-over-year to $157.9 million.
  • Full year revenues were $556.3 million, up 34% year-on-year
  • The quarter’s net loss was up from $20 million to $25 million.
  • For the year, net loss was $100 million, up from $70 million.
  • During the fourth quarter, 500 new customers were added to the books, the largest increase since the firm went public in 2007, ending the year on 24,000 companies.
  • The company says it’s recorded a record number of deals over $500,000.
  • Average selling price for new customers grew by more than 30% year-over-year in 2014 versus 2013.

For CEO Zach Nelson, one of the highlights was the performance of the firm’s e-commerce offering:

In Q4, we added 54 new SuiteCommerce customers. That is more than 3x as many as the 17 customers Demandware reported in their most recently reported quarter. Including existing customers, we upsold SuiteCommerce too during the quarter.

We actually added more than 5x as many customers as Demandware added in their most recently reported quarter. For the year, we also added 5x as many total SuiteCommerce customers as Demandware has in their last 12 months of publicly quoted figures.

This is an area with great potential, he adds:

E-commerce has always been very big for us. As a standalone entity, e-tail, retail, however, you want to characterize it, it's really about omni-channel commerce.

While retail is the world being disrupted today by this phenomenon, every company is going to be disrupted by it tomorrow. So this capability is going to be needed, not just for retailers, it's going to be needed for distributors, it's going to be needed for manufacturers. It's going to be needed for services companies. It's going to be needed for governments. Every company is going to need this capability in the future.

I actually think it's the future of ERP. So for us, it's impossible to distinguish between what we're doing in commerce and what we're going to do in ERP.

In terms of the core ERP space, Nelson was typically bullish about the competition, most particularly of course SAP:

SAP had its seventh straight quarter of license revenue declines, and to add more pain, they also announced that their margin rate is contracting as they move to catch-up mode.

Business ByDesign has had 2 or 3 goes at it and been abject failures. And they've gone pretty dark on the whole subject even though, occasionally, they say, "Oh no, no, it's still alive. It's still alive." We haven't seen it in a long, long time. We certainly don't see it in the marketplace today that we're competing in.

Competing with PowerPoints is pretty easy for us, particularly in these sort of mission-critical application spaces because people don't buy PowerPoints, you need real features, real functionality. And even if they do manage to deliver it, hey, it's going to be a 1.0. We've been at this for how long now, 16 years? This is not a 1.0 product.

SAP don't cause us any sleepless nights. I'm sure we cause them many sleepless nights.

The next question then must be that if NetSuite is offering a compelling ‘next generation ERP’ solution, how long will it be before it’s not seen by larger organisations as an extension to existing offerings - the so-called Two Tier ERP option that sees NetSuite coming in to complement existing SAP or Oracle software- but as a full replacement for those larger vendors?

Nelson is pragmatically cautious in his response:

I think, you can see it on the horizon, but the horizon is very far away typically.

You're talking about multi-billion dollar CIOs, their interest in changing out their core corporate system of record, be it Oracle, be it SAP, is almost zero. It's just acting as a general ledger 9GL), and they're entering journal entries. That's not anything they want to mess with.

What they really want are the operational systems and that's really more of what NetSuite is - an operational system, order management, e-commerce, order-to-cash, those kinds of things. Those are the systems that they're looking at replacing. And those things sit down the big dumb GL.

Certainly, some place down the road, the dumb GL will be replaced. But where the real action is, is how do you go from one subsidiary to another, or how do you go from one business process around that dumb GL to another? So I think the two-tier opportunity is certainly the much more lucrative opportunity for the near horizon.

As for immediate priorities for 2015, Nelson has a tick-list of things-to-do:

Where we're going next is continuing our focus on omni-channel commerce, which, again, affects retailers today, but affects every company tomorrow. That's an investment well spent for all of our customers.

ERP as a general category is getting a lot of investment, and some of that is horizontal ERP capabilities, like some of the things that we announced in our suite GL product, and many of the capabilities are vertical. So we're investing more resources, more product management vertically to get really down to the last mile of the problem in the verticals that we serve.

Mobile is obviously an area of focus for us. Omni-channel is not just about point of sale or about the website, it's about how do you transact business on your phone? Again, that's a B2B and a B2C problem. So we're just coming out with Android now. We obviously had Apple before, lots more capabilities there.

Finally, to support our international efforts, you'll see even deeper internationalization of the product. I think, we already have the world's greatest omni-channel, multi-company, multicurrency, multi-tax system on the planet. We're going to go even deeper in places like Brazil and Germany next year, which are very complex tax environments, to make it look exactly as if these companies were designed by a Brazilian or a German company.

My take

NetSuite's plans for international expansion are interesting, but will clearly come at a cost. Nelson's talking in terms of two new data centers in Europe, for example, which will be valuable assets, but require investment. The fact that the firm is willing to commit to such investment is encouraging. Meanwhile revenues continue to grow. An upbeat start to 2015.

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

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