Q3 2014 NetSuite Inc Earnings Call
Oct 23, 2014 AM EDT
Thomson Reuters StreetEvents Event Transcript
E D I T E D V E R S I O N
N - NetSuite Inc
Q3 2014 NetSuite Inc Earnings Call
Oct 23, 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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* Phil Winslow
Credit Suisse - Analyst
* Ron MacMillan
RBC Capital Markets - Analyst
* Jason Maynard
Wells Fargo Securities, LLC - Analyst
* Samad Samana
FBR Capital Markets - Analyst
* Patrick Walravens
JMP Securities - Analyst
* Jennifer Law
Morgan Stanley - Analyst
* Justin Furby
William Blair & Company - Analyst
* Harry Hire
Barclays Capital - Analyst
* Greg Dunham
Goldman Sachs - Analyst
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Presentation
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Operator [1]
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Good afternoon. My name is Keith, and I'll be your operator for today. At this time, I'd like to welcome everyone to the NetSuite Q3 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)
Thank you. 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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Thank you, operator. Good afternoon, everyone, and welcome to NetSuite's third 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 other nonrevenue 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 third-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 10K and 10Q filings which I encourage you to read.
With that, I will turn the call over 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 FY14 third quarter results. The third quarter was an outstanding quarter for NetSuite as we beat our previously stated outlook across the board in revenue, operating cash flow and earnings. Our revenues in the third quarter climbed to $143.7 million, an increase of 34% year-over-year. In addition, our recurring revenue grew 35% year-over-year.
Non-GAAP profitability was also very strong coming in at $0.11 per share versus our outlook of $0.03 to $0.04 per share. Deferred revenue grew strongly as well. Calculated billings, defined as the change in deferred revenue plus revenue, grew by a healthy 41% versus Q3 of 2013. The changing of the guard from software designed to address the challenges facing companies 20 years ago to NetSuite's cloud software designed to run a modern business is starting to play out publicly for all to see in the financials of companies.
Our accelerating revenue growth and increasing non-GAAP profitability are a result of our bet on the cloud. Yet SAP, in their most recent conference call, said the cloud was actually the opposite impact on their results. Their software license revenue decline continued for the sixth consecutive quarter. In addition, SAP announced their cloud business is now not only causing a hit to revenues, but it's also negatively impacting their margin. Declining revenue and declining profitability does not sound like the cloud has been good for SAP.
But the transition to cloud-based software has been good for customers. Moving from hefty upfront fees to install, hard to maintain, hard to use and hard to upgrade software is a thing of the past for those companies who have moved to NetSuite. And in Q3, more than 380 new customers moved to NetSuite, the largest number this year.
Overall ASPs were up over 40% year-over-year. Our NetSuite OneWorld offering had a very strong quarter with a record ASP and a record percentage of new business. Another indication that larger organizations continue to move their core business systems to the cloud on NetSuite. The quarter also saw a record for number of deals greater than $1 million. ASP increases are certainly driven by our OneWorld multi-company, multi-currency, multi-language capabilities, as well as our multi-year effort to verticalize our software to address the requirements of specific industries.
Our SuiteCommerce offering, which is still the only cloud-based offering to combine e-commerce and point of sale capabilities in a single web-based product, enjoyed another strong quarter in the retail vertical. And during the quarter, IDC recognized NetSuite as a leader in the digital commerce applications market, further validating the success of our efforts to deliver the world's best and most advanced omni-channel commerce engine to companies around the world. But, of course, we believe the SuiteCommerce capabilities apply outside of the retail sector as well, and with this quarter's release of our business-to-business portal, we continue to bring the power of omni-channel commerce to industries like wholesale distribution and manufacturing, and our WD and manufacturing verticals each grew year-over-year by more than 100% during the quarter.
Q3 also saw one of our largest product releases ever. The NetSuite 14.2 release was a milestone in many regards. We have tripled our development team since the beginning of 2012, and this was the release where many of those new developers were fully ramped and contributed to the functionality in that release.
Needless to say, the sheer volume of capabilities we rolled out are too numerous to mention. But the most amazing thing was how seamless the release of these major new capabilities was. With significant features like a next generation user interface, distribution and manufacturing planning functionality, and new e-commerce and CRM capabilities, not only was this the largest release in our history, it also had to qualify as one of the smoothest. Our thousands of customers went to bed one night and woke up the next morning with all of their customizations in place and a massive amount of new functionality at their fingertips. It was an incredible effort by our development and operations team to create such amazing functionality and to deliver it to customers with so little pain.
Without a doubt, our vision of building a cloud-based system designed to run a business rather than a department has become a reality for many customers around the world. Today we are one of the fastest growing public software companies in the world with revenue growth that continues to indicate we are taking market share from the vast generation of stone age software from the likes of Microsoft, Sage, and SAP. Our third quarter results provide further proof that the investments we are making in our strategy are bringing the power of integrated cloud-based business applications to companies of all sizes is paying off for our customers, our employees, and our shareholders.
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 that the third quarter was another terrific quarter at NetSuite. We exceeded expectations on all of our guided metrics, delivering strong revenue growth, outstanding cash flow, and the highest non-GAAP EPS of any quarter since we've been public. As Zach mentioned, we added more than 380 new customers, continued our expansion into larger deals, and invested significantly in building out the products and the organization that we expect to be the foundations of growth in the years ahead.
Let me take you through some of the numbers in more detail. As a reminder, all the nonrevenue 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 Q3, total revenue grew to $143.7 million, up 9% sequentially and up 34.4% over Q3 of 2013. This is our ninth consecutive quarter with a year-over-year growth rate in total revenue of more than 30%. Recurring revenues from subscription and support grew 9.4% sequentially and 35% over the year-ago quarter to $115.8 million. Non-recurring revenue, which comes primarily from professional services, was $27.8 million for the quarter and grew 32% 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 70.7% to 71.4%. Gross margins on recurring revenue improved from 85.3% in the year-ago quarter to 86%, and gross margin on nonrecurring revenue was down slightly from 11.2% in the year-ago quarter to 10.9% in the third quarter of this year. Overall, we expect a blended gross margin to be 71% to 72% of revenue for the full year in 2014.
Year-to-date, about 25% of our revenue has been generated outside the US, and about 16% of our revenue and 29% of our expenses are denominated in a currency other than the US dollar. As you may know, the dollar strengthened somewhat against the number of the foreign currencies in which we operate during the quarter, so let me explain how that impacts us. When the dollar rises against the currencies of our foreign subsidiaries, we begin to see the impact in lower US dollar expenses for those subsidiaries immediately. And in fact, the strong dollar is one of the reasons for the over- achievement in non-GAAP EPS in Q3 that I'll discuss in a moment.
On the revenue side, however, the impact of a change in exchange rates flow through much more slowly only as new invoices are issued and thus the impact on revenue in the quarter was fairly muted. There's a potential for an FX drag on forward revenue, albeit a small one, if rates stay where they are now versus where they were at the end of Q2. That impact is considered in the outlook that Zach and I will give a little later in the call.
Turning to our non-GAAP operating expenses. You see the ongoing story of investing significantly in both growing the product team and expanding sales capacity. The product organization where the number of employees increased more than 46% over the year-ago quarter continues to be the fastest growing area of the Company.
Product development expense was $20.9 million for the quarter and represented 14.5% of Q3 2014 revenue. I expect that spending on the product team will be about 14% of revenue for the full year this year. Sales and marketing expenses were $63.5 million, or 44.2% of revenue in Q3, up from 42.6% of revenue last year. Investments in sales and marketing continue to yield good results in terms of incremental business booked, and so we maintain our bias toward investing here when the opportunity arises to do so within our overall spending target.
G&A expenses were $9.5 million, or 6.6% of revenue, in the third quarter. That's down from 7.8% of revenue in Q3 of 2013 and a little below what I'm thinking of as the near-term trend. For the year, I expect G&A expenses to be between 7% and 8%. Non-GAAP operating income in the third quarter was $8.6 million, up 11% over the prior year and equating to a non-GAAP operating margin of 6%.
During the quarter, we reported a net income tax benefit of approximately $128,000. We continue to expect our net operating losses to offset any income for tax purposes domestically for the foreseeable future. Our foreign subsidiaries are generally in a tax-paying position, and the primary source of the tax benefit in the quarter was from a change in estimate related to those foreign income taxes.
Non-GAAP net income for the third quarter was $8.3 million, up 21% over the prior year. Non-GAAP earnings per share for Q3 were $0.11. This was up from the $0.09 in the year-ago quarter and significantly higher than our outlook for the quarter. As you would expect, one key driver of the higher EPS was the over- achievement on revenue and gross margins. But net margins also benefited from slower than expected hiring, the foreign currency movement that I discussed earlier and the lower income tax impact.
Moving on to the balance sheet. We ended the quarter with cash and marketable securities of $446 million. We had another great quarter for cash collection. Cash flow from operations in Q3 was $16.3 million, up 11% year-over-year.
Moving down the balance sheet from cash to deferred revenue. Our total deferred revenue balance increased 43% year-over-year to a record $271 million. As you may calculate from the financials published in the press release, calculated billings defined as quarterly revenue plus the change in deferred revenue, were $163 million for the quarter, representing an increase of 41% over the third quarter of 2013. As I've consistently pointed out on these calls, there's a wide array of factors that influence calculated billing, and quarter-to-quarter fluctuations in the calculated billings metric should not be taken as an indicator of changes in future revenues. Headcount on September 30, 2014, was 3,154, up 38% from Q3 of 2013, with the fastest-growing teams being those in product development and professional services.
Now I'd like to move to the forward-looking financial outlook, which is covered by the cautionary language that I outlined at the start of the call and based on assumptions which are subject to change over time. We've had a terrific first three quarters in 2014. We continue to experience a very strong demand environment and will maintain our posture toward investing aggressively for the future. For the fourth quarter of 2014, we expect revenues to be in the range of $154 million to $156 million. Some of those positive impacts on expenses I mentioned will carry through into the fourth quarter, and we anticipate non-GAAP EPS of approximately $0.08 to $0.10 and operating cash flow of $15 million to $16 million for the quarter.
Summing that up for the full year, that's an upward revision in our revenue outlook from the prior range of $545 million to $550 million to a new range of $552 million to $554 million. Full-year non-GAAP EPS would increase from our earlier range of $0.24 to $0.26 to a new range of $0.31 to $0.33, and the outlook for operating cash flow narrows from a range of $65 million to $70 million, to a new outlook of $69 million to $70 million. To sum up, we had an outstanding third quarter and are looking forward to Q4 and to 2015.
That concludes my prepared remarks, so I'll turn the call back over to Zach so he can give you a little color on next year.
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Zach Nelson, NetSuite Inc - President and CEO [5]
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Thanks, Ron. 2014 is on track to be another great year for NetSuite. We are outperforming our expectations and making excellent progress on our major initiatives. One of our major initiatives has been expansion outside of North America. In Q4, we are holding a major customer event called SuiteConnect in both the UK and in Australia. These events will bring together NetSuite customers, prospects, partners and developers, as well as industry thought leaders to network face to face and share cloud insights and best practices. And, of course, Q4 is when we finalize our plans for 2015 and beyond. Given our execution during the past several years, we look forward to the future with excitement as we think we are just in the early stages of exploiting our market opportunity.
And while we are still in planning mode for 2015, given our performance in Q3 and year to date, it makes sense to give a glimpse into our outlook for next year. We are currently forecasting revenue between $715 million and $725 million on the top line. The bottom line is a bit harder for us to forecast precisely at this time since we are still finalizing our plans for next year. That said, given our success in translating investments into growth in 2012, 2013 and 2014, our bias is to invest in 2015 in areas we believe hold promise for the future.
As a reminder to you all, NetSuite is the only public cloud company to give an outlook this far in advance of the next fiscal year. However, given the strength of our business and execution this year, I wanted to give you an idea of the good things that we think are in store for NetSuite, our customers and our shareholders in 2015. So, with that, I'd like to open up the call for questions. Operator?
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Phil Winslow, Credit Suisse.
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Phil Winslow, Credit Suisse - Analyst [2]
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Thanks, guys, and congrats on the fantastic quarter. Zach, just kind of a high-level question for you. If I compare your results to really almost every other licensed software company who's missed this quarter, I think except for one, this seems to be the biggest gap of relative out performance by you guys since back in 2009 when you saw massive declines in license revenue.
Back then you talked about that companies have to shift to the cloud whose lower upfront costs, they had to become more agile. When you're talking to customers right now, because we're starting to see this gap reappear, what are they telling you why you think you are seeing this level of out performance?
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Zach Nelson, NetSuite Inc - President and CEO [3]
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Well, I think we've talked about the move to the cloud happening ever since it's been in existence, for 15 years now. I think it's gained momentum, and I really do think we've hit a tipping point there where customers are, if possible, they want to choose cloud first. And they also, I think, understand the difference between what a real cloud solution is and what a non-real cloud solution is that you see many people advertise. About how they're all in on the cloud, yet they're selling products that still require you to manage them, maintain them, upgrade them and all those sorts of things. They're actually pretty savvy now on the difference between cloud and non-cloud, and I think that's been very helpful for us.
I think the other thing that's also been very helpful, certainly over the years, has been our continued success with our customers. Because, as you know, in the software business, particularly in complex software, you can do all the marketing you want, but at the end of the day, they want to talk to a customer or thousands of customers that are successful. And we by far have the largest installed base of successful cloud ERP business system implementations on the planet.
That flywheel just gains more and more momentum as you add more and more customers to it. This quarter we added 385 new customers, the most we've added this year. That's all positive. Added on a new large customer, our largest number of million dollar deals this quarter, so that helps in the upmarket move. That's also a big piece of it.
And I'd say the other thing that's really come home, that's been driving our success has been our success with those SIs and channel partners in general. In the mid-market, the channels has finally made that move to the cloud. We're having great success in the mid-market channel.
So, we have a lot more feet on the street effectively through those partners. And then if you look at what's going on with the large systems integrators, boy, are they on the NetSuite bandwagon at this point.
It's been a great partnership with the Deloittes, the Accentures, the Caps of the world to get into a lot of those new opportunities where customers -- they know they have to get off of SAP. They know this is not the future, but they may not know how to. So, partnering with those SIs and bringing to the table a bunch of our customers that have been successful, I think is beginning to accelerate the uptake in large enterprises as well.
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Phil Winslow, Credit Suisse - Analyst [4]
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And then one quick follow on for Ron. Given that backdrop, one of the things you all talked about was prioritizing spend for 2015. We think about expanding your portfolios, go R&D versus sales and marketing, where do you feel like you're going to put more of the weighting as you exit this year and then going into next year?
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Ron Gill, NetSuite Inc - CFO [5]
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First of all, I'll just caution that it is five quarters out of guidance. With got a lot of execution to do between now and the end of 2015, so I just caveat that, that it's -- we like to give the early revenue look, but as Zach said, we are still in operational planning for next year, and we've got a lot of decisions to make about the details of those investments. I guess I could talk just a little bit about our general bias, which as Zach said in his prepared remarks, is really going to stay the same.
The two areas that you mentioned, sales and marketing and R&D are going to be the primary investment areas certainly. We're going to look for opportunities to invest there where the yield on that investment we think will be good. We've been pretty successful at doing that for the past several years.
I think we are in our fourth and three-quarter year of accelerating the growth rate in revenue. So, I think as long as we see opportunity to invest and have that investment be effected, that the bias is going to be toward that. But let us get through the planning cycle here in the fourth quarter, maybe get the fourth quarter behind us, and then we will give more detail in Q1 when we update.
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Operator [6]
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Your next question comes from a line of Ross MacMillan RBC Capital Markets.
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Ron MacMillan, RBC Capital Markets - Analyst [7]
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Thanks very much. I have two quick questions, one -- actually, both financial. The first is, Ron, you commented on foreign exchange, and it could have some modest impact.
Could you just help us understand the impact on the guide for Q4 from foreign exchange? And then I have one follow-up.
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Ron Gill, NetSuite Inc - CFO [8]
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Yes. Keep in mind, normally, when we talk about normalizing FX in a given normal quarter, what we're really talking about is the year-over-year changes in the FX rate and what that added to or took away from the results. In Q3, what you're looking at year-over-year, the dollar strengthening against most currencies where we operate. With the one exception being the British pound, which is actually a significant revenue currency for us.
So, in quarter, you actually had a positive impact of the FX changes, lowered our expenses, raised revenue just slight. So, you got an overall -- about $0.01 of EPS that probably came from FX changes year-over-year.
But more to your point, about -- I think the thing that people have been really talking about and are interested in is this changes that happened during Q3 where the dollar strengthened rather dramatically against a large basket of currencies. And so for us, you just need to understand that when that happens, the impact on our expenses, and that is stronger dollar, so lowering the expenses, that impact begins to happen right away. Literally, the next payroll check you write, the next rent check that you write in that foreign country is a little less expensive in US dollars.
The revenue impact moves through much more slowly, so it's only as new invoices go out that those invoices get valued at the new currency rate. So, taking that into consideration.
And then as I mentioned my prepared remarks, we've got about 16% of our revenue that is denominated in a currency other than the US dollar. And so if you're just doing the rough math, if you think that those currencies on average declined perhaps, 6% against the US dollar with this dramatic move that happened in Q3, so if you do the rough math there and you see that to be about a percentage point headwind into next year as a result of that. As I said, that impact tends to move through somewhat slowly, so some revenue even into next year would have already been invoiced at this point. Certainly, the bulk of revenue for Q4 would've already been invoiced, but ultimately, you're looking at impact headwind of about that size, roughly 1% as it ultimately flows through. And as I said, that would be baked into the guidance numbers that we provided.
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Zach Nelson, NetSuite Inc - President and CEO [9]
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And that's at today's exchange rates.
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Ron Gill, NetSuite Inc - CFO [10]
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Absolutely right, that's at today's rate. So, that's always our best guess on exchange rates, is always today's exchange rates. So, that's what we're baking through right now.
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Ron MacMillan, RBC Capital Markets - Analyst [11]
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That's very helpful. And just so I'm clear on this as well, when we think about the deferred balance and how that is impacted as you market at the end of the quarter to the prevailing rate, was the impact in the quarter more material from a deferred balance standpoint?
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Ron Gill, NetSuite Inc - CFO [12]
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It's not. Fundamentally, the easiest way to think of this is that our deferred revenue balance is a US dollar value.
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Ron MacMillan, RBC Capital Markets - Analyst [13]
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Okay. That's helpful.
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Ron Gill, NetSuite Inc - CFO [14]
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It's not a dramatic rebalance -- pardon me, revalue impact on that deferred revenue.
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Ron MacMillan, RBC Capital Markets - Analyst [15]
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Great. That's really helpful. And then Zach, just one for you. Nice to see the ASP deaccelerate. I know the first half in aggregate was strong, but Q2 I think was flatter year over year.
Is that predominantly being driven by OneWorld and some of those larger $1 million deals you talked about? Or how broad based is that ASP uplift? Thank you.
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Zach Nelson, NetSuite Inc - President and CEO [16]
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I think it's relatively broad based, both across the non-OneWorld and the OneWorld offerings. Clearly, when OneWorld strong ASP rises a bit more dramatically and we had a good -- I think the largest number of deals -- new deals for OneWorld this quarter. That certainly had an impact.
Then you look at the large -- the million dollar deals that we had, there is a wholesaler distributor in there that I imagine was not a OneWorld deal, as an example. I think the tide is rising on all NetSuite interactions with customers. As I said in the past, part of that is because customers actually understand now the value that we are delivering versus managing your own software.
In the old days, they would discount the fact that they had to run their own applications, believe it or not. They'd say, oh, I've already got Don here and he does a lot of stuff, so you can't really cost that -- count that in the cost of ownership.
Well, now they're starting to count that into the cost of ownership. As well as, the other thing they're really valuing is the increased productivity they're getting because these applications can do so much more than an M4 application designed 20 years ago could do in terms of automating the business.
I think that's really why the -- on the standard, what NetSuite deals, OneWorld and non-OneWorld, you're seeing an increased appreciation and also an increased price tag, therefore. An increased willingness to pay for the NetSuite application.
I would say the other thing that's driving it, and this is why I think the 14.2 release was so important, is ERP at the end of the day, and that's the heart of what we do as a function cell. So, the more functionality we bring out, the more value there is in each release and in each new customer we add.
When you look at some of the things we've added in distribution and planning, suddenly, you have a larger customer that you can sell to, as well as your existing customers. And you can bring more value because of those capabilities. You look at the things we brought out with SuiteCommerce. That will drive average selling price.
We are in a very unique position in a sense of being able to add more functionality to solve our customers' problems and get paid for it. A lot of these point products, hey, once you solve the expense reporting problem, what do you add to it? Not much.
There are a lot of features and functions that we can add to solve our customers' problem in the suite-based approach that we've always put at the heart of our market. And so we feel there's still a lot of room to go on average selling price, both in terms of the customers we're going to reach by adding this new functionality and by expanding distribution. And by the fact that we have a suite that we can continually add functionality to.
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Operator [17]
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Jason Maynard, Wells Fargo.
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Jason Maynard, Wells Fargo Securities, LLC - Analyst [18]
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Zach, I wanted to follow-up on some of the wins that you had that were north of $1 million. I'm curious if you can maybe share with us geographic composition, where those are coming from, are there two tier ERP deals? Or are you actually seeing any customers just go clean sheet and run their whole business with a fresh implementation and just say, let's go all cloud and start from scratch? A little color on what you're seeing on the big deal activity to start.
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Zach Nelson, NetSuite Inc - President and CEO [19]
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I think one of the most exciting things -- there are several exciting things about the big deals. First of all, there were more than a handful of them, right? This is a fairly substantial number, which is exciting.
The thing I would say about big deals, and I've said this every time we talk about big deals is big deals are lumpy. Particularly in our model where you have this really strong mid-market business and you're adding the next story to the house which happen to be big deals.
So, good news was we had lots of lumps that came in, in the quarter. And we hope to continue that, but they are lumpy.
The thing that I liked most about them was they were really spread across industry. It wasn't just retail, although we had one or -- depending on how you count one of them, two in retail.
It wasn't just technology and manufacturing, we had a wholesale distribution deal in there. So, it's amazing to see across every vertical, even some of the verticals which tended to be smaller companies, and wholesale distribution certainly falls into that.
You're starting to see the product mature to such a point you can handle really complex environments. In this batch of deals, I think, trying to remember all of them. I think most of them were single tier.
They are doing the full-blown enterprise replacement of software that was designed 20 years ago. That was pretty cool as well.
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Jason Maynard, Wells Fargo Securities, LLC - Analyst [20]
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Great. And then Ron, maybe I missed it, but I don't know if you -- did you mention in terms of what the apples to apples calculated billings figure was (multiple speaker)?
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Ron Gill, NetSuite Inc - CFO [21]
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Yes, good question. I didn't normalize it in the prepared remarks, so let me to do that here. I always give the caveat, I'll give it again, that I tell you not to read too much into this number. I tell you that when it's high and when it's low. Its high this time. I'm going to tell you again not to read too much into calculated billings.
It -- last year Q3, I think calculated billings was up 30, a little over 35%. It was a fairly tough compare. The growth rate against it was all a pretty good number, it was 41%. We did see a positive impact -- a slight positive impact from FX and a positive impact from billing term as well.
If I do the normalization on those two, it will normalize down. It's still a number that's north of 35%, but much more in line. Normalized down, much more in line with that rolling four quarter average which is somewhere between 35% and 36%.
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Jason Maynard, Wells Fargo Securities, LLC - Analyst [22]
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If I could just ask one follow-up on that, as you guys start doing some of these larger transactions, are you thinking you may see a greater increase in terms of multi year billings? And how does that go into your thinking about your own investments that you're making in the business.
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Zach Nelson, NetSuite Inc - President and CEO [23]
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Our philosophy on billings doesn't really change based on the size of the deal. We've had a religion around here to try to do is much as we can single year deals because it really aligns our goals with the customers' goal, and that is, how do we make this successful as quickly as possible? And now within that context, there are certainly lots of different variables that come into play.
Many of them driven by customers in terms of how they want to purchase. I think anecdotally, as the customers get larger, they tend to want to do larger multi year deals.
But that's certainly not a strategy on our side to try to do that. And we're really -- beyond the one year deal, we are open to working with however the customer would like to engage on that front.
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Ron Gill, NetSuite Inc - CFO [24]
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Yes, and I think just to add to that, even as we've seen, we have seen contract length get a little bit longer as we've done some of these larger deals. As Zach said, really driven by the way the customer wants to buy. But even when we do a multi year deal, it's still, the most common billing for us would be to bill that annually up front as opposed to doing multiple year upfront billing.
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Jason Maynard, Wells Fargo Securities, LLC - Analyst [25]
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Got it. Great. Thank you, guys.
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Operator [26]
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Samad Samana, FBR Capital Markets.
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Samad Samana, FBR Capital Markets - Analyst [27]
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I had a couple. First, we've seen NetSuite investing a lot more in brand awareness on the SuiteCommerce side at IRCE, big sponsorship, Shop.org as well. Can you discuss the progress in raising SuiteCommerce's brand as the go to e-commerce platform and how that's impacting deal flow? And then I have one follow-up to that.
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Zach Nelson, NetSuite Inc - President and CEO [28]
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Yes, thanks. I'm glad you noticed that, but that really has been a multi year investment. I think if you looked back a few years ago, you would've seen the beginning of that investment.
We've been incrementing that investment as we've incremented the investment in the product and certainly, as we've gotten more and more customers to come on. I think the brand is strong and getting stronger out there in the marketplace.
I think -- I just saw a Forrester report that had us listed in the top five of one of their reports of e-commerce and demand where it was not in the top five, by the way. So, I think we're doing really well there. Both from an awareness standpoint, from an execution standpoint on the product front.
I think probably by the end of next year, we'll have more customers on SuiteCommerce than demand ware has total. I think, really excited about what's going on in SuiteCommerce. It's not just the e-commerce component.
What's exciting is this is really the first and only cloud-based omni-channel machine on the planet, and that's what our customers are buying it for. When you see us in a deal, it's about point of sale and phone and website and call center on a single system.
The other thing that's also going on, obviously, is this notion that it's not just a B2C machine. It's a B2C and a B2B machine, right? Many of these retailers have B2B angles to their business as well as B2C. Being able to do both of those things across any device and amazing capability, and I really think we are in the strongest position for a product standpoint today. And over time, we will definitely be the number 1 or number 2 provider in this space.
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Samad Samana, FBR Capital Markets - Analyst [29]
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Thanks for that. I wanted to dig into 2015 guidance. Obviously, it's a very healthy clip, another year of 30% plus growth. Can you tell us what type of ramp you're expecting from these other product categories such as SuiteCommerce and services resources planning and maybe even HR? And what type of contribution you're expecting there versus the core ERP business?
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Zach Nelson, NetSuite Inc - President and CEO [30]
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Our view -- we approach the market basically on an industry basis. So, we don't -- there is something called a basic ERP world, but it really is driven by industry. It's very hard to find a horizontal application of ERP.
There is one area that I would caveat that, and that is the OneWorld product, which is really a horizontal solution for multi company consolidation. That's more broadly based, the horizontal space.
We really do look at the world by industries, people that sell and make products, people that sell and make time, people that do both. And so we want to grow quickly across all of those.
What you see happen is on a quarter by quarter basis, they don't all necessarily grow at 100%. But what was great about Q3 was you saw very high rates of growth across all industry groups. WD and manufacturing growing at 100%, for example, in the quarter was pretty impressive.
That's really the way we look at the marketplace. And we try to invest in the product, according to those industry groups, as well as horizontally in the OneWorld financial product.
And then within industries, how can we extend functionality to address the needs of retailers, as an example or distributors, as an example. And the 14.2 release had functionality, lots of functionality, for all of those industry groups within it.
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Samad Samana, FBR Capital Markets - Analyst [31]
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Great. Thanks for taking my questions, and congrats on a great quarter.
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Zach Nelson, NetSuite Inc - President and CEO [32]
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Thank you.
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Operator [33]
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Pat Walravens, JMP Securities.
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Patrick Walravens, JMP Securities - Analyst [34]
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Great. Thank you, and congratulations.
Zach, I want to follow up on that chain of thinking you were just going down. If you look at your business by industry, which of the industries are experiencing -- how would you rank them in terms of the growth rates that they're experiencing? And then secondly, what new verticals or industries are you contemplating right now?
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Zach Nelson, NetSuite Inc - President and CEO [35]
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Well, again, the level set -- we view the world really as industry. That's how we develop the product of wholesalers and distributors an example within wholesale and distribution. There are hundreds of verticals, agricultural distribution versus electronics distribution, et cetera.
We sometimes use the term a little bit loosely, but largely, we're talking about industry sectors. And again, what's been great about what's really cool about this quarter is just the accelerating growth in almost every industry group. And so each industry group has different dynamics.
Wholesale distribution, as I said, typically, is smaller companies, so you'll see a smaller ASP. But on the flip side, they're incredibly complicated businesses that need all of NetSuite's functionality from the CRM to the warehouse management to the e-commerce capabilities to the financials.
There really -- the great thing that I think you're seeing this quarter and that you've seen us investment in over the last five years is getting really smart about how we go to market in those industries and how we build products for those industries. Because at the end of the day, our sale almost immediately becomes a vertical sale or an industry sale.
If we go to sell a software company or an Internet company, they'd say, don't show me a John Deere dealership. I don't want to see another software internet company running NetSuite because I need complex rev rec and other things.
I think we're so far ahead of the curve in terms of not just delivering cloud solutions, not just delivering complex cloud solutions, but really delivering cloud solutions to designed to run many different businesses. And on top of that, you look at how we've grown our development organization over the last three years, growing it, tripling it really, since the beginning of 2012.
We can really now advance the product on many, many fronts, which gives us an enormous competitive advantage over some of the ankle biters that are out there that -- all the NetSuite wannabes. They have a long way to go to want to be us. We're in a great position horizontally and vertically.
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Patrick Walravens, JMP Securities - Analyst [36]
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Great. Thank you. Just as an example, would government be an area that would be interesting to you?
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Zach Nelson, NetSuite Inc - President and CEO [37]
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Certain aspects of government. You saw the state of Texas actually roll us out as their -- effectively their internal commerce platform, right? That was an incredible application. All the purchasing in the state of Texas now running through NetSuite.
So, certainly within government, there are many applications that we are suitable for. So, yes, that's definitely something on our road map.
Related to government, of course, are government contractors, right? We already have great capabilities there. The old Dell tech product. Talk about an old product, there's another one.
We have a great solution for government contractors, right? That's really combining the services resource capability with some product capability with some unique things for government. Yes, there are lots of adjacencies off of these industry groups like services, like wholesale distribution, like manufacturing that we talk about quite a bit. And then we can get into verticals off --adjacently off those industry groups.
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Samad Samana, FBR Capital Markets - Analyst [38]
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Great. Thank you.
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Operator [39]
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Jennifer [Law], Morgan Stanley.
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Jennifer Law, Morgan Stanley - Analyst [40]
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Great. Thank you. Just a couple quick ones for me. First, Ron, I just want to follow up. I think you made a comment that hiring was a little slower than planned in Q3. Can you talk a little bit about maybe where some of the challenges were and then how your thinking about hiring headed into Q4?
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Ron Gill, NetSuite Inc - CFO [41]
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Yes, let me -- I'll give some background on that. Keep in mind, we're talking about a very aggressive hiring number that we have. Overall headcount still increased 38% year-over-year. I think we said R&D headcount increased 46%, so that's -- that was what we actually achieved, even though our original plan had even slightly higher and slightly earlier in the quarter hiring plan that we actually achieved.
The one caveat I would say is even though it resulted in the savings versus our forecasted plan for the quarter, we still hit some pretty aggressive hiring numbers. That said, I think we've got our irons in the fire, hiring globally. We've certainly increased in the last couple of years the number of places in the world where we are hiring.
A product development team, for example, adding the Czech Republic, adding Uruguay, we've recently added Kitchener and Waterloo in Canada as a new development center. We've got a bunch of places there outside of silicon valley, where we're hiring.
And the same with sales as well. We're hiring sales people globally, and we've opened a number of additional sales offices in the US just within the last year so that we are hiring more regionally within the US. So, I think we're trying to be pretty aggressive about it. And as I said, hitting 38% year-over-year overall growth. So, hitting a pretty high number, but just not spending quite what we'd expected to spend in the quarter.
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Jennifer Law, Morgan Stanley - Analyst [42]
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Great. And then just rolling forward to calendar 2015. And I certainly understand the desire to keep some optionality there on the expense side, and we appreciate even getting the revenue look. But just reading between the lines a little bit there, is the message that we should take away that there's no reason to think expense growth will materially slow next year?
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Zach Nelson, NetSuite Inc - President and CEO [43]
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In the past I've been pretty right up front about saying what we did this year, expect next year. I'm not being that definitive this year. Primarily because we really -- there is so many opportunities in front of us to invest wisely, to grow profitably that I think we really have to get through this planning period.
I think we're on a -- we've obviously been on a real tear for the last four or five years. And so we're going to look very deeply at what we want to do for the next four or five years, and it's very hard for me to really say one way or the other how we might come out of our meetings at the end of this quarter.
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Jennifer Law, Morgan Stanley - Analyst [44]
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Thanks.
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Operator [45]
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Justin Furby, William Blair and Company.
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Justin Furby, William Blair & Company - Analyst [46]
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Hey, guys. Thanks. Great quarter. Zach, can you talk a little bit about rep productivity that you saw in the quarter maybe versus last quarter? And then separately on Europe, I know it's not a huge piece of your business, but if you look at from a new business perspective, what did that look like, both Asia Pac and Europe? What did that look like from a new bookings perspective?
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Zach Nelson, NetSuite Inc - President and CEO [47]
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In terms of rep productivity, it remains strong. Again, Ron said we added something like 37% growth in reps in sales expense and roughly correlating that to quota. Is that --
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Ron Gill, NetSuite Inc - CFO [48]
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34% of sales.
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Zach Nelson, NetSuite Inc - President and CEO [49]
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34% sales and marketing. We grew really nicely in the pipeline, actually, and the productivity of those reps actually grew a bit. Again, this is been the same thing we've been saying for the last three to four years is when you add that many reps, at some point you expect productivity to decline and that has not happened.
That tells you, we can keep going. We can keep the foot on the gas, and that's an a nice metric to have at your back, to have confidence to continue to do the kind of growth we've been doing in the sales organization.
The other thing I'd say, that it's nice to see in the productivity, obviously, it is not just the ASP growth, but also the deal count growth. Over the last couple quarters, you've seen that inflection point, and that's a real positive as well.
In terms of international and business around the world, the UK had another great quarter, it grew something north of 100%. As we've been saying, we've investing heavily in the UK, we're doing a lot of marketing, growing the organization there. Last year it grew at 100%. This quarter it grew at 100%, and we're heading into a very strong Q4.
Really excited about what's going on in Europe. I've been spending about a week a month over there now. It may become more time as we move into next year because I think we have a real opportunity there with the Sage base, because Sage has really done nothing to move their customers into the cloud and we obviously have everything to move them into the cloud. So, we think we're about to hit a tipping point there.
Asia, North America was obviously very strong. Asia, and particularly emerging Asia. The -- not necessarily Japan or Australia/New Zealand, but those emerging countries had really strong quarter.
And I'll be heading over there. Friday night I jump on a plane to go to Asia to meet with customers and whatnot, so I might have a little better quantitative feel on what's happening in those markets.
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Justin Furby, William Blair & Company - Analyst [50]
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Okay, great. And then just quickly, Ron, on the bookings or on the billings guidance and the normalization, is that --I'm just curious, what did Venda do in terms of deferred and actual -- what was the impact of Venda? So, if you netted that out, what did organic number look like net of all the billings noise or the duration noise and FX noise?
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Ron Gill, NetSuite Inc - CFO [51]
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Yes. We're not -- I'm not going to be breaking out these small acquisitions probably on almost any metric. I think probably the thing that you could refer to, the impact would have been very small. I think the thing I could refer you to as a reference point would be, look at the deferred revenue growth year-over-year.
I think the deferred revenue growth was north of 40% itself, and Venda represents basically none of the deferred revenue on the balance sheet at the end of the quarter. There's no deferred revenue there from Venda anymore.
So, you can see that apples-to-apples, year-over-year growth rate in deferred is also in excess of 40%. I think that's something I can point you to as a pure number as a reference that you can see probably was not that impactful.
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Justin Furby, William Blair & Company - Analyst [52]
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Okay, great. Thanks, guys.
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Operator [53]
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Raimo Lenschow, Barclays Capital.
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Harry Hire, Barclays Capital - Analyst [54]
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This is Harry Hire for Raimo, thanks for taking the question and congrats on a great quarter. I was just hoping to dig in a little bit more on what you're seeing in terms of the benefits from integrating Venda from a more qualitative perspective.
How are you hitting the ground running internationally? I know you just talked about -- it's a focus for you obviously, but where is strategically the -- where is the focus? Is it just hiring or is it more product evangelizing, or can you just give a little bit more color there?
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Zach Nelson, NetSuite Inc - President and CEO [55]
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It's a great question. It's really on -- what the Venda acquisition was all about was strategic investment in a couple different vectors. I've obviously been heavily involved in the integration of the Company. It's a very exciting thing that we have going on over there.
We've got an incredible group of people, and that's the most important thing that you get in these acquisitions, is the people. Incredible quality people, great development team, really dedicated folks.
We've gotten through some of the throes of integration and being part of a new company and all those things, which are really challenging for the other side, frankly. But we've had a bunch of our guys become a part of their team and they're definitely part of our team right now. So, very excited about the people that we have.
And if you look at even our past acquisitions, things like OpenAir, some of the great leaders that we still have that NetSuite were part of our first acquisition at OpenAir. So, you get incredible people out of this -- out of these types of engagements.
Second thing is geographic expansion. While you sit in America you think, oh, we can figure out the UK or we can figure out Asia. But it's really nice when you have a couple hundred people sitting there figuring it out who are local. And so I think they're helping us enormously to figure out how we're going to go to market, not just in the UK, but throughout Europe.
Part of that is how we go to market from a product basis. Obviously, that was a piece of this, being that domain expertise. Largely around commerce, but global commerce, dealing with many, many markets, many different sort of rules, regulations and capabilities that are required. So, that's a huge piece of this, are the product capabilities.
And then last but not least, I'd say it's the customers. They brought -- while they had a relatively small number of customers compared to us, they have some incredible customers. Again, to get the local feedback of companies like Laura Ashley and Boohoo and Fat Face, really big brands in the UK that are now part of the NetSuite family, really help us understand what's going on, on the ground, what companies like that are facing. And it makes us even more excited about the opportunity that we have in the UK and throughout Europe.
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Harry Hire, Barclays Capital - Analyst [56]
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Great. Thanks.
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Operator [57]
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We have time for one more question. Your last question comes from the line of Greg Dunham, Goldman Sachs.
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Greg Dunham, Goldman Sachs - Analyst [58]
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Yes. Thanks for taking my question. First, I think you got asked this question already, but given the numbers and given some of the commentary from other software vendors this quarter, I've gotten a number of questions, how is the spending environment? In September, did you see any sort of hesitation or slowdown from a buying perspective? And any sort of hesitation in the software spending environment in September?
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Zach Nelson, NetSuite Inc - President and CEO [59]
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We saw the opposite of hesitation. I guess we were unusual in that sense.
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Greg Dunham, Goldman Sachs - Analyst [60]
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Okay. That answers that question. Follow-up question, one other question that I get often. What's the sustainability of the ASP growth, given the fact that the mix of OneWorld has gotten to a very strong level already? How should investors think about that for NetSuite?
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Zach Nelson, NetSuite Inc - President and CEO [61]
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Again, I think OneWorld was an initial driver of average selling price. But as I said in my earlier commentary, it's not just about OneWorld. It really is about bringing broader and broader capabilities of the suite to the customers.
If you think about those types of customers that NetSuite has, they tend to be very tightly coupled and frankly compact businesses. Companies like wholesalers and distributors where the salesperson sells something. They have to see the inventory and when they sell the inventory, they need to lock it up.
In those tightly coupled businesses, they tend to want to use more and more of the suite. And so as we either expand the footprint of the suite, that gives us upsell opportunity. And as they begin to consolidate their systems around the suite, that gives us upsell opportunity. Certainly not just limited to OneWorld.
We should all be excited about how much larger our development organization is because we have the rare opportunity of having the ability to add new functionality that the customers not only will pay for, but will happily pay for because of the problem they're facing and they're trying to include together a bunch of different things.
There are very few software companies on the planet that have the opportunity that we do, given the fact that we started out by building a suite. Not by building a point product and then calling it a suite. We really started by building a suite. And you see the power of the suite model playing out in average selling prices.
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Greg Dunham, Goldman Sachs - Analyst [62]
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Perfect, thanks, guys.
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Zach Nelson, NetSuite Inc - President and CEO [63]
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You bet. Thank you all for joining us for the Q3 report. It was an exciting quarter for us, and I think it sets up a great Q4 for us. With that, we will head off from the call and go execute on Q4. Thank you very much.
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Operator [64]
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This concludes today's conference call. You may now disconnect.
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