NetSuite (N) Zach Nelson on Q4 2015 Results - Earnings Call Transcript

| About: NetSuite Inc. (N)

NetSuite, Inc. (NYSE:N)

Q4 2015 Earnings Call

January 28, 2016 5:00 pm ET

Executives

Jennifer Gianola - Head-Investor Relations

Zach Nelson - President and Chief Executive Officer

Ronald S. Gill - Chief Financial Officer

Analysts

Philip Alan Winslow - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Pat D. Walravens - JMP Securities LLC

Brendan Barnicle - Pacific Crest Securities

Nikolay Beliov - Bank of America Merrill Lynch

Samad S. Samana - FBR Capital Markets & Co.

Matthew J. Coss - JPMorgan Securities LLC

Abhey R. Lamba - Mizuho Securities USA, Inc.

Michael S. Huang - Needham & Co. LLC

Alex J. Zukin - Stephens, Inc.

J. Derrick Wood - Susquehanna Financial Group LLLP

Operator

Good afternoon. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2015 NetSuite's Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session. Thank you.

Ms. Jennifer Gianola, Director of Investor Relations, you may begin your conference.

Jennifer Gianola - Head-Investor Relations

Thank you, operator. Good afternoon, everyone. And welcome to NetSuite's fourth quarter and fiscal year 2015 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, please visit 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 a question-and-answer session.

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

The primary purpose of today's call is to discuss the fourth quarter and fiscal year 2015 financial 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 would 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 the 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 will turn the call over to Zach.

Zach Nelson - President and Chief Executive Officer

Thank you, Jennifer, and thank you all for joining us today. It is a pleasure to speak with you and provide our fourth quarter and full year results for 2015. And the results for the quarter and the year were great and exceeded our outlook for all guided metrics including revenue, earnings per share, and cash flow.

I'm going to let Ron cover the detail behind that overachievement while I spend my time today making a few remarks about our momentum and trajectory.

As I look back on the 2015 year, I'm struck by the impact of the investments we have made in people, product, and customers in advancing our strategy. It is exciting to see the many multiyear investments we have made bore fruit during the year. And it's equally rewarding to see all the momentum behind the shift from ERP systems design to support the way company's operated 20 years ago to our modern pioneering cloud-based approach to running a business.

Just a few years ago, few believed that businesses would run mission critical core business applications in the cloud. Today, companies in many industries can't get there fast enough. But delivering on that emerging demand and momentum goes well beyond just building a product, particularly in the midmarket. I've always said there are four elements of intellectual property we have developed over the past decade that are required for success in this new world. First, you have to develop a rich suite of applications that spans many industries. Our discussions with customers first and foremost center around product capabilities and the fit with their business today and where they want to take their business tomorrow.

Next, you have to solve the nontrivial problem, how to deliver those goods over the cloud. It's especially nontrivial for some software companies whose primary business model and expense structure revolve around putting the burden and cost of managing applications on their customers' shoulders.

Third, beyond the technical challenges, there are substantial go-to-market problems to solve. Firstly, how do you sell business suites not just to the Fortune 500, but to the Fortune 5 million?

And finally, implementing complex business applications is not a simple process. Small and midsize customers often face the same business model complexity of large organizations, but they don't have the technical or financial resources to manage the historically complex applications required to solve such problems.

In each of these four categories of acquired intellectual property, NetSuite has such a lead and a continued 100% focus on extending that lead. For customers serious about moving their businesses forward, NetSuite has to be the leading choice. And in 2015 our investments in our people and partners in each of these areas extended our leadership.

In 2015, our product organization responsible for building the world's most complete and easy to use business software application delivered amazing functionality. Whether you look at the rich new capabilities delivered for our customers in various target industries like manufacturing, distribution, services, Internet and software and retail, or the core horizontal capabilities of our SuiteCloud Platform, the OneWorld multi-company consolidation system, and our SuiteCommerce omnichannel CRM capabilities, our customers can now meet the requirement of their evolving business models more rapidly than ever.

Importantly, I believe what the cloud is doing is blurring distinctions between product companies and services companies, and our historical strengths and long-term product development in both of those industry segments positions us better than any other applications company to meet the challenges on the horizon for companies large and small.

Just looking at some of NetSuite's recent releases of advanced functionality in areas like revenue management and revenue recognition in the back office and our leadership position in next-generation front office capabilities with our SuiteCommerce omnichannel platform are just two elements that we advanced significantly in 2015 that will solve our customers' challenges well into the future. The other core technical requirement for success in cloud ERP is not just developing the powerful yet easy to use aforementioned capabilities, but to deliver those capabilities flawlessly, invisibly, economically, and at scale to millions of users around the world.

NetSuite's data centers operations are by far the largest of any cloud ERP vendor in the world and rival in scale any cloud business application provider. During the year, the volume of transactions was truly mind blowing. More than 156 million orders were processed, more than 186 million invoices generated, more than 150 million items were managed, and more than 2.5 million services projects were delivered.

On a daily basis, on average, almost a quarter of a billion application requests are processed. And on peak days, the number jumps to nearly half a billion requests. Amazingly, more than 10 terabytes of transactional customer data is added on average every day to the NetSuite system. Our ongoing investment in handling these massive requirements expanded during the year with the addition of a third data center in North America and two new data centers in Europe.

The other two elements of IP revolve around go-to-market strategies. Selling complex business applications to small, medium, and large enterprises is perhaps the hardest sales model to crack. In 2015, we made major investments in new senior sales leadership with new heads of all of our major regions, North America, Asia Pacific, and EMEA. And their efforts, not just in Q4, but throughout the year resulted in numbers unmatched in the cloud ERP world. While some self-proclaimed ERP vendors barely tally with hundred customers running in the cloud, at the close of 2015, we have more than 10,000 companies running more than 30,000 subsidiaries and entities in more than 100 countries with support for 20 languages and 190 currencies. And the span of those customers is incredible.

We have emerging start-ups of the world with the majority of unicorns like Snapchat that we added in the quarter building next-generation business models on NetSuite. We have transformational midsize global brands like Lucky Jeans and Billabong reimaging their businesses on the cloud with NetSuite as their backbone. And Q4 really saw the power of our ability to address the needs of small and midsized enterprises as we added a record 616 new customers.

In addition to the incredible of volume of logos we added this year, the desire of the world's largest organizations to deploy our solution also grew. During Q4, we did the most $1 million plus deals in our history. We also added the highest number of new OneWorld customers ever in Q4.

In addition to our ability to scale from small to medium to large enterprises, equally remarkable is the breadth of industry coverage supported by our cloud suite. While all of our customers run a common release of our product, clearly the functionality and dashboard's users and the manufacturing companies see when they log into NetSuite are very different, for example, from the functionality and dashboards users at a software company sees. And each of our industry groups saw strong double-digit growth throughout the year. In particular, our product-based industries of manufacturing, distribution, and retail had a great year. These results show that our multiyear investments in omnichannel commerce and rich supply chain and order management capabilities are taking us where no cloud product has gone before.

And finally, I've always said delivering and implementing complex solutions is probably the least appreciated piece of intellectual property required to deliver cloud ERP. And in many ways, it may be the hardest problem to solve given the fact that midsized companies often have business processes that are as complex and unique as large enterprises. Our services and support operation has dedicated itself to solving these challenges for our customers. And with more than 1,000 employees in our professional services organization, we are among the largest, if not the largest, midmarket consulting firm in the world. And better than being the largest, I would say our unique approach to getting customers live quickly and successfully makes us among the best consulting firms in the world.

As importantly, our partner community and ecosystem plays a major role in our customer's success. Whether you look at our large base of traditional midmarket value-added resellers, again, probably the largest third-party channel built around any cloud ERP product, or our very successful engagements with large systems integrators, our decade-long strategy of creating an army of skilled partners around the globe who are sharing in our success and helping our customers succeed is paying off.

So across the four core areas for success – rich product functionality, painless and almost invisible delivery of that functionality and related upgrades, and building the unique sales and service capabilities required to enable the Fortune 5 million to transition their mission critical business processes to the cloud – I think 2015 was a milestone year.

In summary, if you look across our nearly 5,000 person company, we have by far the most brainpower dedicated to bringing the benefits of a modern business application platform to next-generation companies. In 2015, our strong execution across many fronts, across all sizes of companies and many, many industries, established by a wide margin as the leading cloud ERP platform for small, medium, and large enterprises.

Following Ron's discussions of our results for the quarter and year and outlook for 2016, I'll provide some final thoughts as we enter the new year. So with that, let me turn it over to Ron.

Ronald S. Gill - Chief Financial Officer

Thank you, Zach. As you heard from Zach, the fourth quarter marked a solid finish to the year. 2015 was a huge year of investment for us with a significant build-out of sales management and sales capacity, construction of three new data centers, and material expansion of our product teams. 2015 was also another year of record retention for NetSuite. And that fact combined with the record number of new customers Zach talked about, continues to build the foundation for the next level of success.

Let me turn to the numbers and provide you with some more details. As usual, 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. All financials discussed here are consolidated figures.

Our total revenues for the fourth quarter were $206.2 million, up 7% sequentially and up 31% over Q4 of 2014. For the full year, total revenue was $741.1 million, an increase of $184.9 million or 33% over that for 2014. Recurring revenues from subscription and supporting Q4 grew 30% over the year-ago quarter to $164.5 million and accounted for 80% of our total revenue.

For the full year, recurring revenues totaled $593.1 million, up 32% over 2014. Our non-recurring revenue, which comes predominantly from professional services, was $41.7 million for the quarter and grew 34% over that for the same period last year. For the full year, non-recurring revenue was $148.1 million, up 36% year-over-year and representing 20% of total revenue.

In Q4, approximately 25% of our revenue was generated outside of the United States. The impact of the stronger dollar continued to play out and negatively impacted our revenue again in the fourth quarter. Total revenue in Q4 would have been about $2.5 million higher at year-ago currency rates. As you're probably aware, over the last month or so, the U.S. dollar has renewed its climb against a number of the currencies in which we recognize revenue, and you'll see some impact from that reflected in the outlook I'll give in a few minutes.

We closed the year with a record number of new business deals. In Q4, average deal size was up 10% over that for Q4 last year, and as Zach mentioned, we hit new records in Q4 for both the number of OneWorld deals and the number of deals over $1 million. OneWorld sales accounted for more than 50% of new business for both Q4 and the full year. SuiteCommerce also had a great year with the average SuiteCommerce deal size up over 20% and SuiteCommerce deals increasing as a percentage of both upsell and new business deals over 2014.

Moving down the P&L to gross margins, our overall gross margin for the quarter was 70.2% compared to 71.3% in the year-ago quarter. Gross margin on recurring revenue was 85.4%, down just slightly from 86% in the fourth quarter in the prior year. We invested significantly in data centers in 2015 and are pleased to have been be able to bring on significant additional capacity and add three new data centers while maintaining recurring gross margins of better than 85%. Gross margin on professional services was 10.1% compared with 11.3% in the fourth quarter of 2014. For the full year, overall gross margin was 70.2% compared with 71.6% in 2014.

Turning to our non-GAAP operating expenses, product development expense was $28.7 million for the quarter, up 36% over Q4 of 2014. For the full year spending in the product area was up 32% as we continued to make significant investments in our developer teams. We ended 2015 with more than 1,000 employees in our product organization and will continue to make significant investments in this area, as we expand the breadth and depth of the NetSuite platform with each release.

Sales and marketing expenses were $95.2 million or 46.2% of revenues in Q4 and up about 32% over the year-ago quarter. G&A expenses were $15.1 million or 7.3% of revenue in the fourth quarter. For the full year, G&A expenses were 7.2% of revenue.

Non-GAAP operating income in the fourth quarter was $5.8 million, down from $8.6 million in Q4 of 2014. This equates to a non-GAAP operating margin of 2.8% for the quarter. For the full year, operating income was $21.7 million, representing an operating margin of 2.9%.

During the quarter, we recorded a net income tax expense of $1.3 million 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 $4.3 million, down from $7.5 million in the year-ago quarter. For the full year, non-GAAP net income was $17.7 million for a net margin of 2.4%. Non-GAAP earnings per share for Q4 was $0.05, and for the full year, we posted $0.22 of non-GAAP earnings per share.

Now, on to the balance sheet. We closed the year with approximately $379 million in cash and marketable securities. Q4 was a record quarter for cash collections and operating cash flow was $21 million. For the full year, cash flow from operations was $100 million, up 34% over 2014.

Looking down the balance sheet from cash to deferred revenue, our total deferred revenue balance increased to $428 million, an increase of 36% over the prior year. Calculated billings defined as revenue plus the change in deferred revenue was $256.8 million for the quarter, representing an increase of 28% over the fourth quarter of 2014.

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 head count on December 31, 2015 was 4,603. For the full year, we added 1,246 employees or 37% year-over-year with the majority of the additions coming from the sales and professional services teams.

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 2016 as a whole and then we'll come back to some specifics about the March quarter. While the macro environment does provide some potential uncertainty, we continue to experience a strong demand environment, and there's no question that both SaaS as a platform and NetSuite as a solution are gaining traction in a larger and larger segment of the market. For the full year, we expect 2016 revenue up from $950 million to $970 million, a growth range of about 28% to 31%.

We do expect to return to expanding margin this year and are anticipating growing non-GAAP EPS by between 80% and 100% to a range of $0.40 to $0.45. Our projected EPS would correspond to operating cash flows in the range of $135 million to $140 million. I mentioned that we made some very significant investments in 2015, and in fact, our total capital expenditure for the year more than doubled from the prior year to $50 million. With that infrastructure now in place, the need for that type of investment will moderate, and I'm expecting CapEx in 2016 to be approximately flat to 2015.

Again this year, I expect you'll see our usual pattern with the most significant investments focused early in the year and margins expanding more in the second half. For the March quarter, we foresee revenue in the $212 million to $214 million range and non-GAAP EPS from $0.02 to $0.03. We expect operating cash flow to be between $22 million and $24 million.

That concludes my prepared remarks, so I'll turn it over to Zach.

Zach Nelson - President and Chief Executive Officer

Thank you, Ron. Our strong close to 2015 bodes well for this year, and we are well-positioned to benefit from the continued shift to the cloud. In 2016, we approach $1 billion in annual revenue. We will join an elite group of software companies that have reached this level. We are making history here at NetSuite. While $1 billion is a milestone of sorts, it never has really been the goal.

The goal is to enable as many companies as possible to realize their business vision with a modern next-generation business application platform. That goal is what gets us excited to go to work every morning and has driven everything we have done since before we had $1 million in revenue, and it will continue to be the driving force behind everything we do well beyond $1 billion in revenue.

In terms of the investments we will be making in 2016, as you know, we have always had a bias towards investing in the enormous opportunity in front of us, and the strong year we just experienced gives us even more confidence in this strategy.

That said, we feel we have the capacity and the sales organization to grow substantially during 2016 while delivering incremental EPS and margin expansion to our previously stated outlook in this area. We also feel like we have the capacity to invest in our core intellectual property in our product and services organizations to continue to put distance between us and our competitors and deliver beyond the expectations of our small, medium and large enterprise customers.

So with that, we'll now open the line for your questions. Operator, you may begin.

Question-and-Answer Session

Operator

Your first question comes from Philip Winslow with Credit Suisse. Your line is open.

Philip Alan Winslow - Credit Suisse Securities (USA) LLC (Broker)

Hi. Thanks, guys. Ron, just a question for you. You talked about the 28% year-over-year billings growth. I know, as you mentioned, there are a lot of things that as far as like puts and takes that go into that can vary quarter to quarter. Was there anything that you'd call out this quarter? And then a related question for Zach, you guys talked about your record deals in OneWorld and you have some good traction in SuiteCommerce. What if you'd give us just sort of any color of just the trend over the course of the year that you saw there? Was one inflecting up? Stabilizing? Just sort of relative kind of performance would be great. Thanks, guys.

Ronald S. Gill - Chief Financial Officer

Sure, thanks, Phil. So first on the calculated billings question, nothing really unusual in the quarter. Probably the one thing is the recurring theme that we've seen all year, which is FX has been a factor, a factor all year. I mentioned in my prepared remarks the impact on revenue. And if you took FX, if I do the normalization we normally do. So billing term actually was just a slight good guy to calculated billings. It helps calculated billings a little bit. But FX, of course, is a bad guy as it has been every quarter this year. And if I normalize both of those out, I would normalize up a couple of percentage points. I'd basically get to about a 30% number. In fact, I'd get to a dollar number that's around $261 million, just over $261 million. So right around there, just slightly north of where you guys had consensus of course is where it would be with the FX normalized out in billing term.

Zach Nelson - President and Chief Executive Officer

Yeah. And, Phil, in terms of the other sort of color on some metrics beneath that, I think the thing that obviously pops out the most as the year went on was just the increase in new logo additions. I mean if you recall a couple years ago, 300 was sort of the norm. We added a lot of capacity since that norm, and now Q4 you see north of 600 new logos. So that's really exciting. The other element that's exciting about that, particularly in Q4, wasn't just adding the most new logos ever but we did it at a higher average selling price than we did the year prior. So those – that's a pretty virtuous cycle when you can start to add record numbers of customers at higher average selling prices.

Obviously, some of the things contributing to both of those elements are the new technologies that we're bringing out that – we're not – obviously, everybody uses our financials. But really they use NetSuite to run business processes. So when you look at the impact of something like SuiteCommerce that obviously is a driver to average selling price. But more importantly, it's a driver to the pieces of the business that we can automate. And so, SuiteCommerce obviously is very important in retail for its omnichannel capabilities. But as I've always said, we sell more SuiteCommerce outside of the retail vertical than inside the retail vertical. So you sort of see that extending our footprint into next-generation CRM is how I would characterize it with the SuiteCommerce capabilities.

In the quarter specifically about SuiteCommerce, we saw the average selling price of that actually double. So sometimes people compare us to demand where in that segment and people always say, oh, their average selling price is much higher than ours. Well, their average selling price isn't that much higher than ours anymore and we're doing about four times as many customers as they are. So I think that's a pretty exciting element. And also shows really the power of what we've put together in the sense of commerce is really – it's obviously about the front end experience and multiple front end experiences. But ultimately you have to deliver the business capabilities through that front end experience and we obviously are a business process machine. So that's been very powerful.

OneWorld continues to get stronger. It's over – half the bookings, as usual. Again, you start to see record numbers of OneWorld deals in the quarter. Obviously, we're moving up market across the mid and the enterprise space when you see that. So a real positive there and we do lots of investment in OneWorld in the coming year and you'll hear more about that at SuiteWorld. And finally, one of the interesting things I think we saw in Q4 that bodes well for the whole business as well is the midmarket; if you will, the non-OneWorld portion of the business, the average selling price there really exploded. So that's really positive too for those single entity, single country type companies, those deals are getting larger as well. So, lots of virtuous cycles going on throughout the various elements of our business.

Operator

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

Pat D. Walravens - JMP Securities LLC

Oh, great. Thank you. Just to start, Zach, it's great to see 30% growth with improving profitability. That's wonderful. I think the question I'll ask is, especially with venture capital funding drying up in the valley, a lot of investors worry that churn might pick up for NetSuite. And I'd love to hear your perspective on that and sort of – NetSuite is very different now than it was in the last downturn – but if you could just highlight some of the key points there, that would be great.

Zach Nelson - President and Chief Executive Officer

Yeah. I think if you're talking specifically about venture investments in software and Internet companies, we obviously have a huge footprint there. Especially if you look at the unicorns or what may now formerly be known as unicorns, the vast majority of those guys run on NetSuite. We're the platform that these companies build these ideas on. And obviously, I mentioned Snapchat as an example of one of those that was added recently.

So, if venture capital investment turns down, it's probably more of an issue for the smaller companies than it is for us. We're still going to be the platform for that innovation. And I recall talking to one such company that grew up to be a very large company, and he said NetSuite is one of the most important things that has happened to the startup community in the last decade. So, our technology provides the most efficient way to run those startups. It also provides great visibility from the venture community, from the private equity community into what's going on in those businesses. It's not a black box. They can actually see what's happening in those companies with a log into NetSuite. So I don't think that particular element will have an effect on churn.

I know there's been some discussion of churn perhaps in the higher end of our customer base, largely around one account. Some people have been saying Fitbit moved to SAP. And I can just say categorically that for the next year and certainly the year after that, I believe Fitbit is going to be a customer. Some companies make decisions not so much based on technology but based on internal dynamics of where they might be going and where their people are most comfortable.

But in particular, if you look at the manufacturing sector where there's lots of investment going on in consumer packaged goods and those kinds of things, that was among our fastest growing industries in the year and certainly in the quarter. We have great manufacturing capabilities. And I really think it's the future of manufacturing. You look at SAP, it's built on a mainframe model of manufacturing, materials driven. We're built on a business process model of manufacturing, and that's why we're growing so rapidly in the manufacturing space for next-generation startups and even for companies like GoPro, who by the way, just renewed their relationship with NetSuite for the next three years.

So, I think you look generally at the startup community and then to speak broadly about churn in our customer base, essentially it's never been lower. I mean we're – the customer base churn is very, very low. And Q4 saw probably the biggest upsell quarter than we've seen in a long time, so not – certainly in the year it was the biggest upsell quarter, well 100% of revenue renewed – well above that. And so when you see that – in the downturn of 2008, you saw the problems happen, as you say, in the installed base. In the quarter we just had in upsell and the installed base, that group looks very happy and solid and makes us not that concerned at this time about the macro environment.

Ronald S. Gill - Chief Financial Officer

Yeah. I think I would just add to that that I mentioned in my prepared remarks that retention was at an all-time high in 2015. And I know you're talking about probably more recent events, but even in Q4 of 2015, retention was significantly better than in Q4 of the prior year. I keep saying that I think we've gone as far as we can go with retention. It's good as it can possibly be, and it keeps getting just a little bit better. And that's primarily because of mix. As Zach pointed out, we are having some larger and larger customers, more and more larger, established and stable customers, and they just don't churn. And so retention has gotten better and better and better.

Operator

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

Brendan Barnicle - Pacific Crest Securities

Thanks so much. Zach, I wanted to follow up on Phil's earlier question and touch base just on these record $1 million deals. Were there any kind of factors or color you can give us that was driving that separate from what you told us about OneWorld and some of the upside you saw there?

Zach Nelson - President and Chief Executive Officer

Well, I think it was pretty cross industry. One of the things I will say, in the quarter we replaced SAP 17 times. So you're starting to see that happen. So that's a product-based company world; had some really great deals in software vertical as well. We had some great new technologies coming out particularly in the complex billing. And as I talked about in my preamble, the things we've just released in complex rev rec, I think are the best on the planet. And so, certainly those come into play very quickly in the software world. That's driving some of these larger deals on the software side. But not just the software side; I think the other thing that I mentioned was – effectively what's happening is product companies become service companies, and service companies become product companies – their back office operations start to look more like the back office operations of software companies. They become very complex.

Things have to be – some parts of a piece of technology that they're selling or IP that they're selling has to be recognized upfront. Some has to be recognized ratably. It has to be billed to the customer in very different ways than how it's recognized. So all of this strength and capability that we've built up originally for software companies is now beginning to apply into markets, even like manufacturing and distribution. So that's also driving that sort of capability, very hard to build, very – brings a lot of value to those companies, solves a lot of problems for them. That's going to be – it has been a driver of average selling price. It was certainly a driver of the up-market deals in Q4. And as we release really next-generation versions of what I called unified billing and rev rec, I think that's going to be another driver far into the future from an average selling price perspective across industry.

Operator

Your next question comes from the line of Kash Rangan with Bank of America. Your line is open.

Nikolay Beliov - Bank of America Merrill Lynch

Hi. This is Nikolay Beliov sitting for Kash Rangan. Thanks for taking my question. Can you please comment on the sales productivity that you saw in 2015? And the level of sales hiring you did last year and the trends for both of these metrics going into 2016?

Zach Nelson - President and Chief Executive Officer

Yeah. Thanks for the question. Yeah, so sales, I mean, as you've been following, we grew that organization enormously. I think head count grew something north of 40%. Just to add a little more clarity to that 40%, most of that growth happened in the first three quarters of the year. So that was a massive amount of hiring. As you do that much hiring, you're going to expect productivity to decline somewhat during the year, and in fact we did see a small decline in sales productivity particularly among the new reps as they ramp. I think something like half of our sales force has been hired in the last year, year and a half. On one side that's a headwind as you hire them, but as you move into 2016 and 2017 it's a tailwind, because suddenly they're experienced and they have knowledge under their belt. And that's what's really driving our sales hiring. This year we're definitely not going to, at least in the current plan not grow the sales head count anything like 40% or probably roughly half that because we have the capacity in the organization and it's ramping. So we feel very comfortable with that sort of level of productivity and level of investment in the sales organization.

Related to sales, I'll just point this out, is the services component. And I mentioned that in my preamble. It's the second piece of go-to-market IP, if you will, that's required in this marketplace. Our services team has done an amazing job. It's an enormous organization, and you will see us invest incrementally in the services team next year. Our customers frankly are demanding more services. They're demanding different types of services, sort of ongoing services, outsourced admin services to help them run their NetSuite instances more efficiently. And so while sales will be growing not at the rate of the prior year, I think you'll see the services line grow faster certainly as a percentage of the investment in 2016.

Operator

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

Samad S. Samana - FBR Capital Markets & Co.

Hi. Thanks for taking my questions. First one for you, Ron. Are you – can you give us an idea of the mix between subscription revenue and professional services, kind of what you're thinking about in growth terms for 2016 there?

Ronald S. Gill - Chief Financial Officer

Sure. So Zach hinted at it a little bit. What we've seen this year is we've made a significant investment in the professional services team. And I think you've seen the mix shift just slightly this year, I'm saying this year, I mean 2015. You saw the mix shifted just slightly. And I think at least for 2016, we'll see that continue. And you might see another half a point. I'm not sure exactly what the percentages shift toward professional services in the overall recurring/nonrecurring mix. I think our fundamental philosophy towards professional services has not changed at all. That is, we're not out to try to drive a huge amount of margin through that organization. For us, that is fundamentally an organization whose purpose is to turn on annuities and they do a very good job of doing some very complex implementations and getting customers live and happy and then – and thus making what will be often better than a perpetual annuity stream for us in this customer. So I think the philosophy about that stays the same. And I think the sort of pattern of what happens year-over-year in 2016 is very similar to the pattern of what happened year-over-year in 2015. So probably a slight increase in the mix on the nonrecurring side.

Operator

Your next question comes from the line of Matt Coss with JPMorgan. Your line is open.

Matthew J. Coss - JPMorgan Securities LLC

Hi. Good afternoon. Thanks very much. I'm sitting in for Mark Murphy. Just one quick one, are you doing anything differently or with your partner channels such as enforcing contract minimums, providing new incentives, or making any sort of changes that kind of help allow your partners to onboard as quickly as you're able to onboard some of your customers. Thanks.

Zach Nelson - President and Chief Executive Officer

Great. Yeah. Well, I'd say just in terms of contracts, I hope we always try to enforce our contractual terms, so hopefully that's not a change. But I think we have one of the greatest channel programs on the planet. I mean we sort of invented cloud sales through third-party channels 10 years ago. And I think part of – that's part of the reason you see such strength in our channel. Our channel, when you start a company like NetSuite and NetSuite like most software service companies started as a direct sales operation because nobody believe this would happen, so you had to go out and sell and service it yourself. We always felt that particularly in the midmarket, the channel was going to be very important but it would take a long time for them to get there. So we created a very incentive laden – they get to share in the recurring revenue of the customer over time sort of program. And when we started that program people would ask me, well, what do you think the channel could become as a percentage of the mix? And guys who run direct sales forces always state, oh, yeah, some day it will be 50-50. I've never been involved with a company that actually reached 50-50 but we're getting really close. We're something like 40% now of our business is coming through the channel. That is pretty amazing. And you look at the channel partners we added this year, some of Microsoft's largest channel partners. You look at folks McGladrey who are ramping incredibly well.

And we'll have a host of other new partners to announce at SuiteWorld in this regard. The channel really is coming our way. We've got an amazing program. And they're an important part of how we service our customers, our customers love our partners. They provide services that are very different than the services Ron and I have talked about in our services organization. So we love to see that army of NetSuite service providers grow. On the high end of the channel, we talked a lot about the multi-million dollar and million, and multi-million dollar deals that we closed during the quarter, the record number of those, and of course that comes from a partner with different channels yet, the systems integrators. And again, we're doing some very innovative things there. This year, we announced an exclusive deal with Capgemini in France, a partnership there around NetSuite. That's just going to begin to take off next year. A lot of the large implementations that we've done, you look at the American Express implementation that has been amazing, 24 subsidiaries live in less than a year, millions of transactions being processed daily. That was done in conjunction with Deloitte. So that element of the channel and the program related to that channel is very strong.

Operator

Your next question comes from the line of Abhey Lamba with Mizuho Securities. Your line is open.

Abhey R. Lamba - Mizuho Securities USA, Inc.

Yeah. Thanks. Zach, who do you see the most in the e-commerce space versus your SuiteCommerce? And how do you differentiate your offerings there?

Zach Nelson - President and Chief Executive Officer

Well, as in almost every opportunity that we're in, even outside of commerce, we're usually facing multiple applications. When people are looking at NetSuite, they're looking at us to do the work of the back office, the warehouse, manufacturing in some cases if they're direct-to-consumer manufacturers, as well as the front end, point of sale and commerce in that particular regard. So it's hard to say that it's one company. You know it might be a demand where, on the front end of – name your horrible ERP product – on the back end, and that's really the competitive set. So that said, when we go into NetSuite versus multiple products, the various elements of our products have to be as good as the various elements of their products. And so if you look at the front end of what we're doing, we have the best omnichannel architecture on the planet. You combine that with the order management that's built right into that, that's a massive differentiator against the front end guys. Nobody really has order management.

And last time I looked, that's what e-commerce is all about is taking an order. And so the fact that our order management is tightly coupled with a front end that's the fastest in the world, where we've released some data this week that said customers on our front end are actually delivering experiences faster, not in demand ware, but guys like Amazon and Apple. So speed, the ability to control every pixel combined with this rich, truly commerce functionality, the ability to take an order, fulfill an order, invoice an order, and not just B2B but B2C. So your competitive set would be different certainly if you looked at B2B commerce, things like demand ware don't have any presence in that world. So once you start breaking the market up into different segments, you start seeing different competitors. But sort of a longwinded way of saying the NetSuite sale regardless of industry is a multi competitor sale. It's three of them versus one of us. And believe me if they can go with one versus three different products, they're going to go that way.

Operator

Your next question...

Zach Nelson - President and Chief Executive Officer

And if you look something like Bronto which we added, that even makes a value proposition even more powerful, because that's one less system they have to figure out how to cobble together with all of these other systems.

Operator

Your next question comes from the line of Michael Huang with Needham & Company. Your line is open.

Michael S. Huang - Needham & Co. LLC

Thanks very much for taking my question. Was wondering as you – as we're talking about 2016 guide, could you talk about the key assumptions around close rates and sales cycles, and maybe even competition, given the global uncertainty out there? I was wondering if you're any more conservative in your assumptions than you historically have been, given kind of what we see out there in the landscape? Thanks.

Zach Nelson - President and Chief Executive Officer

No, I think our models for assumptions really haven't changed that much. If you look at the sort of macro competitive environment, nothing has really changed in terms of who we're competing with from a product standpoint, still by and large, very old on-premise software. Look at our – the count-based competitors. It's Microsoft, the variants of Microsoft, the variants of Sage, and then sort of the great unwatched masses of mid market stuff, Infor, Epicor, SunSystems. A lot of these products were around before any of us were born. So that's really what the competitive landscape is. What has changed is everybody is – all of those people who don't have cloud products or talking about the cloud that causes some level of confusion, certainly in the customer base. But ultimately I think the benefit accrues to us, when you start talking about – and this happened when SAP introduced Business One as an example. They were, oh, wouldn't it be great to have a suite of applications that was delivered over the Internet and you could automate all of your business process as well? Yeah. It happens to be called NetSuite. Business One sort of didn't work. So when people start talking about these things and you're really the only solution that delivers on them, you've got a pretty good chance of fulfilling the demand they're creating. And so, I think that's exciting.

From an assumptions standpoint, we are a pretty simple model that looks at the capacity we have, how many deals they can do in a given year and what the average sales price of those deals is. And given a strong demand environment, that's really the planning – the high level of the planning model we use.

Operator

Your next question comes from the line of Alex Zukin with Stephens. Your line is open.

Alex J. Zukin - Stephens, Inc.

Hey, guys. Thanks for taking my questions. Maybe one for you first, is just around the Bronto revenues and deferred revenue contribution in the quarter?

Ronald S. Gill - Chief Financial Officer

Sorry. I'll take that – one for me. Okay. Let's see. Last quarter, I said I wasn't – I was going to stop talking about breaking Bronto out. Now, we've been seven months into combining those teams. So probably I'm going to stop breaking them out of some of the normalization, but maybe I can give you some color that will help a little bit, especially on the full year which is more meaningful.

So the full year, the calculated billing was 32% and if we normalize that for FX, you're up at 35% or so. And Bronto would have contributed probably something just shy of five points to that. So you have the NetSuite – the pre-Bronto NetSuite – at something around 30% or just above and you'd have the Bronto piece be the remainder between there and the 35%. I think that's about the contribution. And as I say, we are merging those organizations now and selling more and more together and so, I'll probably be talking less and less about the two as separate things.

Alex J. Zukin - Stephens, Inc.

Got it. That's helpful. And Zach, maybe just another question on competition. As we see more of the legacy competitors like Oracle and SAP moving to the cloud particularly, we pick up that Oracle in particular is seeing more success even in the midmarket. How do you compete with Oracle in situations where you see them and what's kind of the proposition?

Zach Nelson - President and Chief Executive Officer

I don't think competing – we compete with everybody sort of on the same level. At the end of the day, the name of the competitor isn't nearly as important in the ERP space as the functionality that they're delivering. I mean, that is the – as I said in my preamble – the first level of competition is does your product solve my mission critical business app problem? And if it doesn't, it doesn't matter if your cloud, your bits are delivered from Stuttgart or from Mars or from some other place, they're not going to buy the product. So the hurdle in this area is never cloud. It's functionality and we by far have been building functionality longer than anyone on the planet. Horizontally, look at OneWorld; there's nothing like OneWorld in the world. There's nothing like SuiteCommerce, is a part of the OneWorld solution. And then you start to look at the industries we're focused on, product companies, distributors, manufacturers, retailers and on the services side, project-based businesses, software companies, we have far more functionality than anyone in the cloud. And so I think that hurdle bodes well for us against any set of competitors.

What we have – to make sure we have – is plenty of distribution to be in every deal. I think that's the bigger issue is not the deals were in but the deals were not in. And that's why we focus so much on distribution and growing distribution and growing productivity. And then secondly, delivering against the promises we make to customers on the services side. And again, we talked a lot about how we're investing in our services organization and methodology. Again, so while people may be building the product, they really have to build the four elements of IP that I talked about: the product, the delivery model, the sales and the services. And so, if you look across all of those things, some companies may be having some success in some areas. But when it comes to a real battle, having almost 20 years of experience doing those four things, it gives us an enormous opportunity against anyone.

Operator

We have time for one final question. And that question comes from the line of Derrick Wood with Susquehanna International Group. Your line is open.

J. Derrick Wood - Susquehanna Financial Group LLLP

Great. Thanks. As I look back at the last several years, ASP growth was in the kind of 20% to 40% level. It looks like this year it was flat, maybe slightly down. I'm just curious, what was the cause for the slowdown? And then, kind of how you're thinking about ASP growth going forward?

Zach Nelson - President and Chief Executive Officer

Well, I think, going forward, ASP growth really gets driven by two factors. One is moving up market, and we've done that pretty substantially over the last few years, so that was certainly a driver And within that move-up market, there were two factors. One is the number of users attaching to the system, and the second is the functionality that they're buying within that system. So, really important in continuing to drive the average selling price is bringing out new functionality that solves complex business problems. And again, as I said in 2016, I think if you look at some of the complex back office problems facing lots of different companies in lots of different industries around building and revenue management, we have some major new introductions coming out in those areas. And so I think as we look forwards, I am expecting us to see ASP growth driven by those new product cycles.

Ronald S. Gill - Chief Financial Officer

Yeah. I think I'll just add to that to say that – so ASP is one of those numbers that's very volatile. And if you look over the last many quarters, you'll see some quarters where it's up 90% year-over-year. You'll see some quarters where it's down slightly. And so, you got to take several quarters of this together to get a meaningful trend. And one of the things that we've done in the last year is invest also significantly in midmarket sales capacity as well. You can see the results of that, for example, in Q4, in the volume of deals increasing year-over-year. And so, we start having to look at – it's some separate metrics, right? So, if you look at the overall ASP for the year, I think that you're right. It'd be pretty much flat for the year. But then you look at what's happening, so with volume of large deals – so, record number of deals over $1 million, for example, in Q4. I've got to look at that metric and the blended ASP together knowing that I'm bringing on a bunch of college hires in the sales organization, a bunch of midmarket sales reps who are going to a larger volume than midmarket deals. We're really, make no mistake – even as we move up organically, and there's certainly a customer pull and a trend in SaaS that larger and larger customers want NetSuite. At the same time we have a huge amount of success in midmarket. We have a huge opportunity in the midmarket. And so that's a piece of the investment as well.

Zach Nelson - President and Chief Executive Officer

Yeah. And I would just reinforce that. Looking at some of the results that other cloud companies announce where they have 10 customers or 20 customers in a quarter at a very high ASP, that ain't NetSuite. We want to get this technology into the hands of as many customers as we can. Our whole reason of being is we believe that small and midsize companies need this technology to become large companies. So as Ron mentioned, we have been expanding our sales efforts down market, if you will, to get younger companies into the funnel and grow with them. And so our – the dream is to add lots of customers at a higher average sales price. We saw that dream in Q4. It's a beautiful dream. But given our druthers, we'd rather get as many customers as we can at the same average sales price rather than go to 10 customers at some gigantic sales price. That's our philosophy.

Operator

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.

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