NetSuite Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.25.13 | About: NetSuite Inc. (N)

NetSuite (NYSE:N)

Q1 2013 Earnings Call

April 25, 2013 5:00 pm ET

Executives

Ronald Gill - Chief Financial Officer and Principal Accounting Officer

Zachary Nelson - Chief Executive Officer, President and Director

Analysts

Jason Maynard - Wells Fargo Securities, LLC, Research Division

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

Philip Winslow - Crédit Suisse AG, Research Division

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Laura Lederman - William Blair & Company L.L.C., Research Division

Patrick D. Walravens - JMP Securities LLC, Research Division

Scott R. Berg - Northland Capital Markets, Research Division

Matthew Gall

David M. Hilal - FBR Capital Markets & Co., Research Division

Michael Huang - Needham & Company, LLC, Research Division

Matthew J. Coss - Piper Jaffray Companies, Research Division

Jennifer Swanson Lowe - Morgan Stanley, Research Division

Operator

Thanks so much for holding, everyone, and welcome to the NetSuite First Quarter 2013 Financial Results Conference Call. Just a quick reminder, today's call is being recorded. [Operator Instructions] Now at this time, I'd like to turn your conference over to your host, Mr. Ron Gill, Chief Financial Officer. Please go ahead, sir.

Ronald Gill

Thank you, operator. Good afternoon, everyone, and welcome to NetSuite's First Quarter 2013 Financial Results Conference Call. A more complete disclosure of our results can be found in our press release issued about an hour ago, as well as in our related Form 8-K furnished to the SEC earlier today. To access the press release and the financial details, please see the Investor Relations section of our website. As a reminder, today's call is being recorded, and a replay will be available following the conclusion of the call. On the call with me today is Zach Nelson, our Chief Executive Officer. Zach and I will begin with prepared remarks, and then we'll open up the line for questions.

During the call today, we'll be referring to both GAAP and non-GAAP financial measures. The reconciliation of our GAAP to non-GAAP financial information is provided in our press release, which is available on our website. All of the nonrevenue financial measures we will discuss today are non-GAAP, unless we state that the measure is a GAAP measure.

The primary purpose of today's call is to discuss our first quarter 2013 results. However, some of the information discussed during this call, including any financial outlook we provide, may constitute forward-looking statements within the meaning of the U.S. federal securities laws. These statements are subject to risks, uncertainties and assumptions and are based on financial information available as of today. We disclaim any obligation to update any forward-looking statements or outlook. Risks and uncertainties that would cause our results to differ materially from those expressed or implied by any such forward-looking statements include those summarized in today's press release. These risks and additional risks are also described in detail in our reports that we file from time to time with the SEC, including our most recent 10-K and 10-Q filings, which I encourage you to read.

With that, I'll now turn the call over to Zach.

Zachary Nelson

Thank you, Ron, and thank you, all, for joining us today. It is indeed a pleasure to speak with you and provide our first report on the 2013 fiscal year. As I stated at the end of our Q4 call, while Q4 was a record quarter, our pipeline was by no means drained as we went into Q1. Our results during the quarter bear out that assessment as we had one of our best new business quarters in recent memory. And that is saying a lot given the roll we've been on for the last several years. In addition to exceeding outlook for the quarter on every metric, the great start allows us to raise substantially our revenue guidance for the year.

For the quarter, on the revenue front, year-over-year our top line grew by 32% to a record $91.6 million, above our previously stated outlook of $90.5 million to $91 million. This growth was driven by excellent performance across the company with revenue in each major vertical, geography and channel growing in double digits. And in the installed base, we once again saw record revenue retention, continuing the trends in customer satisfaction that we have experienced over the past several years. Our non-GAAP earnings came in at $0.04 per share, above our previously stated outlook of $0.02 to $0.03 per share for the quarter.

As we said last quarter when we gave our outlook for this fiscal year, 2013 would be a year of investment to take advantage of the opportunity that we have in front of us. And during the quarter, we did kick off significant advertising and hiring campaigns. On the hiring front, we did very well by adding 175 net new employees. Over the past year, we have added more than 600 net new employees, bringing our total headcount to more than 2,000 today.

Much of that hiring is going into the onboarding of quota-bearing sales reps, and our calculated billing results for the quarter gives some insight into the productivity of the capacity we have added over the last year. In Q1, calculated billings, defined as the change in deferred revenue plus revenue, grew by 32% over Q1 of 2012. And as you'll recall, Q1 of 2012 was a great quarter, so it's a tough comparison. These results are indicative of the excellent execution of our global sales organization, and productivity is up substantially year-over-year. And as we discussed on the Q4 call, the seamless transition of sales leadership in North America from James Ramsey to Jeff Honeycomb happened flawlessly during the quarter, as evidenced by these strong results.

Finally, operating cash flow was once again strong, coming in at $14.7 million, up nearly 40% year-over-year and above our stated outlook of $11.5 million to $12 million dollars for the quarter. These quarterly results are a tribute to our customers who are using NetSuite to transform their operations and enable their business visions and to our 2,000-plus employees around the globe whose commitment enables those transformations.

Our results also reinforce our market momentum driven by the growing appetite for small, medium and large enterprises for NetSuite's cloud-based business suite. Q1 was a strong quarter on the new customer front. We added roughly 325 total new customers, and we did it with an average selling price that was 14% higher than the prior year. We also had a strong upsell quarter as many of our large enterprise deployments that started as pilots in 2012 expanded during the quarter. Our channel sales efforts continue to show great success and accelerated to 50% growth year-over-year. Unlike some of our non-cloud competitors, Asia Pacific was very strong as sales through the channel there grew at more than 100%.

I have always said that the foundation of NetSuite has been built on our strategy of delivering to midsize companies a system more powerful and modern than those used by the world's largest companies. And once again, our mid-market customers agreed. And of course, the opportunity in the mid-market is enormous given the fragmentation of the systems these businesses have been forced to kludge together over the years.

Our enterprise business has also played a very important role in our strong Q1 results, with the number of deals greater than $100,000 growing by more than 40% year-over-year. In part, growth in sales to larger companies is propelled by our NetSuite OneWorld product that enables multinational companies to run their business operations in real time in the cloud. Sales of OneWorld were very strong during the quarter. We sold the highest number ever of OneWorld deals during the quarter, and OneWorld represented more than 40% of our new business sales in Q1.

Another very strong performer during the quarter was our eTail/Retail vertical, which grew about 70% over the first quarter of 2012. And this growth rate understates the growth of our commerce offerings since SuiteCommerce sold in the other verticals is not counted in this 70% growth rate. NetSuite, driven by SuiteCommerce as our e-commerce platform, has been markedly successful in helping our customers turn their core operational systems into their customer-facing e-commerce systems. Today, there are more than 3,000 B2B and B2C websites that use SuiteCommerce to transact business online.

Last year, we extended SuiteCommerce to enable the world's largest companies to gain the power and agility of this approach. Global omnichannel commerce is what SuiteCommerce is all about, and SuiteCommerce represents the only cloud-based multichannel offering in the world with technology for managing interactions from in-store point of sale to online interactions across any device. Our next-generation offerings like NetSuite OneWorld and SuiteCommerce are delivering capabilities found nowhere else in the market and are fundamentally transforming the operations of small, medium and large business enterprises so that they can achieve their business vision.

While we're in the early stages of the year, our pipeline is growing nicely, and we continue to add sales headcount to meet the opportunity we see both in the mid-market and upmarket in the enterprise arena. We now have more sales capacity than at any time in our history. So any way you look at the business, by record financial metrics from the top line, by growing average selling price, by customer revenue retention or by notable strength in our dual attack on midsize and large enterprises, Q1 was a great start to the year.

Following Ron's detailed remarks on our financials, I'll close by sharing some of the exciting activities that will be a part of our upcoming May SuiteWorld User Conference. So with that, let me turn it over to Ron Gill, our CFO.

Ronald Gill

Thank you, Zach. As you heard from Zach, Q1 was another really strong quarter and a great start for 2013. Let me take you through some of the numbers. As a reminder, all the nonrevenue financial figures I will discuss here are non-GAAP unless I state the measure as a GAAP number. Revenues are, of course, GAAP numbers, and as always, you can find a reconciliation of GAAP to non-GAAP results in today's press release.

Revenues for the first quarter totaled $91.6 million, up 8% sequentially and up 32% over Q1 of 2012. Recurring revenues from subscription and support grew 8% sequentially and 28% over the year-ago quarter to $74 million, while our nonrecurring revenue, which comes primarily from professional services, was $17.7 million for the quarter and grew 56% over that for same period last year. Our new business results were very strong. And as you can see, the associated demand for implementation services continues to drive annual growth of more than 50% to nonrecurring revenues. More importantly, the growth rate of recurring revenue continues to accelerate very nicely as well. Q1, in fact, saw the highest rate of growth in recurring revenue we've seen since the first quarter of 2009.

Year-over-year, the United States was the fastest-growing geographic area on a revenue basis, and approximately 26% of our revenue for Q1 was generated outside the U.S. Our EMEA team had the best booking results we've seen there since we went public and more than doubled their year-ago result, so we're hopeful that we're starting to see the beginnings of a thaw in Europe. Average deal size continued to increase in Q1 with the ASP on new business deals up 14% over that for the first quarter of last year. At the larger end of the spectrum, sales of NetSuite OneWorld, which is typically purchased by larger customers with more complex operations, were very strong in Q1 and accounted for more than 40% of new business. The total number of OneWorld deals sold in the quarter was a new record, exceeding even that for Q4 of last year.

Moving down the P&L to gross margins. We saw slight decrease year-over-year from 73% to 71%, driven primarily by the larger portion of professional services revenue in the mix. The gross margin on recurring revenue was 85% compared with 86% in the year-ago quarter, while the gross margin on nonrecurring revenue grew to 12% from 8% in the first quarter of last year. Overall, we expect gross margin to be approximately 71% of revenue for the full year in 2013.

Turning to our non-GAAP operating expenses. Product development expense was $11.8 million for the quarter, up 50% over Q1 of 2012 and representing about 13% of Q1 2013 revenue. We've been making huge investments in our product team with the number of people in that team up more than 60% over the year-ago quarter. This is certainly the fastest-growing area of the company, and I expect that spending on product team will be approximately 13% of revenue for 2013.

Sales and marketing expenses were $41.6 million or 45% of revenue in Q1, on par with about the same percentage of revenue in Q1 of last year. We continue to invest aggressively in sales capacity with headcount growing fastest in the presales and direct sales teams. I generally expect sales and marketing spending will continue near that level as a percentage of revenue for the remainder of 2013. We do have SuiteWorld, our largest marketing event here in Q2, so we will see a higher level of marketing spending in Q2 associated with that event.

G&A expenses were $7.8 million or 8.5% of revenue in the first quarter. That's down from 9.3% of revenue in Q1 of 2012, so we're pleased to be continuing our efficiency gains there.

Non-GAAP operating income in the first quarter was $3.8 million. This equates to a non-GAAP operating margin of 4.1% compared with a 6.7% margin in the first quarter last year. This is in line with our objective to step up the pace of investment in sales, marketing and the product team in the first half of this year.

During the quarter, we reported a net income tax benefit of approximately $351,000. This was the result of a onetime benefit of approximately $1.1 million associated with a small acquisition we did during the quarter. Factoring out that onetime impact, we recorded an income tax expense of $768,000 principally related to our international entities. We continue to expect our net operating losses to offset any domestic earnings for tax purposes for the foreseeable future.

Non-GAAP net income for first quarter was $2.8 million. Non-GAAP earnings per share for Q1 was $0.04. This was down from the $0.06 in the year-ago quarter, again, per our intention to start the year with a focus on significant investment but above our stated outlook range of $0.02 to $0.03 for the quarter.

Moving on to the balance sheet. We had another record quarter for cash collections, and our cash balance continues to increase. Cash flow from operations in Q1 was $14.7 million, up 39% year-over-year, and we closed the quarter with $190.7 million in cash and cash equivalents and minimal debt. That represents an increase in our cash balance of $36.5 million or 24% over the balance we had just a year ago at the end of Q1 2012.

Moving down the balance sheet from cash to deferred revenue. Our total deferred revenue balance increased to $172.3 million, an increase of 7% over the prior quarter and up 43% over the prior year. As you may calculate from the financials published in the press release, calculated billings, defined as revenue plus the change in deferred revenue were $102.5 million for the quarter, representing an increase of 32% over the first quarter of 2012. As I've consistently pointed out on these calls, there's a wide array of factors that influence calculated billings, and quarter-to-quarter fluctuations in the calculated billings metric should not be taken as an indicator of changes in future revenues.

You may recall that on last quarter's call, I mentioned that changes in our renewal agreement had caused the recording of some renewals to pull out of Q1 and into Q4, thus raising the growth rate for Q4. As a result, on that call, I normalized the Q4 calculated billings growth rate down from the 41% on the face of the financials to about 33%. If we do that same normalization calculation and neutralize out the renewal effect and the impact of FX rates and billing term, the year-over-year growth rate for Q1 normalizes up from 32% to 37%. This renewal impact on calculated billings began in Q2 of last year. So I'll need to give you a normalized figure one more time next quarter, and then that phenomenon will be behind us.

Headcount on March 31, 2013, was 1,953, up 175 heads from Q4 2012 and an increase of 46% from Q1 of 2012. Hiring momentum really picked up in Q1, and we added headcount across the organization. The majority of headcount additions were in sales and the product development organization, which are key areas of investment for this year.

Now I'd like to move to the forward-looking financial outlook, which is covered by the cautionary language I outlined at the start of the call and based on assumptions which are subject to change over time. We've had a great start to the year. We've got solid momentum on the sale side, and we're investing aggressively in both product and distribution for the future. With that in mind, we're going to be raising our full year outlook for revenue. Our previous outlook was for revenue in the range of $397 million to $402 million, and we're now raising that to a range of $404 million to $408 million. We're going to keep putting the overachievement back into the business, so we'll maintain our earlier outlook for operating cash flow of $55 million to $60 million and non-GAAP EPS of $0.26 to $0.27 for 2013.

For the second quarter of 2013, we expect revenues in the $100 million to $101 million range. The SuiteWorld event this quarter will be the largest we've ever done by far, and that will drive some increase in cash expenses in Q2. We anticipate non-GAAP EPS of approximately $0.02 and operating cash flow of $12 million to $12.5 million.

That concludes my prepared remarks. We're all looking forward to a great Q2 and an exciting SuiteWorld in May. With that, I'll turn the call back over to Zach.

Zachary Nelson

Thank you, Ron. Ron's comments reinforced that the significant momentum we gained in 2012 carried over into the first quarter of 2013. And I think the trends driving NetSuite's growth will only get stronger as the year progresses. Our SuiteWorld Conference will be held May 13 through May 16, and it will be a great opportunity to experience the momentum of our business as we are joined by thousands of customers, partners and prospects from around the world. SuiteWorld is already far surpassing last year in terms of the number of attendees and partners that will join us.

This year, each day, we'll have major news as we have significant announcements across all of our core initiatives. On the product front, the result of growing our development organization by 60% year-over-year will be on display as we will be introducing many new horizontal and vertical offerings. On the partnership front, we have many announcements slated, several of which will surprise the market. And of course, we will feature customers, large and small, that are accomplishing amazing things in partnership with NetSuite. We hope you'll be able to join us either in person or online during our live streaming events.

And with that, we will now open the lines for your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Jason Maynard with Wells Fargo.

Jason Maynard - Wells Fargo Securities, LLC, Research Division

I just have 2 questions. First, Zach, I know this is Q1 and you had great results, but it definitely feels like there's a change where there's a tipping point in momentum in the market. So I'd love to just get your high-level take on what do you think is happening, how are customers voting with dollars and what are some of the drivers there. And then the second question is just around your go to market and distribution, maybe a little bit more drill down on some of the partner relationships, how that's helping OneWorld and some of the upmarket traction you're generating.

Zachary Nelson

Great. Those 2 questions are kind of one question in many ways. I think if I look at the quarter holistically, you just -- you see enormous demand coming to NetSuite and coming to NetSuite partners. So you really, I think, are seeing a continued shift, not just of applications of the cloud, but obviously, the big change when you speak about NetSuite is the shift of mission-critical applications of the cloud. So I think that's something we're seeing. And it's equally exciting to see the level at which our partners are seeing that shift, and that's both the classic mid-market bar channel that's been growing for NetSuite over the last decade really and also the systems integrator channel that's really grown over the last few years. We're seeing that demand not just from our direct organization but also on the indirect front. So you're starting to see -- and the thing that gets really exciting about the channel really is we've always managed the business on things that we feel we can control pretty tightly, which is really our direct sales and service efforts. The beauty of what's happening now is some of these things that are outside our control, which are really demand driven, and by that, I mean things that are going through the channel, are really starting to grow very nicely, both in the mid-market and in the enterprise. So I think that's probably the most interesting trend that we're starting to see, is real momentum in the broad-based channel. The other thing we're seeing in that channel area is people shifting from not just traditional products like Microsoft Great Plains. The channel's been abandoning that for years now. Sage in the U.K., that's accelerating. But you're also starting to see companies that bet on the wrong cloud platform begin to move to NetSuite for their sales efforts. And in the last quarter, we saw people begin to move from Business ByDesign, for example, based on the lack of traction of that product in the market, and frankly, the lack of commitment from SAP as their strategy has begun to change in the cloud. And they've moved that really to be an HR sales model and enterprise sales model and moving away from Business ByDesign. So it's really interesting to see not just your traditional Microsoft Great Plains channel begin to move, but channel partners who bet on the wrong cloud platform like Business ByDesign are beginning to move.

Operator

And we will now take our next question from Brendan Barnicle with Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

Zach, I wanted to just drill down a little bit on the success you had over in Europe and kind of the way that market is developing for you guys. I know when we look at sales force in that market, you kind of started in the mid-market and moved up. Have you noticed anything different about how you go to market there and how the market's responding to the offerings you've got versus kind of what you've seen in the U.S.?

Zachary Nelson

Well, Ron did point that out, that Europe was particularly strong this quarter. It was -- if you look at the regions on a year-over-year growth rate basis, it was the strongest. So that was very positive on many fronts. I think -- my analysis of what's going on in Europe starting with the mid-market is the companies there are incredibly loyal to Sage for whatever reason. Obviously, it's a local company, particularly in the U.K., and there's some loyalty to the product line. But I think that's starting to fade now as Sage has been unable to deliver anything cloud-based, particularly on the ERP side. So seeing what happened in the last quarter there, I'm very excited about the Sage replacement cycle that's about to happen in that area. So that's a real important move there. The other thing we are starting to see there is it was a bit retarded from the speed with which it happened in the U.S. You are starting to also now begin to see enterprises, large enterprises, move up to NetSuite. We signed a very large deal with $1 billion company over there in the quarter. So you're beginning to see begin to happen in Europe what happened really in the U.S. over the last couple of years. So we're very excited about Europe now. And I think as we look at the rest of the year, we may see incremental investment, frankly, in Europe.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

And then any updates on any new verticals that you saw traction in? And lastly, anything around your expense management product?

Zachary Nelson

Well, I don't -- we're in pretty broad verticals and really industries today, right? Wholesale -- people that sell things, distributors, people that make things, manufacturing, the services-based businesses, time-based businesses and eTail/Retail. They're all very strong for us. eTail/Retail had just an incredible quarter on the back of some of the new introductions we've made on SuiteCommerce. That was a 70% grower year-over-year. So I have a feeling we're clearly the fastest-growing public e-commerce company on the planet today with that sort of new business growth. So the industries that we're in are very attractive, and I think at SuiteWorld, you'll see some true vertical solutions from partners being built on NetSuite and on SuiteCloud, as we've talked about for many years. So that's an exciting new market expansion for us, if you will, based on our partnership strategy.

Operator

And we will now take our next question from Phil Winslow with Crédit Suisse.

Philip Winslow - Crédit Suisse AG, Research Division

I just want to echo my congratulations on a great quarter. So far, a standout from what we've seen so far. I mean along those lines, Zach, what are customers telling you? Because we've seen a lot of other names in software and hardware report really kind of below seasonal results declining and as Ron pointed out, kind of adjusting your growth rate, there's sort of no evidence of that. What are customers saying back to you about where they're focusing their dollars now, particularly just given the strength that you guys saw in OneWorld this quarter?

Zachary Nelson

Well, my perspective is if you hear a lot about sort of the phenomenon of social when people talk about next-generation business applications and how companies are quickly trying to retool their maybe, customer-facing capabilities to address some of the changes in how people communicate nowadays. You've heard less about what companies are doing to really retool their operational systems to address new business models. How do you transact a business, how do you -- not just how you communicate with customers online, but literally, how do you transact a business seamlessly with them? And that's what NetSuite's all about, is enabling them not just to talk to their customers but actually, take an order, to fulfill an order, to generate an invoice, to really have a true business relationship with these customers but in new way. And so, what I think you're starting to see is the acceleration of companies beginning replace their ancient operational infrastructure that things like Microsoft Great Plains that were designed before the Internet existed in its current form. You really can't build a modern business on a system that has no idea that the Internet exists. You can't have a real customer relationship with a company when you bill your operational systems on these pre-Internet architectures. And so I think in the same way that you're seeing race to embrace all things social, I think there's a more fundamental transformation going on in these businesses around how do we create systems that are operationally social? And that's where things like NetSuite -- and in particular, what we've done with SuiteCommerce, is enabling our customers to turn those operational systems into social, if you will, customer-facing systems.

Operator

And we will take our next question from Greg Dunham with Goldman Sachs.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Zach, I want to kind of follow up on this dynamic of increased awareness of the cloud and SaaS and why these companies are doing better than some traditional companies. And really, what I wanted to ask is how -- what have you seen in terms of the pricing umbrella versus some of your competition, even over the last year versus 2, 3 years ago? How has it changed?

Zachary Nelson

Well, I mean, you're certainly seeing -- again, NetSuite provides a unique SaaS offering. We are a mission-critical system. We are -- as I've always said, we're a heart transplant, not a knee replacement. And so they're the very complex systems that people are replacing using NetSuite to replace. And certainly, you've seen with us over last 2 years, an incredible growth in ASP. I think in 2011, it was 40 -- 50%, 49% growth in average selling price. Last year, we didn't plan on it and it was something like...

Ronald Gill

21%.

Zachary Nelson

21% growth. And this year in Q1, it was already 14% growth. So I think that phenomenon is unique to NetSuite even among SaaS players. I don't think you're seeing SaaS players grow average selling price at that sort of rate. And so part of that is when you build mission-critical functionality, there's an enormous amount of value in that and customers are willing to pay for it, number one. Number two, we talk about it as ERP but what we enable our customers to do is not possible in the traditional ERP system. The ability to turn your ERP system into customer-facing commerce system, not possible with SAP, not possible with Great Plains without enormous amounts of pain. So they're willing to pay more for that because hey, it enables them to do something that really is fundamentally impossible on their old system. So that's another contributor to average selling price. And then obviously, the third thing that's driving NetSuite is the beautiful thing of what we've created and where we've come from is we serve every segment of the market. We serve the small business market, we serve the midsized business market, and more recently over last few years, you begin to see large enterprises begin to embrace this solution. So the fact that we can scale from very small to very large companies is enormously helpful to us in terms of the market we can reach, but it also enables us to price the product appropriately based on the size of the customer and the size of the problem they're trying to solve. And certainly in the larger enterprise, they can -- the problems we're solving there are bigger, more complex and therefore, can command a higher average selling price. And you're certainly starting to see that come into play as well.

Operator

And we'll take our next question from Laura Lederman with William Blair.

Laura Lederman - William Blair & Company L.L.C., Research Division

Any really large deals or megadeals that stand out in the quarter? And kind of a similar related question, what percentage of the pipeline is now would you consider enterprise, not middle market or small business?

Zachary Nelson

Well, I can speak generally to the -- we've invested a lot in the enterprise group really over the last year. The last -- a year ago was when we first put a big investment in true enterprise sales organization. And Q1 was, by far, our biggest quarter out of that group. It was a couple hundred percent growth. It was enormous, a very big quarter for the enterprise team. And that's pretty unusual in a Q1, right? You expect a great quarter in Q4 but we had just a monster quarter out of the enterprise team in Q1. So that's a very exciting phenomenon. We're continuing to add capacity there. I think when I talk to the rest in that group, they have a lot of pipeline, more, frankly, than they can handle, so we're expanding that group rapidly. But the good news is when we bring in these reps from SAP into that enterprise group, these are territories like they've never seen before. I mean, they have enormous territories. So we're getting great sales people in that group because the opportunity with NetSuite is enormous. They'll never see a territory as large as this ever again in their career, with a product as good as what we have. So we're expecting really good things out of the enterprise group based on the results in Q1 certainly, but also based on what we see in front of us in terms of pipeline.

Laura Lederman - William Blair & Company L.L.C., Research Division

Who are you competing with for the enterprise deals? In other words, teams that you brought in over last year? Is there a competitive environment different than the other reps that you see?

Zachary Nelson

Well, yes. It's a very -- the enterprise sales process in general is very different than the mid-market sales processes, which was a realization we came to a few years ago and it's why we instantiated this enterprise sales organization. So you're selling into a lot of SAP accounts, you're selling into a lot of Oracle accounts and on a stand-alone basis, you're selling to billion-dollar companies that are replacing ancient systems like JD Edwards and Epicor and Lawson and these types of systems. So it's a pretty different profile. The mid-market, we see a lot of Great Plains in North America, you see a lot of Sage Line 50 and Line 100 in the U.K. But in the enterprise group, you'll see a different competitor. All of them, frankly, are old, Stone Age software, right? It's the same kind of mess but designed for larger companies. So the competition is similar. The price point and frankly, the skill of the other sales organizations is at a different level.

Laura Lederman - William Blair & Company L.L.C., Research Division

Final question, which is if you look at Ecommerce, can you give us a sense of the average sale sizes there versus your traditional business and what type of GMV? Is it $50 million, $10 million type of GMV type customers?

Zachary Nelson

I'm sorry, what was the second part, Laura?

Laura Lederman - William Blair & Company L.L.C., Research Division

What type of average growth merchandise value do the new SuiteCommerce customers have?

Zachary Nelson

So SuiteCommerce, there's 2 flavors of SuiteCommerce. As you know, there's the -- our existing SuiteCommerce Site Builder product and then our new SuiteCommerce Advanced product, which we've been releasing to larger companies with larger product catalogs, larger order volume really, over the last year and then we'll go GA some time this summer. So on our traditional product, it tends to be smaller, sub-$100 million retailer, sub-$50 million retailers. And on the new product, we don't really think there's a limit frankly, to the transaction volume and the size of an e-tailer that we can support with that product. So that's sort of the landscape there. And what you are beginning to see is, as we said, we've signed up billion dollar e-tailers already on the new SuiteCommerce platform. So I think you'll see -- hear more from us about -- at SuiteWorld, about some of those deals. But in both products, both -- again, we spend a lot of time talking about the enterprise opportunity here but the mid-market opportunity in ERP and commerce is just enormous. We're not taking our eye off of that ball. We want to be dominant in the mid-market. So we're definitely focused on that segment at the same time as we're attacking some of these larger enterprise deals.

Operator

And we will take our next question from Pat Walravens with GMP.

Patrick D. Walravens - JMP Securities LLC, Research Division

Zach, my question first question would be where do you think we are in the process of the channel retooling the Dell Cloud ERP? I mean, maybe if you look at the top 100 VARs, how many of them are now selling your stuff for -- I don't know other cloud vendors or selling your stuff for something else?

Zachary Nelson

Yes, I think we're probably in sort of the third inning of the channel re-architecture, re-architecting yourself for cloud solutions. This is Software as a Service was enormously disruptive to the traditional VAR channel because let's face it, if you were selling Microsoft Great Plains, you made a ton of money shopping the server back into life and doing these horrible upgrades for customers and all those kinds of things. And with a system like NetSuite, there is no server to shock back into life and there are no horrible upgrades. So all of those mid-market VARs had to really recreate a new business model around not knowing how to run Microsoft software, but how to take NetSuite software and make it help advance the cause of the customer, help advance their business vision with it. That's a different approach. So you've -- But you've begun to see that now. You saw companies like Blytheco, Sage's largest reseller last year began to build the NetSuite practice. You see things like McGladrey, who's I think, arguably is Microsoft Great Plains' biggest reseller, doing very well on NetSuite today. And as I mentioned, one of the early Business ByDesign resellers is now moving to NetSuite as well, based on both the support of NetSuite in the marketplace as well as obviously, we're 100% behind the NetSuite product, where Business ByDesign is sort of a forgotten product in the SAP stack. So I think you're going to see an acceleration certainly, of that channel momentum and we've seen that over last year. And it's not just North America, by the way. As I mentioned, Asia Pacific, our business through the channel there grew at 100%. So in Europe, I think you'll see the same thing with the Sage reseller channel now beginning to move very quickly to NetSuite.

Operator

And we will take our next question from Scott Berg with Northland Capital Markets.

Scott R. Berg - Northland Capital Markets, Research Division

First question is around sales headcount. Can you quantify at all, how much your direct sales headcount has increased year-over-year?

Zachary Nelson

Well, we added 175 total employees in the quarter and I would have to say the largest percentage of that 175 was sales. Overall, our mission this year is to invest heavily in sales. That's why we're taking the operating margin down this year, certainly a piece of it. Last year, we expanded capacity by 50%, and we're targeting to expand it by at least that much this year. Frankly, we were slightly behind the hiring plan for sales people in Q1. But still, we're really happy overall with the fact -- 175 is the most employees we've ever added in a quarter. And so the hiring machine is cranking. It certainly is becoming easier to hire sales people as they want to get to a fast-growing platform like NetSuite versus effectively, dying platforms all around us on the ERP side. So I'm pretty confident that we'll hit our hiring plans for capacity this year.

Scott R. Berg - Northland Capital Markets, Research Division

Zach, I don't recall. How much did their quotas go up for the year? Was it a nominal amount or kind of...

Zachary Nelson

We haven't really talked about exact amounts but quotas always go up and territories always shrink. But as I said, when you look at our opportunity even in the mid-market, these territories are gigantic. So we have a long way to go before we're in sort of an SAP mode where you have 3 accounts that you have to generate revenue out of. And that's very attractive to people that want a new opportunity on the sales side.

Matthew Gall

My last question is on SuiteCommerce. Are you seeing more customers buy that along with either NetSuite or OneWorld together out of chute, implying attach rates for those customers is higher or has it been more of an up-sell recently to existing customers?

Zachary Nelson

Well, to be clear, SuiteCommerce is NetSuite, right? It's not a separate product. It is the core application. In effect, it's NetSuite instead of looking like a controller's dashboard, now looks like your customer-facing website. It's the same product. They're different technologies to enable that, of course, but it's not a separate code base, not a separate product. And so that's a very important piece of the puzzle. So every time they buy SuiteCommerce, frankly, they're buying NetSuite. We may market it differently to address the needs of an Ecommerce site manager or a website manager but it's the same product. That said, it is an incremental value that's priced separately. If you want to turn your operational system and your customer-facing B2C or B2B commerce site, there's certainly a separate charge for that. So it's going to be incremental. And in addition to that, we also have point of sale. As you'll recall, last year, we acquired a point-of-sale vendor and that's yet another option. It's not just about selling online, it's about selling in stores. So there's lots of opportunities both for up-sell and for new customer attach. Now in terms of new customers versus up-sell, I think there are many parallels between how SuiteCommerce is evolving and how OneWorld evolves. And if you'll recall in the early OneWorld days, there was a lot of up-sell in the installed base. The customers had multiple subsidiaries and were waiting for that capability. And over time, that ratio shifted somewhat to be more new business focused versus up-sell focused. But we still did an amazing amount of up-sell with OneWorld. SuiteCommerce I think, has a similar trajectory along those lines. I think you'll see up-sell certainly in the installed bases. Some of our larger current e-tailers want some of the new technology in SuiteCommerce but we're also seeing great traction. As I said, we signed up a multibillion-dollar retailer already. That's a new customer that's rolling out NetSuite today. So I think you'll see some more traction on -- a similar curve in many ways to what you saw with OneWorld.

Operator

And we'll take our next question from David Hilal with FBR.

David M. Hilal - FBR Capital Markets & Co., Research Division

Zach, I was hoping you could give us a feel for this 300-plus new customers? What percent of them did you lead with maybe CRM or the commerce offering? And how is that trend -- how has that trended over the last year or so?

Zachary Nelson

What we lead with and what they ultimately buy, frankly, end up being 2 different things. We build a system designed to run a business. Very few companies and very few CEOs wake up in the morning and say, you know, I wish I just had a system, 1 system that could run my business. What they do is they wake up and say, oh I've got an accounting pain, I've got an Ecommerce pain, I've got a warehouse management pain, I have an order management pain. How do I go solve this? And so we ultimately end up marketing the many different pain points. But what happens when they get into the funnel and they see NetSuite and they realize their pain isn't that point product issue, it's how data moves across their company. And so while they may come in for a point product pain, they might come in for an Ecommerce pain, they might come in for an ERP pain, they all buy the Suite and they all deploy multiple elements of the Suite. And ultimately, if you look at the history of NetSuite, we began by being NetLedger. We sold accounting online. Guess what? Nobody wants accounting online. That's not their problem. Their problem is how data moves across their company, how business processes get automated. Of course, accounting is important in that. Accounting needs to come out of that but what they really want is a suite of applications that they can use to run their core business processes. And literally, every one of our customers buys the entire suite.

David M. Hilal - FBR Capital Markets & Co., Research Division

And then let me ask you about the sales headcount growth. Obviously, it's a little more of a focus international. What percent would you say of the new quota reps you're bringing onboard are being diverted overseas versus those staying in North America?

Zachary Nelson

I think you're seeing more hiring in North America than overseas. As you recall, particularly, let's look at Europe for example. We've always talked about expanding in Europe. It's very expensive to expand in Europe and so over the years, we've made a decision, let's keep working out of the U.K. and let's use channel partners to address Continental Europe and maybe take those direct resources and apply them in the U.S., for example. And that's been -- so we've made that decision over the years. We're still investing obviously, in Europe but largely in our U.K. headquarters. So I think you see increment -- as a percentage, you'll see more heads going into North America. In Asia Pacific, we've taken -- outside of Australia really, we've taken a much heavier channel approach in Asia Pac because of the geographic spread over there, right? It's a huge territory. How do you reach those people cost-effectively? And so the channel model is predominant there versus a direct model, with the exception of Australia and somewhat, Japan, as I said. So from a headcount standpoint, again, we have headcount required to do that. Now that said, with some of the results particularly we saw in Q1, we may revisit that. As I said, we may revisit it in the second half of the year, particularly as it relates to European expansion.

Operator

And we'll take our next question from Michael Huang with Needham & Company.

Michael Huang - Needham & Company, LLC, Research Division

Just a couple quick ones for you. So again, on the Ecommerce front, so with respect to your win with some of the billion dollar retailers, are any of these guys live yet on Ecommerce and could you give us some sense for the timing of launches if they're not live yet?

Zachary Nelson

Yes, I think we'll have more news of that to report certainly at SuiteWorld. And I think it will be interesting. It's -- one earlier question or has the question about how does this SuiteCommerce and OneWorld play together? Really, what you're seeing in these large multinationals is the combination of OneWorld with SuiteCommerce. What they want to do is how do you run a multinational commerce business in a single product. And that's what you get when you combine OneWorld with the multicurrency, multitax, multicompany capabilities with the SuiteCommerce omnichannel commerce capability. So the interesting thing you'll see in the billion dollar retail space is not a website but 4, 5, 6 websites running in different languages and different currencies with different stock levels, all running in a single system. So they're going to be -- it's going to be pretty amazing when you see the combination really, at SuiteCommerce with OneWorld in these billion dollar companies.

Michael Huang - Needham & Company, LLC, Research Division

But just clarify, so kind of the more sophisticated commerce capabilities aren't generally available yet, but will be later on this year and I guess that will simultaneously be GA kind of around the timing of these launches?

Zachary Nelson

Well, we have incredibly sophisticated commerce capabilities. The stuff I'm talking about now is available today, right? We have companies go look at magellangps.com. They have 20 different websites running on NetSuite today, multicurrency, multicompany, multi-language today. Show me one other commerce vendor on the planet that can pull this off. They can't. So with our existing product, people are doing these incredibly complex things. With next generation of SuiteCommerce, really what we're enabling them to do is to control every pixel on the screen, which is it's more of a front-end display capability, number one and also, richer customization capabilities of the business process logic as a customer moves through a buying cycle, be it a B2B or B2C. So now, we're doing incredibly complex things today. We'll just be able to do them on a larger scale tomorrow.

Michael Huang - Needham & Company, LLC, Research Division

Got you, okay. And in terms of the partner channel, so I know that you're working some large SIs like Accenture. I was wondering if you could comment on which of those kind of global SIs are having the biggest impact in your business? And not to steal thunder from your upcoming conference, but are we going to hear about any new kind of new SIs that are ramping on NetSuite at this upcoming conference?

Zachary Nelson

Well, there will definitely be announcements around all of our partner channels, mid-market and the size at SuiteWorld. We've had great relationships over the years now with Accenture, had a lot of success with them, seeing success with Deloitte. And also, McGladrey again, is having -- has been a great partner. Very exciting in the mid-market, replacing a bunch of Microsoft Great Plains, old technology, enabling customers to come to the modern cloud era with their ERP system. So we'll certainly have more to say at SuiteWorld but the partnership front, particularly large SIs, if you look, as I mentioned, our enterprise group had its best quarter ever and those guys go to market with the large SIs. So I think it's been a great 2-way street in terms of addressing the needs of large enterprises.

Operator

And we will take our next question from Mark Murphy with Piper Jaffray.

Matthew J. Coss - Piper Jaffray Companies, Research Division

This is Matthew Coss on for Mark Murphy. During our field checks, we heard about a price increase that happened after the end of Q1? Which products did the price increase take place for and what will that mean for new bookings? And then separately, you made a Retail Anywhere acquisition. I know you talked about it on your last call, but I just wanted to know if there's any sort of update on kind of what the strategy for Retail Anywhere what might be.

Zachary Nelson

Yes. I think I've been saying for probably a year, that I felt that we were underpriced in terms of the value we've been delivering and in particular, in the enterprise. When you look at the solutions we are competing against up there, in many ways, people see our estimate. And they don't believe our product can solve the problem because it's so much cheaper than the $20 million or $40 million bill that somebody else just dropped on them. So there's a lot of reasons to do it. Obviously, we want to extract the appropriate value for the value we're delivering. And also really, it's a competitive situation. Sort of in the mid-market, we've looked at that and we're kind of surprised to see that a company like salesforce.com is commanding 3x to 4x the bookings of a customer than NetSuite is. And since when was Siebel more expensive than SAP? It never was, right? So even in the mid-market, I think we're somewhat underpriced. So we've look, really, across the board. We haven't changed our per-user pricing at all. It's still $99 per user per month on average. But we've looked both on the enterprise price list and the mid-market price list and made pricing changes where we think the value that we're delivering, be they on the suite or be they on a variety of modules is delivering the customer a lot of value and value they appreciate and respect and are willing to pay for. But that said, for the quarter, the overachievement in the quarter and certainly what you've seen us forecast for the year has really been driven by demand. I mean, if you look at the raise from 3 97 to 4 02 to 4 04 to 4 08, that's a pretty big raise and I think the reason we're comfortable doing that is the fact that a lot of the overachievement happened in January. We got off to an incredible start, and that was before any of this discussion of pricing changes came out in the marketplace. So we had a great start of the quarter, great pipeline growth and we're feeling very positive about that regardless of how pricing may vary for this customer or that customer. In terms of Retail Anywhere, that -- we made that acquisition last year as you recall and that was -- we made a partnership with them early in the year to enable our retail customers to truly have an omni-channel integrated solution. You hear a lot of people demand with others, talking about delivering an omni-channel offering, but none of them offer a point of sale product. It's hard to omnichannel when you're not covering the channel that is 93% of all retail sales. And so our partnership with Retail Anywhere started that way. It was incredibly successful. We acquired them at the end of last year. So Retail Anywhere has already been built on NetSuite. It's already tightly coupled with NetSuite and we've been enormously successful with that in Q1. Obviously, we're going to make -- retail is changing. The metaphor for retail is changing but I just saw Retail Anywhere deployed on tablet at point of sale at a large event than I went to recently, and it ran beautifully even in its current state. So we're certainly investing a lot in all parts of the SuiteCommerce solution. And retail, our point of sale solution is a big piece of that, so we're investing enormously in there. But the most important thing about Retail Anywhere acquisition is that NetSuite is literally the only company that offers an omni-channel, cloud-based solution for customers today.

Operator

And we will take our next question from Jennifer Lowe with Morgan Stanley.

Jennifer Swanson Lowe - Morgan Stanley, Research Division

I just had a quick one for Ron. Ron, you'll find in your remarks that you saw an acceleration in subscription revenues. And for a while, these were flattish due to last year. You start to see a little acceleration in the quarter but you're still lagging the 30%-plus billings growth that you've been seeing for some time now. Do you see that acceleration continuing? And is there a scenario where we could start to see subscription revenue growth approximate or exceed 30% over the next few quarters?

Ronald Gill

Yes, thanks. It's a good question. Recurring revenue growth did accelerate last year. I know you think about sort of quarter-to-quarter but in 2011, recurring revenue growth was about 22%. Last year in 2012, that was almost 27%, so that was an acceleration. And in this quarter, just accelerated just a bit further with about 28%. So it's nice. We are seeing acceleration in recurring revenue. I'll also point out that of the raise that we just did and then as Zach was just talking about again, that was pretty much entirely driven on the recurring revenue side. We really did -- haven't changed outlook for nonrecurring revenue for the year. So we're really seeing some growth there. We've got nonreferring revenue growing more than 50%, so it's still growing a bit faster than recurring. But we are seeing the recurring revenue growth accelerate pretty nicely, and that's really what drove the increase in guidance.

Zachary Nelson

Great. Well -- and thank all of you for joining us today. We'll close on Ron's very eloquent answer. Hopefully, we get a chance to see all of you on May 13 to May 16 at SuiteWorld. It's going to be a great few days of important product announcements, partnership announcements and customer announcements. And as always, it's great to see our thousands of customers and how they're transforming their operations with NetSuite. So I look forward to seeing many of you there and if we don't see you there, we'll talk to you on our next quarterly conference call.

Operator

Ladies and gentlemen, this concludes today's conference. We thank you for your participation.

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