Q2 2015 NetSuite Inc Earnings Call
Jul 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
Q2 2015 NetSuite Inc Earnings Call
Jul 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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* Justin Furby
William Blair & Company - Analyst
* Patrick Walravens
JMP Securities - Analyst
* Kash Rangan
BofA Merrill Lynch - Analyst
* Phil Winslow
Credit Suisse - Analyst
* Brendan Barnicle
Pacific Crest Securities - Analyst
* Pinjalim Bora
JPMorgan - Analyst
* Jobin Mathew
Deutsche Bank - Analyst
* Ross MacMillan
RBC Capital Markets - Analyst
* Unidentified Participant
- Analyst
* Brad Reback
Stifel Nicolaus - Analyst
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Presentation
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Operator [1]
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Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2015 NetSuite earnings conference call.
(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 second 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. 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 will be referring to both GAAP and non-GAAP financial measures; the reconciliation of our GAAP to non-GAAP financial information is provided in our press release, which is available on our website. All of the non-revenue financial members we will discuss today are non-GAAP, unless we state that the measure is a GAAP measure.
The primary purpose of today's call is to discuss the second quarter 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. These statements are subject to risks, uncertainties, and assumptions, and are based on financial information available as of today. We disclaim any obligation to update any forward-looking statements or outlook.
Risk and uncertainties that would cause our results to differ materially from those expressed or implied by such forward-looking statements include those summarized in the press release that we issued today. These risks and additional risks are also described in detail in reports that we file from time to time with the SEC, including our most recent 10-K and 10-Q filings, which I encourage you to read.
With that, I will turn 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 FY15 second quarter results. And what great results they are. While the income statements of some traditional software companies are being turned upside down by the shift to the cloud, I'm pleased to report our 30th consecutive quarter of year-over-year revenue growth, our 12th consecutive quarter of 30% plus year-over-year revenue growth, and our 9th consecutive quarter of 30% or more year-over-year recurring revenue growth.
NetSuite's strong financial results, not just this quarter but over the last several years, validate our belief that to survive all businesses need to transform their operations with a cloud-based business application suite. NetSuite is enabling our customers to bring their businesses to a modern, cloud-centric world, and our value proposition of delivering a flexible, cloud-based, commerce-ready solution is essential for the new economy. While NetSuite saw particular strength in our retail, manufacturing, and wholesale distribution verticals, what is truly amazing is the breadth of companies transforming their operations and their industries with NetSuite.
As you saw at our record-breaking SuiteWorld customer conference this quarter, attended by thousands of companies from around the globe, you saw fast growing small businesses starting on NetSuite to billion dollar valuation unicorns like Lyft building next generation companies on NetSuite, and the transformation of large enterprises such as American Express Global Travel, Billabong, and HP preparing for the cloud with NetSuite as their backbone. It is truly an honor for NetSuite be the common thread for companies to thrive in the era of the cloud.
We also received notable industry recognition during the quarter. According to Gartner's recent report on world-wide software market share for financial systems published in March 2015, while client server ERP providers like SAP, Sage, and Microsoft continue to struggle, we were busy growing our market share by more than 45%. In fact, according to Gartner our 2014 year-over-year global market share growth rate was almost 6 times faster than the next closest competitor in the top 10 by market share.
In addition, NetSuite's financial management systems revenue growth, on a global basis, was more than four times the growth of our closest competitor within the top 10 by market share. Bottom-line, NetSuite is the fastest growing top 10 financial management system globally, by market share and by revenue.
Last month NetSuite was also recognized by Forbes magazine for the second consecutive year as one of the most innovative growth companies in the world, and in June the Software and Information Industry Association announced NetSuite OneWorld won the award for best financial management solution for the third consecutive year.
And once again, the customer's shifting preference for cloud-native solutions continued to reveal itself in the reported financials of software companies. Traditional vendors that lack cloud-native ERP, such as SAP, saw their license revenue crater once again. SAP's 7% constant currency decline in license revenue was their largest license decline since the great recession of 2009. It appears that as the shift to the cloud accelerates, SAP is now enjoying its own individual great recession, with very little light at the end of the tunnel, as both revenue and profitability shrink, and they have no modern native-cloud ERP offering to stop the bleeding.
The details of our quarter however highlight where that business is moving. For the quarter, year-over-year, our topline grew by 35% to a record $177.3 million. Recurring revenue grew 33% year-over-year.
In Q2 calculated billings defined as the change in differed revenue plus revenue grew by 38% over Q2 of 2014. Our non-GAAP earnings came in at $0.02 per share, in line with our outlook range of $0.01 to $0.02 per share for the quarter. In addition operating cash flow was strong, coming in at $24 million versus our stated outlook of $20 million to $22 million.
This quarterly results are a tribute to our customers, who are using NetSuite to transform their operations and enable their business vision. We added more than 400 new customers to our install base during the quarter, and we added them with an average selling price that was up more than 40% over the prior year.
We have invested enormously in building industry-specific versions of our suite, and that industry focus kicked into high gear into Q2. While we have always been strong in industries like software and technology, where new business models require a flexible modern system like NetSuite, our efforts focused on the manufacturing and distribution industry saw continued acceleration, as both the features we've added over the past several years combined with the expertise to service and support these complex industries has really taken hold.
If you believe that the internet of things is the way of the future, NetSuite has the ultimate business system to enable you to manufacture, distribute, and sell those things. And as evidenced by the IPO of NetSuite customer Fitbit during the quarter, this one small end-market is becoming the driver of the modern economy.
In addition, our efforts in the retail vertical saw incredible success, where we had a record quarter, with bookings up 200% year-over-year. The investment we have made in SuiteCommerce has not only put us ahead on paper in the market for omnichannel solutions, it has also done so in reality, as we become the market leader in enabling omnichannel, omnibusiness model, and omnicurrency commerce around the globe.
And with the new capabilities announced during the quarter, such as SuiteCommerce in store, a point of sale solution that literally unifies the in-store and the online customer [driven] together, we are putting even more distance between ourselves and the powerpoint slides of would-be competition. With a single platform driving online and in-store experiences, we have delivered the holy grail of commerce for retailers. Of course, all enabled by the world's most powerful back-end business management platform that includes order management, inventory management, multi-currency, multi-language, multi-tax, and full financials.
And of course we continue extend the lead we have built in omnichannel commerce. With our acquisition of Bronto software, we have begun to unify systems of engagement with systems of commerce. Bronto is not just any system of engagement, it is the market-leading provider.
In Q2, the Internet Retailer advisory list was published, and Bronto gained market share over the likes of Salesforce.com's ExactTarget to once again claim the top spot as the leading provider to this [newest] world's leading on-line retailers. While we've only completed this acquisition late in the quarter, I can confidently say it is the best acquisition we have done both strategically and executionally. The Bronto and NetSuite teams have already found much common ground in terms of go-to-market operations, and we have just in the short time we've been together, found a number of joint customers.
So, by almost every measure, this was an amazing quarter. Where some traditional software vendors saw high single and double digit license revenue shrinkage, really something almost unheard-of in the software world, NetSuite saw record revenue, record recurring revenue, record deferred revenue, 30 consecutive quarters of year-over-year revenue growth, 12 consecutive quarters of 30% or greater revenue growth, our 9th consecutive quarter of more than 30% year-over-year recurring revenue growth, and great new customer adds with an increase in ASP of 40%.
Our consistent vision of designing a system to run a business and deliver it via the crowd continues to be the driving force behind what we do at NetSuite, and as the years go by, it has become apparent that it's also the driving force of the world leading next-generation businesses.
With that, let me turn it over to our CFO, Ron Gill, to provide more color on the great quarter.
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Ron Gill, NetSuite Inc - CFO [4]
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Thank you, Zach.
I'm pleased to report another excellent quarter at NetSuite. Not only did the NetSuite standalone business exceed our expectations, the newly acquired Bronto business is off to a promising start, and we're really excited about the results overall. Let me take you to some of the numbers in more detail.
As a reminder our numbers for Q2 will include a partial period of Bronto results, from the short period between when we closed the deal on June 8 and the end of the month. The financial metrics I will discuss are consolidated figures, but for this call, I'll breakout the Bronto impact in a couple of key places. As usual, all the non-revenue financial figures discussed here are non-GAAP, unless I state the measure is a GAAP number. Revenues are of course GAAP numbers, and as always you can find a reconciliation of GAAP to non-GAAP results in today's press release.
During Q2, total revenues grew to $177.3 million, up 8% sequentially, and up 35% over Q2 of 2014. NetSuite's revenue without the impact of Bronto was $175.6 million, up 33% over last year. Total recurring revenues from subscription support grew 6% sequentially, and 33% over the year ago quarter to $140.9 million. Nonrecurring revenue which comes primarily from professional services was $36.4 million for the quarter, and grew 40% over that for the same period last year. Approximately 25% of our revenue for Q2 was generated outside of the United States, with about 15% of revenue denominated in a foreign currency. The impact of the strong dollar continued to play out and negatively impacted our revenue again this quarter. Total revenue in Q2 would have been about $3 million higher at year ago currency rates.
Sales of NetSuite OneWorld were strong and accounted for more than 50% of new business. Average deal size for new business deals with and without OneWorld were each up more than 40%, year-over-year.
Moving down the P&L to gross margins, recurring gross margins was up slightly from a year ago to 86%. Nonrecurring gross margin declined from 14% in Q2 of 2014 to 7% this year. The mix between recurring and nonrecurring revenue in Q2 was relatively unchanged, so the decline in blended gross margin from 72% in the year ago quarter to 70% this Q2 was largely was driven by lower margin in professional services.
Turning to our non-GAAP operating expenses, product development expense was $24.1 million for the quarter, up 30% over Q2 of 2014 and representing about 14% of Q2 2015 revenue. Headcount for the product organization was up 37% over the year ago quarter, or about 48% after you add the Bronto employees.
Sales and marketing expenses were $84.6 million, or 48% of revenue in Q2. As Zach discussed, we hosted our largest SuiteWorld ever in Q2, and that accounts for the largest quarter-over-quarter increase in spend in this area. Headcount in the sales and marketing organization was up 35% year-over-year, or 49% year-over-year after adding the Bronto team.
G&A expenses were $12.1 million, or 6.8% of revenue in the second quarter, down from 7.1% of revenue in Q2 2014. Non-GAAP operating income in the second quarter was $2.8 million, or a non-GAAP operating margin of 1.6%, compared to 4.4% in the year ago quarter. As I mentioned in our last call, Bronto was not an operating income break-even business at the time of the acquisition, and that fact, together with the fair value adjustments in the acquisition accounting, mean that the deal was especially dilutive in Q2 and Q3 of this year.
During the quarter we reported a net income tax benefit of approximately $7.2 million. This was driven by a one-time gain of approximately $8 million associated with the Bronto acquisition. Factoring out that one-time impact, we recorded an income tax expense of $731,000, principally related to our international entities. We continue to expect our net operating losses to offset any domestic earnings for tax purposes for the foreseeable future.
Non-GAAP net income for the second quarter was $1.7 million, and non-GAAP earnings per share were $0.02. NetSuite's standalone EPS was $0.04, and the impact from the Bronto acquisition was negative $0.02, in line with the outlook that we provided on last quarter's call.
Moving on to the balance sheet, we had another great quarter for cash collections. Cash flow from operations in Q2 was $23.9 million, up 29% year-over-year, and we closed the quarter with $386 million in cash and marketable securities.
Moving down to deferred revenue, our total deferred revenue balance increased 38% year-over-year to a record $348 million. Normalizing for the impact of Bronto, NetSuite deferred revenue before the acquisition was up about 36% year-over-year. Calculated billings, defined as the quarterly revenue plus the change in deferred revenue, were $201.6 million for the quarter, representing an increase of 37.6% over the second quarter of 2014.
Bronto revenue and deferred revenue, of course, contributed to the consolidated calculated billings metrics in the quarter, and NetSuite's calculated billings without the acquisition were up 33% year-over-year. As I've consistently pointed out on these calls, there's a wide array of factors that influence calculated billings, and quarter to quarter fluctuations in the calculated billings metric should not be taken as an indicator of changes in future revenues. Headcount on June 30, 2015 was 4,101 employees, an increase of 1,339 over Q2 of 2014, including 272 employees from Bronto.
Now I'd like to move to the forward-looking financial outlook, which is covered by the cautionary language outlined at the start of the call, and based on assumptions which are subject to change over time. For the third quarter of 2015, we expect revenue to be in the range of $192 million to $194 million. We anticipate non-GAAP EPS of approximately $0.01 to $0.02 and operating cash flow of $22 million to $24 million for the quarter. For the full year, we are increasing our revenue outlook from the prior range of $730 million to $743 million to a new range of $735 million to $745 million, and increasing our outlook for operating cash flow from a range of $87 million to $93 million to a new range of $93 million to $98 million. We continue to expect non-GAAP EPS of approximately $0.21.
That concludes my prepared remarks, and with that, I will turn the call back over to Zach.
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Zach Nelson, NetSuite Inc - CEO [5]
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Thank you, Ron.
I must conclude by saying that it has been amazing to watch the NetSuite team execute on our strategy of delivering next-generation business applications so that our customers can transform their operations and their industries. It's one thing to talk about changing how companies run their business, it's entirely another enable it, and to do it at scale.
In the last year, we've added more than 1,000 employees, and to see our company of more than 4,000 employees around the globe and what they've done for our customers and our shareholders is nothing short of amazing. Across the company, we are focused on taking advantage of the opportunity in front of us, growing our internal management capabilities, as well as bringing in new skills from the outside, to help us deliver the benefits of our solutions over the next decade.
We've seen great long time leaders like Ron Gill create entirely new business models, Marc Huffman step up to build what will soon be a billion-dollar worldwide operation, and Andy Lloyd take our vision of how to create a new approach to omni-channel commerce from a drawing on a whiteboard to the industry's leading solution.
We've also brought a new industry veterans into our field organization like Mike Arntz in North America, Lee Thompson in Asia-Pacific, and Doug Kennedy in the channel. These new additions and the efforts of all of our global employees have changed the world from saying that no one would ever run their mission critical applications in the cloud to today, where companies can't get there fast enough.
In this vein, I'm very happy to announce the appointment of Jim McGeever to the new role of President, and also to announce his appointment to our Board of Directors. Together with the vision and passion of Evan Goldberg, our founder, Chairman, and CTO, Jim has been the operational visionary that has driven our success. Jim was there at the beginning, joining in the year 2000 in a small office above a hair salon on El Camino as our 15th employee, spearheading as our CFO our record breaking 2007 initial public offering, and over the last five years as COO, driving our go-to-market organization to new heights.
Given he has directed financial operations at companies across the spectrum of industries, he has always been the voice of the NetSuite customer in the room and those experiences have served us well. His contributions are one of the reasons why NetSuite is one of the leading cloud computing software companies in the world. In his new role as president, Jim will continue to report to me, and will add all customer, vertical, product, and human resource responsibilities.
Evan will continue in his role leading the NetSuite product organization, now reporting to Jim. And of course, I will remain CEO, working in much the same way that I have worked with Jim and Evan in the past, to keep the heritage of NetSuite alive while taking us to places that no enterprise software company has gone before.
So with that, I would like to turn the phone back to the operator for your questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Justin Furby, with William Blair and Co. Your line is open.
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Justin Furby, William Blair & Company - Analyst [2]
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Zach, let me start off. I wanted to ask, what was different, if anything, about Q2 versus Q1 from a new business perspective? Did you see shifts in demand, maybe some of these sales changes you made in Q1 have settled in? A particular geo, it just seemed like the results are obviously quite a bit different than last quarter. I'm wondering if there was any one or two reasons why?
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Zach Nelson, NetSuite Inc - CEO [3]
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Thinking back on Q1, I think the comments were we were beginning to see, as we got larger, a bit more seasonality in our business. A traditional [offer a] company seasonality, where big Q4 -- Q1 starts slowly, and you build momentum throughout the year, and so I think that certainly is a factor in the mix.
As well, we've hired a ton of sales people over the last year. More than half of our sales reps have less than a year of experience under their belt. So again, it takes a year or so for those folks to ramp up to the real productivity, and I think you are starting to see some of that ramp kick in with the younger -- the newer reps beginning to kick in and produce, and then finally, as you've noted, we have done a lot of hiring in sales management. Bringing in some great new bodies, and certainly their impact now is beginning, I think, to take effect in terms of both shape of the organization, how it's managed, and productivity of the organization.
I definitely would say in Q2, productivity again, even with all of these adds, grew over the prior-year, so that's a real positive sign. To see year-over-year growth with all the addition of new capacity that we added. So, all in all, it was a great execution quarter by the sales organization.
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Justin Furby, William Blair & Company - Analyst [4]
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Ron, maybe I missed it, but when you broke out Bronto, can you also give the normalized billings growth in Q2 on a constant currency basis, when you strip out Bronto? And for purposes of next quarter, because the model is different than most, can you give us some sort of sense for what you expect the FX headwind in Q3 to be from a billing standpoint?
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Ron Gill, NetSuite Inc - CFO [5]
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Sure. Let me break that out. In my prepared remarks, the 38% number -- more precisely, the 37.6% number, which is year-over-year calculated billings growth. In the prepared remarks, I broke that out and said the Bronto impact $1.7 million in revenue that I called out on the revenue side, also some deferred revenue impact. So if you take out Bronto, you get to a 33%, which would've been NetSuite before the acquisition. Now if do the FX and billing term normalization on that 33%, billing term was a slight tailwind -- Just like good guy to overall calculated billings. FX remains a significant bad guy to calculated billings. If I normalized that 33% for both of those factors it would normalize up by a few points.
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Justin Furby, William Blair & Company - Analyst [6]
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Okay, so mid-30%s for Q2?
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Ron Gill, NetSuite Inc - CFO [7]
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A couple point higher than the 33%. Then, your question about FX is well taken. The impact on revenue this quarter was $3 million, and as everybody knows, the big changes in FX were really -- fairly well behind us, now. This is the first quarter where we haven't had a lot of fresh new bad news on FX. The big changes to the big dollar strength really happened in Q3, Q4 of last year, and to a lesser extent in Q1.
But to your point, the way our model works is the debt takes some time to flow through the system. So $3 million bad guy to revenue this quarter, was only $1.4 million last quarter, it was about $500,000 in Q4. So you see that the FX bad news expands as invoices flow through the system, getting invoiced at the new stronger dollar rate. I think that phenomenon probably continues, let's assume that rates go sideways from here. I think that phenomenon continues again into Q3. I expect the Q3 impact to be similar to, maybe slightly larger than, the impact that we saw on Q2 from a revenue point of view. The same would be true from a calculated billings point of view.
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Justin Furby, William Blair & Company - Analyst [8]
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So from a billings standpoint, was that sort of like four or five points type of a thing in Q3? Is that fair?
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Ron Gill, NetSuite Inc - CFO [9]
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Yes. The billing term good guy impact that I mentioned was very small, less than a point. So the rest of that normalization -- the normalizing up is really FX, so, yes, you're in the ballpark.
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Justin Furby, William Blair & Company - Analyst [10]
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Great. Thanks.
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Operator [11]
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Next -- Patrick Walravens, with JMP. Your line is open.
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Patrick Walravens, JMP Securities - Analyst [12]
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I'm really curious about what the dynamics are like for you guys, competitively in the manufacturing vertical, because I'm getting some feedback there. And I would love to get a little more detail on that.
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Zach Nelson, NetSuite Inc - CEO [13]
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Manufacturing and distribution -- these are both incredibly complex industry groups. Not many companies have built, certainly in the last 10 years, a next-generation application to meet the needs of manufacturers and distributors. Some may have chosen not to do it simply because they thought manufacturing was going away. Most have chosen not to do it because it's incredibly complicated to build the application. And of course, manufacturing itself has many verticals within it. I think it's been a lot of hard work, a lot of really good product management and customer feedback over the last several years to build out just the sheer capabilities of the product.
We've also had some great partners who have used our SuiteCloud platform to extend that platform. That's our concept with NetSuite as a platform and SuiteCloud in particular is how do we enable people with domain expertise in areas like manufacturing or distribution to extend what we've -- the core capabilities we've provided of orders and inventory and build materials, et cetera, to meet the very specific needs of different types of manufacturers. So you have seen a lot of great SuiteCloud applications extend our solution there. Then, finally on the verticalization of the sales in the services organization is the final piece of the puzzle. How do you speak the language of a manufacturer versus a distributor and actually solve their business problems? So, there was nothing magic about it, I don't believe, other than really hard work and sticking to it for several years.
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Patrick Walravens, JMP Securities - Analyst [14]
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So, if you were going to rank your growth areas that you're most excited about in order of the opportunity, what would they be and where would manufacturing fit in there?
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Zach Nelson, NetSuite Inc - CEO [15]
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Well, the two large industries that we are focused on are people that make and sell things. Manufactures and distributors and those who make and sell non-things. Time -- items like NetSuite, virtual items. Those worlds are coming together, so the fact that we've built system for manufacturers, and we've built a system for non-manufacturers, for service companies, if you want to call them broadly, is going to -- is the most exciting part, because those two worlds are colliding. I've got my Fitbit on right now -- what is that? A product or a service? All the data they are collecting on me and whatnot.
The fact that we've actually built a system that envisions both of those use cases is incredible, and for me it's game over application. You hear people talk about what they're doing in ERP, they're talking about doing one of the other typically. I'm going to run services companies, or I'm going to run manufacturing companies. It's a nonstarter, because manufacturing companies are becoming services companies and services companies are becoming manufacturing companies. We are the only company on the planet who solve that problem. So it's that, and then you put on top of that, not to go too crazy, but all of the things we've done in SuiteCommerce, the ability now to expose that system in a way that customers want to be exposed to it, ala a website or on a phone, that product strategy that we've really been executing on over 10 years. It's unmatched in the industry, and I think it will be unmatched in the industry.
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Patrick Walravens, JMP Securities - Analyst [16]
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Great. Thanks very much.
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Operator [17]
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Next -- Kash Rangan with Merrill Lynch. Your line is open.
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Kash Rangan, BofA Merrill Lynch - Analyst [18]
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Could the Bronto acquisition be something targeted beyond just your online community? In the sense that -- I understand the disposition from your position is in internet retailing, but is this something that you could leverage and build on to platform and target the broader set of verticals that you have? And also secondly, I think, Ron, you said -- really, Zach and Ron, both you guys said that the average order value for a new business customer is up about 40% from a year earlier. That got my attention. Can you talk about what is driving that? Is it broader deployments or more modules? Higher value? If you can just expand on that, that would be great.
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Zach Nelson, NetSuite Inc - CEO [19]
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We discussed how Bronto as a system of engagement could be extended beyond perhaps the commerce world, or perhaps more importantly the omnichannel commerce world. I think we've been convinced that we're going to keep it very focused on what we're doing on the omnichannel commerce. There are so many new challenges to solve in that world versus the B2B marketing world, for example. We also think it's a much bigger market, omnichannel commerce. B2B companies are in some ways -- ultimately, they become B2C companies, and so certainly Bronto will be important there. We're going to keep it very focused on what we are doing in commerce.
It's the market leading platform in omnichannel commerce today, and we're going to continue to put all the wood behind that arrowhead, and keep driving it in that particular segment. In terms of ASPs Ron can maybe talk a little bit more about it, but certainly the great thing about NetSuite and you followed us for a decade -- our average selling price has continued to increase year after year, and a big piece of that is, as we add more complex functionality to the core ERP system, guess what, you can charge more for it. Because you're solving more problems, you're replacing more systems, and so that's been an incredible flywheel to our growth is the continued advancement of the product across verticals and across complex ERP problems.
The other thing that we've seen is certainly a large growth in number of users now attaching to that functionality. So, I think year-over-year we saw something like on an average deal 50% more users attaching to that functionality. So, we've got a very virtuous cycle going on here, where we have the deepest, richest product to solve complex mission-critical business process problems, and larger companies with more users are using them.
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Kash Rangan, BofA Merrill Lynch - Analyst [20]
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If I could slip in one more. Your field deployment, your thesis on accelerating your sales headcount has obviously paid off rich dividends, your bookings are accelerating. Your revenues are accelerating. Do you think that you could continue to grow at this rate? Is the market big enough that you can sustain this level of field headcount increase? Or do you feel like you need to slow down a little bit after going through a period of burst just to absorb all the good work and investment you've done?
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Zach Nelson, NetSuite Inc - CEO [21]
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Good question. We keep a very close eye on rep productivity, and as I said, year-over-year the productivity of our reps, as we measure it, grew even with the addition of those headcounts, so that makes us -- gives us self-confidence in the ability to add more field headcount. Certainly we've gotten smarter about how we do that, how we enable the sales management that we bring on -- the sales teams that we bring on, be they college grads or be they experienced reps. The most important factor we have seen in the success of sales people is how long they have been in the seat. And so, you always have this trade-off of knowing the first year that they're in there, they're not going to be as productive as they are the second year, but there is no second year if they don't have a first year, if you know what I mean. So, the good news is over the past several years, we've been able to add a lot of capacity without really negatively impacting productivity.
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Ron Gill, NetSuite Inc - CFO [22]
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Maybe I'll follow up, Kash, on your ASP question. Just to point out that ASPs were up more than 40%, as we said this quarter, and as Zach said, number of users is a big driver of that, that we're seeing. I would just remind everybody that the ASP's are very bumpy. We've seen everything in between flat year-over-year quarters to 90% year-over-year quarters, and coming up Q3 actually is a difficult compare. Q3 of last year was a very high ASP quarter, and so I would just point out that ASPs move every quarter -- the trend is unquestionably up into the right, but it's not necessarily a smooth past there.
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Kash Rangan, BofA Merrill Lynch - Analyst [23]
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Thanks. Congrats on adding a former Merrill Lynch analyst Jason Maynard as your EVP. (Laughter)
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Zach Nelson, NetSuite Inc - CEO [24]
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Thank you.
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Operator [25]
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Next -- Phil Winslow with Credit Suisse. Your line is open.
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Phil Winslow, Credit Suisse - Analyst [26]
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Thanks, and congrats on another great quarter. Zach, wondering if you could just drill into OneWorld, and maybe, Ron, comment if any impact there on the success of OneWorld on ASP's? And in particular, Zach, when you're displacing incumbent vendors with these OneWorld deals particularly in a two-tiered [data] deployment, any changes to who your seeing that you're displacing? Any sort of changes or memento of one versus the other?
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Zach Nelson, NetSuite Inc - CEO [27]
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The competitive world for us still sort of remains the same out there. There hasn't been really any innovation in the space that we're in for 20 years. So, it's us versus a large group of dinosaurs. And so, then it becomes an industry by industry set that -- you're replacing Microsoft Great Plains here, you're replacing Infor there, Epicore in retail, those kinds of things. So it gets very vertical very quickly in terms of the competitive set. OneWorld has just become a core part of the business. I had a great quarter. It wasn't record breaking or anything, but it's just a standard piece of the business. What's actually a little bit -- additionally interesting is the non-OneWorld single company instances of NetSuite -- the average selling price on that actually grew very nicely, as well. Grew more than 40%, as well. So in this particular case, it wasn't necessarily OneWorld driving the ASP, it was the entire OneWorld and single instance NetSuite, single company NetSuite driving the average selling price.
SuiteCommerce was also additive, I would imagine, to the average selling price and had a very big quarter. As we introduce SuiteCommerce, I indicated I thought it would have a average selling price trajectory and really update trajectory very similar to OneWorld when we introduced that in 2008, and that in fact has been the case. So, SuiteCommerce probably also contributed in a material way to the average selling price increase.
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Ron Gill, NetSuite Inc - CFO [28]
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That's right, it did. It had an ASP that's pretty much in line with the OneWorld ASP for the quarter, and we saw the SuiteCommerce penetration come up in the quarter, so it definitely contributed.
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Phil Winslow, Credit Suisse - Analyst [29]
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Great. Thanks. Congrats again.
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Zach Nelson, NetSuite Inc - CEO [30]
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Thank you.
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Operator [31]
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Next -- Brandon Barnicle with Pacific Crest Securities. Your line is open.
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Brendan Barnicle, Pacific Crest Securities - Analyst [32]
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International is now up to over 25%, as you alluded to on the call. And we hear great things internationally about how you guys are doing. As you continue to look at that international expansion, what are the key product pieces that you need to focus on that are differentiated as you make that international push? And are those things you buy, build? How do you go to -- what is the markets or the product strategy on that side?
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Zach Nelson, NetSuite Inc - CEO [33]
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The product is in quite good shape internationally. Having built the OneWorld product now since 2008, in terms of internationalization of the core capabilities, the multi-currency, the tax, those types of things. It's pretty well advanced for -- we're used in over 100 countries. So I don't think has as much of a product, a core product challenge as -- it might be sort of second derivative challenges that are unique, really, to each market. How do the French like to see income statements? Really getting it finally tuned. We've already been through that in Japan. Japan was probably the toughest localization market, and we knocked that off quite a while ago. So I think it's a variety of second derivative challenges. As you begin to add e-commerce to NetSuite in Europe, how do you deal with the shipping and payments area? Of course, that was a very important piece of why we acquired Venda was to get some of that second derivative knowledge.
I think we are in the second and third derivative challenges from a product perspective. And as you mentioned, we're doing very well there. And once again EMEA, Europe, had a great quarter, particularly in the UK. So good things are happening there. Really the bigger challenge, I think, is not so much product as it is distribution and services, right? To sell in Germany, you have to speak German, you have to have German services people, and so you have a fairly large cost initial cost of investment to the make the operational side of it happen, and so as we look out certainly into future years, that's something that we think about layering in more aggressively. And then [flap] in all these data centers, and we are well on the path on the data center front in Europe, and we'll certainly have more to announce about the opening of those data centers shortly.
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Brendan Barnicle, Pacific Crest Securities - Analyst [34]
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Great. One of the other things we are picking up a lot is CMOs who are interested in having their commerce engine work with their marketing applications. Are you seeing SuiteCommerce getting increasingly integrated into marketing pieces and are there some ways to leverage Bronto and SuiteCommerce together?
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Zach Nelson, NetSuite Inc - CEO [35]
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To the latter question, leveraging Bronto and SuiteCommerce together, just since we've announced the Bronto acquisition, we've already sold as many customers -- joint customers as we had before the acquisition. So in the single quarter since the announcement, we've already increased the installed joint customer base by 100%. So this would be a lot of uptake, particularly on the commerce front of Bronto and NetSuite. That said, there are a whole host of other applications, certainly as you look at what people are trying to do with their online presence, their in-store presence. And certainly, you'll see often extensions built on SuiteCloud environment to support combined Bronto and NetSuite products, to deal with promotions and couponing and a whole variety of things.
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Brendan Barnicle, Pacific Crest Securities - Analyst [36]
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Thanks a lot.
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Operator [37]
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Next -- [Mark Moshe] with JPMorgan, your line is open.
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Pinjalim Bora, JPMorgan - Analyst [38]
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Thank you and congratulations on the quarter. This is [Pinjalim] sitting in for Mark. I want to drill down on the American Express deal that you highlighted. Could you give us some color on that? How big was that deployment or the size of the deal? What about the competitive landscape for that deal?
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Zach Nelson, NetSuite Inc - CEO [39]
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When I talked about it at SuiteWorld, and had the Chief Strategy Officer up on stage with me, I think I mentioned it was NetSuite's largest deal, basically, on every front in terms of the size of the deal to NetSuite, the complexity of the deal, the transactional volume of the deal. So, it was certainly a very large deal. Went live in something like nine months with our largest deal ever. That's pretty cool. I hear some people are planning 17 year deployments of SAPs, so that's a little faster than 17 years to deploy our largest deployment. And the competitive set -- these guys, they were spinning out of AmEx and they were just very smart. They said -- why would we build our company on the past, why wouldn't we build it on the future? So, while they absolutely looked at other solutions, I think the propensity was to go with the market leader, and that was NetSuite.
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Pinjalim Bora, JPMorgan - Analyst [40]
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Thanks a lot. Talking about the Bronto deal, now that it has closed, anything surprised you to the positive or negative in terms of the technology, the financial model, anything? Can you compare the revenue opportunity with respect to some of the other acquisitions you have done, like TribeHR, OrderMotion or Venda?
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Zach Nelson, NetSuite Inc - CEO [41]
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Tribe was a very different acquisition for us in the sense that it was -- it looked like basically like NetSuite did at the same size. Large sales organization, large development team, very focused management team, inspirational management team. Where many of our other acquisitions were much smaller in scale, and they may have had more support people than salespeople, those sorts of things. So it's a very good match, philosophically, in terms of how it was structured, how they built the company. Obviously, we think it's a spectacular match in terms of where we both believe the marketplace is going. We both believe heavily in omnichannel commerce. They solved a big piece of the problem that we had not solved. They have incredible domain expertise around the CMO and the marketing aspects of driving omnichannel commerce.
We have incredible expertise in transacting that business, and bring those two together is going to be a massive win for us, and more importantly for our customers. So, it's a great -- the other thing I would say that we're excited about the presence in Raleigh Durham. It gives us critical mass, there. It's a great location to hire well-educated, hard-working people, and anything you can do to get people out of California is probably a good thing from a lot of fronts.
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Pinjalim Bora, JPMorgan - Analyst [42]
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Thanks a lot.
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Operator [43]
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Next -- Karl Keirstead with Deutsche Bank. Your line is open.
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Jobin Mathew, Deutsche Bank - Analyst [44]
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Congrats. This is Jobin Mathew sitting in for Karl. At a high-level, since you guys are going up market, you guys have got a lot of new products to sell. It seems like the deal size is obviously growing, but does that mean the sales cycles will grow as well? Does that impact the predictability in terms of closing deals, and in terms of the deployments of these deals? As kind of a follow-up to that, you also announced some new sales hires in this quarter, starting with the US sales head, the new heads in international regions. What kind of prompted these changes, and are these in line with managing larger deals and going further up-market?
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Zach Nelson, NetSuite Inc - CEO [45]
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It's a good question. I would start with the first statement you made, in that we have a lot of products to sell. We actually don't have a lot of product to sell. We have one product to sell, called NetSuite. It has a lot of features that we turn on and off, but it really is a single code base, and that is a very important piece of the puzzle. How we're able to solve the needs across these spectrums of industries is we have this rich product, and we can just turn on and off capabilities for manufacturers, turn on another set of capabilities for services companies. It's an incredibly well built, well architected product. Frankly, it's amazing in terms of how the application is structured in that sense. So, one product, lots of industries.
As we've moved up-market, certainly sales cycles do extend a bit up there, but I think the other thing that you are seeing, and I mentioned this in my remarks is, people can't get to the cloud fast enough. [And your startup] at companies can't get to the cloud fast enough, and you are starting to see that acceleration. And those that lag behind on old infrastructure are just going to be falling farther and farther behind of their competition in their industry. So, certainly sales cycles are getting longer, but there is a great deal of demand out there, and NetSuite by far is the leading provider of this rich cloud-based capability.
In terms of heads, we're on our way to being a billion-dollar company. Obviously everyone in the company has to step up, we have 4,000 employees. We certainly brought on new talent. We certainly have lots of long-term talent. Look at Jim McGeever and Evan Goldberg, Ron Gill. Obviously as we grow larger and larger, the new team plus the existing team will have to grow with us, and that's really why we're bringing in the new talent. Just to sustain and grow our growth.
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Jobin Mathew, Deutsche Bank - Analyst [46]
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Got it. Thank you.
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Operator [47]
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Next -- Ross MacMillan with RBC Capital Markets.
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Ross MacMillan, RBC Capital Markets - Analyst [48]
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Zach, you commented retail bookings were up 200%, and I think Ron said that ASP for SuiteCommerce was also up 40%. We had heard of some larger deals in retail, and I'm just curious if you landed some particularly large customers in retail this quarter, and what you think that means, if true, from a reference-ability and go forward basis, as you think about the retail vertical? Thanks.
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Zach Nelson, NetSuite Inc - CEO [49]
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At the end of the day, most companies aren't really excited about replacing the heart of their company, which is the ERP system. So, industries that are being disrupted are moving faster to the cloud than those that are not being disrupted, and certainly retail is a great example of an industry going through transition. So, that's sort of a first driver. They need to move to next-generation systems to survive. Now, the next generation system they need to move to is something called omnichannel. They need to have presence wherever the customer is. Whether it's in-store, online, on the phone. And we've been fortunate to have actually built a rich, cloud-based, omnichannel experience, starting really 10 years ago, but rearchitecting it 5 years ago. So, we happen to have just an incredible solution for those retailers, all the retailers on the planet that are replatforming their systems to meet the needs of new customers.
So, it was great to see the growth, certainly in retail -- and the other thing I want to say about SuiteCommerce is, I focused a lot on retail, the other big advantage we have in commerce is -- we're just not about B2C, NetSuite, SuiteCommerce is also all about B2B, and in fact we sold more SuiteCommerce outside of retail, in terms of number of customers than in retail. So, the B2B aspects for wholesalers and distributors and manufacturers is also taking off. So, I didn't focus much on that in my comments, but retail certainly had a great quarter, but the fact that now we have basically omnichannel commerce for any type of company, B2B and B2C, is driving our presence in manufacturing and distribution as well.
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Ross MacMillan, RBC Capital Markets - Analyst [50]
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Great. One for Ron -- as you think about the impact from Bronto on margins, and maybe more specifically on EPS this year, is that playing out to what you originally thought it would when you talked about the deal being a negative $0.11 to EPS last quarter?
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Ron Gill, NetSuite Inc - CFO [51]
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Yes, it very much is. We talked on the last call. We said NetSuite would be $0.03 to $0.04, the impact of the Bronto acquisition would be negative $0.02, and that is pretty much exactly what happened. NetSuite, I don't know if we broke it apart in the prepared remarks, but NetSuite was $0.04 positive, the Bronto impact was diluted $0.02, and so we come to the $0.02 that you see on the face of the financials. So, Q2 played out exactly as we expected, and I expect the rest of the year to play out that way as well.
Obviously, as Zach mentioned, not operating margin positive when we acquired the company. The accounting for the acquisition makes it a little bit worse for a short period of time. So you'll see a larger negative impact in Q3. That's the quarter were they're the most dilutive, and then they're slightly less dilutive in Q4 and then going forward. So, playing out very much the way we'd seen it.
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Ross MacMillan, RBC Capital Markets - Analyst [52]
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Do you think it could be breakeven next year, or is that too premature?
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Ron Gill, NetSuite Inc - CFO [53]
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You know, we'll get into giving the guidance for next year probably on a future call, but the operating model of the company is close enough to the operating model of NetSuite that I believe we'll be able to get the two fairly well in line, at least in the second half of next year.
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Ross MacMillan, RBC Capital Markets - Analyst [54]
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Thanks again. Congratulations.
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Operator [55]
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Next -- Raimo Lenschow with Barclays Capital.
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Unidentified Participant, - Analyst [56]
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This is Harry, on for Raimo, thanks for taking the question. Last quarter, you talked a little bit about improved functionality in HR. So shifting gears a little, I was hoping you might be able to talk a little bit about maybe on the heels of better integration with Ultimate, from a customer standpoint, have you seen better traction? And maybe just give an update there?
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Zach Nelson, NetSuite Inc - CEO [57]
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Yes, as you know, we acquired TribeHR probably close to a year ago, maybe a little less than a year ago. We've both been extending that product, which is targeted at smaller businesses, primarily in the HRIS and talent management space, as well as using that domain knowledge to extend the quarter capabilities of NetSuite in HRIS. The first iterations of that, you've certainly seen, is we built out, really what we call our employee record, which is the basis for where we're taking HR, extending that more deeply, so that we can do better integrations with a variety of HR systems out there. There are tons of HR systems, whether they be things like Ultimate, which by the way, has been a incredible partnership. Ultimate has been a great partner, and lots of joint customers together, there. Payroll providers, and other third parties in the HR space.
So, as we've looked at our world, our world has largely been driven by business processes. Some industries, the people processes are more involved in the business process than others. And certainly, integrations make a lot of sense, there. But if you look at manufacturing and wholesale distribution in commerce, the business process complexity is quite a bit larger than the HR complexity, and so HR hasn't been a huge demand, certainly in those marketplaces. That said, what we're doing to extend the core records within NetSuite, combined with partnerships with folks like Ultimate, has certainly expanded the marketplace for us to provide a broader set of solutions. In particular to larger companies.
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Unidentified Participant, - Analyst [58]
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Thanks.
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Operator [59]
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Next -- Brad Reback, with Stifel. Your line is open.
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Brad Reback, Stifel Nicolaus - Analyst [60]
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Thanks, very much. Just a quick question on the services gross margin. It was the lowest in a couple of years. Is that just related to Bronto, or were there some other one-time items going on?
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Ron Gill, NetSuite Inc - CFO [61]
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Good question. PS margins in Bronto were negative, but the Bronto revenue is small enough but that's not really a big impact. The primary driver there is really just the ramping and the professional services organization. It's a little bit the same phenomenon that we've talked about in the sales organization. PS revenue grew 40% year-over-year in the quarter.
We're needing to ramp that organization for demand in the same way that we're needing to ramp the sales organization for demand, and in the same way, in the early months of a new hire in professional services organization, they are not productive, and so they're sort of dilutive to the model, there. And we have in the professional services organization, just like in the sales organization right now, a higher portion of ramping professional services consultants than we've ever had. So, that's really what's squeezing the gross margin on professional services there. And that's the phenomenon much more than what's going on in Bronto.
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Brad Reback, Stifel Nicolaus - Analyst [62]
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And follow-up on that. Does it take one or two quarters, or almost a full year for that to play through?
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Ron Gill, NetSuite Inc - CFO [63]
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The ramp on a new professional services rep probably looks pretty similar to a new sales rep. They start delivering maybe slightly faster. So, it's really about the growth rate there, and so 40% growth rate is the challenge. And as long as you're needing to grow at that rate and staff for expected future growth, that at something like that rate, then you're going to have a squeeze like that.
One of the things that we're certainly seeing is larger professional services engagements as we move to very large deals, and a little bit of a shift. You can see that revenue has shifted slightly more towards professional services in the mix. And as long as that phenomenon is going on, and we're needing to scale for this faster growth of PS than you've got, you've got this sort of squeeze into the single digits on PS margins.
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Brad Reback, Stifel Nicolaus - Analyst [64]
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Thanks very much.
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Operator [65]
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There are no further questions. I turn the call over to Zach Nelson, NetSuite CEO.
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Zach Nelson, NetSuite Inc - CEO [66]
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Thank you all for joining us for our quarterly conference call. I'm looking at the wire to see some of the other news that came out, the Amazon cloud, how it exploded, the NetSuite cloud, how it's exploding. It's pretty clear that if you haven't made these bets, if you didn't make these bets some time ago, you're going to have a hard time catching up with folks like NetSuite and Amazon. I look forward to speaking with you all next quarter.
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Operator [67]
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This concludes today's conference call. You may now disconnect.
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