NetSuite Reports Another Solid Quarter

NetSuite reported another solid quarter last night, delivering total revenue, subscription revenue and billings above our (and the Street’s) expectations. Consistent with prior periods, Q3 was driven by increasing average deal sizes from the company’s move up market, good retention in the installed base and an increasingly effective channel partner network.

Management maintained its customary upbeat tone on the call, highlighting the good performance and SAP’s recent decision to scale back its “NetSuite killer” BusinessByDesign ERP solution for small companies. While the company’s commentary was entertaining, we expect the competitive environment to be little changed since NetSuite rarely competed with BusinessByDesign.

NetSuite reported 3Q total revenue and non-GAAP EPS of $106.9 million (+34% y/y) and $0.09 (7% operating margins), which was respectively $1.1 million ahead and a penny above our estimates and the Street consensus. Subscription revenue grew 31% in the quarter to $85.8 million and was $1.5 million above our forecast.

There were 320 new customers while average selling prices increased over 20% y/y. Consistent with management’s strategy of optimizing the business for revenue rather than earnings growth, the company hired-up in the quarter, adding 153 employees to the 2,138 already onboard. Billings grew 35.5% to $116 million while operating cash flow was $14.6 million.

Earlier in the week, NetSuite acquired TribeHR, a provider of Human Capital Management (HCM) software delivered as a cloud service for small and medium-sized businesses. The acquisition extends NetSuite’s ERP capabilities into the rapidly growing and strategically important HCM market. While terms of the deal were not disclosed, management expects the deal to add little revenue and be slightly dilutive in Q4.

Management’s Q4 revenue and EPS guidance is $111 million and $0.07 — which is respectively in line and $0.04 below the consensus — so we have adjusted our estimates accordingly. Management’s preliminary 2014 outlook calls for total revenue growth in the 28%-30% range but calls for continued investments in R&D and sales that will keep EPS growth relatively flat.