NetSuite Announces Second Quarter 2015 Financial Results

Ninth Consecutive Quarter of More than 30 Percent Year-over-Year Recurring Revenue Growth

- Record Q2 Revenue of $177.3 Million, a 35% Year-over-Year Increase

- Operating Cash Flow of $23.9 Million, a 29% Year-over-Year Increase

Jul 23, 2015, 16:10 ET from NetSuite Inc.

SAN MATEO, Calif., July 23, 2015 /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 second quarter ended June 30, 2015.

Total revenue for the second quarter of 2015 was $177.3 million, representing a 35% increase over the same period in the prior year.

Cash flows from operations were $23.9 million in the second quarter of 2015, up from $18.6 million in the same period in the prior year.

On a GAAP basis, net loss for the second quarter of 2015 was $32.3 million, or $(0.41) per share, as compared to a net loss of $23.2 million, or $(0.31) per share, in the second quarter of 2014.

Non-GAAP net income for the second quarter of 2015 was $1.7 million, or $0.02 per share, as compared to non-GAAP net income of $4.8 million, or $0.06 per share, in the second quarter of 2014.

"NetSuite's strong financial results, not just this quarter but over the last several years, validate our belief that to survive, all businesses need to transform their operations with cloud-based business application suites. While NetSuite saw particular strength in our retail, manufacturing and wholesale distribution verticals, what is truly amazing is the breadth of companies transforming their operations and their industries with NetSuite," said NetSuite CEO Zach Nelson. "From the billion-dollar valuation 'unicorn' companies to transformational companies such as American Express Global Travel and HP, the common thread is the NetSuite platform enabling them to thrive in the era of the cloud."

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 second quarter 2015 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 on the Investor Relations section of NetSuite's website at www.netsuite.com/investors. The live call can be accessed by dialing 855-416-1337 (U.S.) or 779-232-4661 (outside the U.S.) and referencing passcode: 72824756. An audio replay will be available for two weeks after the call by dialing 855-859-2056 (U.S.) or 404-537-3406 (outside the U.S.), and referencing passcode: 72824756.

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, commerce marketing automation, 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 2, 2015 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 registered service marks of NetSuite Inc.

NetSuite Inc.

Condensed Consolidated Balance Sheets

(dollars in thousands)

(unaudited)

June 30, 2015

December 31, 2014

Assets

Current assets:

Cash and cash equivalents

$

298,617

$

367,769

Short-term marketable securities

87,004

82,622

Accounts receivable, net of allowances of $1,332 and $1,886 as of June 30, 2015 and December 31, 2014, respectively

138,147

139,221

Deferred commissions

54,452

53,377

Other current assets

33,465

30,012

Total current assets

611,685

673,001

Marketable securities, non-current

9,143

Property and equipment, net

74,651

58,539

Deferred commissions, non-current

14,333

13,499

Goodwill

277,332

123,049

Other intangible assets, net

59,356

32,404

Other assets

26,327

12,604

Total assets

$

1,063,684

$

922,239

Liabilities and total equity

Current liabilities:

Accounts payable

$

5,132

$

5,082

Deferred revenue

331,511

300,884

Accrued compensation

39,732

41,081

Accrued expenses

35,762

30,975

Other current liabilities

19,456

14,751

Total current liabilities

431,593

392,773

Long-term liabilities:

Convertible 0.25% senior notes, net

271,711

265,710

Deferred revenue, non-current

16,201

13,622

Other long-term liabilities

28,398

15,900

Total long-term liabilities

316,310

295,232

Total liabilities

747,903

688,005

Total equity:

Common stock

790

770

Additional paid-in capital

926,407

788,583

Accumulated other comprehensive loss

(7,209)

(5,912)

Accumulated deficit

(604,207)

(549,207)

Total equity

315,781

234,234

Total liabilities and total equity

$

1,063,684

$

922,239

 

NetSuite Inc.

Condensed Consolidated Statements of Operations

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

(unaudited)

Three months ended

June 30,

2015

March 31,

2015

December 31,

2014

September 30, 2014

June 30,

2014

Revenue:

Subscription and support

$

140,922

$

132,974

$

126,705

$

115,831

$

105,851

Professional services and other

36,358

31,843

31,164

27,829

25,943

Total revenue

177,280

164,817

157,869

143,660

131,794

Cost of revenue:

Subscription and support (1)

22,454

20,990

20,041

18,522

17,084

Professional services and other (1)

36,687

31,371

30,496

27,477

24,513

Total cost of revenue

59,141

52,361

50,537

45,999

41,597

Gross profit

118,139

112,456

107,332

97,661

90,197

Operating expenses:

Product development (1)

32,537

29,719

28,548

28,610

25,376

Sales and marketing (1)

95,803

83,254

82,856

74,699

69,726

General and administrative (1)

25,642

18,433

16,902

20,097

14,106

Total operating expenses

153,982

131,406

128,306

123,406

109,208

Operating loss

(35,843)

(18,950)

(20,974)

(25,745)

(19,011)

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

3,556

(3,763)

(4,371)

(3,550)

(4,153)

Net loss

(32,287)

(22,713)

(25,345)

(29,295)

(23,164)

Net loss per share

$

(0.41)

$

(0.29)

$

(0.33)

$

(0.38)

$

(0.31)

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

77,975

77,276

76,850

76,477

75,919

(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:

 

June 30, 2015

March 31, 2015

December 31, 2014

September 30, 2014

June 30, 2014

Cost of revenue:

Subscription and support

$

2,646

$

2,513

$

2,332

$

2,173

$

1,851

Professional services and other

2,826

2,796

2,845

2,684

2,317

Operating expenses:

Product development

8,421

7,784

7,396

7,733

6,884

Sales and marketing

11,196

9,271

10,945

11,156

9,087

General and administrative

13,524

6,074

6,012

10,552

4,683

Other income / (expenses) and income taxes, net

(4,613)

3,294

3,291

3,287

3,191

Total

$

34,000

$

31,732

$

32,821

$

37,585

$

28,013

 

 NetSuite Inc.

 GAAP Results Reconciled to Non-GAAP Financial Measures

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

 (unaudited)

Three months ended

June 30, 2015

March 31, 2015

December 31, 2014

September 30, 2014

June 30, 2014

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

Operating loss

$

(35,843)

$

(18,950)

$

(20,974)

$

(25,745)

$

(19,011)

Reversal of non-GAAP expenses:

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

28,489

25,331

26,475

26,601

22,798

Amortization of intangible assets and business combination costs (b)

10,124

3,107

3,055

7,697

2,024

Non-GAAP operating income

$

2,770

$

9,488

$

8,556

$

8,553

$

5,811

Numerator:

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

Net loss

$

(32,287)

$

(22,713)

$

(25,345)

$

(29,295)

$

(23,164)

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

28,489

25,331

26,475

26,601

22,798

Amortization of intangible assets and business combination costs (b)

10,124

3,107

3,055

7,697

2,024

Non-cash interest expense on convertible debt (c)

3,346

3,294

3,291

3,287

3,191

Income tax benefit associated with business combination (d)

(7,959)

Non-GAAP net income

$

1,713

$

9,019

$

7,476

$

8,290

$

4,849

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

77,975

77,276

76,850

76,477

75,919

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

1,296

1,477

1,522

1,303

1,239

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

79,271

78,753

78,372

77,780

77,158

GAAP net loss per share

$

(0.41)

$

(0.29)

$

(0.33)

$

(0.38)

$

(0.31)

Non-GAAP net income per share

$

0.02

$

0.11

$

0.10

$

0.11

$

0.06

 

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 Bronto Software, Inc. acquisition during the second quarter of 2015, we recorded an income tax benefit that reduced our income tax provision for the second quarter of 2015.  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)

Six Months Ended June 30,

2015

2014

Cash flows from operating activities:

Net loss

$

(55,000)

$

(45,397)

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

Depreciation and amortization

13,420

9,269

Amortization of other intangible assets

6,817

4,050

Amortization of debt discount and transaction costs

6,641

6,332

Provision for accounts receivable allowances

496

663

Stock-based compensation

53,288

43,873

Amortization of deferred commissions

46,164

34,699

Excess tax benefit on stock-based compensation

(223)

(369)

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

Accounts receivable

4,557

(3,760)

Deferred commissions

(48,072)

(38,060)

Other current assets

1,488

1,224

Other assets

(8,216)

(1,720)

Accounts payable

318

(1,678)

Accrued compensation

(3,682)

2,681

Deferred revenue

29,435

27,475

Other current liabilities

4,251

(1,176)

Other long-term liabilities

192

(390)

Net cash provided by operating activities

51,874

37,716

Cash flows from investing activities:

Purchases of property and equipment

(23,239)

(10,326)

Capitalized internal use software

(1,633)

(1,049)

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

(95,565)

Purchases of marketable securities

(65,674)

Maturities of marketable securities

70,263

Sales of marketable securities

104

Net cash used in investing activities

(115,744)

(11,375)

Cash flows from financing activities:

Payments under capital leases

(112)

(155)

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

(1,371)

(1,713)

Payments related to business combinations

(1,335)

(2,293)

RSUs acquired to settle employee withholding liability

(6,926)

(53)

Excess tax benefit on stock-based compensation

223

369

Proceeds from issuance of common stock, net of issuance costs

4,512

4,668

Net cash (used in) / provided by financing activities

(5,009)

823

Effect of exchange rate changes on cash and cash equivalents

(273)

450

Net change in cash and cash equivalents

(69,152)

27,614

Cash and cash equivalents at beginning of period

367,769

451,577

Cash and cash equivalents at end of period

$

298,617

$

479,191

 

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SOURCE NetSuite Inc.



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