NetSuite is one of the longest-running players in the SaaS market. That gives you the advantage of maturity, but does it also mean that your core architecture is getting dated?
Nelson: No. The good thing about NetSuite is that we architected it correctly from the start. Multitenancy out of the gate, that was a very important decision. We chose to make it very customizable. Not all SaaS applications are customizable. We put deep customization in the first iteration of the architecture. As time has moved on and our customer profile has changed we've had to re-architect some of the subsystems to deal with application performance. Last year we introduced SuiteCommerce. That allowed us to scale up to larger retailers. That was an 18-month re-architecture. I think you'll see us do a subsystem re-architecture once every 18 months.
Legacy software vendors have often been criticized for letting products slide into "maintenance mode," with decreasing amounts of new features being added. Is NetSuite spending enough on research and development?
Nelson: Two years ago it was about 14%t [of revenue]. Since then it's come down to somewhere in the 12s. However in that time frame we have tripled the number of developers. We do our global development on the NetSuite platform. It allows us to scale research and development, while spending less.
You're hiring in other parts of the world, including the Czech Republic. Is the potential for lower developer salaries there another consideration?
Nelson: It's not just the lower cost of hiring developers, it's being able to find them. Hiring in the Bay Area for developers is a very arduous process. You have to start looking in other locations. However, in the U.S. we have a new development center in progress. We still do a lot of hiring in North America.
NetSuite runs on the Oracle stack. Although it might be uncomfortable given that Oracle CEO Larry Ellison is an investor in NetSuite, is there any interest in moving off Oracle to other technologies?
Nelson: No. It's definitely not on anyone's priority list. Oracle is the database of record for most SaaS systems for a reason.
How do you handle deals where you're competing with Oracle, given your deep relationship?
Nelson: We don't really avoid competing directly. If the customer wants to put us and SAP side by side, us and Oracle side by side, we're going to compete and try to win the deal. I think there's a natural separation in our strategies so we don't collide that much.
Oracle likes to talk about what a big advantage its new Fusion Applications have, since the same codebase can run in the cloud or on-premises. NetSuite is all about the cloud, though. Does Oracle have an edge over you with Fusion?
Nelson: Oracle has a different target market than us. That decision of whether to go on-premises or off-premises may be a bigger decision point in the CIO office at those companies. They may want to hug their server. In our companies they don't want to hug the server, they don't want to manage these applications. We're pretty religious about not putting software on site, but I suppose some industries probably require it be on-premises. But I think the segment of the market who wants it on-premises is shrinking.
Our customers have also figured out that if the guy writing the software actually has to run it, they have to write it a lot better.
Is NetSuite in the market to acquire a cloud-based HCM (human capital management) vendor, like SAP did with SuccessFactors and Oracle did with Taleo?
Nelson: Historically, our customers have not been demanding HR solutions. What NetSuite has been designed to do is run business processes. Procure to cash, procure to pay. We rarely, rarely get asked for HR. I think you're seeing the evolution of three core processing clouds that are somewhat independent. One's an HR process: finding employees, onboarding them and training them. NetSuite runs an operational process: how does data about sales move through your core transaction processing system? Finally there's the sales force cloud: How do you prospect and find new leads?
HR has certainly not been a priority [for NetSuite]. Is NetSuite interested in managing job reviews? Not really. That said we're always looking at where the intersection points are. We already do payroll today. We'll continue to beef up HR in terms of payroll and benefits, but when it comes to talent management and job reviews, it's not as core. We'll partner there.
What about analytics? Will NetSuite make any acquisitions in that area?
Nelson: We have good core reporting today. One of the biggest challenges in reports is getting the data consolidated so you can visualize it. We solve the big problem, in that [customers'] data is all in one place. We're delivering real-time BI to all user types today. That said, if you look at the things we're doing in e-commerce, the massive amounts of customer data, then you might do something different. You might see some new efforts in that area of analytics.
You're growing quickly and beating analysts' expectations. However, your customer churn rate has been cited as a concern in the past. What is your churn rate today?
Nelson: It's never been lower in our history. We don't really give a churn number, but it can't really get any lower. The churn numbers that we saw [in the past], that was when we were in the very low end of the market. [Such customers] may go out of business 30 percent of the time, so you have 30 percent churn. The primary source of churn now is when one of our customers gets acquired.
We don’t really avoid competing directly. If the customer wants to put us and SAP side by side, us and Oracle side by side, we’re going to compete and try to win the deal.”