NetSuite – Solid 1Q2012 and Continued Shift Toward the Enterprise

Earlier this morning, Saugatuck listened in to the hour-long NetSuite (NYSE: N) earnings call for 1Q2012, recorded after the market closed yesterday. While not a huge part of our research process, monitoring vendor financial performance and Wall Street perspectives are an important additional input to our research process – beyond our ongoing client interactions, deep-dive vendor briefings, and primary buyer-demand research.

Overall, NetSuite reported strong 1Q2012 results, and well ahead of consensus estimates – with revenues advancing 29.7 percent (to $69.3 million), billings growing 26 percent, and earnings reaching $0.06 EPS. More impressive is the fact that year-over-year and quarter-to-quarter comparisons were particularly challenging, given strong performance in 1Q2011 and 4Q2012. NetSuite’s CFO guided the Wall Street analysts on the call toward full-year revenues of $295-$300 million, which would represent 25-27 percent growth, with operating margins approaching 6.0 percent (up from 5.3 percent in 2011).

However, the big story out of this call for Saugatuck is the continued strength of its evolving large-enterprise business. Beginning several years ago, NetSuite began a de-emphasis on selling to smaller companies, and instead refocused on mid-size and larger enterprises where they could achieve higher initial ASPs, and where there was significantly greater up-selling opportunity. While small business still represent a large chunk of its customer base (Saugatuck would guess greater than 35 percent), today it represents a small portion of its revenues (Saugatuck’s best guess – 5-10 percent).

One expression of its evolved strategy has been a major focus on growing the VAR and SI channel, which represented 40 percent of new bookings in the quarter. But NetSuite also shared that it is continuing to aggressively add to its direct sales staffing, which will be critical to its longer-term plans to move upstream to compete effective for large enterprise deals. To this end, its OneWorld product offering represented 45 percent of new business in the quarter, which I am confident included a number of very large deals . . .

The tone of the call was very upbeat, with only the occasional rift against the competition, reflecting a confident management team and where they are taking the business. They are very much viewing and managing the mid-market and large-enterprise as separate segments – with plans to provide additional vertical extensions for mid-market customers, and new functionality for large-enterprise customers.

While NetSuite emphasized that they are taking share in the mid-market (claiming 80 percent win rates against Sage and Microsoft GP, and 75 percent win rates against SAP ByD) – the entry point in the large enterprise segment continues to be with global companies deploying a 2-tier consolidation / roll-up strategy. This is consistent with several client scenarios we have had over the past two years, where NetSuite has won at the regional level. Interestingly, some of these are now also assessing the replacement of their corporate footprint as well.

We found Zach Nelson’s near closing comments about what is now driving large enterprise demand supportive of several key Saugatuck research threads – as he emphasized “end-of-life” / ERP upgrades as the key catalyst, along with growing C-Suite awareness that traditional on-premises infrastructure and applications will not help their companies innovate and compete going forward (from a 3-5 year planning horizon perspective).

No doubt, NetSuite will begin to receive greater and greater competition across a range of mega-vendors, as Oracle and SAP roll out more serious large-enterprise product portfolios / strategies for their broad and deep installed bases. In the case of Oracle, look for some strong announcements this fall. In SAPs case, we are seeing some traction among its customer base with their repositioning of ByD away from its SMB origins, and instead into an effective weapon for clients seeking to deploy a 2-tier financials strategy.

The wild big card in the deck is Workday. While they are having some success selling their Financials into their growing HCM customer base, we believe Workday’s evolving Financials suite should be able to lead a sale within 12-18 months (see Lens 360 blog post Workday Update – Move to HTML5, Financials Almost There, published 19April2012). As larger enterprises begin to seriously look at replacing many of their money-focused apps over the next 2-5 years, in many regards it is a race to see who will emerge on the “credible” Cloud short-list, in either a pure-Cloud or hybrid-Cloud mode.