NetSuite's numbers are not what they appear

During yesterday's earnings call, I was struck by the way CEO Zach Nelson got an easy ride from the Wall Street folk. Today, Jason Carter dropped a bomb which the financial folk should have spotted:Over the last 5 years this company has lost more customers than it has been able to add.

During yesterday's earnings call, I was struck by the way CEO Zach Nelson got an easy ride from the Wall Street folk. Today, Jason Carter dropped a bomb which the financial folk should have spotted:

Over the last 5 years this company has lost more customers than it has been able to add.

This is one of those things that just failed to register the first time I saw it. In scanning the company's S-1 filing with the SEC there is a note that the customer base was "over 5,400". That should have caught my eye. It didn't. But today, reading the earnings press release I saw the company added 432 customers during Q4, bringing the customer to "over 5,600". Interesting. I would not have expected it to be 5,832 as there has to be some churn in this business. But what does it say when your rate of churn is about half of your customer add rate?

As I said at the end of my reporting on the call, no=one challenged Nelson on problems I've identified in the customer base. I then checked Jason's assertions. He's correct. This from a press release dated March 27, 2003:

As a result of his [Nelson's] leadership, NetLedger's revenues have grown five-fold; workforce has doubled; and the company has reached the unprecedented 6,000-customer milestone

This from fellow Irregular Jason Wood's notes on the S1:

They have no redundancy which astounds me when you consider the company has 5,300 customers and $67mm in 2006 revenues and runs a utility computing model

During the call, Nelson made a point of talking about the effort being put into upselling into the customer base. Given the churn which Jason Carter has identified I'm not surprised. It also lends weight to disquiet about the extent to which NetSuite prices have risen over the last few years.

Paying attention to top line earnings is only one metric and of course it is the one Wall Street clamors over. In the on-demand world, you have to continue to grow the customer base in real terms. It seems that in NetSuite's case, the customer base is not growing as rapidly as they are leading us to believe. Given that Nelson stated the expected customer additions on a quarter by quarter basis are expected to be in the range 300-500, you can be sure this is a metric that will be revisited.

UPDATE: I subsequently spoke with Craig Sullivan, NetSuite's VP International, who pointed out that in 2003, the company was focused on the SMB market and directly competing with the likes of QuickBooks. He also said that as the company developed the suite, prices increased and that some customers went away as the offering was more than they needed.

That still doesn't answer the question of what happened between the S1 filing in July, 2007 and the latest release to which he said he would return an answer 'within the hour.' Instead of which I received a personal attack on me based upon inaccuracies coupled with an obfuscation of NetSuite's own definition of customers. In my experience it never serves a company well to attack the messenger and fail to explain its own statements. As at this time I am still awaiting a cogent response to the questions raised. (See the Talkbacks on this post)