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Oracle’s SaaS Targets

Posted on Tuesday, Mar 31st 2009

In my recent piece on Oracle, I said, Oracle’s entry into SaaS is inevitable, and it will happen probably as early as this year. Let’s look at two companies that are potential acquisitions for Oracle this year.

In its fourth quarter and fiscal year 2008 results released February 10, NetSuite (NYSE:N) reported its first non-GAAP net profit in the face of the economic downturn – one more example of how the SaaS sector is relatively recession-proofRightNow is another SaaS company that recently turned profitable.

For the fiscal year 2008, NetSuite reported revenue of $152.5 million, up 40.5%. Net loss was $15.9 million or $0.26 per share versus net loss of $23.9 million or $2.45 per share last year. Total headcount at the end of the year was 971, up 44% over 2007. Revenue from the Americas was $123.4 million, while revenue from international regions was $29.1 million.

Q4 revenue was up 30.5% to $40 million. Net loss was $4.5 million or $0.07 per share versus net loss of $3.3 million or $0.26 per share in Q407. Non-GAAP net income was 534,000 or $0.01 per share. The Street consensus was revenue of $41.58 million and a loss of a penny a share. Gross margin was 71%, an improvement over third quarter’s gross margin of 68.8%. It ended the quarter with $124 million in cash and cash equivalents.

NetSuite added approximately 350 new customers in the quarter and ended the year with over 6,600 active companies. Its average selling price per customer increased 20% to $340,000, reflecting its success in its efforts to attract larger and profitable customers. In Q4, ASP for new customers reached a record $74,000 per customer driven by the high ASP of $100,000 per customer of its OneWorld product. OneWorld accounted for more than 35% of its new business bookings. Bookings were up approximately 20% sequentially and 30% for the year.

Short-term deferred revenue totaled $66.7 million versus $64.2 million in Q3. Long-term deferred revenue was $7.2 million, down from $11.1 million last year. The long-term deferred revenue balance is set to continue to decline as more and more contracts are converted from multi-year to one-year contracts.

In the quarter, NetSuite launched NetSuite Release J, an ERP suite for the Japanese market. Excluding deferred revenue associated with the Japanese partnership, total deferred revenue was $64.5 million, an increase from $64.2 million last quarter.

NetSuite continued to be aggressively competitive, this time targeting SAP customers by introducing its Business ByNetSuite Program that it says cuts costs by 50%. Last quarter, it offered a 50% discount to customers for switching to NetSuite CRM. Recent coverage of is available here. Other competitors that we have covered in our Deal Radar series include Intacct and Everest Software in the financial SaaS space.

For Q1 2009, NetSuite expects revenue in the range of $41.5 to $42.5 million, non-GAAP EPS of $0.0 or a non-GAAP net loss of $250,000 to non-GAAP net income of $250,000. The Street consensus for the first quarter is $43 million revenue and a loss of a penny a share. For 2009, Street consensus is for $186.2 million in revenue and profit of a penny a share. NetSuite did not provide guidance for the full year. It is currently trading around $11 with a market cap of about $680 million.

Chart for NetSuite, Inc. (N)

On February 23, Taleo, the leading provider of on-demand talent management solutions, provided an update for its fourth quarter and fiscal year 2008 results as a revenue recognition review was in progress. The review was completed on March 23 and Taleo announced deferral of approximately $18 million in services revenue previously recognized through June 30, 2008.

The review follows a change in Taleo’s accounting standards. Earlier, when consulting and application services were sold together, consulting revenue was recorded when the services were delivered. Now, the consulting revenue will be recorded over the term of the application services agreement, typically three years. My interview with Taleo CEO Michael Gregoire is available here.

In Q4 Taleo, which had 2007 annual revenue of $128 million, said it added 27 new enterprise customers, up from 22 in Q3 and 26 in Q4 of 2007. It signed 12 large enterprise deals over $250,000 in Q4, up from six in Q3 and eight in Q4 in 2007. It also signed a large multi-year outsourcing deal with IBM. In the SMB division, it added 175 new customers in the quarter.

The company ended the quarter with approximately $49 million in cash and cash equivalents. Headcount at the end of Q4 was 878, compared to 852 at the end of Q3. The stock is currently trading around $12 with a market cap of about $354 million.

Chart for Taleo Corp. (TLEO)

In summary, both NetSuite and Taleo fit nicely into a SaaS roll-up strategy, covering the finance and HR functions, and building out from those two. NetSuite also has CRM, although it is not a market leader. Plus there are another 600 SaaS companies to pick from in this current buyer’s market scenario.

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