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Executives

Jim McGeever - CFO

Zach Nelson - CEO

Analysts

Laura Lederman - William Blair

Patrick Walravens - JMP Securities

Brendan Barnicle - Pacific Crest Securities

Michael Huang - ThinkEquity

Bill Waite

Matilda Samson

Bryan McGrath

Charles Di Bona

NetSuite Inc. (N) Q1 2008 Earnings Call May 1, 2008 5:00 PM ET

Operator

Good day and welcome to the NetSuite quarter one 2008 financial results call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Jim McGeever, Chief Financial Officer for NetSuite. Please go ahead, sir.

Jim McGeever

Thank you. Good afternoon everyone and welcome to NetSuite's first quarter 2008 financial results conference call. We will discuss the results of our quarter which ended March 31st. By now you should have received a copy of our press release which was released today after the market closed and furnished on Form 8-K to the SEC. Joining me today on the call is Zach Nelson, our Chief Executive Officer.

Today's call will begin with Zach providing a brief overview of our record results with some color on the drivers of our business. Then I will review our key financial results in more detail and provide our financial outlook for the second quarter and full year 2008. We will then take some questions.

Today's call is being recorded and a replay will be available shortly following the conclusion of the call. To access the press release, the financial detail or the webcast replay, please access our investor relations website at www.netsuite.com/investors.

During this call we will be referencing both GAAP and non-GAAP financial measures and wish to note that GAAP reconciliation information is provided in the press release and on our website. All of the non-revenue financial measures we will discuss today are non-GAAP unless we specifically state that the measure is a GAAP number. The non-GAAP measures exclude stock-based compensation expense. Some of the information discussed during this call, particularly information regarding our revenue, including expectations concerning revenue growth, non-GAAP net income and loss, business strategy, customer demand, market observations and future product plans are based on information available as of today, May 1st, 2008.

In addition, some of the statements we will make on today's call constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, and Section 27A of the Securities Act of 1933. We disclaim any obligation to update any forward-looking statements. The risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statements are summarized in the press release we issued earlier today. They are also described in detail in our 10-K filed with the SEC on March 26th, 2008 is available on our investor relations website and which I encourage you to read.

Finally customers who purchase our services make sure their decisions are based on features that are currently available. Please be advised that any unreleased services or features from NetSuite referenced in today's discussion or other public statements are not currently available and may not be delivered on time or at all.

With that, I will now turn the call over to Zach Nelson.

Zach Nelson

Thank you, Jim and thank you everyone for joining us today. We are pleased to once again report record results for the quarter on both the top and on the bottom line. Before Jim and I go into the specifics, I think it's important to note that these record financials are a reflection of our continued execution against the product and distribution strategies we have laid out to our employees, our customers, and to our investors.

On the product side, we continue to lead the industry. New product announcements like NetSuite OneWorld and the release of the NS-BOS development platform were not only important advancements for the Software as a Service industry, they were firsts in the entire software industry. I will discuss each of these announcements shortly.

On the distribution front, we continue to execute on our sales strategy to attract new customers and our services strategy to ensure our customers' success in deploying NetSuite. During the quarter we continued to enhance our ability to reach and satisfy customers, both by expanding our internal sales and services team and through external partnerships such as the agreement we recently announced with BT, a relationship I will describe in a bit more detail later.

So, in all aspects of our strategy, in product development, in creating sales and services channels that bring the benefits of NetSuite to customers around the world and in creating partnerships that extend the utility of our product and the reach of our company we have executed very well. And it was this great execution by our employees which led to these record results.

Now, let me speak to those results directly. On the top line our revenue exceeded the high end of the expectations we outlined in our last financial results call. Q1 was another record quarter for NetSuite. We had revenue of $34.1 million, a 47% increase over the $23.2 million recorded in the first quarter of 2007. Our growth rate makes us one of the fastest growing public software and Software as a Service companies in the world.

On the bottom line, our net loss also exceeded the expectations we outlined in our last financial results call. Non-GAAP net loss for the first quarter was $420,000 an improvement of more than $400,000 over the previous quarter and an 82% improvement over the net loss we posted in the first quarter of 2007.

And finally, we topped more than one million unique logins into NetSuite accounts during the quarter, making NetSuite one of the most widely used business application platforms in the world. Other metrics were also ahead of our internal expectations and Jim will detail those in just a moment.

The overachievement on these top level goals really point to the excellent execution against our product, distribution, and business strategies that we laid out during our IPO. On the product front, we continue to expand our leadership in on-demand software suites. We still believe we were the first software vendor to integrate front office, back office, and ecommerce management capabilities into a single on-demand software suite. This is the fundamental concept upon which the Company was founded and we have executed on this vision for almost 10 years.

While other potential competitors have announced they will pursue this vision, they have either cancelled those products entirely or to date have been unable to ship the products they promise.

The recent announcement of NetSuite OneWorld just puts us further ahead of potential competitors. NetSuite OneWorld enables multinational companies to manage their entire business in real time on a single application. There's not another product like it in the market and we believe the announcement is a watershed event for NetSuite, for the industry and for our current and future customers.

For NetSuite, OneWorld enabled us to address the needs of more complex companies than ever before. The multinational capabilities also make OneWorld very attractive in geographies outside the United States where international operations are the norm, even for small enterprises. And we continue to grow very well outside North America. In Q1, our international revenue grew 64% over the first quarter of 2007 and now comprises 19% of our total revenue.

As importantly, OneWorld is a groundbreaking product for customers. OneWorld now offers to mid-market companies the multi-company consolidation capabilities that large companies have spent tens and sometimes hundreds of millions of dollars trying to achieve. And while those large enterprise companies may spend years to get up and running on a global system, OneWorld allows our customers to achieve this vision in as little as six weeks. Over 30 companies are currently live on OneWorld, with another 50 currently going through implementation.

And just to give you an idea of the power of OneWorld, one customer currently going through implementation will be managing more than 100 separate subsidiaries running at a single instance of NetSuite. OneWorld really is an incredible product and I believe it will be an important contributor to NetSuite's growth in the future.

The second core element of our strategy was to continue to use our lead in product sales and services to grow our customer base and expand the use of NetSuite within existing customer accounts. We added more than 400 new customers in Q1, within the range of the 300 to 500 customers we typically add during a quarter.

In addition to continuing to build our own direct sales team, we also continue to grow our reseller network. Last week we announced a strategic partnership with British Telecom who will resell NetSuite into its 1.6 million SMB customers in the UK and in Europe. Such wins with distribution powerhouses like BT show that mainstream organizations will eventually offer SaaS products, and NetSuite is well positioned to take advantage of those opportunities.

In terms of our existing customer base, the breadth of our product provides significant up-sell opportunities. Such up-sell has historically more than offset any churn associated with customers that choose not to renew. This trend continued in Q1. Our subscription revenue renewal in Q1 2008 was greater than 90% of the subscription revenue we sold in Q1 2007. When you add in the recurring revenue gained from up-sell in our customer accounts, our total revenue retention was well over 100%. So, up-sell more than replaces churn year-over-year effectively enabling us to renew in excess of 100% of what we sold in the prior period. This trend has been consistent throughout our history, and we expect this trend will continue into the future. We also believe our total revenue retention to be among the highest in the SaaS industry.

A final important element of our business strategy has been the verticalization of NetSuite. And by that, I mean the addition of product features and go-to-market strategies designed to cater to customers' specific industries. And Q1 saw significant progress in this effort. While we provide a general purpose suite applicable to all businesses, we believe that tailoring our application to customers' specific industries has been and will continue to be important to our growth. We currently offer industry-specific editions of our service for wholesale distribution, for services companies, and for other software companies.

In addition to the industry-specific versions we already offer, in Q1 we announced the NetSuite Ecommerce Company Edition, a new vertical product designed for retailers, a market that has always been strong for NetSuite.

In addition, during the quarter we introduced the NetSuite Business Operating System, or NS-BOS, an important set of technologies that turn the NetSuite application into a platform for third party application development. And unlike other cloudbased development environments, our NS-BOS environment is targeted to allow partners, in particular independent software vendors to extend NetSuite by developing industry-specific versions of our application suite. And to date we have more than a 1000 developers doing just that.

So, in summary, our record financial results are due to strong execution against the core product, distribution, and business strategies that we've articulated. As we continue to focus on these strategies, and execute against them, we believe that 2008 will be a great year for us.

So now, let me turn the call over to our CFO, Jim McGeever. Jim?

Jim McGeever

Thanks, Zach. Our first quarter of 2008 was another excellent quarter for NetSuite as we continued to make progress on our financial and strategic targets. Q1 was our 34th straight quarter of increasing revenue and our 10th consecutive quarter of improved non-GAAP net income results. We continue to transition effectively operating as a public company after our December IPO.

I would like to remind you that our discussion today will be based on non-GAAP financial measures with stock-based compensation. Let's turn to our financial statement for our first quarter of 2008. Total revenue for the quarter was $34.1 million, a 47% increase over the first quarter of 2007 and an 8% increase over the fourth quarter of 2007. This increase in revenue was driven by the continued strong growth in our customer base as well as the delivery of professional services to support those customers. Continued strong growth across all areas of our business built this increase.

International revenue represented 19% of our global business in the first quarter, growing faster than our overall business. We believe international markets to provide an exciting opportunity, we need to expand our business, especially with the launch of OneWorld.

As described in our 10-K, we recognized $1.5 million of revenue in Q1 related to the distribution rights of our Japanese product. We expect to continue to recognize $1.5 million in revenue related to this product in each quarter of 2008. Overall gross margin for Q1 '08 was 71%, a slight increase compared to 70% in the fourth quarter of 2007. This increase was primarily due to overall revenue growth outpacing expense growth as a result of a reduction in use of external professional services.

As we have disclosed in our S-1, we anticipate adding a second data center in 2008 which will result in slightly lower overall gross margins throughout the remainder of 2008 than we experienced in Q1.

Turning to our operating expenses, product development expense was $3.6 million in the first quarter, an increase of 2% over the previous quarter as a result of additional hiring. In 2008 we expect product development expense to be roughly 12% to 13% of our revenue. Sales and marketing expense was $17.5 million in the first quarter, an increase of 11% over the fourth quarter of 2007. The increase in sales expenses was primarily due to the hiring in the new sales office we opened last quarter. As we had previously discussed, we plan on significantly increasing our sales force in 2008, and our hiring is currently on track to meet that goal. We expect sales and marketing expenses to increase as a percent of our revenue.

G&A for the first quarter was $5 million, a 28% increase over the last quarter of 2007. This increase reflected additional expenses associated with being a public company, including an increase in headcount as well as additional audit, legal and stock-administration expenses. G&A expenses will typically be higher in the first quarter of each year as a percentage of revenue due to costs associated with annual filings and audit fees. For 2008 we expect G&A expense to be roughly 12% to 13% of our revenue.

Due to our increasing operations in international locations, a higher portion of our expenses exposed to variation in foreign exchange rates. For Q1 2008, approximately 35% of our expenses were in currencies other than the US dollar. This didn't have a meaningful impact on expenses in Q1, but could cause some quarterly fluctuations if there are significant changes in exchange rates. As we continue to expand our international footprint, we estimate that even more of our expenses will be incurred in currencies other than the US dollar in the remainder of the year.

We added 19 new employees in the first quarter of 2008, an increase of 13% quarter-over-quarter with a total of 765 employees at the end of the quarter. As we discussed last quarter, a substantial portion of the 350 employees we expect to add in 2008 will focus on sales and professional services. In Q1 of 2008 we recorded a $229,000 income tax provision. This was principally related to our international entities. For tax purposes, we expect our net operating loss to offset any domestic earnings in the near term.

On a non-GAAP basis, net loss for the first quarter was negative $420,000 versus negative $842,000 in the prior quarter. EPS loss for the first quarter on a non-GAAP basis was negative $0.01. The weighted average basic and diluted shares outstanding used for calculating EPS was 60.1 million shares for the first quarter. As a reminder, a non-GAAP reconciliation is available on our website. Cash flow from operations for Q1 was $1.5 million as compared to $3.7 million for Q4 2007 and a negative $0.5 million for Q1 of 2007. As expected, Q1 cash flow from operations was not as strong as Q4 due to the payment of annual bonuses and commissions and the previously anticipated payoff of certain accrued liabilities.

Cash flow used in investing in Q1 '08 was $1.1 million as compared to $1.4 million for Q4 of 2007 and $1.4 million for Q1 of 2007. It primarily consists of hosting capacity increases, headcount related equipment purchases, and leasehold improvements in our facilities around the world. Our free cash flow for Q1 of 2008 was $379,000 as compared to a negative $1.9 million for Q1 of 2007.

Let me turn to the balance sheet. We closed the quarter with $170.2 million in cash. Accounts receivable ended the quarter at $16.2 million, down from $18.7 million at the end of 2007. Even on revenue recognition model and the flow of deferred revenue, we do not use the traditional DSO calculation as a metric internally. We manage the cash collection goals and days billing outstanding, all of which were well within our ranges.

Next, I will discuss how our business model impacts our deferred revenue balances. Subscription and support revenue is generally recognized on a ratable basis over the initial term of the contract based revenue in our deferred revenue account as we invoice our customers. While most of our business is billed annually, some customers are billed quarterly. The average amount billed for each customer is approximately nine months worth of services is unchanged from the prior quarter. We do not record any amounts in deferred revenue till we have billed the customer.

Short-term deferred revenue totaled $67.1 million at the end of Q1, an increase of $1.3 million over the prior quarter. Long-term deferred revenue totaled $8.9 million at the end of Q1, a decrease of $2.2 million over the prior quarter. As we continue to shift from multi-year to one-year contracts with our customers, we expect our long-term deferred revenue balance to decline. Long-term deferred revenue balance also declined as the revenue related to our localized Japanese product became current. Stock-based compensation expense for the first quarter of 2008 was $1.6 million as opposed to $2.4 million in the prior quarter.

Now, I would like to move on to our forward-looking financial outlook, which is covered by the cautionary language outlined at the start of the call and is based on assumptions which are subject to change over time.

We plan to operate the business so as to improve our non-GAAP net income every quarter just as we expect to add back 2% every year to the bottom line. Our plan is to reinvest any overachievement on the top line back into the business. Some analyst models indicate that some overachievement at the top line will result in greater net income. However, our current plans to invest in growing the business do not make that outcome likely.

For Q2 2008 we are projecting revenue in the range of $36 million to $36.7 million and non-GAAP net loss in the range of negative $1 million to negative $250,000. This indicates non-GAAP EPS of approximately negative $0.02 to $0.00. Our projections assume a weighted average share count for Q2 of 60.6 million shares.

For the full year 2008 we are increasing our projected revenue from our previous outlook to be in the range of $154 million to $157 million. And we still expect our non-GAAP net loss in the range of negative $2.5 million to negative $0.5 million. This indicates non-GAAP EPS of approximately negative $0.04 per share to negative $0.01 per share. Our projections assume a weighted average share count for 2008 of approximately 61.3 million shares.

We are very proud of our company's financial performance in the first quarter of 2008 and continue to look forward to future success in the remainder of 2008.

This concludes my prepared remarks. With that, I will turn the call over to Zach.

Zach Nelson

Thank you, Jim.

Before we open the lines for questions, I would like to make one final announcement. I would like to invite you all to our first Analyst Day which is currently scheduled for June 13th and we'll hold it at the New York Stock Exchange. More details will be forthcoming, but I'd like you all to please mark your calendars for this upcoming event. It'll be a great opportunity for you to meet with the NetSuite management team and have more in depth discussions around our strategy and our progress against the goals we've laid out for the Company.

So with that, I'd like to turn it over to the operator who can open the line for questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions.) We will take our first question from the side of Laura Lederman. Go ahead, please.

Laura Lederman - William Blair

Yes. Good quarter and thank you for taking my call. Two questions. One, any sense of slowing anywhere in the business even in let's say little, tiny financial companies or little tiny real estate companies, any slowing anywhere? And the second question is competition. I know that you guys have been competing a little bit with SAP Business ByDesign, what are you seeing? What's like competing against that product? And also, have you seen the new CODA product that is built on Salesforce.com? Thanks.

Zach Nelson

Great. Thanks, Laura. I'll start answering some of those questions in terms of overall demand across our customer base and perhaps within various vertical segments. In all honesty, as we look at sort of the leading indicators of our business which are primarily lead flow and pipeline growth, in the aggregate across the opportunity we have, we haven't seen any slowing in the growth of either of those metrics. In fact, if you look year-over-year, both of those metrics are up. So, in the aggregate we haven't seen much slowing or any slowing, excuse me.

Now, if you look in specific markets, we haven't really gone down and done a granular analysis of sub-50 financial services companies. I would just say that if you look at the key verticals that we're in, wholesale distribution, broadly-based services companies, other high tech companies and retailers, we don't believe that they've been particularly impacted by perhaps some of the difficulties you seen in the financial services industry, for example which is a market, quite frankly. We don't have a great deal of exposure to today. We want more exposure by the way. So, for all of you listening, go talk to your IT departments and have them look at NetSuite. But, it's not a particularly large market for us today in that particular market segment.

The other thing that I would say is, outside the US, as we talked about on the call, we had another great quarter, in particular this quarter we had a great quarter in Japan, for example. We did a lot of business there, far in excess of what we've done historically. So, I think as we expand internationally, as the OneWorld product kicks in, that also provide us a lever perhaps to withstand any macroeconomic issues that might be on the horizon.

With regards to competitive environment, I think the competitive environment has largely stayed the same. And maybe I'll save SAP remarks for a bit later. I've got some opinions on what happened -- what's happened there. With regards to the CODA product, it's not available. I haven't seen it on the market. What I did see, what I have seen on the internet is it's not a full blown ERP product. It doesn't even have a full blown GL. So, it appears to be just an order management built on today. And quite frankly, nobody uses order management in isolation from the rest of the ERP product. So, a stand along the order management product that built onto Salesforce.com isn't going to be of great utility, I don't believe.

Laura Lederman - William Blair

Great and a final question, one final one and then I'll hand it over to the queue. If you look at international, how much is Europe versus Japan and let's say you look out one year and then three years, how much do you think international can be of the total business?

Zach Nelson

Well, I think today the lion's share is UK-based, but again we did have this nice -- we have had great growth actually, beginning now in Asia. Australia has been picking up quite a bit for us and as we talked about Japan. I think you would see over time, particularly in the long-term model, an overall revenue profile that's comparable to other traditional enterprise software companies. I think the opportunity we have is global, not just for Software as a Service, but in particular for what we're targeting, that gap between QuickBooks and SAP, that gap is a wide open market around the globe. It's just that the players change.

In UK it's the gap between the Sage Line 50 product and SAP, in Australia it's the gap between MYOB and SAP, in Japan it's the gap between Yayoi and SAP. That mid-market is a complete hairball around the globe and particularly with advanced and that's why OneWorld was such an important product for us and why we had been presaging that really, both in the S1 materials as well as in what we talked about in the last conference call. That product gives us the opportunity now to attack that opportunity around the globe.

Laura Lederman - William Blair

Thank you.

Operator

Thank you. We'll take our next question from the site of Bryan McGrath. Go ahead, please.

Bryan McGrath

Hey, guys. Thanks for taking my question. I want to kind of circle back or maybe drill down a little bit more on the SAP, but not really from a competitive standpoint because clearly this should be incrementally positive for you guys, I'm referring to them scaling back their investments in Business By Design. But to the extent that they've slowed their investments in the mid-market because they found the opportunity wasn't as lucrative as maybe they had initially thought, for whatever reasons this could potentially be a negative or at least be seen that way. I was wondering, could you give us your perspective on whether or not you've seen any changes and what you see as the mid-market opportunity and either long-term or short-term would be great? And then perhaps what your take on SAP's revised go-to-market approach will have on you guys?

Zach Nelson

So, our opinion has always been that SAP announcing a product years in advance of its availability was going to be very positive for NetSuite and that's been our experience. Our challenge in reaching that market, that we call the Fortune Five Million, is convincing them that they need to look at their business holistically that they need an integrated suite to run their business and we don't have the $20 million or the $30 million a year to broadcast that message. SAP does and SAP has been broadcasting that message.

So, we've been very excited about their at least philosophical entry to the market because effectively, they've just spread the word that we've been spreading for 10 years that this is the absolute right way to run a business and in fact, years ago, as I've told many of you, Larry Ellison told me that in the early days of Oracle, Oracle was doing fine but the business really took off when IBM pre-announced a relational database and guess what? Larry was the only guy that a real relational database, IBM's was years yet to be released and the exact same thing has happened here. SAP's talked about the power of an integrated suite to run your business and as we've seen now, they've slipped three dates and 18 months behind. So, what happened to Oracle back in the late 70s, early 80s is happening to NetSuite I believe now with SAP's announcement.

The other thing that we've always said and I think perhaps one of the most rewarding things about reading the transcript from the SAP call, was we've always said this is not a simple problem to solve. There's a reason why this market is fragmented and that's because this is a very difficult market to attack. Not just from a product standpoint, but from a delivery standpoint. How do you deliver an on-demand application to the Fortune Five Million? From a sales standpoint, how do you sell a complex -- a fairly complex application to companies without a lot of money and then finally, how do you service those companies? And if you look at SAP's transcript that's exactly why they're backing off, its not because of -- just because of product. It's because they have to rethink their distribution model, they have to rethink their services model, and their -- it appears that they have challenges upgrading their application. These are all things that we've solved.

So, I think from an investor standpoint, investors should be very excited about SAP's announcement vis-à-vis NetSuite because, clearly we are in an incredible defensible position. We're the only company that's cracked the nut on all four of those particular items and they are not simple problems to solve. I guess the final thing I'd say in relation to NetSuite, vis-à-vis SAP, is I think we've built the right product and the product is a big fundamental part of this. The notion that we have a single database, single data model to run this application. Based on the reports we've heard, it sounds like they have multiple data storage for this application. And if that's the case, this is going to be a very, very difficult road for SAP to hoe.

The right model of a single database, not multiple databases, one with CRM data, one with HR data, etc. So -- and I think the notion that that is in fact true about their architecture is the fact they're talking about how NetWeaver is a part of Business By Design and as far as I can tell, all NetWeaver is for is to tie together different data stores. So, we'll see when it comes out because we don't compete against it today because you can't buy it. But I think there's a fundamental flaw in that architectural decision and one other and that is -- again, as I read the transcript yesterday it talked about how little, how uncustomizable this product was going to be and as we've told you many times, every one of our customers has customized NetSuite.

While they're on the same instance of NetSuite, everything -- every customer has changed the user interface, they've added tables to the database, they've done a great deal of customization even to our vertical products. So, if their product is non-customizable, that's another non-starter. So, I guess those major points really can be summarized and we've always thought that SAP talking about this marketplace is a good thing. We've always thought about them talking about it in the same way NetSuite talks about it is a good thing for NetSuite. And today we believe they're just -- they're simply creating demand that only one company can fulfill and that's NetSuite.

Bryan McGrath

Alright. Thank you very much.

Operator

Thank you. We'll take our next question from the site of Charles Di Bona. Go ahead, please.

Charles Di Bona

Hi. Just wondering as you -- in this economic environment and as you sort of extend overseas, are you seeing any kind of difference in product mix between consulting and subscription? I guess particularly as you go overseas, is it still looking pretty much the same as it is here in the States?

Zach Nelson

Yeah, it's very -- the interesting thing, even back whatever it was now, three years ago when we first went to the UK, we were shocked to see how similar the markets were, both in terms of demand and to the point you make the mix of product and services. There are some fundamental and this is something SAP's probably figuring out. There are some fundamental ratios that are in the customer's mind, when they look at the cost of the subscription and the cost of the service.

For example, they're not willing to pay 10 times the first year's subscription to get it installed, right? Which would be sort of a like-to-like implementation to a traditional perpetual license. So, I think that, the ratio of what they're willing to pay for a subscription and what they're willing to pay for services to get that subscription implemented, is what sort of drives that commonality and what we've seen in terms of the ratio of subscription to service.

Charles Di Bona

Just a quick follow-up. You've mentioned that you've got a lot of costs overseas but it didn't really -- you didn't have any currency impact. Did you have any currency impact in your top line?

Jim McGeever

Not really, because we amortize our revenue over the term of the contract, which is typically 12 months. So, any benefit you get, you get in the future when you -- when the currency -- when the dollar weakened. So, you don't really see any immediate impact, you pick up that benefit over time.

Charles Di Bona

Okay. Thank you.

Operator

Thank you. (Operator Instructions) We'll take our next question from the site of Patrick Walravens. Go ahead, please.

Patrick Walravens - JMP Securities

Oh, great, thank you. I guess I have two questions. First of all, if you could address, if you're happy with the number of new customers that you added in the quarter and then secondly, if you see signs in terms of how the scaling up effort for your sales force are going and whether that's going to bear fruit, that would be great? Thank you.

Zach Nelson

Yeah, I'll answer both those and then Jim, maybe can jump in too, if he has any additional comments. We're very happy with the number of customers we added in the quarter. In particular, happy with the number of OneWorld implementations we sold as well. As we said in the call, we have about 30 customers already live. We have 50 in implementation and in the quarter we already sold another 40 OneWorld implementations. So again, I think that's a great sign for that product, as well as NetSuite's scaling up market to more complex companies. The second question was --?

Patrick Walravens - JMP Securities

Around the effort to scale the sales force. You're adding a lot of sales reps, and if you're seeing signs that that's going to work.

Jim McGeever

Yeah, well, so what we'd done in Q4, we pre-hired our salespeople to start effective in January. So, we opened up a brand new sales office in the US and we hit the hiring plan and we're on track on that hiring plan and early indications are that it's ramping exactly as we would expect it to. One of the things that we did is that we transferred quite a few existing experienced reps from our other sales offices. So, the new office is actually staffed 50-50 by brand new people and experienced people and that significantly helps get the new people up to speed quickly.

Patrick Walravens - JMP Securities

Great. Thank you.

Operator

Thank you. We'll take our next question from the site of Brendan Barnicle. Go ahead, please.

Brendan Barnicle - Pacific Crest Securities

Thank you. Jim, I was interested in something you mentioned. You were talking about and I wasn't quite sure if I got it right, a 2% increase in net income I think a year before you -- and the remainder of that you would invest back in. Did I have that right? And I was wondering how that would compare in the current situation where we're just sort of this year probably losing money then marginally making money.

Jim McGeever

Right. So, what we've previously talked about and just really basically, saying the same thing in a different way. We talked that we'd improve our net income anywhere from a 0.25% to 1% every quarter and now what we're basically saying on aggregate, that will be about 2 percentage points to net income every year and that's the way we basically plan on managing the business. So, from where we are right now, for all of 2008 we would expect to see about a 2% improvement over 2007 on a non-GAAP basis.

Brendan Barnicle - Pacific Crest Securities

And then that 2% improvement on a non-GAAP basis is what you're planning going forward, with the remainder being invested back into the business.

Jim McGeever

Yes. And actually, some of the companies that we've compared ourselves to, we look at companies we find ourselves quite similar to in the business model respects. For example, a company like Paychex which sells a financial service through a direct sales force in a recurring revenue model. If you look at their business model, you'll see they basically added about 2 percentage points a year and over time they became a very profitable business. And we think over the long term, that's a model that we think would be a very healthy one to follow.

Brendan Barnicle - Pacific Crest Securities

Okay. And Zach, on the -- with the new NS-BOS, you mentioned you have 1,000 developers on it, any ISVs yet and if so, what types of ways are the ISVs looking at it?

Zach Nelson

Yes. So, just to clarify that statement a bit, the 1,000 developers, some of those companies are developing what you would consider to be horizontal solutions, non-vertical solutions. For example, a fixed assets module to NetSuite or some global payment gateways, those types of applications that's one group. And then the other group are ISVs. They could be smaller ISVs such as the one we've talked about with you all frequently, IRON Solutions, building the dealer management system for agricultural equipment dealers and we're also looking at other ISVs and working with other ISVs to build similar vertical applications around the core NetSuite product.

Brendan Barnicle - Pacific Crest Securities

Great. Thank you.

Operator

Thank you. We'll take our next question from the site of Michael Huang. Go ahead, please.

Michael Huang - ThinkEquity

Thanks very much. So with respect to OneWorld, I was wondering what percentage of your customers can migrate to OneWorld over time or is this opportunity primarily with new customers? And then just with respect to distribution, how many retailers are out selling OneWorld now or is it something that's work in progress that these guys get trained and certified on selling a more complex product? Thanks very much.

Zach Nelson

Yeah, exactly. So, -- I'll take your second question first because it's kind of interesting in terms of how we rolled out OneWorld. OneWorld has been live in the product for well over six months. NetSuite been on OneWorld since the end of last year. So, while we introduced it as a new product, we did roll it out very slowly for exactly the reason you point out, is so that we learn how to implement our customers efficiently on it, as well as build a program that enables our resellers to implement customers on OneWorld. So, we are in the process right now of actually certifying our reseller partners for them to be able to do NetSuite OneWorld implementations. And so, that program has been built and we're in the process of leasing our resellers on that as we speak.

In the meantime, if a reseller has a particular OneWorld deal, we'll work jointly with them, our professional services team and the reseller, make sure that that customer gets implemented properly. In terms of our existing customers, I think there is a big opportunity of up-sell within our existing customer base. Something like 20% to 30% of our customers we believe are potential targets for OneWorld. Of our existing customers, of our new customers, I'll tell you, in some markets all we will sell is OneWorld going forward. Other software companies, they will all buy OneWorld. So, for new customers that profile will vary based on the size and the type of industry that the company's in, but for our existing base, just to clarify, we think about 20% to 30% of those.

Michael Huang - ThinkEquity

Thank you.

Operator

(Operator Instructions) Okay. We'll take our next question from the site of Bill Waite. Go ahead, please.

Bill Waite

Yes, hi. I was wondering if you could talk about what you all are seeing in Asia, particularly with regard to sales ex-Japan and ex-Australia.

Zach Nelson

So, our main offices outside of those regions, we have an office in Singapore and we're just preparing to open up an office in Hong Kong. So, it's all over the map literally, I guess, is the way to think about it there. But we see interesting business from emerging markets like Thailand for example, has been a strangely good market for us. We think Hong Kong will be a very strong market for us given the wholesale distribution features of the product and so, we're very excited about the office that we're opening there shortly. So, we think there are lots of opportunities there and we're beginning to invest resources in the geographic hubs to take advantage of those.

Jim McGeever

In fact, one of our largest customers around the world is in the Philippines. So, there are some opportunities that we're attacking in those countries.

Bill Waite

Anything in terms of guidance, percentage of revenue that you're looking for down the road, over the next couple of years to come from that area?

Jim McGeever

We haven't given any specific guidance on that, but we think it's an area that will accelerate faster than the rest of the markets. One of the things right now is we don't actually have a truly localized product in those locations, such as Hong Kong and Singapore. We sell what we call a generic English version. So, as we do more specific localization features in those markets, we think we'll see more acceleration in sales in those areas.

Bill Waite

Great. Thanks guys.

Zach Nelson

Thank you.

Bill Waite

Congrats again.

Zach Nelson

Thank you.

Operator

Thank you. (Operator Instructions) We will take our next question from the site of [Matilda Samson]. Go ahead, please.

Matilda Samson

Hi. I was curious with two questions. One is how are your reseller numbers trending? Have you increased your number of resellers? It is my first question. And then what kind of competition are you seeing from Microsoft and their ERP solutions?

Zach Nelson

So, on reseller front, as we've said, our reseller -- our new business bookings from resellers has remained steady. A rough -- a little bit less than 20% of our overall bookings and that's been consistent for the past three years. So, our belief is that the reseller channel, those resellers that were true believers and early adopters have already joined NetSuite and basically adjusted their business model to offer Software as a Service product. If you're a traditional reseller, selling Great Plaines or Sage, it is a major adjustment, is very similar to the adjustment SAP's going through to try to adjust their business to Software as a Service. For these resellers, they have the same amount of pain to move from implementing on-premise Stone Age software to Software as a Service for a variety of reasons.

So, we really haven't modeled, resellers becoming a larger portion of the business than they have been historically. That said I believe they will ultimately, driven by customer demand, begin to jump at some point and start to become primarily focused on Software as a Service. When that happens I can't predict, but it will happen. So eventually, that will be a lever for future growth, but we're not baking it into any of the models that we have out there. As an aside, I would point to the BT deal that we announced as an interesting one in terms of that notion of customer demand driving changes in the reseller marketplace. The BT deal's very interesting. BT is very much behind Software as a Service, it's a core strategy for them and if you've followed at all what they've done, they in fact have acquired in the last couple of years a couple of large resellers to offer services.

So, I think BT is a very interesting company to watch with regards to bringing Software as a Service solutions to market, not just from a product standpoint with their partnership with NetSuite, but also because they're building a fairly large services organization to complement that effort and I think those are -- that's an important trend to have. Now, with regards to Microsoft, Microsoft is probably, the Great Plains product is probably the -- if you look at all of our competitors, they're the one that you would see most frequently in our competitive list. But again, it's all on premise, it's all client server. We see no movement afoot at Microsoft to create an on-demand, a truly on-demand ERP solution. So, we compete very favorably against Great Plains, particularly now, not just with OneWorld, but with the entire feature set that NetSuite brings to the table.

Jim McGeever

And we really don't see the online CRM product in our deals. In fact, when we -- typically, when we compete we compete against multiple products and it's -- so it'll be Great Plaines and the CRM system. Even when we compete against a Microsoft product, the CRM system we see is typically not a Microsoft CRM system. It'll be Saleslogic, SugarCRM, Salesforce, someone else other than actually even the Microsoft product.

Matilda Samson

Thank you.

Operator

Thank you. (Operator Instructions) There are currently no questions in the queue. Mr. Nelson and Mr. McGeever, do you have any other remarks you would like to make?

Zach Nelson

No, operator. I'd just like to thank everyone for joining us for the call today. And we look forward to seeing all of you on June 13th at the New York Stock Exchange for our Analyst Day. Thanks very much.

Jim McGeever

Thank you.

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Source: NetSuite Inc. Q1 2008 Earnings Call Transcript
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