NetSuite turns into battlground among analysts; High hopes for OneWorld

On the surface NetSuite's first quarter was pretty good. The company beat its earnings targets by a penny a share and revenue was better than expected.
Written by Larry Dignan, Contributor

On the surface NetSuite's first quarter was pretty good. The company beat its earnings targets by a penny a share and revenue was better than expected. However, the on-demand ERP software provider's deferred revenue fell short of what analysts expected.

As Credit Suisse analyst Philip Winslow, who was feeling especially punny Friday, put it: The quarter was "suite and sour." Other analysts weren't as forgiving. Citigroup analysts Brent Thill maintained his sell rating saying that NetSuite's growth didn't match its stock valuation. NetSuite is turning out to be a real battleground for Wall Street with bullish analysts offset by those that doubt the on-demand ERP provider.

NetSuite on Thursday reported a first quarter net loss of $2 million, or 3 cents a share, on revenue of $34.1 million, up 47 percent from a year ago. Excluding items, NetSuite lost a penny a share. Wall Street was expecting a first quarter loss of 2 cents a share on revenue of $33.7 million, according to Thomson Financial.

For the second quarter, NetSuite projected revenue between $36 million to $36.7 million with a loss of 2 cents a share to break even. For 2008, NetSuite projected revenue of $154 million to $157 million with a loss in the range of 4 cents a share to a penny a share. That outlook was in line with expectations. On a conference call with analysts, NetSuite CEO Zach Nelson noted that the company had "excellent execution."

However, deferred revenue--an indicator of demand in the pipeline--grew at a slower clip than expected. NetSuite's short-term deferred revenue increased $1.3 million in the quarter and Winslow had expected $1.5 million. Long-term deferred revenue declined by $1.5 million in the first quarter to $8.9 million. Nelson said that NetSuite's upselling customers to new services offsets any churn that the company is facing.

Here's a look at NetSuite's ledger. On the plus side of the equation, analysts say that NetSuite's OneWorld suite should see strong demand. Meanwhile the OneWorld product cycle is just beginning and could benefit by SAP's Business ByDesign delay.

Nelson said that SAP's Business ByDesign marketing ahead of delivering an actual product has helped NetSuite's demand. He likened it to what Oracle saw back in its early days. Nelson said Oracle's database business was fine, but really took off when IBM preannounced a relational database. In other words, let your bigger rival do your marketing.

"SAP talking about this market is a good thing. They are creating demand for software that only one company can fulfill and that's NetSuite," said Nelson.

He added that SAP's biggest struggle is that it has to revamp its distribution and services to pitch Business ByDesign, but also questioned how its largest rival is modeling its data. Bottom line: Nelson said OneWorld should fuel growth for NetSuite for "years to come." NetSuite management also noted that it wasn't seeing any impact from macroeconomic concerns.

On the negative side of the ledger, NetSuite is arguably more vulnerable to an IT spending fluctuations because the SMB segment may take a bigger economic hit in an economic slowdown. Analysts also expect lower margins from NetSuite than its SaaS peers. Why? It's harder to sell an on-demand ERP suite than focused applications like CRM. NetSuite's OneWorld integrates front- and back-office software with e-commerce capabilities. And slower than expected growth in deferred revenue isn't helping NetSuite's case.

NetSuite has nothing to be ashamed of--its quarter was solid. But if it is going allay the fears of its skeptics the company is going to have to knock the cover off the ball in future quarters.

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