Q1 2015 NetSuite Inc Earnings Call
Apr 23, 2015 AM EDT
Thomson Reuters StreetEvents Event Transcript
E D I T E D V E R S I O N
N - NetSuite Inc
Q1 2015 NetSuite Inc Earnings Call
Apr 23, 2015 / 09:00PM GMT
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Corporate Participants
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* Jennifer Gianola
NetSuite Inc. - Director of IR
* Zach Nelson
NetSuite Inc. - CEO
* Ron Gill
NetSuite Inc. - CFO
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Conference Call Participants
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* Jason Maynard
Wells Fargo Securities - Analyst
* Siti Panigrahi
Credit Suisse - Analyst
* Katherine Egbert
Piper Jaffray - Analyst
* Matt Coss
JPMorgan - Analyst
* Nikolay Beliov
Bank of America Merrill Lynch - Analyst
* Samad Samana
FBR Capital Markets - Analyst
* Frank Robinson
Goldman Sachs - Analyst
* Pat Walravens
JMP Securities - Analyst
* Sarah Hindlian
Brean Capital - Analyst
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Presentation
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Operator [1]
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Good afternoon. My name is Chris, and I will be your conference operator today. At the time, I'd like to welcome everyone to the Q1 2015 NetSuite 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 first quarter 2015 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.
Earlier this morning, NetSuite also announced that it has signed a definitive agreement to acquire Bronto Software. The details of the transaction can be found in the press release issued at approximately 9AM Eastern time this morning and our related Form 8-K filed with the SEC earlier today. Zach and Ron will review the proposed acquisition and the terms of the transaction, including the estimated impact on our full year FY15 outlook which we gave in our most recent results conference call in January.
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 non-GAAP and GAAP financial measures. The reconciliation of our GAAP to non-GAAP financial information is provided in our press release which is available on our website. All of the non-revenue financial measures we will discuss today are non-GAAP, unless we state that the measure is a GAAP measure. The primary purpose of today's call is to discuss the first quarter 2015 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. The 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 SEC, including our most recent 10-K and 10-Q filings, which I encourage you to read.
With that, I will the call over to Zach.
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Zach Nelson, NetSuite Inc. - CEO [3]
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Thank you, Jennifer, and welcome, everyone, to NetSuite's conference call to discuss our fiscal 2015 first quarter results. I'm thrilled to kick off our fiscal 2015 with a good start to the year, and to do it here in Technology Triangle of North Carolina. Earlier this morning in Durham, we announced our intention to acquire Bronto Software, the leading provider of commerce marketing automation. This merger was a long time in the making, and we're fortunate that it worked out in such a way that we can discuss it later in today's call.
First, to NetSuite's results for the quarter, earlier today we reported record first quarter revenues of $164.8 million, up 34% year over year and above our previously stated outlook of $160 million to $162 million. We also showed record recurring revenue of $133 million, up 34% year over year, and also marking a recurring revenue run rate of over $0.5 billion. Our non-GAAP earnings came in at $0.11 per share versus $0.06 a per share a year ago. Operating cash flow was a record $28 million, up 46% year over year.
These quarterly results are a tribute to our customers for using NetSuite to transform their operations and enable their business vision. In Q1, we added more than 350 new customers to our installed base. We also saw continued execution across our strategies of moving upmarket, verticalizing our solutions for specific industries, and enabling our customers to retool their operations for an omnichannel future. On the upmarket front, we recorded a record number of Q1 deals greater than $250,000 in value. While we're in the early stages of the year, our pipeline is growing nicely, and we continue to add sales headcount to meet the opportunity we see both in the midmarket and in the upmarket. We now have more sales capacity than at any time in our history.
Additionally, we announced today that HP has deployed NetSuite in its $5 billion software division. HP's deployment of NetSuite is another shining example of how a Fortune 50 company can bring agility to a legacy infrastructure. In just six months, HP unified mission critical processes, including order to cash and revenue recognition, across multiple subsidiaries in 15 countries and 11 different currencies. It was an exciting deployment and a great example to other large organizations that there is light at the end of the SAP tunnel, and it is called NetSuite.
On the vertical front, both our product-oriented focus on manufacturers and distributors and our focus on project-based services businesses also saw good growth. Our leadership in omnichannel commerce also rolled on, and we saw 25% more customers adding SuiteCommerce than we did in Q1 of 2014. Our belief is that while omnichannel commerce is disrupting the retail industry today, every industry will ultimately face omnichannel challenges as their customers begin to demand rich interactions with their suppliers regardless of the device they are using to interact with those suppliers.
Certainly, the growth in SuiteCommerce customer count underscores this. It also underscores the enormous investment we have made in SuiteCommerce is paying off. We believe that the ERP system of the future looks like a website, and we're way ahead of the curve and the competition in enabling omnichannel, omnibusiness model engagement across our customer base, and not just in retail, as more than 50% of the SuiteCommerce new customer adds were outside of the retail sector.
Over the last several years, we have invested enormously to advance our SuiteCommerce strategy and product. We have re-architected our front end architectures to support an omnichannel future. We have augmented our strategy with six acquisitions to acquire domain expertise and technology to further our lead, and today NetSuite is, in our belief, the undisputed leader in cloud-based, omnichannel commerce.
We believe SuiteCommerce is only cloud-based solution to unify ecommerce, in-store point-of-sale, and call center customer touch points in a single platform. Furthermore, SuiteCommerce is the only platform that brings together all the operational capabilities, such as order management, inventory management, shipping management, and global tax compliance to deliver transactionally on the rich omnichannel customer experience this solution provides.
The next step in this omnichannel journey is to seamlessly combine customer transactional history with rich behavioral data, and the combination we announce today of Bronto and NetSuite will, for the first time, solve this complex problem in a single unified offering. This merger of our two Companies is one that we believe customers will love and competitors will hate. In 2002, Bronto was born on the cloud in Durham, North Carolina, with a laser focus on creating a marketing automation system designed to enable the next-generation of commerce.
Today, they have more than 1,300 customers and is the most widely used email marketing platform in the internet retailer list of top thousand retailers. With the acquisition of Bronto, we once again leap frog the competition by bringing together our next-generation omnichannel commerce platform with Bronto's next-generation omnichannel marketing automation system. We still have the customary closing conditions before Bronto becomes a part of NetSuite, but we look forward to having the 230 great employees officially join NetSuite by the end of Q2.
It was a great start to for 2015. We think the financial results we delivered in Q1 provides a proof that the investments we are making in our strategy of bringing the power of integrated, cloud-based business applications to companies of all sizes are paying off for our customers, employees, and our shareholders.
I will turn it over to Ron to speak to the quarter, as well as the financial impact of the Bronto acquisition for this year and into 2016. 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. As you heard from Zach, Q1 was another solid quarter and a good start for 2015. We exceeded our expectations on every metric for which we gave outlook for the quarter and continued to invest in and scale the business. Let me take you through some of the numbers in more detail. As a reminder, all the non-revenue financial figures I will discuss here are non-GAAP unless I state the measure's 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 Q1, total revenues grew to $164.8 million, up 4% sequentially and up 34% over Q1 of 2014. The recurring revenues from subscription and support grew 5% sequentially and 34% over the year-ago quarter to $133 million, while our nonrecurring revenue which comes primarily from professional services was $31.8 million for the quarter and grew 35% year on year. Approximately 26% of our revenue for Q1 was generated outside the United States. Sales of NetSuite OneWorld were strong and accounted for over 50% of new business.
Moving down the P&L to gross margins, the gross margin on recurring revenue improved 60 basis points from a year ago to 86.1%, and was up 10 basis points from Q4. Nonrecurring gross margin declined from 15.8% a year ago to 10.3%. The mix between recurring and nonrecurring revenue in Q1 was about the same as that in the year-ago quarter, so overall gross margin declined slightly year over year from 72.2% to 71.5%, driven by the lower margin on professional services.
Turning to our non-GAAP operating expenses, our investments continued to be focused on growing our product team as well as on expanding sales capacity. Product development expense was $21.9 million for the quarter, up 25% over Q1 of 2014, and representing about 13% of Q1 2015 revenue. Headcount for the product organization was up 38% over the year-ago quarter. Sales and marketing expenses were $74 million or 45% of revenue in Q1, down slightly as a percentage of revenue versus Q1 of last year. Total sales and marketing headcount was up 40% over that for Q1 of 2014.
Speaking of marketing spending, you will hear Zach talking about some of the great things we're anticipating for SuiteWorld this year, so I'll just remind you that it is our largest marketing event of the year and will be held in Q2. As a result, we'll see a significantly higher level of marketing spending this quarter associated with that event as usual. G&A expenses were $12.4 million or 7.5% of revenue in the first quarter, down just slightly is a percentage of revenue from Q1 of 2014.
Non-GAAP operating income in the first quarter was $9.5 million. This equates to a non-GAAP operating margin of 5.8% compared with a 4.8% margin in the first quarter of last year. During the quarter, we reported a net income tax expense of approximately $230,000. We continue to expect our net operating losses to offset any domestic earnings for tax purposes for the foreseeable future.
Non-GAAP net income for the first quarter was $9 million, and non-GAAP earnings per share for Q1 were $0.11, up from the $0.06 a year ago. Moving on to the balance sheet, we had another record quarter for cash collections, and cash flow from operations in Q1 was a record as well, at $28 million, up 46% year over year. We closed the quarter with $467 million in cash and marketable securities.
Moving down the balance sheet from cash to deferred revenue, our total deferred revenue balance increased to $323.4 million, an increase of 3% over the prior quarter, and up 36% over the prior year. 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 $174 million for the quarter, representing an increase of 28% over the first quarter of 2014. As I've consistently pointed out on these calls, there's a wide array of factors that influence calculated billings and quarter-to-quarter fluctuations in the calculated billings metric should not be taken as indicator of changes in future revenues. Headcount on March 31, 2015, was 3,585, up 41% from Q1 of 2014. We added headcount across the organization in Q1 with the majority of the additions in sales and professional services.
Now I'd like to move to the forward-looking financial outlook which is covered by the cautionary language Jennifer outlined at the start of the call and based on assumptions which are subject to change over time. For the second quarter of 2015, we expect revenues in the $170 million to $172 million range. The SuiteWorld event I mentioned will be the largest we've ever done, and that will certainly drive some increasing cash expenses as usual in Q2. We anticipate non-GAAP EPS of approximately $0.03 to $0.04 and operating cash flow of $20 million to $22 million.
The strong dollar will continue to negatively impact our revenue for the remainder of the year, and that impact expands each quarter as more invoices go out with the new exchange rates. Even given that increasing FX headwind, we're going to maintain our existing outlook with revenue in the range of $715 million to $725 million, operating cash flow in the range of $90 million to $95 million, and non-GAAP EPS of approximately $0.32.
Of course, we've announce an acquisition today, and none of the outlook I've just provided takes that acquisition into account. As Zach said earlier, subject to regulatory approval and other customary closing conditions, we expect the Bronto transaction to close in early June. Assuming the transaction closes as planned, and after taking into account the impact of the fair value adjustments on the deferred revenue, and allowing for some disruption of their business, we're currently estimating that Bronto would contribute approximate $15 million to $18 million in incremental revenue for the remainder of our fiscal 2015, and $40 million to $45 million in 2016.
Regarding earnings, Bronto's standalone operating plan for 2015 generates operating losses, and after the deferred revenue impact and allowing for some integration expenses, we expect the acquisition to reduce our full year non-GAAP EPS by approximately $0.11. In that scenario, it would likely decrease operating cash flow by $2 million to $3 million for the year. If the transaction does close in the expected timeline in June, we would expect little material impact to revenue or cash flow in the second quarter, but would anticipate a negative impact on non-GAAP EPS of about $0.02. Our revised revenue outlook for the year, based on those preliminary expectations, would then be for revenue of $730 million to $743 million, operating cash flow of $87 million to $93 million, and EPS of about $0.21.
That concludes my prepared remarks. We're all looking for to a great Q2, and an exciting SuiteWorld in May. With that, I'll turn the call back over to Zach.
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Zach Nelson, NetSuite Inc. - CEO [5]
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Thank you, Ron. With record revenue up 34%, deferred revenue up 36%, operating cash flow up 46%, and non-GAAP net income up more than 100% year over year, it was indeed a great start to 2015. Our SuiteWorld conference will be held May 4th through the 7th, and it will be a great opportunity to experience the momentum of our business, as we're joined by thousands of customers, partners, and prospects from around the world. As we do at every SuiteWorld, each day we'll have major news as we have significant product and partner announcements across all of our core initiatives.
We'll be announcing exciting new technology across the suite, from the deep financial capabilities to new vertical functionality, to continued advances that expand our leadership in omnichannel commerce. Of course, we will feature our customers small, medium, large, and very large that are accomplishing amazing things in partnership with NetSuite. We hope you will be able to join us either in person or online during our live events.
Our goal is to be the leading provider of next-generation business systems and to achieve $1 billion and beyond in annual revenue. We are well on our way to achieving these goals. Our consistent vision of designing a system to run a business and deliver it via the cloud continues to be the driving force behind what we do at NetSuite. As the cloud moves to be the driving force behind every business, it is hard to imagine a Company better positioned for the future than NetSuite.
With that, we'll now open up the lines for your questions. Operator?
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Jason Maynard with Wells Fargo. Your line is open.
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Jason Maynard, Wells Fargo Securities - Analyst [2]
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Good afternoon, guys. I have actually two questions, one for Zach, and then one for Ron.
First, Zach, congratulations on, I think, you make the claim of being the first cloud provider of integrated marketing in commerce. I think there's a lot of other folks who have done on-premise versions. But I would love to get a little bit more take on what you see happening in the customer landscape, where they're really wanting to see these two systems come together and be an integrated bundled offering.
Then Ron, if you could maybe just help us out on the adjustments around FX and then invoicing durations as it relates to that calculated billings number for the quarter? Thanks.
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Zach Nelson, NetSuite Inc. - CEO [3]
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Thank you, Jason. Sitting here in North Carolina, it's been a very interesting decade that both Companies have been really plowing parallel paths around the commerce environment. NetSuite is am end-to-end commerce platform and Bronto, really focusing all of their efforts on marketing automation, particularly around commerce and ecommerce. I think that is a unique characteristic of Bronto, and one that certainly was exciting to us. Certainly, we saw a lot of synergy between that vision and what we were doing on the commerce platform.
As we begin to develop, and you've seen us invest certainly over the last decade, in our capabilities, initially around ecommerce when we launched the capabilities well back in early 2000s. And then as we rolled out the next-generation SuiteCommerce with the omnichannel front end and a scalable back end, I think the next big thing for us to add to that world was a deep marketing automation piece.
We have always had some capabilities in marketing automation. They've been more centric around B2B. We have a lot of use of our marketing automation, frankly, in the suite, particularly in ecommerce, but this really gives us the opportunity to get the domain expertise and the capabilities of a company that's only been focused on this area for a decade.
I would say why it's coming together in the customer base is pretty transparent. You are only a click away in a marketing campaign from actually buying something. Marketing and commerce, while they be used to be very separate things, as the channels were very separate, have become a tightly integrated thing.
We really have always believed that combining rich transactional data which NetSuite is really the system of record for orders, invoices, shipments, returns, those types of things, with rich behavioral data, which the Bronto system and marketing automation in general is the system of record of, is a game-changing point of integration. Bringing the two together, bringing together a rich heritage in both transactions and behavior analysis and behavior influence from a marketing standpoint is something that we think is really important going forward.
The other thing I say is very important going forward, and again something that Bronto was focused on, is how do you start to deploy campaigns, not just for ecommerce channel but across all of your touch points? How do you do a campaign that works in retail and works online and works in your call center and works on phone? You really need a tightly coupled marketing machine and an omnichannel machine. Bringing those two things together is going to unleash, I think, some really interesting capabilities, and certainly our joint customers believe that to be the case as well.
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Jason Maynard, Wells Fargo Securities - Analyst [4]
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Great. Maybe just one quick follow-up on that. Can you maybe talk a little bit about where the bulk of Bronto's revenue is targeted, or maybe just the size and type of customers they had, and how that kind of fits into what you've been doing with your SuiteCommerce customers?
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Zach Nelson, NetSuite Inc. - CEO [5]
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I think it's pretty similar generally to our customer base. It's midmarkets, midmarket retailers. I think there's a big overlap there.
I think the average sales price may be slightly lower than ours, but it's a different functional system, so that would be expected. You see good overlap there in the midmarket, obviously good overlap in B2C applications. I'd say the interesting thing here is this is such a B2C product that they actually use Marketo as their B2B marketing machine. It's that focused on B2C.
The other data point I would point out on how focused it is on B2C is you look at the Internet Retailer 1000, and they're the leading provider of email marketing to that group of people. Again, it's highly focused on the commerce vertical. It is a very unique set of capabilities, a very unique focus, and a very unique go-to-market strategy that they have because of that verticalization focus.
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Jason Maynard, Wells Fargo Securities - Analyst [6]
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Great.
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Ron Gill, NetSuite Inc. - CFO [7]
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Jason, on the calculated billings, I guess I always have to give the caveat that I always tell you guys, you shouldn't read too much into a single order of calculated billings. I said that positive or negative, regardless of where it falls. That said, let me help you with the normalization.
The one thing that moves around every quarter is the billing term, and that can swing either direction given the quarter. The thing that is becoming a more consistent phenomenon now is FX. You may remember last quarter that I said that the FX impact on calculated billings was about 2 percentage point. This quarter, it was more dramatic, something more in the neighborhood of 5 percentage points.
I guess just to help everybody remember, the way the phenomenon works, even if rates were to stay steady from here on out, the phenomenon has this expanding effect as we invoice through at the new stronger dollar exchange rate. What was a 2 percentage point impact last quarter is more like a 5 percentage point negative impact this quarter.
That said, billing term was a good guy. If I normalize back down for that, you get a net impact that would normalized just up slightly from the 28% that you see on the face of the financials.
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Jason Maynard, Wells Fargo Securities - Analyst [8]
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Got it. I will take the caveat, but I appreciate the color. Thank you.
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Operator [9]
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Your next question is from Phil Winslow with Credit Suisse.
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Siti Panigrahi, Credit Suisse - Analyst [10]
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Hello. This is Siti Panigrahi for Phil.
I just wanted to talk a little bit more about the SuiteCommerce in general. With the change in the competitive environment. Some of your competitors are going private. Have seen any changes in the competitive landscape?
Then a follow-up to Bronto, what kind of overlap do you have in terms of customer base that's using SuiteCommerce and Bronto?
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Zach Nelson, NetSuite Inc. - CEO [11]
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We have some overlap. It's less than 100 companies probably. I think our work together with Bronto has really just begun over the last few years. I believe they joined our [SDM] program maybe last year, but we've seen good traction, certainly since the initial integrations of the product.
Obviously as we bring them, one of the things that we'll focus on, in the very short order and you will probably see it SuiteWorld, is a much deeper integration of the two solutions. Obviously, you will see a much greater overlap in the two customer bases in very short order.
In terms of competitive landscape, I think from a commerce platform standpoint it really hasn't changed much. You have all of the old ancient commerce platforms that everybody is stuck on by channel, the retail set of systems that run point-of-sale, the ecommerce set of systems that run ecommerce, the call system that run call center.
That why I think ultimately to try to deliver on this omnichannel vision that almost every retailer has today, they understand that multiple systems cannot solve the problem in an omnichannel world. You need multiple front ends on a unified back end. That's what's really driving the replatforming.
I'll tell you this quarter, just seeing the number of $1 billion retailers walking through NetSuite's doors for customer visits, this architecture is definitely, I think, what people are moving towards. If you look at the NetSuite architecture, there really is nothing else like it. There's no architecture out there that is cloud-based. There's no architecture that combines any front end attached to a rich transactional back end.
I think if you see what the competition is doing, they're basically trying to recreate SuiteCommerce. SAP, after we announced SuiteCommerce, went and bought hybris. They have a long way to go to make that a single system.
I can go through the other competitors as well, who since the launch of SuiteCommerce, have effectively gone out and tried to replicate it from a balance sheet standpoint. Their challenge is going to be replicating it from an actual technology standpoint.
I think certainly NetSuite, on a standalone basis, is well ahead on that front. And now as we bring in Bronto, obviously there's work to do to bring the systems together and bring that vision into a unified platform. But we are well ahead of the curve in being able to solve that problem, compared to competitors, who are still just trying to get to the cloud, much less trying to unify retail, ecommerce, call center in a single system.
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Siti Panigrahi, Credit Suisse - Analyst [12]
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That's great color, Zach. Thank you.
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Operator [13]
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Katherine Egbert, Piper Jaffray.
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Katherine Egbert, Piper Jaffray - Analyst [14]
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Hello. Good afternoon.
I just want to ask about the HP deal. You called that out. It looks like a nice win for you. That is a very large division. Can you [give us] a little more color on that?
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Zach Nelson, NetSuite Inc. - CEO [15]
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Yes, absolutely. It was a great win. Obviously, they went live after a six-month deployment. It was in previous quarters.
I don't want to speak for HP, but I will give you some general NetSuite color, on my perspective. It may sync with where HP's head is at. They're a big SAP shop and lots of instances of SAP particularly in the software division. As you know, there's been lots of change there at HP with acquisitions. It's grown organically, and as a result, you see lots and lots of different systems doing lots and lots of different functions.
They looked to NetSuite really. How can we streamline and eliminate a lot of systems, particularly around order to cash and around the financial consolidation effort? I think we weren't amazed, but I would have to believe almost any multibillion company would be amazed that, with a system like NetSuite, you could replace these incredibly complex systems in as short as six months running incredibly complex mission-critical business apps.
I think we were both very excited about the relationship at the start. I know we're both very excited about the fact that we're actually able to hit and deliver on a broad scope in a very short timeframe.
I certainly look forward hopefully to doing great things with HP. More importantly, I think HP is leading the way in how you take your business strategically to a next-generation place. To do that, you actually need next-generation system to enable that vision. I think it's also a beacon to other large companies that feel they may be stuck on this legacy infrastructure forever, that there is light at the end of that tunnel.
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Katherine Egbert, Piper Jaffray - Analyst [16]
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Yes, it's a nice reference win for you, for sure. (Technical difficulties) sales capacity, and obviously the headcount in sales and marketing was up a lot, year-on-year. Can you talk about that? Are you still expecting a similar rate of growth as we move through 2015, and how are you doing execution in sales?
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Zach Nelson, NetSuite Inc. - CEO [17]
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I'll address that in just one second. Let me just add one other thing about HP, just as another thought to consider as you look at what we're doing on the commerce front.
Obviously, they didn't deploy our commerce front end. They don't have people doing renewals, for example, using the NetSuite front end and a lot of the NetSuite capabilities that they've implemented. That is exactly a place where you can see things like SuiteCommerce begin to come into effect on top of that core ERP system.
Suddenly, they can take all that work we've done for them and rather than processing the orders internally expose all that data to customers and let them renew and transact very seamlessly through a rich B2B engagement. In my speaking points, I noted how many transactions for SuiteCommerce.
We're actually outside of the retail division. We believe this omnichannel problem is not just a retail problem. It's an every company problem. I use HP as an example of what could happen in a software technology company.
In terms of headcount, we had a great quarter for adding headcount generally across the organization. I think it was 223 people. The sales organization actually did a fantastic job.
We didn't quite doubled the number of new adds in the sales organization that we added Q1-over-Q1, but it was darn close. We're going to continue on the path that we set out with this year, in terms of investing across the Company, certainly on the sales organization but development and services as well.
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Operator [18]
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Mark Murphy, JPMorgan.
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Matt Coss, JPMorgan - Analyst [19]
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Hello. Good afternoon. This is Matt Coss for Mark Murphy. Just a couple more questions about Bronto.
First, are there any earn-outs associated with this acquisition? Second, you mentioned ASPs are a little bit lower obviously because it's a different solution, but can you give us an idea of roughly what those ASPs are? As far as the technology back end of Bronto, can you tell us what that's running on and what you think the technology integration timeframe will be like? Thanks.
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Zach Nelson, NetSuite Inc. - CEO [20]
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Since we haven't closed on the transaction I'm reticent to go too deeply into a ton of details. As we close it, we'll obviously provide much more detail on many of the questions that you asked. I would just speak generally about the people.
I'm here in Raleigh. I'm actually overlooking the Bull Durham Stadium as I do this call. A great place to do business, and I think you'll see NetSuite invest more here. The people that we've met here are world class. I'm very excited to have them on the team.
Our philosophy really in terms of incenting people to stay with NetSuite is to incent them to stay with NetSuite. There aren't any technical earn-outs in place, but certainly they're getting the same sorts of employment packages that we give all of our employees around the world that include stock, and as the Company succeeds, they will succeed both professionally and financially.
I think if you look at our history of acquisitions, and this is certainly our largest acquisition to date from a purchase price standpoint. We've done a great job of keeping the talent. That's what it's all about. Getting the technology is important, but the technology is not very useful without the people, so we're very focused on that.
Second is growing the talent in those locations, if you look at what we've done in Spain, what we've done in Oklahoma City, what we're going to do in Raleigh, what we've done in Toronto with the Tribe acquisition. We think these are incredible places to find and grow talent, and bring them onto the NetSuite mission and as well have them influence where NetSuite's going. We've got incredible ideas from the strategy of not just hiring everybody in Silicon Valley, but really using a distributed business model to run our own business.
We'll have a lot more to say I think about what's going on with Bronto. But generally I think the philosophy we've applied to every acquisition will certainly be played out here as well.
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Matt Coss, JPMorgan - Analyst [21]
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Thank you. That's helpful. See you at SuiteWorld.
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Operator [22]
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Kash Rangan with Merrill Lynch.
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Nikolay Beliov, Bank of America Merrill Lynch - Analyst [23]
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Thank you for taking our question. This is Nikolay Beliov on behalf of Kash.
Can you please give us an update on your strategy in HR? You made an acquisition there recently, and I just wanted to get an update there.
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Zach Nelson, NetSuite Inc. - CEO [24]
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We been doing quite a bit in HR. Historically, we had HR capabilities. The NetSuite system itself is obviously a business system and it turns out businesses have employees. We've always had a very capable component there focused largely around the transactional life of the employee, payroll, benefits, time and billing, and those types of things.
Certainly with the acquisition of Tribe last year, we did a lot of partnerships two years ago with SuiteWorld with a variety of HR vendors. We really saw the Tribe product take off in our customer base, the lower end of our customer base. We felt that based on what the customer feedback was, that would be a great combination for NetSuite.
Now, with Joseph Fung and his team in up in Toronto, we've grown the organization enormously. What they're really focus on is how do we build out, in addition to the Tribe product which we sell, separately, how do we build out within NetSuite? How do we build out that employee capability to an even greater fashion?
Certainly, over time, we'll have more HR capabilities natively in the system, but expanding this, what I call an employee record for simplicity's sake. Expanding the capabilities of that actually help us integrate more deeply with other HR systems. If you look out in the world, there is no one HR system that fits all. Lots of industries have different HR systems.
We certainly will not be able to build the one HR system that fits all. Having a rich employee record that can be integrated with a variety of products is certainly important to us.
Something else we announced this quarter along those lines was a much deeper integration with Ultimate Software. Many of you are familiar with Ultimate. There's incredible overlap of the Ultimate product and Ultimate customer base in the midmarket with NetSuite. We have many joint customers with them.
What we announced this quarter was leveraging some of the work that the team is doing in Toronto to expand our capabilities in HR to provide a deeper integration with the Ultimate HCM solution. We've already seen great traction since that announcement with joint customers and new customers looking for a cloud solution that's world-class in managing people processes, which is how we view the world of HR, and a cloud solution that's world-class in managing complex business process, which is what NetSuite has built.
That is the current state. Certainly, at SuiteWorld you're going to see a ton of HR capabilities, both natively and from partners. I think that will be one of the exciting areas to explore at the conference in May.
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Nikolay Beliov, Bank of America Merrill Lynch - Analyst [25]
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Thank you. Can you also please comment on the verticals, and which verticals stood out in the quarter, and the relative growth rates?
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Zach Nelson, NetSuite Inc. - CEO [26]
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We have three or four verticals that we talk about. They're largely safer to speak of them as industry groups. Basically, the product industry group, largely manufacturers and distributors, had a really strong quarter, and that is after several really strong quarters.
There's been an enormous amount of development on the manufacturing side of the product. We've begun to seen that take off, and you'll certainly see more manufacturing capability at SuiteWorld. That had a great quarter.
The services component as well, project-based businesses also had a very strong quarter. Again, I think ultimately the strength of NetSuite in the future state of the world, no one has built a business system designed to run a product company and a service company. They have typically been very separate systems. They're very separate.
One has to worry about inventory. One has to worry about time. Nobody has built a system like this other than NetSuite. It really has an evolution of our customer base. Those were the first two customers that came to us. They were people that sold things, and people that sold time, and that is why we built this rich system.
In the future, companies that sell things are going to sell time, and companies that sell time are going to sell things. Products and services are becoming interchangeable. I think that -- the problem we've solved there, is going to be very important for the future state of all businesses.
Of then course, the final vertical that we've been focused heavily on his retail. That vertical really grew out of the product-based businesses that we supported. What was an ecommerce company but somebody that distributed a product online, in effect?
Our retail history came out of that heritage. Of course over the last three years, we've gone from being online retailers to all types of retailers, in-store, online, et cetera, and that vertical continues to chug along. Thank you.
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Operator [27]
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Samad Samana with FBR Capital Markets.
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Samad Samana, FBR Capital Markets - Analyst [28]
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Thank you for to my questions. I wanted to ask, was Bronto trying to put itself up for sale, or was NetSuite actively looking for a different solution, and picked that one as the best one? Then I have a follow-up.
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Zach Nelson, NetSuite Inc. - CEO [29]
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Andy Lloyd, who is our GM of Commerce, has really helped us architect the entire SuiteCommerce strategy that you've seen roll out over the last three years. As we looked at the next big thing we had to do, clearly marketing automation was the next big thing. We spent, I would say, almost a year looking at the entire marketplace to determine what was the right fit for our strategy and where we were going.
Again, as I said in my earlier remarks, I was really blown away to find Bronto because what we were really looking for was a company that was focused on, not the last generation of marketing challenges. I think B2B marketing is still going to be there. It's still going to be a challenge, but it really is a last generation challenge, but the next generation of marketing charge which is all about omnichannel commerce. What Joe and Chaz and the team have done here, when they started in 2002, that's what they focus on. That was their differentiation, building a system designed for next-generation marketing challenges all around commerce.
When we met with the guys, we were clear that this was the right company. We spent really six months in diligence, them being diligent on us, and us being diligent on them. We couldn't be more excited about where we've ended up.
It's right company. It's the right strategy for both of us. It is just a great group of people.
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Samad Samana, FBR Capital Markets - Analyst [30]
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Thanks. That's helpful.
One for Ron, I'm not sure if you mentioned ASPs, but could you tell us how those trended in the quarter? And what the driving factors behind those were?
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Ron Gill, NetSuite Inc. - CFO [31]
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Yes, sure. ASPs are really volatile. We've seen them especially moving around a whole lot quarter-to-quarter. I think last year for the full year, ASP was up a little over 30%, but in the year-ago quarter, Q1 of last year, ASP was up over, I think about 90%, if your member.
You may remember last year's Q1 call. I said that there were a couple of deals especially that really pulled the ASP up, and we took those two deals out. Even without those two deals last year in Q1, the ASP was up I think about 50% year-over-year. Then we had a quarter after that was flat.
This year, in Q1 if you compare to that 50% up number from Q1 last year, we're up just slightly, just a little bit better than flat. The Q1 ASP this year is about even with that 50% up number last year, on par with the Q4 ASP. It wasn't a lot of movement.
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Samad Samana, FBR Capital Markets - Analyst [32]
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Thanks. That's helpful.
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Operator [33]
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Greg Dunham, Goldman Sachs.
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Frank Robinson, Goldman Sachs - Analyst [34]
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Hi, guys. It's actually Frank Robinson for Greg Dunham. A question on large deals, I think you said you had the most OneWorld deal ever. I wanted to know whether that was in a 1Q or overall?
Then also, could you talk about what's driving the large deal activity? Were there any geographies or verticals that were particularly strong? Then if you looked at the large deal pipeline going forward, compared to this time last year, how is that trending?
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Zach Nelson, NetSuite Inc. - CEO [35]
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I think what we mentioned in the large deal number was, it was a record, not for OneWorld deals, but deals greater than $250,000 in the Q1. It was certainly a good Q1.
We are starting to see some seasonality in Q1. We've seen that really over the last few years, as we become a little bit more enterprising, and Q4 becomes bigger. Q1, you definitely see a little more seasonality, so we were happy to see the big deal growth certainly year-over-year.
In terms of goals, I don't really have a perfect answer for that. I guess I haven't looked that closely at it. My guess would be it was relatively distributed across all of our industry groups. Perhaps I'll have to get back to you with a little better answer.
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Frank Robinson, Goldman Sachs - Analyst [36]
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Okay. The pipeline?
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Zach Nelson, NetSuite Inc. - CEO [37]
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Pipeline, Q4, Q1, you see lots of cleaning of pipe. You see people cleaning up pipeline certainly in Q1 as new territories and such are assigned. We've definitely seen good growth of pipe from Q1 to Q2.
Large deals as I've said many times are very lumpy, particularly when we're not doing an enormous number of them, so it's hard to predict when those lumps are going to come in. We've had pretty good success as we've move into the enterprise in terms of getting those large deals. As I said, in Q1 the companies I've met with, particularly in retail, $1 billion retails who have been coming through our door was pretty amazing.
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Frank Robinson, Goldman Sachs - Analyst [38]
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Awesome. One more, going back to our acquisitions, it's been 9 or so months since the Venda acquisition. I know you said that you thought that that was a great way to get more aggressive in Europe, so any updates there in what you are seeing in Europe overall?
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Zach Nelson, NetSuite Inc. - CEO [39]
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Good question. I actually should have mentioned it in my remarks.
Europe, I think, was, from a percentage growth standpoint, was our best growers. I think you are seeing both the [Venda] NetSuite investment there, but certainly the addition of the Venda expertise and the Venda people and the London office. I think they're all driving great momentum in London right now. Our vision of putting Sage out of its misery there, it's exciting to see that traction kick off.
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Frank Robinson, Goldman Sachs - Analyst [40]
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Thanks.
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Operator [41]
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Pat Walravens with JMP Securities.
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Pat Walravens, JMP Securities - Analyst [42]
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Great. Thank you.
Zach, looks like you guys hired a couple of new sales leaders in the quarter, Lee Thompson in Asia-Pacific, and Michael Arntz in the Americas. How are you expecting them to contribute?
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Zach Nelson, NetSuite Inc. - CEO [43]
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Like all of our new leaders, we expect them to contribute a lot. We're super excited to have guys of that caliber, and frankly, the hundreds of other people that we've hired over the quarter to contribute a lot to NetSuite.
I would say certainly as we look at how do we get bigger in Asia-Pacific, a guy like Lee who's been there and done it is certainly very important for us. Mike, with his Oracle heritage, certainly great guy in terms of planning the next generation sales organization. How do we go to market in enterprises, as well as how do we address the midmarket? Certainly coming from Kenandy, he can give us. It's not that we need to know what not to do, but he certainly knows what not to do now. I think obviously we expect a lot out of these guys.
The other thing I would say is we just went through our big review process where we review everybody in the Company, and identify who the next-generation leaders are. I think one of the most exciting things in all the data that I looked at was if you look at the highest category of leader we have the Company, the people that we think are really going to take us to a $1 billion and beyond, 50% of those people came from outside of the Company in the last five years.
We've done a great job of bringing in new talent. We've done a great job of keeping our existing talent, and moving them up, and having them continue to help us. As we grow, bringing guys like Mike and Lee and many others, bringing the Bronto guys onto the team, it's really key to keeping the momentum, getting new ideas, and solving new customer problems.
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Pat Walravens, JMP Securities - Analyst [44]
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Thank you. If I can ask one other question which is what are you seeing from Fusion Financial? We heard that they're getting a lot more aggressive and trying to be more aggressive against NetSuite on price, but I suspect that strategy might have some limitations. What are you seeing competitively from Oracle Fusion?
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Zach Nelson, NetSuite Inc. - CEO [45]
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I don't know about Oracle so much per se. I think everybody's getting very aggressive.
If you look at what's changed in the last year, everybody is cloud washing every solution that they have. Customers want cloud now. That's actually quite a big change from a year ago, where there was still some debate about it, frankly.
The battle that we're in, Oracle, others, is proving the difference. You can give away an on-premise application for free, or you shouldn't be able to today. Ensuring that customers understand what is an actual cloud application, what are the benefits of an actual cloud application are important. It becomes a little more difficult, as you see folks like Infor and others cloud wash everything, their technology from 30 years ago.
I say the competitive environment has got even more confusing for the customer on one level, but on the other level it's all good for us because what they want is something that looks and is actually NetSuite. We will do hand-to-hand combat on price, on functionality. We have the architecture of the future. It is that simple.
Ultimately, particularly in these complex, mission-critical applications, it doesn't matter if the bits come from Mars. It doesn't matter if the software is free. If it doesn't solve the customers' complex mission-critical problems, they're not going to buy it.
If you can get HP, multiple subsidiaries of HP, live in six months on 15 currencies across the globe, it doesn't matter if you give it to them for free. They can't use it. This is very different. In no way is what we do is a commodity. Price has its limits in terms of its ability to impact the sale.
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Pat Walravens, JMP Securities - Analyst [46]
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That's great. Thanks a lot, Zach.
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Operator [47]
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The last question is from Sarah Hindlian from Brean Capital.
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Sarah Hindlian, Brean Capital - Analyst [48]
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Thank you for taking my question. It's Sarah Hindlian from Brean Capital.
I'm wondering if you guys could give us a little bit color around expenses internationally, and what you saw their in terms of FX? Just looking through numbers, it looks like your expenses are likely a little bit higher than the revenue mix you saw?
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Zach Nelson, NetSuite Inc. - CEO [49]
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FX effect on international expenses.
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Ron Gill, NetSuite Inc. - CFO [50]
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Maybe I'll try to take that, if I understood the question correctly.
You saw it beat significantly our outlook on EPS for the quarter. It's primarily a revenue driven phenomenon. In fact, if you look at the midpoint of our revenue outlook range versus where we ended up that almost accounts for all of the beat on the bottom line. There was a little benefit against what we expected, driven by FX.
It's hard to triangulate sometimes because it is a different currency mix on revenue than it is on the expenses. We have a larger portion of our expenses denominated in foreign currency than in the revenue. We're running about 30% of our expenses, denominated in foreign currency.
We saw a little bit of benefit beyond what we had planned for the quarter on expenses, but it wasn't a big impact. The really big impact came from the revenue over-achievement. That's really what drove that EPS overage.
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Sarah Hindlian, Brean Capital - Analyst [51]
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Great. Thank you. That answers my question.
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Zach Nelson, NetSuite Inc. - CEO [52]
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Thank you all very much for joining us for our Q1 call. It was a great way to start the year, both in terms of the top line, bottom line performance of the Company, as well as the announcement of the Bronto team joining the NetSuite team, as we look forward to closing on this transaction.
We're very excited about where we are at in the marketplace. I think certainly SuiteWorld which is only a few weeks of away will give you a great idea of all the investment we've been doing in the product. Enormous product capability coming out, as I said, financial, omnichannel, commerce, et cetera. Our partners' products, you will see great traction there in terms of partners bringing value to our customers.
Most importantly and the coolest part of SuiteWorld for all of us is seeing what our customers are doing with the technology. You'll see customers from retailers, to manufacturers, to financial services companies that are using these next-generation systems to dominate their markets.
With that, we'll see many of you in May, and look forward to a great SuiteWorld.
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Ron Gill, NetSuite Inc. - CFO [53]
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Thanks, everyone.
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Operator [54]
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Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
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