Cloud Upstart NetSuite Overhauls Accounting System

May 17, 2016, 4:40 PM UTC

33. Zach Nelson

CEO, NetSuite Nelson has his eyes on the prize: $1 billion in annual revenue. Thanks to a hot niche -- business software delivered via the Internet -- he may achieve his goal. (Revenue for the last four quarters rose 28% to $288 million.) Investors are bullish: Shares of NetSuite are up some 56% this year. --SNM
Photo: David Paul Morris/Bloomberg/Getty

Most accounting systems were originally designed for the era of widgets. That is, they’re great at tracking product orders and sales, but not-so-good at managing recurring revenue streams from subscriptions or time-bound services.

As a result, many organizations rely on several different financial applications cobbled together—such as systems for billing, revenue recognition, and orders—to manage this data in a manner that regulators will bless.

Cloud software company NetSuite (N) wants to simplify things. It has spent the past five years building an application that can handle all of these different models and tasks simultaneously. The product, called SuiteBilling, will enable companies to track orders and subscriptions side-by-side.

In many cases, product and service revenue streams are already related, so it makes sense to consider them together more holistically, said NetSuite CEO Zach Nelson. He cites the example of a car dealership that might use the application to manage warranties and maintenance services for the vehicles it sells. “The future of the subscription economy has to understand products as well, because in many cases it’s the products that are becoming services,” Nelson said.

SuiteBilling was introduced Tuesday during the company’s annual customers conference. It will be available by June as part of the NetSuite’s core business management system, which is used by approximately 30,000 businesses worldwide. The company didn’t disclose pricing, but the module can be turned off or on as needed, Nelson said.

The market for cloud billing services is estimated at $1.1 billion this year, but it will expand to $5.5 billion by 2020, according to forecasts by MGI Research. “Monetization—which is how efficiently and effectively demand is created and translated into revenue, profit, and market differentiation—is essential to the today’s growth initiatives like [Internet of things], digital business, and omnichannel,” said MGI Research analyst Igor Stenmark.

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Traditionally speaking, companies managing lots of subscription business have developed home-grown systems to manage recurring revenue. Two of the better-known companies hoping to replace those applications are Aria Systems, which counts software purveyor Atlassian, automaker Audi and medical equipment company Philips Healthcare as customers; and Zuora, which sells the systems used by high-profile cloud software players such as Box and Zendesk as well as huge manufacturers like Honeywell and Schneider Electric.

NetSuite isn’t the only business management software company raising the red flag about the need to accommodate new revenue models and accounting standards.

For example, NetSuite rival Intacct last week introduced a new system that automates compliance with new revenue reallocation and expense amortization rules from the Federal Accounting Standards Board and the International Accounting Standards Board that take affect starting in 2018 for public companies and 2019 for private companies.

“As an ERP vendor, NetSuite isn’t alone in calling attention to and preparing customers to address the new standards, but it was among the earliest in understanding the impact they would have on their customer base and in proactively getting out in front of the challenges they posed by improving their product,” said Gartner analyst Robert Anderson.

While every industry will be impacted in some way, Anderson said several are leading the shift to the blended revenue models, including professional services, media and telecommunications, and technology companies.