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NetSuite (NYSE:N)

Q2 2012 Earnings Call

July 26, 2012 5:00 pm ET

Executives

Ronald Gill - Chief Financial Officer and Principal Accounting Officer

Zachary Nelson - Chief Executive Officer, President and Director

Analysts

Philip Winslow - Crédit Suisse AG, Research Division

Peter Lowry

Jason Maynard - Wells Fargo Securities, LLC, Research Division

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Laura Lederman - William Blair & Company L.L.C., Research Division

David M. Hilal - FBR Capital Markets & Co., Research Division

Scott R. Berg - Northland Capital Markets, Research Division

Matthew J. Coss - Piper Jaffray Companies, Research Division

Jennifer A. Swanson - Morgan Stanley, Research Division

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

Operator

Thank you so much for holding, everyone, and welcome to the NetSuite reports second quarter 2012 financial results conference call. Just a quick reminder, today's call is being recorded. Now I'll things over to our host, Mr. Ron Gill, Chief Financial Officer.

Ronald Gill

Thank you very much. Good afternoon, everyone, and welcome to NetSuite's Second Quarter 2012 Financial Results Conference Call. A more complete disclosure of our results can be found in our 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 see the Investor Relations section of our website. As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call.

On the call with me today is Zach Nelson, our Chief Executive Officer. Zach and I will begin with prepared remarks and then we'll open up the line for questions.

During the call, we'll 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 and on our website. All of the nonrevenue financial measures we will discuss today are non-GAAP unless we state that the measure is a GAAP measure.

The primary purpose of today's call is to discuss our second quarter 2012 results. However, some of the information discussed during this call, including any financial outlook we provide, may constitute forward-looking statements within the meaning of U.S. federal securities laws. These statements are subject to risks, uncertainties and assumptions and are based on financial information available as of today. We disclaim any obligation to update any forward-looking statements or outlook.

Risks and uncertainties that would cause our results to differ materially from those expressed or implied by any such forward-looking statements include those summarized in the press release that we issued today. These risks and additional risks are also described in detail in reports that we file from time to time with the SEC, including our most recent 10-K and 10-Q filings, which I encourage you to read. With that, I'll now turn the call over to Zach

Zachary Nelson

Thank you, Ron. In a quarter that saw many traditional enterprise software companies struggle, NetSuite had one of its best quarters ever. We saw continued growth in our financial metrics and exceeded our previously stated outlook on revenue, cash flow and non-GAAP EPS significantly. And the continued execution against our core strategies allows us to increase our full year outlook for revenue and non-GAAP EPS.

On the top line, we posted record revenue with $74.7 million, exceeding our stated outlook of $73 million to $73.5 million. And we finished with a record deferred revenue balance, up 38% year-over-year.

On the bottom line, we had our best quarter ever. Non-GAAP operating income grew 172% year-over-year, and non-GAAP operating margin ended at a record 7.5%. Non-GAAP net income grew 192% year-over-year, and we tripled our earnings per share from Q2 of 2011 by delivering non-GAAP EPS of $0.06 per share. This also exceeded our stated outlook of $0.03 to $0.04 per share.

In addition to overachievement on revenue and EPS, cash flow from operations grew by 80% over Q2 of 2011 to $15.2 million, exceeding our previously stated outlook on cash flow for the quarter of $13.5 million to $14 million. Profitability, viewed through the lens of cash flow, grew to an impressive 28% operating cash flow margin.

These many record results are a testament to our strong execution against our mission to provide companies cloud-based, integrated systems that deliver unprecedented control of and visibility into their business operations. As well, our overperformance in the quarter and the first half is a demonstration of our continued execution against the strategy we have laid out over the past several years.

Our strategy of providing a suite of applications designed to run a business, combined with our move upmarket to bring the benefits of the suite to larger companies and the verticalization of the suite to bring the benefit of the suite to many different industries, continues to pay dividends for NetSuite, our stockholders and our customers.

There was no better place to see the success of our strategy and its impact on customers than in our SuiteWorld conference held during Q2. Once again, SuiteWorld was a phenomenal success with roughly 70% more attendees than our event the prior year.

Customer wins at Land O'Lakes and Procter & Gamble showed the continued success of our move upmarket. And announced wins at fast-growth companies like Square, Airbnb, Evernote and Playdom showed next-generation companies are also betting on NetSuite as their platform for the future.

And we finished the second quarter with great customer momentum. During the quarter, we added 329 new customers. Average business selling price jumped almost 30% year-over-year to well over $50,000 in first year contract value.

SuiteWorld also provided further proof of the growth and success of our SuiteCloud platform. SuiteCloud provides a platform for third-party application developers and resellers to extend the core NetSuite application to meet customer and market requirements.

You could see the growth of our SuiteCloud Developer Network not just in our partner participation at SuiteWorld but also in the many third-party applications announced during the quarter that demonstrate the importance of NetSuite as a platform. And the acceptance of the SuiteCloud-developed applications was also apparent with customers purchasing many of the applications right on the show floor during the conference.

We also continued our reseller-partner momentum at SuiteWorld and during the quarter. We were very excited to introduce Blytheco, Sage Software's Partner of the Year for the last 9 years, as the newest NetSuite reseller.

Likewise, large accounting firms continued their move to the cloud with one of the nation's largest accounting firms, Grant Thornton, making their debut at SuiteWorld to announce a new NetSuite practice.

Finally, our momentum in enterprise systems integrators continued with Deloitte announcing their support for NetSuite at SuiteWorld. And this morning, we announced our first joint deployment with Deloitte.

At the end of the quarter, our North American channel business grew by 50% year-over-year, speaking to the growing acceptance of NetSuite sales to third-party channel providers like these great new partners we introduced at SuiteWorld.

And finally at SuiteWorld, we introduced a major initiative we call NetSuite Commerce as a Service, which enables businesses to manage their interactions with other businesses and directly with consumers via our cloud platform that delivers pixel-perfect display via any device directly on the core NetSuite ERP/CRM business management application.

At the heart of our Commerce as a Service initiative is NetSuite SuiteCommerce, a new commerce-aware platform that provides the central system to manage all transactions and associated customer interactions with consumers and other businesses regardless of touch point, be it a website, a smartphone, a social media site, a retail site or the like. Over the past decade, NetSuite has transformed how customers operate their businesses internally. Over the next decade, I believe SuiteCommerce will transform how businesses operate with other businesses and with their customers. And this initiative provides yet another engine of growth for NetSuite's business model.

With that, let me turn the call over to our CFO, Ron Gill, to detail some of our financial highlights during the quarter.

Ronald Gill

Thank you, Zach. As Zach highlighted, we had great SuiteWorld and another quarter of very strong business results. Let me take you through some of the Q2 numbers in more detail.

As a reminder, all the nonrevenue 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 the reconciliation of GAAP to non-GAAP results in today's press release.

Our revenue for the second quarter totaled $74.7 million, up 7.8% sequentially and up 29.2% over Q2 of 2011. Recurring revenues from subscription and support in Q2 grew 5.3% sequentially and 26.6% over the year-ago quarter to $61 million and accounted for 81.7% of our total revenue. Recurring revenue growth continues to benefit primarily from growth in bookings as well as from improving retention.

Our non-recurring revenue, which comes predominantly from Professional Services, was $13.7 million for the quarter and grew 42.4% over that for the same period last year, driven by both a significant increase in the number of hours worked and a rise in our average realized hourly rate.

Even as our partner community expands and is taking on a larger portion of Professional Services work, we're signing up larger number of new customers, which drives increasing demand for our professional services. In addition, we're also taking on larger implementations as we move upmarket and experience more follow-on up-sale into those larger accounts involving Professional Services. So all these factors are contributing to the growth in Professional Services revenue.

Globally, while revenue in the U.S. was up 30% over the year-ago quarter, the Asia Pacific region was actually our fastest-growing geographic area, and approximately 26% of our revenue for Q2 was generated outside of the U.S. For those of you concerned about Europe, let me first remind you that only about 7% of our revenue is generated from anywhere in Europe or the U.K., and only about 1% of revenue is actually euro-denominated. While there's probably no company these days with a European division that's doing as well as they'd like, we did see our revenues in Q2 in EMEA grow at a double-digit rate over the same period last year in spite of the challenging environment there.

As long as we're on the subject of international business, I'll touch on the impact of foreign exchange for a moment. On a year-over-year basis, the stronger U.S. dollar did have the impact of slightly reducing both revenue and expenses in the quarter. Overall, the impact of foreign exchange fluctuation reduced revenue by about $500,000 while reducing costs by about $650,000 for a net positive impact on non-GAAP net income of $150,000 in the quarter.

Moving on to calculated billings. If you've done the math, you see that calculated billings, defined as revenue plus the change in deferred revenue, were $84.5 million for the quarter, up 35% over Q2 of last year. As I always point out on these calls, there are often quarter-to-quarter fluctuations in the calculated billings metric separate from any true indicator of changes in future revenues. In Q2, the metric was negatively impacted by changes in foreign exchange rates and billing terms and was positively impacted by some renewals booked into the balance sheet earlier than the year-ago quarter. If I factor out all of these positive and negative impacts and normalize the calculation using the same terms and FX rate as in the year-ago quarter, the year-over-year calculated billings growth was 30%.

Retention was very strong in the quarter, and our combined churn down-sell rate improved slightly to reach yet another all-time record low.

Our average selling price on new deals increased 29% over that for Q2 last year to over $50,000. The ASP for OneWorld was up 13%, while across all other products, it increased by 15% and an increase in the OneWorld portion of the mix drove the rest of the increase.

We said that after last year's extremely strong growth in ASPs, we're generally not expecting a significant increase this year, but we were very pleased to see the number of large deals and the average deal size continue to grow in Q2.

Moving down the P&L to gross margins, the gross margin on recurring revenue was 85%, in line with that for Q2 2011. The gross margin on nonrecurring revenue grew to 20.1% from 12.8% in the year-ago quarter. As I mentioned earlier, Professional Services margins benefited significantly from higher overall hourly rates and better utilization versus Q2 of last year.

Total gross margin held steady at 73.1%, and overall, we expect gross margins to be approximately 73% of revenue for the full year in 2012.

Turning to our non-GAAP operating expenses. Product development expense was $9.2 million for the quarter, up 18% over Q2 of 2011 and about 12.3% of Q2 2012 revenue. We continue to make significant investments in our product development team with headcount in that group up more than 40% over the year-ago quarter.

Sales and marketing expenses were $33.4 million, or 44.6% of revenue in Q2, down from 46.8% of revenue in the year-ago quarter. As Zach discussed, we hosted SuiteWorld, our largest marketing event of the year in Q2, and the team did a good job of managing net spend within plan even as the event grew beyond our anticipated demand. We're continuing to invest in adding sales capacity in the second half of 2012, and you'll see sales and marketing expense increase slightly as a percentage of revenue as we make these investments.

G&A expenses were $6.5 million or 8.7% of revenue in the second quarter. That's down from 9.3% of revenue in Q2 of 2011, so G&A continues to scale well. We expect G&A expenses to be approximately 9% of revenue for 2012.

Non-GAAP operating income in the second quarter was $5.6 million, an increase of 172% over that for Q2 in 2011. This equates to a non-GAAP operating margin of 7.5% compared with the 3.6% margin in the second quarter last year.

During the quarter, we reported a net income tax expense of approximately $763,000 principally related to our international operations. For income tax purposes in the U.S., we continue to expect our net operating losses to offset any domestic earnings for the foreseeable future.

Non-GAAP net income from the second quarter was $4.8 million, an increase of 192% over the year-ago quarter. Non-GAAP earnings per share for Q2 was $0.06, which was up from $0.02 in the year-ago quarter.

Moving on to balance sheet. We had another record quarter for cash collections, and our cash balance continues to increase. We closed the quarter with $164.5 million in cash and cash equivalents and minimal debt. That represents an increase in our cash balance of $43.4 million or 36% over the balance we had just a year ago at the end of Q2 2011. Cash flow from operations in Q2 was $15.2 million, up 80% year-over-year.

Moving down the balance sheet to deferred revenue, our total deferred revenue balance increased to $130 million, an increase of 8.1% over the prior quarter and up 38% over the prior year. Headcount on June 30, 2012, was 1,487, up 151 heads from Q1 2012 and an increase of 27% from Q2 2011. We added headcount across the organization with the majority of the additions coming in Professional Services, Product Development and Direct Sales.

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.

Given our solid performance in first half of 2012, we are raising outlook for full year 2012 revenue. Our prior outlook was for a revenue range of $295 million to 300 million, and we're now raising this a range of $300 million to $305 million. We're raising our full year non-GAAP EPS outlook from a range of $0.19 to $0.21 to a new range of $0.21 to $0.22. So you can see there that we're reinvesting some of the top line overachievement back into the business. Since most of that investment will take the form of cash expenditures, we're going to hold our current range on operating cash flow of $50 million to $55 million for the year.

For the third quarter of 2012, we expect revenues in the $77.5 million to $78 million range, non-GAAP EPS of $0.05 to $0.06 and operating cash flow of $13.5 million to $14 million.

So in closing, I think the numbers speak for themselves. We're very pleased with our consistently strong financial performance, and we're looking forward to continued momentum in the second half of this year. That concludes my prepared remarks. With that, I'll turn the call back over to Zach.

Zachary Nelson

Thank you, Ron. As cloud computing becomes the dominant business application architecture for companies of all sizes, I don't believe there is any company better positioned than NetSuite to benefit from the shift to this new architecture. And clearly, customers are moving aggressively to the cloud and to NetSuite.

While Q2's results were great, we believe we are just beginning to scratch the surface of our opportunity. The mid-market alone is a huge opportunity for NetSuite and is the foundation of our historical growth. The enterprise opportunity, while nascent, continues to grow healthfully for NetSuite. And the addition of SuiteCommerce expands our total available market beyond what is available in the already huge markets we can address with ERP and CRM solutions.

In addition, our sales and services strategy continues to perform strongly. We have added 44% sales capacity year-over-year, yet our sales productivity was not negatively impacted. This is a good sign that sales productivity, defined as the average new business sales program, is typically negatively impacted when you add more salespeople as it takes time for those reps to ramp.

Overall, sales force productivity remained flat with last year's then record levels. And our services organization continued to provide stellar support to our customers while delivering their highest level of margin ever.

The decade we've spent inventing and investing in the cloud has given us an enormous lead. And our pure focus on delivering web native applications certainly bodes well for the years ahead. By the end of this year, we will have more than doubled the size of our development team since the end of 2010. You see the contribution of the R&D's effort in our ability to address the needs of customers large and small across a huge variety of industries and verticals, all on a single cloud-based code base.

It is this amazing product achievement that gives NetSuite a significant advantage over those who consider themselves our competition, and it also gives our customers a huge advantage over their competition.

As we always do in Q3, we will be refreshing our multiyear strategic plan. Based on that strategic planning process, I look forward to giving you an early glimpse into our operational plan for 2013 during our next quarterly conference call.

And with that, I'd like to open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Phil Winslow with Credit Suisse.

Philip Winslow - Crédit Suisse AG, Research Division

Zach, I might sound like a broken record here. But again, applications are outperforming other pieces of IT spending, and NetSuite's clearly outperforming the rest of your applications' competitors. Once again, despite of this macro backdrop, what do you think is driving that? And then when you're talking to customers about the second half, what are they saying about their spending intentions for this macro backdrop, and then also kind of relative to these drivers that are producing the growth that you've seen through the first half?

Zachary Nelson

I think it's the drivers that we've really talked about for the last decade. There's the cost driver, obviously, we believe and I think customers are experiencing. This is a massively less expensive way to run your infrastructure. You hear implementations, projects in places like Symantec that are costing $0.25 billion to replace their application infrastructure with on-premise software. That 's -- it's mind-boggling to hear those sorts of things are still going on. So the cost reduction is certainly one. And I think the other piece really is, and probably more importantly, is productivity enhancement. The -- most companies today are built on the Internet. Most companies use the Internet to reach their customers. Most companies' employees are spread all over the globe. So the only way to manage that environment is with a business infrastructure, business application like NetSuite, which is also built on the Internet. And so I really it's think those 2 factors that are driving it. The fact that we're cloud-based makes it much easier to consume our technology. I've always said -- when I joined NetSuite in 2001, I had come from McAfee. And we actually did the first, I think, cloud IPO back in 1999 and 2000 when we IPO-ed mcAfee.com. And my experience in that effort, as well as subsequent efforts at mcAfee, showed to me one thing, and that is, all of this cloud-based technology, the advantage accrues to the customer. Because at the end of the day, if the guy who is writing the software, in this case namely NetSuite, also has to manage it, they write a lot better software instead of putting that burden on the customer to figure out how to manage it and how to upgrade it. And I think that's a fundamental -- obviously a fundamental change in terms of what's happened in the customer-software-vendor relationship. And the fact that we've always been tooled to take advantage of that certainly accrues to our benefit, and I think that's why you see us outperforming the market as opposed to other folks whose business model is basically built on shipping customers discs and daring them to install them. That business model is fatally broken, and I think you're seeing more than the tipping point at this point in terms of the shift towards an approach like NetSuite's.

Operator

Next we'll hear from Patrick Walravens with JMP Securities.

Peter Lowry

It's Pete Lowry in for Pat. Can you talk about any differences you saw in the SMB market versus the enterprise market in the quarter?

Zachary Nelson

If you look at our numbers, our customer wins, the business was healthy across both our SMB -- and we're more largely M than the SMB these days. The complex, small business and then the heart of the mid-market is really where you see NetSuite playing more frequently. And the enterprise market is growing very rapidly for us. Again, it's the early days of that marketplace for us, so we -- we're -- we see a small piece of it. But certainly, if you look at our numbers and the growth in the average selling price, you're seeing both of those businesses behave in a strong fashion. The number of customer wins, 329, was essentially flat with the prior year, began at a much healthier average selling price. So we're not really seeing -- we're seeing a very strong demand environment. I don't know what the rest of the world is seeing. If you look at it geographically, U.S. was very strong, Asia Pacific was very strong. Europe, of course, as Ron mentioned, revenue grew there in double digits. But of course, we're all -- everyone in the world is a little bit cautious about Europe, and we're treating it the same way. That said, I think we have the appropriate investment levels in Europe. And so we feel pretty good about where we are geographically as well.

Operator

Moving on to Jason Maynard with Wells Fargo.

Jason Maynard - Wells Fargo Securities, LLC, Research Division

I wanted to dive into a little bit on the operational metrics around sales productivity and customers because that again looks like it's going to be one of those stories that'll keep playing out over the next couple of quarters and years. And one of the things that I'm curious about as you announced the Deloitte -- I think it was one of the first, Deloitte wins today, where do you think you're at in the life cycle of channel leverage with some of your partners, especially since you announced some, obviously, earlier in the quarter? What's your estimation on ramp time for those? And then a second point, just building off of the direct sales efforts sort of in the upmarket, I believe I'm -- I heard the metric for the number of deals greater than $100,000. And just how do you anticipate that kind of playing out now that you're obviously adding richer products like SuiteCommerce into the mix?

Zachary Nelson

Yes, so if you -- I think if you look across our distribution model, we're -- we really are firing on all cylinders. You look on the direct front, I gave some of the metrics there in terms of maintaining our record for -- our then record productivity from last year even though we've added 44% capacity, quota capacity this year. I think I've said in the past that we're going to add 60% quota capacity by the end of the year. So we're continuing to ramp that. We may actually try to ramp that to add more quota capacity this year based on our overachievement on the bottom line as well because the more we add this year, that really -- all of that impact is going to accrue to next year. So we're going to see if we can actually raise our direct capacity this year beyond what we've projected. The indirect channel is -- has -- is really a great story. In North America actually, the indirect channel grew faster in new business than our direct channel did. So we -- we've been investing in the indirect channel ever since I've been here for more than a decade now. We've always felt the channel was going to be an important distribution model. We just didn't know when the channel would come along, and it was really up to the channel to make the switch to the cloud. It's a big business model disruption for people that traditionally carry sort of the stone-age products of Microsoft Great Plains and Sage, but they're making that change and you certainly see it in the accelerated growth of our channel and you also see it in the terms of the partners that are joining us. I mentioned Blytheco, Sage's Partner of the Year for many years. Frank, Rimermen Associates is a very large Bay Area Great Plains reseller also joining NetSuite. So you're starting to see the large mid-market VARs that have been traditionally tied to the products like Great Plains designed in the 80s are beginning to make that change. So we see that also being yet another engine of growth that's just beginning to kick in. On systems integrator front, we've had -- I think we've been doing some great work with all of our systems integrator partners. The work with Accenture tends to be -- it's still moving on very well, a very healthy pipeline. And the fact that we announced Deloitte and then go live -- we didn't just announce our first customer, we announced our first deployment today with Deloitte -- shows you some of the accelerated not just sales but also deployment of these larger systems integrator-driven deals. So it's hard not to be excited about what we're seeing in the distribution model right now.

Operator

Next, we'll here from Greg Dunham with Goldman Sachs.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

One follow-up on that indirect distribution. Is there any way to quantify the capacity expansion that you've had over the last year on the indirect side? And I know you mentioned the 50% increase in sales, but how about the capacity that you built out over the years versus just kind of same-store sales from partners that you've had? That's -- that'll be my first question. And the follow-up question, unrelated, is Ron, you mentioned some early renewals, if I heard you correctly. Could you just give us a little bit more color on that and what actually happened to offset the shrinking payment terms in that regard on the billings number?

Zachary Nelson

Yes, it's hard to talk of the -- talk about capacity in the channel because we don't really give them quotas per se. So it's really hard to measure what we're adding. We look at the number of partners we're adding on an -- in an aggregate basis but then also, really importantly, is the quality of those partners. And that's why when I mentioned the names like Blytheco and Rimerman, these are the highest-quality, mid-market channel partners on the planet. Lots of experience, very large installed customer bases on traditional products. And so we get -- we're very excited about it, although we don't hand out quotas. It's their business to manage. And I've always said we run the business internally on things we can control. We can tend to control our direct sales force and the capacity we add there. The channel is a very important piece of the puzzle, but we've always seen it somewhat as upside because of that unpredictability. They're not driven to the same metrics we might be driven to quarterly or monthly. They run their own businesses. So it's very difficult for us to sort of quantify the capacity. All we can look at is the result. And again, the result is great and getting better all the time. The fact that in North America, they're growing at a faster rate than our direct sales force is saying quite a bit given the growth of our direct sales. And Ron?

Ronald Gill

Oh yes, sure. On the second -- to the second question, the calculated billings question, so I talk on every call about all these things that can cause unusual fluctuations in calculated billings. And the impacts from FX and the billing terms are very common, and I know I've occasionally talked on past calls about a large renewal coming in earlier and impacting the number. I think last quarter on this call, I -- the number on the face of the financials was 26%, and I normalized those factors out and got to a 27.5%. This quarter, when you can calculate the number from the face of the financials, again you'll get to 35%. But when I take out all of those impacts and normalized it, I get a number more like 30%, which looks a lot more like what we saw going on in the business. And I've always said that on a quarter-to-quarter basis, this metric has a lot of things that move it up and down, and that's why I know that a lot of people look at this number. So we don't particularly use it internally, but I try to help normalize that calculation each quarter so that you guys can understand it better. So those are the things that impacted it this quarter. We don't really manage to it or guide to it, but I'd like to normalize the calculation for you guys.

Operator

And from William Blair & Company, Laura Lederman.

Laura Lederman - William Blair & Company L.L.C., Research Division

Can you talk a little bit about the pipeline for big deals? And also on the subject of big deals, Land O'Lakes, what were you -- they using before? And who did you compete with? And why did you win? So I'm just trying to understand sort of the dynamics of the higher end of the market that you're competing in today. And I guess along the same questions since I still have breath, are you seeing Workday in the large deals?

Zachary Nelson

Thank you. Yes, no, on the Land O'Lakes deal, I think they're a JD Edwards shop. And again, I've seen some recent articles from the CIO of Land O'Lakes where they're really rushing headlong to the cloud. And so their implementation of NetSuite was a 2-tier implementation. I think we're in -- I think they're going to run 3 of their subsidiaries on us. If I'm not mistaken, off the top of my head, I think it's China, Mexico and the United States is a subsidiary, believe it or not. So that's just a classic example of a company that believes in moving their operations to the cloud, and NetSuite's obviously a part of the financial movement there. In terms of the enterprise effort in general, we've -- and I talked a little bit about the quota capacity we added this year, 44% quota capacity. We've added a lot of heads to build out some of that capacity, and about half of those heads have gone into what we call our corporate and enterprise groups. So a large investment there. The enterprise group, if you recall, that's the group that's targeting the Fortune or the Forbes 2000, if you will, the true enterprise organization. That group is the fastest-ramping group we've ever added. So we've added many groups over our history. We went from small to mid-market and mid-market corporate, and now corporate to enterprise. And that group is ramping at a much faster trajectory than any of the other groups that we've seen. So again, while it's small, it is growing very rapidly, and we think we have lots of proof points now on how successful we're going to be in that space. So we continue to add to the headcount there. We also go to market jointly with our systems integrator partners there. That group, by and large, does not carry a number of our services. So their service is agnostic. And they're encouraged to bring in partners, the largest [ph] Size and larger accounting firms like Grant Thornton and others that we talked about. So that's a new piece of the business model that seems to be working as well. So the enterprise portion of the business so far is going very well.

Laura Lederman - William Blair & Company L.L.C., Research Division

And quickly, competitively, who you're seeing more of there, who you're seeing less of there. And I realize the group's ramping but just kind of a complexion of...

Zachary Nelson

Yes, yes. Competitively, it's mostly -- it's still mostly SAP and, in some industry groups, Oracle. And it's not SAP Business ByDesign, it's all their traditional products. In fact, Business ByDesign fell in terms of the number of competitive deals we've seen them in most recently. So it's the traditional SAP and Oracle. Workday, they're still an HR solution. They don't do financials. We have basic HR but not for these large 100,000-person organization. So we're not in the HR aspect of that deal. They're also not in the financials aspects of that deal.

Operator

And next from FBR, David Hilal.

David M. Hilal - FBR Capital Markets & Co., Research Division

Zach, I want to talk a little bit about SuiteCommerce, the new release. I know it's still early days but to what extent is it driving completely new customer sales versus existing customers that maybe didn't want the prior product but now realizes this is not good for them and then, therefore, it's kind of add-on sale?

Zachary Nelson

Yes, it's a good question. And I think in general, if you look at SuiteCommerce, I -- where I view we were at with SuiteCommerce is very similar to where we were at when we introduced OneWorld back in, I guess it was April of 2008. And that is more in terms of rolling it out, we're taking a very measured way -- measured approach to rolling it out so that we have the resources to make customers successful with it. Secondly, I think you do see early traction in the installed base. And the beauty of it is hey, you have -- you're running NetSuite already. Now you can effectively enable it to present a consumer-like website to anybody you represent that website to, be it your business partners, be it consumers or be it your manufacturing channel. And we already are starting to see some of that traction. For example, replacing things like Digital River at some of our customers in that in regards to commerce enabling their NetSuite systems. So I think you will see early traction and larger deals in the installed base. And that was very similar to OneWorld, if you recall. And frankly, the reason we introduced OneWorld was when we went public, many of you would say, "Well, when did the company outgrow NetSuite?" And we'd say, "Oh, well, when they have multicompany, multinational needs." And so we built OneWorld to solve that. And so lots of our existing customers bought it because they needed it. But lo and behold, it also solved a very large problem for people that weren't our customers. And I think that's the second factor that you're going to see come into play here with SuiteCommerce, is this solves a major problem for a lot of non-NetSuite customers and opens up opportunities for us where the ERP replacement, frankly, may not be open. Let's face it, their B2B and their B2B -- B2C website is disaster. You need ERP-like functionality to deliver the experience that the consumer is experiencing, number one. And number 2, with some of the new front-end user interface technology that we've created as a part of the SuiteCommerce, you also need to deliver that technology in a way that they wanted their -- they're expecting to consume it. And that is a consumer-like website, a social media experience, et cetera. And that's the second big piece of what we introduced with SuiteCommerce. So I think it will have a very similar trajectory to OneWorld: installed base early, new business later. And that's right where we're -- I think we're right at the beginning of that stage.

David M. Hilal - FBR Capital Markets & Co., Research Division

And so a similar trajectory in terms of customer adoption. I guess the obvious follow-up then is from a revenue contribution, also similar trajectory? What kind of ASP uplift do you think SuiteCommerce can provide you?

Zachary Nelson

It'll be interesting to see. I think the other thing that we're doing here in the commerce space is we're fundamentally going to change the existing pricing paradigms out there in Ecommerce. If you look at what Demandware does, you look at what Digital River does, somehow they're able to get away with charging 5% of revenue, 10% of revenue of all the transactions that go through these sites. We're not going to price our software that way. We don’t believe customers long term will accept that pricing model. We're applying our traditional pricing model to the Ecommerce space. So we think we're fundamentally going to change the pricing model of Ecommerce and what we call Commerce as a Service. And that will certainly accrue to our advantage and will accrue to the disadvantage of companies like Demandware and Digital River that are on the drug of taking more and more of their customers' revenue as that website grows. So how ultimately -- so for us, it's all upside in our business model. I think for our competitors, the way we're pricing our product is very much downside for them.

Operator

And next, we'll hear from Scott Berg with Northland Capital Markets.

Scott R. Berg - Northland Capital Markets, Research Division

I have a couple of kind of point questions. First is, Ron, you had a large amortization expense in the quarter, and it looks like a cash outlay for some sort of small acquisition. Can you talk about that a little bit?

Ronald Gill

Sure. I think I had a tough time hearing you. I think the questions were around the amortization spends and the cash outlay and the investing line. Let's address the amortization expense first. So if you look at the press release and look at the notes, you'll see yes, there was a small amortization expense. It's about $400,000 related to technology that we acquired when we acquired QuickArrow and when we acquired QuickArrow back in 2009 and we assigned a portion of that purchase price to acquire technology. And then we started as quickly as possible, moving customers from that acquired technology on to either our OpenAir Professional Services Automation platform or on to the NetSuite product itself. And made -- and the acquired technology had an amortization schedule built to it based on an assumption of how fast that transition would go. That transition has gone faster than we originally anticipated, so you're seeing a write-down as an impairment of the acquired technology asset from the QuickArrow acquisition of about $400,000. There's still about $480,000 of that asset on the books. And then certainly, there's been no impairment of the acquired customers because we've transitioned most of that and we still have significant revenues from those customers just from different products. So the technology write-downs is that $400,000 or so you see there.

Zachary Nelson

Yes.

Ronald Gill

On the acquisition, yes, we -- there is a little bit of a cash outlay in the quarter for some small acquisitions that we did in association with the SuiteCommerce product and putting together all of the infrastructure that we wanted to have together to roll out that product we did. There are some small acquisitions in the quarter, and that's what you see there in the cash flow statement.

Scott R. Berg - Northland Capital Markets, Research Division

And my last question for you, Zach, is, cash is up significantly year-over-year. What are you going to do with all those cash right now because the business is certainly leveraging cash flows very well and it appears that it will for at least several quarters?

Zachary Nelson

Yes, we don't feel like we have a -- the cash is burning a hole in our pocket and we have to go out and spend it. I mean, the interesting thing that we learned in the downturn is that it actually is good to have a lot of cash for that rainy day that sometimes comes. Not that we see a rainy day on the horizon, but it is nice to have the cash there and have the cash growing. We look at acquisitions, but we certainly look at acquisitions very much through the lens of our business strategy of either moving upmarket or moving into verticals. And so we'll continue to do that. We just haven't found anything that we believe makes sense. We're growing so strongly organically right now. We've been reticent about any sort of -- any sort of model-busting acquisitions that you see some companies do. So we just think we have lots of runway in front of us with doing exactly what we're doing, investing heavily in the product. I talked a little bit about doubling the size of our development organization in the last 2 years. You're seeing that come out in the incredible new product that we're introducing, SuiteCommerce being a part of it, but we have many other core, native capabilities being built in the product. You see the benefit of that in terms of our ability to serve larger customers. But I also think you see the -- that investment showing up in a growing average selling price. The more functionality we add, the more we can charge for it and the more the customer is willing to pay. And I think that investment, that organic investment in building the product and building our distribution capabilities without acquisitions is something that I'm very comfortable with. And if the right thing comes along, we'd certainly look at it. We have plenty of cash do it, but we also feel we have just an enormous organic opportunity in front of us.

Operator

Next, we'll move on to Mark Murphy with Piper Jaffray.

Matthew J. Coss - Piper Jaffray Companies, Research Division

This is Matthew Coss on for Mark Murphy. A couple of questions. Our field checks this quarter showed a better pricing environment. So we got some feedback saying that you having to discount nearly as much as some of your competitors. So one, is that true? And then, two, maybe a question for Ron. You said international taxes were $763,000 this quarter. Is that level going to be something we can anticipate going forward? Or is that something that should basically grow with your revenue?

Zachary Nelson

Yes, on the discounting environment, discounts go up and down quarter by quarter. In fact, discounts did go down slightly this quarter, but you look at the long-term trend on those kind of things. I would say the more important thing other than discounting is we saw a mission-critical application that companies run their business on. And so the first hurdle that everyone has to cross, including people who want to kind of compete with us, is, does your product solve my business problem? And I'll tell you, our product solves a lot of business problems today. Our competitors' products, whether they're retooled software that was written in 1980 that can suddenly be hosted now or products that have been developed in the last year, doesn't solve a lot of modern business problems. So again, I've said in the past I think customers are willing to pay more for our product because it actually does the job they're looking for. If the customer needs demand-based inventory replenishment and you don't have it, no amount of discount is going to win that customer. But if you do have it, they're going to -- they're willing to pay up for it. And again, the amount of effort we've built into the product, into educating our sales force on how to sell into these various industries, what their business problems are, how we solve those problems, all of those things, I think, accrue to a better selling environment. And it accrues to NetSuite. It doesn't accrue to everybody in the space. It accrues to us because of the effort we've put into building a great product and building a sales force that understands our customers' problems and how to apply that product to those problems.

Ronald Gill

So right. The second part of the question, on taxes, for the most part, the income tax expense you see there is associated with our foreign subsidiaries, and specifically our foreign subsidiaries that operate on a cost plus basis. And most of our foreign subsidiaries are in a income tax-paying position in the country they're in, unlike the headquarters. And so most of the taxes are associated with that. So to that -- to the extent that they are associated with the foreign subs, they're going to scale with our foreign footprint from a cost point of view. There is a little bit of a factor in there occasionally. In any given quarter, you can see some withholding taxes in there associated with when we've sold into certain specific countries where they're withholding taxes, and that can make the number a little bumpy. But for the most part, that comes from our foreign operations. And in terms of the level of it, yes, the $762, 000, it's a little bit higher than last quarter, but it's not that out of line with what we're seeing for the last couple of quarters. So I would expect it to continue to sort of scale with the business from that rate.

Operator

And Jen Swanson now from Morgan Stanley has our next question.

Jennifer A. Swanson - Morgan Stanley, Research Division

I had a couple of questions. First, Ron, I just wanted to follow up on the question that Greg asked around the early renewals and just as we're thinking about it going forward. Was that early renewal pulled largely from Q3? Should we be thinking about maybe a more challenging comp as we model up? I know [ph] It's not something that you make the business to, but just in terms of setting expectations appropriately, is that something that we should be thinking about in terms of the next quarter or next 2 quarters where renewal may not happen that normally would that may cause the difficult comp on the billings side?

Zachary Nelson

Yes. Fundamentally, yes, it's pulled from Q -- it pulls from Q3 when that happens, when it's renewal. And in fact, most of the impacts that when we normalize out the noise out of that number, I would say with the exception of FX, to the extent that FX causes a change in the year-over-year number, well, that's going to be permanent. But other than that, I think the thing to keep in mind is that whenever -- if I'm -- like in this case, I'm normalizing the number down by 5 percentage points. That means that either a billing timing was late, meaning that could have been in a prior quarter but now it was in this quarter, or it's early, meaning it was in this quarter and not -- and it won't be in a subsequent quarter. So I think you're thinking about it the right way. And predominantly, that's stuff that was pulled from Q3. So there's no -- there's never any found money in this number. It's all going to be billed some time. So if billing terms extend, then those billings will happen later. If billing terms are shorter, then it will happen earlier. So it's all -- it is a matter of timing. And yes, here, it's mostly from Q3.

Jennifer A. Swanson - Morgan Stanley, Research Division

And then I just want to touch on the Professional Services business and the higher revenue there and also the higher margin. And I guess 2 questions on that. First, as we do see you start to do some more of these larger deals that maybe require a heavier professional service touch than they have in the past, should we think about the revenue mix potentially shifting over time? Or are there offsets there as you work more with partners? And then secondly, given that the gross margin there was 20%, which is very high looking at some of your peers, is there any risk that maybe you're running a little too hot in Professional Services at this point? And is there any issues with having the capacity you need to implement customers as you sign them?

Zachary Nelson

Yes. So I think there are a couple interesting points around the PS line. First of all, I think if you look at the growth in PS, I mean, it's somewhat of an early indicator of success on the license sales side because you see the PS revenue earlier than you do the full license aspect of the business, but it gets recognized as delivered. So that's a net positive, I think, when you look at the growth of that number in the short term. The second thing that we've done over the last couple of years in Professional Services is we have really limited our sales force's ability to sell services below certain hourly rates and certain size deals and all those things. And so part of that helps make our services business healthier. And you certainly saw it get healthier a lot this quarter with a 20% margin. But it also helps our partners' services business get healthier as well because we're not taking all the services business. There are certainly plenty of services business for our partners. You'll see -- you're obviously seeing that -- much of that services business you don’t see because it goes directly to the partners, and we talked a little bit about the growth in the North American channel. So there's lots of services business there going to our partners as well. So I think we have a very healthy approach to it today in terms of what we're doing direct, what our partners are doing, what deals NetSuite feels comfortable doing at what hourly rate. And you certainly saw that in the profitability. That said, we don't intend to run the business at 20% margin. We've always viewed services as an investment in our customers' success. We've always viewed it as an investment in the renewal. So I don't think we expect 20% to be the norm. Now we're going to add more services bodies to continue to deliver that very high-quality services experience that we want the customers to have, and that will certainly bring down the services margin. But all in all, we are very pleased to see what happened this quarter, and I think it's really an indication, both in terms of the growth of the revenue and the growth of the profitability, how well we have solved the services challenges that face a SaaS company.

Operator

Next, we'll hear from Brendan Barnicle with Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

I just wanted to follow up on a comment you guys had about the ASP growth in OneWorld versus the rest of the products, that, that was a little bit slower than the rest of the products. What's the reason for a difference between those 2?

Ronald Gill

Well, remember, at the beginning of the year, we were saying coming off of last year's incredible ASP growth, we really we're not anticipating a whole lot of ASP growth overall this year. Last year, I think ASPs for the year were up 45%. And so we really planned around a much slower growth, a very low growth in ASPs this year just as a kind of reversion to the norm. So we're pretty pleased that we -- that the ASPs continue really to grow at all off of that incredible growth last year. So the OneWorld ASP was up 13% I think I said in my prepared remarks, and the ASP for everything else up 15%. So that's -- those are both fundamentally pretty strong ASP growth, I think, given the compare. And then OneWorld blends into the mix and brings the overall total ASP up 29% because OneWorld accounts for a bigger piece of it. So I think we're very happy with the way ASPs went in the quarter.

Zachary Nelson

And again, Brendan, just I think generally speaking, I've said this for the last couple of calls, again I think if you look at the non-OneWorld transactions, we're selling to larger, single-entity companies. They're running more of their enterprise on the suite, and so that drives up the average selling price as you use more modules, as perhaps you add SuiteCommerce to run your commerce operations or CRM or some of the advanced accounting modules that we have. So I think the other important piece that ASP -- rise in ASP points, too, is that, as we've always said, people are buying NetSuite for the suite. They don't just run their ERP in it, they try to run their business in it. And I think the growth in ASP is another example of that strategy working.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

And I just wanted to follow up on that, in particular as you do the large enterprises. And it's a little bit the question that Jen had as well. Is the -- are the systems integrator partners that you're looking with, are those relationships changing now? I mean, you mentioned the accounting firm. I can't remember their name, but they're -- you've done a lot...

Zachary Nelson

Deloitte [ph].

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

Right. Are you moving now more towards some other more traditional vendors as a result? Or are those sorts of relationships starting to change?

Zachary Nelson

Well, they're just -- the big guys are just beginning, right? And you look at the Deloitte announcement that we did at SuiteWorld, the amazing thing about the time --- the discussion we had on stage there. Deloitte is -- they've effectively created a vision that looks and smells like SuiteCommerce. They're transforming Deloitte into enabling companies to effectively operate with their customers, B2B, B2C, machine to machine, as their core business model, as their core transaction processing engine. And that's effectively what we introduced with SuiteCommerce. So I think you're seeing a confluence of many things. You're seeing the big SIs begin to see the impact of the cloud and how businesses are transforming, leading their customers to help in those transformations. And certainly, an application like NetSuite has to sit at the backbone of those transformations. So yes, the relationship are definitely changing. They're very strategic relationships for us and for them. Investment going on, on both sides, and it's great to see the early customer wins as we announced with Deloitte today.

Operator

We have time for one more question. That will come from Jeff Houston with Barrington Research.

Unknown Analyst

This is Matt Golf [ph] For Jeff Houston. Regarding your research and product development spend, obviously you've got the SuiteCommerce and OneWorld products. But how do you feel that you are -- or if you could provide some insight as to how you allocate your R&D spend between those particular products, and their verticals.

Zachary Nelson

Well, we allocate all of our resources across our core strategy. So we have a fairly direct set of core strategies. One is moving upmarket. And so we allocate a great deal of our development resources to moving upmarket, enhancing the OneWorld product, enhancing our financial requirements for -- brought to us like -- by companies like Accenture and Deloitte for these much larger organizations. Verticalization is the second key strategy. So we allocate our resources against our core verticals. And then finally, SuiteCommerce is our latest initiative and a very important initiative. And we've greatly increased the resources that we've put against our Commerce as a Service offering. So we really operate the business on strategy. And not just development resources, but our services resources, our product resources, our SuiteCloud Developer Network resources are all across those primary areas. But if you look at incremental investment this year, the largest incremental investment has certainly gone against SuiteCommerce. But it has not been at the expense of any of our other initiatives. That's been the beautiful thing that's happened over the last year in R&D spend. If you look at our R&D spend in fact, I think as a percentage, it's gone down year-over-year. But we've, as I said, in 2 years almost doubled the number of heads in that organization. So we have gotten very efficient and very smart about how we allocate those resources, and we've more than doubled those resources. So we feel very good about where we're at right now in terms of the number of resources we have dedicated to the product. We're going to continue to invest against the product with lots of headcount, but we're doing it all the while we're decreasing the cost of our R&D efforts absolutely. So we've talked a little bit about how great we feel about the distribution side, how great we feel about the services side with a 23% operating margin this quarter. The product group is really firing on all cylinders, and the customers are thrilled with the application they're getting.

Great. Well, thank you all very much for joining us. It was -- arguably, we had a little argument here before the call started: was this our best quarter ever? So I would say it was arguably our best quarter ever. But we're -- hopefully, we're off to arguably our next best quarter. The demand environment that we're seeing is very different, I think, than the demand environment that other enterprise software companies are seeing out there, and that's something we're very excited about. The investments we've made in the sales force this year have really paid off. You look at the productivity and the capacity we've added, we're very excited about where that is. The competitive environment, you always have competition, but I just think we keep getting farther and farther ahead of the competition. You look at our strategy, you look at what we announced with SuiteCommerce, we have a very differentiated approach to the problems we're solving for customers. We're all about the suite. Our supposed #1 competitor, Business ByDesign, has decided they're not all about the suite anymore. They're about point products. The addition of SuiteCommerce, enabling our customers to interact with their customers wherever they are or whatever device they're on, you don't have anyone else talking about this approach to business except customers. This is the kind -- this is what the business customers want to run. It's just not the business our competitors want to deliver or can deliver for those customers. So I think we're in an incredible position on the competitive front. So with that, we will talk to you in another quarter and look forward to speaking with you then. Thank you very much.

Operator

Ladies and gentlemen, that does conclude today's conference. Thank you for joining.

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