Special Report: NetSuite's first public outing

NetSuite continues to post hugely impressive numbers with its latest results - the first as a public company. But are there customer support and profile issues to be addressed?

By Stuart Lauchlan, news and analysis editor

In its first outing as a public company, NetSuite managed to narrow its losses in the fourth quarter of 2007, reporting a 62 percent sales growth for all of 2007.

For the fourth quarter ended 31 December, NetSuite reported revenue of $31.7 million, up 57 percent over the same quarter in 2006. Net loss for the quarter was $3.3 million, down from $8.1 million one year earlier. For the full 2007, revenues were $108.5 million, up 62 percent from 2006's sales of $67.2 million while the loss for the year was $23.9 million, down from $35.7 million in 2006.

The current economic uncertainty is not slowing down prospects, reckons CEO Zach Nelson. "The demand seems to be the same and nothing's really changed all that much in discussions with our customers and prospects," he says, adding that the SaaS model provides a cost-effective alternative for companies. “2007 was the year of the suite. By any measure…the move to the on-demand imperative became inevitable. We’re a counter cyclical business because we can cut your costs and improve efficiency…so we're not seeing any impact from any change in general economic conditions.”

"2007 was the year of the suite. By any measure the move to the on-demand imperative became inevitable."


Zach Nelson, CEO, NetSuite

NetSuite said it had added 432 new customers during the fourth quarter - although this resulted in a major flame war on the internet. Some online market commentators questioned what the firm's level of churn was as discrepancies appeared to be present if various NetSuite postings and press releases from different dates are compared.

The response from NetSuite investor relations: “On our call and in our filings we talk about active customers. Customers are not considered 'active' until they go live with the product. Since customers choose their own implementation schedules, you won't see these new customers show up for a quarter or two in the active customer count number.”

One potential issue could ironically come from NetSuite's international expansion. Revenue from customers in the Americas was $89.3 million, about 82 percent of the company's total, while the balance of $19.2 million came from international regions. "In some respects, you would think we would benefit from a weak dollar, as it would make our product more affordable in strong currency markets," said Nelson, explaining the $2 million expense the company accrued from trading in non-dollar markets. "The problem is that most of the revenue from sales in those international markets is deferred over the life of the contract, but the costs, such as international offices, staff, marketing and so on are not, and that is proving expensive.”

But there's still going to be more international operations, although not necessarily direct. "We have looked at China before but the barrier to entry at the moment for our product is the low cost of personnel resources,” commented Nelson. “For now it is still cheaper for a Chinese company to hire four local accountants on local wages than to use our product. But the cost of staff is rising rapidly in the region and that is more favourable for us. For now though we are not going to sell a product there for a loss like some of our competitors," Nelson said.

Pot shots

Nelson took a few pot shots at the competition. "Some company's platform strategy is to be a giant database development environment in the sky," he said alluding to Salesforce.com, before quipping about SAP's BusinessByDesign: "I thought completeness included being able to actually purchase and use this product. We’ve got the code pretty well cracked for upselling existing customers. I still don’t think you can buy this product (BusinessByDesign) - we haven’t seen it because you can’t buy it. I think they’re being a bit disingenuous about completeness.”

The firm's profile remains an issue, reckons Janice McGinn, research director, CIO practice at analyst firm The 451 Group. “Netsuite still has a relatively low profile among UK users interested in SaaS,” she commented. “They know of Salesforce.com and RightNow already and unlike Netsuite, neither MSFT nor SAP need worry about profile even if we are still waiting for their products. NetSuite has been much more focused on getting its board composition right rather than its international management, I guess that should change now post-IPO.

“One constant thorn is the single data centre issue. Yes it probably could survive a nuclear winter as CEO Nelson claims, but nuclear winters are rare events. It’s day to day availability and support that concerns CIOs. This is definitely an issue for CIOs looking to experiment with the SaaS model and as a highly experienced marketer, Zach Nelson knows that perception is all. They have said previously that they'd use some of the IPO money to open another data centre in Europe, so that would build a bit more credibility.

“Nelson knows they can’t run the rest of the world like the 51st state but when we spoke with him and asked him to comment on the perceived lack of sales support, another real issue for CIOs, he says his market is a telesales market. 'It is not enterprise software with 500 people taking CIOs golfing once a week. Secondly, we run our entire global sales operation out of the UK, not the US and around 18 per cent of revenue comes from outside North America.'”

McGinn concludes: “NetSuite has done some hugely impressive numbers over the past couple of years and deserve credit for that but their customer support, the data centre and profile remain to be addressed."

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