Cloud-based enterprise resource planning, or ERP, and customer relationship management, or CRM, are growing at a fast pace. Several companies, such as Salesforce.com (NYSE:CRM) and SAP (NYSE:SAP), are counting on this trend for growth. Both of these companies have been strengthening their positions in the cloud with new product introductions and acquisitions. Despite the presence of these two bigwigs, a smaller player like NetSuite (NYSE:N) is cutting its teeth in the ERP and CRM markets.
Solid growth so far
NetSuite is seeing terrific growth. Its revenue in the first-quarter jumped 34% year over year, and it beat the bottom line estimate by a whopping 200%. Despite such solid figures, NetSuite's stock has dropped close to 21% in 2014. Analysts expect the company to continue its strong streak of financial performance in the long run; making NetSuite's drop a buying opportunity. The company is laser-focused on delivering innovative cloud solutions, which should allow it to capture a larger market share.
NetSuite is focusing on delivering a modern, flexible, and evolving on-demand ERP business management solutions to companies ranging from small and-medium sized businesses to large enterprises. This has helped it report strong revenue growth so far. According to management, there are only a few application software companies that have delivered 30% or more revenue growth consistently for seven consecutive quarters.
Ahead of its peers
NetSuite attributes this success to the fact that it is enabling companies to operate their business in the cloud against other traditional ERP software companies that produce PowerPoint decks. For instance, the core license revenue for non-cloud ERP providers like SAP declined for the fourth consecutive quarter last time, while NetSuite has been delivering terrific growth in comparison.
In March, Gartner published the worldwide software market share for financial systems. Gartner's report revealed that mid-market client-server providers like SAGE and Microsoft are struggling. In comparison, NetSuite grew its market share by more than 40%. In fact, NetSuite's year-over-year global market share growth rate in 2013 was almost four times faster than its nearest competitor, according to Gartner.
This pace of growth is impressive, and it isn't surprising that NetSuite added approximately 310 new customers to its installed base in the first quarter. Additionally, the average selling price was more than 90% higher than the prior year for the new customers.
Looking ahead, the company is confident of sustaining this momentum. NetSuite has access to one of the largest addressable markets in the business application space. Also, the company is targeting more than just ERP by focusing on e-commerce.
The company is making investments in its product team, and is also expanding sales capacity. However, the good part is that, despite expanding its teams, NetSuite's scaling efficiency allowed it to reduce general and administrative expenses as a percentage of revenue. General and administrative expenses declined from 8.5% of revenue in last year's first quarter to 7.6% of revenue in the past quarter. Concurrently, NetSuite also raised its full-year revenue outlook to the range of $540 million-$545 million from the previous range of $535 million-$540 million.
Another impressive fact is that NetSuite is also getting profitable while delivering rapid growth. The company's gross margin increased to 72.2% in the first quarter from 70.9% last year. The gross margin on recurring revenue increased to 85.5% during the quarter from 84.9% in the year-ago period, while the gross margin on non-recurring revenue increased to 15.8% from last year's 12.4%.
Analyzing the threats
There is no doubt that NetSuite is growing at a terrific clip. However, it cannot be ignored that the company competes with established players in the CRM and ERP space. Salesforce, for example, leads the charge in cloud ERP with its Salesforce1 platform. Salesforce1 enables customers to use phones, tablets, and other mobile devices to manage and share data.
Salesforce has more than 250 independent software vendors developing apps on the Salesforce1 platform. Already, there are more than 30 productive apps on Salesforce1, including the likes of Evernote, Dropbox, and LinkedIn.
SAP, meanwhile, is aggressively boosting its real-time business platform, HANA. The company already commands 1,000 customers for SAP Business Suite on HANA, after just a year of its launch. SAP is now strengthening the HANA platform by combining it with Ariba, which was acquired in 2012. SAP has integrated Ariba's "Spend Visibility" solution on HANA, allowing corporations to analyze enormous amounts of spending data almost instantaneously. Additionally, the company is building more of its enterprise cloud data centers in locations such as China, Australia, and Russia.
NetSuite will need to continue aggressively promoting its products, and also focus on innovation to stay ahead of illustrious rivals. So far, the company has done well, and it is expected that it will be able to sustain its strong run in the future. According to analysts, NetSuite's bottom line is on track to improve at a compound annual rate of 33% for the next five years, well ahead of the 20% industry average. This is why the stock's 20% drop this year could be an opportunity for investors looking for a growth stock.