NetSuite Inc. Q3 2008 Earnings Call Transcript

| About: NetSuite Inc. (N)

NetSuite Inc. (NYSE:N)

Q3 2008 Earnings Call Transcript

November 3, 2008, 5:00 pm ET


Jim McGeever – CFO

Zach Nelson – President and CEO


Jeff Keene – William Blair

Patrick Walravens – JMP Securities

Atul Bagga – ThinkEquity

Gordon [ph] – Thomas Weisel Partners


Good day and welcome to the NetSuite third quarter 2008 financial results conference call. Today’s call is being recorded. At this time, I would like to turn the conference over to Mr. Jim McGeever, Chief Financial Officer of NetSuite. Please go ahead sir.

Jim McGeever

Thank you. Good afternoon everyone and welcome to NetSuite's third quarter 2008 financial results conference call. We will discuss the results for our quarter, which ended September 30th. By now you should have received a copy of our press release, which was released today after the market closed and furnished on Form 8-K to the SEC. Joining me on the call today is Zach Nelson, our Chief Executive Officer.

Today's call will begin with Zach providing a brief overview of our record results with some color on the drivers of our business. Then I will review our key financial results in more detail and provide our financial outlook for the fourth quarter of 2008. We will then take some questions.

Today's call is being recorded and a replay will be available shortly following the conclusion of the call. To access the release, the financial detail of our website replay, please access our Investor Relations website at Customers who purchase our service should make sure the decisions are based on features that are currently available. Please be advised that any unreleased services or features that NetSuite reference in today’s discussion or other public segments are not currently available and may not be delivered on time or at all.

During this call, we will be referencing both GAAP and non-GAAP financial measures and wish to note that GAAP reconciliation information is provided in the press release and on our website. All of the non-revenue financial measures we will discuss today are non-GAAP unless we specifically state that the measure is a GAAP number. The non-GAAP measure excludes stock-based compensation expense and the amortization of intangible assets.

Some of the information discussed during this call, particularly information regarding our revenue, including expectations concerning revenue growth, non-GAAP net income and loss, business strategy, customer demand, market observations and future product plans are based on information available as of today, November 3rd, 2008.

In addition, some of the forward-looking statements we will make on today's call constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. We disclaim any obligation to update any forward-looking statements.

The risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statements are summarized in the press release we issued earlier today. They are also described in detail in our 10-Q filed with the SEC for the second quarter of 2008, which is available on our investor relations website, and which I encourage you to read.

With that, I will now turn the call over to Zach Nelson.

Zach Nelson

Thanks, Jim, and thank you everyone for joining us today. We had a strong quarter that once again established NetSuite as one of the fastest growing public software and software service vendors in the industry, and when one views our Q3 performance through the lens of a global economic environment that by any measure is creating enormous challenges for companies across all industries, we were particularly satisfied.

In this environment, we were able to post record results, which included our 36th straight quarter of increased revenue. On the top line, we delivered revenue of $40.4 million. Year-over-year, our revenue growth was 44% as compared with 43% last quarter. We also hit our bottom line targets. In terms of operating loss, we continued to progress with our third quarter non-GAAP operating loss decreasing to $1.5 million, an improvement of $392,000 over the second quarter of 2008.

In terms of net income, excluding the impact of foreign exchange losses, which for the first time in our history had a material impact on our income and balance sheet, we posted a loss of $0.01 per share for the quarter.

Our bookings numbers were good, but they obviously were impacted by the market jitters experienced in the latter portion of September. In particular, in the last two days of the quarter, we saw a freezing of our pipeline due to the inability of the US Congress to pass the initial Wall Street bail out bill, and we, like most other software companies, booked a healthy portion of our new business in the final days of the quarter.

Even in the phase of that watershed event, we did sign more than 330 new customers for the quarter, which is within our cited internal range of 300 to 500 new customers per quarter and again hit a record for average selling price beating the record $30,000 per customer level we saw in Q2.

We also did add to our short-term deferred revenue when you back out the effect of our non-recurring Japanese contract. Jim will discuss these results and other financial metrics in more detail later. I would also like to briefly highlight our continued execution against the key product sales and services strategies during the quarter.

On the product front, we released our second major upgrade of the year, NetSuite Version 2008 Release 2, which included new functionality for services companies, expanded financial reporting, and extensions for light manufactures, a new vertical for NetSuite. In addition, we announced native support for both FireFox 30 and the Google Chrome browser, becoming one if the first, if not the first business application provider to do so.

We also delivered on our road map of brining together the OpenAir and NetSuite products by unveiling the industry’s first and only on-demand enterprise application for what we are calling services resource planning or SRP. NetSuite SRP has the potential to do for services business, what SAP’s R3 software did for the manufacturing industry in the early 1990s.

We also announced a new standalone OpenAir product line covering and spanning the needs of – from small to large project based businesses. We are very pleased that our OpenAir has progressed as a part of the NetSuite organization, not only on the product front, but also on the sales, services, and support fronts as well. We had record attendance at the OpenAir User Summit in mid-October and the customer and prospect excitement was obvious.

During the quarter, we added new sales head count to the organization, and had a good bookings quarter including one deal greater than $1 million. Existing customer satisfaction is incredibly high and churn is negligible.

Average selling price also rose on the OpenAir products during the quarter, and we signed our first joint customers and continued to see pipelines for the standalone OpenAir and combined OpenAir NetSuite offerings growing. In short, we are very pleased with the increased momentum of the OpenAir business since the acquisition.

On the NetSuite sales front, we continued to expand our distribution in the US and around the world. In August, we announced US expansion into the Denver Metro area. We also opened a new office in Hong Kong to respond to the fast growing demand for software as a service in that region, and we introduced NetSuite OneWorld to the Australian, New Zealand, Singapore, and Hong Kong markets.

We closed the quarter with 170 quota-bearing sales people, and as previously stated, we do not intend to hire additional sales staff in Q4. We also expanded distribution through third party partners in Q3. While it remains unclear who the channel will evolve to play a role in the distribution of computing solution, traditional and new channels are emerging, and NetSuite is leading the way in helping these companies craft new business models to participate in the SAS revolution.

We announced the signing of one such partnership in Australia. This OEM agreement with the Brennan Group, a leading managed hosting and mid-market solution provider in Australia is one example of the changing landscape of traditional VARS and system integrators and NetSuite’s role in fostering such new distribution ecosystems.

On the services and support front, we have seen this year’s investments continue to enhance our customer satisfaction. We have made major investments in customer sat over the last two years and these investments culminated in this quarter’s launch of SuiteSuccess, a comprehensive program of professional services, training, and customer support offerings, designed to address the unique business and economic requirements of mid-sized companies deploying our solution.

Our investments are further validated by the fact that our customer service and support metrics continue to improve. Our average customer rating for professional services implementations went up to 4.4 out of 5. We also made enormous strides in customer support continuing to rate over 4 out of 5 on our customer surveys.

In addition, we exceeded our service level targets with an average speed of answer of under 2 minutes and that was during the release period, traditionally one of our busiest times on the support lines. We are pleased with these macro trends in customer satisfaction and have been thrilled by the unsolicited positive feedback we continue to get directly from our customers and our user groups.

I believe our company is focused in employee’s dedication to meeting service and support needs of such a diverse customer base is as important barrier to entry for potential competition as is our ten-year head start in product development and product distribution.

I believe we have cracked the code on how to deliver end support on-demand business management software suites with the speed, knowledge and price point required by mid-sized companies. All of our product distribution and services investments are made to better serve our customers.

In Q3, we continued success in moving up market to serve mid-sized companies. Included in the list of customers that we added and that went live this quarter are several brand names including a multi-hundred million dollar division of Iron Mountain, Red Octane, the makers of Guitar Hero, the US subsidiary of Sun Tech Power, a leading provider of solar panels, and e-commerce applications at The Limited, and as I said earlier, we set a new record for average selling price in the third quarter.

As well, we are using the economic climate to press our advantage in both reducing our customers’ costs and increasing their productivity with our integrated applications. In times like these, CFO’s take control and eliminate spending on inefficient, expensive departmental applications by moving to integrated suites. During the dotcom bust, we saw the CFO driven movement away from expensive point products to integrated suites like Oracle, SAP, and NetSuite, and we expect to see it happen in this environment as well.

This eventuality is one of the reasons we announced RenewForce, a program that enables existing customers to switch to NetSuite CRM at 50% off their renewal price. In this environment, paying roughly $100 per user per month for the basic SFA functionalities of will receive scrutiny, especially with an offer like this and a more complete product offering like NetSuite has the alternative, and from our perspective it really does not put any pricing pressure on NetSuite as these companies previously would have blindly just paid their renewal notice.

In a similar way but in a different market segment, in the next few days, we will be rolling out of program for SAP customers suffering under the burden of enormous maintenance and support contracts to reduce their costs by at least 50% by switching to NetSuite, and we will highlight companies who have done exactly that.

In this environment, we believe using NetSuite in major divisions while enabling companies to keep their huge sub costs in SAP running at headquarters will become a significant opportunity.

In closing, while the macro economic situation is unprecedented and it is hard to predict what the future holds, I think this quarter’s results, the differentiation of the NetSuite product line and our ability to reduce our customers’ costs while increasing their productivity bode very well for NetSuite. We believe that NetSuite will thrive in this economic environment, while smaller competitors will weather away and large competitors will de-invest from the mid market.

And while we believe that software as a service in general, it is even better positioned in tough times, because of its inherent cost effectiveness, it is going to take more than just a SAS offering to win the battle. The real value is the differentiation of NetSuite as an integrated application designed to run a business.

No other competitor has such a solution, and more importantly, the incredible cost savings and productivity improvements associated with such a suite rather than point products, makes NetSuite all the more compelling in this environment.

With that, I will turn it over to Jim for more financial detail on the quarter’s results.

Jim McGeever

Thanks Zach. Our third quarter of 2008 was another good quarter for NetSuite as we continued to make progress on our financial and strategic targets. Q3 was the 36th straight quarter of increasing revenue. I would like to remind you that discussions today will be based on non-GAAP financial measures, which excludes stock-based compensation expense and the amortization of intangible assets.

Let’s turn to our financial statements for the third quarter of 2008. Total revenue for the quarter was $40.4 million, a 44% increase over the third quarter of 2007, an 11% increase over the second quarter of 2008. Our growth is the result of the consistent increase in customers, who pay us more than $10,000 a year. While we have almost 3,000 customers that pay us less than $10,000 a year, these customers make up less than 10% of our revenue.

Our average selling price for new customers had an all time high during the third quarter of 2008, and has increased in 13 of the past 15 quarters. We expect to see this metric continue its historical upward trend as new product offerings such as OneWorld makes NetSuite an even more attractive choice for increasingly larger customers.

International revenue represented 18% of our global business in the third quarter. We continued to see strong demand for our products overseas, an indication that NetSuite addresses the significant global opportunity. Because of this we expect to see this metric increase in future years.

As described on most recent 10-Q and 10-K, we recognized $1.5 million of revenue in Q3 related to the distribution rights for our localized on-demand application suite for the Japanese market. We expect to continue to recognize $1.5 million in revenue related to be distribution-wise by localized Japanese products through Q1 of 2009.

We have also provided detail regarding the balance sheet impact of this transaction in the financial tables accompanying the press release on our website. If you are building a model of our future revenues, you should take this into account that the revenue will not recur in the second quarter of 2009 and beyond.

Overall gross margin for Q3 of 2008 was 69%, a slight decrease compared to 70% in the second quarter of 2008. This decrease was in part due to additional expenses relating to hiring of additional employees in our professional services training organizations. We expect our gross margin to stay roughly flat relative to Q2 and Q3 for the remainder of the year.

Turning to our operating expenses, product development expense was $4.9 million in the third quarter, an increase of 26% over the previous quarter, primarily as a result of the impact of having OpenAir employees including their results for the full quarter and some additional hiring.

For 2008, we expect product development expense to be roughly 12% to 13% of our revenue. Sales and marketing expense was $19 million in the third quarter, an increase of 1% over the second quarter of 2008. During the quarter, increases in expenses due to additional sales head count as well as the recognition of the deferred commissions were offset by decreases in spending on marketing programs and travel expenses.

Sales rep hiring was somewhat behind our initial plan and we do not usually hire in the fourth quarter; however, we think that hiring great sales talent will become easier in the coming quarters. We currently have 170 quota-bearing reps, which give us significant sales capacity to continue to grow our business into the new year.

As stated in our SEC filings, our sales commission expenses are deferred and amortized over the contract term, but paid in full to the sales person in the month after receipt of payment from the customer.

G&A for the third quarter was $5.4 million, an 18% increase from the previous quarter. This increase is primarily a result of including OpenAir in our results for the full quarter as well as increases in head count, legal expenses, and spending for Sarbanes-Oxley compliance. For 2008, we expect G&A expense to be roughly 12% to 13% of our revenue.

Due to our operations in international locations, higher portions of our expenses were exposed to variations in foreign exchange rates. For Q3 of 2008, approximately 36% of our expenses were in currencies other than the US dollar. We did incur $874,000 in foreign exchanges losses in Q3 related to re-evaluation of the net assets, which I will discuss in more detail later.

We had 58 net employees in the third quarter of 2008, in increase of 6% quarter-over-quarter for a total of 959 employees at the end of the quarter. As we look forward, we intend to take a cautious approach on hiring.

We will only invest in certain functional areas as we see opportunities present themselves. As such, we expect the growth in our head count to grow a more measured pace in the near term. Given the substantial hiring so far during 2008 in services, support, and sales, we believe that we have significant resources at present to continue to grow the company.

Total other income and expense in the third quarter was a loss of $209,000 versus an income of $982,000 in the second quarter of 2008, a decrease of $1.2 million. This decrease was a result of lower interest income and a negative foreign exchange impact.

Interest income was $750,000 during Q3 of 2008, a decrease of 31% from the prior quarter, primarily due to the declining interest rate earned on our cash balances and to the transfer of our cash balances to US treasuries.

Our plans are to carefully monitor the current financing environment and to selectively reinvest in only the highest grade, most liquid assets as and when we believe is appropriate. We closed the quarter with $133 million in cash.

I would like to discuss in more detail the impact of foreign exchange in other income and expense. As a result of the strengthening of the US dollar, we incurred $874,000 in foreign exchange losses during the third quarter. These losses were the result of re-evaluating assets and liabilities denominated in foreign currencies. We have now implemented a more aggressive hedging strategy to reduce the short-term balance sheet exposure of foreign exchange rate fluctuations, though we could still experience some quarterly fluctuations in the future.

In Q3 of 2008, we recorded $221,000 in income tax provision. This was principally related to our international entities. For the US tax purposes, we expect net-operating losses to offset any domestic earnings in the near term. Non-GAAP operating loss for the third quarter was $1.5 million versus a non-GAAP operating loss of $1.9 million in the prior quarter, an improvement of 21%. This was largely the result of solid revenue growth to outpace spending especially in sales and marketing.

On a non-GAAP basis, net loss for the third quarter was $1.7 million versus a net loss of $900,000 in the prior quarter. The EPS loss for the third quarter on a non-GAAP basis was negative $0.03, and excluding the impact of foreign exchange loss, non-GAAP EPS would have been negative $0.01.

The weighted average basic and diluted shares outstanding used for calculating EPS was 60.4 million shares for the quarter. This is less than the outlook we provided in Q2 of 62 million shares as fewer than expected employees exercised stock options. As a reminder, a non-GAAP reconciliation is available on our website.

Cash flow from operations for Q3 was negative $3.4 million as compared to negative $1.8 million for Q2 of 2008. Cash flow from operations was, as previously announced, impacted by the payments of certain tax liabilities related to prior periods. In addition, towards the end of the quarter, we did see some increases in our days billings outstanding, which we believe is related to the current financing environment. However, we continued to closely monitor this. I have not seen any further deterioration during October.

Cash flow used in investing in Q3 2008 was $1.8 million as compared to $30 million for Q2 of 2008 and $1.1 million for Q3 of 2007. Third quarter 2008 investing cash flows almost entirely relate to the purchase of capital equipment. In the fourth quarter of 2008, there will be an additional $1.5 million of leasehold improvements related to our expansion in our San Mateo headquarters and other international offices, Q2 of 2008 investing cash flows including $28.2 million related to the OpenAir acquisition.

Let me turn to the balance sheet. We closed the quarter with $133 million in cash. Accounts receivable ended the quarter at $22.6 million up from $21.5 million at the end of the second quarter, probably as a result of the increase in days billings outstanding. Given our revenue recognition model on the flow-deferred revenue, we do not use the traditional DSO calculation as a metric internally or focus on days billings or invoice as outstanding.

While most of our business is now billed annually, some customers are billed quarterly, even though customers generally have annual contracts. The average amount billed for each customer in the third quarter was approximately 7 months worth of services, which is in line with the prior quarter, but below our historic averages.

Short-term deferred revenue, excluding the impact of Japan transaction, totaled $64.2 million at the end of Q3, an increase of $0.3 million over the prior quarter. Short-term deferred revenue related to the Japan transaction will decline by $1.5 million quarterly through the end of Q1 of 2009, as we are less than 12 months away from recognizing certain elements of the transaction in full.

Total long-term deferred revenue was $8.5 million at the end of Q3, a decrease of $817,000 over the prior quarter as we continued to shift away from multi-year contracts to one-year contracts. We expect our long-term deferred revenue balances to decline.

In the third quarter, we incurred $787,000 of expenses related to the amortization of intangible assets, primarily related to the OpenAir acquisition. We expect to incur approximately $640,000 of amortization expense in Q4 of 2008 and in each quarter of 2009. These expenses are not reflected in our non-GAAP results.

Stock-based compensation expense for the third quarter of 2008 was $3.8 million as opposed to $2 million in the prior quarter. This increase was primarily related to our annual employee stock grants that we make to many of our employees in the third quarter of each year.

Now, I would like to move on to our forward-looking financial outlook which is covered by the cautionary language outlined at the start of this call and is based on assumptions which are subject to change over time.

For Q4 2008, we are projecting revenue in the range of $41 million to $42 million and non-GAAP net loss in the range of negative $900,000 to negative $300,000. This indicates non-GAAP EPS of approximately negative $0.01 to $0.00. Our projections assume a weighted average share count for Q4 of 61 million shares.

This concludes my prepared remarks. With that, I would turn the call over to Zach.

Zach Nelson

Thanks Jim, and in closing, I would to say that we are optimistic about our position and prospects, but of course given the macro economic conditions, we are cautiously so. We are managing our expenses very aggressively and monitoring our customer and prospect base closely.

On the sales front, because we did not plan on expanding our sales force this quarter, we will leverage the team we have through Q4. On the product front, we will continue to invest in verticals and add the features our customers need to be successful. Our services and support capacity is also strong.

We have a strong customer base and a good flow of prospects, and last but not least, we have a great balance sheet with $133 million in the bank. In these environments, the strong gets stronger and the weak die. With all of our financial product sales, services, and customer assets, we think NetSuite will emerge from this downturn with an even greater lead and greater strength.

So, with that, I will turn it over to the operator for any questions that you might have.

Zach Nelson

Operator, you can poll for questions when you are ready.

Question-and-Answer Session


(Operator instructions) We will take our first question from Jeff Keene with William Blair.

Jeff Keene – William Blair

Yes, could you guys please talk about your business in October and what demand looked like and also what close rates looked like?

Zach Nelson

Yes, this is Zach. We typically do not comment on bookings in a quarter, but this is – I think this is a little unusual time, so we might give a little color around that. I guess I would say, at least from our sales teams perspective, the October month was better than anticipated, so we are pretty happy with what – what we saw actually close in October. It felt like a normal month in many ways. I personally was in New York for about a week and met with several customers both of whom closed, and so I had a little insight into their mindset, and I would say in many cases, they are somewhat like us, they are cautiously optimistic, both of those customers that I visited with did in fact ultimately end up purchasing NetSuite in the month, so I think there were some very good signs in October, but of course I could still think it is a little bit too early to draw conclusions for the entire quarter. You know, we saw that in the last quarter, and certainly in the September month that that would have been very dangerous, but I think we are pretty heartened by what we saw in October.

Jeff Keene – William Blair

Great. Could you guys also comment on what the billings duration was for the quarter?

Jim McGeever

So, the billings duration on new business was about 7 months – typically on a 12-month contract, we billed on average 7 months to a new customer.

Jeff Keene – William Blair

And what was it last quarter?

Jim McGeever

It is roughly flat with last quarter, but that is below our historical averages. We traditionally have averaged about 9 months.

Jeff Keene – William Blair

Great. Thank you guys very much.


And we will take our next question from Pat Walravens with JMP Securities, and Pat Walravens your line is open if you do have a question.

Patrick Walravens – JMP Securities

Hi. Can you hear me okay?

Jim McGeever

Yes Pat.

Patrick Walravens – JMP Securities

Okay, hi guys. So, Jim, I want to make sure I heard you right, what was your revenue guidance for Q4?

Jim McGeever

$41 million to $42 million.

Patrick Walravens – JMP Securities

Okay, we are going to have to talk about that a little bit, so that means $152 million to $153 million for the year, and the last quarter, you had us at $156 million to $159 million, where did the revenue go?

Jim McGeever

Well, I mean, it is just several reasons, so we all being cautious on new business, obviously what happened in September and September’s bookings towards the end came in very light in the latter part of September. There were some large – pretty large deals that we signed in Q3 that were on delayed rev racks, so these are contracts which we signed but unfortunately we are not going to get – start recognizing revenue until some positive implementation are complete. We are being cautious on churn. We did not see anything – the trend in Q3 was consistent with what we have seen in 2008 in line with Q2, but when we are looking at forecast, we are being cautious on that and we will – as I said, we are also being cautious on the new business side.

Patrick Walravens – JMP Securities

So that would put you at – I guess 32% year-over-year growth rate? Does that sound right? I guess that – here is my question, that puts you at 32% year-over-year growth rate, is that what we should expect going forward?

Jim McGeever

Well, it will depend on – we are seeing a very wide range of expectations from analysts and there are some people who think the economy – view the world and the economy as glass half full, and some people view as glass half empty, and it really – we are not giving guidance for 2009, our plan was always to give guidance on that January call. It really depends on your view of the world as what you think is going to happen to the economy, so we are not giving guidance for 2009 at this point, but obviously there could be a wide range of expectations out there right now.

Patrick Walravens – JMP Securities

Okay, I guess Maybe here is another way to get out, so you had 300 new customers and in what you have disclosed so far, at least – you know that is worse than anything you had in the last six quarters, right? How far back do we have to go to get a bookings quarter as light as this one was?

Jim McGeever

Well, just in terms of number of customers, we also have to remember that the average selling price has also gone up significantly. So, 300 customers today is not the equivalent of 300 customers two years ago because the average deal size has gone up that much – that much.

Patrick Walravens – JMP Securities

Right, I guess I am just trying to get a sense for how light was it this year.

Jim McGeever

And obviously, we will do some follow-up calls as well, and we can go into some more detail, but I mean so – as I said, September did come in light at the end of September in terms of the bookings number, but we think that was largely driven by not passing off the bail out bill, and we really saw business froze in the last couple of days, so we do not know and we cannot predict because we are not economists if those trends would continue as we have said in October. October seemed like a normal month, and if that continues, then the business could continue as normal, but we are being cautious.

Zach Nelson

And I would say, this is Zach, having lived through those two days in September, it was – it was really unprecedented in terms of basically – everybody just froze their wallets and pushed the deal off into this quarter, as you know, we are re-evaluating at this point, so it was definitely a very interesting two days and it happened to happen literally on the last two days of the quarter.

Patrick Walravens – JMP Securities

Okay, I will pass it on to the next person, thank you.


Okay, our next question is from Atul Bagga with ThinkEquity.

Atul Bagga – ThinkEquity

Hi guys. Thank you for taking my questions.

Zach Nelson


Jim McGeever


Atul Bagga – ThinkEquity

I just wanted to check with you, so can you talk a little bit about renewals, how these renewals are getting impacted in current environment? Are you seeing any up sell, cross sell opportunities in this environment or is that something, which is also getting impacted now?

Zach Nelson

Yes, I guess, this is Zach. Generally, we have not seen any real change in revenue renewals throughout this year, so Q3 was consistent with the rest of the year in terms of revenue churn and/or renewal, and historically and in Q3, up sell continued to replace that churn, so there was no real change from our experience this year on either up sell or renewal, so that was business as usual from all appearances.

Atul Bagga – ThinkEquity

And on the pricing that you talked about with – the campaign that you talked about for Salesforce and upcoming for SAP, can you share some results from the campaign that you launched for customers?

Zach Nelson

It is still early, but I am being very heartened. We closed our first deal, that was one of the deals I was involved with in New York was somebody who was just looking at us for ERP and then they threw their Salesforce users, and as a part of the promotions, that was very nice, and then we also have a couple other deals that I am aware of in the pipeline that were pure ERP only deals, and now they have also put their CRM seats in place, so I really do think it is going to be a huge opportunity for us. People are paying enormous amount of money for and in most cases, it is providing pretty basic SFA functionality. A lot of customers do not even generate a forecast out of the system, so – and I think you can figure out how much they are paying per user just based on Salesforce’s reported number, that is something like on average $75, it is not unusual to see a $100 per user per month. That is a very big expense in this environment and we think our solution certainly on a standalone SFA is equivalent to theirs, but then when you add the broader suite, it is a much more powerful solution, so we have been happy to see what has happened so far and it really was not some sort of publicity (inaudible). We think there is a real opportunity there and we certainly think there is a real opportunity in the SAP world. You will see more about that in the next few days, but we have already done this where we have had either replaced SAP in a division or become a – have NetSuite installed at a traditional SAP shop at a divisional level, and the cost savings there are enormous, so I think you will see some progress on that front as well.

Atul Bagga – ThinkEquity

And on campaign, do you think the opportunity is mainly to convert these customers from Salesforce to NetSuite CRM, or is it the broader opportunity from CRM to integrated suites?

Zach Nelson

Well, we are seeing both and it has been, I think, positive on both. You know, again there were these two deals that I am aware that were ERP only that are now full suite. Those haven’t closed, but they are in the pipeline and they are pretty exciting, and then there are others where they are only CRM only deals that very large C count CRM only deals that the people are looking in that suite to replace Salesforce for us, so –now all that said, in some ways – in some places we partner with Salesforce, right. There was a connector announced at Dream Force today connecting NetSuite and Salesforce. There will always be people who want to integrate the two applications and we are happy to do that, but in the same token, at the end of the day, I think people get enormous efficiencies and can get cost reductions based on some of these offers we are putting in front of them.

Atul Bagga – ThinkEquity

Perfect, thank you.


We will take our next question from Tom Roderick with Thomas Weisel Partners.

Gordon – Thomas Weisel Partners

Hi guys, this is actually Gordon [ph] for Tom. Hoping you might be able to give us some sort of indication as to the adoption pattern of OneWorld (inaudible), are you seeing any up tick there or is it still early goings?

Zach Nelson

I should have had better numbers for you OneWorld on this call, I have not looked at that closely, but OneWorld is really a big segment of the – one of the big parts of the reason why we are – you are seeing our average sales price move up, so it becoming very main stream part of the product mix and that is why to look at it nearly as much as I used to, it is almost – every customer is certainly looking at it if not buying it, so it is a fantastic product, in particular now that we have gone off and launched it in Asia, which we spent much of the last quarter doing, that opens up new opportunities for us there as well, so we are still at the very early beginning of that cycle, but I think – particularly, if you look at this SAP offer, I think what you will see there in these divisions of large companies is these divisions running OneWorld, they can run their divisions across multiple countries, multiple companies, and still consolidate into that SAP corporate backbone, so I think you will see that OneWorld play a role in that promotion as well.

Gordon – Thomas Weisel Partners

Excellent, and may be – any additional interest from the ISV community out there?

Zach Nelson

Well, we have been making good progress internally on NS VOS. We have been staffing the division very aggressively here. We hired a manager for the effort, a director for the effort last quarter and now he has staffed up his team, so we are making progress in a number of verticals with a number of small, medium, and large ISVs. Our focus is, really what we are trying to do in the company is really tier our program so that we have strategic partners that are partnering with us to go after certain verticals, that is where we spend a lot of the effort in this quarter. There is also an effort to talk about the great masses of developers who may want to develop a point solution or integrate their existing point solution with NetSuite. They may not be so strategic, that is another element, but right now – where we have really focused our effort and research on is finding really deep vertical partners that we can go to market with and I think you will see some of the fruits of that in the coming quarters.

Gordon – Thomas Weisel Partners

Great, and just one last question from me. On the competitive landscape, you are seeing any change out there, any guys out there perhaps you know pricing more aggressively, some smaller, niche, on-demand ERP guys perhaps?

Jim McGeever

No, you know, we do not really see that. The competitive landscape really has not changed that much, you know, we really compete against the – all of these incredible number of mid-market traditional vendors, so that has not changed particularly much. I think in general, if you look at the promotions that we put together around Salesforce, around SAP, you know we are not reducing our prices, we are causing our competition to reduce theirs, and so I do not think you will see us dealing any price pressure, because our functionality is so differentiated, but when you have undifferentiated functionality, everybody does contact management, that is when price pressure begins, and when you look at things like OneWorld and multi-company consolidation in the integrated suite, nobody has these capabilities, so I do not really expect to see enormous price erosion on NetSuite. I do expect us to put price pressure on our competition, particularly in point product segment.

Gordon – Thomas Weisel Partners

Okay, thank you very much.


(Operator instructions) There appear to be no further questions at this time. I will turn the conference back over to our speakers for any additional closing comments.

Jim McGeever

Thank you very much operator and thanks all for joining us, in fact just one last point here. I think the implied growth rate on the numbers you were talking about is something like 40% to 42% growth, but – at any rate. With that, we will end the conference call. Thank you very much for your time and we look forward to seeing you all later.


And that does conclude today’s conference call. We thank you all for your participation and you may now disconnect.

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