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NetSuite (NYSE:N)

Q4 2013 Earnings Call

January 30, 2014 5:00 pm ET

Executives

Ronald Gill - Chief Financial Officer and Principal Accounting Officer

Zachary Nelson - Chief Executive Officer, President and Director

Analysts

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Jason Maynard - Wells Fargo Securities, LLC, Research Division

Karl Keirstead - Deutsche Bank AG, Research Division

Raimo Lenschow - Barclays Capital, Research Division

Philip Winslow - Crédit Suisse AG, Research Division

Samad Samana - FBR Capital Markets & Co., Research Division

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

Scott R. Berg - Northland Capital Markets, Research Division

Patrick D. Walravens - JMP Securities LLC, Research Division

Operator

Good afternoon. My name is Anastasia, and I will be your conference operator. At this time, I would like to welcome you to the NetSuite Fourth Quarter and Fiscal Year 2013 Year-End Conference Call. [Operator Instructions] Ron Gill, CFO, you may begin your conference.

Ronald Gill

Thank you, operator. Good afternoon, everyone, and welcome to NetSuite's Fourth Quarter and Fiscal 2013 Financial Results Conference Call. A more complete disclosure can be found in the 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, see the Investor Relations segment on 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

[Audio Gap]

During the call, we'll be referring to both GAAP and non-GAAP financial measures. The reconciliation of our GAAP and 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 the fourth quarter and fiscal year 2013 results. However, some of the information discussed during this call, including financial outlook we provide, may constitute forward-looking statements within the meaning of 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 could cause our results to differ materially from those expressed or implied by such forward-looking statements include those summarized in the press release that we issued today.

These risks and additional risks are also described in detail in 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.

And with that, I'll turn the call over to Zach.

Zachary Nelson

Thank you, Ron, and thank you, all, for joining us. It is a pleasure to speak with you and provide our final report on the 2013 fiscal year. As we look back on 2013, it was a year of many milestones. First, I think we probably saw the strongest demand environment we've seen since we went public, as the move to the cloud by companies of all sizes became unstoppable, and our sales organization really took advantage of that. It's long forgotten now, but at the start of the year, our long-time sales leader stepped aside. We quickly and seamlessly transitioned to new great sales leaders in our North American and European sales organizations, and the whole team arguably delivered our best new business and renewal sales year ever.

We also saw continued success in our channel business. For the year, not only did we see channel new business bookings grow at roughly 40%. I'm pleased to say that we also saw the rate of new business growth accelerate over the prior year. All in all, the great execution of our distribution organization and partners around the world allowed us to deliver record Q4 and 2013 revenue.

In addition, the great end of the year also enables us to raise the 2014 revenue outlook that we provided in our last call.

Our product organization also executed incredibly well in 2013. We have long focused on creating versions of NetSuite designed for specific industries, and new industry product features for manufacturers, distributors and technology companies were well-received.

In the eTail/Retail industry, we saw our global leadership in omnichannel commerce, driven by our SuiteCommerce platform take off with companies of all sizes, including, as promised, multibillion-dollar retailers.

In addition, 2013 was a record year for the NetSuite OneWorld product as we added the largest number of new customers for that product, which offers rich, multi-company, multicurrency, multi-language capabilities to larger enterprises.

Finally, I would say 2013 was a milestone year for our entire organization. Over the years, NetSuite itself has become a multinational corporation, and during the year, it was inspiring to see how our organization rose to the challenge of serving the needs of thousands of businesses around the globe as they move their most mission-critical applications to the cloud.

Our organization matured materially, especially in how we engage with large enterprises now using NetSuite to run key elements of their business. Internal investments by our services and support teams and our strong partnerships with large SIs like Accenture, Deloitte, Capgemini and McGladrey have enabled us to go beyond the expectations of this very demanding class of customer. When you look at all of those milestones, I'm proud to say that our investments in people, product and customers paid off in a big way in 2013. Much of the investment we have made over the last several years has been to accelerate our top line growth. And as I move now to a short discussion of the financial highlights of the quarter and of the year, you will see how these bets paid off.

For the fourth quarter, revenue accelerated to a little more than $115 million, representing 35% growth over Q4 of last year. Even more impressively, recurring revenue accelerated to 37% growth over the prior year. This is the highest rate of year-over-year growth in recurring revenue that we have seen since the fourth quarter of 2008 when, of course, we were a much smaller company.

For the year, we reported $414.5 million in revenue. In fiscal year 2013, total revenue growth accelerated to 34% versus the 31% growth rate we saw in the 2012 over 2011 period. More impressively, this is the fourth consecutive year of accelerating revenue growth, a record unmatched by most public on-premise or even public cloud software vendors.

In the quarter, calculated billings, defined as quarterly revenue, plus the change in deferred revenue, grew 35% year-over-year. And for the full year, calculated billings grew roughly 33% year-over-year.

On the bottom line, we delivered non-GAAP earnings of $0.08 for the quarter, resulting in $0.26 for the year. Non-GAAP operating income grew by more than 35% during Q4 and by 7% during the year. Cash flow from operations grew nicely at 15% year-over-year to $62 million, and NetSuite now has roughly $450 million of cash on hand.

All in all, NetSuite's quarterly and fiscal year financial results were spectacular and are driven by the tremendous effort and commitment of our now more than 2,400 employees around the globe. The results are also driven by the now obvious and unstoppable movement of mission-critical business applications from on-premise to the cloud. And when you look at our historical market vision and tactical execution, combined with growing customer demand, you can't help but be incredibly excited about the opportunity in front of NetSuite.

During the quarter, we added more than 450 -- excuse me, more than 430 new companies to the family of NetSuite customers. This is the highest number of new customers we have added in a quarter since we went public in 2007. Our average selling price for new customers grew by more than 20% year-over-year during 2013. And as I mentioned, OneWorld had the largest number of new customer adds since we have been offering that product.

In total, we closed this year with approximately 20,000 companies, subsidiaries and organizations that have transformed or in the process of transforming their operations with a NetSuite platform.

While the work of our customers and employees get the lion's share of the credit for our success in 2013 and over the last several years, I also feel I must thank our legacy ERP competitors as well. They continue to talk about how important the cloud is, how they are all in on the cloud, all the while having little in the way of cloud native ERP products to deliver on the rosy picture they're painting for customers. So SAP and Microsoft, thank you for creating all this demand. And keep it up, our data centers are standing by.

While 2013 was a great year, as measured by NetSuite's numbers, it also provided a yardstick to measure the success of our strategy of broadening the functionality of our suite and making it available not just to small and midsize businesses but also to the world's largest companies.

While the move to the cloud by customers of all sizes is accelerating and certainly helps a pure-play SaaS company like NetSuite, it is really the strategy beyond how the bits are delivered that will define the long-term winners, and we think our strategy and execution certainly will make us one of those few long-term winners.

Our next-generation offerings like NetSuite OneWorld and SuiteCommerce are delivering capabilities found nowhere else in the market, and they're transforming the operation of small, medium and large businesses so that they can achieve their business vision. Given these final 2013 results, it really is hard to imagine that we could be any better position. Our record results once again confirmed that NetSuite is where business is going, and our current offerings are altering the business software landscape.

2014 is a year of enormous opportunity for NetSuite, and following Ron's comments, I'll speak briefly on some of the investments we'll be making to take advantage of that opportunity.

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

Ronald Gill

Thank you, Zach. Q4 was another great quarter and captured another great year of excellent execution, increasing momentum in the business and acceleration in the rates of growth of both recurring and total revenue. Let me turn to the numbers and provide you with some more detail.

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

Our total revenue for the fourth quarter was $115 million, up 8% sequentially and up 35% over Q4 of 2012. Recurring revenues from subscription and support in Q4 grew 9% sequentially and a record 37% over the year-ago quarter to $93.6 million and accounted for 81% of our total revenue.

Our nonrecurring revenue, which comes predominantly from professional services, was $21.4 million for the quarter and grew 30% over that for the same period last year. For the full year, revenue totaled $414.5 million, an increase of $105.7 million or 34% over that for 2012.

Zach mentioned that NetSuite is one of the very few software companies consistently accelerating the rate of growth, and, in fact, 2013 represents the fourth consecutive year of accelerating growth. So let me remind you of some of the history.

You may recall, we began the streak in 2010 when revenue growth accelerated to 16% from 9% the prior year. We accelerated that to 22% in 2011 and then to 31% in 2012 and now to 34% in 2013. Recurring revenues for the full year in 2013 totaled $333.6 million, and the story here is very much the same. In 2010, the growth rate in our recurring revenues was 18%; then in 2011, it was 22%; and 27% in 2012; and now 32% in 2013. That acceleration was the story of growing acceptance of SaaS business solutions and increasing depth and breadth in our product offering that has taken us further upmarket and an excellent execution throughout the company. And the really exciting thing is that we believe all of those trends have a long way yet to run. Again, in Q4 and for the full year in 2013, approximately 26% of our revenue was generated outside the United States.

With a great year globally, with all 3 regions accelerating the growth rate in bookings in 2013, we were especially pleased to see the new strength in the EMEA region, where the volume of business booked more than doubled over the prior year. We continued our move upmarket this quarter and, of course, larger deals were a key theme all year. Our average new business deal size was up more than 20% for the full year in 2013, and in Q4, we again broke our previous records on large deals with a number of new deals over 100k and 500k, both reaching new highs.

Sales of NetSuite OneWorld were very strong in Q4 and, once again, accounted for more than 40% of new business growth. The total number of OneWorld deals sold in the quarter was also a new record by a significant margin. Also, on the top of the large deals, the average deal size for new SuiteCommerce deals came up significantly in 2013 and was about even with the average OneWorld deal size for the year.

Moving down to P&L to gross margins. Our overall gross margin for the quarter was 71.4% compared with 71.9% in the year-ago quarter. For the full year, overall gross margin was 71% compared with 72.5% in 2012. Gross margin on recurring revenue was constant at 85.3% for the year. But even as the growth rate in recurring revenue accelerated to 32%, revenue from professional services grew about 45%. So the slight decline in overall gross margin resulted from a small degradation in gross margins on professional services, combined with a slight increase in the portion of revenue coming from PS.

Turning to our non-GAAP operating expenses. Product development expense was $16.5 million for the quarter, up 58% over Q4 of 2012. For the full year, spending in the product area was up 46% over the prior year as we continue to make significant investments in our development teams. Total headcount in the group ended the year up more than 50% from the end of 2012. So you can see the emphasis we're putting here and the significant increase in development capacity that's resulting from our investments in this area. I would expect that with our plans to continue aggressive investment, spending on the product team will be in the 13% to 14% of revenue range for 2014.

Sales and marketing expenses were $49.7 million or 43% of revenues in Q4 and up about 30% over the year-ago quarter. Total headcount in the sales and marketing organization was up almost 40% year-over-year in 2013. Given the very strong demand environment we're seeing, you'll again see us invest aggressively in this area in 2014 as we continue to scale capacity.

G&A expenses were $8.6 million or 7.5% of revenue in the fourth quarter. That's down from 8.2% of revenue in Q4 of 2012. For the full year, G&A expenses were 7.9% of revenue, down from 8.6% in 2012. So we continue to see leverage in this area. For 2014, I expect G&A expenses to be roughly 7.5% to 8% of revenue.

Non-GAAP operating income in the fourth quarter was $7.4 million, an increase of 36% over that for Q4 in 2012. This equates to a non-GAAP operating margin of 6.4% for the quarter. For the year, operating income was $23.6 million, an increase of 7% over that for 2012 and representing an operating margin of 5.7% for the year.

During the quarter, we reported a net income tax expense of $690,000, principally related to our international operations. For income tax purposes in the U.S., we continue to expect our net operating losses to offset any domestic earnings for the foreseeable future.

Non-GAAP net income for the fourth quarter was $6.2 million, an increase of 36% over the year-ago quarter. For the full year, non-GAAP net income was $19.9 million for a net margin of 4.8%. Non-GAAP earnings per share for Q4 was $0.08, up 33% versus the year-ago quarter. For the full year, we posted $0.26 of non-GAAP earnings per share, in line with 2012.

Onto the balance sheet. We closed the year with over $450 million in cash. Q4 was another record quarter for both cash collections and cash flow from operations. Q4 operating cash flow was $17.3 million, up 29% year-over-year. For the full year, cash flow from operations was $62.2 million, up 15% over 2012.

Looking down the balance sheet from cash to deferred revenue, our total deferred revenue balance increased to $224.6 million, an increase of 18% over the prior quarter and up 39% over the prior year. Calculated billings, defined as revenue, plus the change in deferred revenue, was $150 million for the quarter, representing an increase of 35% over the fourth quarter of 2012.

As I consistently point out on these calls, there's a wide array of factors that influence calculated billings, and, therefore, quarter-to-quarter fluctuations in the calculated billings metric should not be taken as an indicator of changes in future revenues.

Total headcount on December 31, 2013 was 2,434, up 143 from Q3 of 2013 and an increase of 37% from Q4 of 2012. For the full year, we added more than 650 employees, with the majority of the additions coming in the product development and sales teams. That hiring momentum will largely continue, and we expect to add headcount across the entire organization and all of our geographic regions in 2014.

Now I'd like to move on 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. First, I'd like to talk about what we're expecting for 2014 as a whole, and then we'll come back to some specifics about the March quarter.

We continue to experience a very strong demand environment. In that environment, we're going to maintain our focus on adding great people company-wide and building out the infrastructure we'll need as a much larger company, even as we continue to invest most aggressively in the product and sales teams.

For 2014, we're raising our revenue outlook from the previously stated range of $525 million to $535 million and currently expect revenues to be in the range of $535 million to $540 million. Given the expansion we're planning for the year, we're now expecting relatively flat EPS in the range of $0.24 to $0.26 for 2014, which would result in operating cash flows in the range of $65 million to $70 million. As in 2013, you'll see some increase in capital spending as we invest in building out both office space and operational capacity. For the year, I expect CapEx to be in the range of $25 million to $30 million. Again, this year, I expect you'll see our usual pattern with the most significant investments focused early in the year and margins expanding in the second half. For the March quarter, we foresee revenue in the $119 million to $121 million range and non-GAAP EPS from $0.01 to $0.02. We expect operating cash flow to be between $14 million and $15 million.

That concludes my prepared remarks. And with that, I'll turn the call back over to Zach.

Zachary Nelson

Thank you, Ron. NetSuite gained incredible momentum in 2013, and the demand environment we see in 2014 is one of the strongest we've experienced since the founding of the company. In 2014, we will make investments to ensure that we, our customers and our shareholders continue to gain from the market leadership position we have achieved, driven by our laser-focused cloud computing strategy and our excellent historical execution against that strategy. To take advantage of our leadership position and market opportunity, we're going to continue to invest aggressively in 2014. Sales, engineering and services will all grow substantially.

As we have in the last 2 years, we plan to front-load as much of this investment as possible in Q1 and Q2. This early investment allows our operating results to benefit more rapidly than if we would equally proportion the spending across the 4 quarters. Given the nature of our recurring revenue business model, these investments should have the majority of their impact in the acceleration of our business beyond 2014.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Greg Dunham with Goldman Sachs.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

I guess, the first question, the number of customer adds is impressive because that actually grew, but the other thing is, if you look at the ASP of those new customers, those are significantly -- it's significantly higher than the ASP of the overall customer base. It's close to 3x by my math, I guess. So the question is, when we look at your pipeline going forward, do you expect the mix of these higher-end customers to stay consistent with 2013? And what are you doing from an organizational standpoint to keep this trend line going?

Zachary Nelson

Greg, yes, that's a good observation at the start and a good question at the end. I think your analysis is right. Really, if you look at it over the last 5 years, you've seen -- if you've just run math across the number of companies we have as a customer, you get a much smaller ASP than obviously what our current ASP is, as we add these new companies, yes. So getting a 4 in front of the customer add number with a much higher ASP is certainly exciting, and we don't see any reason why that would change moving forward. It's really been historical trend over a number of years. In terms of sales investment, it'll sort of back that up. We've been building a true enterprise sales organization probably over the last 2, 2.5 years. And so as I said, we're going to invest a lot in sales. But again, on a percentage basis, that enterprise organization is going to get a much larger percentage investment than, say, the mid-market organization. Well, the mid-market is also going to grow healthily. We love the mid-market -- obviously, we have tons of customers in the mid-market. It's a very lucrative market for us that no one else has really figured out how to penetrate. So we're adding that enterprise story as the second story on the house. It's not a new house, and it's not replacing our old house. It's part of the whole strategy. But -- and going back to some of Ron's points, the largest number of deals over 100,000, the largest number of deals over 500,000. And you're not talking about just a handful of deals either. You're talking about fairly substantial numbers of customer count in those areas now, so it's pretty exciting.

Operator

Your next question comes from the line of Jason Maynard.

Jason Maynard - Wells Fargo Securities, LLC, Research Division

I got a couple of questions, actually. Maybe, first, just, Zach, as you move upmarket, can you give us your assessment of how far up market can NetSuite go today? And if you want to bound it by customers or complexity of business or revenue size, what do you think the upper end of your TAM is today? And then I got a couple of follow-ups.

Zachary Nelson

We try not to limit ourselves. A lot of times it is the customer choice. We've had some very large customers come in that were skeptical of NetSuite's ability to scale into the larger enterprise. They deployed us in smaller enterprises. And then by the end of that year, I sat down and had meetings with them again, and they said, "Well, we'd love to be able to take you everywhere." So I think we have a very powerful solution that can be deployed in very large companies today. Clearly, you'll see billion-dollar enterprises running on NetSuite, and we're approaching that now. So -- but I don't see $1 billion of the limit, certainly. The other element, of course, that comes into play is what industry group you're in. Obviously, if you're a manufacturer of steel, you probably won't use NetSuite to run your operation regardless of size because we don't do process manufacturing, right? But that caveat aside, in the industries we're in, we continue to move upmarket to larger and larger companies. I don't think that will stop over time. And then secondly, when you look at the multi-company opportunity, we have the best multi-company, multicurrency, multi-language solution on the planet, bar none. And those are all very, very large organizations that will -- that are and will be deploying those. OneWorld, once again, had an incredible quarter, an incredible year, and we're just at the beginning of that cycle. So I don't know if that answers your question, but we don't really -- we aren't limiting ourselves by setting a goal of saying, "We're going to run $5 billion companies because who knows? There's probably some $10 billion companies someday that could use NetSuite, too."

Ronald Gill

It's definitely a growing number. It's getting larger each quarter when we -- every time we're reporting a quarter like this with record number of deals greater than 100k or a record number of deals greater than 500k, all of those deals are coming in on the back of references of successful customers that are increasingly larger every quarter as well. And so that momentum just continues.

Zachary Nelson

And not to chew up too much airtime here but the other important piece, obviously, is the partnerships with the big SIs, Accenture, Deloitte, Cap. These guys, we've done incredible things with them already, and they really understand that market well. And they -- they're certainly not putting any limitations around NetSuite as we look at opportunities together. And I trust their opinion quite a bit.

Jason Maynard - Wells Fargo Securities, LLC, Research Division

Well, that was actually going to be my follow-up because I was going to ask you -- the feedback from those kind of global system integrators has really changed, I think, over the last couple of years. And we're seeing the practices grow and the interest level grow with those folks. Where would you say you're at right now when you go to market with them? Are they at the point where they're actively bringing in you into a large number of deals? Are you bringing them in? And if you had to look out maybe this year and into next year, what percentage of maybe the OneWorld deals do you see them having a real critical role in driving demand for NetSuite?

Zachary Nelson

So OneWorld is an unusual product. I mean, it was not an unusual product. It's an interesting product in the sense that outside the U.S., even midsize companies need OneWorld. If you're in Australia, you want to sell outside of Australia, multi-company, multicurrency becomes very important very fast. So I don't think you really quantify it by talking about the count of deals influenced by those guys from a OneWorld perspective. That said, I think it's probably fair to say that most of the enterprise deals that we're involved with today involve one of our core SI partners. And I would say, while we bring them into some opportunities, they're bringing us into quite a few more opportunities than we're bringing them into, and that's really been our strategy all along. So they've been -- again, I can't say enough about how well the partnerships are going with those guys. In fact, Ron was kind of complaining on his way up here today that he had to walk through these gauntlet of SIs in our lobby, and he couldn't get here for about 5 minutes. So that gives you an idea how close these partnerships are.

Operator

Your next question comes from the line of Karl Keirstead with Deutsche Bank.

Karl Keirstead - Deutsche Bank AG, Research Division

My question is for Ron and focuses on the subscription revenue line. Ron, given the ratable recognition model, you tend not to get big swings in that subscription revenue growth number. But it spiked up to 37% this quarter, and that number popped out at me more so than any other, up from 31% in the last couple of quarters. That's a big jump. Could you just give a little color there? Is it just bookings that rolled in? Or is there anything unusual worth calling out?

Ronald Gill

Yes, there were really 2 factors that drove that this quarter. I mean, you're fundamentally right about the subscription. Recurring revenue line usually doesn't swing that much in the quarter. Two fundamental factors this quarter. One was the bookings skew in the quarter was much more -- was much earlier in the quarter than we had in our forecast. We actually had a really strong October and November, whereas in a lot of ways, we have a traditional hockey stick like a lot of enterprise companies where a lot of the business comes in late in the quarter. But we actually had a very solid bookings even early in the quarter, and so that had an impact. And then the rest of impact was just the retention being slightly higher than we had in our plan, and that's a big lever. And so that was the rest of it.

Operator

Your next question comes from the line of Raimo Lenschow with Barclays.

Raimo Lenschow - Barclays Capital, Research Division

The -- [indiscernible]. If you think about 2014, can you talk a little bit about your plans on international? You mentioned Europe. That doubled and was very strong. I mean -- but you're still predominantly -- at the moment, a U.S. player. What are your plans for international expansion? And then can you talk a little bit about your vertical positioning at the moment? Where -- I mean, we talked about this in the past, but where do you see the current strengths? And what are the plans for '14 to maybe broaden that reach a bit?

Zachary Nelson

Yes, great. No, we were very excited to see what happened outside of the U.S. this year and this quarter. And so, yes, I think there's obviously, I mean, incremental investment in Europe, given the greater than 100% growth there this year. Asia Pac also grew. Asia Pac is usually the star we talk about, but it was really overshadowed by Europe. So they had a great year as well and so continue to invest there as well. The other thing we're doing in Europe, too, that I've mentioned recently in some -- in the press is putting a data center in Europe. And Ron talked a little bit about the cap expenditures related to that. But we're pretty excited about putting the data closer to our European companies, and we think that will probably be a driver for further acceleration in Europe. So that's going to happen over this year and probably go live in early '15. So that's an exciting sort of historical point. In terms of verticals, again, we talk about -- we use the word verticals with, really, industries that we're targeting, with the exception maybe of retail. Retail is a pretty true vertical. So we're going to stay in the industries that we're in, eTail/Retail, which had an incredible year; SuiteCommerce just killing it, almost double that business during the year. Manufacturing had a great year. As you recall, we launched new manufacturing capabilities at beginning of the year, and that rolled out through the year. You saw we announced Roku today as another example of a next-generation product manufacturer building their business around NetSuite. Services companies were really time-based businesses, is what falls into that group. They had a great year, over 50% growth, great new stuff coming out on the product in that front. Software companies, I think we dominate the software industry. Other companies like NetSuite, I don't know what percentage of that marketplace we own, but it's a very large percentage. Small market but our team there continues to do very well. And then if you look at the enterprise, in general, the enterprise groups grew very well. So we're going to continue investing heavily in those core areas. We may branch out and actually do some vertical work this year. We're still finalizing that in some of those particular areas. But as we make more progress on that, we'll talk about next-generation verticals perhaps later in the year.

Operator

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

Philip Winslow - Crédit Suisse AG, Research Division

Zach, just wanted to focus in on SuiteCommerce. You just mentioned in answer to your last question. And like you mentioned it actually on your previous question. You're an omnichannel commerce provider, not just e-commerce. I wonder if you could talk about just sort of how you think you stack up with sort of that omnichannel versus e versus the competition out there. And then also, when you think about continuing to extend this going forward, I get questions about you guys on the marketing space versus, obviously, the back-end order management integration. How far, call it, to the front-end do you think you go on the commerce side?

Zachary Nelson

So thanks, Phil. So on the commerce front, what we've done with SuiteCommerce over the last 2 years now is really re-architect the product in a way that you can now generate, I think, probably the world's fastest front-end websites, if you will, just picking that as a front-end. Our -- the front-ends that are being generated out of NetSuite are faster than, I think, anything that you would find on the planet. Demandware, Magento, totally competitive, stack up head-to-head both in terms of functionality, the ability to control every pixel and speed with all of those guys. So I think we're at total parity there. If you talk about omnichannel, which everybody talks about, and you ask about our competitive position, I think we are the only omnichannel cloud platform on the planet. People who talk about omnichannel really are just talking about e-commerce and maybe mobile commerce. They tend to forget about this 90% commerce called retail, point-of-sale. And NetSuite is the only cloud-based solution that has an integrated -- not integrated, it's built on our platform, point-of-sale, as well as e-commerce, I talked about the front-end, and, obviously, mobile, et cetera. So I think our position is unchallenged in that particular space. Nobody else, from a cloud perspective, has point-of-sale. Now other on-premise guys have point-of-sale, but it's just -- it's this whole separate stack of technology. It's a separate database sitting behind it, so you have to tie your point-of-sale hairball to your e-commerce hairball, to your back-office hairball. Good luck, right? It's incredibly complex. In the case of NetSuite, it's a single system that basically feeds all of these channels. So I'm incredibly excited about where we are from a market position standpoint. I think in terms of some of the core functionality that we're continuing to develop, we're certainly not done developing this, I think marketing, automation or merchandising, as it might be more properly called in this particular market segment, is an area we're going to continue to invest. Some other folks might have more merchandising capabilities than we do, but we have lots of partners in that space that are filling those gaps for us today. We're doing a lot of work in content management within the system itself. So -- but I think, architecturally, if you look what SAP is doing with Hybris, they basically did that to try to compete with NetSuite, right? But they're 2 separate product stacks. So how are they going to migrate that to a single code base to compete with something like NetSuite? I think from a product standpoint and now from a go-to-market standpoint, there is no company that's positioned in omnichannel commerce like NetSuite.

Operator

Your next question comes from the line of Samad Samana with FBR Capital Markets.

Samad Samana - FBR Capital Markets & Co., Research Division

Zach, could you comment on how SAPs are for vertical-specific deals or just your specific oriented solutions versus kind of the off-the-shelf solution and how that's benefiting the ASP lift?

Zachary Nelson

Yes, it's a good question. We've always said, part of the whole -- at the end of the day, the idea behind NetSuite was to build a system to run a business. It turns out the kind of business using that application actually matters for a manufacturer. You need different functionality than you do for a services company as one example. So for a business strategy standpoint, we always had to verticalize or industrialize the applications. It also has the benefit. Once you verticalize your software, you can actually get paid a lot more for it because you show it to a customer and they say, "Oh, yes, that looks like an omnichannel commerce machine. It doesn't look like this machine I saw from our competitor where I have to build all this stuff to make it an omnichannel commerce machine." So they're willing to pay more for it. And in fact, just in the case of SuiteCommerce, Ron mentioned this, in our eTail/Retail vertical, in effect, where we sell the majority of SuiteCommerce, our average selling price is as high as it is with OneWorld. So -- and that's double our standard generic product. So that's a good case in point what verticalization does to our average selling prices, and the customer is willing to pay more for that technology versus undifferentiated stuff they might find from Microsoft, Great Plains that was built in the 1990s in Fargo.

Samad Samana - FBR Capital Markets & Co., Research Division

And then one follow-up. On TribeHR, can you update us on the integration? And if there's any incentives for the NetSuite sales force to pass along leads to the salespeople that came over from TribeHR, how you think about that ramp?

Zachary Nelson

Yes, that's great. So Tribe, as you all know, we acquired them last year. We really disclosed that, I think, late in November. So they've -- we've really had -- we've really owned them, if you will, for a little more than 2 months. So we're in that process now, obviously, developing a longer-term product plan around Tribe. It was already integrated. We're doing deeper integration right now from a product standpoint. From a sales standpoint, we have a sales team dedicated to selling the Tribe product. Part of that sales team is dedicated to working with the NetSuite installed base. And the way they do that, as you would indicate, is working through some of our NetSuite internal sales reps. So yes, there is -- there are agreements between those folks in terms of how to pass leads over. But we will set up those stand-alone for those folks that maybe aren't ready to move their ERP systems, as well as, obviously, there's a great opportunity within the NetSuite installed base to begin for them to move not just to NetSuite for their business operations but also move to Tribe for their people operations.

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

Ron, I guess, is there anything that tells you that 2014 can't be another year of accelerated revenue growth, at least on the recurring line? Obviously, your guidance implied some deceleration in total revenue. But, I guess, what are the implications on the recurring side for fiscal '14?

Ronald Gill

Yes, we usually don't try to break that out at this point in the year. You're always going to have -- if you look at our Q1 guidance, I think total revenue, the range is somewhere between 30% and 32%. Obviously, you're going to have more visibility and confidence to the near quarter, and there's a wider range of possibilities the further out you go. In terms of recurring versus nonrecurring, I do think -- you saw the nonrecurring revenue growth rates slowdown in the back half of this year. We have had [ph] a good job. Zach was talking about global SIs. Certainly, where they're involved, they often take the professional services on, which is fantastic. So we've seen, for the year, even though PS grew significantly more than recurring, the rate of recurring revenue growth is accelerating, the rate of PS, revenue growth is decelerating. For the year, in '14, I guess I'm not expecting much change in the overall mix. If you look at the full year mix, recurring versus nonrecurring, I'm not expecting a lot of change, and I'm expecting certainly a slower rate of growth of professional services in 2014 than we saw in 2013. I'll probably leave it there.

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

Okay. And then, Zach, if you look at your enterprise pipeline, you've kind of talked to us earlier in the Q&A, but I'm wondering if you're starting to see -- if you could quantify the opportunities, where you guys are actually looking to replace the core headquarters as opposed to more 2-tier in that space. Has that percentage been increasing if you look forward to your pipeline?

Zachary Nelson

In the true enterprise organization, the vast majority is 2-tier of some way, shape or form. It might be, as in the case of Williams Sonoma, 2-tier e-commerce, right? So it can be a functional 2-tier, as well as, okay, a financial multi-company consolidation sort of play. So -- and, frankly, I think if you look at all SaaS software, by and large, the way it's entered the enterprise is they didn't call it 2-tier but departmental is probably what they called it, right? You put this into the -- around the core systems and then you begin to subsume them. So we're very -- we love the 2-tier approach. That's -- we think it's the right sales strategy, and it's definitely the way the enterprise consumes these products. Now that said, in the mid-market, and let's say a mid-market company is $500 million to $1 billion at the high end, those are full replacements. I think we did a couple of in-floor replacements in that segment over the last year. So, yes, I've always sort of said it's interesting. Our mid-market enterprises look like -- our mid-market deployments look like enterprise deployments, and our enterprise deployments look like mid-market deployments, if that makes sense. So mid-market, you definitely replace the entire thing.

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

Okay. And then last one real quickly, Ron, can you give a sense of mix of new bookings in Q4 in terms of upsell versus new and then talk a little bit about the types of cross-sell opportunities you're seeing the most of?

Ronald Gill

I don't think I want to split that out, Justin. We're seeing -- I think the overall trend that we've talked about, we certainly see it continue. As we're signing up these larger customers, larger and larger customers than we've historically signed, there is a lot more room for upsell in those accounts. So we're certainly -- in a longer trend, we're certainly seeing the upsell opportunity grow as a larger and larger portion of opportunity because the installed base accounts that we've got are larger and larger accounts, and there's more room to grow in those accounts. But that trend is certainly there. I don't think -- I don't have the number in front of me, but I don't believe there was anything unusual at all in Q4 in terms of that mixed skewing in one way or the other.

Operator

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

Scott R. Berg - Northland Capital Markets, Research Division

I guess, my first question, Zach, is sales from channel partners have accelerated, obviously, nicely over the last 4 years and coincided with your increasingly accelerating top line growth. But what should that mix look like, whether it's in '14 or from a longer-term perspective? Is that mix kind of plateau at 40%? Or should we see that at a higher level at some point, do you think?

Zachary Nelson

I'm so -- I got to say I'm so excited about the channel. I've been in direct sales organizations almost my entire career, and when you start to engage with channel partners, people say, "Well, what do you think the mix should be?" And the direct sales guy always says, "Oh, someday it'll be 50-50, but it never gets close to 50-50." And what's amazing -- what's happening here that's so amazing is we're actually getting pretty darn close to 50-50. And -- so I don't know what it could be. Someday, I'd love to be 100%. Wouldn't it be great to be Microsoft and have no sales costs, right? So I think the important thing, though, to look at in terms of how we view the channel is -- and what is accomplished so far is we -- as we look at our business plan, we sort of say, "What sort of things can we really control in our own hands?" And that tends to be our direct team. We obviously think about how the channel could grow, but frankly, it's almost we kind of view it as the upside in the model. So as they begin to really kick in over the last few years, that's been a real positive for the model, number one. And secondly, we view our market as the Fortune 5 Million, which includes the Fortune 500 but also includes millions of other companies. And so we need 5 million sales reps out there to make that happen. These are complex apps to sell and install and everything else. So you look at that momentum in the channel and you need to run a model that says, "Here's what percentage that could be over time." And again, I challenge -- I don't think there's any SaaS company, frankly, doing 40% of their new business through the channel. Maybe there's some that have interesting sales relationships like Concur with AMEX or something like that. But a classic sort of VAR channel, I don't think there's anybody even close to what we're doing, and that's very exciting.

Scott R. Berg - Northland Capital Markets, Research Division

Fantastic. Then my -- I guess, my kind of a follow-up question to that is as you look at your sales and marketing investments in '14 relative to the channel, are most of them directed from a domestic perspective, whether it's SIs or others? Or how much of that is maybe focused more on international partners?

Zachary Nelson

Obviously, the old on-premise guys do a lot of stuff through the channel. I'm talking primarily about the cloud, cloud people with that sort of ratios, just to be clear. Interestingly enough, what turned around for us really internationally in the U.K. was really our direct. We have a great channel operation going in the U.K. What really turned around there was the direct operation over the last year. So different regions have different sort of levers that are being turned. But we're going to continue to invest in both pretty heavily, the channels more leveraged. And, frankly, I don't believe that channel number I talked to really encompasses a lot of the influence of the SIs, certainly. So if you talk about influence of the SIs, the number is actually -- gets bigger than 40%. So that's actual business done through the channel, by the channel. So, yes, SIs are getting a big investment this year.

Operator

Your next question comes from the line of Pat Walravens with JMP Group.

Patrick D. Walravens - JMP Securities LLC, Research Division

I have 2 questions. I'll just lay them out upfront. Ron, for you, I mean, it looks like your share count went down in Q4 from Q3. Is that because you bought back stock? Or did something else happen? And, Zach, I'm just wondering, what key points would you make for investors who wonder how the relationship with Oracle is likely to play out over the next few years?

Zachary Nelson

The Oracle relationship has been really the same over the history of our company. We've been a big customer of Oracle, certainly, and we've built a great application on top of their great database and application servers. So that's going to, obviously, continue. More recently, we have done some interesting partnerships on the HR front, and I think there are some other opportunities, certainly, in Oracle's portfolio. For NetSuite to partner there, you certainly -- we're just going to talk a little bit on marketing automation. Oracle is doing some very powerful things in marketing automation, so that might be a nice place to look at partnerships. So I think it will be more the same, at least, certainly, from our perspective, in terms of how we are a customer of Oracle, how we partner with them. And then, of course, obviously, where we compete with them in the marketplace, we're going to do everything we can to win those deals, but that's not unusual in the technology space to be a customer and a competitor at certain times. So that's really how we think of the Oracle relationship, not really much different than what it's been today.

Patrick D. Walravens - JMP Securities LLC, Research Division

And, Ron, on the share count?

Ronald Gill

Yes, on the share count, I'm not sure where you're looking. I'm looking at share count numbers in front of me that are increasing quarter-on-quarter. You're looking at the non-GAAP share count number?

Patrick D. Walravens - JMP Securities LLC, Research Division

Maybe I got it wrong. Okay, I'll follow up with you.

Operator

At this time, this concludes our conference call. Let me turn the call back over to the presenters.

Zachary Nelson

Well, thank you, all, very much for joining us for the conference call this quarter. It was a -- it's fun to look back at the year and appreciate the opportunity to do that. If you look at the year, the product got better, both in terms of its breadth and depth for verticals, so super incredible effort by the product organization, incredible investment in that. I think it grew, as a percentage of revenue, the amount we're investing in product. So we're going to continue to invest in product. We're fighting a multi-front war here. We're winning a multi-front war, which is the cool part. But we definitely -- the first thing we need there is the product to fight that war. I know the team got stronger. As I said earlier on, you've forgotten that we changed out our sales leadership. And I think Jeff Honeycomb and Pete Daffern and Marc Huffman and our sales leadership organization and, obviously, Jim McGeever heading up, that group have done an amazing job over the year and just set us up, delivered an amazing year and set us up for hopefully even a more amazing year. As I always get excited, I don't want to be Richard Sherman here, but the competition got weaker. And you can't beat that when you're competing against products made in 1990 with this incredible piece of software we have that really enables customers to bring their business into the Internet age. And all of that added up to faster growth. We -- you allowed us to spend a lot of our -- a lot of incremental profitability last year into the organization, and we were really excited that turned into the revenue growth that we had promised. So it's not Groundhogs Day yet, but we -- we have that feeling. We hope to wake up and do it again this year and look forward to talking with you at the end of our Q1 call. Thank you very much.

Ronald Gill

Thanks a lot, everyone.

Operator

This concludes today's conference call. You may now disconnect.

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