NetSuite is adding its name to the mix of public companies investors will have to choose from in the software as a service (SaaS) space. NetSuite is attempting to position itself as an integrated ERP solution for small to medium sized businesses (SMB) versus competition that aims more at a specific application area like accounting (Intuit), sales (salesforce.com), marketing (Vocus) or human resources (Workday).

As with any IPO marketing presentation there is a mix of fact and fiction to be sorted out in terms of what they company real has and can be expected to do. By nature the investment case is an exercise left to the viewer and we will fill in some of the gaps there. Specifically we would note the following reality checks with respect to NetSuite:

1. Functionally speaking NetSuite comes from roots in accounting that they have expanded from to include additional areas like procurement and some others. It's probably not at all fair to suggest they are a real ERP or integrated solution that can be applied to companies in general
2. With annual revenue per client routinely upwards of $20,000 per year NetSuite is not for very small companies. This suggests that they will compete less with Intuit and more with Microsoft and SAP SaaS-based SMB offerings over time. This niche also translates into a smaller overall market opportunity for NetSuite. In fact NetSuite is focused on moving existing customers to higher value solutions that are closer to the $100,000 price point.
3. The company has recently entered a period of accelerated growth and improved propects thanks to the strength of the SaaS pricing model today. However NetSuite is still early in its ramp to profitability. Their target model of 12-15% operating income is pretty aggressive and is more likely to be reached in 5 years versus its stated goal of 3 to 5 years. Cash flow should be higher and a better metric over time.

The conclusion we arrive at via the more elaborate discussion below suggests that NetSuite represents a good short-term opportunity thanks to its SaaS roots and strong market demand entering 2008. However in the longer term NetSuite is not as well positioned as larger players and will be challenged to generate the type of growth in later years that will be needed to reach its profitability goals.

The NetSuite Solution
NetSuite is a proven enterprise application for organizations with 1000 employees or less that has been delivered via theSaaS delivery model for almost 10 years. [In fact, at its beginnings, NetSuite's version of SaaS was called application service provision (ASP).] NetSuite's history provides an experience level that major NetSuite competitors Microsoft and SAP lack.

NetSuite's better than average U.S.-centric accounting capability, first delivered in 1999, has been expanded with fairly broad procurement and ecommerce functionality and some customer relationship management (CRM) features. It also includes a U.S. payroll package. Not only is the resultant role-based suite sold as a subscription, but most of the pieces are available separately as a service as well.

NetSuite calls the combination enterprise resource planning (ERP). However, at its core, it really is only ERP for four industry segments: wholesale distributors, professional services firms, IT resellers and other software companies. NetSuite's core functionality itself lacks the broad industry-specific resource planning capabilities—particularly for manufacturers—of Microsoft's and SAP's flagship applications, functionality Microsoft and SAP will be able to add to their SaaS offerings much more easily than NetSuite can add the same features to its' offering. This means NetSuite also lacks the ERP features of many of the incumbent software packages in small and medium businesses (SMB) that NetSuite must replace in order to grow at an investment-appealing rate. NetSuite partners in specific industries overcome some of these industry-specific ERP deficiency issues.

NetSuite also prices expanded services offerings, training and professional consulting separate from the subscription. However, it accounts for the resultant revenue flow together with the subscription over the life of each client's subscription. Therefore it is not possible to tell from NetSuite's financial reports—unlike with salesforce.com's filings—how well the pure SaaS model is working for NetSuite. The comparable flow equals about 10% of salesforce.com's revenue; if that percentage is substantially higher for NetSuite, then NetSuite should be compared with more traditional software suppliers rather than with those suppliers about to ride the wave of modern SaaS.

Possibly overcoming functionality deficiencies, the company's 10 years of experience addressing SMB and selling SaaS is a major plus. NetSuite offers a clear service level agreement (SLA) promising 99.5% uptime and it has recently added Savvis as a back-up hosting provider to its long time partner, Level 3. The software architecture is a mature thin-client client/server design accessing the proven Oracle relational database management system. NetSuite encourages partners to also develop to that architecture through a program and toolset it calls SuiteFlex. NetSuite has an odd "phased release methodology" when it updates its functionality; it updates more like traditional software suppliers rather than all at once as most SaaS suppliers do. Users would not notice the difference, so it has no market-dynamics effect, but it increases NetSuite expense.


To read more on whether NetSuite is positioned to fulfill the demand for ERP SaaS, and an analysis of its valuation, download the full report from the Research 2.0 site.

Kris Tuttle is director of research at Research 2.0.