NetSuite Benefits From Trend Toward Cloud Products

The company’s offerings also help clients with everything from taxation rules and marketing automation to legal management.

Earnings Growth

The rising popularity of cloud-based products is reflected in NetSuite’s strong financial growth over the past few years. Annual earnings per share have tripled since 2009, while revenue has increased more than 40% over the same period.

Meanwhile, the company has grown its customer base to 2,800 companies and landed contracts with bigger clients, including Qualcomm (QCOM) and Groupon (GRPN), after targeting mostly mid-market accounts a few years ago.

But even as cloud computing becomes more entrenched in the business world, NetSuite still has to deal with skeptics in marketing its products.

"We still have conversations with people who are uncomfortable with cloud," said Ron Gill, NetSuite’s chief financial officer. "Sometimes you think the whole world has turned to cloud, but that’s not the case."

This is actually good news for NetSuite because it means the market is still wide open for the kinds of cloud products and services it specializes in.

"This wave of adoption of SaaS still has a long way to run," Gill told IBD. "CRM is one of the areas with the highest adoption of SaaS. ERP is well behind that because of the conservative nature of the service. There is a lot of runway left in this trend."

Not only does NetSuite have ample growth opportunity in its core products and services, it can expand its footprint even further by developing new products.

An example is SuiteCommerce, a commerce-as-a-service (CaaS) product that NetSuite announced last month. SuiteCommerce lets businesses manage their interactions with other businesses, as well as directly with consumers, via a cloud platform.

Though NetSuite has not issued any revenue projections for SuiteCommerce, Gill says there are plenty of potential clients.

"Certainly, there is a a lot of opportunity with customers we already have, but there is also opportunity for companies with separate stand-alone systems for back-end commerce," he said.

Financially, NetSuite has grown revenue in double digits eight quarters in a row. It has grown earnings at least in double digits in seven of the last eight quarters.

First-quarter revenue came in at $69.3 million. That was up 30% from the prior year and above estimates for $67.8 million. Earnings doubled to 6 cents a share, topping views by 3 cents.

Calculated billings, which NetSuite describes as revenue plus the change in deferred revenue, rose 26% to $77.9 million. That growth rate was down from 30% the previous year and 36% the previous quarter.

"The decline in growth was due in part to difficult year-over-year comparisons," Barrington Research analyst Jeffrey Houston noted in a report. "The first quarter of 2011 benefited from a couple of large deals."

NetSuite added 300 new clients during the quarter vs. 350 the previous quarter and 273 the prior year.

"This metric is less of a focus for us because the company is signing larger deals and shying away from smaller companies," Houston said.

Analysts polled by Thomson Reuters expect NetSuite to grow EPS 40% this year and 62% in 2013.

The main question now is how long NetSuite will remain an independent company. Larry Ellison, the billionaire chief executive of Oracle (ORCL), owns a controlling stake in NetSuite.

Oracle Rumors

For years, rumors have circulated that Oracle will eventually buy out NetSuite.

Those rumors grew louder recently when Oracle announced plans to distribute more than 100 business cloud-based software applications over the Internet rather than sell them as products that must be installed on individual computers.

The move will put Oracle in competition with Salesforce.com (CRM), a maker of cloud-based software. Having NetSuite’s lineup of products would only increase Oracle’s ability to compete, experts say.

Even before Oracle’s recent announcement, there was talk the software giant would acquire NetSuite.

"NetSuite is one of our favorite SaaS companies, and we believe that Oracle will eventually acquire it," Houston noted in April.

NetSuite’s Gill acknowledges that his company gets mentioned often as a buyout candidate. But he prefers not to address specific rumors directly.

Instead, Gill says he and his colleagues at NetSuite take the rumors as a compliment.

"We look at it is as validation of SaaS," Gill said. "We are happy they are acknowledging the cloud. But it does not affect for one minute how we operate the company. We are taking market share away from very big competitors, and that’s where our focus is."