NetSuite looks to a bright 2012

Q4 2011 was another record year for NetSuite. What does 2012 look like? if the company delivers on its forecast then NetSuite will be nudging $300 million in revenue

NetSuite had a solid Q4 in 2011. Larry Dignan has the headline numbers. During the analyst call, Zach Nelson, CEO NetSuite fleshed out some of the company's achievements during the quarter.

  • New channel business grew 50%, grew 150% in US
  • Average selling price grew 45% for the year
  • Finished the year with 1,200 employees
  • Added 315 new customers in the quarter
  • 12,000 active companies in over 100 countries and currencies
  • Grew number of OneWorld customers 30%
  • 43% more deals of contract value greater than $100,000
  • Signed another $1 million deal with Accenture in the quarter
  • Services group now running at an operational profit

During the year, the company increased product development headcount by 40% but maintained the percentage of R&D cost to revenue in the 13-14% range. Although the company did not add much as to how this occurred, it is clear NetSuite gains from R&D investments outside the US.

Growth is anticipated to push top line revenues into the $295-300 million for 2012. In turn, the company anticipates operating cash flows in the range $50-55 million.

Nelson is of the view that the macro-economic conditions continue to favor NetSuite in the mid-market as those businesses try to rationalise their 'hairball' of applications into a suite of applications. "Prices didn't go up in 2011," said Nelson. On questions around technology used in running NetSuite he said, "We've been running our applications in-memory...there are lots of places to optimise performance. We've done lots of work in caching for the desktop. The application performs very well, delivered from California, performs great in Asia."

Over the last year, NetSuite cemented channel arrangements with Accenture, Baker Tilly and McGladrey as a way of helping the company reach larger companies. So far, we've not heard a great deal of reflection about what value those partners drove. "We knew it would take time for the channel to change their business model," said Nelson. However, Nelson anticipates that NetSuite will benefit significantly from those arrangements in 2012. "I would reinforce how well our channel is doing."

One interesting nugget that came out of the call - most of the deals EntSuite signs are one year deals. Elsewhere, I am seeing more multi-year deals.

On this quarter's call I sensed a change of tone. Apart from the odd mention of Microsoft and SAP, gone are many of the amusing pops at competition. That is good news. NetSuite is clearly moving into another phase of development and that is reflected in the tightly packed, fact driven call. Similarly, in times past, NetSuite would have been hard pressed to fill an hour with analyst questions. This time, and despite the softball nature of most questions, I guess the call could easily have gone on for another 15-20 minutes.

I have four outstandings from the call which it would be good to hear answered:

  1. What are the data center investments looking like? Any plans to open up in Europe? What capacity does NetSuite think it will need to continue driving growth outside its native turf?
  2. What is the average deal size? Saying the number has risen is useful but from what to what? Last I heard they were talking $41,000. Does that mean this year we were looking north of $65,000?
  3. When does the company anticipate turning a profit? This has proven very difficult for most cloud companies but as the industry matures - NetSuite has been going 10 years - there comes a point when profit is needed.
  4. What are renewal rates and is there a trend for multi-year deals yet?