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NetSuite (NYSE:N)

Q3 2013 Earnings Call

October 24, 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

Philip Winslow - Crédit Suisse AG, Research Division

Justin A. Furby - William Blair & Company L.L.C., Research Division

Gregory Dunham - Goldman Sachs Group Inc., Research Division

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

Scott R. Berg - Northland Capital Markets, Research Division

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

Patrick D. Walravens - JMP Securities LLC, Research Division

Aleksandr J. Zukin - Stephens Inc., Research Division

Operator

Good afternoon. My name is Crystal, and I will be your conference operator today. At this time, I would like to welcome everyone to the Netsuite Third Quarter 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Ron Gill. Please go ahead.

Ronald Gill

Thank you, operator. Good afternoon, everyone, and welcome to NetSuite's third 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.

Joining me on the call today from the East Coast 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 non-revenue 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 third 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 the 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 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'd like to turn the call over to Zach.

Zachary Nelson

Thank you, Ron. And thank you, all, for joining us today. I'm really excited to announce our results for the third quarter of 2013. It was another great quarter as we turned in results that were better than our previously stated outlook for revenue, cash flow and EPS. We also saw incredible traction across our industry vertical and upmarket initiatives, with major new customer wins, including the signing of our largest new customer transaction ever.

This week, we announced yet another engine of growth, an expansion of our already enormous total available market opportunity, with the acquisition of TribeHR, which in combination with NetSuite will bring for the first time an integrated ERP/HCM suite to the mid-market. We plan to be the #1 provider of HCM to mid-size companies as we are with our cloud ERP offering.

And finally, on the competitive front, SAP admitted that after 7 years and billions of euros of investment in Business ByDesign that they are de-committing from that cloud-based product. What they once positioned as their Netsuite killer is itself being killed, showing how difficult it is to replicate NetSuite's product and delivery model.

Let me start with some detail around the financial and strategic highlights of Q3 2013.

On the top line, our revenue grew by 34% year-over-year to a record $106.9 million for the quarter. Deferred revenue grew 40%. Calculated billings, defined as quarterly revenue plus the change in deferred revenue, grew 35% year-over-year.

On the bottom line, our non-GAAP EPS of $0.09 per share in Q3 2013, exceeded our stated outlook of $0.07 to $0.08 per share. In addition, we saw another quarter of very healthy operating cash flow. Q3 operating cash flow was $14.6 million, and we now have more than $467 million in cash on hand. Ron will provided a deep dive on these and other figures, so I wanted to spend a bit of my time looking at our results over the past several years.

With continued success quarter after quarter, year after year, it can sometimes look easy. And maybe some think that it's so easy that competition is sure to get more aggressive. But there is much more to what we have done than just make it look easy. NetSuite's continued success is a testament to a good strategy and incredible execution by our employees to address the challenge of delivering complex, mission-critical applications to companies of all sizes.

The big idea behind the founding of NetSuite was to build a cloud-based application designed to run a business and enabling this idea is incredibly challenging.

In 1998, when we were founded, while there were lots of applications to run a department of a business, no company had ever built an integrated, single database system to run a business end-to-end. And while there have been imitators since, none have effectively competed with NetSuite. The most spectacular failure, of course, has been SAP Business ByDesign. When launched in 2007, SAP indicated sales of this product to small and medium companies would generate $1 billion in sales by 2010. In 2008, as SAP readied a rewrite of the original ByDesign product, then CEO Léo Apotheker proclaimed that the new product was "the coolest app ever written." In 2010, in the middle of yet another rewrite of the coolest app ever written, one of SAP's 2 CEOs, Bill McDermott, doubled down on Apotheker's statement and announced he would test the toughness of NetSuite when he threw Business ByDesign at us like "a 99 mile-per-hour fastball."

And today in 2013, of course, after SAP invested billions of euros in the product, it is the few customers Business ByDesign has who are having their toughness tested as SAP de-commits from the product.

I'm not telling this story to dance on the grave of Business ByDesign. I detailed it because SAP's failure tells you all you need to know about how hard it is to duplicate our offering. If anyone had the experience to build a product to compete with the NetSuite vision, you would think it would be SAP. And while we may have made it look easy, it is anything but.

First, you have to build an application that has never been built before. One that enables every customer to go from lead to cash in a single application. You have to build an architecture that allows customers and partners to easily customize the system to meet the unique needs of every company as they exist today and as they will need to exist in the future. You have to figure out how to manage and upgrade that complex individually-customized application flawlessly and cost-effectively, rather than giving your customers a disc and daring them to install and maintain it.

But it doesn't stop with the product. The sales and services approach is equally as challenging. You have to build a new sales model that enables the delivery of complex business applications to the Fortune 5 Million. You have to implement an application with the power of the SAP enterprise application, but in months, not years. And you need to implement it for thousands of dollars, not millions of dollars.

And finally, you have to build a support organization that can meet the needs of thousands of customers in hundreds of verticals, as they solve their unique business challenges on your applications.

And speaking of supporting thousands of customers in many verticals, NetSuite's results this quarter, which are based on the continued renewal of, and new sales to, a host of customers across a variety of industries, demonstrate the power of what we have built in bringing companies into the cloud era.

As you may recall, during our SuiteWorld conference, we introduced a version of NetSuite designed for manufacturers. In Q3, Shaw Carpets, a Berkshire Hathaway Company and the largest carpet manufacturer in the world, showed the power of this new suite product by going live with NetSuite in China. And I hear China is pretty strategic to manufacturers these days. Rather than taking their existing SAP infrastructure to China, Shaw did an in-depth analysis of their options and went with NetSuite. They were live in China and 11 other Asian subsidiaries in just under a year.

In another vertical, we believe NetSuite is one of the most widely deployed business systems used by software and new technology companies, particularly those that plan to go public. Two of the hottest recent IPOs, Tableau Software and Veeva Systems, both used NetSuite as their core mission-critical ERP system.

In the quarter, we added more than 320 new customers in software, manufacturing, services, retail/e-tail, wholesale distribution and many other industries. While many of these new wins were mid-sized companies, we had a tremendous quarter in terms of moving upmarket. So while SAP failed to deliver in the mid-market, we are having amazing success moving into their core enterprise space. In fact, this quarter, we closed 1 multiyear transaction that was just shy of 8 figures and 2 others with recurring revenue of more than $1 million per year. Our average selling price during the quarter grew well in excess of 20% year-over-year.

Finally, growth was healthy in every major geography. Not that SAP needs anything else to worry about, but our strongest geography in terms of new sales growth rate is in EMEA, where we grew by more than 100% during the quarter and year-to-date.

So all in all, it was another great quarter that followed a string of great quarters and great years. Our organization is setup for a great Q4, and we are looking forward to an exciting 2014.

Following Ron's comments detailing our Q3 financial performance, I will provide you an early peek into our view of and thinking around our 2014 plan.

So with that, let me turn it over to our CFO, Ron Gill.

Ronald Gill

Thank you, Zach. As Zach highlighted, we executed another very strong quarter and continued building on the momentum we saw in the first half of this year.

We've made great progress not just with the continuing expansion in the business, but with really scaling and developing the organization in ways that I think are going to serve us well as we look to the year and the years ahead. Let me take you through some of the Q3 numbers in detail.

As a reminder, all of the non-revenue financial figures I will discuss here are non-GAAP unless I state the measure is a GAAP number. Revenue numbers are, of course, GAAP numbers and as always, you can find a reconciliation of GAAP to non-GAAP results in today's press release.

Our revenue for the third quarter totaled $106.9 million, up 6% sequentially and up 34% over Q3 of 2012. Recurring revenues from subscription and support in Q3 grew 7% sequentially and 31% over the year-ago quarter to $85.8 million and accounted for 80% of our total revenue. Nonrecurring revenues, which come primarily from professional services related to implementation, grew 46% year-over-year to $21.1 million for the quarter.

Once again, in Q3, the United States was both the largest and the fastest-growing geographic area on a revenue basis, with 26% of our revenue for Q3 generated outside the U.S.

In addition, we were really happy to see that the strength we had in EMEA in the first half of the year continued in the third quarter, with the volume of new business booked there more than doubling year-over-year.

As Zach mentioned, deal size continued to increase in Q3. Both our overall ASP and the recurring ASP hit new all-time record highs in the quarter. In addition, year-to-date, our average selling price is up more than 20% over that for the same period in 2012. Zach mentioned that we signed several large deals, including our largest new contract ever in the quarter. But we also, again, had the highest number of deals over $250,000 in the company's history, so you can see that the ASP increase is broad-based.

Sales of NetSuite OneWorld were again very strong in Q3. And once again, accounted for more than 40% of new business. The total number of OneWorld deals sold in the quarter was also a new record, exceeding that for both the prior quarter and Q4 of last year. Overall, the strong momentum in our steady move upmarket continues.

Moving down the P&L to gross margins. Our gross margin on recurring revenue was up slightly from last year at 85.3%, while gross margin on nonrecurring revenue declined slightly from about 13% in the year-ago quarter to approximately 11% in Q3 of this year. Our overall blended gross margin saw a slight decrease year-over-year from about 72% in Q3 last year to 71% this Q3, driven primarily by the larger portion of professional services revenue in the mix. Overall, we expect the blended gross margin to continue at about this level for the full year in 2013.

Turning to our non-GAAP operating expenses, product development expense was $14.1 million for the quarter. We're making some very significant investments here, with spending in R&D up 42% over Q3 of 2012, and headcount in that team up an even more substantial 54% over last year. We're continuing our aggressive investment in sales and marketing and expenses in that area increased 32% year-over-year to $45.5 million or 43% of revenue in Q3. G&A expenses were $8.3 million or 7.8% of revenue in the third quarter. That's down from 8.5% of revenue in Q3 2012. So we're continuing to expand leverage on this line item.

Non-GAAP operating income in the third quarter was $7.7 million. That's an increase of 19% over the operating income in the third quarter of last year and equates to a non-GAAP operating margin of 7.2%.

During the quarter, we reported a net income tax expense of approximately $370,000, principally related to our international entities. We continue to expect our accumulated net operating losses to offset any domestic earnings for tax purposes for the foreseeable future.

Non-GAAP net income for the third quarter was $6.6 million, up 16% year-over-year. Non-GAAP earnings per share for Q3 was $0.09.

Moving on to the balance sheet. Our cash balance now stands at an all-time high of $467 million. We had another record quarter for cash collections. And cash flow from operations in Q3 was $14.6 million, which was ahead of our expectations.

Moving down the balance sheet from cash to deferred revenue. Our total deferred revenue balance increased to $189.6 million, an increase of 40% over the balance at the end of Q3 last year. As you will no doubt calculate from the financials published in the press release, calculated billings, defined as revenue plus the change in deferred revenue, were approximately $116 million for the quarter, representing an increase of 35% over the third quarter of 2012.

As I will continue to point 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.

Headcount on September 30, 2013, was 2,291, up 661 heads or 41% from Q3 of 2012. Our hiring momentum continues, and we are adding headcount across the entire organization and in all geographies.

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 terrific first 3 quarters of 2013. We continue to experience a very strong demand environment, and we're maintaining our posture towards investing aggressively in both product and distribution for the future. We're again increasing our outlook for full year revenue. And we're now expecting revenues in the range of $410 million to $411 million for 2013, up from the $406 million to $410 million range we provided last quarter.

If you back into Q4 from there, you'll see that, that implies revenue between $110.5 million and $111.5 million for the quarter. We anticipate non-GAAP EPS this quarter of about $0.07, which would imply $0.25 for the full year. That number reflects our estimation of the slightly dilutive impact of the acquisition of TribeHR that we announced earlier this week, and which we expect to close in October.

We expect operating cash flow for the fourth quarter to be in the range of $13 million to $14 million, and find the value for the full year in the range of $57 million to $58 million, which is within our previously stated outlook of $55 million to $60 million. I should also point out that we have a number of office expansion projects around the world that will kick off in Q4, so you will likely see a step up in the investing cash outflow in Q4 compared with the run rate we've done year-to-date.

This concludes my prepared remarks. I know that you'll be interested in hearing from Zach to hear more about what we can see as we look into 2014. Without further ado, I'll turn the call back over to him.

Zachary Nelson

Thanks, Ron. 2013 has been a great year for NetSuite. Our suite approach is transforming how our mid-size companies operate and gives them a business platform more powerful than those used by the world's largest companies.

In addition, this year's investments in our product, sales and services approach to bring the benefits of NetSuite to the world's largest companies, has been one of the most successful initiatives in the history of our company. And with our new investment in the HR space, we are set to make history once again by bringing an integrated ERP/HCM suite to mid-size businesses for the first time.

Our business is also expanding geographically. Our opportunity is global. And in Q3, we saw strong new business bookings performance in North America and APAC and EMEA. And our channel partners' bookings continue to grow at a rapid pace. So we are very bullish on the future. While we are still in planning mode for 2014, I'm happy to give you a first glimpse of what we are projecting for next fiscal year.

And in fact, my comments this year are remarkably similar to the comments I made in the previews I gave before fiscal years 2012 and 2013.

In 2014, on the top line, we are currently forecasting revenue of between $525 million and $535 million. On the bottom line, given our success in translating investment into growth in both 2012 and 2013, we plan to continue on that path in 2014. While we have not yet finalized the exact level of investment, we think it is safe to say that the operating margin trend that you saw in 2013 will continue in 2014, resulting in a relatively flat earnings per share for the year.

So we feel confident about the year ahead. Given the strength of our business this year, I wanted to give you an idea of the good things that we think are in store for NetSuite, our customers and our shareholders in 2014. As is our practice, in our next quarterly call, we will give a full outlook for 2014 when we have the all-important Q4 in the books.

So with that, I'd like to open the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jason Maynard with Wells Fargo.

Jason Maynard - Wells Fargo Securities, LLC, Research Division

So I would be remiss if we didn't maybe start the questions off with a little bit more commentary about what's going on with SAP. And really kind of thinking through in getting your impression of, what you think this means in terms of customers now looking at NetSuite? What do you see happening with channel partners? And just as NetSuite goes into the market now with the HR product, what do you think this can do in terms of increasing attach rates of HR? And really driving, if you will, both mid-market sales and also, if you will, some pull into the upmarket?

Zachary Nelson

Thanks, Jason. Yes, just seeing the reports of sort of the back and forth of what SAP says they're doing and what they're not doing, it's very hard to really understand what their strategy is. Clearly, they're enamored. Very focused on database technology these days. I think much to the detriment of application technology out of SAP. So HANA seems to be a magic database that can do anything. And so we'll have to see what it actually does someday. So very hard to figure out what their strategy is. I think if it's confusing me, and I watch the space very closely, it's got to be incredibly confusing to customers, their customers in particular. And I think the benefit can only accrue to NetSuite, particularly with the mid-size customers who know they have to transition from existing products like SAP, which is kind of -- the enterprise on-premise product is sort of like the flip phone of software today. You'd be crazy to kind of build a next-generation business around it, I think. So I think it opens up enormous opportunities. And certainly, we'll try to take advantage of those. I think just generally speaking about the HR opportunity, I do think, certainly within our own installed base, we've seen the HR product from Tribe takeoff. That was one of the drivers of us bringing it into the fold of products. Looking at what they've done over the last year, they've actually replaced SuccessFactors 3 or 4x already. They've got incredibly strong performance management tied with their social HR product. So I think their opportunity is there as well. And finally, with regards to channel and distribution channels, we sent out a news release this morning, in fact, detailing at least one of those partners was an SAP Business ByDesign original partner, and they're clearly moving to NetSuite. In addition, there were other Great Plains and Sage partners in that release as well. So it's not just sort of the SAP flip phone product. It's the Microsoft flip phone product. It's the Sage flip phone product. All of those flip phone products are going to be replaced by something like NetSuite. And I sort of outlined, I think, in pretty great detail how hard it is to replicate what we've created. So we're pretty excited about our position as you can imagine.

Operator

Your next question comes from the line of Phil Winslow with Crédit Suisse.

Philip Winslow - Crédit Suisse AG, Research Division

So I just wanted to dig in on OneWorld a little bit. Maybe you can compare and contrast what you're seeing from the small and mid-size businesses that you interact with, and then obviously sort of the larger two-tier deployments. And then also just an update on SuiteCommerce would be great.

Zachary Nelson

Yes, so small -- mid -- both sides of the business are growing really well, the mid-market business and the enterprise business. Obviously, we talked about some of the large deals. We had a great deal in the enterprise space. And those 3 deals that I talked about, the one nearly 8 figures and the other for $1 million of recurring per year, the interesting thing about them was, they were all from 3 different industries. So one was from the services industry, professional services industry. One was really a B2B e-commerce application and one was in manufacturing and wholesale distribution. So again, it shows the breadth of the application and where it's going. Also involved in those large enterprise deals, 2 out of the 3 deals had systems integrators as a part of the NetSuite solution. So good indicators of traction around that, that element of the business. On the mid-size business, the average selling prices in the mid-size continue to grow. Part of that is we're selling to larger mid-size companies, but part of it is they're adopting more of the suite. And again, the HR component that we can now bring to that with TribeHR, we think, will increase our footprint even more in the mid-size technology base of our customers.

Operator

Your next question comes from the line of Justin Furby with William Blair & Company.

Justin A. Furby - William Blair & Company L.L.C., Research Division

I guess maybe to start off with Ron. For next year, for the initial outlook, I know you're still in planning phase. But if you think about the revenue that you're thinking about for next year, should we expect kind of the similar 80-20 type of a mix in terms of recurring and services? And just any sort of rough initial thoughts there would be helpful.

Ronald Gill

Sure. I'll be a little bit cautious. It's -- this is 5 quarters out that we're talking about. So it's really early, an early outlook, and we've got a lot of -- both a lot of planning to get finished this quarter and also a big quarter to execute. So I think a lot depends on both of those. And so we'll certainly give more color next quarter. We do have a trend that you can see where the rate of growth of -- while the rate of growth of recurring revenue has been accelerating each year, the rate of growth of nonrecurring revenue has been decelerating. It's still been -- it's been faster than the recurring revenue growth, but the rate of the nonrecurring revenue growth has been decelerating. So I think we've probably seen the top of that peak of PS in the mix, and that we'll probably continue to see it coming down a little bit in the future. That's my outlook right now, but let's refresh that again after we get done with a detailed 2014 plan.

Justin A. Furby - William Blair & Company L.L.C., Research Division

Okay, great. And then Zach, for you on the pipeline. I'd just love to get your thoughts as you're here in Q4, what you're seeing so far in October? And if you could talk a little bit about the mix of enterprise deals versus kind of mid-market opportunities you're seeing out there?

Zachary Nelson

Yes, the pipeline continues to grow nicely, both in the enterprise and the mid-market, and also as you cut it by vertical. And so we'll see how it all comes to pass in Q4. Q4 is always a big quarter. The great thing about what we just did in Q3 was, Q3, we usually plan to be relatively flat because of the nature of it, the summer and all those things. And it was an incredibly strong quarter. So I think that bodes well for what we see in the pipeline in Q4. And as I said, both the mid-market and the enterprise are growing. Obviously, over the past couple of years, we've invested incrementally in terms of sales headcount in the enterprise. But we're very focused on ensuring that the foundation that we built NetSuite on, that selling to the Fortune 5 Million, the mid-sized business continues to be a strong differentiator for us, while we add the final story on the house, which is selling to large enterprises. But again, in Q3, you saw great success on both, and in particular on the enterprise side.

Justin A. Furby - William Blair & Company L.L.C., Research Division

Okay. And then last one, just that you guys have lots of things going in terms of development from HR, for manufacturing, international buildout, continue movement upmarket. I guess, if you sort of tried to stack rank those in terms of what's the most likely to be sort of most impactful over the next 6 quarters or so from a billings perspective, which one of those do you feel like is probably the closest to hitting an inflection point? And I fully expect you to say all of them, but if there's any way you can sort of stack rank those, that would be helpful.

Zachary Nelson

It's hard to stack rank it. Commerce, in general, and commerce, while we treat it in some ways as a -- an e-tail/retail industry group, it also goes across most of our other industries. So commerce, generally, effectively, what we've enabled our customers to do is to turn their ERP system into their customer-facing commerce system. That technology, in general, is growing at a very fast rate. And it grew -- an e-tail/retail alone grew to over 100% year-over-year during the quarter. So again, while you can look at that as a vertical, it also had a big halo effect across all of our industry groups as a big differentiator. Manufacturing, we've invested a lot over the last year and you start to see things like Shaw carpeting and other large manufacturers begin to move to NetSuite. So I think that's spring-loaded for growth. And of course, we've done a lot of work now on our solution for services companies. People that bill time in effect, and I think next year we'll see some new capabilities coming out in that product that will also accelerate growth.

Operator

Your next question comes from the line of Greg Dunham with Goldman Sachs.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

I also want to follow-up on the large enterprise or enterprise opportunity, the 8-figure deal. I mean, you got the pipeline question, but I guess the follow-up would be, was this an anomaly? Anything unique about it? Or should we expect these type of deals every once in a while going forward? And then as follow-up would be, and I know you're early in your budgeting process, but you've invested a lot in that kind of larger enterprise group from a capacity standpoint, would you expect the rate of those investments as you look out to next year to be consistent?

Zachary Nelson

Yes, well I mean, the investments in the enterprise sales organization and product organization are certainly paying off. The productivity in that group is really, really through the roof. So we're very happy with how that's gone. In terms of the deals you've seen, I think our strategy there has been to go to market with the SIs. And we see that continue -- those relationships continue to get stronger and stronger. So the relationship with Accenture has been fantastic. The Cap and Deloitte also have been just great partners in terms of bringing us into these enterprise deals. So we're optimistic that what we're doing in the enterprise will continue to grow and scale over the coming years.

Operator

Your next question comes from the line of David Hilal with FBR Capital Markets.

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

I wanted to ask about TribeHR. HCM is a fairly broad umbrella and, as you guys know, lots of pieces between recruiting and performance management and HRIS. And so maybe can you help us understand within those kind of subsegments, so to speak, where their strength is and what was of most interest to you in bringing that on?

Zachary Nelson

Yes, it's a great question. And I would agree with you 100%. HCM is a huge space. And it really speaks to the strategy we've articulated year-to-date. And that was initially, this year we did a variety of partnerships with a host of HR vendors, addressing not just the span of functionality required, but also how do you address different segments of the market from the small, the medium, to the large. And we still think that strategy is important in terms of what we're trying to solve for our customers. That said, Tribe was one of those early partners. They did an incredible integration with NetSuite. And we saw their product really take off in the mid-size -- small and mid-size section of our customer base, which drove us to really rethink our strategy around, well, maybe we should make this a part of the core portfolio for one segment of our customer base. And when we initially started talking with Tribe as a partnership strategy, they positioned very heavily around social HR. And that is very important, I think, to where the puck is going in HCM. I think they're the leaders in, how do you engage employees in your company with social HR and some of those capabilities? But the thing we really didn't understand until we got under the covers was how deep and rich their traditional HRIS capabilities are. And that was always our view of -- what we wanted to do in HCM was we wanted an HRIS-driven system that was a complete suite across the areas of functionality you talked about: Applicant tracking, onboarding, performance management and then managing the life of the employee from a transactional standpoint within the system. So the thing that Tribe had that we were really excited about was, they had the historical manager-facing capabilities of HCM -- HRIS. They have good applicant tracking, and that's important for growing companies. And their performance management, as I said, is fantastic. And in fact, we've replaced SuccessFactors a couple of times already, Tribe has. So traditional HCM is very strong and probably an underestimated part of the product. What they also have that really, I think, is industry-leading from both its vision and its execution is the social HR component. And when you put those 2 together, I think you got an unbeatable product in the sense of, you've got all the tools required by managers from an HR perspective, which is frankly where most HCM products have been stuck and targeted, including I think things like Workday and other products. They've looked at sort of, how do managers get a view of the employees? But the thing that they've really solved is, how do you get the employee view into this system? And so the social HR capabilities and how they've executed against that are really exciting. So I think it's a unique product in terms of bringing both a suite of HR functionality with this next-generation employee engagement component that we're really excited about.

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

So then as it relates to the Oracle partnership, is there still room to partner with them and bring them in? And if so, where would they slot versus what you now have in-house?

Zachary Nelson

Yes, I think -- the Oracle partnership is very important in terms of larger mid-size companies, right? So if I look at Tribe, we have -- our largest joint customer together is 300 employees. It's a pretty good number. So I would say, that's the lower mid-market area, and that's where we'll continue to focus on the integrated solution. Our partnership with Oracle is really about larger mid-size companies that need global compliance, multicurrency, multi-language, payroll around the planet, all of those sorts of things. So the relationship with Oracle has been strong. We've had a number of joint prospects together already with the NetSuite ERP Oracle Fusion HCM solution. So we're absolutely going to continue to push that solution, particularly as we look at larger mid-market. And then, of course, two-tier opportunity is where they may be deploying NetSuite in a subsidiary, and they're using Oracle as their global financial system. So a couple of different opportunities with Oracle.

Operator

Your next question comes from the line of Scott Berg with Northland Capital.

Scott R. Berg - Northland Capital Markets, Research Division

I just wanted to follow up on the Tribe question a little bit. Can you give us some color on the acquisition price? Maybe how the company had been functioning in terms of revenue growth rates, et cetera? And then how is that -- how is your guidance for '14 factoring in any of that revenue contribution to date? I assume none, but I just want to know how we should think about that going forward.

Zachary Nelson

Ron, maybe I'll have you take the first crack at that.

Ronald Gill

Sure. We haven't published the deal terms on the deal yet, so I think I'll pass on that part of the question. But I can tell you, it's a fairly early-stage company, really in their first year of real revenue. There's no real impact on the top line even next year. It -- we do have in our current guide kind of what we're expecting from a revenue point of view from them next year. But as you know, it takes a long time to build up a recurring revenue stream from the beginning and really build it up. So we've got an initial plan for what we'll think we'll do in bookings there next year. But the impact on revenue from that is fairly small. As I said in my prepared remarks, slightly dilutive in the current quarter. And we believe we'll close the deal in October, so slightly dilutive here in Q4. And then, we're just really fleshing out the plan for what the investments look like and what the impact will be next year.

Scott R. Berg - Northland Capital Markets, Research Division

Okay, great. And then one question for you Zach on the -- as you look at sales distribution and headcount going in towards next year, should it be safe to assume that we look at similar types of additional investments into the headcount? Or does that either accelerate or slow from kind of your current expansion plans?

Zachary Nelson

No, I think our current expansion plans are very similar to what you've seen over the last 2 years. So continued investment in sales across mid-size and enterprise customers. Continued investment in engineering. And you've seen that go up, I think, this year as a percentage of revenue as we move the ball forward on a variety of fronts. And then continued investment in the related areas of sales and engineering, servicing our customers, both from a professional services standpoint and from a product support standpoint.

Operator

Your next question comes from the line of Brendan Barnicle with Pacific Crest Securities.

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

Zach, most of my questions have been asked, but wondering if you saw any change in pricing at all, and what the pricing environment has been like?

Zachary Nelson

No, we've -- our discounting rate looked to be about the same as it was a year ago, so that's a net positive particularly given we've changed some of our pricing in the enterprise space as you know. So I think that shows that we were right in the sense that we were somewhat underpriced in some segments of the market. It's been -- it's nice, obviously, to see average selling price grew dramatically during the quarter, as I said, well above 20%. So that's been a real positive. And again, if you look sort of back at our history, it's been amazing to see how the average sales price has grown over the last 3 years. I don't think -- I think you'd be hard-pressed to find anybody in any segment of the technology industry that's having the success in growing our average selling price. And I don't think that's -- I think that's really a function of the value we're bringing to customers and their willingness to pay more for what we're doing and what -- the agility that the NetSuite solution gives them to respond to the changes their businesses are facing. So I think ASP is certainly good for the financial model, but I think it's really representative of the bigger idea of the value NetSuite is bringing to customers.

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

Sure. And then one of the things we've seen as a theme this year are, SaaS vendors who've had a hard time being able to get all of their work implemented and being able to have enough support to do that. You guys haven't had an issue there. But how has it been in terms of making sure that you get implementations done? And then sort of -- kind of a corollary to that, just hiring in general?

Zachary Nelson

Yes, I think we were doing a great job on hiring. I think we're a bit behind on sales hiring. But I think one of the things that's happened over the last few years that is a testament to Tim Dilley and our services organization is our ability to get partners up to speed to support NetSuite implementations. I think the partner ecosystem has grown very rapidly in terms of -- you saw again today, a lot of traditional sort of on-premise VARs joining the NetSuite family. The team we put in place to get them up to speed to be able to support their customers has been really important. I think as we look at our 3-year plan, one of the key initiatives that we want to make sure we invest in, is how do we continue to build that ecosystem of NetSuite talent out there? And that's not just implementation. You see a lot of our customers needing to hire a NetSuite admin, et cetera. So we're really going to put a lot of thought over the next 3 years on how we grow the NetSuite talent base around the world to support our customers in a variety of ways, both initial implementation, as well as ongoing management of those systems for our customers.

Operator

You have a follow-up question from the line of Justin Furby with William Blair.

Justin A. Furby - William Blair & Company L.L.C., Research Division

Real quickly, Ron. I know we've lapped the billing change in terms of the renewal structure that you guys set forth last year, but were there any other anomalies? Did you bill these big deals multiple years upfront? Or anything else to think about in terms of that reported or calculated billings number?

Ronald Gill

Right. Good question. Yes, as you said, the main phenomena that we've been normalizing for the last year was that change in estimate language. That anniversary-ed last quarter, so we don't need to anniversary -- pardon me, we don't need to normalize for that number anymore. Overall, blended billing term this quarter was just a little bit shorter than the year-ago quarter. So if I were to normalize for that, the calculated billings number would normalize up just a little bit, but it's not really a big impact. Regarding the big deals, no, we still -- even when there's a multiyear contract, we still very rarely do a multiyear billing. And of the very large deals that Zach talked about, in fact, none of those billed more than a year. So that wasn't a big impact. Just calculated billings overall, it's not -- I always give this caveat in my prepared remarks. It's not something that we look at a whole lot quarter-to-quarter. We kind of look at it more on a rolling 4-quarter basis. I think we're at about 34% on the last 4 quarters. And I think you guys -- I think the analyst community has us at about 30% for the year. We know Q4 is going to be a significantly more difficult compare. We grew 41% year-over-year last Q4. So Q4 will be a tougher compare. So maybe that 30% number for the year, maybe that's about right. So yes, nothing unusual that we would need to normalize out this quarter.

Justin A. Furby - William Blair & Company L.L.C., Research Division

Okay. And I don't know if anyone asked this, but did you guys any increase in terms of seeing Workday in competitive deals?

Zachary Nelson

No. As we've said, really, over the last calls, they are -- if you looked at our set of competitors, and we have more than 100 competitors, which gives you an idea of how fragmented the market is we're serving. Workday is in less than 1% of the competitive deals that we're involved in. And again, I think even they, at their analyst call said, they really don't have a financial system for another 15 months, right? So there really would be no reason for Workday to appear in a NetSuite ERP deal that's for sure. I think with the addition of TribeHR, again, I think that's going to be for the mid-market. And Workday has made it pretty clear, they're for the 1,000 and above crowd. So even when we add HR, I don't know that we'd see much more of Workday than we do today.

Operator

[Operator Instructions] Your next question goes to -- is from the line from Pat Walravens with JMP.

Patrick D. Walravens - JMP Securities LLC, Research Division

Zach, can I take you back to the SAP subject? So SAP says, they're going to go to market now in SMB with SAP Business One, which they say is a established solution for SMB, and that it's going to be available on the HANA cloud. So I guess 2 questions. Do you ever see SAP Business One? And how do you think that's going to work out?

Zachary Nelson

When we see SAP Business One, it's in a very, very -- it's more of the small than the medium end of the marketplace. So we don't really see it competitively. So no, I don't think it's going to have much of an impact for us. I mean, the challenge that they face, I think, is the challenge that every large enterprise company faces when they come downmarket, is they just don't have a model that makes any sense for them. How do you go from doing $3 million deals to $3,000 deals? There's just -- no business likes to go from high margin to low margin. And so I think they'll keep jawboning about small and medium business, but their entire DNA is about very large enterprises and delivering very complex systems to very large enterprises. So we'll see if HANA, the magic database, can change that. But I don't really think it can.

Patrick D. Walravens - JMP Securities LLC, Research Division

And then can I ask you, I know you're giving a lot of thought to your 3-year plan the last time I saw you. Is there anything about that you can share with us?

Zachary Nelson

No, I think the 3-year plan is now becoming a 1-year plan, right? We're operationalizing that. I think we have a very solid plan for where we want to be in 3 years. And we're going to start executing against that in 2014. The cool thing about this -- what we've done is we did our first real 3-year planning cycle back in 2010, and we're at the end of that. So we have a really good history of what worked, what didn't work. And now as we implement the next 3-year plan, I think we're really sort of confident in terms of how we can use that to continue to drive our success. So one of the things I did talk about here was -- one of the major points of our 3-year plan is, how do we invest in creating a much broader NetSuite ecosystem? And that's not just from a software development standpoint, it's from a talent standpoint. I think one of the places where we see our partners and our customer challenged is in finding really good NetSuite talent to help them operationalize their business on top of NetSuite and make their business vision happen. So that's one of the probably -- one of the most exciting pieces of the 3-year plan that I think you'll see us invest in.

Operator

We have time for one more question. Your next question comes from the line of Alex Zukin with Stephens.

Aleksandr J. Zukin - Stephens Inc., Research Division

Ron, I had question. Can you talk a little bit about the ASPs of the SuiteCommerce deals in the quarter versus your kind of historical OneWorld deals?

Ronald Gill

Yes, we -- I guess the ASP of the SuiteCommerce deals in the quarter was the fastest -- of all the verticals, the fastest-growing ASP overall. And actually, this quarter, I wouldn't extrapolate necessarily too much from this quarter. This quarter, the ASP of the new SuiteCommerce deal exceeded the OneWorld ASP.

Aleksandr J. Zukin - Stephens Inc., Research Division

Got it. That's very helpful. And Zach, could you talk a little bit about TribeHR with respect to the two-tier ERP opportunities? We've heard -- speaking to Tribe, we've heard they've even done some Oracle Fusion replacements. Obviously, very rare, but I know they did one 1,500 employee company deal. And just longer term, I realize that the first take will be in the mid-market, but how do you view the opportunity to take Tribe up into the two-tier ERP solutions?

Zachary Nelson

Two-tier -- the HR deployment in two-tier ERP is going to be pretty particular to each company that you look at. Some two-tier ERP deployments, they want the individual subs to sort of operate independently from the rest of the organization. So in that case, they may want their own HR system attached to NetSuite. In that case, you might see Tribe riding along with the ERP piece. In some other two-tier deployments, they're really trying to consolidate the subsidiary level into the corporate level. And there, frankly, I think you might see a larger enterprise HCM solution that NetSuite ERP at the subsidiary level is tying into. So I think it'll be interesting to see how that evolves over time. In terms of how NetSuite and our new HR capabilities go to market, I really do see, certainly, in the near term the fact that, that's going to be a mid-market -- small and mid-market solution. Certainly, the way it's designed today. We have a great integration with Tribe today. Over time, as features from Tribe move into NetSuite, they get the benefit of a lot of the sort of OneWorld capabilities that we have naturally, the multi-company, and the multicurrency, and the multi-tax, some of those things which may appeal to larger companies. But really the idea right now is, how do we sell more of our existing small and mid-size customers an incredible HR solution that we have today. And there's no other match for it in the market in terms of an integrated ERP, cloud-based ERP/HCM solution. We'll be the only guy in the marketplace. Certainly, in the mid-market with something like that. And so we're going to try to make as much hay with that as we can, as fast as we can.

Aleksandr J. Zukin - Stephens Inc., Research Division

Understood. And then one -- just one follow up for Ron. Ron, if you look at the numbers for the earnings guidance for 2014, the operating margins look to be around kind of 2010 levels according to initial guidance, where -- where is most of the investment going to be going in 2014?

Ronald Gill

Well, I think, I mean, again, I would say, always stay tuned until we're actually finished with planning, giving the more complete guidance for the year. But as Zach said in his remarks, it's really going to be a year, I think, that looks a lot like this year. Where we're really investing in the 2 areas that you've seen us invest in dramatically this year, which are in the product development area and in distribution capacity.

Zachary Nelson

Thank you. And thank you all for joining us. We really appreciate your time today. We know it's a very busy earnings day. And thank you for spending some time with NetSuite on our earnings call. And we look forward to giving you our final report for the year as we close out Q4 here shortly. So thanks very much.

Operator

Thank you for participating in today's NetSuite Third Quarter 2013 Earnings Call. You may now disconnect.

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