NetSuite Announces Fourth Quarter And Fiscal 2014 Financial Results

NetSuite Inc.

Condensed Consolidated Balance Sheets

(dollars in thousands)

(unaudited)

December 31,

2014

2013

Assets

Current assets:

Cash and cash equivalents

$

367,769

$

451,577

Short-term marketable securities

82,622

—

Accounts receivable, net of allowances of $1,886 and $833 as of December 31, 2014 and December 31, 2013, respectively

139,221

86,818

Deferred commissions

53,377

38,187

Other current assets

30,012

22,622

Total current assets

673,001

599,204

Marketable securities, non-current

9,143

—

Property and equipment, net

58,539

48,183

Deferred commissions, non-current

13,499

8,405

Goodwill

123,049

84,478

Other intangible assets, net

32,404

20,460

Other assets

12,604

11,669

Total assets

$

922,239

$

772,399

Liabilities and total equity

Current liabilities:

Accounts payable

$

5,082

$

4,838

Deferred revenue

300,884

211,694

Accrued compensation

41,081

24,535

Accrued expenses

30,975

21,721

Other current liabilities

14,751

16,776

Total current liabilities

392,773

279,564

Long-term liabilities:

Convertible 0.25% senior notes, net

265,710

254,038

Deferred revenue, non-current

13,622

12,913

Other long-term liabilities

15,900

15,832

Total long-term liabilities

295,232

282,783

Total liabilities

688,005

562,347

Total equity:

Common stock

770

751

Additional paid-in capital

788,583

658,717

Accumulated other comprehensive income

(5,912)

(246)

Accumulated deficit

(549,207)

(449,170)

Total equity

234,234

210,052

Total liabilities and total equity

$

922,239

$

772,399

NetSuite Inc.

Condensed Consolidated Statements of Operations

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

(unaudited)

Three months ended

December 31,

Twelve months ended

December 31,

2014

2013

2014

2013

Revenue:

Subscription and support

126,705

$

93,562

$

447,782

$

333,556

Professional services and other

31,164

21,446

108,502

80,952

Total revenue

157,869

115,008

556,284

414,508

Cost of revenue:

Subscription and support (1)

20,041

15,167

72,007

55,269

Professional services and other (1)

30,496

21,784

104,803

79,925

Total cost of revenue

50,537

36,951

176,810

135,194

Gross profit

107,332

78,057

379,474

279,314

Operating expenses:

Product development (1)

28,548

22,886

106,706

78,312

Sales and marketing (1)

82,856

57,053

290,961

210,079

General and administrative (1)

16,902

14,287

65,138

51,693

Total operating expenses

128,306

94,226

462,805

340,084

Operating loss

(20,974)

(16,169)

(83,331)

(60,770)

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

(4,371)

(4,042)

(16,706)

(9,639)

Net loss

(25,345)

(100,037)

(70,409)

Net loss per share

$

(0.33)

$

(0.27)

$

(1.31)

$

(0.95)

Weighted average number of shares used in computing

net loss per common share

76,850

74,851

76,174

74,085

(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 combinations as follows:

Three months ended

December 31,

Twelve months ended

December 31,

2014

2014

2013

Cost of revenue:

Subscription and support

$

2,332

$

1,733

$

8,342

$

6,135

Professional services and other

2,845

2,345

10,328

8,834

Operating expenses:

Product development

7,396

6,427

28,587

23,543

Sales and marketing

10,945

7,369

38,897

26,749

General and administrative

6,012

5,675

25,988

19,123

Other income / (expenses) and income taxes, net

3,291

2,875

12,910

5,935

Total

$

32,821

$

26,424

$

125,052

$

90,319

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
December 31,

Twelve months ended

December 31,

2014

2013

2014

2013

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

Operating loss

$

(20,974)

$

(16,169)

$

(83,331)

$

(60,770)

Reversal of non-GAAP expenses:

Stock-based compensation and amortization of capitalized stock-based compensation (a)

26,475

20,235

97,340

74,165

Amortization of intangible assets and business combination costs (b)

3,055

3,314

14,802

10,219

Non-GAAP operating income

$

8,556

$

7,380

$

28,811

$

23,614

Numerator:

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

Net loss

$

(25,345)

$

(20,211)

$

(100,037)

$

(70,409)

Stock-based compensation and amortization of capitalized stock-based compensation (a)

26,475

20,235

97,340

74,165

Amortization of intangible assets and business combination costs (b)

3,055

3,314

14,802

10,219

Non-cash interest expense on convertible debt (c)

3,291

3,138

12,910

7,317

Income tax benefit associated with business combinations (d)

—

(263)

—

(1,382)

Non-GAAP net income

$

7,476

$

6,213

$

25,015

$

19,910

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

76,850

74,851

76,174

74,085

Effect of dilutive securities (stock options and restricted stock awards) (e)

1,522

1,859

1,557

2,206

Non-GAAP weighted average shares used in computing non-GAAP net income per common share

78,372

76,710

77,731

76,291

GAAP net loss per share

$

(0.33)

$

(0.27)

$

(1.31)

$

(0.95)

Non-GAAP net income per share

$

0.10

$

0.08

$

0.32

$

0.26

(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 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 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 by us in the normal course of our business operations.  We believe 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 our business acquisitions in the first and fourth quarters of 2013, we recorded an income tax benefit that reduced our income tax provision in each of the respective quarters.  These income tax benefits are non-cash items 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 the Company's net loss, but are considered dilutive on a non-GAAP basis in periods where the Company has reported positive non-GAAP earnings.

NetSuite Inc.

Condensed Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)

Twelve Months Ended December 31,

2014

2013

Cash flows from operating activities:

Net loss

$

(100,037)

$

(70,409)

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

Depreciation and amortization

20,115

15,668

Amortization of other intangible assets

9,993

6,749

Amortization of debt discount and transaction costs

12,910

7,316

Provision for accounts receivable allowances

1,446

1,041

Stock-based compensation

96,480

73,660

Amortization of deferred commissions

75,249

55,531

Excess tax benefit on stock-based compensation

(313)

(410)

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

Accounts receivable

(50,811)

(22,305)

Deferred commissions

(95,532)

(70,380)

Other current assets

(4,932)

(12,486)

Other assets

(2,165)

(2,329)

Accounts payable

(2,321)

1,691

Accrued compensation

15,403

6,173

Deferred revenue

89,668

63,510

Other current liabilities

11,624

8,771

Other long-term liabilities

(1,857)

444

Net cash provided by operating activities

74,920

62,235

Cash flows from investing activities:

Purchases of property and equipment

(23,732)

(20,337)

Capitalized internal use software

(2,578)

(2,056)

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

(39,209)

(58,630)

Purchases of marketable securities

(105,576)

—

Maturities of marketable securities

10,000

—

Sales of marketable securities

3,799

—

Net cash used in investing activities

(157,296)

(81,023)

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

(364)

(744)

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

(3,054)

(2,612)

Payments to repurchase common stock

—

(30,000)

Payments related to business combinations

(5,945)

—

RSU acquired to settle employee withholding liability

(137)

(162)

Excess tax benefit on stock-based compensation

313

410

Proceeds from issuance of common stock, net of issuance costs

9,029

16,944

Net cash (used in) / provided by financing activities

(158)

285,576

Effect of exchange rate changes on cash and cash equivalents

(1,274)

(1,070)

Net change in cash and cash equivalents

(83,808)

265,718

Cash and cash equivalents at beginning of period

451,577

185,859

Cash and cash equivalents at end of period

$

367,769

$

451,577