Don’t get Nervous with NetSuite

Just like SuccessFactors, this was the first quarter since Netsuite went public. Earlier coverage is available here and here. Let’s look at how they are faring in this current climate of gloom.

In February, NetSuite, Inc. (NYSE: N) released its earnings for Q4 and fiscal year 2007 that ended 31 December 2007. Q4 revenue was $31.7 million, up 57% y-o-y and 13% q-o-q. Net loss was $3.3 million or $0.22 per share, compared to $8.1 million or $1.25 per share in Q4 2006.

For the full year 2007, revenue was $108.5 million, up 62% from 2006. Net loss $23.9 million or $2.45 per share, compared to $35.7 million or $6.42 per share in 2006, an improvement of 62%.
Non GAAP net loss had an improvement of 72%.

North America accounted for $89.3 million revenue, while international regions accounted for $19.2 million or 18% revenue.

Deferred revenue in 2007 was $68.1 million, excluding about $8.9 million of deferred revenue related to the TCI and MJS reseller agreements. For 2007, revenue related to these agreements was $2 million. And for each quarter in 2008, Netsuite expects $1.5 million in revenue from them. Since early 2006, Netsuite transitioned to predominantly one-year contracts from multi-year contracts. Before 2006, the majority of its revenue was from multi-year agreements. The transition to one-year agreements has reduced its non-current deferred revenue. I personally like this move, because it takes away an important attraction of SaaS businesses – visibility into the longer term.

At year-end, NetSuite had 5600 active customers and it added 430 new customers in the quarter. In its 10-K, NetSuite defines active customers as customers under contract who have used its service within the recent quarter.

Unlike SuccessFactors and many other SAAS vendors, NetSuite does not provide its customer retention or churn rates. These metrics are quite crucial to gauge its performance and also compare how it fares vis a vis its competitors. So though it is reducing its losses, it needs to clarify concerns over its churn metrics.

For Q1, NetSuite expects revenue in the range of $33 to 34 million. For 2008, it expects revenue between $153 and 156 million. Non-GAAP net loss excluding non-cash impact of stock-based compensation expense is expected to be between $1.5 to $0.5 million for Q1 and $2.5 to $0.5 million for full year 2008. The stock is trading around $23 and its market cap is around $1.4 billion. It hit a 52-week low of $18.31 on February 27, compared to its 52-week high of $45.98 on December 21.

There is rumor that NetSuite is working on a deal with Google. It makes sense, since Google is working out a business application suite partnership also with Salesforce.com, and confirms its interest in the SaaS space, especially focused on the mid-market.

Netsuite got a recent thumbs down from Bernstein Research Analyst Charles DiBona, who questions the stickiness of NetSuite’s business model, which I have a hard time agreeing with. Why would a company, once in, want to switch its ERP system? DiBona’s rationale simple doesn’t make any sense to me!

At the end of the day, I think, NetSuite has plenty of growth ahead over the long term. It is most certainly both a beneficiary and a victim of the market’s somersaults, both the exuberance in December, and the long faced sulking this year.

Good companies with good value propositions should keep going just fine, and generate returns over the long term. NetSuite is certainly one of them.