NetSuite Sales Surge, Making for a Good Day in the Cloud

NetSuite, the software outfit that’s proving so popular with companies that want to move their operations software into the cloud, just reported earnings — and let’s just say it was a good day for the cloud.

Revenue grew by 23 percent year over year to $61 million, while earnings per share on a non-GAAP basis were five cents. The results beat the consensus of analysts by a penny on earnings and $1.5 million on sales — just two of the eight records that NetSuite set in the quarter. Recurring revenue — a key metric that combines both subscriptions and ongoing support — was $51.3 million, also up 23 percent. Cash flow from operations was $9.4 million.

Looking ahead, NetSuite said it expected to earn four cents a share in the current quarter, a penny below the consensus, but that it expects to finish the year with earnings of 15 cents a share, which would be in the upper range of its prior guidance of 13 to 15 cents a share.

NetSuite, which last year did $193 million in sales, has already done $172 million for the first nine months of the year; it said it expects to finish the year with sales in the range of $235.2 million to $235.7 million, slightly ahead of its prior guidance, which topped out at $234 million. It also said it expects sales in the range of $290 million to $300 million.

I had a chance to talk with CEO Zach Nelson about the results and the state of NetSuite’s business. And as usual, he had a lot to say — especially about his biggest competitor, SAP. NetSuite started small, but as its software has grown more complex, its customers have gotten bigger and bigger, lured by the promise that they can not only run their expensive enterprise resource planning (ERP) software cheaper in the cloud than in their own data centers, but do it better.

AllThingsD: Zach, NetSuite is setting records on a lot of fronts this quarter. What’s driving the business? Is it companies swapping other stuff out for yours?

Nelson: In our case, because we do all the back-office stuff, someone is always swapping something out for NetSuite. And what’s changing is the profile of what they’re swapping out. In the old days, when we were getting started, it used to be QuickBooks. Today, it’s SAP and Great Plains and Infor, the very large, midmarket and enterprise ERP. We also set a record for average selling price, and that’s because we keep selling to larger and larger companies.

It’s funny you should mention SAP. I visited with its co-CEO Bill McDermott the other day, and he was talking about SAP’s new cloud-based offerings. What kind of a threat do you see there?

I think when SAP talks about the cloud, it’s enormously helpful to our business. We are the only pure-play cloud-based ERP solution out there. For SAP to be giving it credibility only helps us, because they having nothing to back their claims up other than desire. No traditional software company has successfully made the transition to the cloud, and there are a whole bunch of reasons for that. So it’s great that they’re talking about it. It’s just driving our business more. They have a low-end cloud product called Business ByDesign that doesn’t have much functionality. But we saw more competition from their traditional on-premise product than we did from that. So we’re getting sucked into these deals because SAP is telling the customer they should be looking for a cloud solution, and they really don’t have much to offer in that regard.

You’ve tended to stay away from business functions that aren’t transaction-driven. I’m thinking a little about something like Workday, which does a lot in the human resources area. Do you partner with other companies to shore you up in areas you don’t tend to specialize in?

We have a platform like Salesforce.com does with Force.com. We call it SuiteCloud. So as we go to a lot of these larger companies, it’s important that we augment in areas we haven’t built in, where we don’t have domain expertise. We work with Box.net, for example, on file storage and collaboration, and with SuccessFactors in the human capital management area.

Everyone’s worried about the world economy, especially Europe. Are you?

We aren’t that exposed to Europe. We do some business in the U.K. But Asia has been strong all year. And with regard to the world economy, its important to understand that moving to the cloud is a massive cost reduction for these companies.

You once told me an interesting metric about the costs of on-premise software. It was about how much companies spend to support and run their software.

Every SAP customer I’ve ever talked to tells me that they spend about 2 percent of their revenue getting it running and keeping it running, after you add up all the consultants and other things you need. That’s not just their problem, it’s the customer’s problem. If you’re competing with a company that’s running NetSuite and you’re running on-premise software, you’re at a competitive disadvantage. People are realizing that it’s not just saving them money but it’s also helping them do things better. Disruptive technology doesn’t just help enable you to do the things you’ve always done cheaper than before, but it helps you do them better; and it also helps you do new things that you couldn’t do before. Improving the cost model gets you that 2 percent back, but the real payoff comes from the productivity gains that come on top of that.