NetSuite Q4 Earnings Show Move Upmarket for SaaS ERP
Software-as-a-service has generally been an easier sell for smaller companies that cannot spare large capital outlays, don’t employ big IT staffs and/or have fewer worries about integrating SaaS systems with existing on-premise software.
A recent Aberdeen Group study found deployment of SaaS ERP has reached an average of 9 percent among companies of all sizes. Not surprisingly the percentage is highest, 17 percent, for companies with less than $50 million in annual revenue. For large enterprises, with bigger sunk investments in ERP, the figure drops to 2 percent.
Still, more large companies appear to be investing in SaaS ERP, based on the fourth-quarter and full-year 2011 earnings for NetSuite. The provider of cloud-based ERP reported revenue of $64.1 million for Q4, an increase of 23 percent over the prior year. Total annual revenue was $236.3 million, a year-over-year increase of 22 percent.
While NetSuite’s traditional target market has been midmarket companies, CEO Zach Nelson attributed a significant amount of 2011’s revenue growth to his company’s business with larger companies. In the fourth quarter, NetSuite saw a 43 percent increase in deals worth more than $100,000, Nelson said on yesterday’s earnings call. Not only that, but the company signed more deals worth $500,000-plus in Q4 than in any prior full year in its 13-year history. And NetSuite partner Accenture snagged a contract worth more than $1 million.
Groupon, Magellan and JC Penney are among the larger companies now using NetSuite, Nelson said. These kinds of customers help demonstrate what he called the company’s “ability to scale from the Fortune 5,000,000 to the Fortune 500.”
Thanks to their larger numbers of users, needs for more complex software modules and a somewhat lower price sensitivity than small companies, large companies also helped NetSuite grow its average selling price by 45 percent during 2011, Nelson said.
They also tend to be the buyers for NetSuite’s OneWorld product, which is designed for two-tier ERP deployments, popular among large companies with multiple subsidiaries running multiple ERPs. In two-tier deployments companies usually maintain an on-premise ERP system from a company like Oracle or SAP for their primary corporate business but use a product like OneWorld to standardize across their subsidiaries.
Nelson said NetSuite signed its largest number of OneWorld customers in a single quarter in Q4, and it grew its OneWorld business by approximately 30 percent for the entire year.
Stifel Nicolaus analysts Tom Roderick and Gur Talpaz in a research note called OneWorld “a primary reason for the company's successful push into larger customers.”
NetSuite also benefited from what Nelson called “a tipping point” in ERP replacement cycles, especially among midmarket companies. He said many midmarket companies “have terrible old systems designed before the Internet existed” and they tend to run multiple disparate systems for financials, payroll and other aspects of ERP. “The suite is winning there,” he said, as they look to standardize on a single platform.
Roderick and Talpaz also liked NetSuite’s ability to “shift a greater portion of work to its SI (system integrator) and channel partners.” According to Nelson, NetSuite’s new channel business grew more than 50 percent in 2011.
Buoyed by these results, NetSuite increased its guidance for 2012, saying it now expects total revenue of $295 million to $300 million versus its previously announced range of $290 million to $300 million. It also expects non-GAAP earnings per share of 19 cents to 21 cents. Roderick and Talpaz wrote: “We see room for upside to these metrics based on the company's strong 4Q11 bookings performance.”
The market rewarded NetSuite with a boost in its stock price, which opened at $47.27 earlier today, up from Thursday’s close of $44.36.
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