NetSuite Announces Third Quarter 2013 Financial Results -- Record Q3 Revenue of $106.9 Million, a 34% Year-over-Year Increase

-- Quarterly Operating Cash Flows of $14.6 Million

SAN MATEO, Calif., Oct. 24, 2013 /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, 2013.           

Total revenue for the third quarter of 2013 was $106.9 million, representing a 34% increase over the same period in the prior year.

Cash flows from operations were $14.6 million in the third quarter of 2013, down from $15.2 million in the same period in the prior year.

On a GAAP basis, net loss for the third quarter of 2013 was $16.8 million, or $(0.23) per share, as compared to a net loss of $8.0 million, or $(0.11) per share, in the third quarter of 2012.

Non-GAAP net income for the third quarter of 2013 was $6.9 million, or $0.09 per share, as compared to non-GAAP net income of $5.7 million, or $0.08 per share, in the third quarter of 2012.

"This week has been a tale of two companies as NetSuite's Q3 revenue set a new record, while SAP effectively exited the business of providing software for mid-sized companies as they scale back their Business ByDesign product, which they once hyped as a NetSuite killer," said Zach Nelson, CEO of NetSuite.  "These two divergent results show that as mission-critical software moves to the Cloud, it is far safer for customers to turn to committed leaders like NetSuite rather than bet on the PowerPoint presentations of last-generation providers like SAP, Microsoft and Sage."

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 2013 financial results and our outlook for the fourth quarter of 2013 and full year 2013.  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: 85770631.  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: 85770631.

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 software suites, NetSuite offers a broad suite of applications, including accounting, Customer Relationship Management (CRM), Professional Services Automation (PSA) and Ecommerce that enables 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; continued 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 February 28, 2013, Quarterly Report on Form 10-Q filed on August 1, 2013 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 benefit 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 service marks of NetSuite Inc.

NetSuite Inc.

Condensed Consolidated Balance Sheets

(dollars in thousands)

(unaudited)



September 30, 2013


December 31, 2012

Assets




Current assets:




Cash and cash equivalents

$

467,130


$

185,859

Accounts receivable, net of allowances of $501 and $701 as of September 30, 2013 and December 31, 2012,

respectively

65,118


64,861

Deferred commissions

30,617


26,959

Other current assets

17,276


9,049

Total current assets

580,141


286,728

Property and equipment, net

42,957


27,210

Deferred commissions, non-current

6,782


4,784

Goodwill

63,175


35,661

Other intangible assets, net

19,524


12,420

Other assets

10,159


2,972

Total assets

$

722,738


$

369,775

Liabilities and total equity





Current liabilities:




Accounts payable

$

5,604


$

3,476

Deferred revenue

178,624


154,051

Accrued compensation

20,273


18,806

Accrued expenses

14,987


11,974

Other current liabilities

16,951


9,948

Total current liabilities

236,439


198,255

Long-term liabilities:




Convertible 0.25% senior notes, net

251,201


Deferred revenue, non-current

10,982


7,365

Other long-term liabilities

15,893


5,386

Total long-term liabilities

278,076


12,751

Total liabilities

514,515


211,006

Total equity:




Common stock

747


727

Additional paid-in capital

636,286


535,853

Accumulated other comprehensive income

150


950

Accumulated deficit

(428,960)


(378,761)

Total equity

208,223


158,769

Total liabilities and total equity

$

722,738


$

369,775




NetSuite Inc.

Condensed Consolidated Statements of Operations

(dollars and shares in thousands, except per share amounts)

(unaudited)



Three months ended


September 30,

2013


June 30,

2013


March 31,

2013


December 31,

2012


September 30,

2012

Revenue:










Subscription and support

$

85,795


$

80,239


$

73,960


$

68,534


$

65,329

Professional services and other

21,080


20,757


17,669


16,472


14,462

Total revenue

106,875


100,996


91,629


85,006


79,791

Cost of revenue:










Subscription and support (1)

14,276


13,511


12,315


11,135


10,880

Professional services and other (1)

20,916


19,895


17,330


15,488


14,211

Total cost of revenue

35,192


33,406


29,645


26,623


25,091

Gross profit

71,683


67,590


61,984


58,383


54,700

Operating expenses:










Product development (1)

19,979


18,796


16,650


14,429


13,943

Sales and marketing (1)

52,315


53,960


46,752


42,563


38,591

General and administrative (1)

12,233


13,429


11,745


10,134


9,458

Total operating expenses

84,527


86,185


75,147


67,126


61,992

Operating loss

(12,844)


(18,595)


(13,163)


(8,743)


(7,292)

Other income / (expenses) and income taxes, net (1)

(3,928)


(1,795)


126


(878)


(692)

Net loss

(16,772)


(20,390)


(13,037)


(9,621)


(7,984)

Net loss per share

$

(0.23)


$

(0.28)


$

(0.18)


$

(0.13)


$

(0.11)

Weighted average number of shares used in computing net loss per common share

74,379


73,946


73,144


71,977


71,161



(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 benefit associated with business combination as follows:




September 30,

2013


June 30,

2013


March 31,

2013


December 31,

2012


September 30,

2012

Cost of revenue:










Subscription and support

$

1,687


$

1,588


$

1,127


$

1,135


$

1,169

Professional services and other

2,191


2,452


1,846


1,612


1,688

Operating expenses:










Product development

5,926


6,342


4,848


3,999


4,035

Sales and marketing

6,825


7,379


5,175


4,283


4,142

General and administrative

3,889


5,613


3,946


3,148


2,686

Other income / (expenses) and income taxes, net

3,123


1,056


(1,119)



Total

$

23,641


$

24,430


$

15,823


$

14,177


$

13,720




NetSuite Inc.

Reconciliation of Net Loss Per Share to Non-GAAP Net Income Per Share

(dollars and shares in thousands, except per share amounts)

(unaudited)



Three months ended


September 30,

2013


June 30,

2013


March 31,

2013


December 31,

2012


September 30,

2012

Reconciliation between GAAP operating loss and non-GAAP operating income:










Operating loss

$

(12,844)


$

(18,595)


$

(13,163)


$

(8,743)


$

(7,292)

Reversal of non-GAAP expenses:










Stock-based compensation and amortization of

capitalized stock-based compensation (a)

18,470


20,264


15,196


12,503


12,584

Amortization of intangible assets and business

combination costs (b)

2,048


3,110


1,746


1,674


1,136

Non-GAAP operating income

$

7,674


$

4,779


$

3,779


$

5,434


$

6,428

Numerator:










Reconciliation between GAAP net loss and non-GAAP net income:










Net loss

$

(16,772)


$

(20,390)


$

(13,037)


$

(9,621)


$

(7,984)

Stock-based compensation and amortization of

capitalized stock-based compensation (a)

18,470


20,264


15,196


12,503


12,584

Amortization of intangible assets and business

combination costs (b)

2,048


3,110


1,746


1,674


1,136

Non-cash interest expense on convertible debt (c)

3,123


1,056




Income tax benefit associated with business

combination (d)



(1,119)



Non-GAAP net income

$

6,869


$

4,040


$

2,786


$

4,556


$

5,736

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

74,379


73,946


73,144


71,977


71,161

Effect of dilutive securities (stock options and restricted

stock awards) (e)

2,047


2,144


2,371


2,999


3,051

Non-GAAP weighted average shares used in

computing non-GAAP net income per common share

76,426


76,090


75,515


74,976


74,212

GAAP net loss per share

$

(0.23)


$

(0.28)


$

(0.18)


$

(0.13)


$

(0.11)

Non-GAAP net income per share

$

0.09


$

0.05


$

0.04


$

0.06


$

0.08

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 and income tax benefit 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 transactions cost 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 a small acquisition during the first quarter of 2013, we recorded an income tax benefit that reduced our income tax provision for the first quarter of 2013.  This 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,


2013


2012

Cash flows from operating activities:




Net loss

$

(50,199)


$

(25,607)

Adjustments to reconcile net loss to net cash provided by operating activities:




Depreciation and amortization

11,272


8,048

Amortization of other intangible assets

4,761


3,393

Amortization of debt discount and transaction costs

4,179


Provision for accounts receivable allowances

625


505

Stock-based compensation

53,597


35,939

Amortization of deferred commissions

39,971


33,269

Excess tax benefit on stock-based compensation

(330)


(259)

Changes in operating assets and liabilities, net of acquired assets and liabilities:




Accounts receivable

(153)


(9,476)

Deferred commissions

(45,627)


(32,876)

Other current assets

(8,118)


(137)

Other assets

(520)


797

Accounts payable

2,111


3,241

Accrued compensation

1,784


(1,398)

Deferred revenue

28,307


23,842

Other current liabilities

2,426


1,790

Other long-term liabilities

811


(181)

Net cash provided by operating activities

44,897


40,890

Cash flows from investing activities:




Purchases of property and equipment

(11,581)


(7,730)

Capitalized internal use software

(1,569)


(1,172)

Cash paid in business combinations, net of amounts received, and equity investment

(33,907)


(4,227)

Net cash used in investing activities

(47,057)


(13,129)

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

(556)


(542)

Payments under capital leases and long-term debt - related party

(1,987)


(1,160)

Payments to repurchase common stock

(30,000)


Excess tax benefit on stock-based compensation

330


259

RSU acquired to settle employee withholding liability

(147)


(191)

Proceeds from issuance of common stock, net of issuance costs

14,868


10,523

Net cash provided by financing activities

284,248


8,889

Effect of exchange rate changes on cash and cash equivalents

(817)


354

Net change in cash and cash equivalents

281,271


37,004

Cash and cash equivalents at beginning of period

185,859


141,448

Cash and cash equivalents at end of period

$

467,130


$

178,452

(Logo:  http://photos.prnewswire.com/prnh/20090924/SF81218LOGO-b)

SOURCE NetSuite Inc.



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