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Who’s Really Outperforming Whom? NetSuite vs. Dynamics

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Jason Carter with PartnerCompete found that “based on NetSuite's average sales price and customer add rate during Q409, it looks like the company saw a shocking amount of revenue (as in 1/4 of it) walk out the door due to churn.”

Jason was confronted with a comparison of revenue growth rates leading people to conclude that the Saas vendors like NetSuite (+3.78% last quarter) are really outperforming the on-premise vendors like Dynamics (+1% last quarter). This is proving to not be the case and here are Jason’s findings on why we can no longer take this information at face value:

$41.4 million
That's NetSuite's revenue from a year ago, in the fourth quarter of 2008.

$11.2 million
That's how much "software" the company says it sold during Q409. Specifically, on the earnings call NetSuite said that during Q409 it added 295 customers at an average sales price of $38,000 each. That equates to $11.2 million in revenue.

$52.6 million
Just straight math. Take $41.4 million from last year, add the $11.2 million from new customers, and you get to $52.6 million. In theory, absent churn this is the revenue NetSuite should have delivered in Q409.

$43.0 million
Is the amount of revenue the company actually delivered in Q409. It's a 3.8% increase over $41.4 million during Q408. In dollar terms it was an increase of $1.6 million.

$9.6 million
Is the difference between those two numbers. What could that be but the amount of revenue NetSuite lost to churn?

This is troubling for NetSuite, and when the pundits compare NetSuite's 3.8% growth with an on-premise vendor that grew at a lower rate, they are not taking these issues into account. From $41.4 million in revenue during 4Q08, NetSuite lost $9.6 million by the end of 4Q09. That's a "revenue churn" of 23%. Ouch.

Microsoft has recently invested a huge amount of time and resources in order to make SaaS easily available for Dynamics ERP. If you’re interested to learn more, please contact us here at Computeration.

Specializing in ways to enhance your company’s solutions with Microsoft Dynamics GP in Idaho and the Pacific Northwest, with clients around the world, Computeration makes your implementation successful by offering experienced project management, data integration, training, and consulting services.

By Gloria Braunschweig with Computeration, an ID and Pacific Northwest Microsoft Dynamics GP Partner.

4 Responses to “Who’s Really Outperforming Whom? NetSuite vs. Dynamics”

  1. Jason says:

    Gloria – thanks for referencing my analysis. NetSuite is guarded about the information it gives out relative to churn (with good reason I suspect), so we’re left speculate like this.

    Two very excellent points you raised in the comments above. Both were also raised by members after I initially shared this analysis with them.

    Nick – You are correct that in its recurring revenue model NetSuite is likely recognizing that $11.2 million not all in 4Q09, but is splitting it between that quarter and the three that follow it. But then it’s also true that before they even close a deal in Q4 they are benefitting from the deals closed in the prior three quarters, which is also being recognized over the course of a year. So adjusting for this may have very little impact.

    Rob – You are also correct that services revenue could impact the final “revenue churn” rate. You’d need to subtract the services revenue out of each quarter and make the comparison based on just the recurring portion of the business.

    I’ve run through my math again, adjusting for both factors, and instead of the 23% churn noted above I come up with an estimate of 20%.

    Could I be off the mark with this number? Sure. I’m having to make some assumptions in order to do the math and am left with a number of questions…

    > what is the average amount of services revenue associated with a NetSuite implementation. What is the ratio of one-time services revenue to the recurring subscription revenue of $38K? How has that ratio looked over the past 4-6 quarters and how is it trending?

    > What is NetSuite’s average discount? (for the standard product and for OneWorld)

    > What is the average implementation timeframe? (for the standard product and for OneWorld)

    > How do the answers to each of the above questions vary when a deal is sold direct by NetSuite versus being sold and implemented by a partner? What percentage of deals are sold one way versus the other?

  2. Nick says:

    Are you comparing like for like? Do the figures mix up bookings and revenue?

    As NetSuite sells a service a new customer at $38,000 may represent bookings to be recognized over the next 12 months as recurring revenue. Therefore only 1/4 of it would be recognized in Q409. So the churn rate would be much lower.

    A quick look at the NetSuite earnings release doesn’t help me determine the answer to the above.

    And PartnerCompete are a site for MS Dynamics resellers and partners so the source is going to have a bias.

  3. Rob says:

    While it might be more difficult, it would be more balanced to compare NetSuite’s “churn” as you have estimated, with a similar number for Dynamics.

    BTW you need to consider changes in service/training revenue from year to year to estimate churn.

    I’m a NetSuite partner BTW.

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