The Channel Wire

May 02, 2008

NetSuite's stock was pounded by Wall Street Friday despite the 47 percent increase in first-quarter sales the company reported one day earlier. The culprit appeared to be a less-than-blockbuster sales outlook for the rest of the year.

Some analysts suggested that small and mid-size businesses, NetSuite's core market for its on-demand applications, are more likely to rein in IT spending as the economic downturn drags on. While there may be something to that, expanding its channel efforts might provide a boost to the vendor's growth prospects.

For the quarter ended March 31, NetSuite reported that sales of its on-demand ERP, CRM and E-commerce applications reached $34.1 million, up 47 percent from the same period one year ago. The company continued to narrow its losses, reporting a net loss of $2.0 million for the quarter compared to the $9.3 million loss it reported one year earlier.

But Wall Street was apparently disappointed by NetSuite's prospects for the rest of the year, dropping the company's stock as much as 22 percent in Friday's trading before it closed down almost 16 percent. NetSuite's $76 million in reported deferred revenue -- the amount in the company's sales pipeline -- was lower than some analysts expected. And while bookings increased more than 41 percent year over year, some analysts expected more: Sanford Bernstein analyst Charles Di Bona said in a report that he was counting on 64 percent growth.

What's more, the company plans to invest most of its revenue growth back into the company, increasing its annual net profits by only 2 percent.

While many companies would kill for growth stats like these, NetSuite, since going public last year, is now competing against Wall Street's expectations almost as much as it is against Salesforce.com, SAP and others.

One way NetSuite might broaden its growth prospects is by re-doubling its channel efforts. A number of on-demand software vendors have recently launched channel programs to enlist solution provider partners with expertise in specific vertical industries and business processes. In some cases the solution providers own the customer relationship and actually resell the vendor's services; in others customers contract directly with the vendor and channel partners generate sales leads and provide implementation, training and support services.

NetSuite certainly recognizes the value of the channel. It has a channel initiative, the NetSuite Solution Provider Program. In its application for this year's VARBusiness Partner Programs Guide, NetSuite indicated that 20 percent of its revenue is generated through indirect channels and the company planned on increasing its partner base by 25 percent. (The company did not disclose how many channel partners it works with.)

One reseller NetSuite is working with is British Telecom, a partner NetSuite said could introduce the company's services to as many as 1.6 million small businesses in the United Kingdom and Europe. That's a smart move: NetSuite should consider establishing more of those kinds of partnerships. It just might help the company keep up with Wall Street's ever higher expectations.