Netsuite Needs More Resellers to Grow

Are customer ramp times unnecessarily extended?

If that's the case, does it imply we should see a very dramatic ramp in active customers in early 2008? But if that was going to be true, why the tepid guidance for Q1/08?

Are new customers being off-set by customer churn?

Not so says the company which claims to have exceptional renewal rates.

There may be a simple answer here but its obvious there is a disconnect between the number of contracts being signed and the number of active customers being reported.

However, the real issue to focus upon is not the absolute number of customers but revenue; its growth rate and where it's coming from. Netsuite sells software to small and medium businesses (SMB). Of course, the larger the customer, the higher the revenue potential.

Netsuite Customers: Current Base vs. Where it Should Be?

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Take a look at the Netsuite customer universe (at least the domestic universe) in the graphs below. While the SMB markets are quite large, Netsuite still needs a mechanism to multiply the effectiveness of their sales force--a role that has traditionally been filled by the reseller channel.

Number of Firms By Size and Total Workforce By Firm Size

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When you look at some of the revenue/employee figures I mentioned in my initial comments about Netsuite, it's clear that a company like Salesforce.com (CRM - commentary - Cramer's Take)makes effective use of the reseller channel.

If Netsuite is to be successful and achieve the growth rates anticipated in its valuation, it will need to make effective use of that same channel. And that's where some of the surprises came in.

Although my sample is not large, I did contact a number of resellers that were mentioned in press releases over the past few years. I specifically avoided the most recent mentions because I wanted input from resellers that were experienced with Netsuite, not someone who signed on last month.

To my surprise, a number of resellers that were no longer involved with Netsuite. If five were mentioned in a press release, frequently four were no longer with the program. The company was characterized as being "channel unfriendly."

Now maybe I just stumbled across a few bad apples and you can do some of the same things I did to confirm or refute this finding. But if Netsuite does have a channel conflict problem, that will likely put a drag on the company's ability to grow at rates anticipated by the stock's valuation.

This isn't the first time companies have had channel issues and it won't be the last. The real question is, do they fix it now or wait for it to bite back?

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At time of publication, Faulkner held no position in the stocks mentioned.

Bob Faulkner has been in the investment business for 18 years with an exclusive focus on technology stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Faulkner appreciates your feedback; click here to send him an email.

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