SaaS Vendor NetSuite Has No Separate Backup Center For Customer Data

NetSuite, a software-as-a-service vendor that holds customer data for thousands of small and medium-sized companies, said in a filing with the Securities and Exchange Commission that it has no backup data center for any of its services.

In addition, NetSuite acknowledged in its S-1 filing, a precursor to launching an initial public offering, that its single data center is located in a third-party facility in an area of California that's vulnerable to earthquakes.

The disclosure left at least one analyst firm scratching its head. "We believe that serious SaaS [software-as-a-service] companies need to provide a portfolio of disaster recovery options, should a client want to pay for them," Saugatuck Technology said in a research alert sent Thursday.

NetSuite declined comment on Thursday.

In the SEC filing dated July 2, NetSuite acknowledged using a single data center to deliver its services. "We do not currently operate or maintain a backup data center for any of our services or for any of our customers' data, which increases our vulnerability to interruptions or delays in our service," the company said.

NetSuite, which was started by Oracle Chief Executive Larry Ellison in 1998, went on to say that it planned to add a second data center next year, but not for backup services. "We currently intend to add a second data center facility in 2008, the primary purpose of which is to add capacity," the company said.

NetSuite customer Brad Kugler, chief executive of Distribution Video and Audio near Tampa, Fla., was surprised when told by InformationWeek that his vendor had no separate backup facility. "This is all new to me to be perfectly honest," Kugler said. "I'm actually finding this a little hard to swallow."

DVA, a family-owned business that buys unsold DVDs and CDs from entertainment companies and resells them to brick-and-mortar and online retailers, has all its data with NetSuite, including customer, supplier, inventory, employee and financial information. Kugler planned to contact NetSuite for an explanation. "I have to check it out," he said. Kugler couldn't say for sure what NetSuite had said about backup arrangements when he first signed up with them. NetSuite, in general, charges $499 a month for its entire suite, plus $99 a month per user.

Saugatuck pointed out that many organizations do not have backup facilities. For example, Salesforce.com, the largest pure-play SaaS vendor, operated out of a single data center for several years after its IPO. Nevertheless, the NetSuite disclosure, necessitated by the IPO plans, is expected to have an impact. "While this disclosure may not prove to be a sales and marketing disaster for NetSuite, there are likely to be short-term financial consequences due to distancing by risk-averse buyers," the research firm said.

NetSuite, based in San Mateo, Calif., had revenues of $67.2 million last year, and a net loss of $23.4 million. The company acknowledged in the SEC filing that profitability was unlikely to happen soon. "We have a history of losses, and we may not achieve profitability in the near future," the company said.

Saugatuck questioned how much investors would be willing to spend on a company like NetSuite before it has at least broken even. "It is unlikely they will reward NetSuite with a market multiple similar to profitable SaaS market leaders Salesforce.com, Concur and Kenexa," Saugatuck said.

However, the research firm acknowledged that market leader Salesforce.com is only "marginally profitable" today, yet has a market cap of $5 billion. "The question is for how long will the market continue to pay for growth rather than profitability as this market continues to evolve and mature," the firm said.

NetSuite offers online customer relationship management, enterprise resource planning and e-commerce software. Saugatuck estimates the company has well over 5,000 customers, which are mostly small and medium-sized business with from 50 to 500 employees.

NetSuite faces lots of competition, particularly in the CRM market, whether on-premise or SaaS based. In the SEC filing, NetSuite says its principal competitors include Epicor Software, Intuit, Microsoft, SAP, The Sage Group and Salesforce.com. In 2008, Microsoft is set to release Dynamics Live CRM release 4, and SAP is scheduled to launch A1S, both on-demand software. The companies will compete with NetSuite for small to medium-sized businesses.