NetSuite's (N) CEO Zach Nelson on Q1 2016 Results - Earnings Call Transcript

| About: NetSuite Inc. (N)

NetSuite Inc. (NYSE:N)

Q1 2016 Earnings Conference Call

April 28, 2016 05:00 PM ET


Jennifer Gianola - IR

Zach Nelson - CEO

Ron Gill - CFO


Philip Winslow - Credit Suisse

Mark Murphy - JPMorgan

Karl Keirstead - Deutsche Bank

Ross MacMillan - RBC Capital Markets

Justin Furby - William Blair & Company

Brendan Barnicle - Pacific Crest Securities

Stan Zlotsky - Morgan Stanley

Kash Rangan - BoA Merrill Lynch

Samad Samana - FBR Capital Markets

Pat Walravens - JMP


Good afternoon my name is Blair and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2016 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. [Operator Instructions] Thank you.

Jennifer Gianola, Senior Director of Investor Relations for NetSuite, you may begin your call.

Jennifer Gianola

Thank you, operator. Good afternoon, everyone. And welcome to NetSuite's first quarter 2016 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 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 by non-GAAP unless we state that the measure is a GAAP measure.

The primary purpose of today's call is to discuss the first quarter 2016 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 and reports will be filed 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

Thank you, Jennifer, and welcome everyone to NetSuite's conference call to discuss our fiscal 2016 first quarter results. I am thrilled to kick off our fiscal 2016 with a great start to the year. As our business has grown to the point that we're approaching $1 billion run rate we were always caution around the Q1 as we expect to see the seasonality that impacts larger enterprise focused software companies creeping to our business, but this Q1 was one of our strongest across the Board. As you saw on our news release, we exceeded our stated out work across all the metrics we provide outlook on revenue, cash flow and EPS.

We reported record first revenues of $216.6 million up 31% year-over-year. Record quarterly operating cash flow of $31.3 million and non-GAAP Earnings came in at $0.11. Beyond these core metrics the second derivative metric that drive our view of the business, customer account average selling price, sales productivity and product delivery also were strong specifically for Q1. While Ron will discuss some of the operational details driving these areas measures, I think these results and the results we were delivering for more than 10,000 companies operating globally across Marriot industry groups are driven by continued focus on a differentiated approach to building business software and fantastic execution by our nearly 5,000 employee against that strategy.

While NetSuite was the first company in the world to deliver a complex business applications over the cloud, the biggest idea behind NetSuite was not the decision to deliver software over the internet. The big idea behind the company was to deliver a software application that was designed at its core to run a business, not the departments. This approach is in stark contrast to software product that existed before NetSuite and those that have come out after NetSuite that took the approach of building applications design to the run departments, one for your accounting demand, one for you sales department one for your e-commerce department and so forth.

Our unique vision to build the system to run a business is the core concept behind our approach and what makes our perspective on the world very different than more competitors. At the heart of NetSuite is the functionality one typically equates ERP. The core mission critical back office capitalist that companies use as a system of record to run a business and I can assure you the earnings calls that you will listen to this week and next are supported by core transactional data from the Company's ERP system, not their sale automation system or their marketing system or their expense reported system.

And as our market share gains documented in recent research reported of HEST, the ERP system that more and more companies are using to report those business results is called NetSuite. According to calculation based on a March 2, 2016, Gartner report on worldwide software applications market share for financial management systems for the third straight year NetSuite is the fastest growing top 10 financial management system vender. NetSuite grew by more than 40% by market share percentage growth rate. A rate that was more than 3 times faster than the next competitors in the top 10. Impressively in Garner's ranking NetSuite jumped from eight quarters provider by market share in the prior year reports to number six in this year's report

Furthermore in Gartner top 15 vendors of financial management software, there is another pure play card provider other than NetSuite on the list. NetSuite also achieved the number one revenue gainer spot in the entire worldwide financial management systems vendor market segment adding more than double the revenue of the next gainer. On the opposite side of the spectrum SAP was the biggest revenue loser dropping $443 million in revenue according to the report. These significant market data points show that when companies are re-platforming their core mission critical business systems they are choosing NetSuite far more than other alternatives. I also think that data points to the fact that our strategy of building an ERP system that is architected with the whole business in mind rather than a single department has resulted in a much more functional and modern approach to running a business.

Our orientation towards creating a business system rather than as departmental system is also the key factor driving some of the unique capabilities in NetSuite that are taking us places no ERP system has gone before. Many of you of course are familiar with our OneWorld product which has been a key driver of our market expansion both globally and in selling to a larger companies. And certainly financial consolidation tools existed before OneWorld, but what makes OneWorld so powerful is the fact that while it does financial consolidation it was actually design to consolidate all business data. Where legacy consolidation systems were an after thoughts to our financial system, at NetSuite we built consolidation right into the core business data model. You are English subsidiary doesn’t want to wait three months to find out what happened yesterday any more than our corporate headquarters want to have a numbers only non-transactional view of what's happening across their global enterprise.

With NetSuite OneWorld, we provide real time continual consolidation so every stakeholder and every country knows what's happening in their business now not a year from now. And our results related into customers choosing OneWorld continue to impress, posting strong growth year-over-year with a record number of new OneWorld customers added in Q1. OneWorld sales represented more than 50% of new business in the quarter. Our decision to build a system to run a business rather than department was also key in how we achieved our current position of leadership in omnichannel commerce.

In the first generation of building NetSuite, we knew we would have to innovate technically and the user interface along two vectors. First at the time when we began NetSuite no one had ever delivered complex business applications in a browser. Many of the innovations people take for brand today in web based applications such as drag and drop, dash boarding and in line editing were pioneered by NetSuite.

Second and as importantly, since our mission was to have every user in a company accessing NetSuite, we knew we had to develop a user interface that was unique to each user delivering key information and functionality to the right user at the right time. So that the warehouse user would have access to deep inventory functionality for example, while a services delivery manager would be able to access resource utilization and so on throughout the enterprise. Our delivery of highly customizable enrolled based user interfaces is still unique to NetSuite and is the powerful part of our success. Our early forays into commerce in the early 2000s leveraged these UI innovations and enable us to deliver a tailored experience not just for a user inside of company's firewall but to a customer who expected and experience that was much more like an actual website than a business application. This breakthrough was to seed that ultimately brought us to where we are today with SuiteCommerce. A platform that enabled our customers to transform their core operational business system into their core customer facing commerce system across any channel in-store, online, or in-person. And the capability was only possible because of our mantra of building a system to run a business. We knew selling on the web was going to be key for every company and we built that concept into the very earliest iterations of NetSuite.

If you are focus is just to build an accounting system you would never envision away to extend it as a commerce system and in fact apart from NetSuite that's what you see today. No other traditionally architected ERP or CRM systems delivered on a disc or deliver via the cloud have native omnichannel commerce capabilities remotely comparable to suite commerce. And SuiteCommerce also had a phenomenal quarter arguably the best in our history. As we saw 20% more customers adding SuiteCommerce than we did in Q1 of 2015. Also new deal sold in Q1 2016 that included SuiteCommerce had double the average sales price of new deal sold in Q1 of 2015 that include SuiteCommerce. SuiteCommerce deals also hit another milestone as transactions including SuiteCommerce represented more than 20% of new business in the quarter.

So Q1 was a great quarter from a numbers of perspective and from an execution perspective. Our position as the leading provider of cloud ERP software has allowed us to capitalized on the re-platforming of business systems happening around the world and our unique vision of what our business system of the future looks like were global and commerce centric features are integral, not after thoughts has enabled customers to make NetSuite the first system and the last system they will ever need. Whether you are fast growing start up driving an industry or fortune 100 company we re-imagining your global operations NetSuite has become the go-to platform for business transformation.

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

Ron Gill

Thank you, Zach. As you were hearing Q1 was another solid quarter and a very good start for 2016. We exceeded our expectations on every metrics that which we gave for the quarter and it looks like we're on track for a great year. Our business results reflect both consistent exaction and a continued strong demand for our cloud business management suite.

Let me take you through some of the numbers in more detail, as a reminder all the non-revenue financial figures I will discuss here are non-GAAP unless I state the measure is a GAAP numbers. Revenues are of course GAAP numbers and as always you can find the reconciliation of GAAP to non-GAAP results today's press release. Total revenue for the first quarter was $216.6 million, up 5% sequentially and up 31% of the Q1 of 2015. Recurring revenue from subscriptions and support grew 5% sequentially and 30% over the year ago quarter to $173.3 million while our non-recurring revenue which comes primarily from professional services was $43.2 million for the quarter and grew 36% year-over-year.

Approximately 25% of our revenue in Q1 was generated outside the United States although U.S. dollar strength against our foreign currency basked eased somewhat in Q1. The dollar remained stronger on a year-over-year basis in the quarter and total revenue would have been about $1.2 million higher at year ago currency rates. We had a great quarter from new customer deals in Q1. NetSuite signed 372 new customers an increase of a little over 8% versus Q1 of last year and the average deal size was up by more than 20% over the same quarter last year. We saw solid performance in our enterprise team and continued success of market the number of deals over a $1 would million was the highest ever for Q1 and was up significantly over that for Q1 of last year.

OneWorld sales were very strong and continued to account for over 50% of new business. The increase in average deal size I mentioned was driven partially by increase in that OneWorld mix and partially by the fact that the deal size for both OneWorld and non-OneWorld deal was up. As Zach mentioned SuiteCommerce also had a great quarter with the highest penetration rate for SuiteCommerce since the launch of the product. The average deal size for new SuiteCommerce deals in the quarter was also a new record.

Moving down to P&L, the gross margins, gross margin non-recurring revenue was 85% compared with 86.1% in the first quarter of the prior year. We've made some significant investments over the last year in our data centers adding three new production data centers in the last 12 months and expanding data center operations into Europe. Each of these new data centers does course caused a small step function increase in expenses followed by efficiencies as revenue expanse. Even with the increased costs associated with these expanded operations this year, I expect we will be able to maintain our best-in-class recurring gross margins in the neighborhood of 85% for the full-year in 2016.

Gross margin on professional services was 8.9% for the quarter compared to the 10.3% in Q1 of 2015. Our overall combined gross margin was 70% compared with 71% in the year ago quarter. Turning to our non-GAAP operating expenses, product development expense was $28.4 million for the quarter up 29% of Q1 of 2015 and representing about 13% of Q1 2016 revenue. Sales and marketing expenses were $98.2 million or 45% revenue in Q1 and up 33% over the year ago quarter. Speaking of marketing spending, I will just remind you the SuiteWorld our largest marketing event of the year is about three weeks away. As a result we expect is a significantly higher levels marketing spending in Q2 associated with that event as usual.

G&A expenses in Q1 were $14.4 million or 6.7% of revenue in the first quarter. Non-GAAP operating income in the first quarter was $10.2 million, up from $9.5 million in Q1 of 2015. This equates to a non-GAAP operating margin of 4.7% for the quarter. During the quarter we reported a net income tax expense of approximately $1.2 million 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 first quarter was $9 million and non-GAAP earnings per share for Q1 were $0.11.

Moving onto the balance sheet, we closed the quarter with approximately $387 million in cash and marketable securities. Q1 was another record quarter for cash collections and operating cash flow was $31.3 million, up 12% year-over-year. Looking down the balance sheet from cash to deferred revenue, our total deferred revenue balance increased to $439 million, an increase of 3% over the prior quarter and up 36% over the prior year. Calculated billings defined as quarterly revenue plus the change in deferred revenue were $228 million for the quarter, representing an increase of 31% over the first quarter of 2015. As I've consistently pointed out on this call, there is a wide array of factors that influence calculated billings and quarter-to-quarter fluctuations in the calculated billings metric should not be taken as an indicator of changes in future revenues.

Headcount on March 31, 2016 was 4,682, up 31% from Q1 of 2015. As we discussed many times last year, 2015 was the year of significant capacity investments for the Company. We hired aggressively ahead of plan last year and that allowed us to slow hiring a little in the early part of this year and mature the organization for a quarter. Don't expect that to trend to continue, our annual plan has us returning to form in Q2 and resuming building out the capacity we need for 2017 and beyond, so expect to see the acceleration in hiring from here.

Now, I would like move to the forward-looking financial outlook which is covered by the cautionary language, Jennifer outlined it for the start of the call. And based on assumption which are subject to change over time obviously we have significantly overachieved our outlook for the first quarter. For the full-year this year, we're going to revise our revenue range upward from our previous outlook of $950 million to $970 million to a new range of $955 million to $975 million. We believe the leverage that we are seeing in our operations will both allow us to increase some investments in capacities for the remainder of this year and expand net margin slightly as well. So were raising our EPS guidance for the year from the previous range of $0.40 to $0.45 to a new range of $0.42 to $0.47. We’re raising the range on operating cash flow from the prior range of $135 million to $140 million to a new range of $140 million to $145 million.

For the second quarter of 2016 we expect revenues in the range of $229 million to $231 million. The suite world event I mentioned will be the largest we've ever done and that will certainly drive some increasing cash expenses as usual in Q2. We anticipate non-GAAP EPS of approximately $0.02 to $0.03 and operating cash flow of $27 million to $29 million.

That concludes my prepared remarks. We are looking forward to a great Q2 and exciting SuiteWorld in May and with that I'll turn the call back over to Zach.

Zach Nelson

Thank you, Ron. With record revenue of 31% differed revenue up 36% and record quarterly operating cash flow it wasn’t due to a great start to 2016. As Ron, mentioned our SuiteWorld conference will be held in May 16th through May 19th and it's a great opportunity to experience momentum of our business as we are joined by thousands of customers, partners and prospectus from around the world.

As we do at every SuiteWorld each day will have major news as we have significant product and partnership announcements across all of our core initiatives. So I hope you will be able to join us there either online or in-person.

With that we will open the lines for your questions. Operator?

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Philip Winslow from Credit Suisse. Your line is open.

Philip Winslow

Zach some of other players and industry cited macro weakness as a reason for some either message in the results or it would just slowdown in some of the metrics but for you guys especially in the Q1 obviously had a strong performance. Why don’t you just comment on that what's you are seeing out there, across the various businesses that you serve as small mid-size [indiscernible] two tier. Just sort of what you are hearing from people what are they saying, what's the tone out there?

Zach Nelson

Well I think as a whole number of ways to look at the question, I think geographically we had the strong quarter certainly in North America and EMEA continues to be for us as you probably saw during the quarter were investing more heavily in EMEA opening offices on the continents and with the data center investments. So performance there was certainly good for us. I think in terms of verticals you can think of us really serving to major industry groups people that sell physical things and people that sell non-physical things whether those subscriptions NetSuite or time based services and both of those industry groups saw really great growth and our particular taste. So that's I think we are in very good verticals, there is a lot of transformation happening in those verticals, particularly as product companies become service companies and service companies become product companies, there is a great deal of disruption actually going on in both segments of the marketplace and where you see disruption is where you see people moving to NetSuite, so that's a very strong aspect of the business.

And then the other thing that worked well for us and I don’t know about for the rest of the world, but our mid-market business obviously was strong. I think Ron mentioned for the non-OneWorld a portion of our business standalone single entity versions of NetSuite had a very strong average selling price so that shows the mid-market is looking very solid in our particular case and then our enterprise team had a super quarter, very good growth in enterprise. So I don’t know really what's happening in other companies and another approaches, but if you look across the board and NetSuite geographically and vertically and by market segment mid-marketing enterprise it was strong across the board.

Philip Winslow

Great and then just one quick follow up on SuiteCommerce obviously Ron called that out as the area of the strength. Just wondering if you can provide some more color there was it particularly strong in any vertical or area where just anything you call out there.

Zach Nelson

Well again we think about SuiteCommerce we really think about the omnichannel disruption that's being seen most visibly and in the retail space and certainly that continues to be a strong vertical for us and as you’ll see in SuiteWorld we’re doubling down in retail by even going deeper from a vertical perspective both on the frontend and on some of the backend ERP processes, but as I said almost on every call since we've introduced SuiteCommerce sales of SuiteCommerce outside the retail vertical are actually stronger than inside the retail vertical. So you’re seeing wholesalers and distributors and manufacturers began to use this top technology to extend their poor system of record, NetSuite now to their customers with the B2B fashion, but with a B2C touch and field.

SuiteCommerce is playing out as I thought it would. When we introduced and we said someday it will working smell in terms of its business impact of NetSuite like OneWorld did and I think as I mentioned in my comments if we were to become now greater than 20% of our new business bookings you are starting to see a trajectory there very similar to the early trajectory of OneWorld so it's going to be a strong engine of growth for us in the future.


[Operator Instructions] Your next question comes from the line of Mark Murphy from JPMorgan. Your line is open.

Mark Murphy

Thank you, very much and congratulations on the top line acceleration that happened in the quarter. Zach, last year I believe you made multiple changes in terms of sales management and you also added quite a bit of sales capacity during the year. I'm curious where do you think your enterprise sales teams rhythm sits today just in terms of on one end of the spectrum it can be the store famine, I think on the other and it can be a pretty predictable cadence closing a good volume of transactions each quarter, so just not only in Q1, but as you go forward, I'm wondering how lumpy is that currently versus last year?

Zach Nelson

Just generally our philosophy on the enterprise marketplace, a true enterprise marketplace, we've established our approach about three year ago where wanted to make sure that we kept all the D&A that we have in the midmarket. It's very hard to build an organization that can sell complex -- sell and implement complex applications to midsized companies and I think NetSuite is probably the best company on the planet doing that.

So as we move to the enterprise I didn't want to lose that D&A and we set out building really a separate organization both in the sales and services and go-to-market strategy and from the channel partners to do it differently. I think we've seen great success [technical difficulty]. That's part of having more success in enterprise applications. The flywheel begins with reference customers and I think we are well into the world now of having incredible reference customers in the enterprise space that's driving more business for in the enterprise.

That said I think it still is a bit lumpier than I would like. I think we have some more work to do on the demand generation side to smooth out that lumpiness. I think we have plenty of capacity on our sales organization. And when we find the demand, they're very excited about what else we can do for their business as they did in Q1. We did more deals over a $1 million in Q1 than we had in any other Q1 in our history. So and more deals in fact above $500,000 in Q1 than we did in any other time in our history. While I say it’s lumpy, I think we're starting to see more traction and I like you believe in the next year or two that lumpiness will smooth out and will just become a standard part of the business.


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

Karl Keirstead

This one for you Ron, in 3Q and 4Q last year, at least relative to your revenue guidance see a little bit more in line, it feels like in this quarter 3 million upside relative to the high end of your revenue guidance was sort of backed to the performance you were posting a little bit earlier, is there anything you could put your finger on to explain that any sort of accelerated deployments or worth lagging? Thank you.

Ron Gill

I think a lot of that you've heard us talk about in the prepared remarks. We saw -- a lot of things that really fell our way. The deal size was up strong strongly both in the midmarket and the enterprise, the enterprise team had strong performance. I think it's fair to say that when we're sitting here a quarter ago in late January everybody was very concerned about macro, there was a lot of -- there was a lot of China and oil and stock market concern and it was an environment where I think people were cautious and that's the environment in which we get guidance. We ended up as with so many macroeconomics scares over the last several year, nothing changed in our demand environment through the quarter and we saw very strong demand and pretty good execution for the quarter and I think that’s just what all came together in the our performance for the quarter. You see that flowing through the year.


The next question comes from the line of Ross MacMillan from RBC Capital Markets. Your line is open.

Ross MacMillan

Thanks so much and I echo others on congratulating you on this strong quarter. One for Zach and one quick follow-up for Ron, just Zach if you could maybe content around that 20% of new booking in SuiteCommerce in Q1, can you give us any reference last year either for the year or for Q1 of last year, so we can frame that? And then for Ron on your cash flow, it looks this year is going to be more backend loaded something closer to 60% or just little under that in the back half and I think typically you're more sort of 50/50 and I am just curious whether there is any particular things you should be thinking about in terms of the seasonality of cash flow this year? Thanks.

Zach Nelson

Yes, Ross, in relationship to I think last year's Q1 was a good quarter for SuiteCommerce as well, so I think the growth can be saw on counts certainly is indicative of people coming to our solution. I think the other thing that's a bit different this year than last is we did introduce mid last year the second component of the omnichannel capability and that was the SuiteCommerce in store aspects of the product for online, in stores and of course on phone with traditional NetSuite. So I think rounding out the suite was also very important in terms of moving the solution up market.

Ron Gill

Sure on the cash flow Ross I don't think there is anything particularly interesting to note there. In our original plan for this year cash flow and operating income quarterization I think would have married each other pretty well. We've obviously significantly over achieved in the first quarter, but otherwise there is nothing unusual happening there is obviously significant cash cost associated with the SuiteWorld event you see that reflected in the guidance for the quarter there both on cash flow and EPS. But no particular phenomena on the call out that's making a disconnect between this hit.


The next question comes from the line of Justin Furby from William Blair & Company. Your line is open.

Justin Furby

Couple of questions, I want to ask on growth trajectory I think people myself included of a long time this is a business that could grow 25% maybe higher organically for a long time and I was as you guys get to the next level as you approach 700 million or so of run rate revenue. Is that how you think about the business and then I have one quick follow up for Ron. Thanks.

Zach Nelson

Yes, I mean that's what we’ve send, the statement you've made is the statement we've probably made for as long as I've been here, is that we see this as sustainable growth between 20% and 30% for a long time and even with the sort of results that were chronicled in the Gartner report, just looking at the financial management segments we've had great success, moved to become the sixth largest provider of financial management systems but on a relative market share basis we are still pretty small, so just within that context we see awesome room for growth and that doesn’t even really take into consideration of lot of the other capabilities certainly that all of our customers use the SuiteCommerce capabilities which is yet another marketplace that's really open for the taking and I think we have the best omnichannel solution on the plan and I think you saw that in some of our results this quarter so there is that market segment there is the broader CRM space and a whole variety of capabilities that NetSuite has there are customers use that open up much broader markets.

So I think we are just scratching the surface in terms of what we can do both for new customers and for existing customers so still lots of opportunity in our world and so we still keep that 20% to 30% growth factor in mind we always want to grow as quickly as we can at the top end of that and add solutions to our portfolio that enable us to do that but we don’t see any reason that's not possible given a stable macro environment.

Justin Furby

Got it, that's helpful. And then Ron maybe you called that up but for balance for Q2 can you give the adjustments to ratio currency et cetera, and I know you don’t guide for billings but people obviously key in on this metric and there is some moving parts next quarter as your anniversary brought, is there any direction you can provide us in terms of what to think about for Q2. Thanks.

Ron Gill

Sure, thanks Justin. The billings normalization that we usually do their so foreign exchange continues to be a drag on that calculated billings calculation that you could imagine but billing term with a slight positive in the quarter if you normalize those two take both of them out, you would normalize the 31% up very slightly less than a percentage point. So this is not a big impact from the and now I think not guiding to a calculated billings has been a good practice. I think we've seen that the idea of guiding the calculated billings has been fought for some other company's and reach it's not something that we are steering or sort of deal by deal decisions to try to do so. I'm going to keep away from trying to get forward guidance on calculated billings.


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

Brendan Barnicle

Zach in last week we start to see some M&A activity among the public companies we go ahead and see that for about a year you guys have stayed focus on a private companies primarily, I was wondering what you think of some of this new M&A activity and whether you guys still feel like private companies are demanded to be more successful a few years ago?

Zach Nelson

I don’t think we really think what other companies go affect our strategy that much I think our M&A strategy has been fairly consistent over that overtime and that is how do we find capabilities that extend NetSuite solution typically into a vertical direction and so in those cases we are largely, were buying -- in some cases were buying technology but it’s more likely we’re buying domain expertise to understand the vertical better and to more quickly extend our solutions into those marketplaces.

So I think that will continue to be our focus going forward during the quarter we did a very small acquisition along those lines a company call IQity in addition to bringing us very rich manufacturing capabilities is the fact that as that solution was actually built natively on our SuiteCommerce platform, so if I looked as if our engineers had built it we already have 40 customers in common and so those kinds of acquisitions we love and in fact if you look at some of our the things we've done over the last couple of years there have been applications that have been built natively on top of NetSuite our point of sale capabilities that you now see rolling out with the SuiteCommerce in store where the acquisition of a company called retail anywhere would build there next generation point of sale on our SuiteCommerce platform, we went to market with them. Sold a number of customers and then made them part of our companies so while we certainly look outside the NetSuite ecosystem there are very cool thing is to see the growth in the NetSuite ecosystem and the ISD community building natively on our platform and makes it much easier for us to add new vertical capabilities and if we choose to really bring those capabilities in house via acquisition.


The next question comes from the line of Stan Zlotsky from Morgan Stanley. Your line is open.

Stan Zlotsky

So I wanted to actually continue with that theme of verticalization without obviously disclosing where kind of acquisitions you might be making, but which verticals do you feel like you want to focus in the most and where is the most opportunities?

Zach Nelson

Well, we've really worked on over the last few years as advancing, the really industry groups since the way we look at all of our industry at all of our industry at a very rapid pace rather than doing at serially. And so again if you look at the industry groups we’re focused, people that make and sell things, manufacturers and distributors, both industry groups had very strong quarters.

You will see at SuiteWorld a number of new capabilities for those types of companies and we've had great success both in startup in those world, companies like GoPro that have gotten very large on NetSuite, all the way to something like Shaw Carpets, the world's largest manufacturer of carper using NetSuite for their international marketing or international manufacturing areas.

So pushing forward very heavily internally on those fronts and then the other large components are not physical things but virtual things whether they would be software, whether they would be internet services, whether they would be medical services, whether they would be profession services, and some of earliest acquisitions of course with no segment to bring deeper project management and resource management to bear for those customers. So we could just continue to hopefully advance all of them at very rapid pace. And occasionally acquisition helps us do that at a more rapid pace that we can do it building it ourselves.


Your next question comes from the line of Kash Rangan from BoA Merrill Lynch. Your line is open.

Kash Rangan

Zach did you talked about the financial market moving to the cloud owner. you mentioned that SAP was down about 400 ton a million, what are your thoughts on the large enterprise market WorkDay has been talking about this as well, but you’ve been in this market much longer than many in the cloud, so how closer are we to an inflexion point where you can actually start selling next week’s financials to large Fortune 500 companies?

And I guess follow-up for you Ron is, how do you view the profit model going forward, I know that the Company has been focused a lot on potential reaction or acceleration of billings but ramping of the sale force headcount, what are we -- are you reconsidering sounds like my body language and by what happened in the quarter, are you looking to actual rate sales that counter and so how should we look at the operating margin implication near term longer? Thank you.

Zach Nelson

So my view on the enterprise is I don't think enterprises have a burning desire to switch out their financial system. I don't think the problem in larger enterprise if you go to talk to any of them is what happening in their GL. And when you talk about companies that talking about replacing financial system, I think they're really talking about an old world approach to running a business. NetSuite certainly has a GL, we certainly are used by all of our customers to generate financials.

But the GL is not the center of our system. The center of our system is really the older if you will, it's the core business record that drive every business what did the customer buy, what should we promise them in terms of services and then all of the financial aspects spin-off the business priority. And so when we look at large enterprises I don’t think any multibillion dollar company is interested in replacing their GL.

I think lots of multibillion dollar companies are interested in figuring out how they automate their business operations, how they process orders more quickly, how they interact with customers more efficiently. They do that very urgently. So I whole preamble really was about the fact that NetSuite built the business system that's enabling these companies to rapidly transition their business models to meet the changing requirements of their customers and their industries. If you're building and accounting application in the cloud, I don't think you're going to be very successful.

In the whirlwind of the market and so plenty of accounting applications in the cloud they're just spinning their wheels at $50 million to $60 million. They're not growing or the very high end of the market, if you have GL centric view of the world. At NetSuite we started the world as NetLedger as that sort of in the early generation of product as a GL centric product and that wasn't until we expanded the suite to address business process concerned that we took off.

So in summary I don't think enterprises are interested in replacing GL and by definition that's there sort of financial system. I think they all interested in replacing their business systems.

Ron Gill

And just cash to address the sort of for the posture on margins, I guess we're always a little cautious to project on that because we feel like the opportunity in front of is still so huge, we're always little reluctant to say that we would pass-through over achievement into net margin. We had a tendency that to want to expand the distribution capacity because it feels like there is still huge opportunity there. I think that said, we're pretty happy with the productivity gains that we're seeing.

Q2 has a large marketing event in it but I think for the full year you will start to see some more leveraged come out of the sales and marketing spend line. Don’t get too excited of course, our focus is really growing the business, you will see an acceleration in hiring but going forward I am pretty confident that we can continue to grow the business at a healthy rate while showing a little additional leverage coming out of that sales and marketing spend line.


The next question comes from the line of Samad Samana from FBR Capital Markets. Your line is open.

Samad Samana

I was wondering if you could give us an update on Bronto software and what kind of impact that's having as you fold it in with SuiteCommerce and how that’s impacting deal cycles and whether that's operating under the NetSuite and Bronto is still operating under the NetSuite umbrella now or still operating autonomously.

Unidentified Company Representative

Yes well so Bronto really is operating as a key part of the NetSuite organization. I think it's fairly well integrated into the company and our processes and our approaches. We certainly are still selling it on a standalone basis, but I think what was interesting in the quarter was the attach rate of Bronto systems to NetSuite systems in Q1. About 20% of deal Bronto sold were with NetSuite, we’re into the NetSuite customer base either way and that's the highest level yet in the short history that we've been together so that's a great positive. In the other case as Magenta was probably the other platform that they were sold most frequently into. So it was very happy to see that sort of attach rate as well as their ability to continue to sell into a variety of other standalone B2C commerce platforms.

On the product side of course were bringing the technologies closer together and trying to figure out where the intersection points are with the SuiteCommerce architecture, from a UI standpoint and a data integration standpoint. And of course we never really intend to have billions of emails sent out of NetSuite core, so all of that great infrastructure that Bronto has built up over the decade to manage enormous mail volumes and customer interactions will stay as is, but finding really tight integration points in the B2C world primarily between SuiteCommerce and Bronto is something we are still working on from a development standpoint.


And the last question will come from the line of Pat Walravens from JMP. Your line is open.

Pat Walravens

So, Zach last year you made some changes to your marketing organization. And I was wondering if you can just share with us what you expect from that organization and how they are doing now?

Zach Nelson

Well, I think as marketing enterprise software is complex in some ways and very simple in other ways but at the end of the day prospects want to see customers in their industry being successful with these business applications. So we are very focused on it, you will certainly see the SuiteWorld and hopefully you've seen it to date is not so much talking about NetSuite, but talking about what customers are doing with NetSuite.

And if you look across our 10,000 customers I mean it's amazing what our customers are doing with NetSuite. Just as an example, as CEO I always talked about my latest data point as if it is all data points, but this kind it is. We were -- just opened up Amsterdam and so we have some of our -- the Netherlands and some of our early customers at a dinner and it was just a macroeconomics of how cool these companies are.

If one company is making a next generation wallet called Secret, this isn’t a digital wallet, it’s a physical wallet. It's protects your credit cards from being ripped off as you are in the subway the numbers and what not, great product and they are absolutely killing it and then sitting across the table from them was an airline called Transavia which is a joint venture between KLM and I think Air France. You couldn’t have two more difference businesses sitting across the table and the one common thing that united them was the fact they were able to build these amazing businesses on NetSuite.

And so that's really that was the great marketing pitch right, who nobody on the planet is doing the things that our customers are doing and NetSuite as the core part of how they can transform these industries, transform their products and offerings and so really that's the core marketing efforts that we've always had at NetSuite and that's the core marketing that we will use going forward.


And that concludes today's conference call. You may now disconnect.

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