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Ellison's NetSuite still not making money

But SaaS apps sales are growing nicely

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Sales for the Larry Ellison–backed online-application software peddler NetSuite shot up over 20 per cent in its most recent quarter, but despite that increase it still managed to lose nearly $10m.

Despite those numbers, however, perhaps the firm in which Ellison has his day job – Oracle – should look into snapping NetSuite up. After all, Oracle already bought one Ellison-funded startup, Pillar Data Systems, which it borged at the end of June.

Or maybe Oracle doesn't have to bag NetSuite, because Ellison is already having his cake and eating it, too.

NetSuite was founded in 1998 by former Oracle employee Evan Goldberg, the company's current chairman, with financial backing from Ellison and his venture arm, Tako Ventures. In December 2007, just as the Great Recession was starting its dive, NetSuite went public, and a fifth of the shares were floated to the public.

Fast forward to the end of this March, when Ellison, his family members, and Tako Ventures together owned 55.4 per cent of the company, which as El Reg goes to press has a market capitalization of $2.38bn after a nice 9.2 per cent run up in the stock thanks to better-than-expected results in the second quarter.

For the period ending in June, NetSuite had sales of $57.8m, up 22.8 per cent. Subscription and support licenses for its various online ERP, CRM, and e-commerce software were up 21.3 per cent to $48.2m, while professional services and other revenues rose by 31.2 per cent to $9.6m.

However, even though NetSuite had a gross profit of $40.4m, its product development, sales, marketing, and general costs grew faster, and once again NetSuite didn't make any money. The company, in fact, booked a net loss of $9.8m, wider than the $7.2m hole it dug in the year-ago period.

In the past five years combined (2006 through 2010), NetSuite has pulled in an aggregate of $687.9m in sales, but has lost a total of $126.3m.

If Larry Ellison is measuring himself against former Oracle employee and online software rival Marc Benioff and his Salesforce.com (founded about the same time in 1998; funny that), then he must be pretty annoyed.

Salesforce.com, which only focused on CRM applications instead of a broader ERP suite, has a market cap of $19.5bn, posted $5.3bn in revenues in its past five fiscal years, but has an unimpressive $206m in net earnings over those five years. Ellison is losing a T-shirt on NetSuite, but Benioff is making only a pair of socks. No matter what, Oracle is huge compared to NetSuite, and Larry has more yachts and Iron Man appearances than Marc.

So presumably, Larry wins.

The question is whether NetSuite will ever make any money. In a conference call with Wall Street analysts, NetSuite CEO Zach Nelson said that the company has closed its biggest deal ever, with a US-based multinational with 45,000 employees and over $1bn in sales. That customer had initially used NetSuite for its foreign divisions, and this year decided to install it back into the HQ operations and be done with it.

That's good business, and obviously it displaced either homegrown applications, third-party apps from Oracle, SAP, or someone else. Nelson did not say.

But what he did say was that NetSuite added 328 new customers in the second quarter, the highest new customer-count in more than two years. He also noted that average selling prices across its product lines rose by 25 per cent to over $40,000 during the quarter. And for the flagship NetSuite OneWorld suite, ASPs have crested above $100,000.

And yes, OneWorld is the same name as an Oracle product from the formerly independent JD Edwards ERP software supplier, which came to Oracle by way of its PeopleSoft acquisition. When the boss owns the company violating the trademark, it is less of an issue, apparently.

Like Oracle, NetSuite has its sights set on SAP. "While SAP is trying to compete with NetSuite by moving down-market," said Nelson, "having seen a number of SAP customers in Q2, it is clear to me that their existing installed base is very, very vulnerable."

Instead of buying TomorrowNow and incurring the legal wrath of Oracle and potentially $1.3bn in fines, what SAP should have done was chuck its Business ByDesign online apps and work out a deal to buy Dave Duffield's Workday, a completely online human resources and financial suite made from scratch to be that way, just like NetSuite. Duffield is, of course, the original founder of PeopleSoft who was made none too happy to see his company eaten by Ellison a few years back.

It’s still not too late for SAP to make such a move – or for new HP CEO Leo Apotheker, who also has no great love of Ellison, and who has his own software cravings. ®

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