NetSuite's third quarter earnings and outlook have more than a few observers eyeing a tipping point in enterprise applications as software as a service trumps on-premise software.
The company reported a third quarter net loss of $6.9 million, or 10 cents a share, on revenue of $61 million, up 23 percent from a year ago. Non-GAAP earnings were 5 cents a share, a penny ahead of Wall Street estimates.
As for the outlook, NetSuite projected $63 million to $63.5 million ahead of Wall Street estimates of $62.9 million. NetSuite projected non-GAAP earnings of 4 cents a share, a penny below expectations. For 2012, NetSuite projected revenue for $290 million to $300 million, which was ahead of Wall Street's $279 million estimate.
On a conference call with analysts CEO Zach Nelson recapped his CIO conversations at the Gartner Symposium conference in Orlando, which I recapped last month:
We're very early in the cycle. If you look at Gartner numbers and the folks that follow market share numbers, we are the fastest growing ERP provider on the planet, but we still have lots of market share in front of us. As you see the market begin to tilt towards the cloud, these very large companies really establishing a strategy now.
So my belief on what's driving this is pretty straightforward. That is, most companies are running their business on applications designed for the 1990s. This is a very different world we live in. This is about the Internet. It's about Social. It's about Mobile. Most companies are driving their core business systems on an application that has no idea how to interoperate in that modern world.
Meanwhile, a potential recession could tilt large enterprises to the cloud at a faster rate.
The big question here is whether you buy all of this SaaS tipping point talk. Dennis Howlett thinks we're two to three quarters away from a tipping point where applications increasingly go to the software as a service model. Other tech giants also see this SaaS movement happening. After all, Oracle bought RightNow to go after Salesforce.com. And companies like IBM are increasingly moving to a SaaS model. When the music stops, on-premise players could struggle.
Another wrinkle here is that Oracle CEO Larry Ellison owns a controlling stake in NetSuite. At some point, NetSuite will ding Oracle as well as SAP. Cue up the awkward conversations. Nelson largely ducked a question about Oracle conflicts on the conference call and said NetSuite may be more complementary to Ellison's juggernaut on two-tier ERP cloud deployments.
The bigger theme around companies like NetSuite, Salesforce.com, Workday, SuccessFactors and others is about the future. These companies are likely to be the next enterprise software giants.
JMP Securities analyst Patrick Walravens sees NetSuite as the new SAP. He said in a research note:
The big question investors ask us on NetSuite is simply, "what do you have to believe to own it at this premium valuation?" The answer, in our opinion, is that NetSuite today is very similar to SAP in 1992 and is poised to experience a similar growth trajectory -- making allowances for the differences between NetSuite's subscription model and SAP's license model.
William Blair analyst Laura Lederman had a similar argument:
We are in the early stages of a decade?long ERP replacement cycle to the cloud. We have seen market after market move to the cloud, from salesforce automation (SFA) to human resources and call centers. The vendors that dominate each space end up taking significant market share from the on?premise players. We first saw salesforce take significant share in SFA from Siebel, ONYX, and Pivotal; then RightNow started to replace the legacy on?premise call center providers, such as Aurum (Infor). We have also seen on?premise HR applications being replaced by companies such as Ultimate Software, Cornerstone, and SuccessFactors.
SaaS has gone mainstream over the past decade, and we are seeing more mission?critical application categories—such as accounting software—moving to the cloud. There is little effective competition in the on?demand accounting space, and NetSuite continues to take share from Microsoft’s Great Plains solutions, vendors such as Epicor and Exact Software, and SAP’s on?premise middle?market products. NetSuite added more customers over the last two quarters than Business ByDesign has accumulated in total.