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NetSuite Spins Financial Results

On demand accounting software maker NetSuite has brought new meaning to business software innovation by touting their own financial performance in non-GAAP measures. In a not so subtle effort to answer the critics calls for profitability, NetSuite broadcast their 2008 year end performance with a unique spin. Despite showing a GAAP financial loss for the quarter and the year, NetSuite used repeated terms of profitability in their period end results.

"We have answered the question that some of our investors have asked over the past year: when will NetSuite become profitable?" stated Zach Nelson, CEO of NetSuite. "Well, Q4 gave you the answer. For the first time in our history, we made a non-GAAP net profit and were profitable on a non-GAAP operating basis as well."

Within hours of the NetSuite announcement, Citi released their NetSuite (NYSE: N) coverage opinion by maintaining their "Sell" rating and lowering their NetSuite price target from $9 to $7.40. According to Citi analysts, "For two quarters in a row, NetSuite set quarterly revenue guidance below consensus. Further, despite benefits of on-demand model, visibility is so cloudy that company did not give FY09 revenue guidance. Reported bookings continued to decelerate (though up 20% quarter over quarter adjusted for various factors), and customers are asking to pay less upfront. Instead, mgmt is shifting focus to profitability ..."

Outside of Nelson's creating accounting disclosures, NetSuite shared several business fundamentals which show progress for both the On Demand ERP vendor and the SaaS industry. NetSuite added about 350 new SaaS customers in the fourth quarter of 2008 and increased the size of the average purchase price. "Our average selling price hit a new record in Q4, reaching $340,000 per customer,” says Nelson. "This increase in average selling price indicates continued success in our efforts to move up market to larger, more profitable customers.

NetSuite attributes the increased customer acquisitions and increased average customer solution price to the core tenants of the software as a service value proposition. "Unlike applications like Microsoft Great Plains, developed years before the internet became ubiquitous, NetSuite customers no longer have to pay for the resources required to manage, update and upgrade our applications," Nelson says.

"Firms like McKinsey have indicated that our software service delivery model, such as the one NetSuite pioneered in 1998, can reduce the cost of ownership by as much as 40 percent. But NetSuite takes that cost savings a step further by integrating the functionality of multiple applications into a single application, eliminating the cost of 'cowboying' together multiple incompatible applications, which compounds the value of our offering."

Possibly as a sign of the economic climate, Nelson acknowledged that newer customers are more frequently requesting monthly or quarterly billing terms. According to CEO Nelson, "As seen in the results of other SaaS companies - and expected given the economic uncertainty - more of our customers requested quarterly or even monthly payment terms versus the usual one year, up-front contract we strive for." However, Nelson adds "The contract length is still the same, ... It's always a minimum year contract, so while the payment terms may be changing, it is still a contract that's solid and really doesn't change at all. In terms of negotiation, why we've been a little more flexible on terms we want to keep the recurring revenue high. You may hold firm on one year up-front and you may have to give more in discount to get that with a particular customer.”

Posted: February 11, 2009


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