Yesterday, NetSuite announced record Q2 revenue and earnings. Rachel King has the outline numbers. The graphic above provides some of the detail at the top line.
Like SAP a few days beforehand, NetSuite provided the market with a pleasant surprise by exceeding analyst concensus expectations. The margin of excess was not earth shattering but more than satisfying in a global economy that's rocky in many regions. What has been driving revenue?
On the earnings call, Zach Nelson, CEO cited a number of factors including the move upmarket with average deal size now running at "over $50,000 in first year contract value," a jump of 30% on the previous year. Verticialization was also cited. Among the wins mentioned, Proctor & Gamble was a surprise. He also mentioned 'next generation' companies like Evernote as "betting their future" on NetSuite. Another surprise: Deloitte continues to build its cloud based implementation business announcing a two month NetSuite deployment for Circuit of Americas. In addition, the company made a point of talking about a doubling of its R&D spend since 2010 plus a fast ramp in what it terms its enterprise unit which partners with SIs on a services agnostic basis.
Given all these moving parts, what can we deduce?
I am increasingly getting the sense that NetSuite is in something akin to early break out mode in the enterprise market. Its early history was one I characterize as being in something of a no-mans land. A combination of an attempt to disrupt the small business market while developing a more comprehensive suite for the mid-market was a tough sell. It was also difficult to manage profitably with numerous tales of woe along the way. That has undergone fundamental change the last three years with a much clearer focus on the larger of the mid-market businesses while appealing to businesses that were only established in the last decade. Anecdotally, I see business being stripped from Microsoft and Sage in particular but with regional players also suffering in the face of competition from the NetSuite's of the world.
Even now with average deal sizes rising to $50,000, you'd hardly expect that to bother the large players. But the landscape is more nuanced than the bald figures suggest. Here you really have to look at how SuiteWorld in particular is maturing, how NetSuite is growing its development partner ecosystem and how it is attracting not only the larger accounting practices as partners but also the large SIs for its 'two-tier' business. Taking those factors together, even in the context of fragile economies and you can see how business will be attracted to players like NetSuite rather than continuing with older software or even upgrading.
There is an emerging trend here. Looking back over recent results among those reporting this time around, it does seem that solid new offerings can be sold. The wheels have not fallen off as some feared - at least not yet - but it appears that when investing in technology, a small but significant number of businesses are prepared to spend more for the future AND will look seriously at cloud offerings. NetSuite has joined that band of happy campers who are able to take the opportunities presented.
Another more cautionary factor noted this time around. During the call, the company was careful to point out that quarter by quarter volatility can still have a significant impact on its results. For example, NetSuite said that On the calculated billings - a figure which is reached by adding the change in deferred revenue plus revenue in the quarter - on the face of the financials showed 35% year-over-year growth. This was normalized down to 30% in an effort to provide an apples-to-apples comparison with the prior quarter.
This speaks of caution at a company that otherwise likes to talk up progress against competition at every opportunity. In short, NetSuite is now becoming more serious about its business. That's a sign of management maturity which is always welcome.
NetSuite is still a relatively small player with annual revenue projected to around $300-305 million for FY2012. However, the speed at which it is growing suggests it could hit $500 million in the 2014 time frame. At that stage, it will be a serious threat to incumbents who have not modernised.
As always it will be interesting to follow this story.