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NetSuite Inc. (NYSE:N)

Credit Suisse 2013 Technology Conference

December 3, 2013 3:30 PM ET

Executives

Ron Gill – CFO

Unidentified Analyst

Okay. Well, good afternoon everyone after the lunch keynotes. I hope everybody enjoyed the barbeque. And so we are very excited to have CFO of NetSuite join us, Ron Gill. Ron, thanks for making it down.

Ron Gill

Sure.

Unidentified Analyst

We’re making a habit of this. I appreciate you’re attending every year. So like I’ve been saying, executives like you make this conference special. So thanks for coming down.

Ron Gill

Sure. Thanks for having us.

Unidentified Analyst

Just wondered, I guess loads of things. I mean obviously you guys had a great 2012. If I think about year-to-date 2013 here, almost accelerating growth, continued good execution on the billing side. What’s really – I don’t want to change, but what’s really driving that? I mean now there is OneWorld in there, there is SMB, there is SuiteCommerce. I mean how do you guys think about, sort of how we’ve gotten where we are right now?

Ron Gill

Yes, I think you’re right. We’re in our, I would say, fourth year in a row now of accelerating the rate of growth. So that’s great. And I guess as importantly or maybe the more importantly fourth year in a row of accelerating the rate of recurring revenue. So this year recurring revenue will be about 30%, 31% something like that, the recurring revenue. And it’s a really sticky and early trend so to see that increasing by that rate. So it’s fantastic.

And I think in fact that it’s the same thing fundamentally sort of year-after-year that’s been driving it. There is a little bit of certainly macro trend behind it in terms of acceptance of SaaS in the enterprise, and more specifically, acceptance of SaaS ERP in the enterprise, that’s certainly been a bit of a tailwind, I think that – were still a theory [ph] that fits at NetSuite or another SaaS company, sometimes I think that the world has completely changed, it hasn’t yet, there is still lot of resistance.

So I think there is some room to run yet on that, but at the same time I think you had a multiyear trend that certainly will continue for use in the future, of our product getting more sophisticated with each release, more features and functions that help us either penetrate new verticals or move further upmarket in the verticals we’re in. So that trends continues.

You mentioned OneWorld, which is sort of even a multiyear driver or increasing deal size. And at the same time, I think as I said, the product getting more sophisticated has increased deal size overtime. We’ve got a couple of additional things now, SuiteCommerce probably the biggest announcement in 2013 that’s really – we’ve been in a bit of controlled release this year with that, but that will really take the ecommerce and multi-channel commerce part of the suite, much further upmarket than it had traditionally been.

And I think you see some of the emergent areas as well. So we started with a little bit of an additional push into manufacturing this year. We announced a partnership with AutoDesk which is pretty interesting. And you start to see some interesting new business there like the Shaw Carpets deal, where we’ll doing manufacturing for them in China and be doing multiple subsidiaries for them. And so a kind of steady stream of new product releases as well as the suite overall getting more sophisticated, and I think it’s been that same trend for this whole period of the accelerated growth. I think it’s fairly steady and I think it’s probably the same kind of drivers that continue in the future.

Unidentified Analyst

And the other things just getting, Ron, in fact in Q3, similar timing as you came with the results was the news out of SAP, de-emphasis of Business ByDesign. How do you think that affects you guys? So what is the response really from customers or potential customers been with them sort of stepping back?

Ron Gill

I love to say, that is a big impact and it opens up a huge opportunity for us. The fact is that there was never a great deal of traction with Business ByDesign. We compete very frequently against SAP, against the core business suite, or smaller in the scale, we compete against that Business One, the on-premise small business solution.

But we saw Business ByDesign very rarely head-to-head. And so it’s never felt like they were really in the market enthusiastically behind it, really selling it. So I can't – I love to say it opens it this massive opportunity...

Unidentified Analyst

So [indiscernible] it doesn’t make you sound Business ByDesign.

Ron Gill

Your worry, it’s not mine, but it doesn’t leave a gaping hole for us, I would say. I mean I am very excited about our opportunity, don’t get me wrong. I just don’t think that the absence of the Business ByDesign is going to be a big factor.

Unidentified Analyst

It looks like I’m on ecommerce, because I think you’ve got sort of an interesting, I guess for the lack of better word the customers – with the order management side, coming sort of at the front-end, sort of the customer facing.

Ron Gill

Yes.

Unidentified Analyst

Products historically, but with the back-end order management, maybe kind of elaborate how these are coming together and why you think that distinguishes your offering from Digital River or a Demandware on the commerce side?

Ron Gill

Yes, it is a fairly unique offering we believe. And you’ve got to understand the history a little bit that we have – even, when we first envisioned the product and we really envisioned one system to run the entire business, including the website, and even before we made the SuiteCommerce announcement, we were running websites for – I think we were running 2,800 or something, just shy of 3,000 websites, ecommerce websites for our customers even before the SuiteCommerce announcement.

And that meant that we are running the back-end, running the ERP system for those companies, also hosting the website and running on that same platform all the throughput through the website. So these are really ecommerce websites, not websites meant to showcase or present – only the websites meant to process transaction volume of – transaction through the website.

And so we were doing that already for these 3,000-ish website already, but they were mostly smaller companies, mostly companies probably that had chosen us for ERP in the mid-market and then had decided to, if we could also do the website, we would also do the website, and they were lot of specialty e-commerce retailers, that kind of company.

And where the solution wasn’t as built-out as it could be was really on the design tool sites. We had a fairly rigid toolset that wasn’t as customizable as some companies would like. And so when customers really wanted to customize the website, or really customize the shopping experience, that’s where they found the limitation.

So we spent some years to really develop out that part of the toolset, so with a much more familiar toolset to a design from much more flexible responsive designs to design for any device, so you can make the website look and feel as you want, but still this is single platform solution, so running on the same back-end. So the way it differs from the competitors that you mentioned is, it’s not going to be a situation where you go and setup a standalone, what most companies do today, put up a standalone system for the website often having to use – often having to pull in another system to handle actual order processing through that website and then having to integrate that into all of the things that you need to have visible to the website in order to do that.

Have to integrate it for inventory availability, have to have two copies of the item master list, two copies of customer records in order to maintain that and then the integration and synchronization process systems. That's not our vision. We really had the vision for one system, ecommerce running on that same back-office platform and all of the back-office information in the ERP system exposed to be available for the website, for example for promotions.

So if you want to promotions based on something that only the ERP system would know like gross margins or supply chain available to deliver times and this kind of thing, that type of information is readily available to use on the website without you having to think. What you normally having to do is you deploy a website is think about where is the information that we need and do we – have we already built an integration to that particular system so I can get that to do something on the web.

So that’s how we think that the value proposition is very different. The first sort of showcase customer that we announced here Williams-Sonoma using it very much that way, really a completion of the true multi-channel vision there. So they used the system for four brands, for the websites for those four brands, for the point-of-sale solution in the store is also running this within back-end serving that also NetSuite, so that’s the vision.

Unidentified Analyst

Yes, I think you and Zach illustrated on – I think two earnings calls ago were sort of almost like the commerce platform is the new ERP, because that’s where you have the customer interaction, the customer data and then we still have to have the back-end to fulfill it to make sure to its invoiced correctly etcetera, but that front-end commerce is almost certainly the new ERP.

Ron Gill

Absolutely, and just to have the single record, so that if a customer is visiting you through any of the channels, it’s that same customer record, not three different customer records for example.

Unidentified Analyst

Exactly. So there has been also an issue that you guys were talking about for multiple years and that’s partners.

Ron Gill

Yes.

Unidentified Analyst

And I know that you guys have been kind of unique in sort of the SaaS world and actually having success with partners. And maybe provide us an update of sort of just where you guys are, what sort of your focus is and strategy to continue that success you’ve had with those partners?

Ron Gill

Sure. Yes, our traditional channel partner network was really built on the bunch of smaller SIs and you probably would not have heard the names of many of them, but they were system integrators who had been partners for Microsoft Great Plains or partners for Sage or partners from some of the older on-premise products and we had some success with over time as they would eventually either lose a couple of deals in a row to us head-to-head or perhaps the customers was demanding that they present them with a SaaS solution, we have some time convincing them to become partners. And that has grown up to – that makes up even today probably the bulk of, let's say 30% of new business bookings that come through the channel.

And that channel group also traditionally has done deals slightly smaller than our average deal. So they’re really at a smaller end of the SMB market doing that type of business. The more recent phenomenon really beginning – probably beginning about two years ago with the initiation of the Accenture partnership was really signing up a global system integrators. So two years ago, the Accenture partnership, a year ago the Deloitte partnership, this year Capgemini became a partner. So we’re starting to see what you think of more as a more traditional global SI in the ERP space that might be partners for some of the bigger ERP players.

And there is really just a couple of phenomenon that are making that possible. One, it’s just the same thing that was happening to the smaller guys. We started to have more success in this space were those guys are playing. So we got more visibility than they saw us. Our product got more sophisticated, so as they – and those global SIs were typically using pretty intensive benchmarking. As our product got more sophisticated, they’ll benchmarked cloud product again, SAP for example and see there is completeness of the feature set there, so that certainly helped.

And then finally we started doing some deals that were large enough, where the implementation was frankly just large enough to be of interest to implementers of that size, those things have helped there.

So the Accenture relationship now two years old, up and running, scaling very well and delivering business every quarter. The Deloitte relationship is about a year old, but I think we did a better job. The second time that a second partner is planning for us and so they are up and running as well, and now the interesting thing about this group is of course they do deals that are significantly larger than our average deal.

They are most closely partnered with the enterprise team at NetSuite doing primarily two-tier business, so where they are the incumbent, the trusted partner in a big SAP or Oracle based company, they are bringing us in for second tier-business in those.

Unidentified Analyst

Thank you for that transition, because I was going to ask about OneWorld next.

Ron Gill

Yes.

Unidentified Analyst

And just two-tier ERP and I remember what’s been out there for many years now and it really does feel like it’s just getting tracking and momentum. Where are we in terms of sort of just that enterprise acceptance of the two-tier ERP but also two-tier ERP with, call it a SaaS flavor to it?

Ron Gill

Yes. I think I mean two-tier ERP is really made most compelling by the SaaS model I believe. And so it seems to think because it is quite a different value proposition than what we traditionally grew up within the mid-market. And as I’ve said before, this two-tier business is kind of a business that found us with the solutions that we had developed for the mid-market, OneWorld being the most prominent of those, really a solution that we made for the mid-market, but it made the system able to handle multiple subsidiary consolidation, able to handle multiple currencies and we started to see some adoption and really with customers that introduced us to the concept of two-tier.

A few years before we started deliberatively going after two-tier business, we had some general managers in far-flung subsidiaries that looked at how soon they were going to get SAP or Oracle and decided to go with NetSuite. More recently really starting in 2011, we see a lot more corporate global CIOs really making a strategic decision. We’ve been rolling out the big ERP system for years. It’s going very slowly. It looks like there is a whole group of subsidiaries here that either it’s going to take us forever before we get to them or we’re really conflicted about the cost benefit of rolling out this big solution into those smaller subsidiaries, and then they’ll take a look at NetSuite.

And it’s really the agility that’s helped and it’s really how quickly can you get it in, how quickly could we go subsidiary, subsidiary, subsidiary and I could have this group of subsidiaries that we have not had on any standard system for a long time, how quickly I could get them standardized.

In a big way, it’s about realizing what was really the original vision of ERP, which is let's get everybody on a single system, let's get that visibility. They just haven't able to realize that with the pace of rollout that happens with on-premise ERP.

Unidentified Analyst

I mean one of the questions I get is who do actually compete with? Two-tier world, because I mean theoretically it’s been lot of times could have done this. They actually tried to pivot for a little bit there to do that, but when you go up for these – and is it mostly just still selling the idea – I mean sorry, two-tier ERP and then it’s almost sort of like naturally comes to you or I mean how does I guess the go-to-market just came into work [ph]?

Ron Gill

Yes, it’s funny. It often comes up in the cycle where they are having that internal debate about well we’ve done headquarters, we’ve done European headquarters, we did Asia headquarters, now we’re getting ready to go and do France or the Mexico office or the Singapore office. And they’re really getting conflicted, looking at the quote of what it’s going to cost to deploy there and then it’s another year and a half project and that’s when they start thinking about, it’s going to be another year and half to do France and I’ve got another 40 subsidiaries behind that one and the company is acquiring three companies a year. I’m going to be painting the Golden Gate Bridge here and never finish it.

And so that’s when they really start to look and see if there is different way, is there is way we could get to what we were after with ERP deployment originally which is to get to visibility, to get to standardization, to get to standardized processes, standardized controls across all my subsidiaries and get to it a lot faster. And then having got to it and got it in, in have it in a way that’s not going to require a team of 100 to keep it running, keep it maintaining, keep it current. That’s often the way the conversation starts.

So who you’re competing against there? It’s funny because you’re really not competing against these incumbent in the subsidiary which maybe an old on-premise system, it could be an ancient AS/400 base system, it could be just some older on-premise system. The only thing that’s really being compared from a cost and time point of view is going out more to the headquarter system and really use by comparing very well.

Unidentified Analyst

I’ve got a couple of more questions, so I’m going to ask one then I’m going to open up to the audience. So this is about go-to-market and just sort of headcount growth, because we’ve talked about sort of so many different opportunities here. I mean we’ve just scratched the surface on verticals, you mentioned that, but we could talk about that, and there could be another question, but SuiteCommerce, OneWorld also just doing what you’re doing with SMBs, how are you guys thinking about headcount growth and go-to-market to capture like all these sort of different opportunities you got?

Ron Gill

Yes, we’re growing very aggressively this year. I think most quarters this year our headcount has been at something like 30% year-over-year. I think that the pace of growth certainly continues to – the interesting challenge, the discussion internally that you have as a SaaS company is always that the investments this year are yielding next year. And as we’re at the point in the cycle right now, we’re planning for 2014, actually nailing down to 2014 operating plan.

And it’s interesting to see how much that exercise is about 2015 growth. 2014 at this point in terms of the sales capacity, we’ve got the capacity on board, that we’re going to have for 2014 and you can add, you can hire people in 2014, then I can have a great yield impact on ’14, but your sort of exit rate of capacity at the end of 2014 will be determinant, absolutely determinant to 2015 booking spreads. And so it’s this time of year, that you’re having that discussion and waving off to how much should we invest in that capacity.

We’re in a very fortunate place where we do feel capacity constraints still – really feels like the demand is there. It’s not – I mean we’re having those discussions. It’s not about well how much more should we invest in marketing programs to generate the demand, it’s really about, gosh the demand is there, should we add X percent of sales capacity or Y percent of sales capacity, it’s really about how that impacts the three year plan, how it impacts ’15 and beyond. And it’s a constant discussion internally at the board level of trying to hit the right balance.

Unidentified Analyst

Got it. Like I said I’ve got much more questions, so I’d just figure out and pause and see if there any audience otherwise I’ll ask about verticals. I guess we’re on a roll, so I’ll ask about verticals. So let's talk about verticals. I mean mentioned manufacturing, but how should we think about NetSuite vertical strategy. I know this is something that Zach talked about it in June when he was at our conference at Half Moon Bay, but what is your strategy, how do you expect this to evolve over time too?

Ron Gill

Yes. So certainly it’s probably the biggest sector of moving upmarket is – and it’s funny because it’s not as dramatic sometimes as the big launches like SuiteCommerce, but just the functionality set becoming more sophisticated vertically is one of the biggest drivers of the move upmarket. So that sort of happening across the suite at all times that vertical functionality is being built out and that helps move upmarket.

We’ve got – so SuiteCommerce was a big launch this year that really goes into being really openly sold without that sort of handcuffs on it in Q4 and then next year. So that’s going to be a big driver next year. Manufacturing, we started to make a push in, but it’s one of those – manufacturing is probably an area of the suite now, where a few years ago we’re not present at all. And now present in it, but it’s not as far upmarket as software. We’re doing much larger deals in software than already yet in manufacturing.

So manufacturing has a roadmap of functionality. Although we’re having some great success there, there is a long way to go to move that part of suite upmarket, right. Professional services automation coming significant upmarket and then there is a limit I guess to how many new verticals we’re going to be launching.

If you look back at the pace of it, it’s been kind of a vertical a year and about the pace, because at the same time as we’re doing that, like I said we’re increasing vertical functionality across the suite and then doing some more hardcore [ph] things, the TribeHR would be an example there, where that’s something that will both be a point solution but also help enhance the core HR functionality in the suite.

Unidentified Analyst

That was actually going to be my next question. It was on HR and that acquisition. I mean what are your – when you think about building out just HR functionalities.

Ron Gill

Yes.

Unidentified Analyst

I mean what’s the – I’m bit wondering [ph] sort of what’s the goal. I guess again some people have asked me, is this in reaction towards coming from HR and saying they are going to get into financials or what’s the goal, what was the driver behind that, I guess?

Ron Gill

Yes, so there shouldn’t be any confusion there, I mean TribeHR is not going to be a head-to-head competitor again. Of course the TribeHR is a small business solution. I think the things that we’re compelling about the Tribe – we had announced – we had a partnership-oriented approach to HCM for sometime. And we announced early this year a number of partnerships in this space. And one of those partners was Tribe and they had already built out their integration with NetSuite, they presented at SuiteWorld that integration.

We really liked the management team there. And the interesting thing about their solution was, yet they had HCM in terms of the performance management part of HCM, but they also had really nice Core HRIS in terms of employee master record, employee self-service, manager serf-service, those types of things. And so I think we can do with them what we’ve done with some acquisitions in the past, and I just think that they have got a point solution in the market. We can support that point solution and go-to-market with that point solution, but at the same time they’ve got knowledge and a design sensibility and developers that we could actually put into core NetSuite, that will help enhance the core NetSuite functionality in this area.

So NetSuite itself is single platform solution will get to be a better and better solution in this area. And I think and that will be a multiyear execution, but that’s part of the plan as well. And I think we’ve done that in the past with acquisitions and I think that’s part of what we’re doing [ph].

Unidentified Analyst

Got it. I think if you think about it in sort of another way that’ll be great [ph] we’ve got products, we’ve got functionality, let's talk about markets and international expansion. Obviously there has been a focus for multiple years. How are you going out in targeting some of these new geographies?

Ron Gill

Yes. It’s interesting. So as we came out of the recession, 2009 to now, and the business really reaccelerated and Asia really reaccelerated and North America really reaccelerated and Europe was the area that we talk sort of quarter-after-quarter about how Europe was not really accelerated, but this year we’ve seen Europe really – it happened in Q1, they had a great Q1 and we said we were a little reluctant to extrapolate it. There was one quarter, then they had a Q2, then they had a good Q3. So eventually we’re going to have to start thinking that things are going better in Europe.

So I think it’s probably the one area where we will really looking to making some investment next year. We haven't invested there in a long time, but it’s starting to perform and so I think that’s kind of a potential area for investment. It’s nice that we’ve been able to reaccelerate growth for four years and get it to where it is without Europe, but it’d be even nice to sort of have them participating, yes.

Unidentified Analyst

Yes, it’s historically been a big market for software.

Ron Gill

Yes.

Unidentified Analyst

A little contribution there would be good.

Ron Gill

Yes.

Unidentified Analyst

Okay, last question if I can – our time is almost up, but okay, so we talk about HR, SuiteCommerce, ERP, OneWorld. One of the questions I get is especially with SuiteCommerce. Just how much to the front-end, so to speak, towards the customer facing side do you want to go? Obviously you’ve got the differentiation of the order management, then into the ERP system with the commerce side, but then would you ever see yourself getting into more sort of like, call it the customer acquisition side? Do you need the marketing functionalities, [indiscernible] animation or campaign management to pull people under the website into the commerce side and go to the commerce order management invoicing? How far beyond I guess to the front you would go?

Ron Gill

It’s a good question. If I knew the answer exactly, I probably wouldn’t say it out loud. But it is a good question. I think it will depend a little bit on the way the SuiteCommerce deployment set go out and how they develop overtime. The functionality set that you talked about is very different in the B2C world than it is in the B2B world. And so I think we’ll look in a little bit how those deployments go out and then what’s the functionality set that’s increasingly demanded by that install base that just hasn’t built out and it will certainly be area that you talked about would be one that we look at – always looking at adjacently all around the suite.

Unidentified Analyst

So stay tuned.

Ron Gill

I would probably say stay tuned, yes.

Unidentified Analyst

Stay tuned, awesome. Unfortunately it’s time for us so.

Ron Gill

All right. Thanks.

Unidentified Analyst

I appreciate. The time went past, awesome.

Question-and-Answer Session

[No Q&A session for this event]

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