Q3 2014 Earnings Call / October 23, 2014 5:00 pm ET
Executives
Jennifer Gianola -
Zachary Nelson - Chief Executive Officer, President, Director and Member of Corporate Development Committee
Ronald Gill - Chief Financial Officer and Principal Accounting Officer
Analysts
Philip Winslow - Crédit Suisse AG, Research Division
Ross MacMillan - RBC Capital Markets, LLC, Research Division
Jason Maynard - Wells Fargo Securities, LLC, Research Division
Samad Samana - FBR Capital Markets & Co., Research Division
Patrick D. Walravens - JMP Securities LLC, Research Division
Jennifer Swanson Lowe - Morgan Stanley, Research Division
Justin A. Furby - William Blair & Company L.L.C., Research Division
Harris Heyer - Barclays Capital, Research Division
Gregory Dunham - Goldman Sachs Group Inc., Research Division
Operator
Good afternoon. My name is Keith, and I will be your conference operator today. At this time, I would like to welcome everyone to the NetSuite Q3 Earnings Conference Call. [Operator Instructions] Thank you. Jennifer Gianola, Director of Investor Relations, you may begin your conference.
Jennifer Gianola -
Thank you, operator. Good afternoon, everyone, and welcome to NetSuite's third quarter 2014 financial results conference call. A more complete disclosure can be found in the press release issued about an hour ago as well as in our related Form 8-K furnished to the SEC earlier today. To access the press release and the financial details, please visit the Investor Relations section of our website. As a reminder, today's call is being recorded, and a replay will be available following the conclusion of the call. On the call with me today is Zach Nelson, our Chief Executive Officer; and Ron Gill, our Chief Financial Officer. Zach and Ron will begin with prepared remarks, and we will turn the call over to a question-and-answer session. During the call, we will be referring to both GAAP and non-GAAP financial measures. The reconciliation of our GAAP to non-GAAP financial information is provided in our press release, which is available on our website. All of the nonrevenue financial measures we will discuss today are non-GAAP, unless we state that the measure is a GAAP measure.
The primary purpose of today's call is to discuss the third quarter 2014 financial results. However, some of the information discussed during this call, including financial outlook we provide, may constitute forward-looking statements within the meaning of the U.S. federal securities laws. These statements are subject to risks, uncertainties and assumptions and are based on financial information available as of today. We disclaim any obligation to update any forward-looking statements or outlook. The risks and uncertainties that would cause our results to differ materially from those expressed or implied by such forward-looking statements include those summarized in the press release that we issued today. These risks and additional risks are also described in detail in reports that we file from time to time with the SEC, including our most recent 10-K and 10-Q filings, which I encourage you to read.
With that, I will turn the call over to Zach.
Zachary Nelson - Chief Executive Officer, President, Director and Member of Corporate Development Committee
Thank you, Jennifer, and welcome, everyone, to NetSuite's conference call to discuss our fiscal 2014 third quarter results. The third quarter was an outstanding quarter for NetSuite as we beat our previously stated outlook across the board in revenue, operating cash flow and earnings. Our revenues in the third quarter climbed to $143.7 million, an increase of 34% year-over-year. In addition, our recurring revenue grew 35% year-over-year. Non-GAAP profitability was also very strong coming in at $0.11 per share versus our outlook of $0.03 to $0.04 per share. Deferred revenue grew strongly as well. Calculated billings, defined as the change in deferred revenue plus revenue, grew by a healthy 41% versus Q3 of 2013. The changing of the guard from software design to address the challenges facing companies 20 years ago to NetSuite's cloud software designed to run a modern business is starting to play out publicly for all to see in the financials of companies. Our accelerating revenue growth and increasing non-GAAP profitability are a result of our bet on the cloud. Yet, SAP, in their most recent conference call, said the cloud was actually having the opposite impact on their results. Their software license revenue decline continued for the sixth consecutive quarter. In addition, SAP announced their cloud business is now not only causing a hit to revenues but it's also negatively impacting their margins. Declining revenue and declining profitability does not sound like the cloud has been good for SAP. But the transition to cloud-based software has been good for customers, moving from hefty upfront fees to install, hard-to-maintain, hard-to-use and hard-to-upgrade software is a thing of the past for those companies who have moved to NetSuite. And in Q3, more than 380 new customers moved to NetSuite, the largest number this year.
Overall, ASPs were up over 40% year-over-year. Our NetSuite OneWorld offering had a very strong quarter, with a record ASP and a record percentage of new business, another indication that larger organizations continue to move their core business systems to the cloud on NetSuite. The quarter also saw a record for number of deals greater than $1 million. ASP increases are certainly driven by our OneWorld multicompany, multicurrency, multilanguage capabilities as well as our multiyear effort to verticalize our software to address the requirements of specific industries. Our SuiteCommerce offering, which is still the only cloud-based offering to combine e-commerce and point-of-sale capabilities in a single web-based product, enjoyed another strong quarter in the retail vertical. And during the quarter, IDC recognized NetSuite as a leader in the digital commerce applications market, further validating the success of our efforts to deliver the world's best and most advanced omnichannel commerce engine to companies around the world. But of course, we believe the SuiteCommerce capabilities apply outside of the retail sector as well, and with this quarter's release of our business-to-business portal, we continue to bring the power of omnichannel commerce to industries like wholesale distribution and manufacturing. And our WD and manufacturing verticals each grew year-over-year by more than 100% during the quarter.
Q3 also saw one of our largest product releases ever. The NetSuite 14.2 release was a milestone in many regards. We have tripled our development team since the beginning of 2012, and this was the release where many of those new developers were fully ramped and contributed to the functionality in that release. Needless to say, the sheer volume of capabilities we rolled out are too numerous to mention, but the most amazing thing was how seamless the release of these major new capabilities was. With significant features like a next-generation user interface, distribution and manufacturing planning functionality and new e-commerce and CRM capabilities, not only was this the largest release in our history, it also had to qualify as one of the smoothest. Our thousands of customers went to bed one night and woke up the next morning with all of their customizations in place, and a massive amount of new functionality at their fingertips. It was an incredible effort by our development and operations team to create such amazing functionality and to deliver it to the customer with so little pain.
Without a doubt, our vision of building a cloud-based system designed to run a business rather than a department, has become a reality for many customers around the world. Today, we are one of the fastest growing public software companies in the world with revenue growth that continues to indicate we are taking market share from the vast generation of stone age software from the likes of Microsoft, Sage and SAP.
Our third quarter results provide further proof that the investments we are making in our strategy of bringing the power of integrated cloud-based business applications to companies of all sizes is paying off for our customers, our employees and our shareholders. So with that, let me turn it over to Ron Gill, our CFO.
Ronald Gill - Chief Financial Officer and Principal Accounting Officer
Thank you, Zach. I'm pleased to report that the third quarter was another terrific quarter at NetSuite. We exceeded expectations on all of our guided metrics, delivering strong revenue growth, outstanding cash flow and the highest non-GAAP EPS of any quarter since we've been public. As Zach mentioned, we added more than 380 new customers, continued our expansion into larger deals and invested significantly in building out the products in the organization that we expect to be the foundations of growth in the years ahead.
Let me take you through some of the numbers in more detail. As a reminder, all the nonrevenue financial figures I will discuss here are non-GAAP, unless I state the measure is a GAAP measure. Revenues are of course, GAAP numbers and as always, you can find a reconciliation of GAAP to non-GAAP results in today's press release. During Q3, total revenue grew to $143.7 million, up 9% sequentially and up 34.4% over Q3 of 2013. This is our ninth consecutive quarter with a year-over-year growth rate and total revenue of more than 30%. Recurring revenues from subscription and support grew 9.4% sequentially and 35% over the year-ago quarter to $115.8 million. Nonrecurring revenue, which comes primarily from professional services, was $27.8 million for the quarter and grew 32% over that for the same period last year.
Moving down the P&L to gross margins. We saw an increase in our total gross margin year-over-year from 70.7% to 71.4%. Gross margins on recurring revenue improved from 85.3% in the year-ago quarter to 86%. And gross margin on nonrecurring revenue was down slightly from 11.2% in the year-ago quarter to 10.9% in the third quarter of this year. Overall, we expect the blended gross margin to be 71% to 72% of revenue for the full year and 2014.
Year-to-date, about 25% of our revenue has been generated outside the U.S. and about 16% of our revenue and 29% of our expenses are denominated in a currency other than the U.S. dollar. As you may know, the dollar strengthened somewhat against a number of the foreign currencies in which we operate during the quarter, so let me explain how that impacts us. When the dollar rises against the currencies of our foreign subsidiaries, we begin to see the impact in lower U.S. dollar expenses for those subsidiaries immediately, and in fact, the strong dollar is one of the reasons for the overachievement in non-GAAP EPS in Q3 that I'll discuss in a moment. On the revenue side, however, the impact of a changing exchange-rate flows through much more slowly only as new invoices are issued and thus the impact on revenue in the quarter was fairly muted. There's a potential for an FX drag on forward revenue, albeit a small one, if rates stay where they are now versus where they were at the end of Q2. That impact is considered in the outlook that Zach and I will give a little later in the call.
Turning to our non-GAAP operating expenses. You see the ongoing story of investing significantly in both growing the product team and expanding sales capacity. The product organization where the number of employees increased more than 46% over the year-ago quarter, continues to be the fastest-growing area of the company. Product development expense was $20.9 million for the quarter and represented 14.5% of Q3 2014 revenue. I expect that spending on the product team will be about 14% of revenue for the full year this year. Sales and marketing expenses were $63.5 million or 44.2% of revenue in Q3, up from 42.6% of revenue last year. Investments in sales and marketing continue to yield good results in terms of incremental business booked and so we maintain our bias toward investing here when the opportunity arises to do so within our overall spending targets.
G&A expenses were $9.5 million or 6.6% of revenue in the third quarter. That's down from 7.8% of revenue in Q3 of 2013 and a little below what I'm thinking of as the near-term trend. For the year, I expect G&A expenses to be between 7% and 8%. Non-GAAP operating income in the third quarter was $8.6 million, up 11% over the prior year and equating to a non-GAAP operating margin of 6%. During the quarter, we reported a net income tax benefit of approximately $128,000. We continue to expect our net operating losses to offset any income for tax purposes domestically for the foreseeable future. Our foreign subsidiaries are generally in a taxpaying position, and the primary source of the tax benefit in the quarter was from a change in investment related to those foreign income taxes. Non-GAAP net income for the third quarter was $8.3 million, up 21% over the prior year. Non-GAAP earnings per share for Q3 were $0.11. This was up from the $0.09 in the year-ago quarter and significantly higher than our outlook for the quarter. As you would expect, one key driver of the higher EPS was the overachievement on revenue and gross margins, but net margins also benefited from slower than expected hiring, the foreign currency movement that I discussed earlier and the lower income tax impact.
Moving on to the balance sheet. We ended the quarter with cash and marketable securities of $446 million. We had another great quarter for cash collections. Cash flow from operations was -- in Q3, was $16.3 million, up 11% year-over-year. Moving down the balance sheet from cash to deferred revenue. Our total deferred revenue balance increased 43% year-over-year to a record $271 million. As you may calculate from the financials published in the press release, calculated billings defined as quarterly revenue plus the change in deferred revenue were $163 million for the quarter, representing an increase of 41% over the third quarter of 2013. As I've consistently pointed out on these calls, there's a wide array of factors that influence calculated billings and quarter-to-quarter fluctuations in the calculated billings metric should not be taken as an indicator of changes in future revenues. Headcount on September 30, 2014, was 3,154, up 38% from Q3 of 2013 with the fastest-growing teams being those in product development and professional services.
Now I'd like to move to the forward-looking financial outlook, which is covered by the cautionary language I outlined at the start of the call and based on assumptions which are subject to change over time. We've had a terrific first 3 quarters of 2014. We continue to experience a very strong demand environment and we maintain our posture towards investing aggressively for the future. For the fourth quarter of 2014, we expect revenues to be in the range of $154 million to $156 million. Some of those positive impacts on expenses I mentioned will carry through into the fourth quarter and we anticipate non-GAAP EPS of approximately $0.08 to $0.10 and operating cash flow of $15 million to $16 million for the quarter. Summing that up for the full year, that's an upward revision in our revenue outlook from the prior range of $545 million to $550 million to a new range of $552 million to $554 million. Full year non-GAAP EPS would increase from our earlier range of $0.24 to $0.26 to a new range of $0.31 to $0.33 and the outlook for operating cash flow narrows from a range of $65 million to $70 million to a new outlook of $69 million to $70 million.
To sum up, we had an outstanding third quarter and are looking forward to Q4 and to 2015. That concludes my prepared remarks. So I'll turn the call back over to Zach so he can give you a little color on next year.
Zachary Nelson - Chief Executive Officer, President, Director and Member of Corporate Development Committee
Thanks, Ron. 2014 is on track to be another great year for NetSuite. We are outperforming our expectations and making excellent progress on our major initiatives. One of our major initiatives has been expansion outside of North America. In Q4, we are holding a major customer event called Suite Connect in both the U.K. and in Australia. These events will bring together NetSuite customers, prospects, partners and developers as well as industry thought leaders to network face-to-face and share cloud insights and best practices. And of course, Q4 is when we finalize our plans for 2015 and beyond. Given our execution during the past several years, we look forward to the future with excitement as we think we are just in the early stages of exploiting our market opportunity. And while we are still in planning mode for 2015, given our performance in Q3 and year-to-date, it makes sense to give a glimpse into our outlook for next year. We are currently forecasting revenue of between $715 million and $725 million on the top line. The bottom line is a bit harder for us to forecast precisely at this time since we are still finalizing our plans for next year. That said, given our success in translating investments into growth in 2012, 2013 and 2014, our bias is to invest in 2015 in areas we believe hold promise for the future.
As a reminder to you all, NetSuite is the only public cloud company to give an outlook this far in advance of the next fiscal year. However, given the strength of our business and execution this year, I wanted to give you an idea of the good things that we think are in store for NetSuite, our customers and our shareholders in 2015. So with that, I'd like to open up the call for questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Phil Winslow from Crédit Suisse.
Philip Winslow - Crédit Suisse AG, Research Division
Zach, I just kind of have a high-level question for you. If I compare your results to really almost every other licensed software company who's missed this quarter, I think, except for one, this seems to be biggest sort of gap relative to outperformance by you guys since back in '09 when you saw massive declines of license revenue. Back then you talked about that, hey, companies had to shift to the cloud, it was lower upfront cost, they had to become more agile, when you're talking to customers right now because we're starting to see this gap reappear, what are they telling you? Why do you think you're seeing this level of outperformance?
Zachary Nelson - Chief Executive Officer, President, Director and Member of Corporate Development Committee
Well, I think we've talked about the move to the cloud happening ever since we've been in existence for 15 years now, and I think it's gained momentum and I really do think we hit a tipping point there where customers are -- if possible, they want to choose cloud first and they also, I think, understand the difference between what a real cloud solution is and what a nonreal cloud solution is. You see many people advertise about how they're all-in on the cloud yet they're selling products that still require you to manage them, maintain them, upgrade them and all those sorts of things. So they're actually pretty savvy now on the difference between cloud and noncloud, I think that's been very, very helpful for us. I think other thing that's also been very helpful certainly over the years has been just our continued success with our customers because as you know, in the software business, particularly in complex software, you can do all the marketing you want, but at the end of the day, they want to talk to a customer or thousands of customers that are successful. And we, by far, have the largest installed base of successful cloud ERP, cloud business system implementations on the planet. So that fly wheel just gains more and more momentum as you add more and more customers to it, and this quarter we added 385 new customers, the most we've added this year, that's all positive. Added a lot of new large customers, our largest number of million-dollar deals this quarter. So that helps in that upmarket move. That's also a big, big piece of it. And I'd say the other thing that's really come home that's been driving our success has been our success with SIs and channel partners in general. In the mid-market, the channel has finally made that move to the cloud. We're having great success in the mid-market channels. So we have a lot more feet-on-the-street effectively through those partners. And if you look at what's going on with the large systems integrators, boy, are they on the NetSuite bandwagon at this point. So it's been a great partnership with the Deloittes, the Accentures, the Caps of the world to get into a lot of those new opportunities where customers are -- they know they have to get off of SAP, they know this is not the future, but they may not know how to. So partnering with those SIs and bringing to the table a bunch of our customers that have been successful, I think, is beginning to accelerate the uptake in large enterprises as well.
Philip Winslow - Crédit Suisse AG, Research Division
And then just one quick follow-up for Ron. Given that your backdrop, one of the things you all talked about was prioritizing spend for 2015. When you think about expanding your portfolios through R&D versus sales and marketing, where do you feel like you're going to put more of the weighting as you exit this year and then going on to next year?
Ronald Gill - Chief Financial Officer and Principal Accounting Officer
First of all, I'll just caution that it is 5 quarters out of guidance. We've got a lot of execution to do between now and the end of 2015. So I just caveat that, that it's -- we like to give the early revenue look but as Zach said, we are still in operational planning for next year and we have a lot of decisions to make about the details of those investments. I guess I could talk just a little bit about our general bias which, as Zach said in his prepared remarks, is really going to say the same. The 2 areas that you mentioned, sales and marketing and R&D, are going to be the primary investment areas certainly. We're going to look for opportunities to invest there where the yield on that investment we think will be good. We've been pretty successful at doing that for the past several years. I think we're in our 4.75 years of accelerating the growth rate in revenue. So I think as long as we see opportunity to invest and have that investment be effective that the bias is going to be toward that. But let us get through the planning cycle here in the fourth quarter, maybe get the fourth quarter behind us and then we'll give more detail in Q1 when we update.
Operator
Your next question comes from the line of Ross MacMillan from RBC Capital Markets.
Ross MacMillan - RBC Capital Markets, LLC, Research Division
I had just 2 quick questions. One -- actually both financial. The first is, Ron, you commented on foreign exchange and it could have some modest impact. Could you just maybe help us understand the impact on the guide for Q4 for foreign exchange? And then I have one follow-up.
Ronald Gill - Chief Financial Officer and Principal Accounting Officer
Yes. So just keep in mind, normally when we talk about normalizing FX in a given normal quarter, what we're really talking about is the year-over-year changes in the FX rate and what that added to or took away from the results. So in Q3, what you're looking at is year-over-year, the dollar strengthening against most currencies where we operate with the one exception being the British pound, which is actually a significant revenue currency for us. So in-quarter, you actually had a positive impact of the FX changes, lowered our expenses, raised revenue just slightly. So you got an overall about $0.01 of EPS that probably came from FX changes year-over-year. But more to your point, about -- I think the thing that people have been really talking about and are interested in is this change that happened during Q3, where the dollar strengthened rather dramatically against a large basket of currencies. And so for us, you just need to understand that when that happens, the impact on our expenses, and that is stronger dollar, so lowering the expenses, that impact begins to happen right away. So literally the next payroll check you write, the next rent check that you write in that foreign country is a little less expensive in U.S. dollars. The revenue impact moves through much more slowly. So it's only as new invoices go out that those invoices get valued at the new currency rate. So taking that into consideration and then, as I mentioned in my prepared remarks, we got about 16% of our revenue that is denominated in a currency other than the U.S. dollar. And so if you're just doing the rough math, if you think that those currencies on average declined perhaps 6% against the U.S. dollar with this dramatic move that happened in Q3, so if you do the rough math here, and you can see there to be about a percentage point headwind into next year as a result of that. As I said, that impact tends to move through somewhat slowly. So some revenue, even into next year, would have already been invoiced at this point. Certainly, the bulk for revenue for Q4 would've already been invoiced but ultimately looking at an impact headwind of about that size, roughly 1% as it ultimately flows through. And as I said, that would be baked into the guidance numbers that we provided.
Ross MacMillan - RBC Capital Markets, LLC, Research Division
And that's at today's current exchange?
Ronald Gill - Chief Financial Officer and Principal Accounting Officer
Absolutely right. That's at today's rate. So that's always our best guess on exchange rate is always today's exchange rate. So that's sort of what we're baking through right now.
Ross MacMillan - RBC Capital Markets, LLC, Research Division
That's very helpful. And just so I'm clear on this as well, when we think about the deferred balance and how that is impacted as you market at the end of the quarter to the prevailing rate, was the impact in the quarter more material from a deferred balance standpoint?
Ronald Gill - Chief Financial Officer and Principal Accounting Officer
It's not. So fundamentally, the easiest way to think of this is that our deferred revenue balance is a U.S. dollar value. So it's not a dramatic rebalance -- pardon me, revalue impact on that deferred revenue.
Ross MacMillan - RBC Capital Markets, LLC, Research Division
Great, that's really helpful. And then, Zach, just one for you, nice to see the ASP sort of reaccelerate. I know the first half in aggregate was strong, but Q2, I think, was flatter year-over-year. Is that predominantly being driven by OneWorld and some of those larger $1 million deals you talked about? Or I guess how broad-based is that ASP uplift?
Zachary Nelson - Chief Executive Officer, President, Director and Member of Corporate Development Committee
I think it's relatively broad-based both across the non-OneWorld and the OneWorld offerings. Clearly when OneWorld's strong, ASP rise is a bit more dramatic and we have a good -- that said, I think the largest number of deals for -- new deals for OneWorld this quarter. So that certainly had an impact. And then you look at those -- the large, the million dollar deals that we had, there was a wholesaler distributer in there that I imagine was not a OneWorld deal as an example. So I think the tide is rising on all NetSuite interactions with customers. And as I said in the past, part of that is because customers actually understand now the value that we're delivering versus managing your own software. In the old days, they would discount the fact they had to run their own applications, believe it or not. They say, "Oh, I already got John here and he does a lot of stuff." So you can't really cost that -- count that in the cost of ownership. Well, now they're starting to count that into the cost of ownership as well as the other thing they're really valuing, I think, is the increased productivity they're getting because these applications can do so much more than an in-for application designed 20 years could do in terms of automating their business. So I think that's really why on the standard NetSuite deals, OneWorld and non-OneWorld you're seeing an increased appreciation and also an increased price tag therefore, increased willingness to pay for the NetSuite application. I would say the other thing that's driving it, and this is why I think the 14.2 release was so important is, ERP, at the end of the day, that's sort of the heart of what we do as a functional sell. So the more functionality we bring out, the more value there is in each release and in each new customer we add. So when you look at some of the things we've added in distribution and planning, suddenly you have a larger customer that you can sell to as well as your existing customers and you can bring more value because of those capabilities. You look at the things we brought out was SuiteCommerce, that will drive average selling price. So we're in a very unique position in the sense of being able to add more functionality to solve our customers' problems and get paid for it. A lot of these point products, hey, once you solve the expense reporting problem, what do you add to it? Not much. There's a lot -- there are a lot of features and functions that we can add to solve our customers' problem in this suite-based approach that we've always put at the heart of our market. And so we feel there's still a lot of room to go on average selling price, both in terms of the customers we're going to reach, by adding this new functionality and by expanding distribution. And by the fact that we have a suite that we can continually add functionality to.
Operator
Your next question comes from the line of Jason Maynard from Wells Fargo.
Jason Maynard - Wells Fargo Securities, LLC, Research Division
Zach, I wanted to follow up just on some of the wins that you had that were north of $1 million and I'm curious if you can maybe share with us geographic composition, where those are coming from. Are there 2-tiered ERP deals or are you actually seeing any customers just go clean sheet and run their whole business with a fresh implementation and just say, let's go all cloud and start from scratch. So a little -- a summary -- a little color on just what you're seeing on the big deal activity to start.
Zachary Nelson - Chief Executive Officer, President, Director and Member of Corporate Development Committee
Yes, I think one of the most exciting things -- there are several exciting things about the big deals. First of all, there were more than a handful of them, right? So this is a fairly substantial number which is exciting. The thing I would say about big deals, and I've said this every time we talked about big deals is big deals are lumpy, particularly in our model, where you have this really strong mid-market business and you're adding the next story to the house which happen to be big deals. So good news was we have lots of lumps that came in, in the quarter. And we hope to continue that, but they are lumpy. But the thing that I liked most about them was they were really spread across industry. It wasn't just retail, although we had 1 or potentially -- depending how you count 1 of them, 2 in retail. Wasn't just technology and manufacturing. We had a wholesale distribution deal in there. So it's amazing to see across every vertical, even some of the verticals which tended to be smaller companies and wholesale distribution certainly falls into that. You're starting to see the product mature to such a point that you can handle really complex environments. And in this batch of deals, I think, just sort of trying to remember all of them, I think most of them were single tier. They are doing the full-blown enterprise replacement of software that was designed 20 years ago. So that was pretty cool as well.
Jason Maynard - Wells Fargo Securities, LLC, Research Division
Great. And then, Ron, maybe I missed it but I don't know if you -- did you mention in terms of sort of what the apples-to-apples calculated billings figure was adjusting for duration?
Ronald Gill - Chief Financial Officer and Principal Accounting Officer
Yes. Yes. Good question. I didn't normalize it in the prepared remarks, so let me do that here. So I always give the caveat, I'll give it again that I tell you not to read too much into this number. I tell you that when it's high and when it's low. It's high at this time. I'm going to tell you again not to read too much into calculated billings. It -- last year, Q3, I think calculated billings was up 30 -- a little over 35% so it was a fairly tough compare but the growth rate against it was still a pretty good number with a 41%. We did see a positive impact, a slight positive impact from FX and a positive impact from billing term as well. So if I do the normalization on those 2, it will normalize down. It's still a number that's north of 35%, but much more in line -- normalized down, much more in line with that rolling 4-quarter average which is somewhere between 35% and 36%.
Jason Maynard - Wells Fargo Securities, LLC, Research Division
If I could just ask one follow-up on that is as you guys start doing some of these larger transactions, I mean, are you thinking you may see a greater increase in terms of multiyear billings? And how does that go into your thinking about your own investments that you're making in the business?
Zachary Nelson - Chief Executive Officer, President, Director and Member of Corporate Development Committee
Look, our policy on billings doesn't really change based on the size of the deal. We've sort of had a religion around here to try to do as much as we can single year deals because it really aligns our goals with the customer's goal, and that is how do we make this successful as quickly as possible. And now within that context, there are certainly lots of different variables that come into play, many of them driven by customers in terms of how they want to purchase. And I think, again, just sort of anecdotally, as the customers get larger, they tend to want to do larger multiyear deals. But that's certainly not a strategy on our side to try to do that and we're really -- beyond the one year deal, we're open to working with however the customer would like to engage on that front.
Ronald Gill - Chief Financial Officer and Principal Accounting Officer
Yes. If I could just add to that. Even as we've seen -- we have seen contract length get a little bit longer as we've done some of these larger deals, as Zach said, really driven by the way the customer wants to buy. But even when we do a multiyear deal, it's still the most common billing for us would be to bill that annually upfront as opposed to doing a multiple year upfront billing.
Operator
Your next question comes from the line of Samad Samana from FBR Capital Markets.
Samad Samana - FBR Capital Markets & Co., Research Division
I had a couple. First, we've seen NetSuite investing a lot more in brand awareness on the SuiteCommerce side at IRCE, big sponsorship, Shop.org as well. Can you discuss the progress in raising SuiteCommerce's brand as kind of the go-to e-commerce platform and how that's impacting deal flow? And then I have one follow-up to that.
Zachary Nelson - Chief Executive Officer, President, Director and Member of Corporate Development Committee
Yes, thanks. That's -- I'm glad you noticed that, but that really has been a multiyear investment. I think if you look back a few years ago, you would have seen the beginning of that investment. So -- and we've been incrementing that investment as we've incremented the investment in the product and certainly as we've gotten more and more customers to come on. So I think the brand is strong and getting stronger out there in the marketplace. I think -- so I just saw a Forrester report that had us listed in the top 5 of one of their reports of e-commerce and Demandware was not in the top 5, by the way. So I think we're doing really well there, both from an awareness standpoint, from an execution standpoint on the product front, I think can probably by the end of next year, we will have more customers on SuiteCommerce than Demandware has total. So I think really excited about what's going on in SuiteCommerce. And it's not just about the e-commerce component, right? What's exciting is this is really the first and only cloud-based omnichannel machine on the planet and that's what our customers are buying it for. When you see us in a deal, it's about point of sale and phone and website and call center on a single system. And the other thing that's also going on, obviously, is this notion that it's not just a B2C machine, it's a B2C and a B2B machine, right? And many of these retailers have B2B angles to their business as well as B2C. So being able to do both of those things across any device is an amazing capability, and I really think we are in the strongest position from a product standpoint today and over time, we will definitely be the #1 or #2 provider in this space.
Samad Samana - FBR Capital Markets & Co., Research Division
Okay. I wanted to dig into 2015 guidance. Obviously, it's a very healthy clip, another year of 30%-plus growth. Can you tell us what type of ramp you're expecting from these other product categories such as SuiteCommerce and services, resources, planning and maybe even HR? And what type of contribution you're expecting there versus the core ERP business?
Zachary Nelson - Chief Executive Officer, President, Director and Member of Corporate Development Committee
Well, our view there -- we approach the market, basically, on an industry basis. So we don't -- I mean this is something called a basic ERP world, but it really is driven by industries. It's very hard to find a horizontal application of ERP. There is one area that I would caveat that, and that is the OneWorld product, which is really sort of a horizontal solution for multicompany consolidation. So that's more broadly based to horizontal space. But we really do look at the world by industry, people that sell and make products, people that sell and make time, people that do both. And so we want to grow quickly across all of those. What you see happen is on a quarter-by-quarter basis, they don't all necessarily grow at 100% but what was great about Q3 was you saw very high rates of growth across all industry groups. WD and manufacturing growing at 100%, for example, in the quarter, was pretty impressive. So that's really the way we look at the marketplace and we try to invest in the product, according to those industry groups as well as horizontally in the OneWorld financial product. And then within industries, how can we extend functionality to address the needs of retailers as an example or distributors as an example and the 14.2 release had functionality, lots of functionality for all of those industry groups within it.
Operator
Your next question comes from the line of Pat Walravens from JMP Securities.
Patrick D. Walravens - JMP Securities LLC, Research Division
Zach, I want to follow up on that train of thinking you were just going down. So if you look at your business by industry, which of the industries are experiencing -- how would you sort of rank them in terms of the growth rates that they're experiencing? And then secondly, what new verticals or industries are you contemplating right now?
Zachary Nelson - Chief Executive Officer, President, Director and Member of Corporate Development Committee
Well, again, to sort of levels set, we view the world really as industries, that's how we develop the products, so wholesalers and distributers is an example. Within wholesale and distribution, there are hundreds of verticals, agricultural distribution versus electronics distribution, et cetera. So we sometimes use the term a little bit loosely but largely, we're talking about industry sectors. And again, what's been great about -- what's really cool about this quarter is just the accelerating growth in almost every industry group. And so each industry group has different dynamics. Wholesale distribution, as I said, typically is smaller companies so you'll see a smaller ASP but on the flip side, they're incredibly complicated businesses that need all of NetSuite's functionality from the CRM to the warehouse management to the e-commerce capabilities to the financials. So they're really -- the great thing that, I think, you're seeing this quarter and you've seen us invest in over the last 5 years is getting really smart about how we go to market in those industries and how we build products for those industries. Because at the end of the day, our sale almost immediately becomes a vertical sale or an industry sale. If we go to sell a software company or an Internet company, they say, "Don't show a John Deere dealership. I want to see another software Internet company running NetSuite because I need complex rev rec and other things." So I think we are so far ahead of the curve in terms of not just delivering cloud solutions, not just delivering complex cloud solutions but really delivering cloud solutions designed to run many different businesses. And on top of that, you look at how we've grown our development organization over the last 3 years growing at -- tripling it really since the beginning of 2012. We can really now advance the product on many, many fronts which gives us an enormous competitive advantage over some of the ankle-biters that are out there, all the NetSuite wannabes, they have a long way to go to want to be us. So we're in a great position horizontally and vertically.
Patrick D. Walravens - JMP Securities LLC, Research Division
Great. So just as an example, would government be an area that would be interesting to you?
Zachary Nelson - Chief Executive Officer, President, Director and Member of Corporate Development Committee
Well, certain aspects of government. You saw the State of Texas actually roll us out as their -- effectively, their internal commerce platform, right? That was an incredible application. All the purchasing of the State of Texas now running through NetSuite. So certainly within government, there are many applications that we are suitable for. So yes, that's definitely something on our road map. Related to government, of course, are government contractors, right? And we already have great capabilities there. The old Deltek product, talk about an old product, there's another one. We have a great solution for government contractors, right? That's really combining the services resource planning capability with some product capability, with some unique things for government. So yes, there are lots of adjacencies off of these industry groups like services, like wholesale distribution, like manufacturing that we talk about quite a bit, and then we can get into verticals off -- adjacently off those industry groups.
Operator
Your next question comes from the line of Jennifer Lowe from Morgan Stanley.
Jennifer Swanson Lowe - Morgan Stanley, Research Division
Just a couple of quick ones for me. First, Ron, I just want a follow up, I think you made a comment that hiring was a little slower than planned in Q3. Can you talk a little bit about maybe where some of the challenges were and then how you're thinking about hiring headed into Q4?
Ronald Gill - Chief Financial Officer and Principal Accounting Officer
Yes, let me -- I'll give some background on that. So keep in mind, we're talking about a very aggressive hiring number that we have, overall headcount still increased 38% year-over-year. I think we said R&D headcount increased 46%. So that's -- that was what we actually achieved even though our original plan had an even slightly higher and slightly earlier in the quarter hiring plan than we actually achieved. So I guess the one caveat I would say is if it resulted in a savings versus our forecasted plan for the quarter, we still hit some pretty aggressive hiring numbers. That said, I think we've got kind of irons in the fire hiring globally. So we certainly increased in last couple of years the number of places in the world where we are hiring product development team, for example. Adding the Czech Republic, adding Uruguay, we've recently added Kitchener and Waterloo in Canada as a new development center. So we've got a bunch of places there outside of Silicon Valley where we're hiring. And the same with sales as well. We're hiring salespeople globally and we've opened a number of additional sales offices in the U.S. just within the last year so that we are hiring more regionally within the U.S. So I think we're trying to be pretty aggressive about it. And as I said, hitting 38% year-over-year overall growth, so hitting a pretty high number but just not spending quite what we expected to spend in the quarter.
Jennifer Swanson Lowe - Morgan Stanley, Research Division
Okay, great. And then just rolling forward to calendar '15, and I certainly understand the desire to keep some optionality there on the expense side we appreciate even getting the revenue look. But just reading behind -- between the lines a little bit there, is the message that we should take away that there's no reason to think expense growth will materially slow next year?
Zachary Nelson - Chief Executive Officer, President, Director and Member of Corporate Development Committee
In the past, I've been pretty right up front about saying what we did this year, expect next year. I'm not being that definitive this year, primarily because we really -- there are so many opportunities in front of us to invest wisely, to grow profitably that I think we really have to get through this planning period. I think we're on a -- we've always been on a real tear for the last 4 or 5 years. And so we're going to look very deeply at what we want to do for the next 4 or 5 years. It's very hard for me to really say one way or another how we might come out of our meetings at the end of this quarter.
Operator
Your next question comes from the line of Justin Furby from William Blair & Company.
Justin A. Furby - William Blair & Company L.L.C., Research Division
Zach, can you talk a little bit about rep productivity that you saw in the quarter maybe versus last quarter? And then just separately on Europe, I know it's not a huge piece of your business but if you look at it from a new business perspective, what did that look like -- both Asia-Pac and Europe, what did that look like from a new bookings perspective?
Zachary Nelson - Chief Executive Officer, President, Director and Member of Corporate Development Committee
Yes. In terms of -- rep productivity remains strong. Again, Ron said we had it something like 37% growth in reps, in sales expense and roughly correlating that to quota. Is that...
Ronald Gill - Chief Financial Officer and Principal Accounting Officer
34% sales and marketing.
Zachary Nelson - Chief Executive Officer, President, Director and Member of Corporate Development Committee
34% sales and marketing. So we grew really nicely in the pipeline actually and the productivity of those reps actually grew a bit. So again, this has been sort of the same thing we've been saying for the last 3 to 4 years is when you add that many reps at some point, you expect productivity to decline, and that has not happened. And so that sort of tells you, hey, we can keep going, we can keep the foot on the gas and that's a nice metric to have at your back to have confidence to continue to do the kind of growth we've been doing in the sales organization. The other thing I'd say, it's nice to see in the productivity, obviously, it's not just the ASP growth but also the deal count growth. And so over the last couple of quarters, you've seen that inflection point and that's a real positive as well. In terms of international and business around the world, the U.K. had another great quarter, it grew something north of 100%. So as we've been saying, we're investing heavily in the U.K., we're doing a lot of marketing, growing the organization there. Last year, it grew at 100%. This quarter, it grew at 100% and we're heading into a very strong Q4. So really excited about what's going on in Europe. I've been spending about a week a month over there now. It may become more time as we move into next year because I think we have a real opportunity there with the Sage base because Sage has really done nothing to move their customers into the cloud and we obviously have everything to move them into the cloud. So we think we're about to hit a tipping point there. Asia -- North America was obviously very strong. Asia, particularly emerging Asia, not necessarily Japan or Australia, New Zealand, but those emerging countries had a really strong quarter and I'll be heading over there Friday night, I'll jump on a plane to go to Asia to meet with customers and whatnot, so I might have a little better quantitative feel on what's happening in those markets.
Justin A. Furby - William Blair & Company L.L.C., Research Division
Okay, great. And then just quickly around on the bookings, around the billings guidance and the normalization. Is that -- I'm just curious, what did Venda do in terms of deferred and actual -- what was the impact of Venda? So if you netted that out, what did the organic number look like sort of net of all the billing the noise or the duration noise and FX noise?
Ronald Gill - Chief Financial Officer and Principal Accounting Officer
Yes. So we're not -- I'm not going to be breaking out the small acquisitions probably on almost any metric. I think probably the thing that you could refer to -- the impact would have been very small. I think the thing I could refer you to as a reference point would be look at the deferred revenue growth year-over-year. So I think the deferred revenue growth was north of 40% itself and Venda represents basically none of the deferred revenue on the balance sheet at end of the quarter. There's no deferred revenue there for Venda anymore. So you can see that just apples-to-apples, year-over-year growth rate in deferred is also in excess of 40%. So I think that's something I can point you to as a pure number, as a reference that you can see probably was not that impactful.
Operator
Our next question comes from the line of Raimo Lenschow from Barclays Capital.
Harris Heyer - Barclays Capital, Research Division
This is Harry Heyer for Raimo. I was just hoping to dig in a little bit more on what you're seeing in terms of the benefits from integrating Venda from a more qualitative perspective, how are you hitting the ground running internationally? I know you just talked about kind of it's a focus for you, obviously, but where is strategically the -- where's the focus? Is it just hiring or is it more, I guess, product evangelizing? Can you just give a little bit more color there?
Zachary Nelson - Chief Executive Officer, President, Director and Member of Corporate Development Committee
Yes. No, it's a great question. It's really on -- what the Venda acquisition was all about was strategic investment in a couple of different vectors. And so I've obviously been heavily involved in the integration of the company. It's very exciting thing that we have going on over there. We've got an incredible group of people and that's the most important thing you get in these acquisitions is the people and incredible quality people, great development team, really dedicated folks. We've gotten through some of the throes of integration and being part of a new company and all those things which are really challenging for the other side, frankly, but we've had a bunch of our guys become a part of their team and they're definitely a part of our team right now. So very excited about the people that we have. And if you look even at our past acquisitions, things like OpenAir, some of the great leaders that we still have at NetSuite were part of our very first acquisition, OpenAir. So you get incredible people out of these types of engagements. Second thing is geographic expansion. And while you sit in America, you think, we can figure out the U.K. or we can figure out Asia, but it's really nice when you have a couple of hundred people sitting there figuring it out who are local. And so I think they're helping us enormously to figure out how we're going to go to market, not just in the U.K. but throughout Europe. Part of that as we go to market from a product basis, and obviously, that was a piece of this being a domain expertise largely around commerce, but -- global commerce, dealing with many, many markets, many different sort of rules, regulations and capabilities that are required. And so that's a huge piece of it. So the product capability. And then last but not least, I'd say it's the customers. They brought a relatively small number of customers compared to us, they have some incredible customers. So again, to get the local feedback of companies like Laura Ashley and boohoo and Fat Face, I mean, really big brands in the U.K. that are now part of the NetSuite family, really helps us understand what's going on the ground, what companies like that are facing and it makes us even more excited about the opportunity that we have in the U.K. and throughout Europe.
Operator
Your last question comes from the line of Greg Dunham from Goldman Sachs.
Gregory Dunham - Goldman Sachs Group Inc., Research Division
First, I think you got asked this question already but given the numbers and given some of the commentary from other software vendors this quarter, I've gotten a number of questions, how's the spending environment? In September, did you see any sort of hesitation or slowdown from a buy-in perspective? Any sort of hesitation in this software spending environment in September?
Zachary Nelson - Chief Executive Officer, President, Director and Member of Corporate Development Committee
We saw the opposite of hesitation. So I guess we were unusual in that sense.
Gregory Dunham - Goldman Sachs Group Inc., Research Division
Okay, that answers that question. A follow-up question, one of the questions I get often are what's the sustainability of the ASP growth given the fact that the mix of OneWorld has gotten to a very strong level already? How should investors think about that for NetSuite?
Zachary Nelson - Chief Executive Officer, President, Director and Member of Corporate Development Committee
Well, again, I think OneWorld was an initial sort of driver of average selling price. But as I said in my earlier commentary, it's not just about OneWorld, it really is about bringing broader and broader capabilities of the suite to the customers. And if you think about the types of the customer that NetSuite has, they tend to be very tightly coupled and frankly complex businesses, companies like wholesalers and distributors, where if the salesperson sells something, they have to see the inventory and when they sell the inventory, they need to lock it up. In those tightly coupled businesses, they tend to want to use more and more of the suite. And so as we either expand the footprint of the suite, that gives us upsell opportunity and as they begin to consolidate their systems around the suite, that gives us upsell opportunity. So certainly not just limited to OneWorld. You should all be excited about how much larger our development organization is because we have the rare opportunity of having the ability to add new functionality that the customers not only will pay for, but will happily pay for because the problem they're facing and they're trying to kludge together a bunch of different things. So there are very few software companies on the planet that have the opportunity that we do given the fact that we started out by building a suite, not by building a point product and then calling it a suite, we really started by building a suite and you see the power of the suite model playing out in average selling price.
Well, thank you, all, for joining us for the Q3 report. It was an exciting quarter for us, and I think it sets up a great Q4 for us. So with that, we will head off from the call and go execute on Q4. Thank you very much.
Operator
This concludes today's conference call. You may now disconnect.
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