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NetSuite Announces First Quarter 2014 Financial Results

Companies mentioned in this article: NetSuite Inc.

SAN MATEO, Calif., April 28, 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 first quarter ended March 31, 2014.

Total revenue for the first quarter of 2014 was $123.0 million, representing a 34% increase over the same period in the prior year.

Cash flows from operations were $19.1 million in the first quarter of 2014, up from $14.7 million in the same period in the prior year.

On a GAAP basis, net loss for the first quarter of 2014 was $22.2 million, or $(0.29) per share, as compared to a net loss of $13.0 million, or $(0.18) per share, in the first quarter of 2013.

Non-GAAP net income for the first quarter of 2014 was $4.4 million, or $0.06 per share, as compared to non-GAAP net income of $2.8 million, or $0.04 per share, in the first quarter of 2013.

"NetSuite's fiscal year 2014 started strong with record first quarter results, as we grew year-over-year revenue by more than 30 percent for our seventh consecutive quarter, beat our outlook on revenue, operating cash flow and non-GAAP earnings per share, and are raising our revenue outlook for the full year," said NetSuite CEO Zach Nelson. "There is clearly a changing of the guard taking place in the ERP market as evidenced by NetSuite's significant market share growth, and by the shrinking core license business of non-cloud ERP vendors such as SAP."

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 first quarter 2014 financial results and our outlook for the second quarter of 2014 and full year 2014. 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: 32050448. 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: 32050448.

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; 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 March 3, 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 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)


                                                                      March 31, 2014            December 31,
                                                                                                     2013
                                                                      --------------            -------------

    Assets

    Current assets:

    Cash and cash equivalents                                                          $465,267                  $451,577

    Accounts receivable, net of allowances of $1,168
     and $833 as of March 31, 2014 and December 31,
     2013, respectively                                                       82,147                     86,818

    Deferred commissions                                                      37,790                     38,187

    Other current assets                                                      24,922                     22,622
                                                                              ------                     ------

    Total current assets                                                     610,126                    599,204

    Property and equipment, net                                               49,993                     48,183

    Deferred commissions, non-current                                         10,021                      8,405

    Goodwill                                                                  83,573                     84,478

    Other intangible assets, net                                              18,420                     20,460

    Other assets                                                              15,035                     11,669
                                                                              ------                     ------

    Total assets                                                                       $787,168                  $772,399
                                                                                       ========                  ========

    Liabilities and total equity

    Current liabilities:

    Accounts payable                                                                     $3,993                    $4,838

    Deferred revenue                                                         224,294                    211,694

    Accrued compensation                                                      25,158                     24,535

    Accrued expenses                                                          18,898                     21,721

    Other current liabilities                                                 16,896                     16,776
                                                                              ------                     ------

    Total current liabilities                                                289,239                    279,564

    Long-term liabilities:

    Convertible 0.25% senior notes, net                                      256,875                    254,038

    Deferred revenue, non-current                                             13,157                     12,913

    Other long-term liabilities                                               15,519                     15,832
                                                                              ------                     ------

    Total long-term liabilities                                              285,551                    282,783
                                                                             -------                    -------

    Total liabilities                                                        574,790                    562,347
                                                                             -------                    -------

    Total equity:

    Common stock                                                                 758                        751

    Additional paid-in capital                                               683,962                    658,717

    Accumulated other comprehensive loss                                        (939)                      (246)

    Accumulated deficit                                                     (471,403)                 (449,170)
                                                                            --------                   --------

    Total equity                                                             212,378                    210,052
                                                                             -------                    -------

    Total liabilities and total equity                                                 $787,168                  $772,399
                                                                                       ========                  ========


                                                                                        NetSuite Inc.

                                                                       Condensed Consolidated Statements of Operations

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

                                                                                         (unaudited)


                                                                    Three months ended
                                                                    ------------------

                                  March 31,            December 31,                          September 30,                   June 30,   March 31,

                                        2014                   2013                                   2013                        2013        2013
                                        ----                   ----                                   ----                        ----        ----

    Revenue:

    Subscription and support                  $99,395                               $93,562                                    $85,795              $80,239  $73,960

    Professional services and
     other                            23,566                 21,446                                 21,080                      20,757      17,669
                                      ------                 ------                                 ------                      ------      ------

    Total revenue                    122,961                115,008                                106,875                     100,996      91,629

    Cost of revenue:

    Subscription and support (1)      16,360                 15,167                                 14,276                      13,511      12,315

    Professional services and
     other (1)                        22,317                 21,784                                 20,916                      19,895      17,330
                                      ------                 ------                                 ------                      ------      ------

    Total cost of revenue             38,677                 36,951                                 35,192                      33,406      29,645
                                      ------                 ------                                 ------                      ------      ------

    Gross profit                      84,284                 78,057                                 71,683                      67,590      61,984
                                      ------                 ------                                 ------                      ------      ------

    Operating expenses:

    Product development (1)           24,172                 22,886                                 19,979                      18,796      16,650

    Sales and marketing (1)           63,680                 57,053                                 52,315                      53,960      46,752

    General and administrative
     (1)                              14,033                 14,287                                 12,233                      13,429      11,745
                                      ------                 ------                                 ------                      ------      ------

    Total operating expenses         101,885                 94,226                                 84,527                      86,185      75,147
                                     -------                 ------                                 ------                      ------      ------

    Operating loss                   (17,601)               (16,169)                               (12,844)                    (18,595)    (13,163)

    Other income /(expenses) and
     income taxes, net (1)            (4,632)                (4,042)                                (3,928)                     (1,795)        126
                                      ------                 ------                                 ------                      ------         ---

    Net loss                         (22,233)               (20,211)                               (16,772)                    (20,390)    (13,037)

    Net loss per share                         $(0.29)                               $(0.27)                                    $(0.23)              $(0.28)  $(0.18)
                                               ======                                ======                                     ======               ======   ======

    Weighted average number of
     shares used in computing net
     loss per common share            75,433                 74,851                                 74,379                      73,946      73,144
                                      ======                 ======                                 ======                      ======      ======

                   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
    (1)            follows:

                               March 31,          December 31,       September 30,         June 30, March 31,

                                     2014                 2013                2013             2013       2013
                                     ----                 ----                ----             ----       ----

    Cost of revenue:

    Subscription and support               $1,986                                   $1,733                      $1,687          $1,588  $1,127

    Professional services and
     other                          2,482                      2,345                          2,191              2,452  1,846

    Operating expenses:

    Product development             6,576                      6,427                          5,926              6,342  4,848

    Sales and marketing             7,709                      7,369                          6,825              7,379  5,175

    General and administrative      4,739                      5,675                          3,889              5,613  3,946

    Other income /(expenses)
     and income taxes, net          3,141                      2,875                          3,123              1,056 (1,119)
                                    -----                      -----                          -----              ----- ------

    Total                                 $26,633                                  $26,424                     $23,641         $24,430 $15,823
                                          =======                                  =======                     =======         ======= =======


                                                                                                             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
                                                                                     ------------------

                                               March 31,            December 31,                September 30,           June 30,              March 31,

                                                     2014                      2013                       2013               2013                   2013
                                                     ----                      ----                       ----               ----                   ----

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

    Operating loss                                        $(17,601)                                   $(16,169)                                 $(12,844)         $(18,595) $(13,163)

    Reversal of non-GAAP expenses:

    Stock-based compensation and
     amortization of capitalized
     stock-based compensation
     (a)                                           21,465                    20,235                              18,470                           20,264  15,196

    Amortization of intangible
     assets and business
     combination costs (b)                          2,026                     3,314                               2,048                            3,110   1,746


    Non-GAAP operating income                               $5,890                                      $7,380                                    $7,674            $4,779    $3,779
                                                            ======                                      ======                                    ======            ======    ======

    Numerator:

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

    Net loss                                              $(22,233)                                   $(20,211)                                 $(16,772)         $(20,390) $(13,037)

    Stock-based compensation and
     amortization of capitalized
     stock-based compensation
     (a)                                           21,465                    20,235                              18,470                           20,264  15,196

    Amortization of intangible
     assets and business
     combination costs (b)                          2,026                     3,314                               2,048                            3,110   1,746

    Non-cash interest expense on
     convertible debt (c)                           3,141                     3,138                               3,123                            1,056       -

    Income tax benefits
     associated with business
     combination (d)                                    -                      (263)                                  -                                -  (1,119)
                                                      ---                      ----                                 ---                              ---  ------

    Non-GAAP net income                                     $4,399                                      $6,213                                    $6,869            $4,040    $2,786
                                                            ======                                      ======                                    ======            ======    ======

    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                         75,433                    74,851                              74,379                           73,946  73,144

    Effect of dilutive securities
     (stock options and
     restricted stock awards) (e)                   1,717                     1,859                               2,047                            2,144   2,371
                                                    -----                     -----                               -----                            -----   -----

    Non-GAAP weighted average
     shares used in computing
     non-GAAP net income per
     common share                                  77,150                    76,710                              76,426                           76,090  75,515
                                                   ======                    ======                              ======                           ======  ======

    GAAP net loss per share                                 $(0.29)                                     $(0.27)                                   $(0.23)           $(0.28)   $(0.18)
                                                            ======                                      ======                                    ======            ======    ======

    Non-GAAP net income per share                            $0.06                                       $0.08                                     $0.09             $0.05     $0.04
                                                             =====                                       =====                                     =====             =====     =====

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 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 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 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)


                                                                              Three Months Ended March 31,
                                                                            ----------------------------

                                                                             2014                          2013
                                                                             ----                          ----

    Cash flows from operating activities:

    Net loss                                                                        $(22,233)                    $(13,037)

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

    Depreciation and amortization                                           4,510                         3,380

    Amortization of other intangible assets                                 2,026                         1,186

    Amortization of debt discount and transaction
     costs                                                                  3,141                             -

    Provision for accounts receivable allowances                              304                           171

    Stock-based compensation                                               21,294                        15,120

    Amortization of deferred commissions                                   17,370                        12,599

    Excess tax benefit on stock-based compensation                           (100)                          (70)

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

    Accounts receivable                                                     4,380                         1,878

    Deferred commissions                                                  (18,589)                     (13,407)

    Other current assets                                                   (2,241)                       (4,862)

    Other assets                                                           (3,683)                         (589)

    Accounts payable                                                         (248)                          658

    Accrued compensation                                                      597                          (737)

    Deferred revenue                                                       12,797                        10,990

    Other current liabilities                                                (582)                        2,287

    Other long-term liabilities                                               392                          (867)
                                                                              ---                          ----

    Net cash provided by operating activities                              19,135                        14,700
                                                                           ------                        ------

    Cash flows from investing activities:

    Purchases of property and equipment                                    (6,545)                       (3,162)

    Capitalized internal use software                                        (413)                         (472)

    Cash paid in business combinations, net of amounts
     received, and equity investment                                            -                      (10,429)
                                                                              ---                       -------

    Net cash used in investing activities                                  (6,958)                     (14,063)
                                                                           ------                       -------

    Cash flows from financing activities:

    Payments under capital leases                                             (87)                         (184)

    Payments under capital leases and long-term debt
     - related party                                                       (1,053)                         (393)

    Payments related to business combinations                              (1,125)                            -

    RSU acquired to settle employee withholding
     liability                                                                (20)                          (96)

    Excess tax benefit on stock-based compensation                            100                            70

    Proceeds from issuance of common stock, net of
     issuance costs                                                         3,598                         4,984
                                                                            -----                         -----

    Net cash provided by financing activities                               1,413                         4,381
                                                                            -----                         -----

    Effect of exchange rate changes on cash and cash
     equivalents                                                              100                          (224)
                                                                              ---                          ----

    Net change in cash and cash equivalents                                13,690                         4,794

    Cash and cash equivalents at beginning of period                      451,577                       185,859
                                                                          -------                       -------

    Cash and cash equivalents at end of period                                      $465,267                     $190,653
                                                                                    ========                     ========

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SOURCE NetSuite Inc.