NetSuite Announces Third Quarter 2014 Financial Results

-- Record Q3 Revenue of $143.7 Million, a 34% Year-over-Year Increase

-- Q3 Operating Cash Flows of $16.3 Million, an 11% Year-over-Year Increase

News provided by

Oct 23, 2014, 04:05 ET

SAN MATEO, Calif., Oct. 23, 2014 /PRNewswire/ -- NetSuite Inc. (NYSE: N), the industry's leading provider of cloud-based financials / ERP and omnichannel commerce software suites, today announced results for its third quarter ended September 30, 2014.

Total revenue for the third quarter of 2014 was $143.7 million, representing a 34% increase over the same period in the prior year.

Cash flows from operations were $16.3 million in the third quarter of 2014, up from $14.6 million in the same period in the prior year.

On a GAAP basis, net loss for the third quarter of 2014 was $29.3 million, or $(0.38) per share, as compared to a net loss of $16.8 million, or $(0.23) per share, in the third quarter of 2013.

Non-GAAP net income for the third quarter of 2014 was $8.3 million, or $0.11 per share, as compared to non-GAAP net income of $6.9 million, or $0.09 per share, in the third quarter of 2013.

"The Cloud giveth, and the Cloud taketh away. While NetSuite reported our ninth consecutive quarter of more than 30% year-over-year revenue growth and Q3 profitability well ahead of our outlook, SAP experienced a sixth straight quarter of declining license sales and announced negatively impacted margins based on the move of customers to the cloud," said Zach Nelson, CEO of NetSuite. "The shift from antiquated software such as SAP and Microsoft to NetSuite's modern cloud-native solution is transforming the capabilities of small, medium and large organizations around the globe."

Conference Call

In conjunction with this announcement, NetSuite will host a conference call at 2:00 p.m. PDT (5:00 p.m. EDT) today to discuss our third quarter 2014 financial results and our outlook for future periods. A live audio webcast and replay of the call, together with detailed financial information, will be available in the Investor Relations section of NetSuite's website at www.netsuite.com/investors. The live call can be accessed by dialing 855-812-1881 (U.S.) or 817-385-7868 (outside the U.S.) and referencing passcode: 16836910. A replay of the call can also be accessed by dialing 855-859-2056 (U.S.) or 404-537-3406 (outside the U.S.), and referencing passcode: 16836910.

About NetSuite

NetSuite Inc. is the industry's leading provider of cloud-based financials / Enterprise Resource Planning (ERP) and omnichannel commerce software suites. In addition to financials/ERP and omnichannel commerce software suites, NetSuite offers a broad suite of applications, including financial management, Customer Relationship Management (CRM), ecommerce and retail management, Professional Services Automation (PSA) and Human Capital Management (HCM) that enable companies to manage most of their core business operations in its single integrated suite. NetSuite software allows businesses to automate operations, streamline processes and access real-time business information anytime, anywhere. For more information about NetSuite, please visit www.netsuite.com.

Cautionary Note Regarding Forward-Looking Statements

This press release and NetSuite's scheduled conference call contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to, among other things, expectations, plans, prospects and financial results for NetSuite, including, but not limited to, our expectations regarding our products, market demand, future earnings, revenue and market share growth. These forward-looking statements are based upon the current expectations and beliefs of NetSuite's management as of the date of this press release and conference call, and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. All forward-looking statements made in this press release and during the conference call are based on information available to us as of the date thereof, and NetSuite disclaims any obligation to update these forward-looking statements.

In particular, the following factors, among others, could cause results to differ materially from those expressed or implied by such forward-looking statements: the market for on-demand services may develop more slowly than expected or than it has in the past; adverse and unpredictable macro-economic conditions or reduced investments in on-demand applications and information technology spending; quarterly operating results may fluctuate more than expected; unexpected disruptions of service at one or more of our data centers may occur; a security breach may impact operations; risks associated with material defects or errors in our software or the effect of undetected computer viruses could impact operations; the risk of technological developments and innovations by others; our ability to successfully identify other businesses and technologies for acquisition that will complement our business and the ability to successfully acquire and integrate those businesses and technologies; the risk of loss of power or disruption in Internet service; failure to manage growth and effectively scale the organization; failure to protect and enforce our intellectual property rights; assertions by third parties that we infringe their intellectual property rights; the ability to manage operations when faced with competitive pricing and marketing strategies by competitors or changing macro-economic conditions; the risk of losing key employees; evolving government regulation of the Internet and ecommerce; changes to current accounting rules; changes in foreign exchange rates; and general political or destabilizing events, including war, conflict or acts of terrorism; and other risks and uncertainties.

Customers who purchase our services should make sure the decisions are based on features that are currently available. Please be advised that any unreleased services or features from NetSuite referenced in today's discussion or other public statements are not currently available and may not be delivered on time or at all.

For a detailed discussion of these and other cautionary statements, please refer to the risk factors discussed in filings with the U.S. Securities and Exchange Commission ("SEC"), including but not limited to our Annual Report on Form 10-K filed on March 3, 2014, our Quarterly Report on Form 10-Q filed on May 6, 2014, our Quarterly Report on Form 10-Q filed on August 6, 2014 and any subsequently filed reports on Forms 10-K, 10-Q and 8-K. All documents are available through the SEC's Electronic Data Gathering Analysis and Retrieval system ("EDGAR") at www.sec.gov or NetSuite's website at www.netsuite.com.

Non-GAAP Financial Measures

Our stated results include certain non-GAAP financial measures, including non-GAAP operating income, net income, weighted average shares outstanding, and net income per share. Non-GAAP operating income excludes expenses related to stock-based compensation expense, amortization of intangible assets, and transaction costs for business combinations. Non-GAAP net income excludes expenses related to stock-based compensation expense, amortization of intangible assets, transaction costs for business combinations, non-cash interest expense on convertible debt and income tax benefits associated with business combination. Non-GAAP operating income and non-GAAP net income exclude these expenses as they are often excluded by other companies to help investors understand the operational performance of their business, and in the case of stock-based compensation, can be difficult to predict. We believe these adjustments provide useful comparative information to investors.

We consider these non-GAAP financial measures to be important because they provide useful measures of our operating performance and are used by our management for that purpose. In addition, investors often use measures such as these to evaluate the operating performance of a company. Non-GAAP results are presented for supplemental informational purposes only for understanding our operating results. The non-GAAP results should not be considered a substitute for financial information presented in accordance with generally accepted accounting principles, and may be different from non-GAAP measures used by other companies.

A copy of this press release can be found on our Investor Relations website at www.netsuite.com/investors. The contents of the website are not incorporated by reference into this press release.

NOTE: NetSuite and the NetSuite logo are registered service marks of NetSuite Inc.

NetSuite Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands)
(unaudited)

	September 30, 2014		December 31, 2013
Assets
Current assets:
Cash and cash equivalents	$	387,422	$	451,577
Short-term marketable securities	43,824		—
Accounts receivable, net of allowances of $3,566 and $833 as of September 30, 2014 and December 31, 2013, respectively	106,995		86,818
Deferred commissions	42,627		38,187
Other current assets	29,016		22,622
Total current assets	609,884		599,204
Marketable securities, non-current	15,189		—
Property and equipment, net	54,140		48,183
Deferred commissions, non-current	12,379		8,405
Goodwill	120,607		84,478
Other intangible assets, net	39,345		20,460
Other assets	12,394		11,669
Total assets	$	863,938	$	772,399
Liabilities and total equity
Current liabilities:
Accounts payable	$	6,625	$	4,838
Deferred revenue	256,933		211,694
Accrued compensation	34,876		24,535
Accrued expenses	24,175		21,721
Other current liabilities	14,265		16,776
Total current liabilities	336,874		279,564
Long-term liabilities:
Convertible 0.25% senior notes, net	262,734		254,038
Deferred revenue, non-current	14,454		12,913
Other long-term liabilities	18,372		15,832
Total long-term liabilities	295,560		282,783
Total liabilities	632,434		562,347
Total equity:
Common stock	767		751
Additional paid-in capital	758,393		658,717
Accumulated other comprehensive loss	(3,794)		(246)
Accumulated deficit	(523,862)		(449,170)
Total equity	231,504		210,052
Total liabilities and total equity	$	863,938	$	772,399

NetSuite Inc.
Condensed Consolidated Statements of Operations
(dollars and shares in thousands, except per share amounts)
(unaudited)

	Three months ended
	September 30, 2014		June 30, 2014		March 31, 2014		December 31, 2013		September 30, 2013
Revenue:
Subscription and support	$	115,831	$	105,851	$	99,395	$	93,562	$	85,795
Professional services and other	27,829		25,943		23,566		21,446		21,080
Total revenue	143,660		131,794		122,961		115,008		106,875
Cost of revenue:
Subscription and support (1)	18,522		17,084		16,360		15,167		14,276
Professional services and other (1)	27,477		24,513		22,317		21,784		20,916
Total cost of revenue	45,999		41,597		38,677		36,951		35,192
Gross profit	97,661		90,197		84,284		78,057		71,683
Operating expenses:
Product development (1)	28,610		25,376		24,172		22,886		19,979
Sales and marketing (1)	74,699		69,726		63,680		57,053		52,315
General and administrative (1)	20,097		14,106		14,033		14,287		12,233
Total operating expenses	123,406		109,208		101,885		94,226		84,527
Operating loss	(25,745)		(19,011)		(17,601)		(16,169)		(12,844)
Other income / (expenses) and income taxes, net (1)	(3,550)		(4,153)		(4,632)		(4,042)		(3,928)
Net loss	(29,295)		(23,164)		(22,233)		(20,211)		(16,772)
Net loss per share	$	(0.38)	$	(0.31)	$	(0.29)	$	(0.27)	$	(0.23)
Weighted average number of shares used in computing net loss per common share	76,477		75,919		75,433		74,851		74,379

(1)	Includes stock-based compensation expense, amortization of intangible assets, transaction costs for business combinations, non-cash interest expense on convertible debt and income tax benefits associated with business combination as follows:

	September 30, 2014		June 30, 2014		March 31, 2014		December 31, 2013		September 30, 2013
Cost of revenue:
Subscription and support	$	2,173	$	1,851	$	1,986	$	1,733	$	1,687
Professional services and other	2,684		2,317		2,482		2,345		2,191
Operating expenses:
Product development	7,733		6,884		6,576		6,427		5,926
Sales and marketing	11,156		9,087		7,709		7,369		6,825
General and administrative	10,552		4,683		4,739		5,675		3,889
Other income / (expenses) and income taxes, net	3,287		3,191		3,141		2,875		3,123
Total	$	37,585	$	28,013	$	26,633	$	26,424	$	23,641

NetSuite Inc.
GAAP Results Reconciled to Non-GAAP Financial Measures
(dollars and shares in thousands, except per share amounts)
(unaudited)

	Three months ended
	September 30, 2014		June 30, 2014		March 31, 2014		December 31, 2013		September 30, 2013
Reconciliation between GAAP operating loss and non-GAAP operating income:
Operating loss	$	(25,745)	$	(19,011)	$	(17,601)	$	(16,169)	$	(12,844)
Reversal of non-GAAP expenses:
Stock-based compensation and amortization of capitalized stock-based compensation (a)	26,601		22,798		21,465		20,235		18,470
Amortization of intangible assets and business combination costs (b)	7,697		2,024		2,026		3,314		2,048
Non-GAAP operating income	$	8,553	$	5,811	$	5,890	$	7,380	$	7,674
Numerator:
Reconciliation between GAAP net loss and non-GAAP net income:
Net loss	$	(29,295)	$	(23,164)	$	(22,233)	$	(20,211)	$	(16,772)
Stock-based compensation and amortization of capitalized stock-based compensation (a)	26,601		22,798		21,465		20,235		18,470
Amortization of intangible assets and business combination costs (b)	7,697		2,024		2,026		3,314		2,048
Non-cash interest expense on convertible debt (c)	3,287		3,191		3,141		3,138		3,123
Income tax benefits associated with business combination (d)	—		—		—		(263)		—
Non-GAAP net income	$	8,290	$	4,849	$	4,399	$	6,213	$	6,869
Denominator:
Reconciliation between GAAP and non-GAAP weighted average shares used in computing basic and diluted net income / (loss) per common share:
Weighted average number of shares used in computing net loss per common share	76,477		75,919		75,433		74,851		74,379
Effect of dilutive securities (stock options and restricted stock awards) (e)	1,303		1,239		1,717		1,859		2,047
Non-GAAP weighted average shares used in computing non-GAAP net income per common share	77,780		77,158		77,150		76,710		76,426
GAAP net loss per share	$	(0.38)	$	(0.31)	$	(0.29)	$	(0.27)	$	(0.23)
Non-GAAP net income per share	$	0.11	$	0.06	$	0.06	$	0.08	$	0.09

Use of Non-GAAP Financial Measures
To supplement our condensed consolidated financial statements presented on a GAAP basis, NetSuite uses non-GAAP measures of operating income, net income, weighted average shares outstanding and net income per share, which are adjusted to exclude stock-based compensation expense, amortization of acquisition-related intangible assets, transaction costs for business combinations, non-cash interest expense on convertible debt, income tax benefits associated with business combination and includes dilutive shares where applicable. We believe these adjustments are appropriate to enhance an overall understanding of our past financial performance and also our prospects for the future.

These adjustments to our current period GAAP results are made with the intent of providing both management and investors a more complete understanding of NetSuite's underlying operating results and trends and our marketplace performance.

The non-GAAP results are an indication of our baseline performance that are considered by management for the purpose of making operational decisions. In addition, these non-GAAP results are the primary indicators management uses as a basis for our planning and forecasting of future periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for operating loss, net loss or basic and diluted net loss per share prepared in accordance with generally accepted accounting principles in the United States. Non-GAAP financial measures are not based on a comprehensive set of accounting rules or principles and are subject to limitations.

While a large component of our expense in certain periods, we believe investors may want to exclude the effects of these items in order to compare our financial performance with that of other companies and between time periods:

(a)	Stock-based compensation is a non-cash expense accounted for in accordance with FASB ASC Topic 718. We believe that the exclusion of stock-based compensation expense allows for financial results that are more indicative of our operational performance and provide for a useful comparison of our operating results to prior periods and to our peer companies because stock-based compensation expense varies from period to period and company to company due to such things as differing valuation methodologies and changes in stock price. Additionally, we capitalize equity based compensation costs in connection with our capitalization of internally developed software costs. These equity based compensation costs are included in cost of revenue when the internally developed software costs are amortized. As such, we included these costs in the stock-based compensation line item to determine both non-GAAP operating income and non-GAAP net income.

(b)	Amortization of intangible assets and transaction costs, which include employee severance and facility closing costs, related to business combinations resulted principally from mergers and acquisitions. Expense for the amortization of intangible assets is a non-cash item, and we believe that the exclusion of this amortization expense provides for a useful comparison of our operating results to prior periods and to our peer companies. Business combinations result in non-continuing operating expenses which would not otherwise have been incurred in the normal course of our business operations. We believe that the exclusion of acquisition related expense items allows for financial results that are more indicative of our continuing operations and provide for a useful comparison of our operating results to prior periods and to our peer companies.

(c)	During the second quarter of 2013, we issued $310.0 million in senior convertible debt with a coupon interest rate of 0.25%. Interest is paid semiannually on June 1 and December 1 over the five year term of the debt. In connection with this convertible debt, we are required to recognize non-cash interest expense, including debt transaction costs, in accordance with the authoritative accounting guidance for convertible debt that may be settled in cash. We exclude this incremental non-cash interest expense, including debt transaction costs, for purposes of calculating non-GAAP net income and non-GAAP net income per share. We believe that excluding these expenses from our non-GAAP measures is useful to investors because the incremental interest expense does not represent a cash outflow for the company and the debt transaction costs do not represent a cash outflow for the company except in the period the debt was issued and therefore both are not indicative of our continuing operations or meaningful in evaluating current versus past business results. Finally, we believe that non-GAAP measures of profitability that exclude non-cash interest expense and debt transaction costs are widely used by analysts and investors.

(d)	In connection with our business acquisition in the fourth quarter of 2013, we recorded an income tax benefit that reduced our income tax provision. The income tax benefit is a non-cash item that would not otherwise have been incurred in the normal course of our business operations. We believe that the exclusion of acquisition related items allows for financial results that are more indicative of our continuing operations and provide for a useful comparison of our operating results to prior periods and to our peer companies.

(e)	These securities are anti-dilutive on a GAAP basis as a result of our net loss, but are considered dilutive on a non-GAAP basis in periods where we reported positive non-GAAP earnings.

NetSuite Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)

	Nine Months Ended September 30,
	2014		2013
Cash flows from operating activities:
Net loss	$	(74,692)	$	(50,199)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	14,468		11,272
Amortization of other intangible assets	6,904		4,761
Amortization of debt discount and transaction costs	9,619		4,179
Provision for accounts receivable allowances	846		625
Stock-based compensation	70,256		53,597
Amortization of deferred commissions	53,478		39,971
Excess tax benefit on stock-based compensation	(519)		(330)
Changes in operating assets and liabilities, net of acquired assets and liabilities:
Accounts receivable	(17,650)		(153)
Deferred commissions	(61,892)		(45,627)
Other current assets	(1,745)		(8,118)
Other assets	(1,631)		(520)
Accounts payable	(1,395)		2,111
Accrued compensation	8,920		1,784
Deferred revenue	46,500		28,307
Other current liabilities	2,465		2,426
Other long-term liabilities	40		811
Net cash provided by operating activities	53,972		44,897
Cash flows from investing activities:
Purchases of property and equipment	(15,469)		(11,581)
Capitalized internal use software	(1,125)		(1,569)
Cash paid in business combinations, net of amounts received, and equity investment	(39,209)		(33,907)
Purchases of marketable securities	(59,815)		—
Sales of marketable securities	799		—
Net cash used in investing activities	(114,819)		(47,057)
Cash flows from financing activities:
Proceeds from issuance of convertible 0.25% senior notes	—		310,000
Payments of issuance costs on convertible 0.25% senior notes	—		(8,260)
Payments under capital leases	(300)		(556)
Payments under capital leases and long-term debt - related party	(2,379)		(1,987)
Payments to repurchase common stock	—		(30,000)
Payments related to business combinations	(5,890)		—
RSUs acquired to settle employee withholding liability	(96)		(147)
Excess tax benefit on stock-based compensation	519		330
Proceeds from issuance of common stock, net of issuance costs	5,573		14,868
Net cash (used in) / provided by financing activities	(2,573)		284,248
Effect of exchange rate changes on cash and cash equivalents	(735)		(817)
Net change in cash and cash equivalents	(64,155)		281,271
Cash and cash equivalents at beginning of period	451,577		185,859
Cash and cash equivalents at end of period	$	387,422	$	467,130