Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

NetSuite Inc. (NYSE:N)

Q1 2014 Earnings Conference Call

April 28, 2014 05:00 AM ET

Executives

Jennifer Gianola - Director, IR

Zach Nelson - President and CEO

Ron Gill - CFO

Analysts

Brendan Barnicle - Pacific Crest Securities

Jason Maynard - Wells Fargo

Karl Keirstead - Deutsche Bank

Phil Winslow - Credit Suisse

Mark Murphy - Piper Jaffray

Greg Dunham - Goldman Sachs

Raimo Lenschow - Barclays Capital

Scott Berg - Northland Capital Markets

Brad Sills - Maxim Group

Samad Samana - FBR Capital Markets

Patrick Walravens - JMP Securities

Operator

Good afternoon and welcome to the NetSuite First Quarter 2014 Earnings Conference Call. My name is Jay and I will be facilitating the audio portion of today’s interactive broadcast. All lines have been placed on mute to prevent any background noise. [Operator Instructions]

At this time I would like to turn the show over to Jennifer Gianola, Director of Investor Relations. Jennifer, you may begin.

Jennifer Gianola

Thank you operator. Good afternoon everyone and welcome to NetSuite’s first quarter 2014 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 section of our website.

As a reminder, today's call is being recorded, and a replay will be available following the conclusion of the call. On the call with me today is Zach Nelson, our Chief Executive Officer and Ron Gill our Chief Financial Officer. Zach and Ron will begin with prepared remarks, and we will turn the call over to question-and-answer session.

During the call, we will be referring to both GAAP and non-GAAP financial measures. A 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 first quarter 2014 financial 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 U.S. federal securities laws. These statements are subject to risks, uncertainties and assumptions and are based on financial information available as of today.

We disclaim any obligation to update any forward-looking statements or outlook. Risks and uncertainties that would cause our outlook 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 our reports that we file from time to time with the SEC, including our most recent 10-K and 10-Q filings, which I encourage you to read.

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

Zach Nelson

Thank you Jennifer and welcome everyone to NetSuite’s conference call to discuss our fiscal 2014 first quarter results. Our outstanding first quarter results are a great way to start off the year. Not only did we deliver an excellent financial product and operational quarter but also our continued market share growth reflects the accelerating re-platforming of core mission critical business systems to the cloud and marks a chancing of leadership in the ERP market. NetSuite’s value proposition of offering a modern, flexible and evolving on-demand ERP business management service delivered to companies ranging from small and medium size businesses to large enterprises continues to result in accelerating revenue growth.

There are very few application software companies, cloud or non-cloud that have delivered consistent 30% or greater revenue growth on a year-over-year basis over the past seven consecutive quarters. And while the notion of what constitutes a cloud application continues to be co-opted and twisted by non-cloud companies, these metrics bear out that the customer knows the difference.

Bottom line, NetSuite is executing and enabling companies to operate their business in the cloud while other traditional ERP software companies produce power point decks. For example in Q1, while we grew our revenue year-over-year by more than 30% for the seventh consecutive quarter, non-cloud ERP providers like SAP saw their core license revenue shrink for the fourth consecutive quarter.

In addition, according to Gartner’s recent report on worldwide software market share for financial systems published in March 2014, while mid-market clients server providers like SAGE and Microsoft continued to struggle, we were busy growing our market share by more than 40%. In fact, according to Gartner our 2013 year-over-year global market share growth rate was almost four times faster than the next nearest competitor in the top 10.

Also we cracked the list of top 10 global providers for the first time, and as significant in the Gartner market share ranking of the top 20 global financial systems providers, NetSuite is the only pure cloud provider. In our results this quarter, we look to add to the market share gains reported in the Gartner analysis.

As you read in today’s press release, our first quarter performance highlights our continued execution in response to the continued transition of business software to the cloud. In addition to exceeding outlook for the quarter on every metric we provide, the strong start allows us to raise our revenue guidance for the year to be in the range of $540 million to $545 million.

For the quarter on the revenue front, year-over-year our top line grew by 34% to record $123 million above our previously stated outlook of $120 million to $121 million dollars. Recurring revenue continued to accelerate year-over-year as it grew 34% versus the 27.5% growth rate recorded at the end of Q1 2013. In the installed base we once again saw strong levels of revenue retention, continuing the trends in customer satisfaction that we have experienced over the past several years.

Our non-GAAP earnings came in at $0.06 per share, well above our previously stated outlook of $0.01 to $0.02 per share for the quarter and operating cash flow was a record $19.1 million versus our stated outlook of $14 million to $15 million.

In Q1, calculated billings, defined as the change in deferred revenue plus revenue grew by 33% over Q1 of 2013 and as you recall Q1 of 2013 was a strong quarter, so it was a tough comparison. These results are indicative of excellent execution of our global sales organization. And to continue their sales strong execution, we are pleased to announce today the appointment of Mark Hoffman as President of Worldwide Sales and Distribution.

Mark is a long time NetSuite leader who has previously headed up our North American organization and our sales enablement organizations. In this newly created role, the regional sales organizations of North America, Asia Pacific and EMEA will move from operating to our Chief Operating, Jim McGeever to reporting to Mark. This new structure will free up Jim to focus on variety of key initiatives around verticalization and enterprise engagement, while providing the sales organization with a strong leader who is knowledgeable about our markets and about NetSuite.

These quarterly results are also attributed to our customers, who are using NetSuite to transform their operations and enable their business vision and in Q1 we added roughly 310 new customers to installed base. And we did it with an average selling price that was more than 90% higher than the prior year. While that ASP was somewhat skewed by a couple of very large enterprise deals, including our largest contract ever, even removing those from the calculation resulted in an average selling price that was up approximately 50% from Q1 2013, a very healthy start to the New Year.

In conclusion, our business model is playing out in a way that we think is favorable for NetSuite our customers and our shareholders both in the short and the long term. Our position as the clear leader in cloud ERP systems provides us access to probably the largest single total addressable market in the business application space. And of course, out addressable market is more than just ERP. Our successful suite approach, including strong functionality and CRM and e-commerce just to add to that TAM.

We’re very excited about the long potential of the markets we are targeting and the continued investments we are making in the sales and product model we use to penetrate those markets. We think that the financial results we delivered in Q1 provide the proof that the investments we are making in our strategy of bringing the power of integrated, cloud-based business applications to companies of all sizes are paying off for our customers, our employees and our shareholders.

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

Ron Gill

Thank you, Zach. As that stated, we exceeded our expectations on every metric for which we gave outlook for the quarter. I’m pleased to report the Q1 and record revenue, record operating cash flow, record deal size and generally speaking represented a fantastic start to 2014. During the quarter, we added roughly 310 new customers and as you’ve heard already we did it with an average annualized contract value that was almost double that for the previous year.

Given our high rates of revenue attention, once we acquire a new customer we typically keep that customer for many years beyond the initial subscription period. That not only results in wonderfully predictable and sustainable revenue model, it also means that each new customer added represents the potential for a long multi-year revenue stream as we continue to deliver the subscription over the subsequent years.

Let me take you through some of the numbers in more detail. As a reminder, all of the non-revenue financial figures I will discuss here are non-GAAP unless I state the measure a GAAP number. Revenues are of course GAAP numbers and as always you can find a reconciliation of GAAP to non-GAAP results in today’s press release.

During Q1 revenues grew to $123 million, up 7% sequentially and up 34% over Q1 of 2013. As Zach mentioned, this is our seventh consecutive quarter with a year-over-year growth rate in total revenue of 30% or more. Recurring revenues from subscription and support grew 6% sequentially and 34% over the year-ago quarter to $99.4 million, while our non-recurring revenue, which comes primarily from professional services was $23.6 million for the quarter and grew 33% over that for the same period last year.

Year-over-year in May it was the fastest growing geographic area on a revenue basis and approximately 25% of our revenue for Q1 was generated outside the U.S. I mentioned the significant increase in average deal size in the quarter. At the larger end of spectrum, sales of NetSuite OneWorld which is typically purchased by larger customers with more complex operations were very strong in Q1 and accounted for more than 40% of new business.

The average annualized deal size of new OneWorld agreements was a new record high by a wide margin and increasing penetration of larger suite commerce still in the mix is also beginning to contribute to higher ASPs. Moving down to P&L to gross margins, we saw an increase in our gross margin year-over-year from 70.9% to 72.2%. Gross margins on both recurring and non-recurring revenue improved with the gross margin on recurring revenue up from 84.9% in the year-ago quarter to 85.5% and a gross margin on non-occurring revenue up from 12.4% in the year-ago quarter to 15.8% in the first quarter of this year.

Overall we expect the blended gross margin to approximately 71% to 72% of revenue for the full year in 2014. Turning to our non-GAAP operating expenses, we continue to make significant investments in our product team as well as in expanding sales capacity. Our product organization, where the number of people in the team was up more than 48% over the year ago quarter continues to be the fastest growing area of the Company. Product development expense was $17.6 million for the quarter, up 49% over Q1 of 2013 and representing about 14% of Q1 2014 revenue. I expect that this spending on our product team will be approximately 13% to 14% of revenue for 2014. Sales and marketing expenses were $56 million or 46% of revenue in Q1, on par with about the same percentage of revenue in Q1 of last year. We do have SuiteWorld, our largest marketing event of the year in Q2. So we will see a significantly higher level of marketing spending this quarter associated with that event.

G&A expenses were $9.3 million or 7.6% of revenue in the first quarter. That’s down from 8.5% of revenue in Q1 of 2013. So we continue to have good scaling efficiency in that area. Non-GAAP operating income in the first quarter was $5.9 million. This equates to a non-GAAP operating margin of 4.8% compared with the 4.1% margin in the first quarter of last year. During the quarter we reported a net income tax expense of approximately $1 million. We continue to expect our net operating losses to offset any the domestic earnings for tax purposes for the foreseeable future. Non-GAAP net income for the first quarter was $4.4 million, non-GAAP earnings per share for Q1 were $0.06. This was up from the $0.04 in the year ago quarter.

Moving on to the balance sheet, we had another record quarter for cash collections and our cash balance again increased. Cash flow from operations in Q1 was a record $19.1 million, up 30% year-over-year and we closed the quarter with $465 million in cash and cash equivalents.

Moving down the balance sheet from cash to deferred revenue, our total deferred revenue balance increased to a record $237.5 million, an increase of 6% over the prior quarter and up 38% over the prior year. As you may calculate from the financials published in the press release, calculated billings defined as quarterly revenue plus the change in deferred revenue were $135.8 million for the quarter, representing an increase of 32.5% over the first quarter of 2013.

As I’ve consistently pointed out on these calls, there is a wide array of factors that influence calculated billings and quarter-to-quarter fluctuations in the calculated billing’s metric should not be taken as an indicator of changes in future revenues. One example of those factors is our ongoing shift away from fixed fee and toward more time in materials based engagements for our larger implementations jobs. While we believe this is the right way for us to manage the business, it has the impact of reducing the portion of the engagement which is build upfront and thus negatively impacts calculated billings without any related impact on revenue. Headcount on March 31, 2014 was 2,550, up 31% from Q1 of 2013. We added headcount across the organization in Q1 with a majority of additions and product development and sales.

Now I’d like to move to the forward looking financial outlook, which is covered by cautionary language I outlined at the start of the call and based on assumptions which are subject to change over time. We’ve had a great start to the year and have solid momentum going into the second quarter. With that in mind, as Zach mentioned, we’re going to be raising our full year outlook for revenue. Our previous outlook was for revenue in the range of $535 million to $540 million and we’re now raising that to a range of $540 million to $545 million.

We’re going to keep putting the old regime back into the business. So we’ll maintain our earlier outlook for operating cash flow of $65 million to $70 million and non-GAAP EPS of $0.24 to $0.26 for 2014. For the second quarter of 2014, we expect revenues in the $130 million to $132 million range. The SuiteWorld event I mentioned will be the largest we’ve ever done and that will drive some increase in cash expenses in Q2. We anticipate non-GAAP EPS of approximately $0.02 to $0.03 and operating cash flow of $14 million to $15 million for the quarter. Our top priority remains growth. We view the overall market opportunity for NetSuite as huge and growing. As such we’ll continue to invest in sales and product development capacity together with the infrastructure necessary to grow the business and extend our leadership position.

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

Zach Nelson

Thank you, Ron. Ron’s comments detail that the significant momentum we gained in 2013 carried over into the first quarter of 2014 and I think the trends driving NetSuite’s growth will continue as the year progresses. To summarize the highlights from today’s prepared comments, we posted record revenue, record deferred revenue, record cash collections, record operating cash flow, record average selling prices, record OneWorld average selling prices, record SuiteCommerce average selling prices, the largest contract in the Company’s history, 19 consecutive quarters of revenue growth, seven consecutive quarters of 30% or greater revenue growth. We raised our outlook for fiscal year 2014 on the revenue front and today we have more employees than we have ever had in the Company’s history. Our goal is to be the leading provider of next generation business suites and to achieve $1 billion of revenue and beyond and we are on our way to achieving these goals.

Our consistent vision of designing a system to run a business and deliver via the cloud continues to be the driving force behind what we do at NetSuite. Our SuiteWorld conference will be held May 12th through May 15th and will be a great opportunity to experience the momentum of our business as we are joined by thousands of customers, partners and prospects from around the world. As at every SuiteWorld, this year each day will have major news as we have significant product and partner announcements across all of our core initiatives. And of course we will feature customers small, medium, large, and very large that are accomplishing amazing things in partnership with NetSuite. We hope you’ll be joint us either in person or online during our live streaming events.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Brendan Barnicle with Pacific Crest Securities. Your line is open.

Brendan Barnicle - Pacific Crest Securities

Zach, the big deals are very impressive. We’re already had some commentary this Q1 about big deals not getting closed with other enterprise companies. So I was interested if you could give us a little more color on that. It sounded like you saw it across all the products. Is that you’re getting more people to buy a bigger selection of production or are they starting with a bigger initial install of one product?

Zach Nelson

Thanks, Brendan. I think it’s hard to make generalization about our customer base because they vary much in size. The large deal we did, the one I talked about, it was our largest contract effort ever, started with a small proof of concept and then became a very large deal. It was always envisioned as being a large deployment that they wanted to try before they brought and then buy the whole thing. So that sort of shows you how variable the data points can be. I’d say generally about the large deals -- we have our record number of large deals, over $200,000 for us. That grew by over 100% in the quarter.

So in our world of large deals, those are -- that may not be a large deal to Oracle but certainly a large to NetSuite. We saw a solid quarter. That said, these large deals are -- the very large deals have -- kind of seem to be lumpy. And the good news was that the lumps came this quarter and we have a good pipeline of future deals there. So we’re cautiously optimistic about our continued success moving up market. Certainly you look at the quarter, 90% average selling price growth. I think you’ll be pretty hard pressed to find any other software company growing their average selling price by 90%. So we feel pretty good about where we’re at right now in the up market space.

Brendan Barnicle - Pacific Crest Securities

Great. And I just want to follow up on SuiteCommerce. You guys mentioned it a bit near prepared comments but anything changing there on the competitive front or reasons for win rate that you’re saying?

Zach Nelson

No, it’s just getting stronger and stronger. The reasons for the win rate we’re seeing is the fact and I’ve said this over and over again -- we’re the only OmniChannel commerce cloud based solution out there on the planet. Point-of-sale, online, single system, NetSuite is the only answer. And in fact looking at our competitive deal mix, we did not lose a single deal to Demandware or Magento. And that’s primarily because we are OmniChannel, they’re single channel. That’s nothing critical of those solutions but it’s just a very different customer that’s buying NetSuite. It’s those customers they have point-of-sale or have a physical bricks-and-mortar environment and an online environment as a part of their solution. And so they need that multichannel offering. The other piece that we have of course is we’re not just B to C but B to B and in fact government to government. So that’s another place where you won’t see - what people consider to be the eCommerce vendors, they don’t play in those spaces, they’re just B to C. And our OmniChannel OmniBusiness model architecture is really the big differentiation there.

Operator

You next question comes from the line of Jason Maynard with Wells Fargo. Your line is open.

Jason Maynard - Wells Fargo

I have two questions. Just first for Zach on the promotion, any other organizational change or impact that you’re anticipating with the new alignment? And then the second question maybe, talk a little about early returns, feedback in HR space and what we should be looking for with Tribe here in the coming quarters and perhaps even at SuiteWorld next month?

Zach Nelson

Yes, on the organizational front with Mark’s promotion, I think it’s really symbolic of the fact that we are gaining depth across the board, not just in our sales organization but across the company. Mark has probably been here for close to if not more than 10 years, opened our Toronto office, opened up Denver. He was really instrumental in building our entire sales architecture. In fact over the last year we took him just to focus on how do we scale the sales organization, how do we build the infrastructure to scale the organization. So well-known commodity, incredibly experienced both with NetSuite and our customer base. So we’re really excited to put him in the role of running the entire global sales origination.

Beneath Mark, I think one of the great things we’ve really done over the last six months is really upgraded our sales management capacity across the vertical suite. You look at what we’ve done in -- not only as our success in eTail and Retail due to the product. It’s due to the great organization we’ve built around that. Similar things we’ve done in manufacturing at wholesale distribution now in terms of increasing the depth of our experience on the sales and services side. So Mark’s promotion is really indicative of our focus on getting scalable people in the origination that can take the sales and distribution team where it needs to go for $1 billion and beyond. And now the second question, it slipped my mind.

Jason Maynard - Wells Fargo

Tribe HR and just what you saw in your early returns with the product and how you’re thinking about the next year or so?

Zachary Nelson

Yes, you’ll see a lot from Tribe certainly a SuiteWorld but what we’ve seen since we’ve acquired them, I think they really just came on board. We closed the acquisition in December 2013 I believe and the idea there was of course to get the expertise, the great domain knowledge of that team, both in terms of the functionality as well in terms of things like user interface and next generation capabilities.

What we’ve seen in the quarter or since we’ve really have them on is it does provide differentiation for us, certainly in the lower end of the mid-market to have an ERP and HR solution when we go up against name your point product in that space, Great Plains, SAGE et cetera to have a total cloud solution for both employee based processes with Tribe and business based processes with NetSuite is a great thing.

As I said at SuiteWorld you’ll see some of the next generation capabilities that we’re building into the tribe/NetSuite HR product, both in terms of mobile capabilities, in terms of user interface, cross pollination and deeper integration between the two solutions.

Operator

Your next question comes from Karl Keirstead with Deutsche Bank. Your line is open.

Karl Keirstead - Deutsche Bank

Zach, I just want to congratulate you on signing your largest deal ever and ask you if you could give a little bit of color be it by industry, who you might have displaced, you might help us a little bit. And then the follow up is for Ron. On that large deal was it all invoiced and did it all drop into DR in this quarter or will some of the invoicing slipped into coming quarters?

Zach Nelson

It’s an interesting deal. I typically don’t talk about things until they are live but this implementation is going really well at this point. So happy to speak a little bit more out about it. It’s not one of our traditional verticals actually and it’s really with a deal driven about around our rich order management capabilities. We’ve often talked about how order management is a key differentiator in the NetSuite offering, very rich, easy to use, highly functional and so that was a big piece of this win.

What it replaced was really the customer was facing an upgrade of a traditional ERP product and so as that upgrade came, they said well let’s see what the cloud looks like and they like what they saw. So that’s the net on that contract and Ron cam talk a little bit about the financial impact.

Ron Gill

Sure, Karl. The billing on that particular deal was actually impacted by the phenomenon that I called out in my prepared remarks; time and material. So that deal had a large time and materials professional services engagement associated with it. And although it was a multi-year deal, as we’ve talked about, we usually are not billing the subscription more than about a year upfront. So in fact the billing term on that deal in particular was below the average billing term of the overall population. So proportion to the booking it’s actually had a slightly negative effect on calculated billings relative to its size.

Operator

Your next question comes from Phil Winslow with Credit Suisse. Your line is open.

Phil Winslow - Credit Suisse

I just wanted to go back on the ASP side and the comments you had about OneWorld. Wondering if you could give us just an outlook when you look in your pipeline as far as what your expectations are sort of for -- we got a high level for OneWorld versus the SMB products, kind of relative to what we saw this quarter and maybe last fiscal year?

Zach Nelson

Yes, OneWorld continues to go from strength to strength, it was a new record in OneWorld ASP as we mentioned, so that’s a net positive. It continued to be in the 40% range of the new business that we did. So that’s been fairly consistent now for about the past year. The thing I will say about OneWorld again is that while on the U.S. it tends to be larger companies that buy OneWorld outside the U.S. Midsized companies need OneWorld desperately right now and that’s the beauty of the solution. If you’re in UK you need a multi-company multi-currency product to sell outside the UK. If you’re in Australia or Hong Kong, you need to have a multi-company multi-currency, multi-subsidiary solution to sell outside of Hong Kong.

So it’s really not, it’s -- certainly the average the selling price of OneWorld deals are larger but that doesn’t necessarily mean that it’s all going to Fortune 500. There is still plenty of mid-market companies that are going to that solution. In fact it’s one of the key reasons we win both in the mid-market and in large enterprises, that multi-company multi-currency.

Now at SuiteWorld we’re going to add to those capabilities with a variety of new rich functionality that sort of extend the OneWorld multi-company multi-currency capabilities into other areas that are related to that. So we’re just going to expand our leadership further at SuiteWorld in that particular product category.

Operator

Your next question comes from Mark Murphy with Piper Jaffray. Your line is open.

Mark Murphy - Piper Jaffray

Ron, I wanted to ask you, to the extent that inventors at least seem to be showing less interest in the combination of high growth with limited profitability in the last couple of months, what do you plan for the pace of hiring this year? And I noticed that your pace of hiring on a sequential basis I think was the slowest it had been in a couple of years. I’m just wondering if we should be reading anything into that or do you think it might reaccelerate in the coming quarters?

Ron Gill

Thanks Mark. No I don’t think you should read too much into that. I would say we still h pretty aggressive growth plans and hiring is certainly going to be a part of that. I think we were just slightly behind our plan for this year. Also year-over-year I believe last year had a small acquisition in it. So we probably just slightly behind in Q1, our hiring target but that’s -- I think you will see hiring accelerate in the second half of the year. No plans from us to slowdown.

Mark Murphy - Piper Jaffray

Great. And then Zach, just a quick follow up. In terms of competitive presence, competitive tactics, maybe any of the discounting practices that you’re seeing out there in the market. Is there anything new as you consider I guess that some of the more modern or relatively modern cloud competitors that you think across Workday, FinancialForce, Intacct, Zuora or anyone else?

Zac Nelson

Not particularly. I mean it’s -- a lot of the companies you mentioned are in the very, very low into the market with sort of average selling prices of $6,000 per deal I’ve read in some places, very small companies that we’ve somewhat moved out of that space. Workday is like the Tasmanian Tiger. We’re still waiting for a siding of their financial product. People are very excited to see us someday but like the Tasmanian Tiger, it’s not showing up very often. Workday isn’t even our top 20 competitor lists. So someday they may have it. I think most of you guys do checks and you hear the same feedback I think from folks as they don’t -- financials in the case of Workday is considered to be expense reporting and payroll and that’s a strange financial product. But we’ll wait and see what happens over the next several years.

Operator

Your next question comes from Greg Dunham with Goldman Sachs. Your line is open.

Greg Dunham - Goldman Sachs

First one for Ron, I wanted to on follow up on the calculated billings metric - and you highlighted moving through time and materials basis from fixed fee being a drag. So I should assume that there was a drag this quarter. Could you help in terms of quantifying that with us? Are you talking like a one to two point drag or are you talking something bigger than that? And then the follow up would be looking forward, how much of a drag should we expect if this repeats itself?

Ron Gill

Billing term is something that moves around a lot quarter to quarter. It’s one of the things I always call out that you should be cautious about in reading too much into any one quarter’s calculated billings number. So time and material, the increase in time, materials and the bookings were certainly an impact of pulling down a billing term and then FX year over year was also a slight bad guy to the calculated billings’ number. If I normalize for those two things, maybe I’ll just say, it would normalize up by several percentage points, if I normalize for those two phenomenon. And those are the really the main drivers that are having the impact on it this quarter. On the question about projecting it, calculated billings is not really something that we project or forecast out. So I am going to be cautious about estimating what the impact in there. I will say that time and materials portion of bookings is something that fluctuates, can fluctuate dramatically quarter to quarter. So, again that just -- another reason to sort of look at four quarters rolling on calculated billings rather than trying to read too much into one quarter.

Greg Dunham - Goldman Sachs

That’s helpful. And I mean several points and also looking at the number of deals north of 200k, growing over 100%, let me just clarify; you said that it was a record which I think would be odd for a March quarter. So, first clarify that. And then I know you’re asked this before, but what drove the large deal activity, not for the biggest deal but just the volume of large deals? Were there any specific verticals that drove it or was this just the way the pipeline kind of worked its way through? Thanks.

Ron Gill

Yes, the deals greater than 200k. You’re right, it is unusual to have a record like to have - to have a record in Q1. I know the deals of more than - the 200k was up over 100% year-over-year. So that’s pretty dramatic. And maybe I’ll let Zack talk a little bit about what kind of things is driving the large deal. We had a number of pretty broad based significant growth rate in the number of deals in several of those large deal category so it wasn’t just the dealer too that we factored out of the ASP.

Zac Nelson

My guess is the growth rate is record, not the absolute number. So just to be clear on that, we’d have to look and see absolute numbers of deals greater than 200k. But the general trend obviously, if you look at that 310 deals we deal with the 90% growth in average selling prices as to larger deals. And I think it’s -- again it’s not all necessarily large enterprise Fortune 500 type deals, it’s the rich upper end of the mid-market. And I think the same things driving us there that has been over the last several years and that is customers are beginning to understand that when they deploy a solution about NetSuite, it’s not primarily about reducing cost and in fact when they’re deploy that suite it may actually increase their cost. They may have a site license for SAP they actually want to pay SAP anything and they still chose NetSuite, right. So it’s really about a more functional appropriate platform for a modern business one that they need to scale their company, one that they need to be respond -- the platform has to be responsive to their changes and their business so it’s really about productivity more than it is about cost reduction on their side and I think that’s part of the reason you’re seeing an uplift in ASPs, is because really seeing around revenue generation platform, as opposed to a cost reduction platform. Certainly they get cost reduction broadly speaking in terms of managing the application and all those things. But I think the bigger benefit that’s starting to be realized, both consciously and actually is the gain in productivity and the ability to respond to change in their marketplace which just make their businesses better.

Operator

Your next question comes from Raimo Lenschow with Barclays. Your line is open.

Raimo Lenschow - Barclays Capital

Hey, thank you. Congrats from me as well. You called out Europe as one with very good strong numbers this quarter. Can you talk a little bit about the, what you see in the market there, because obviously the competition from the incumbent should be strongest there? And then the follow-up can, you just remind us, as the product gets more of a broader and more usable for our larger clients, how do you see your solution moving up markets and so will there be any natural limits in terms of how far up the market you can go there? Thank you.

Zach Nelson

I’ll take the latter question first. In our space the limits to moving up have nothing to do with the scalability of the platform. We probably had more than 4 million unique logins into the NetSuite application. Last quarter there was no SAP application that has 4 million logins, believe me. So from a scalability standpoint, this is far more scalable technically.

The scale issues come usually with vertical processes and that’s why we focus so heavily on vertical functionality and so if you look at an industry group like retail, we think we probably have one of the more scalable retail solutions in the world because we’re the only company on the planet with a integrative multi-channel Omni-channel solution.

So we didn’t go very large in retail and in fact we have $3 billion companies, using us as a part of their retail customer facing e-commerce strategy. So that’s a great example there. Frankly if you’re making steel, I don’t care if you’re 5% steel company you can’t use NetSuite because we don’t have the functionality required to make steel. So that’s really the long and short of it, why we focus on industries, just to be able to move on up market and solve those used cases.

And we’ve done a very good job of that in the industries we’re in, including wholesale distribution, manufacturing, etail, technology companies and of course services companies. The other question was about Europe and that’s an interesting question in terms of scale, because the one exception to having to go vertical in industries to scale our product, we found one sort of horizontal and that was multi Company-multi currency consolidation. Every multinational has that problem.

And so when you look at OneWorld, which again we think is the best solution for multi-company, multi-currency, multi-language consolidation, suddenly we’ve solved the problem that goes across multinationals whether you’re in Europe, whether you’re in the U.S. or whether you’re in Asia and so that product certainly has been a large driver of our penetration of larger companies, and as I mentioned smaller standalone entities that have multinational subsidiaries.

Europe again as strong for us. I think it was our fastest growing revenue segment in the quarter. We continue to invest heavily there and so, that’s our continued plans for the year based on really the fine overachievement that we saw in Europe certainly in 2013.

Operator

Your next question comes from Justin Furby with William Blair. Your line is open.

Justin Furby - William Blair

Zach, I’m just curious, as you’ve entered new markets over last few years and as you continue move up market, how are you guys currently sizing you TAM from a dollars perspective and how much of that do you think is Greenfield versus replacement?

Zach Nelson

Well, I’ll take the last part first. The big idea behind NetSuite was to build the system to run a business. And in that case almost every company we run into has the system they’re using to run that business whether it’s QuickBooks in the U.S. or Sage Line 50 in the U.K or MYOB in Australia or Yayo in Japan. So we’re always replacing something certainly, typically. So that’s just, that’s the nature of these -- and the ERP trip market churns a little more slowly.

I think what’s driving the churn to accelerate, not our churn but the replacement of traditional client server applications with NetSuite as the core ERP business system is the requirement that every company basically begin to build their organizations on a cloud-platform because that’s how their customers actually expect to interact with them. So that’s really been our core driver, an accelerating driver over the past few years is our customers have to retool their infrastructure to look more like NetSuite infrastructure then to look like Microsoft, Great Plains infrastructure as an example. So, and then the first part of your question again?

Justin Furby - William Blair

How are you deciding to the dollars and number of customers you can go after across your various products?

Zach Nelson

Yeah. I mean, you look at -- again ERP TAM, choose your numbers, 40 billion globally, it’s a large number, throw in e-commerce and retail TAM on there. I don’t what that is, add another $40 billion, grow CRM into there, another $20 billion. So TAM for us really isn’t the challenge, even if you look at sub segments of that. And so what -- our view of sizing the market is really looking at how many customers we can acquire and what the average sales price of those customers that we acquire and add are. And so you can do pretty simple math and you don’t have to have that many customers at even our current average selling price add that many customers to have a very substantial multibillion dollar organization. So as one my mentors once said to me, goals only limit you. So we don’t try to put goals on that suite in terms of the number of customers we could have or how big we could get, but if he does look at the midmarket, there is no dominant platform for ERP in the midmarket. Great Plains has 15% share in the U.S. and SAGE, whatever variant of SAGE has 15% in the UK, no software market looks like that. So even in the midmarket as a standalone -- in the standalone world which some people size about the total available TAM of ERP, it’s a wide open market and we think we have both a delivery model i.e. cloud, and the functional model i.e. suite to really become the SAP of the midmarket if you will.

Justin Furby - William Blair

Okay, and then can you just give an update on manufacturing. How big is that today in terms of whether bookings or revenue or just some way to bring that up and have you been, what’s the growth rate look like in that business and then Ron, on the retention you guys keep talking about improvements there. Any way to sort of just point and try to give a sense for what the retention actually is and how much room there is for improvement.

Zach Nelson

On the manufacturing side we had a great quarter in manufacturing. I mean it was up, probably our second fastest growing vertical in our host of verticals after e-commerce and retail. I think you should also consider wholesale distribution as a part of what we’re doing in manufacturing because it’s somewhat linked to the types of manufacturers NetSuite attracts. We really attract modern manufacturers who are mostly outsourcing much of the manufacturing process. So folks like Jawbone and Gopro and Nest and these types of companies. So it was a great quarter. We announced as a year ago really deep functionality for those types of manufacturers. Last year at SuiteWorld -- we’ll give you an update and more details certainly at SuiteWorld but we’ve had some incredible wins really in that segment of the marketplace and we saw great growth in Q1.

Ron Gill

Oh, on the retention, sure, our dollar retention rate has improved every year since 2009. Every year was better than the last. And so 2013 was another year we had record retention rate. We have talked about how in the last year or so, that those improvements have gotten pretty small. The retention rate now is very, very good. It’s a little hard to imagine a whole lot more improvement in the retention rate at this point. I think the improvements that we see now which tend to be -- which tend to now be smaller really come from mix. There’s no question that the larger customers that we sign are much stickier and have higher retention rate. Just because the companies stick around longer, they have a tendency to get acquired or go out of business less than the smaller companies that we sold to historically. So I’m not -- it’s been great. We’ve had several years of dramatically improving retention. My model forward doesn’t depend on driving a whole lot of additional improvement in that retention for us to get where we’re trying to go.

Operator

Your next question comes from Scott Berg with Northland Capital Markets. Your line is open.

Scott Berg - Northland Capital Markets

One question for me, since most might have been answered at the moment is, Zach can you give us some more color the SuiteCommerce sales in the quarter, We’ve been hearing about a lot more momentum obviously in that business and you’re talking about it today, but are customer’s just buying more in the upfront sales, becoming a better upsell later in the cycle and from a geographic perspective, are there certain markets where you’re seeing more adaption today.

Zach Nelson

Yes, when we launched SuiteCommerce I felt it would be very similar across all of those dimensions as the OneWorld product and I think that’s really proven to be the case. In terms of install base versus new business, when it first launched OneWorld was very attractive to the install base because frankly that’s who we built it for, right? Those were the customers we were losing, our largest customers that needed Multi-Company. So nice install base sale and oh by the way, everybody else on the planet who’s a multinational needs this and so over time you saw it go from an install base sale, dominated solution to a new business being the lead and so I think we’re some place in the middle of that transition. We certainly see plenty of upsell within the install base and again the thing to think about SuiteCommerce is it’s not just B2C. B2C is certainly an attractive part of it. We do lots of B2C commerce out of this solution but it’s an incredibly strong B2B machine. So if you look at what manufacturers are trying to do direct, you look at what wholesalers and distributors are trying to do direct, even what software companies are trying to do, right, they want to renew their customers online. Why have a sales rep do that when you could do it with your e-commerce machine. So we saw a large software company go live with Suite Commerce this quarter. So B2C, B2B on that front.

In terms of ASPs, it’s tracking very similarly to OneWorld where continued growth in the average selling price and in fact I think we mentioned it was a record this quarter and frankly I think it’s probably still underpriced, when you look at what the competitors get for doing a fraction of what we do in SuiteCommerce. So I think as usual with NetSuite, we land and we expand and we learn more about the value of providing the customers and I think that’s been a big driver of our average selling price growth over time. It’s as not just selling to larger companies but also really capturing the value that we’re delivering to the customer.

Operator

Your next question comes from Brad Sills with Maxim Group. Your line is open.

Brad Sills - Maxim Group

Just a question on the channel. I know, you’ve been focusing more on offloading the services delivery to the channel and that’s been coming through in the numbers here with professional services growth kind of coming down and subscription holding if not accelerating. How much of this move up market would attribute to kind of that interplay in your focus on offloading more of the services to the channel?

Zach Nelson

Well, I wouldn’t use the word offloading to say how we operate within the channel. We really see the channel as - certainly, we do sub-contract in the channel, a lot of that for training purposes to get their skills up and running as well as to make our services more efficient. There’s certainly that component. But our channel model has always been if the channel goes out and finds the customer and sells the customer and does the services. And so I think in the midmarket, you’re seeing that model work very well. They’re hunting their own customers and they’re implementing their own customers.

Now in the larger segment of the market, where we go to market with SI is the model was a little different where we go in hand in hand with the system integrators the Accentures of the world, the Deloittes, the Capgeminis what have you and we really -- in that world we’re completely service diagnostic. We want the customer to engage with the big global SI because frankly in many -- those larger global deployments, they have a better skill set to do change management and all those sorts of things. We have great skills to implement NetSuite but perhaps we don’t have necessarily the skills required to do some of the things that are required in those large enterprise organizations on project management and change management.

So that’s a little bit of flavor on how we’ve worked with the channel. But I’m so impressed with our channel, generally speaking and they’re out there making it happened on their own every day. Certainly NetSuite, as we say does use them for subcontracting in some cases as a strategy to train their people. But I’ll tell you these guys are out there, not dependent frankly on NetSuite to find them deals. It’s very impressive.

Operator

Your next question comes from Samad Samana with FBR Capital Markets. Your line is open.

Samad Samana - FBR Capital Markets

You’ve mentioned the channel -- I wanted to ask in terms of mix of deals for SuiteCommerce, how many of those - what’s the percentage that’s being driven by the Company’s direct sales force versus the channel? And how is that compared to the Company’s overall ERP practice?

Zach Nelson

Well, again going back to the OneWorld analogy, it’s having a very similar evolution if you were around back in 2008 when we introduced OneWorld. At first NetSuite frankly was the only -- we wouldn’t allow the channel to sell OneWorld because we wanted to really ensure -- people were knowledgeable of how to implement OneWorld. And so the initial implementation for all NetSuite and now certainly we have lots of channel partners doing OneWorld. We took a similar approach with the re-architected SuiteCommerce Advance that we announced a few years back, but the great thing, the very cool thing about the Q1 with our first channel deals coming through -- well, not our first. We saw some in Q4 as well. I think if you recall in Q4, I think I’ve mentioned the attach rate of eCommerce in the channel was actually incredibly strong.

So partners are capable now of implementing and driving business in SuiteCommerce. So that’s a very exciting piece. Related to that of course is if you just look at the eCommerce component of the SuiteCommerce, remember it’s an OmniChannel solution. So you point-of-sale and eCommerce. So of course there’s a whole world of eCommerce implementers that are important in this space and we’re also having success getting them on board, the folks that do strategies around merchandizing and eCommerce look and feel and all those sort of things. So we should have some interesting announcements at SuiteWorld related to that whole new class of partner, related to the design community beginning to embrace what we’re able to do with SuiteCommerce.

Samad Samana - FBR Capital Markets

And then a quick follow-up. How is overall channel capacity? How does the Company feel about growing out the partner channel versus growing out the direct sales force and after that?

Zach Nelson

We also feel we’re under distributed, right. We call it the Fortune 5 million and China is the Fortune 50 million. We need at least 5 million reps in the U.S. and we don’t have anywhere close to that today. So we love the channel. Some people talk about our models having inherit channel conflict. It really never has had channel conflict because there is so much opportunity, so many different skill sets required based on the industry that’s using NetSuite, the type of deployment they’re doing, are they using eCommerce, are they using distribution, whatever the functionality is that you have. So we’re really happy about the partners we have. We’ve had some partners that had been with us since day one that now fairly large resellers and implementers. So it’s great to watch those kinds of business run.

But we feel we’re under distributed. And the good news is the channel is beginning to come to us. We just sent out a news release today talking about our a whole host of new channels, folks that were carrying Great Plains, people that were carrying SAGE et cetera, that see the writing on the wall. You need cloud native solution to survive in the world, whether you are a company selling things or a company like a Great Plains reseller whose business is built on helping companies implement technology. They both need solutions built on the cloud and so we’re excited about the momentum we have there as well.

Operator

The next question comes from Patrick Walravens with JMP Securities. Your line is open.

Patrick Walravens - JMP Securities

It’s actually Pete Lowry in for Pat. Just a quick follow up on the growth versus profitability question asked earlier. In Q1 you outperformed and that led to better than expected non-GAAP operating margin and EPS. I was just wondering how you view the growth versus profitability question, in particular in the context of future outperformance -- possible future outperformance.

Zach Nelson

Yes, regardless of sort of macro conditions beyond our control, we think the fundamental opportunity for us remains unchanged. So our fundamental thesis remains unchanged and that is, we’re going to -- as long as we can invest for growth and get the growth, we’re going to continue to do that. So while we were slightly behind, while we are ahead on revenue certainly and that was nice for the bottom line and we were slightly behind on hiring and that also had an impact on the bottom line, our event is to continue to invest back in the business and I think that’s on the non-GAAP EPS front. That’s why we’ve basically kept it unchanged is, fundamentally regardless of macro things outside of our control, the macro things inside of our control like the move to the cloud all look very strong to us and so we’re going to continue to invest.

Operator

We have time for one more question. Our last question will come from Michael Hwang with Needham & Company. Your line is open.

Michael Hwang - Needham & Company

Just a quick one for you. So without trying to steal the thunder from SuiteWorld, I was wondering if you could share -- what’s the profile of those who’re going to be attending SuiteWorld and maybe if you could comment, like how does that look different than what we saw last year and in terms of as were there -- what do you think is going to be the biggest takeaway that we’re going to get from that.

Zach Nelson

Well I think, obviously you’ll see new products, you’ll see some interesting new applications of NetSuite that you may not have considered before in new industries which are pretty exciting. So again the market growing, people seeing how they can apply this technology in a whole host of different challenges and different applications. So that’s going to be exciting.

In terms of the profile, it’s kind of the profile of customers we’ve talked about in these calls for the last seven consecutive quarters of 30% growth and it’s where we started, the small and medium market and it’s where we’ve been going for the last few years, large and very large enterprises. So I don’t think the profile’s going to change that much of who you see there. I don’t think what you’re going to take away from a momentum standpoint is going to change much because we had incredible momentum last year and I think -- but coming out of Suite World people are always very excited because they can see how all of these different customers in different industries are using NetSuite to change their marketplaces and change their competitive posture. But you certainly will take away new capabilities in the product, both in terms of new industries deploying NetSuite in very large applications, as well as new capabilities that we’re going to be bringing to market that allow us to move upmarket in particular industries.

Michael Hwang - Needham & Company

Thanks so much guys.

Unidentified company representative

Great. Well I thank you all for joining us. It’s great to have Q1 in the books, as I said there in the Q&A, there’s always going to be macro issues beyond our control but as we look at the macro that we control and that is the transformation of the software industry, in particular complex business applications to the cloud, we don’t think the story has changed and we certainly think the conditions we’re seeing in the marketplace has changed. Certainly the cloud is the future of software and the future of ERP software.

I think as a company, we continue to execute and if you look at whether it’s Gartner or market share calculations that were released today that show us growing at 4 times the nearest competitor of the top 10 of the ERP marketplace or you look at some of the metrics we talked about today, the records that we released in terms of average selling price, the financial records, the customer records, really nothing looks changed from the momentum we’ve seen in the past. We like every other business face challenges but these are the kind of challenges you want to face in the business. How do you hire a 1000 employees? How do you increase NetSuite skills in the market place? There’s enormous demand for NetSuite skills within our customer base. How do we change the model to support the needs of larger companies, both from a sales standpoint and a services standpoint? I love these challenges, I’d hate to have the challenges of the other guys -- how do you build a cloud application right, that’s kind of a bad place to be. These are the challenges to have and I’m really proud of our employees, that the ability to have responded to these challenges to date and I have a great degree of confidence that we’re going to continue to be able to respond to them and continue to take market share going forward.

So with that we’ll close down this conference call and look forward to speaking with you all following our Q2.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: NetSuite's CEO Discusses Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts