NetSuite Inc at Pacific Crest Emerging Technology Summit

Thomson Reuters StreetEvents Event Transcript
E D I T E D   V E R S I O N

N - NetSuite Inc
NetSuite Inc at Pacific Crest Emerging Technology Summit
Mar 02, 2016 / 08:05PM GMT 

==============================
Corporate Participants
==============================
   *  Zach Nelson
      NetSuite Inc. - CEO

==============================
Conference Call Participants
==============================
   *  Brendan Barnicle
      Pacific Crest Securities - Analyst

==============================
Presentation
------------------------------
 Brendan Barnicle,  Pacific Crest Securities - Analyst   [1]
------------------------------
 Good afternoon. I'm Brendan Barnicle from Pacific Crest. Thanks so much for joining us for our 11th annual Emerging Technology Conference. When we did the very first one of these, it was exclusively a SaaS conference. We did it at the Hotel Nikko in a room that I don't think you can quite call a ballroom. It was maybe about a third of the size of this room. And Marc Benioff the keynote address and -- but opening that day was Zach Nelson.

 At that time, NetSuite wasn't a public company. Zach had had a great career at Oracle and one of the security companies that's been acquired [some certainly]. And had done all sorts of things. And he was just starting with what was going to be a tremendous run at NetSuite.

 And every year since then, Zach has been kind enough to spend some time with us, share his insights on the industry, and continue to lead this industry and NetSuite to whole new levels. And today, he's going to spend about 30 minutes with some comments and then we'll have plenty of time for Q&A.

 Zach, thanks so much for joining us again and we're excited to hear what you've got to say.

------------------------------
 Zach Nelson,  NetSuite Inc. - CEO   [2]
------------------------------
 Thanks very much. Great to be back for my 11th appearance. I think you were being generous; the room was probably a 10th the size of this, but it was very crowded. It's always good to kind of walk down memory lane and remember those days when nobody thought people would run complex applications in the cloud. And now everybody -- all of our customers certainly and all customers around the world are trying to get their infrastructure to the cloud as quickly as possible.

 So I thought I'd share this morning just a brief update on NetSuite, but then spend the majority of my time speaking about the things that we're seeing in our customer base that's driving us to do different things in our solutions to meet requirements of tens of thousands, hundreds of thousands of companies across the globe. And then we can open it up to some questions from all of you. Obviously, you should read all of our filings to triangulate what I'm about to tell you.

 Quickly: closed Q4. 2015 was a great year; Q4 was a great year for us. $206 million in revenue, up 31%; record number of OneWorld deals. For those of you that follow us closely, you know OneWorld is the system that drives some of our upmarket activity with the multicompany, multicurrency, multi-subsidiary capabilities.

 Certainly outside the US, smaller companies need those kinds of capabilities. But inside the US, they tend to be much larger companies. It's been a huge driver of our growth upmarket since about 2008 when we introduced that product. Comprises about 40% of the business.

 Record number of deals above $1 million in Q4. I'm going to talk a little bit about the trajectory of our large deals over the last five years. It's pretty phenomenal to see the growth rate of a NetSuite solution above $500,000. Some of that is driven by selling to larger companies. Some of it is also driven by midsized companies using more and more of the functionality of NetSuite.

 In short, NetSuite's -- really we have a financial system. Everyone uses our financial system. We have the world's greatest financial system, but what they really use NetSuite for is to run business operations. It's really a business system that includes financials.

 So we have lots of capabilities beyond the financial system that they can add to automate their business processes. We've talked a lot about e-commerce as one of the latest initiatives. We'll talk about some of the new capabilities coming outside the financial system, but this growth in average selling price is not just selling to larger companies. It's companies using more and more of the functionality, replacing more and more of their ancillary systems on a common back-office platform.

 A record number of customers. So this was always the magic formula we've been trying to solve. Can you sell more customers at a higher ASP? For the years prior to this, we were always selling -- we grew the customer account a bit. It was always between 300 and 400 customers, but the average selling price grew phenomenally. What was nice to see about Q4 was suddenly customer count and average selling price going up. That's a very virtuous cycle and a big highlight of Q4.

 For the year, $741 million in revenue. Cash flow from operations very strong -- grew 34%. Added 1,800 customers. I hear Workday added their 101st customer recently. We added 1,800 customers last year, just to give a scale factor there. And 1,200 employees -- massive growth in the employee base. We have about 5,000 employees around the globe today.

 Looking at the revenue, $960 million is the outlook for this year. I know had I given this slide maybe a month ago, people would have been saying, oh my God, the markets are in turmoil. Is everything going to zero?

 We've been through a number of these cycles, the worst of which, of course, was 2008/2009. Even in the worst years, we still grew. I know most of our competitors shrank by about 35% in the 2008/2009 period; we grew by something like 9%, even in the worst possible market.

 And I think the interesting thing, even to go back to those days and to show you how strong our retention and upsell are, we always look at retention as we model the business and say a dollar we sold last year is going to recur as a dollar the next year. So upsell replaces churn and downsell. It's usually better than that. We usually have more than 100% revenue retention. But even in the worst years, even in the darkest years of 2008 and 2009, our revenue retention was almost 100%.

 And in terms of what we are seeing in the macro environment -- that's where we saw the problems first in 2008/2009 was in retention. We are seeing nothing like that, obviously. We are seeing sort of classic renewal rates today. So I don't think there's anything macro happening that approximates anything close to 2008/2009 or for that matter 2011.

 We are number one in cloud ERP. I know lots of people are making claims. These clouds are to scale, sort of. We have over 30,000 Company subsidiaries, organizations running their core mission-critical business applications on NetSuite. If you look at anyone else in the enterprise space, it's not even a close second.

 And so while we certainly don't whistle by the graveyard, we are really confident about our position and our differentiation really in terms of how we go to market. And the technology and the capabilities that our customers use versus what they might use in other systems. And I'll talk a little bit about that when I go into the futures.

 The other beautiful thing about NetSuite and really around all sort of successful cloud products is the ability to scale from very small to very large organizations. And you've certainly seen that over the last year. We probably deployed our largest customer in 2015: American Express Global Travel. $1.5 billion multinational company went live on NetSuite. Talk a little bit about that in nine months. So you are starting to see real companies of scale use NetSuite to automate their business operations as they begin to look at where they are going to replace their infrastructure.

 Customer account trend -- talked a little bit about average selling price. And I know you talked about average selling price today and pricing power. We've certainly seen that in NetSuite. I think we probably have if not the best, certainly among the best growth in average selling price over the last five years, over the last decade. From 2009, average customer size was 32,000 to today over 100,000. And again, some of that is selling to larger companies, but a large portion of that is also selling to same-size companies, but selling them more functionality.

 And this is also an interesting slide to point out here in terms of our growth. If we look at customers -- this is quarterized over the last five years -- we've grown at 15X companies greater than $500,000 in average recurring revenue. So pretty important and pretty impressive growth trend. So you apply that sort of growth rate with suddenly going from 400 to 600 customers a quarter, you can see a very virtuous flywheel happening there.

 In terms of market share growth, this is Gartner's data from last year. NetSuite by far -- these guys are barely off the lines in terms of growth. 46% growth in market share in financial systems management. Last year, if you look at the previous years, you would see very similar charts to this. Maybe some players changing.

 We're the only pure play cloud in the top 20 in the financial management system. And interestingly enough, while we're growing this fast, we are still only eighth in market share. So people talk about TAM, but if you flip this around and put us on number eight and then scaled it based on market share, if you looked to our left, you would literally see the graveyard of software: Infor, Epicor, SAP.

 So we have a long way to go, but if you look to our left, it is not a very pretty picture for customers. It's a pretty picture for NetSuite.

 So what's driving the ERP replacement cycle? And why isn't the ERP replacement cycle faster? Why are we only number eight? Well, I've often likened an ERP replacement to a heart transplant. And it's not a knee replacement -- I sort of looked at the SFA world as a knee replacement. If the operation fails, you might limp, but you are not going to die. In a heart transplant, you may die; and we've certainly seen people die with some heart transplants on other systems.

 So it's a very considered purchase. You have to be sick -- nobody does elective heart surgery. Your company has to be sick before they do a heart transplant. So this is a much slower-churning market, but there are things that are driving and accelerating the churn -- not just in technology, but across every industry. And these are really the drivers that I see and that we see in our customer base. And I'll talk a little bit about how we've responded to these.

 First of all, every company is a cloud company. When we started 11 years ago, we didn't call it the cloud then, but it was the cloud. People thought this sort of movement to delivering services over the Internet was largely a technology and software trend.

 Today, it's basically an every industry trend. Every industry is trying to figure out how to deliver new services, new experiences, new billing models to support a new way that customers want to consume their services -- be they cars, be they shaving products. Name your product, name your industry -- every company is a cloud company. And that's driving a replacement cycle.

 The need for flexibility goes hand-in-hand with that. You don't know what your next business model is going to look like. You need to have a business system that you can change in real time so that you can respond to changes in your marketplace and competitive set.

 Related again to the cloud as a business platform, the power of data aggregation is incredibly important. Again, not just in technology companies, but in every company. So having a platform that enables data aggregation and things you can do once you've aggregated that data is important. Delivering this not just in one country, but around the globe, delivering all your products and services globally -- very important whether you are small or large.

 And finally, what you see in companies around the world is really a startup state of mind. How do we cannibalize ourselves? Not how NetSuite cannibalizes itself but, but how does GE cannibalize itself? How do companies make sure that they are not the next industry that's disrupted? So a startup state of mine is very important in all of our customers' world.

 So we've seen this -- everything has become a cloud. Entity has become a cloud company. LinkedIn -- who thought you could aggregate all the world's resumes? Who thought you could aggregate all the world's friends, sports. Name your industry -- every industry has become a cloud company.

 Our industries, the ones we focus on at NetSuite, we are seeing this transformation as well in retail. Obviously omnichannel is a big driver there. Manufacturing -- the lines between manufacturing and retailers are becoming blurred. We just announced an acquisition in manufacturing today related to some of the things you are seeing from the cloud impact in manufacturing. Wholesale distribution; similar challenges.

 Software -- the ultimate cloud disruption and services as well. How do you deliver services over the Internet. Every one of these industries is changing, and we've been trying to build capabilities within our system to enable those companies to transform their businesses in response to that.

 Secondly, the need for flexibility. I can't overestimate this. If you think back to the early days of the cloud and certainly what competitors said about cloud applications like NetSuite, they mistook the concept of NetSuite being a single product used by everybody and extrapolated that to say, well, if the same product is used by everybody, you can't change it. Everybody is on the same not just version, but the same instance of the product.

 Nothing could be further from the truth. Every one of our customers has customized the system. We architected the ability to change the system into the core application at the very beginning of our history. And the idea really came from the fact that we were trying to build a system to run a business. And we didn't know how to run every business in the world, so we knew customers were going to have to change what we gave them to run a distribution business versus a software business versus a services business.

 And only we and Salesforce really recognized in the first generation of cloud systems this need for -- and I literally call it customization of the system. And they call theirs force.com; we call our platform SuiteCloud. Very similar technologies designed to solve the same problem in that how do you let the customer build the last mile to solve their business requirements?

 So today, SuiteCloud is used by every one of our customers. It's also used by our partners. Obviously, the reseller food chain and the SI chain are using this platform to enable new types of services for our customers. And finally, it's used by ISVs to build applications on top of our stack that look as if our developers built them.

 And this acquisition that we announced today, IQity, is a great example of that. They built shop floor control on top of NetSuite, a whole host of process manufacturing capabilities on top of NetSuite. It looks as if NetSuite's engineers built it, and over the last year, we've gone to market with them, sold many, many combined sales with IQity. And today we bought that product.

 But what this gives us is certainly a way to meet customers' requirement for building the last mile as well as our requirement to find domain expertise in domains where we have no domain expertise. We don't really know that much about process manufacturing. The guys who founded IQity know everything about process manufacturing and they built it into NetSuite. So the platform is very important from almost every perspective that you look at.

 The power of data aggregation. This is certainly something that we leverage. Going back to the slide of all these different types of cloud companies, all of these guys' business model is built on leveraging the aggregated data. LinkedIn is selling information about all those resumes. Facebook is leveraging all the information about your friends and on and on and on.

 At NetSuite, we have a pretty unique position in terms of the data we're aggregating. And this is just an example of the data that we've added that our customers have added in the last year. 150 million items -- people still sell physical products; imagine that. 150 million items across all of our customers. 2 million service projects delivered through NetSuite. 500 million application requests a day. 186 million invoices generated. 20 million purchase orders. 156 million -- these numbers are ridiculous. 9 terabytes of data added every day. This is the data that NetSuite gets to leverage and analyze and do things with.

 And while we've talked about analyzing it for particular industry groups to be able to show wholesaler distributors how they compare to their peers, what this capability is really enabling us to do is anticipate needs that our customers don't even though they have. And a lot of our next-generation technologies are going to leverage what we've learned about the commonalities between product companies and service companies and the collision course that those two types of industries are on.

 The other thing obviously it lets us do on a customer-by-customer basis is to provide incredible business intelligence about their business across all of these different data types. What's going on in their warehouse. What's going on in their finance department. What's going on in sales. What's going on in orders. So incredible BI built into the system versus added on through third-party products because all the data is there.

 If you think about what BI tools do typically, because most companies have the vast majority of their data spread in multiple systems, they suck all the data out of those multiple systems, put it in a single place, and then suddenly you can look at it. In the case of NetSuite and its customers, our customers' data typically isn't fragmented. It is all in one place. It's in their NetSuite account.

 So it becomes just a display issue: how do we display that data in a way that makes sense to a warehouse manager versus a sales manager versus an accountant and so forth. So the BI capability is built-in.

 [Driver 4] is the globalization of everyone's business, whether you are a small company or a large company. The promise of the Internet when I spoke 11 years ago was to build a small company that sold anywhere in the world.

 Well, it's a great idea, except you need multicompany, you need multicurrency, you need multi-tax. And that's really the system that we've built to enable the idea of selling anytime, anywhere, to anyone.

 OneWorld, as I mentioned, is a huge driver. We are -- people talk about how we're doing in the enterprise. This is the greatest system for multicompany, multicurrency, multi-tax on the planet. Oracle has nothing like it. SAP has nothing like it. No one has anything like OneWorld. It's been a massive driver, both in the enterprise and in the small-midsized world. You see some of the deployment facts there: 160 countries, 100-plus tax regimes.

 And the other thing I would say about OneWorld is not just applied to financials. OneWorld is also driving our success in e-commerce. Because if you think about commerce, your website is exposing this sort of transactional capability -- charge VAT in the UK, charge GST in Australia, etc. So OneWorld really provides the underpinnings for our e-commerce offerings from a transactional standpoint as well.

 And just one example of companies deploying this -- not in nine years, but nine months. 14,000 employees, 135 companies, 30 currencies, 1 million invoices a month -- all in nine months for American Express Global Travel. So incredible capabilities not just on slides, but in reality.

 And finally, obviously, we are increasing our footprint from a data center perspective so this data is available in local jurisdictions. And as those situations evolve certainly in Europe and other places, the multi-data center model is important. And a non-trivial exercise -- it's very difficult to figure out how to actually run multiple data centers with complex applications. So again, it looks simple on slides; it's very hard to do in reality.

 And last, but not least, this point is really what's driving some of the next-generation technologies that you will see it at our SuiteWorld's conference in May -- and that is business models are constantly changing. And companies need to be able to respond in their front office and in their back office to those changes.

 And these are the capabilities that we are bringing to them in the future to future proof their business. So they want to go into new markets; they want to do new pricing models -- price a product as a service or price a product as a subscription, price a service as a product. All of these new business models.

 New channels -- they want to manufacturers, retailers, and distributors -- the lines are blurring. Distributors want to go direct to retail, etc., etc. So all of these business models are colliding in products and services companies and we have a host of new capabilities really around solving these problems for our customers.

 Unified building and rev rec is I think probably the next big engine of growth for NetSuite. If you look at what companies are going through as the cloud transforms their business, from a back-office standpoint, it's popping up in two places: the billing system and the revenue recognition system.

 What's happening is software companies used to be the only companies with complex rev rec. Now almost every industry has complicated revenue recognition management. And billing is getting more and more complex by the day. It used to be product companies sold products; service companies sold services. Now you have companies selling products, selling subscriptions, selling usage -- all of these pricing models are popping up and they also all have revenue recognition impact.

 So NetSuite sells a subscription for 12 months. We might get the cash up front, but we obviously want to recognize it over time. So multiply that problem by 20 or 30 and you can see why unified billing and rev rec is going to be a very important feature. And again, I think we are probably the only company on the planet that will solve this problem.

 Advanced order management. Order management sits at the heart of the NetSuite system. All of these capabilities are driven by capturing the order, and that's a big piece of it. And it really solves for the omnichannel commerce. Order management sits at the heart of what we're doing in omnichannel commerce as well.

 So with that, that was sort of my brief interlude on where we're going with the Company, the things that have driven us in the past, the things that have driven us in the future.

 And happy to open it up to any questions that you have.

==============================
Questions and Answers
------------------------------
 Brendan Barnicle,  Pacific Crest Securities - Analyst   [1]
------------------------------
 (inaudible - microphone inaccessible)

------------------------------
 Zach Nelson,  NetSuite Inc. - CEO   [2]
------------------------------
 It's a challenge. We are almost -- this year, we'll be almost a $1 billion company. And I think some of the ways that we've handled it is very early on in our Company's history, we decided not to hire everyone in San Mateo. In fact, we probably have 300 or 400 people in California we really wanted to get outside of California. Number one, to reduce costs, but also to get new ideas into the Company.

 So we have far more employees outside of San Mateo than we have inside. We had big office in Uruguay. We have Oklahoma City. We have a variety of -- a distributed workforce. And that's been I think a driver of innovation and ideas.

 You certainly have insular thinking when you are a large company, but when the bodies are physically separated, the insular thinking quotient goes way down. Because there's not this sort of overbearing corporate mentality in the company.

 Second thing we've done is we've hired enormously from college students. Really, we've created this giant feeder of college students. We will hire 300 or 400 college students this year, so those people -- they've never had a job before. So they bring a whole new sense of energy and possibility to the Company. That's been a big change.

 And the final thing that I've seen from my role is ultimately if you really want to make a big change in the company, the CEO has to take responsibility for that startup. And that is really what we did in e-commerce over the last three years.

 I broke it out separately. I ran it -- not that I'm God's greatest manager, but when people see the CEO taking a specific interest in something, the company culture changes. And that startup begins to have life. And certainly if you look at what we've done in e-commerce over the last three years, our retail vertical grew 50% last year. I think we have the best omnichannel commerce solution on the planet. I think personal commitment to that is very important.

------------------------------
 Brendan Barnicle,  Pacific Crest Securities - Analyst   [3]
------------------------------
 (inaudible - microphone inaccessible)

------------------------------
 Zach Nelson,  NetSuite Inc. - CEO   [4]
------------------------------
 It's a good question. We look for very specific types of students that we are recruiting. Again, we are doing it all over the world. We have Denver, Boston, North Carolina. So I think, again, the distributed workforce model enables us to -- by the way, we don't do it in San Mateo. We do it everywhere but San Mateo. So we are looking at our other hubs -- our other innovation centers really are providing the backbone for those capabilities.

------------------------------
Unidentified Audience Member   [5]
------------------------------
 So when you first started coming here, cloud-based ERP was a tough sell to the biggest global companies. At this point now, are the Fortune 50, are the biggest of the big, ready and willing? And if so, why now are they willing and ready?

------------------------------
 Zach Nelson,  NetSuite Inc. - CEO   [6]
------------------------------
 I think the desire for cloud has evolved from never when we started, to maybe, to let's make cloud first if possible. And so I think you have to look at the various segments of the enterprise, the various functional areas, to see how quickly that cloud-first mentality can kick in.

 Again, ERP is really the heart of these companies. So it's the last system that they even consider. And I think in many cases -- if you look at the world's largest companies, people think of the ERP system as the GL. Believe me, McKesson has no interest in replacing their GL. Their GL is not their problem. How they suck all the journal entries in from all these various systems is not the system they are having problems with. Their problems are in their order management system. Their problems are in their billing system.

 So our desire is never -- and their desire is frankly not to replace their GL. Their desire is to replace the business systems that sit around that GL. And so that you are seeing great activity in. I don't think this concept of going to replace Oracle's GL at GE or SAP's GL at McKesson, whatever the case may be, that's not on their roadmap. There are lots of other things on their roadmaps that we solve unrelated to that.

------------------------------
Unidentified Audience Member   [7]
------------------------------
 What do you plan to do around this data you are collecting? You skimmed over it a little bit. And how do you seek permissions? How are you going to manage permissioning from your clients around all this collected data?

------------------------------
 Zach Nelson,  NetSuite Inc. - CEO   [8]
------------------------------
 For what? I'm sorry?

------------------------------
Unidentified Audience Member   [9]
------------------------------
 All of the data that you're collecting -- I think it was like slide 9 or something. You mentioned that you are going to analyze that and produce some enriched data set from that. How do you manage that and how are you going to gain permission?

------------------------------
 Zach Nelson,  NetSuite Inc. - CEO   [10]
------------------------------
 Well, we have the ability to analyze in aggregate today anonymized data across our customers. That's part of our standard license contract. We would obviously never expose any single customer's data that somebody -- it wasn't their data, right? So we are not permitted to do that.

 So we can certainly do that. We obviously analyze the data in aggregate and in accounts to see how we can better the service. How is this company using the system and how could they be using it better based on their pattern of usage? So that's also allowed. In aggregate, it's all anonymized.

------------------------------
 Brendan Barnicle,  Pacific Crest Securities - Analyst   [11]
------------------------------
 (inaudible - microphone inaccessible)

------------------------------
 Zach Nelson,  NetSuite Inc. - CEO   [12]
------------------------------
 So IQity is probably the textbook acquisition for NetSuite. It's what we've done historically, and that is if you look at an ERP system or you look at the heart transplant, every customer's business is different. There's a ton of domain expertise involved in dealing with process manufacturers versus discrete manufacturers. And so the challenge that all ERP vendors have had -- even if you look at legacy SAP -- every sale gets very vertical very quickly.

 So the challenge is how do you get enough domain expertise in your business to solve that problem? And I see [Klaus] sitting here; he's got a totally virtualized appfolio, totally virtualized series of applications for real estate and one other -- I can't remember -- and legal. So he can talk eloquently about this as well.

 So while we have a fairly broad industry-based solution -- great for distributors, great for manufacturers, great for Internet companies, great for services companies. When you begin to go truly vertical, like a real estate company, it's another level of complexity, and another level of knowledge.

 So what IQity is bringing to us, first and foremost, is real domain expertise around process manufacturing. The second thing that IQity is bringing to us is the fact that they've built that domain expertise on our platform. So it looks as if NetSuite built it itself. So we already have a ready-made solution that looks and feels and smells like NetSuite. It upgrades with NetSuite. So the fact they used our platform is enormously helpful.

 And the third thing we have is we have a lot of joint customers already today. So we know the combined products really work in expanding our footprint with process manufacturers.

 The other thing I would say related to verticalization of ERP, when you verticalize, that's what allows you to move upmarket. It's not about how many users you can support. We have 4 million users logging into NetSuite every quarter. That's more than any other SAP instance. So it's not about user scale, it's about functional scale.

 So when you add something like IQity, suddenly you can meet the needs of larger manufacturers, your TAM expands, and your average selling prices expands. So we've done those types of acquisitions in many cases.

 Our point-of-sale system that's part of our omnichannel solution, the backbone for that was a very similarly structured company built their point-of-sale system on NetSuite. We acquired that company and that became the backbone for our in-store experience portion of our omnichannel solution.

 Bronto is a bit different. There are some areas of horizontal functionality that are useful to our customers. And in some cases, those can be -- we have those integrated solutions rather than native solutions. And certainly email marketing is one of those. We don't want to generate -- I think Bronto generated 1 billion emails last year. We don't want to generate that out of NetSuite. We want to generate 1 billion emails out of a system designed for that.

 So if you look at our commerce strategy, obviously a piece of that has to be merchandising and marketing automation. And they have the best B2C marketing platform on the planet, so that really made sense as we pushed the commerce lever.

------------------------------
Unidentified Audience Member   [13]
------------------------------
 You talked a lot about retail and the pace of change going on there. I guess, what are you really seeing in that market? How far along is the retail segment in terms of its adoption of technology? And what are some of the priorities that you are seeing them really focus their spend and attention to?

------------------------------
 Zach Nelson,  NetSuite Inc. - CEO   [14]
------------------------------
 Well, retail is sort of the poster -- if you see where NetSuite grows most quickly, it is in industries that are being disrupted. And retail is obviously being disrupted very rapidly by the Internet and the desire for customers to have different experiences. Certainly with providers of retail solutions.

 I always liken it to I've got, whatever, 40,000 followers on Twitter; they know who I am. Yet when I walk into a store where I've bought many products, they have no idea who I am. That's a very bad user experience. So really providing a common experience, whether you encounter a company in-store, online, on the phone. That's the problem they're trying to solve. And they are competing with guys who have solved that problem in some sense -- Amazon and others.

 So the drive there is really to unify first and foremost the online and the in-store experience, and that really requires an entire replatforming of their systems. Their systems today -- they have one system for point-of-sale; it's called Micros; one system for online; it's called whatever; and another system for phone sales or catalog sales. There is no way you are going to recognize a customer without spending -- I think Nordstrom tried to unify that and it cost them, I don't know, hundreds of millions of dollars trying to unify the experience across these old existing systems.

 So what you're really seeing is people replatforming to a common back end that feeds multiple front ends, which is effectively the NetSuite architecture. And that's why that's our fastest-growing industry: it's being disrupted most quickly.

 But the point of my whole speech was every industry is going to go through that disruption at some point. Media publishing is also another place where we are having enormous success. That's clearly been disrupted by the cloud. All of those companies need to replatform their systems to an entirely different user experience, an entirely different billing model, an entirely different business model. So those are the industries we look for: those that are being disrupted by the cloud first, but it's going to happen everywhere.

------------------------------
Unidentified Audience Member   [15]
------------------------------
 (inaudible - microphone inaccessible)

------------------------------
 Zach Nelson,  NetSuite Inc. - CEO   [16]
------------------------------
 Again, it depends on segment, right? The Shopifys and e-commerce -- it hasn't been successful at every segment, certainly. So you have QuickBooks online being very successful in online ERP and then NetSuite. Not much in between. ERP is a very different market.

 I think in the ERP SMB space, below us there's so much churn that those companies just run in place trying to replace the churn 20% to 30%. So it's very hard for them to grow and very hard for them to invest in the technologies that we talking about to move upmarket. So I think the ERP space is a little different.

 But clearly, the other driver I think of adoption in the SMB space is that people starting companies don't know that you could actually or should actually run software online. They think it's absurd to run a website online. And QuickBooks -- they've been born on the Internet. So I think you are also seeing a generational change in the startup community that goes cloud always. They don't even know there's another option. So folks like Shopify and others have taken advantage of that with their particular products.

 I think if you think about some of our challenges as we move upmarket, that ethos has not necessarily penetrated the Fortune 50, to the earlier question. A guy who knows how to run -- a CIO who knows how to run SAP, they are going to put in SAP. That generation needs to be changed out before they really adopt a cloud-first mentality.

------------------------------
 Brendan Barnicle,  Pacific Crest Securities - Analyst   [17]
------------------------------
 One of the things that you highlighted in your presentation was the pricing changes that you had seen and you're referencing something we had shared today. We continue to see pricing in SaaS remain very robust. I think we've done 30 different surveys on this, and I think in all those 30, we've had two times where respondents said they saw their SaaS pricing go up in the last 12 months -- or go down in the last 12 months, rather than up.

 We've got some theories on why that is. Why do you think we continue to see this good really inflationary trend in SaaS, which has not been true for most technology?

------------------------------
 Zach Nelson,  NetSuite Inc. - CEO   [18]
------------------------------
 Well, in our particular case -- and it probably applies to the other companies as well. Our first generation of customers -- it was in sort of the 2001 period, which was also a crash. And in those contractions, people move to SaaS because it was seen as cost reduction. So that was the first driver.

 I think the second driver -- what you're seeing now is that people actually say okay, there is cost reduction, but what's really happening is there's productivity enhancement. This ability to access applications anytime, anywhere, on any device is actually far more valuable than having the application look like Microsoft Windows, which is what they used want applications to look like.

 So even if you look at our deals, when we are up against -- and this is the predominant competitive set that we're up against -- when we're up against and on-premise application, we are more expensive than the on-premise application today. And the customers are willing to pay it because they see the value.

 They obviously appreciate the cost of managing software, so they know that there is a savings there. And secondly, they know there's a productivity gain that they are not going to get in an application that looks like Microsoft Windows, which is what the vast majority of these applications look like. So I think that's -- the value has shifted to applications that look like NetSuite.

------------------------------
 Brendan Barnicle,  Pacific Crest Securities - Analyst   [19]
------------------------------
 Do we have any final questions? Zach, thanks so much for 11 years of being with us. We really appreciate it. We'll see you next year.

------------------------------
 Zach Nelson,  NetSuite Inc. - CEO   [20]
------------------------------
 Appreciate it. Thank you very much.




------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the 
Transcript has been published in near real-time by an experienced 
professional transcriber.  While the Preliminary Transcript is highly 
accurate, it has not been edited to ensure the entire transcription 
represents a verbatim report of the call.

EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional 
editors have listened to the event a second time to confirm that the 
content of the call has been transcribed accurately and in full.

------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other 
information on this web site without obligation to notify any person of 
such changes.

In the conference calls upon which Event Transcripts are based, companies 
may make projections or other forward-looking statements regarding a variety 
of items. Such forward-looking statements are based upon current 
expectations and involve risks and uncertainties. Actual results may differ 
materially from those stated in any forward-looking statement based on a 
number of important factors and risks, which are more specifically 
identified in the companies' most recent SEC filings. Although the companies 
may indicate and believe that the assumptions underlying the forward-looking 
statements are reasonable, any of the assumptions could prove inaccurate or 
incorrect and, therefore, there can be no assurance that the results 
contemplated in the forward-looking statements will be realized.

THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2016 Thomson Reuters. All Rights Reserved.
------------------------------