Q2 2014 NetSuite Inc Earnings Call

Jul 24, 2014 AM EDT
Thomson Reuters StreetEvents Event Transcript
E D I T E D   V E R S I O N

N - NetSuite Inc
Q2 2014 NetSuite Inc Earnings Call
Jul 24, 2014 / 09:00PM GMT 

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Corporate Participants
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   *  Jennifer Gianola
      NetSuite Inc - Director of IR
   *  Zach Nelson
      NetSuite Inc - President and CEO
   *  Ron Gill
      NetSuite Inc - CFO

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Conference Call Participants
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   *  Jason Maynard
      Wells Fargo Securities, LLC - Analyst
   *  Frank Robinson
      - Analyst
   *  Samad Samana
      FBR Capital Markets - Analyst
   *  Brad Reback
      Stifel Nicolaus - Analyst
   *  Harris Hire
      - Analyst
   *  Justin Furby
      William Blair & Company - Analyst
   *  Philip Winslow
      Credit Suisse - Analyst
   *  Unidentified Participant
      - Analyst
   *  Alex Zukin
      Stephens    - Analyst

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Presentation
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Operator   [1]
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 I would like to welcome everyone to the NetSuite quarter to earnings conference call all lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.

 (Operator Instructions)

 I'll now turn the call over to Jennifer Gianola, Director of Investor Relations. You may begin your conference.

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 Jennifer Gianola,  NetSuite Inc - Director of IR   [2]
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 Good afternoon, everyone, and welcome to NetSuite's second quarter 2014 financial results conference call. A more complete disclosure can be found in the press release issued about an hour ago as well as in our related Form 8-K furnished to the SEC earlier today. To access the press release and the financial details, please visit the investor relations section of our website. As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call.

 On the call with me today is Zach Nelson, our Chief Executive Officer, and Ron Gill, our Chief Financial Officer. Zach and Ron will begin with prepared remarks, and we will turn the call over to a question-and-answer session. During the call, we will be referring to both GAAP and non-GAAP financial measures. The reconciliation of our GAAP to non-GAAP financial information is provided in our press release, which is available on our website. All of the non-revenue financial measures we will discuss today are non-GAAP unless we state that the measure is a GAAP measure.

 The primary purpose of today's call is to discuss the second quarter 2014 financial results. However, some of the information discussed during this call, including financial outlook we provide, may constitute forward-looking statements within the meaning of the US federal securities laws. These statements are subject to risks, uncertainties, and assumptions and are based on financial information available as of today. We disclaim any obligation to update any forward-looking statements or outlook.

 Risks and uncertainties that would cause our results to differ materially from those expressed or implied by such forward-looking statements include those summarized in the press release that we issued today. These risks and additional risks are also described in detail in reports that we file from time to time with the SEC, including our most recent 10-K and 10-Q filings which I encourage you to read. With that, I'll turn over the call to Zach.

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 Zach Nelson,  NetSuite Inc - President and CEO   [3]
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 Thank you, Jennifer, and welcome, everyone, to NetSuite's conference call to discuss our fiscal 2014 second quarter results. After a quarter like Q2, it's hard not to look back and appreciate all that we have accomplished with a history of firsts, from our founding in 1998 as arguably the first cloud business application provider to our position today as the most widely deployed ERP-based cloud suite in the world, but what is even more exciting is that we have an enormous opportunity in front of us. We are really just that the beginning of the journey to create the next-generation business system for companies of the future.

 Q2 also provided a few new firsts in our history. On the business front we hit two milestones worth noting. First, we had our first $100 million recurring revenue quarter. In addition, based on our Q2 results, NetSuite has become the first ERP-driven cloud software company to achieve an annual total revenue run rate of over $0.5 billion.

 On the industry front we also received notable recognition during the quarter. Last month NetSuite was recognized by Forbes magazine as one of the most innovative growth companies in the world. In June, the Software and Information Industry Association announced that NetSuite had won three CODiE awards for product excellence. First, we one for OneWorld, named it the best financial management solution. We also won for NetSuite PSA, named as the best project management solution and, finally, we won for NetSuite SuiteCommerce, named the best commerce solution.

 As you read in today's press release, our second quarter's performance highlights our continued progress. We once again had record revenue hitting the high end of our revenue outlook for the quarter and we exceeded our outlook on both operating cash flow and non-GAAP EPS. For the quarter, year-over-year our top line grew by 30% to a record $131.8 million. Recurring revenue grew 32% year-over-year, a slightly faster pace than what we saw in Q2 of 2013. Our non-GAAP earnings came in at $0.06 per share, well above our previously stated outlook of $0.02 to $0.03 per share for the quarter. In addition, operating cash flow came in at a healthy $18.6 million versus our stated outlook of $14 million to $15 million.

 In Q2, calculated billings, defined as the change in deferred revenue plus revenue, grew by 34% over Q2 of 2013. These quarterly results are a tribute to our customers who are using NetSuite to transform their operations and enable their business vision. And we had our strongest Q2 since 2009 in terms of new customer additions, adding more than 360 new customers to our install base. Our average selling price was up slightly over the prior year and for the first half of the year it is up more than 40%.

 Probably the biggest highlight of the quarter was SuiteWorld, our annual global gathering for customers and partners. We exceeded our goals for this conference with over 6500 members of the NetSuite community joining to share the unique experience of SuiteWorld. That's 30% more than the roughly 50% who attended it just one year ago. And one of the most notable things about SuiteWorld was the sheer amount of product we introduced, a reflection of the increased investment we have made across the suite to support the vertical and horizontal business application needs of our growing customer base.

 As announced at SuiteWorld, we launched new capabilities that allow us to address the needs of large services and project-based businesses. The new NetSuite SRP provides a comprehensive end-to-end services resource planning solution that supports an entire services business. We are seeing significant upsell in new customer wins from customers who have either bought the entire SRP suite in the past or have bought modules such as advanced projects, resource allocation, job costing, and budgeting. We are in the process of rolling SRP out globally and we anticipate similar success in EMEA and APAC from both software and services verticals. And during the quarter our services verticals saw good new business growth so we are pleased with the early success of the new offering.

 With our SuiteGL announcement, feedback from customers is that this capability is game changing in meeting local, statutory, and business process requirements. We have just scratched the surface on use cases for SuiteGL and we are working closely with our partners and customers as they begin to adopt the new technology starting with the 2014 2 release which is rolling out later this quarter.

 Also, later this year we are planning the roll out our next generation user interface. NetSuite over the years has pioneered many of the features considered standard today in a modern web-based application and the new UI built on that heritage. This release will include a fantastic mix of features that are simple, intuitive, and bold. We believe the new user interface will make NetSuite the easiest and most enjoyable business application to use anywhere.

 And, finally, we delivered new capabilities in our SuiteCommerce offering that enable global customers to deliver a true omni-channel experience to their customers. While most people consider omni-channel commerce a concern only for B2C companies, we believe omni-channel will be an important capability in any business model.

 For example, the State of Texas comptroller's office was featured at SuiteWorld highlighting their use of our SuiteCommerce capabilities to support their government to government internal purchasing portal. And I'm happy to announce that they've gone completely live across all of their departments and agencies since the time that their CIO joined us on stage.

 The new SuiteCommerce B2B portal that we also announced at SuiteWorld is now rolling out to customers to support their omni-channel business model requirements as well. The other important capability unique to SuiteCommerce in addition to its ability to support multiple business models, B2B, B2C, B to anything, is its ability to support those customer requirements around the globe in multiple languages, in multiple currencies.

 And in that regard last week we announced the important acquisition of Venda, Europe's pioneering provider of cloud-based e-commerce, to some of the biggest and best-known brands in the world. And while they certainly do have great customer logos using their offerings, this acquisition is really about extending our strategy to take advantage of our market opportunity around the globe. Today, about 24% of our revenue comes from outside the US and Europe remains one of our biggest growth opportunities.

 While we have done well in Europe, we could do better with more resources, focus, and investment. And, as I have said in the past, we would be doubling down in Europe someday. Well, some day officially arrived last Thursday. While there is a lot of work ahead, we think the financial results we delivered in Q2 provide the proof that the investments we are making in our strategy of bringing the power of unified cloud-based business applications to companies of all sizes are paying off for our customers, our employees, and our shareholders. And so with that, let me turn it over to Ron Gill, our CFO.

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 Ron Gill,  NetSuite Inc - CFO   [4]
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 Thank you, Zach. I'm pleased to report another excellent quarter at NetSuite. We had a very successful first half of 2014 and are on track for a really solid year. In Q2 we had a fantastic SuiteWorld, brought on board a record number of new employees and reported record revenue and deferred revenue.

 But just to step back a moment and put the quarter into historical context. Our revenue in the second quarter of 2014 alone was more than the revenue we recorded during our entire fiscal 2007, the year that we went public. Our revenue of $255 million for the first half of 2014 was more revenue than we posted for our entire fiscal 2011. In other words, the steady effort to build a world-class company by growing a high-quality team, building an increasingly sophisticated product, and providing a great experience to our customers continues to pay off.

 Let me take you through some of the numbers in more detail. As a reminder, all the non-revenue financial figures I will discuss here are non-GAAP unless I state the measure is a GAAP number. Revenues are of course GAAP numbers and, as always, you can find a reconciliation of GAAP to non-GAAP results in today's press release.

 During Q2, total revenue grew to $131.8 million, up 7% sequentially and up 30% over Q2 of 2013. This is our eighth consecutive quarter with a year-over-year growth rate in total revenue of 30% or more. Recurring revenues from subscription and support grew 6% sequentially and 32% over the year-ago quarter to $105.9 million, representing, as Zach mentioned, our first-ever $100 million recurring revenue quarter. Nonrecurring revenue, which comes primarily from professional services, was $25.9 million for the quarter and grew 25% over that for the same period last year.

 Moving down the P&L to gross margins, we saw an increase in our total gross margin year-over-year from 71% to 72%. Gross margins on recurring revenue improved from 85% in the year-ago quarter to 86% and a gross margin on nonrecurring revenue was down from 16% in the year-ago quarter to 14% in the second quarter of this year. Overall, we expect the blended gross margin to be approximately 71% to 72% of revenue for the full year in 2014. In Q2, 24% of our revenue was generated outside the United States.

 Turning to our non-GAAP operating expenses, we continue to make significant investments in our product team as well as in expanding sales capacity. The product organization, where the number of employees in the team was up more than 40% over the year-ago quarter, continues to be the fastest growing area of the Company. Product development expense was $18.5 million for the quarter and represented 14% of Q2, 2014 revenue. I expect that spending on the product team will be approximately 13% to 14% of revenue for 2014.

 Sales and marketing expenses were $60.6 million or 46% of revenue in Q2, on par with the same percentage of revenue in Q2 of last year. As Zach discussed, we hosted the largest SuiteWorld ever in Q2, but the team did a good job of managing that spend and strong attendance and partnership participation helped offset the cost as well. G&A expenses were $9.4 million or 7.1% of revenue in the second quarter. That is down from 7.7% of revenue in Q2 2013, so we continue to have good scaling efficiency in that area.

 Non-GAAP operating income in the second quarter was $5.8 million, up 22% over the prior year and equating to a non-GAAP operating margin of 4.4%. During the quarter, we reported the net income tax expense of approximately $448,000. We continue to expect our net operating losses to offset any domestic earnings for tax purposes for the foreseeable future. Non-GAAP net income for the second quarter was $4.8 million, up 20% over the prior year. Non-GAAP earnings per share for Q2 were $0.06. This was up from $0.05 in the year-ago quarter.

 Moving on to the balance sheet. We had another great quarter for cash collections and closed the quarter with a record $479 million in cash and cash equivalents. Cash flow from operations in Q2 was $18.6 million, up 19% year-over-year.

 Moving down the balance sheet from cash to deferred revenue. Our total deferred revenue balance increased 39% year-over-year to a record $252 million. As you may calculate from the financials published in the press release, calculated billings defined as the quarterly revenue plus the change in deferred revenue were $146.5 million for the quarter, representing an increase of 34% over the second quarter of 2013. As I've consistently pointed out on these calls, there's a wide array of factors that influence calculated billings and quarter to quarter fluctuations in the calculated billings metric should not be taken as an indicator of changes in future revenues.

 Head count on June 30, 2014, was 2762, up 29% from Q2 of 2013. We added a record 212 employees to our head count across the organization in Q2 with the fastest growing teams being those in product development and sales.

 Before I move on to outlook, I'd like to briefly address the recent acquisition. As we announced last week, on July 17 we acquired Venda, a privately held e-commerce company based in London. This is not a material transaction for us and we did not publish the purchase price in the press release, but since the announcement there has been some speculation both about the purchase price itself and about the run rate of revenue the company was doing before the acquisition. I've seen estimates as high as a few hundred million dollars for the purchase price and of revenue in the $40 million range.

 To bring things down to earth a bit, I want to clarify that the total purchase price paid was $50.5 million in a combination of cash and stock. As you can imagine, at that price the revenue estimates are also well off the mark. We did acquire a great team of people with significant domain expertise, a great product and some wonderful customers, but nowhere near that amount of revenue. Given the current state of the business and the accounting required by the acquisition, we're currently forecasting incremental revenue to NetSuite for the remainder of 2014 of about $5 million and we expect the bottom line impact to be dilutive.

 With that understanding, I'd like to move to the forward-looking financial outlook which is covered by the cautionary language I outlined at the start of the call and based on assumptions which are subject to change over time. We've had a great first half and have solid momentum going into the second half of the year. Taking into account the Venda acquisition, we're raising our revenue outlook for the year to a new range from $545 million to $550 million. Given our EPS and cash flow over-performance in the first half, I believe we can absorb the dilutive impact from Venda I mentioned and still be within our current outlook, so we're maintaining our outlook for operating cash flow of $65 million to $70 million and non-GAAP EPS of $0.24 to $0.26 for 2014.

 For the third quarter of 2014 we expect revenues to be in the range of $140 million to $142 million. We anticipate non-GAAP EPS of approximately $0.03 to $0.04 and operating cash flow of $14 million to $15 million for the quarter.

 In summary, the first half was a great start to the year. We are positioned well for a strong second half and another year of record revenues and industry-leading growth. That concludes my prepared remarks. With that, I'll turn the call back over to Zach

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 Zach Nelson,  NetSuite Inc - President and CEO   [5]
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 Thank you, Ron. Ron's comments detail that the significant momentum we gained in 2013 carried over into the first half of 2014 and I think the trends driving NetSuite's growth will continue as the year progresses. To summarize the highlights from today's prepared comments, we posted record revenue, record deferred revenue, record levels of revenue retention, our 20th consecutive quarter of revenue growth, our eighth consecutive quarter of 30% or greater revenue growth, and today we have more employees at NetSuite than we have had in our history.

 By achieving a $0.5 billion total revenue run rate this quarter, we are well on our way of achieving our goal to be the leading provider of next-generation business systems and to achieve $1 billion and beyond in annual revenue. Our consistent vision of designing a system to run a business and deliver it via the cloud continues to be the driving force behind what we do at NetSuite. And, with that, we will turn it over to the operator for your questions. Operator?

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Questions and Answers
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Operator   [1]
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 (Operator instructions)

 First question comes from the line of Jason Maynard from Wells Fargo.

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 Jason Maynard,  Wells Fargo Securities, LLC - Analyst   [2]
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 Good afternoon and congratulations on the quarter. Two questions for you. First, Zach, can you maybe talk a little bit more about your international and European opportunity? And you made the comment about doubling down and I'd just be curious in terms of beyond just the acquisition of Venda, what other investments do you think are necessary to really make that a bigger part of the overall revenue stream? And then just quickly, Ron, you gave the $5 million contribution to revenue. Maybe I missed it here, but what would you assume compared to last quarter's guidance, the EPS dilution from the deal would be for the second half of the year? Thanks.

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 Zach Nelson,  NetSuite Inc - President and CEO   [3]
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 Thank you, Jason. So, I'll take the first half. The strategy around international investments and maybe the other things we'll have to do. I think one of the great things about Venda, as I've said in discussing this acquisition, is the fact that I think now we really do have critical mass certainly in the UK with the addition of the Venda team, the Venda location right in central London, all of those things I think will have a big impact on our ability to execute from a distribution standpoint in Europe.

 The other aspect of executing in Europe -- we have great capabilities in OneWorld today for a company who is operating really in any country. We have multi currency, we have multi language. Our tax engine is unmatched in the world in terms of being able to comply with local statutory requirements. But as you begin to get into some of these countries more specifically, the actual business practices and the customs differ materially and so now our ability to have visibility into the second and third derivative issues around doing business. And not just e-commerce business but any type of business in places like Germany and France, I think we'll have a much better visibility into that.

 We'll be able to finally tune our product to look and smell and feel that much more French or German as the case may be as we go into those markets. So, I think that insight is going to be important. I think in terms of additional investments, obviously I think the big additional investment certainly in Europe, perhaps a little bit less so in parts of Asia, is just the language requirement of our people and the ability to actually conduct business in German and in French specifically.

 And so I think that will be the other big piece of investment you'll see here and over time that will be the next big piece of investment is how do you go to Germany? Well, you go hire German salespeople, German [Essi's], German consulting, German support and that's yet another large investment that I still think we have in front of us, but I think the Venda acquisition gives us the foundation to begin to make those investments coherently.

 And then finally the final piece of course is the data center in Europe and, as you know, we've been talking about the data center in Europe here. The Venda acquisition actually gives us now obviously a data center in Europe given that they're delivering to most of their customers out of that data center and so we're also gaining great expertise in terms of making the decision on how to roll out the data center in Europe. They have a great data center operations team, so we'll also have a foot up on that front as well.

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 Ron Gill,  NetSuite Inc - CFO   [4]
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 Sure. Maybe I'll take the second part of that question, Jason. So, yes, $5 million on the revenue. It's probably a few cents dilutive on EPS. We over performed plan on EPS in Q1 and have just done the same again in Q2, so we were probably on target to over achieve EPS for the year. So, as I said in prepared remarks, I think we can absorb this dilutive impact and still be back within the original guidance range, the $0.24 to $0.26.

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 Jason Maynard,  Wells Fargo Securities, LLC - Analyst   [5]
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 Great. Thank you very much.

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Operator   [6]
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 Your next question comes from the line of Greg Dunham.

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 Frank Robinson,  - Analyst   [7]
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 Hi, you actually have [Frank Robinson] here for Greg Dunham. I guess I want to say starting in early March we saw like significant sell off in growth stocks and some investors seem to be favoring stocks that are more profitable. On previous calls you stated you prefer to invest if you can get the growth. Have your thoughts around that changed at all?

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 Zach Nelson,  NetSuite Inc - President and CEO   [8]
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 No, not at all, Frank. And I think every study that you see and certainly history tells us that if you can invest -- every software company that invests in growth -- the winners invest in growth when the growth opportunity presents itself. And so that's certainly our tendency and it's been what we've stated for all of time since we've been public.

 And so what we did over achieve on the bottom line and we're happy about that from a fiscal management standpoint. Frankly we would've rather have spent that money investing to get growth not so much for this year. As you know, it takes a while for this to impact, but get the growth for next year.

 And so we're happy about the extra EPS, but in some ways we feel, frankly, that we should've spent that money in our growth strategy. Now, that said, the fact that we did deliver extra EPS, the thing that we won't do is just spend the money to spend the money. And if we can't spend the money efficiently to invest in that growth, we're not going to go try to wipe out over attainment just to show that we're spending the money. So, I think we invest it wisely and we're going to continue to invest it wisely and we have invested it wisely over the past several years. I think you've seen that result in more and more growth and that is really what our whole strategy is here.

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 Frank Robinson,  - Analyst   [9]
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 Okay. And I want to go back to the Venda acquisition. You listed a bunch of things you got from the acquisition in terms of more capacity in Europe data center and different things like that. But was there any unique functionality you got with the acquisition, and I guess are there any plans to integrate the product with SuiteCommerce? Thanks.

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 Zach Nelson,  NetSuite Inc - President and CEO   [10]
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 Well, they have a very deep product certainly and so there are many capabilities in the product that are exciting. I think from a strategy standpoint, the thing that I'm most excited about in terms of what we're getting from Venda from a product standpoint but really more of a domain expertise standpoint is depth of knowledge around shipping and payments which are substantially different in Europe.

 So, many our customers are beginning to go global. We can see on the horizon that we're going to have to address many of these unique shipping and payment requirements of Europe, and so I think this is really going to give us a good leg up in terms of addressing those. In terms of integrating Venda with the NetSuite platform, we already have some customers that are using Venda in conjunction with NetSuite today and so there are some integrations that exist.

 So, we'll certainly continue to support those and we'll support a variety of deployment options depending on what the customer sees fit. I think more likely than not you'll see customers deploying Venda with legacy systems like SAP where they don't necessarily want to replace the ERP system, but every customer has a unique strategy and we will certainly look to support that in the products that we own.

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 Frank Robinson,  - Analyst   [11]
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 Thanks, guys.

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Operator   [12]
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 Your next question comes from the line of Samad Samana from FBR Capital Markets.

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 Samad Samana,  FBR Capital Markets - Analyst   [13]
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 Hi. Thanks for taking my question. I wanted to ask a question on Venda and then SuiteCommerce. Could you give us a little bit of idea of how fast Venda was growing by itself and the typical customer size? And then I have a followup on SuiteCommerce.

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 Zach Nelson,  NetSuite Inc - President and CEO   [14]
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 For those of you that were -- Venda was very similar to OpenAir, for those of you that remember that acquisition which was our first acquisition probably back in 2008 or something like that. A lot of similarities between the two and the biggest similarity between the two, at least from an operational standpoint, was they had great product teams, they had great service teams, they had great support teams, they had almost nonexistent sales teams.

 And so it's safe to say Venda was not growing when we acquired it because it turns out you need salespeople to grow revenue. So, it's great news on the logos. We're getting incredibly happy customers. We're getting incredible development team. We're getting a great services and support team and that's really -- the nature of what NetSuite does in acquisitions is try to acquire great teams more so than fast-growing revenue streams or large customer bases, frankly.

 So, it's really sort of a perfect match for the way we look at acquisitions in that regard. And then the second half of the question?

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 Samad Samana,  FBR Capital Markets - Analyst   [15]
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 Yes, on SuiteCommerce. Could you give us an update on where your deals are coming from? Are you seeing greater uptick within the install base? Are you starting to see a healthier flow of new customers that are new to NetSuite coming because of SuiteCommerce?

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 Zach Nelson,  NetSuite Inc - President and CEO   [16]
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 SuiteCommerce continues to do really well. It's like every new product introduction at NetSuite. The install base tends to be the early adopters because people are waiting for that functionality, so you've certainly seen that, but I think it's -- I don't know the exact number, but I'm sure it is pretty close to equal proportions new and existing.

 The other thing that is very different about SuiteCommerce than Venda or DemandWare or any other e-commerce product on the market is SuiteCommerce applies really to not just B2C environments, it applies almost across all of our industry groups. So you're seeing the new B2B portal being used in our manufacturing vertical as manufacturers begin to want to do B2B transactions through an incredibly functional and beautiful website. State of Texas is another one, right, where you're seeing government agencies wanting to do effectively commerce applications but in that case to their internal audiences.

 So, the big difference between SuiteCommerce and really every other solution on there is not just omni-channel, which we've nailed with the integration of a retail point-of-sale system and the SuiteCommerce capabilities, but also omni business model, B2B, B2C, and so we certainly look at SuiteCommerce on a standalone basis, but you also need to put into your mind and into your model that SuiteCommerce also gets sold almost across all of our verticals. The primary exception to that from a vertical standpoint would be services companies, if they're pure or project-based services businesses they may not have the need for an omni-channel commerce machine, but every other industry group, software, we have software companies deploying it for maintenance and renewals management.

 Manufacturing and distribution obviously B2B and many of those guys are experimenting with B2C models as well. You've now seen government role it out and certainly retail. So, it's a really broad application of the technology and it's why we say we don't believe omni-channel is a retail problem. It's an every company problem.

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 Samad Samana,  FBR Capital Markets - Analyst   [17]
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 Great. Thanks for taking my questions.

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Operator   [18]
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 Your next question comes from Brad Reback from Stifel.

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 Brad Reback,  Stifel Nicolaus - Analyst   [19]
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 Zach, can you maybe talk to the ASP commentary? It's been a couple of years since you haven't seen healthy growth obviously with the move-up market. Do you think this is a transitory sort of timing event or have you gotten to a place where it should be more stable going forward? Thanks.

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 Zach Nelson,  NetSuite Inc - President and CEO   [20]
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 No, I think -- Ron always cautions people on a number of these metrics to not take a point in time, the calculated billings is one that he is always cautioning folks to, at a single point in time, not to look too much into it because there are a lot of factors that come into play. I would say ASP is also one of those factors. In this particular quarter we did see growth, but we did an enormous deal in our install base. In fact, it was our largest recurring annualized recurring deal ever in our history. But because it was in our install base, we do not count it in the average selling price because that only talks about new business.

 So, yes, we're happy to see it grow. Over the past six months it's grown 40%. Nobody's -- I'd be hard-pressed to find any company on the -- certainly a SaaS company on the planet that grew their average selling price 40% over the last six months. So, we're pretty excited about what's happening there. This other thing that was also very exciting and may relate somewhat to ASPs which is the big jump up we saw in customer count, right? 360 plus customers and sometimes when you sign up more customers you do do it at a slightly smaller average selling price but, hey, hurt me with more customers.

 In terms of our modeling, we've had healthy I think certainly it's safe to say 20% average selling price growth over last couple of years. We're clearly on track for that and frankly when we build a model we don't even build that sort of level of average selling price growth into our model. So, that's sort of -- those are my thoughts on average selling price.

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 Ron Gill,  NetSuite Inc - CFO   [21]
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 I can just elaborate on that a little bit. You probably remember that last quarter ASPs were up 90% year-over-year, so of course that's not that is not what we expect to see every quarter is that dramatic an increase. And as Zach said, I've often talked about this phenomenon with you guys where as we sell into larger and larger accounts and more enterprise accounts, those accounts have a lot more room for upsell in them than the traditional mid market accounts that we used to sell to, and we certainly saw that this quarter.

 As Zach mentioned, we had the largest recurring revenue deal we've ever done, but it was an upsell deal so it doesn't count in the ASPs. If I were to count that deal as if it were a new deal, we'd be looking at ASP increases of something like 25% year-over-year for Q2.

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 Brad Reback,  Stifel Nicolaus - Analyst   [22]
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 Perfect. Thanks.

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Operator   [23]
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 Your next question come from the line of Raimo Lenschow from Barclays.

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 Harris Hire,  - Analyst   [24]
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 Hi, guys. This is [Harris Hire] for Raimo. Thanks for taking the question and congrats on a good quarter. I was just hoping you could give a little bit more commentary on how you've seen big deals trending. I know obviously it's a lumpy pattern, but can you give a little bit more color there and what you see going forward?

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 Zach Nelson,  NetSuite Inc - President and CEO   [25]
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 Yes, Harris. Thank you for the question. The nature of the big deals really hasn't changed much I guess generally speaking. There are big deals where NetSuite is being used as the end-to-end enterprise system, and then there are big deals that are being deployed in a two-tier model and those each have a little different flavor to them in terms of the sales cycle and whose involved and all those things.

 I would say on the former we saw a great quarter in terms of go lives for large companies deploying NetSuite across the entire organization, so we had a billion-dollar software company go live on NetSuite this quarter. That's a big software company, as you guys know. There aren't that many billion dollar software companies. I think today CommVault was announced replacing something like 12 different applications with NetSuite. That is a $500 million software company. That's another big company in particular in that vertical.

 So, I think that piece is doing well and two-tier continues to do well as well beyond financial consolidation the functional two-tier we've talked about before when companies began to deploy e-commerce. NetSuite is their e-commerce platform within these large organizations.

 I'd say the biggest change for us in addition to the fact that it is lumpy, interestingly things do change in those deals more quickly than you might think in terms of the dynamics of what's happening inside the company is really just the presence of the CIO. The small and mid size businesses typically don't really have a CIO level person or CIO level organization which is why the cloud is great for them because, guess what, they don't want to manage software.

 And so the thing that we really have to retool for and refactor for in our organization is another person in the room, a very important person called the CIO, and addressing their concerns. So, that's really the biggest change I think in the sales model standpoint.

 In terms of go-to market, again as you look at those large companies, the SI's are playing a huge role. Very excited about what's going on with all of our SI partners in terms of their dedication of people and resources and the growth of the pipeline there. So we're very excited think about what the SI's are bringing to the table in that regard.

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 Harris Hire,  - Analyst   [26]
------------------------------
 Got it. Thanks. And if you don't mind just one more quick followup. You've seen a really steady, nice increase in your renewal rate from Q2 last year when it was at 86%. Do you have any updates there?

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 Ron Gill,  NetSuite Inc - CFO   [27]
------------------------------
 I'm not sure where that 86% comes from because I know we haven't published a renewal rate. Our overall retention would be higher than that rate.

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 Harris Hire,  - Analyst   [28]
------------------------------
 Okay. I'm sorry about that.

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 Ron Gill,  NetSuite Inc - CFO   [29]
------------------------------
 We have -- but you're right in the first part, in the premise of your question, that we have seen it improve. If you go back several years then we've seen dramatic improvement and I know we get to say, like on this quarter again it was -- we had a record retention rate. So really unprecedented rate of retention, but the amount of movement we see in this metric now is pretty small. It's improving in very, very small increments at this point. It's fun to say that it's a new record but in terms of projecting out in the future and me projecting any further real impact to the model, I'm projecting steady-state at this point because I just can't imagine retention getting much better.

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 Harris Hire,  - Analyst   [30]
------------------------------
 Got it. Thanks, guys.

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Operator   [31]
------------------------------
 Your next questions comes from the line of Justin Furby from William Blair & Company.

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 Justin Furby,  William Blair & Company - Analyst   [32]
------------------------------
 Hey, guys. Thanks for taking my questions. Ron, on the booking side were there any kind of anomalies in that number, areas like duration, et cetera, that might have moved it one way or the other? And then was that large upsell that Zach just mentioned, was that part of the calculated billings number for Q2?

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 Ron Gill,  NetSuite Inc - CFO   [33]
------------------------------
 Sure. So, yes, not a big normalization this quarter. The stronger dollar hurt a little bit, so that was a little bit of a drag on calculated billings. Overall billing term helped a little bill so that boosted calculated billings. If you did the normalized number, it would normalize down a couple of points, so not a big change.

 And then of course every deal that we do is of course in the calculated billings number. It's literally the calculation -- I'm doing the calculation that you guys can see on the face of the financials, so the deferred revenue and the revenue. So, yes, of course every deal is in there, but that billing term normalization that I'm doing would take out if there was any multi-year effect of that or anything, so obviously it's not having a really outsized impact on it.

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 Justin Furby,  William Blair & Company - Analyst   [34]
------------------------------
 Okay. And going forward is there any kind of deferred revenue to be thinking about with Venda when it hits your books for Q3?

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 Ron Gill,  NetSuite Inc - CFO   [35]
------------------------------
 Yes, there is a little bit. There is always this impact whenever you do an acquisition, especially in the SaaS space. So, they do have a little bit of deferred revenue. It's not a huge number but it is a real number and so that will sort of slow down the uptake of revenue in our books from their business.

 They've also got -- the way they're recognizing revenue on some of their projects which are currently in progress during implementation, we won't be able to do that revenue recognition until they've gone live and so will have some delays there in the uptick of revenue. But overall the deferred revenue, it's not a huge number, it's more of a little bit of a drag relative to what their run rate would be on Q3 and then we're probably at a more normalized rate in Q4.

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 Justin Furby,  William Blair & Company - Analyst   [36]
------------------------------
 Okay. And then just, Zach, on the strategy piece on the purchase I guess I'm still not clear. So, are you going to be selling multiple products so Venda potentially in Europe, SuiteCommerce in the US and will you continue to sell Venda as a standalone platform? You mentioned that a lot of customers use other European systems. I'm sure you'll continue to support that but will you also sell it to new customers that might prefer hybrid approach?

------------------------------
 Zach Nelson,  NetSuite Inc - President and CEO   [37]
------------------------------
 Yes. The focus for NetSuite is always the NetSuite core product, so SuiteCommerce globally is really the focus and what Venda gives us there is the opportunity to invest more from a distribution standpoint in Europe on SuiteCommerce and other NetSuite products.

 That said, very much like OpenAir, when we acquired OpenAir there were large companies, Siemens is a good example in Germany, which is one of our largest OpenAir customers where they had an SAP backbone and they weren't going to replace that. And so we were happy to sell them OpenAir, so when those scenarios exist, we're happy to provide a product like OpenAir or a product like Venda.

 The other thing we've seen certainly is we've done that historically is getting a foothold in those accounts with a NetSuite branded product actually becomes important when they do decide to trade out their legacy stone age SAP or sage implementation. Because they're already using NetSuite effectively they're happy and then when they do come to the ERP replacement cycle, it brings us to the front of the queue. So, there are some net positives from that approach as well.

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 Justin Furby,  William Blair & Company - Analyst   [38]
------------------------------
 Okay. So, it sounds like you will continue to have SuiteCommerce, you'll be selling that and then Venda as a separate product as well, is that fair to say?

------------------------------
 Zach Nelson,  NetSuite Inc - President and CEO   [39]
------------------------------
 Absolutely. We won actually some great deals in Europe with SuiteCommerce to date. So, we're pretty happy about that. We're just going to be able to get more domain expertise on that -- on that core capability as well as distribution capability as well.

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 Justin Furby,  William Blair & Company - Analyst   [40]
------------------------------
 Okay. And then completely separate. On the two-tier deals or sizing today I guess if you look at sort of your new deals, how big -- what's a way to think about two-tier as a percentage to serve your new business? And where do you think over the next 3 to 5 years or even longer term? Where do you think that goes and maybe what are the implications for you guys on the sales and marketing side from a leverage perspective if that continues to go up, assuming it does?

------------------------------
 Zach Nelson,  NetSuite Inc - President and CEO   [41]
------------------------------
 Two-tier really isn't a category that we track here because frankly all SaaS software, most SaaS software, typically does move in around the edges even in sort of a mid-size company you might see NetSuite being deployed in the two-tier fashion. So, I think two-tier for us is a way and a way the customers are thinking about it, but it's not something we track as a revenue driver or a revenue category even per se, so I wouldn't even know how to answer that.

 Some of the products that make up two-tier of course are OneWorld and OneWorld continues to grow as a percentage of overall bookings, for example it crossed 50% this quarter. So, that's maybe a proxy for two-tier, maybe not though because smaller companies need OneWorld as well, but it's interesting to see it cross the 50% threshold, so that might give you a little idea.

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 Justin Furby,  William Blair & Company - Analyst   [42]
------------------------------
 Okay, great. I think that's it for me. Thanks, guys. I appreciate it.

------------------------------
Operator   [43]
------------------------------
 Your next question comes from Philip Winslow from Credit Suisse.

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 Philip Winslow,  Credit Suisse - Analyst   [44]
------------------------------
 Thanks, guys, and congrats on another great quarter. Most of my questions have been answered, but I just wanted to dig into OneWorld for a little bit. Obviously that's been a great success.

 Just wanted to get your update there as far as where do you think just the industry is in terms of just adoption of large enterprises in terms of just an on-demand two-tier ERP offering? Are we starting to cross over from sort of early adopters to sort of more mainstream acceptance? And then I just have one follow-up to that.

------------------------------
 Zach Nelson,  NetSuite Inc - President and CEO   [45]
------------------------------
 Well, I still think we're early in all of our ERP cycles, frankly, just look at our market share. We crossed over recently on the Gartner Financial Management Systems charting to the top 10, but we have a lot of room to go on the market share front.

 So, I think in all of these markets it's just beginning but the good news is I've always had you look to the left on that market share chart and the right on that market share chart you don't see a single modern cloud-based application. And that's, I think, the big thing that you're seeing and you're even seeing it from the guys who don't have the modern cloud-based applications is all they talk about is cloud.

 So, guess what, all anyone thinks about now in terms of deploying any application is cloud first. And that's probably the most important thing you've seen happen over the last year industry wide is you watch the SAP advertising, the Microsoft advertising, the Epicor advertising. Go down (inaudible) of the advertising, it's all about the cloud and, guess what, they really don't have a native cloud application even to speak of.

 So, to me that's a reflection of what their customers are telling them and we're certainly seeing that from our customers. So, I think you could be entering a period of accelerated adoption of solutions like NetSuite. Now again ERP solutions are always slower to move in. I put that caveat on there as the heart transplant, but more and more hearts are getting sick certainly as every company tries to move its business to the cloud. And you really need a system that looks more like NetSuite obviously for a modern business than you do like the applications that I mentioned previously. So, I think we're still in early adoption, but it is clearly becoming rapid early adoption now.

------------------------------
 Philip Winslow,  Credit Suisse - Analyst   [46]
------------------------------
 Got it. And then obviously you've talked a lot about vertical and horizontal business applications and NetSuite's focus on there and broadening and deepening, and that was also clearly a focus at SuiteWorld. Wondering if you guys can update on that and where your focus points are right now and then where you see that evolving over time?

------------------------------
 Zach Nelson,  NetSuite Inc - President and CEO   [47]
------------------------------
 Yes. I think -- I'll talk a little bit about the verticals, but I think sort of the broad picture to put across these industry groups is I really do believe that the lines between what makes up a retailer and what makes up a manufacture are starting to blur. And that's across industries. What's a product company, what's a service company? They're all beginning to blur and that's really what's causing companies to rethink their infrastructures is how do they support these evolving business models in their world. And amazingly NetSuite is really the only product that's ever been developed that allows you to manage a product and services company in a single application.

 So, that's I think in the future is going to be an important characteristic of NetSuite that there is no other application on the planet that looks like that. So, I'm pretty excited about that. That evolution of our product.

 But if you look at the software in our internet space, I have to believe we're the dominant platform there. We've grown our logos this year by 58%. You look at the two big -- there were two software IPOs this quarter, Zendesk and Mobile Iron, both on NetSuite, great work there. It's really the platform for next-generation technology companies.

 That includes next-generation hardware companies, our manufacturing and WD verticals doing very well. You saw we sent out a news release out today about Penguin distributor of data center systems replacing SARP3 with NetSuite. GoPro and Arista went public on NetSuite this quarter. So, again, you're looking at the platform of the future for the companies of the future. And, believe me, the companies of the past who want to be the companies of the future notice that and they want to be on a system like NetSuite.

 Retail, obviously doing great in retail. That's our highest average selling price of any of the verticals, lots of industry recognition. And we are starting to see the B2B, B2C, B to anything model on a single platform begin to roll out with NetSuite with some of the customers I've mentioned and certainly Venda helps us do that on a global scale.

 In the services vertical, which is what we focus on heavily at SuiteWorld, we rolled out the new SRP product. We've got almost approaching 100 companies live on the new NetSuite SRP product, so really excited about that. The other thing I'd say about services is lots of product companies have services businesses and so that SRP -- the combination of the SRP capability with our products capability is really unmatched in the industry. So I could keep going on forever here but I think I better stop.

------------------------------
 Philip Winslow,  Credit Suisse - Analyst   [48]
------------------------------
 Great. Thanks, guys, and keep up the great work.

------------------------------
Operator   [49]
------------------------------
 Your next question comes from the line of Abhey Lamba from Mizuho Securities.

------------------------------
 Unidentified Participant,  - Analyst   [50]
------------------------------
 Yes. Hi. Thanks for taking my question. This is (inaudible) for Abhey. Most of our questions have been answered, but just in terms of specifically in the retail segment, how would you categorize your value proposition versus other players? I know you talked about it to some extent, but specifically in the retail segment. Thank you.

------------------------------
 Zach Nelson,  NetSuite Inc - President and CEO   [51]
------------------------------
 Well, in retail it's really easy. We are the only cloud-based provider of an omni-channel commerce solution. We are the only integrated cloud solution that has point of sale, e-commerce, and mobile commerce running on a common infrastructure. Everyone else trying to provide that solution has multiple elements. They have a retail infrastructure, they have a e-commerce infrastructure, and then you have to tie the hairball back together again. That's not the future retail.

 If you look at the great the retailers of the world, who are people trying to imitate is people like Apple. Where your experience in store is pretty darn identical to your experience online. Guess what, to deliver that type of solution you need a solution like NetSuite, that's plain and simple. So, that's certainly our strongest vertical.

 Then on top of that of course you layer underneath that all the OneWorld capability, the ability to take that model anywhere on the globe with multi currency, multi-tax, multi-language, multi-site. That's the second element that no one is even close to matching. We're very confident of our position in retail against anybody, not even cloud vendors on premise, in hard goods retail there is no better solution than NetSuite.

------------------------------
 Unidentified Participant,  - Analyst   [52]
------------------------------
 Thank you.

------------------------------
Operator   [53]
------------------------------
 We have time for one more question. Your question is from Alex Zukin from Stephens.

------------------------------
 Alex Zukin,  Stephens    - Analyst   [54]
------------------------------
 Hey, guys. Congratulations on the quarter. Most of my questions have been answered, but I just wanted to touch on the large deal with an existing customer. Could you walk through kind of what exactly that deal looked like? Was it a SuiteCommerce upsell? Was it OneWorld? Just help us understand kind of the dynamic of that deal.

------------------------------
 Zach Nelson,  NetSuite Inc - President and CEO   [55]
------------------------------
 Yes, I'll tell you exactly the dynamics of that deal. This company, very large company, had spent nine months and $52 million trying to upgrade their SAP system. After the nine-month period they were presented with another bill for another $100 million to actually make the upgrade work and they wisely said stop, we're not going to spend another $100 million after we spent the $50 million to make this thing work.

 And they came to NetSuite and said how can you guys help us out of this quagmire. And that was really how the sales cycle -- what they've seen in their other divisions how well NetSuite worked for the complex software divisions. And they figured out like many of our customers do, this is actually a better solution than trying to retrofit an ancient archaic system by spending as much money as humanly possible to make it work it still doesn't work. So, it was a very exciting deal on many fronts.

------------------------------
 Alex Zukin,  Stephens    - Analyst   [56]
------------------------------
 Got it. That's helpful. Just one followup on that and maybe the competitive environment within that deal in particular and just in general are you seeing any more competition with Workday, Microsoft, some new entrants?

------------------------------
 Zach Nelson,  NetSuite Inc - President and CEO   [57]
------------------------------
 No. I think it's pretty much in terms of competition it's pretty much the same old story we've been saying for several years. It varies a bit by vertical, right, so as we get stronger and bigger and things like manufacturing and wholesale distribution you start seeing us replace a lot more of Epicor and those types of solution -- that's also the case in retail. SAP is still a mess and the Penguin replacement is just another example of that opportunity.

 On the Microsoft front, in the ERP perspective, I don't think again they're really doing anything and they seem to be more worried about fins and phones than cloud-based software, so they have other fish to fry apparently. And Workday is interesting, again in financials they really don't have the capability to run a significant -- companies in the verticals that we're in, right? They have no product capabilities as an example in manufacturing and distribution.

 But we did have one interesting data point, we never like to take one data point and make it a trend, but we had one very large customer this quarter come to us to license Tribe HR which, as you all know we bought recently because, the work day bill that was handed to them was so enormous that they just couldn't stomach paying it and now their looking at Tribe. So, who knows. They're not really competing much with us, but maybe we will be competing with them soon.

------------------------------
 Alex Zukin,  Stephens    - Analyst   [58]
------------------------------
 Perfect. That's helpful. Thank you, guys.

------------------------------
 Zach Nelson,  NetSuite Inc - President and CEO   [59]
------------------------------
 Great. Well, thank you all -- sorry, Operator, I'll just close off here. Thank you all for joining us. It's been a great Q2 and we're on to the second half of the year so, with that, we will close the call for the day. Thank you very much.

------------------------------
 Ron Gill,  NetSuite Inc - CFO   [60]
------------------------------
 Thanks, everybody.

------------------------------
Operator   [61]
------------------------------
 This concludes today's conference call. You may now disconnect.




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