NetSuite Inc at Pacific Crest Emerging Technology Summit

Mar 04, 2015 AM EST
Thomson Reuters StreetEvents Event Transcript
E D I T E D   V E R S I O N

N - NetSuite Inc
NetSuite Inc at Pacific Crest Emerging Technology Summit
Mar 04, 2015 / 08:00PM GMT 

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Corporate Participants
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   *  Zach Nelson
      NetSuite Inc - CEO

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Conference Call Participants
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   *  Brendan Barnicle
      Pacific Crest - Analyst

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Presentation
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 Brendan Barnicle,  Pacific Crest - Analyst   [1]
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 Good afternoon, everyone. I'm Brendan Barnicle from Pacific Crest. Thanks so much for joining us for our 10th Annual Emerging Technology Conference. 10 years ago when we first did this conference, nobody knew me and very few people knew Pacific Crest, but we called Zach Nelson to ask him if he would keynote and kindly Zach came. I think it was out of sympathy more than anything else. Zach and I were just saying, the original room was probably about the size of maybe that, and we had probably about 50 or 60 people. So, obviously it's come a long way. In every single one of these events that we've held, Zach Nelson has been a keynote for us.

 And so, Zach has been incredibly instrumental in the success and the maturing that we've seen at this conference. And in the meantime, he's also led a hell of a company and he's really given us a great example of how to run a SaaS company and how the SaaS industry has evolved. Every year, he's had great insights about what's going on in the industry and I expect we're going to hear more today. So, please join me in welcoming NetSuite's CEO, Zach Nelson.



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 Zach Nelson,  NetSuite Inc - CEO   [2]
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 Thank you. Thanks for having me again. Yes, it has been certainly an amazing 10 years, and one thing I'll say about Brendan and the Pacific Crest team is that the research you guys do every year is always very interesting and certainly interesting to us. I know there were a lot of interesting insights this morning that I'll talk a little bit about. I don't know why I'm always invited back, because my story hasn't changed in 15 years. So, I'll probably bore you a little bit with the same story.

 We've hired a new VP of Marketing, Fred Studer, out of Microsoft and his job is to change the story. So, it's not exactly the same every year. Some of the slides have changed, they look prettier than they did 10 years ago. And also, at least to give you some insight into what I've seen over the last 15 years and where we think the world is going. Just for those of you that aren't that familiar with NetSuite, today, we're the world's largest provider of cloud ERP solutions and I actually kind of hate using -- calling us ERP, because the idea behind NetSuite really wasn't to an ERP system, it was to build a system to run a business, had to build the ERP system first to do that, but the idea is really about how do you go from lead to cash in a single machine. And the way you did was you had to build the ERP system first because it was the hardest system to build.

 Certainly today, all of our customers use us for ERP, but 70% use us for some other part of the suite. We'll talk a little bit about that. And many of the people that you've met probably in your breakouts and in your meetings are on NetSuite. We've become the platform really for next-generation companies. As I look back at the evolution of our customer base I came up and I'll talk about this a little bit. NetSuite's really the platform for the disruptors and the disrupted. The guys building next-generation companies are building them on NetSuite and now what's happening is, those companies that are being disrupted or that are about to be disrupted by new competitors are re-platforming on NetSuite to gain the agility that, that platform has given to disruptors.

 So, you certainly met a lot of NetSuite customers. Our last decade of revenue growth looks something like this. So, back in 2006 when we were to speak, we were $67 million, that was a good number. This year, we're estimating to do something like $720 million in revenue. So, it's been a great run for us and the early that suite made have certainly paid off. Over the last five years, investors have allowed us to invest incrementally in growing our sales and marketing in our development organizations and we've been able to accelerate revenue growth over the last five years. I think we're probably the only software company cloud or non-cloud where you see actual acceleration in the revenue line.

 So, the investments we've made that I'll talk about a bit and why we're making those investments, have paid off and I think we have an incredible pipeline of innovation coming both this year and next year. One of the things that we've done over the last four years is we've increased the size of our development organization 400%. And so, you'll start to see some of that innovation come out of the NetSuite pipeline this year at SuiteWorld, which is our big user conference in May. Incredible new innovation coming up, I'll presage that a little bit today. But the development organization is really bringing to market incredible new capabilities that frankly ERP systems of the past could never do because they weren't architected the way NetSuite is architected and we'll talk a bit about that.

 I just wanted to start before I talked a little bit about the NetSuite strategy, some of the lessons that that we've learned in the cloud, and I talked to Brendan briefly before I got up here about some of his research. And the first bullet is I think is a huge transformation that's been made in the mindset of our customers and the customers of other cloud vendors and that's in the early days, back 10 years ago when we were smaller, the discussion around cloud really centered around how do you reduce costs. Cloud was seen largely as a cost reduction capability.

 What's happened today is it's much more about business enablement and in fact, in many cases when people moved to NetSuite, they're actually increasing their costs. They've paid for great plains, they've already bought all the SAP licenses they can buy. It's not going to cost them any more to deploy those systems, but those systems are designed to solve the problems that they're facing in today's business. And I think where this comes out and I know Brendan talked about average selling pricing increasing for SaaS vendors, it's because of the latter part of the statement, people are willing to pay more for capabilities that actually enable them to do new things in their business rather than just worry about reducing cost.

 Now at the same time, this stuff reduces cost. I think that's given at this point, but the growth in ASP I think is -- certainly in our case it's related to two factors. People willing to pay more for the capabilities that we're providing than they have historically because they see they need those capabilities. And secondly, unique to NetSuite, our customers are getting larger and that's certainly driving ASPs. The second lesson learned in 15 years in the cloud is when we started delivering cloud systems, there were lots of myths about the cloud. Back then 1998, we were arguably the first cloud company started. People actually wanted applications that looked like Windows, if you guys remember what Windows applications looked like. And there was a transition that happened and suddenly they wanted applications that look Amazon and the web.

 So, many of these myths have been knocked down over time. One of the big myths that we face, because we build systems to run mission-critical processes and mission-critical applications is that no one would run mission-critical applications in the cloud, largely because they didn't believe it was possible to build complex mission-critical applications like NetSuite on the Internet. And it turns out properly architected, a lot of the problems that you couldn't solve with existing on-premise software are actually more easily solved on a cloud-based application. And a great example in our particular case has been the growth of our OneWorld product, which enabled us to do multi-company, multi-currency consolidation for large multinational organizations.

 It's an incredibly complex problem for large companies, in fact SAP and Oracle typically can't even do consolidations of their own instances, you have to buy something called Hyperion, which I guess is Oracle now, but you had to buy another product to actually consolidate across those instances. In the case of NetSuite there is -- we have effectively Hyperion built into NetSuite. And why the cloud made that easier to solve was because NetSuite while it's distributed, the user base is distributed, every user is transacting actually in the same database. So, you have your French company, your English company, your US company transacting in their particular slice of NetSuite, but they are physically in the same data model. That makes it much easier to figure out how to consolidate across those entities than the old model where you had an instance of SAP in Europe, an instance of SAP -- if you are lucky, you had an instance of SAP in Europe, an instance of SAP in the US, and an instance of SAP in Europe and then try to put humpty dumpty back together again after you'd fragmented the data model was almost impossible.

 In the case of NetSuite, in the case of distributed applications, you see that we could actually solve that problem now. And you certainly see it across other cloud-based applications, right. What makes LinkedIn possible? Who thought that you could aggregate every resume on the planet into a single data store? Well, that's effectively what LinkedIn has enabled. And if you look across all of these various cloud applications, the ability to aggregate previously un-aggregatable data is actually the power of that business model in different ways for different cloud companies and for us, it's the ability to solve these complex business problems.

 Which leads to the next point, integrated data models that's what NetSuite's about and integrated business application. Again, make it easier to solve problems that were unsolvable before. We talk a lot about omnichannel and e-commerce. It turns out, it's much easier to solve the omnichannel problem, if you have a common back end serving multiple front ends, rather than multiple front-ends with multiple back-ends. You'll never solve the omnichannel problem if you have an omnichannel or an omni-business system model. Common back-end, serving multiple front-ends is the way to solve it. Certainly, the way all the large companies have solved it and it's architecture that we've created to solve that problem.

 And last but not least, the final sort of myth that's been blown up was, in the early days when we'd compete against traditional software vendors, they'd say "Okay, NetSuite's great, but everybody's on the same version of software. So you can't customize it." Well, talk a little bit about our customer base, we have distributors running NetSuite, we have software companies running NetSuite, we have manufacturers running NetSuite, we have services companies running NetSuite, we have retailers running NetSuite. Those are all very different businesses. Believe me, when the CEO of a retailer is looking at NetSuite, he's looking at a whole different set of metrics than I look at when I look at NetSuite running a software business. So clearly, we've had to have some ability to customize the system. And in fact, my belief is properly architected and not everyone building SaaS application has properly architected them, but properly architected, these systems are far more customizable than traditional on-premise systems ever were for two reasons.

 One is, in our case in particular, since we were building a system to run a business and we didn't know how to run every business on the planet, we knew we'd have to enable our customers to change the system to map to their business model. So we knew we had to have customization in it. But more importantly, because we were running the software for our customers and in fact, we were running it in a multi-tenant fashion, so we had multiple customers sharing that business application. We would have to figure out, not only how to enable all of those customers on that system to change our data model, but then when we upgraded the software, how did you migrate the customizations. And so that is the magic, that's -- the key problem that you have to solve in building next-generation multi-tenant application is enabling customization and then migrating those customizations.

 As you know, in traditional software, you implement SAP, you implement Oracle, you customize it and then you never want to touch it again for fear of blowing it up. They're far less customizable than NetSuite. We had to solve this customization migration problem in version 1 and today that customization architecture's evolved into an entire development platform that we call SuiteCloud, very similar to what Salesforce had done with Force.com. Both of those platform architectures, if you will, evolved out of our earlier solution to enabling customers to customize the application. So, these applications are far more customizable than traditional apps ever were.

 And frankly, that's why I think SAP failed in their first iterations of trying to build cloud applications as they came to the problem saying well these applications aren't customizable, so not want to worry about that. No, every customer wants to customize their business application and in fact, our architecture, SuiteCloud, is why we win deals usually is the ability for our customers to build the last mile in the system. And then as we upgrade the software, we upgraded it 400 times last year, wake up the next morning and all of those customizations are still in the system. So, it’s a very important concept in our application and in every other successful complex cloud application.

 So, just again a little -- perhaps more detail on what NetSuite's done and how our business has evolved. While my presentation hasn't changed over the last 15 years, certainly our customer base has changed. This was the problem we set out to solve Larry Ellison, Evan Goldberg set out to solve this problem, we call the hairball and I put this slide up for a big multi-billion dollar company last week and of course they said this hairball wasn't close to the hairball they have. And frankly, the smallest customers we put this up in front of say our hairball is much more complicated than that. So this really is the challenge that people have when they run their businesses.

 They've historically bought applications by department. You bought an accounting application, you try to tie out to a sales application, you had a website and the challenge we came how do you synchronize data between those systems. For mid-sized company, its unsolvable, right. It's too expensive for them to solve their problem. Large companies, the big SIs have historically solved this for them, but only after tens of millions and hundreds of millions of dollars of integration. So, our notion was to build an integrated application that solved that problem. We've done it for product-based companies for services-based companies, I'll talk about that. So that was step one. Step two is once you built that integrated application, how do you expose that data, now in this case to a browser to different user types, so role-based views of that data. A controller logs in, they see it (inaudible) see a controller system, the CEO logs in, they see a CEO system, inventory manager logs in, they see an inventory system. So, the ability to reconfigure the user interface as the system evolves.

 And last but not least, one of the things we learnt very early on instead of making that business application -- that system look like a business application, which it looks like to an internal user, we could evolve our customers to put their websites directly on top of that core informational data and make it look like a customer-facing website. So, as we talk about e-commerce a little bit, e-commerce is effectively an accident of this architecture that we've doubled down on in the last three years to enable our customers to turn their core ERP system into their customer-facing commerce system.

 So when we started this company as I said, in 1998, nobody believed that people would run mission-critical applications. And you fast forward to today and look at where market share is going, market share growth in these systems everybody wants to get to a system like NetSuite, in fact everyone wants to get to NetSuite. This is Gartner's most recent chart on financial management system market share growth and I guess ours is something like 40% over the last year. If you look at the Top 10 providers of financial management systems, we're Number 10. But if you look to the left of us, one through nine is the graveyard of software and if you look to the right of us 10 through 20 is the graveyard of software. So, there is no one in that Top 20 that is cloud-based and delivering these systems.

 And certainly when people are re-platforming this kind of chart shows you where customers are betting the future is, and it's clearly a system like NetSuite and in fact, it is a system exactly like NetSuite. Why these customers choose us? We talked a little bit about the customers, but this is really the big thing, nobody wants to do accounting in the cloud. There is no hell you and accounting in cloud. They want to run their business in the cloud. And this application is designed to function the way a modern company functions. To put it simply, I'm not -- when I talk about SAP, I talk about the [in-force] and the Microsofts of the world in the mid-market and I'm not saying a pejorative thing. They were great for the way a company was run 20 years ago, before the cloud existed. But if you look at the architectures of those applications, not only were they designed before the modern cloud existed, they were actually designed to prevent access from outside the firewall, right. And that's no way to run a business today.

 You want to have all of your business capabilities for your internal users, users accessible outside your company and now you also want to have all the data locked in these systems available for your customers to come in and interact with, to order, to pay, all of those things. So the last generation of applications were literally designed to prevent the way a modern company has to function. NetSuite was designed completely differently. It was designed on the cloud, for the cloud. So that's really the transition that you're seeing happening. Obviously there's rapid deployment and I've been surprised even as we've moved up market into much, much larger companies, I don't think you ever see -- I don't recall seeing a deployment that took as longer than 12 months to roll-out for large complex billion-dollar companies.

 This was really unheard of especially in ERP, complex business applications. We just rolled out Order to Cash for $500 million software company six months, completely finished, multinational, multi-currency, multi-tax. We're not talking about small pieces of functionality, we're talking about the hearts of these companies in 6 to 12 months. Flexibility at the core, I talked a little bit about that. You can't overestimate the customization required to run a business, right. We have lots of functionality for different verticals, I will talk about that, but ultimately the last mile that a company wants to build on NetSuite is their business strategy.

 There is no way we can identify what every company on the planet's business strategy is going to be. How they're going to want to manipulate the system and that's what this SuiteCloud architecture enables them to do. And by the way, given how quickly business changes, you want to experiment with new business models. That's something else this flexibility is very important here. Obviously, last upgrade we talked about that. We run the software, they run their business. It works.

 Commerce-ready, the ability to turn this system in your customer-facing commerce system. We're killing it in omnichannel commerce. And last but not least, this stuff actually works. I've been in the software business for a long time. The old model of shipping a disk to a customer and daring them to install it was a beautiful model, because it wasn't your problem if the software didn't work, you've gotten all your money. In this model, we only make money if the customer renews for a long time. So it had to work, but it actually does work for 24,000 companies and organizations around the world. So I'm going to talk a little -- I know Brendan talked a little bit about verticalization is a key trend in what's going on in SaaS.

 Verticalization has always been at the heart of what NetSuite does, because as you can imagine, if we were to go to Pacific Crest and have Pacific Crest run on NetSuite, they'd say well, show me five other investment banks that run on NetSuite, don't show me John Deere dealership. So, the discussion turns into a vertical discussion very quickly, and we've evolved obviously deeply in several verticals. So, I'm going to talk a little bit about those types of companies, and really what the next-generation of those companies look like because those are the innovations that we're building into the product today. So, I talked a little bit about it, the disruptors, the guys building next-generation companies, you look at all the IPOs that have happened this year, Hortonworks, Box, New Relic, all on NetSuite.

 So the next-generation companies are not starting with the old stuff, they're starting with the good stuff. And then the companies that are disrupting want a platform that's agile, that they can start to change their business model to respond to those companies. They are also running on NetSuite. So ultimately, we're a heart transplant for a company and nobody does elective heart surgery. So, the company has to be sick essentially to begin to think about how we would change our core business system. The good news for us is companies are getting sicker and sicker because their business models are being changed from underneath them by next-generation companies and by new business models. So there is a big cycle of heart transplants going on, you've certainly seen that in our numbers.

 The second type of company that comes to NetSuite are what I call tightly -- they have tightly coupled business models, and that is we build an integrated system, lead to cash in a single data model. So, what types of businesses does that appeals to or it appeals to folks like distributors? When a sales person sells something, they need to see the actual physical inventory and when they close the deal, they need to lock up the inventory so no one else can see it. So, people that sell and make things are a big industry for us.

 Interestingly enough, there is another group of product companies, easily said. The second company that had a very similar challenge to product companies were services companies, in particular time-based services companies. If you're billing time, it's not just about the tracking of the time, which is the front-end process, it's actually more important to bill the time because you actually want to get paid for it. So again a tightly coupled system that enabled that seamless business flow was key. And now of course, for the first time, there is a system that you could actually run a product and a service company in. Nobody has really built a system like that. We did as an accident of our heritage in some sense. It applies immediately to technology companies, people that sell a product and then service a thing, right. That's a unique thing, but the other important concept within this is, this is the disruption that's going on in almost every industry around the world.

 Product companies are becoming service companies and service companies are becoming product companies. And they want to be able to switch between those business models, and not just in terms of being able to track time, but turning products into things like NetSuite, usage or subscriptions. And this is the disruption that's going on in companies is this desire to flip between being a product company, a service company and we're uniquely situated to actually address that transition.

 The third large industry group in NetSuite is particularly applicable for is omnichannel retail. And this evolved really out of our heritage of supporting distributors because what was a retailer or an e-commerce company, but an online distributor. And so, as I said, our architecture lent itself to the fact that instead of making it look like a business application, we could make it look a website. We've done an enormous amount of investment in this particular area. Retail obviously is going through massive re-platforming to build an omnichannel experience, recognizing your customer wherever they are.

 We, I believe, have the only cloud-based omnichannel retail system in existence, and you see it being rolled out in places like Williams-Sonoma. So, this is Williams-Sonoma, they're using NetSuite as their platform outside of North America for e-commerce. So that website that you see use is their ERP system, that's NetSuite. They've been able to turn their core operational system into their customer facing e-commerce system. All of the pricing, all of the inventory, all of the images, all of the transactions are being generated directly out of NetSuite exposed to the customer and business is happening. This -- by the way, it's not just the website that's being generated out of NetSuite, point-of-sale, call center, so multiple front-ends single, back-end, common customer experience across channels. That's effectively how they're using NetSuite and that's effectively what people are trying to do in retail to deliver an omnichannel experience.

 So while omnichannel today is talked about as a retail problem, I believe it's an every-company problem tomorrow, because believe me all of our customers want to interact with them through a myriad devices. They want to transact with through a phone, they want to transact with through a website. If you're an auto manufacturer you want all those screens in the car to transact on their behalf. So, this omnichannel capability that we've built is not just applicable to retail, I believe it's applicable to every company on the planet. Here is another great example it's not just B2C it's B2B, PAG Leisurewear, international clothing company uses NetSuite as their B2B site so they can sell to retailers via a website that's as sexy as a B2C site, but that process is the order entirely differently. It gives them term, it doesn't charge their credit card, it generates an invoice, it gives terms based selling. So again, all of these different back-end functions serving a very cool front-end for B2B.

 And finally, it's not just businesses that are trying to figure out how to turn into an omnichannel business. The State of Texas has rolled out NetSuite as their internal distribution system for all of the agencies. And guess what, their ERP system to do that is a website coming out of NetSuite. Hundreds of agencies, billions of dollars of spend, all coming through, not a business application, which is -- we replaced eight business applications doing this function before with a single instance of NetSuite that looks like a website. So, this is the future of every company; manufacturing, the future manufacturing is their ERP system looks like this; wholesale distributors, the future of their ERP system looks like this; software companies, you go to renew your subscription, why do you have to call a human, you should be able to go to their system effectively with their ERP system to renew and on and on and on. So, this capability omnichannel retail, the ability for the machine to effectively interact with the customer has big implications for what the next-generation ERP system looks like. These are some of the new developments that we're bringing out, certainly at SuiteWorld and beyond.

 And finally, we talked a little bit about this. The fourth class is really a non-vertical, it's multinational. Hard to find a non-vertical ERP problem to solve a multi-company, multi-currency consolidation was that problem for us that we solved it. Solved it elegantly in this product called OneWorld, incredible product and in fact ultimately when you look at this to go back to my Williams-Sonoma example, it's interesting to see that many US companies are actually using us as their global, their outside-the-US platform for their next-generation business initiatives.

 So, Williams-Sonoma is using us in Australia, in the UK, in Singapore to do what I showed you, they're doing, but they're leveraging all of the OneWorld capabilities, the multi-company, multi-currency, multi-taxes sitting underneath all of that complexity. So, the combination of OneWorld plus omnichannel commerce is really transformational in terms of what their capabilities are.

 So, with that I gave you a little flavor of what's going on in our customer base, what we've learned from the cloud is where I started. I think what's on the horizon and where we're focusing our development efforts are on these sorts of things. This is the future. You started the conference 10 years ago talking about SaaS, today we call it cloud and that's largely been a technology concept, technology companies or cloud companies. What we see happening is every company is a cloud company now. Coca-Cola has to go from figuring out how to ship pallets of coke to Wal-Mart to putting soda fountains in every house, completely different business model. You go through every industry on the planet, they're trying to figure out how to use this ubiquitous network to reach customers more efficiently and to do things differently. And that's causing major disruption in their business models and in their business systems, their old business systems. You can't take two years to change your business system to respond to these kinds of changes.

 Talked about a little bit omnichannels transforming retail. Omnichannel is an every company problem tomorrow, this is an incredible opportunity for us, but solving this problem is crucial for in every industry. And last but not least, product companies are becoming service companies, service companies are becoming product companies. So, the ability to switch between business models is becoming very important and where this problem really pops up? One is in the flexibility of the system, how quickly can we experiment with these business models, that's important, but the complexity really pops up in the billing system and in the revenue management system. So, these are areas that we are making major investments in and I think there's some solutions we have coming out that are the Holy Grail to enabling this product/service company to thrive. So with that, I'll turn it over.



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Questions and Answers
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 Brendan Barnicle,  Pacific Crest - Analyst   [1]
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 Thanks so much. I think we have some mikes still be in the audience for focus of questions. And to get it started Zach, you guys have done -- you mentioned a couple different international examples with Williams-Sonoma and I think with PAG, how did you -- a lot of the companies here just starting to thinking about going international. How did you do that? How did you make that transition at NetSuite?

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 Zach Nelson,  NetSuite Inc - CEO   [2]
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 It's interesting. There are two, one is a product piece and one is a company strategy piece. Very early on in our history, if you look at the business strategy was really initially to fill the gap between QuickBooks and SAP. And so what you find when you serve the mid-market is it's complicated to sell -- it's actually more complicated to sell into that market than it is in a large enterprise and it's also very complicated to implement these complex applications. So, one of our first challenges was how do we reduce the cost of sales and services. And the first thing we decided to do in 2003 to do that was let's get out of California.

 So, we try to hire as few humans as -- so we built a distributed company from the start. We said, let's go to different places that are lower cost, but super high quality people. And so that's been -- our model has been -- I think it's a next-generation model for all companies. I would recommend all small companies if they can figure how to do this, get out of California and get to other regions because you tap these incredible talent pools at a lower price typically, but it also enables you to run your business like your customers are running their business, which is in a distributed fashion. So, that was number one, it was a core strategy for us to build a distributed company. And so I think we went to the UK in 2003 or something. Our revenue was whatever it was, $10 million or something.

 The second piece that happened to work for us was, you recall when we first started the Company, the idea was to build a system to run our business and the way we architected that initially was we built it for a single company. So, one company, one currency, that was the model. As our customers grew, we saw our largest customers begin to leave us because guess what, they had multiple subsidiaries, they were operating around the globe. I mean like well, maybe we should build a solution to solve this problem, and that became OneWorld. So even before we were a large multinational ourselves, our customers were becoming multinational.

 So by solving the OneWorld problem, how do you do multi-currency, multi-tax, multi-language in a single instance of the application certainly allowed us to meet their business requirements. So, I think it was really the combination of the two. We had a company that was structured globally and we had very early on realized our product had to support and ultimately support customers like us. That was the other thing that we did that I'm sure every small company in the audience does.

 We're just about using NetSuite for everything we do. So our engineering management is in NetSuite. Our engineers do issue management, do roadmap tracking, and we've taken it to that extreme. And so, certainly running our business required us to have multi-currency and multi-tax. And so I think that's another sort of best practices you have to be with and believe me, their temptation is not to eat your own dog food, right, but it's sort of a mantra for us.

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 Brendan Barnicle,  Pacific Crest - Analyst   [3]
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 Any questions? I know one of the questions that I get all the time, particularly from earlier stage companies is how do you balance growth versus profitability, and obviously the market has been giving sort of mixed messages on where it wants that to go over the last year. How have you and your Board looked at and continue to evaluate that question?

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 Zach Nelson,  NetSuite Inc - CEO   [4]
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 We've always opted on the side of growth and I think, but not in a crazy fashion. Over the last five years, we've continue to invest more and more. I think our operating margin has probably gone down a bit over that period. But the investments have paid off and accelerated revenue. So I think that's a trade-off you'd make all day. The other thing we're pretty doctrinaire about is especially in sales and marketing, it's the largest volume, it's 44%, 45%, is to ensure that every dollar we spend there is actually getting more efficient in delivering a dollar of revenue and that's actually been the case. It's cost us less each year that we've gone down this path to generate a dollar of revenue that did the year before.

 So when you see those metrics you'd invest all day long. When we went public, we got those questions a lot too. We had just become cash flow positive back in 2007 and people were wondering about the path to improve profitability. And back then we said, well, we'll get really profitable really fast if growth slows down. And so that's the other dynamic and lo and behold, we went public in 2007 and 2008, things kind of got really bad for the world. And so our growth rate went from 40% revenue growth rate to 9%. And so, we got profitable really fast. But our stock price went from $40 to $6. And so, we've run this experiment before and the net-net is if we can invest and invest wisely and drive revenue growth and customer sat and all these things we have to do, we'll always opt on that.

 The other thing I'd say for NetSuite in particular, we've had a interesting 15-year run here where people didn't believe this would happen. And then the next period was, the large guy started to give web service to it, but didn't really do anything about it. I think we're entering a new phase now where the traditional software vendors in the mid-market, that Microsofts, the Inforce, the hundreds of companies in that segment in the large market, the SAP and the Oracles, they've now realized this is an existential threat and they are panicked.

 So this is certainly not the time for us to reduce investment in growing the market, because I think the competitive landscape and the battles in the next three years -- we're incredibly well situated to go do those battles, but the battlefield is going to change substantially for us and every other cloud company given the fact that the incumbents definitely feel cornered at this point.

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 Brendan Barnicle,  Pacific Crest - Analyst   [5]
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 So we shared some survey did at this morning that showed that within our -- when we asked our survey respondents about the incumbents, they actually increased in terms of their likelihood to use them for SaaS, and probably because some of the new introductions that they've had. What are those incumbents going to be able to do as a strategy? Because just building product has not really work for them, is there a way to do something around security threat or around some other sort of external thing other than just straight application comparisons as a way to muddy the waters and create an opportunity?



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 Zach Nelson,  NetSuite Inc - CEO   [6]
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 In the mid-market, they can't do much. Our competitors just don't have the strength to rewrite the products, which is what they have to do, none of which have done that. And they don't have the sort of lock-in in the mid-market that you might think an Oracle and SAP have in the large enterprise. I think in the large enterprise, first they'll have to rewrite the applications, Oracle's done a better job, SAP hasn't begun to rewrite their core applications, right. They talk about cloud but they've never built a cloud product ever. They've acquired cloud products, but their core application is still on-premise.

 So, they still have to do that but I think both of those guys compete with us and others just on the power of their distribution model. They have so much spend in those organizations, they can rob Peter to pay Paul, this is free, this costs more. But again I don't even know that, that strategy will ultimately be successful against a company like us because in many cases when we go into an S&P organization, they've got a site license. They don't have to pay for another license ever and they're still deploying that suite. So, again it goes back to my first point that what's really going on is customers need new platforms to compete and they realize their existing platforms just are going to get them there. So, doing more of the same even if it's free, will solve their problem.



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 Brendan Barnicle,  Pacific Crest - Analyst   [7]
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 Any questions? One of things that you guys did a great job at was moving up market and around that time coming out of 2009, you guys made a deliberate effort to kind of move up market into some bigger companies, not massive enterprise originally. How did you make that migration?

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 Zach Nelson,  NetSuite Inc - CEO   [8]
------------------------------
 Well, for us, I mean our strategy had always been fill the gap between QuickBooks and SAP, as we've built a system powerful system that looked like enterprise system but brought it down in the form factor and a price and a distribution model that made it easy for mid-sized companies to consume, that was the idea. If anything happened on the way to doing that is the large companies said, "Hey, you know, we want the agility of that system that our competitors are you eating our lunch with." We want the ability to change things in our business system in a week, not in three years, right. So, we began being sucked up into those larger organizations.

 So, it’s really large companies sucking us up more so than a coherent strategy, let's go for divisions of large companies. Once that happened, we got in there, we realized how frankly superior our solution was in a number of areas. One is multi-company consolidation, our multi-company, multi-currency, multi-tax machine is much better than anything available from any vendor. So, that was sort of a eureka moment and that was the first driver of the OneWorld product, it was the first driver of success there. And then the second component was really seeing that if you look at large companies, their core -- what you would consider their core enterprise system is really nothing more than a dumb GL, where people I'd say -- I don't say dumb in a pejorative sense, but I say in the sense of they're just jamming journal entries in that all day long and producing financials. And frankly, that's not their problem that's what we say, we're never really interested in replacing that system, because it's just a dumb GL. Their problems are in operational systems surrounding that dumb GL and we're an operational system, right. That's what we've built is a business system.

 So, one thing that I'll say that's totally different out NetSuite while we've talked about ERP, you will never hear us call NetSuite financials. We have financials, all of our customers use financials, but we effectively spit out financials at the end of a business process. Our goal is not to be a financials engine, our goal is to be a business machine and that business machine has lots of impacts on the financial system. So, that was a second discovery these guys need new operational systems to run whether it's a division, new strategies and that's where we're penetrating that market.

 So those were two eurekas that we saw as we got up to. We've done a lot of things operationally; obviously we've built -- learned a lot of as we got pulled up into the mid-market -- up into the enterprise, we changed our sales organization. I've given this anecdote before, the first large and enterprise deal we did I thought mid-sized guys could just scale up and take down a bigger deal. In the first deal we were in, it was up against SAP, it was like a $40 million re-install of moving from one version to the next and they told my sales rep this. "Fantastic, what did you tell them we cost?" Like $40 million over five years, on a $400,000 that was the price was said. Mike are you crazy?

 So, I discovered very early on that a mid-market sales rep will turn an enterprise deal into a mid-market deal. And so, we spent the last three years really building an enterprise sales organization that knows how to say $10 million, right. And it is not you are trying to fleece anybody, we're delivering that much value you shouldn't getting pay. Actually we doing more value than the system that doesn't work of $40 million and see if they can make it work, right. And we're doing it in a time frame, we're not doing in three years, we're doing it in 12 months. They should actually pay us more, don't get me getting started.

 So, that was where the eureka is we had the change the company in substantial ways, but the thing that we've worked very hard on doing is as we've changed, as we've moved up market, there's always a risk that everybody runs up market, because the money looks easier, the checks are bigger. And so, we've solved the hardest problem there is to solve in enterprise software. How you sell a complex mission-critical application to the mid-market? I do not want to lose that DNA. So, we've built different sales models, different sales people, different services model. We go to market with the SIs out there to try to have success on both paths.

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Unidentified Audience Member   [9]
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 Zach, two questions. First is, as one of the older SaaS companies, I'm just curious, are you at all at an architectural disadvantage to newer SaaS companies? Do you need to re-platform? Have you already done that? And the second question that always strikes me when I hear the NetSuite story that you guys are doing these heart transplants and it's really hard, and that's an amazing technology, but you don't have a kind of natural scaling factors in your business around seats, API calls, workloads, capacity, and just some of your competitors with business and pricing models that have some of those natural scaling factors. It just feels like life is a little easier for them and having kind of mastered the heart transplant, is there a way we can add the knee transplant and the hip transplant, and businesses with natural scaling factors?

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 Zach Nelson,  NetSuite Inc - CEO   [10]
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 Great. Yes, so on the first front, I would say we're mature, we are not old, right. And certainly lots of things have changed since we started the company. The good news was, we started with the right vision. We started -- we are the first company to have built a system that started as a suite. At the end of the day, all enterprise software ends up in a battle for the suite. So architecturally, we started in the right place. Now, certainly things have changed over time. Our companies have gone from two people to 2,000 people, and we've had to re-architect subsystems within NetSuite over that time, but the core infrastructure -- the development team we have has always been amazing. That's the reason I joined NetSuite, it was Evan Goldberg and the team that started the Company. Whenever Larry Ellison had a hard problem to solve at Oracle, he went to these guys.

 So incredible group of developers. So the data center architecture, we made all of the right choices there in the early days. Most people were putting it on big iron, we put it on very small iron that scaled out, right decision, very good decisions on the stack. It was interesting. I met with -- talked about the database layer where Oracle application server for BDA Oracle database, I had a meeting the other day with a guy who was in the Oracle kernel group when I was there. He went to Yahoo. Yahoo, of course built Hadoop because Oracle couldn't handle all these massive amount of data Yahoo was developing.

 So he knew both, the next-generation and the current generation. I said to him, listen, if you were starting NetSuite today, would you choose Oracle or would choose something else? He said, I don't know. Absolutely, we would choose Oracle, because this is a transactional problem we're solving. So that stack I think is great. I think (inaudible) win the database wars. I'm pretty confident of that. So, I've bet on the right horse there. But certainly within those years, we've had to rebuild subsystems and we've done it quite well. You look at the transition from single company NetSuite to multi-company OneWorld, big re-architecture, incredible opened up new markets for us.

 The re-architecture we just did with from our initial iterations of turning NetSuite into an e-commerce machine to what we've done now with SuiteCommerce, completely re-architecture, multi-year and boom suddenly you're serving billion-dollar retailers on this platform. So, I think for some companies that might be a challenge. Given our development team and the fact that we chose to build a suite first, there are lots of benefits of both of those decisions that have played out over the long-term. In fact, if you look at our architecture, it's what everybody is trying to get you, right. They are trying to --they are trying to build us. So, we're in a very good place on that part.

 In terms of the knee replacements versus heart transplant, (inaudible) ultimately the knee replacement guys grow very fast and then they stop because it's over. This is a slower churn but far more strategic market. SAP one not Siebel, right. This is where the core business data lives and that's our bet.

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 Brendan Barnicle,  Pacific Crest - Analyst   [11]
------------------------------
 Other questions?

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Unidentified Audience Member   [12]
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 (inaudible - microphone inaccessible) what percentage of your software is rewritten every year?

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 Zach Nelson,  NetSuite Inc - CEO   [13]
------------------------------
 I'd say I wouldn't know what percentage it is, but there are sub-systems that we say three years ago our COGS machine, right, cost of goods calculations how we did them had to be rewritten because the customers -- the inventories got larger, had to be faster, all those things. So, really its re-architecting subsystems for the challenges we're seeing in our existing customer base. So, the next big subsystem that we're rewriting and again I don't think -- when we rewrite this, this is almost a game over subsystem. And that is billing in rev rec. This notion of having a unified billing system that you can bill for product, bill for service, bill for usage, bill for subscription, we are the only company on the planet that has visibility into that problem because of the nature of our customer base. How you build is one thing, how you recognize that revenue is something very different. So these are -- not only are they coupled within the category of billing and rev rec, but they are coupled across the category.

 So unified billing and rev rec, a lots of interesting stuff going on there at NetSuite, but stay tuned. So, that's -- and when you do these kind of things, obviously you are creating more value and you can obviously charge for that value. So, to the point about pricing, we certainly -- we get more revenue from the functionality we sell than user count, because you're right, in many cases when we introduce our first version of rev rec, of course we have rev rec because we've been a software company you like fire the floor people running a rev rec spreadsheet, right. So oftentimes, if we do our job right, we're reducing the number of users. That's a hope right. We want the machine to run the business. And so our pricing model reflects that.

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 Brendan Barnicle,  Pacific Crest - Analyst   [14]
------------------------------
 Zach, thanks so much for being with us again this year. It is terrific to have you here. Great insights, and we really appreciate all your support.

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 Zach Nelson,  NetSuite Inc - CEO   [15]
------------------------------
 Thank you.




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