July 30, 2012
Last week say NetSuite report it’s Q2 revenue and earnings – hi level numbers include;
- Subscription and support revenue was $61.0 million, a 27 percent increase on an annual basis
- Cash flows from operations were $15.2 million, up by 80 percent from Q2 2011
While the specific numbers themselves are of vague interest, and more so to those who hold stock in the company, what is more interesting is the trend that these numbers indicate. Especially so given the poor performance of internet stocks such as Zynga, Amazon and others. Two points to note;
Enterprise May Not Be Sexy, But it Pays
While the world gets all excited by consumer and social plays, and spends time chasing its tail investing in the next high growth gaming startup, the fact is that enterprise software continues to be the best place to make money year over year. Look at every industry – mining, airlines, banking, heck even consumer internet plays, and they all run on enterprise software. The great thing about enterprise software is that it’s directly monetizable – whereas consumer tech companies have to work out some indirect methodology to actually make some money (sponsored tweets to justify a valuation anyone), enterprise software companies have a much simpler conversation with their customers who need a service and have total realization that they’re going to pay for said service. Not sexy, but in a climate that looks set to eventually punish the highly speculative investing in non revenue generating companies, one that looks increasingly smart.
NetSuite Finds Itself
As others have mentioned, in its early days, NetSuite was a bit of a dark horse – founded by enterprise people but with a bit of an SMB focus. Recent years have seen that all change and NetSuite is now an unreservedly enterprise focused company. CEO Zach nelson spoke to this in the earnings call when he mentioned that average deal size is now over $50k in first year contract value. This is 30% more than previous years and NetSuite’s bottom line shows the benefits of selling software of this value as opposed to the $1000/month type level of other vendors. While it’s undeniable that there are more prospects looking at lower priced software – the sales cycle is protracted, the partner networks aren’t strong, and simply telling the story is harder. NetSuite’s current focus on moving up the food chain and providing highly tailored vertical solutions is a smart one and one which seems to be paying dividends.
What it Means for the Future
With NetSuite reporting such good numbers, and its success in moving up the food chain, even more credence is given to the “two-tier ERP” notion it’s been evangelizing. I’ve long said that it was only a matter of time before Oracle swoops in to acquire the company (especially so given the fact that Larry Ellison is the biggest shareholder already) and more tightly integrates it in with core Oracle offerings. The acquisition of SuccessFactors by SAP and the corresponding disruption it brings have brought both oracle and NetSuite some breathing room. I suspect however that new SAP Cloud Tzar Lars Dalgaard is working hard on a credible two tier and cloud plan and oracle and NetSuite need to plan for when this comes to fruition.