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NetSuite Announces Second Quarter 2014 Financial Results

Companies mentioned in this article: NetSuite Inc.

SAN MATEO, Calif., July 24, 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 second quarter ended June 30, 2014.

Total revenue for the second quarter of 2014 was $131.8 million, representing a 30% increase over the same period in the prior year.

Cash flows from operations were $18.6 million in the second quarter of 2014, up from $15.6 million in the same period in the prior year.

On a GAAP basis, net loss for the second quarter of 2014 was $23.2 million, or $(0.31) per share, as compared to a net loss of $20.4 million, or $(0.28) per share, in the second quarter of 2013.

Non-GAAP net income for the second quarter of 2014 was $4.8 million, or $0.06 per share, as compared to non-GAAP net income of $4.0 million, or $0.05 per share, in the second quarter of 2013.

"NetSuite delivered record second quarter revenues, growing year-over-year by 30 percent for the eighth consecutive quarter. We also reported our first-ever $100 million quarter of recurring revenue signaling a break out moment. NetSuite's leadership in cloud ERP has never been more clear," said NetSuite CEO Zach Nelson.

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 2014 financial results and our outlook for the third 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: 74179530. 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: 74179530.

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

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

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

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

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

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

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

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

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


                                                                 NetSuite Inc.

                                                     Condensed Consolidated Balance Sheets

                                                            (dollars in thousands)

                                                                  (unaudited)


                                                                        June 30, 2014             December 31, 2013
                                                                        -------------             -----------------

    Assets

    Current assets:

    Cash and cash equivalents                                                            $479,191                       $451,577

    Accounts receivable, net of allowances of $1,498
     and $833 as of June 30, 2014 and December 31,
     2013, respectively                                                        89,961                            86,818

    Deferred commissions                                                       39,549                            38,187

    Other current assets                                                       21,492                            22,622
                                                                               ------                            ------

    Total current assets                                                      630,193                           599,204

    Property and equipment, net                                                51,786                            48,183

    Deferred commissions, non-current                                          10,404                             8,405

    Goodwill                                                                   84,042                            84,478

    Other intangible assets, net                                               16,408                            20,460

    Other assets                                                               12,763                            11,669
                                                                               ------                            ------

    Total assets                                                                         $805,596                       $772,399
                                                                                         ========                       ========

    Liabilities and total equity

    Current liabilities:

    Accounts payable                                                                       $3,124                         $4,838

    Deferred revenue                                                          237,929                           211,694

    Accrued compensation                                                       27,335                            24,535

    Accrued expenses                                                           20,731                            21,721

    Other current liabilities                                                  13,530                            16,776
                                                                               ------                            ------

    Total current liabilities                                                 302,649                           279,564

    Long-term liabilities:

    Convertible 0.25% senior notes, net                                       259,758                           254,038

    Deferred revenue, non-current                                              14,257                            12,913

    Other long-term liabilities                                                14,733                            15,832
                                                                               ------                            ------

    Total long-term liabilities                                               288,748                           282,783
                                                                              -------                           -------

    Total liabilities                                                         591,397                           562,347
                                                                              -------                           -------

    Total equity:

    Common stock                                                                  761                               751

    Additional paid-in capital                                                708,178                           658,717

    Accumulated other comprehensive loss                                        (173)                            (246)

    Accumulated deficit                                                     (494,567)                        (449,170)
                                                                             --------                          --------

    Total equity                                                              214,199                           210,052
                                                                              -------                           -------

    Total liabilities and total equity                                                   $805,596                       $772,399
                                                                                         ========                       ========


                                                                                    NetSuite Inc.

                                                                   Condensed Consolidated Statements of Operations

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

                                                                                     (unaudited)


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

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

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

    Revenue:

    Subscription and support                 $105,851                            $99,395                                         $93,562                    $85,795     $80,239

    Professional services and
     other                            25,943              23,566                                  21,446                           21,080         20,757
                                      ------              ------                                  ------                           ------         ------

    Total revenue                    131,794             122,961                                 115,008                          106,875        100,996

    Cost of revenue:

    Subscription and support (1)      17,084              16,360                                  15,167                           14,276         13,511

    Professional services and
     other (1)                        24,513              22,317                                  21,784                           20,916         19,895
                                      ------              ------                                  ------                           ------         ------

    Total cost of revenue             41,597              38,677                                  36,951                           35,192         33,406
                                      ------              ------                                  ------                           ------         ------

    Gross profit                      90,197              84,284                                  78,057                           71,683         67,590
                                      ------              ------                                  ------                           ------         ------

    Operating expenses:

    Product development (1)           25,376              24,172                                  22,886                           19,979         18,796

    Sales and marketing (1)           69,726              63,680                                  57,053                           52,315         53,960

    General and administrative (1)    14,106              14,033                                  14,287                           12,233         13,429
                                      ------              ------                                  ------                           ------         ------

    Total operating expenses         109,208             101,885                                  94,226                           84,527         86,185
                                     -------             -------                                  ------                           ------         ------

    Operating loss                  (19,011)           (17,601)                               (16,169)                        (12,844)      (18,595)

    Other income /(expenses) and
     income taxes, net (1)           (4,153)            (4,632)                                (4,042)                         (3,928)       (1,795)
                                      ------              ------                                  ------                           ------         ------

    Net loss                        (23,164)           (22,233)                               (20,211)                        (16,772)      (20,390)

    Net loss per share                        $(0.31)                           $(0.29)                                        $(0.27)                   $(0.23)    $(0.28)
                                               ======                             ======                                          ======                     ======      ======

    Weighted average number of
     shares used in computing net
     loss per common share            75,919              75,433                                  74,851                           74,379         73,946
                                      ======              ======                                  ======                           ======         ======

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

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

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

    Cost of revenue:

    Subscription and support              $1,851                     $1,986                        $1,733         $1,687  $1,588

    Professional services and
     other                         2,317                 2,482              2,345                    2,191 2,452

    Operating expenses:

    Product development            6,884                 6,576              6,427                    5,926 6,342

    Sales and marketing            9,087                 7,709              7,369                    6,825 7,379

    General and administrative     4,683                 4,739              5,675                    3,889 5,613

    Other income /(expenses)
     and income taxes, net         3,191                 3,141              2,875                    3,123 1,056
                                   -----                 -----              -----                    ----- -----

    Total                                $28,013                    $26,633                       $26,424        $23,641 $24,430
                                         =======                    =======                       =======        ======= =======


                                                                                                           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,            March 31,          December 31, 2013                September 30,
                                                                                                                            2013                June 30,

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

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

    Operating loss                                       $(19,011)                                        $(17,601)                                        $(16,169)         $(12,844)    $(18,595)

    Reversal of non-GAAP expenses:

    Stock-based compensation and
     amortization of capitalized
     stock-based compensation (a)                 22,798                      21,465                                            20,235                           18,470 20,264

    Amortization of intangible
     assets and business
     combination costs (b)                         2,024                       2,026                                             3,314                            2,048  3,110


    Non-GAAP operating income                               $5,811                                            $5,890                                            $7,380             $7,674        $4,779
                                                            ======                                            ======                                            ======             ======        ======

    Numerator:

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

    Net loss                                             $(23,164)                                        $(22,233)                                        $(20,211)         $(16,772)    $(20,390)

    Stock-based compensation and
     amortization of capitalized
     stock-based compensation (a)                 22,798                      21,465                                            20,235                           18,470 20,264

    Amortization of intangible
     assets and business
     combination costs (b)                         2,024                       2,026                                             3,314                            2,048  3,110

    Non-cash interest expense on
     convertible debt (c)                          3,191                       3,141                                             3,138                            3,123  1,056

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

    Non-GAAP net income                                     $4,849                                            $4,399                                            $6,213             $6,869        $4,040
                                                            ======                                            ======                                            ======             ======        ======

    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                        75,919                      75,433                                            74,851                           74,379 73,946

    Effect of dilutive securities
     (stock options and restricted
     stock awards) (e)                             1,239                       1,717                                             1,859                            2,047  2,144
                                                   -----                       -----                                             -----                            -----  -----

    Non-GAAP weighted average
     shares used in computing non-
     GAAP net income per common
     share                                        77,158                      77,150                                            76,710                           76,426 76,090
                                                  ======                      ======                                            ======                           ====== ======

    GAAP net loss per share                                $(0.31)                                          $(0.29)                                          $(0.27)           $(0.23)      $(0.28)
                                                            ======                                            ======                                            ======             ======        ======

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

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


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


                                                                 NetSuite Inc.

                                                Condensed Consolidated Statements of Cash Flows

                                                            (dollars in thousands)

                                                                  (unaudited)


                                                                                 Six Months Ended June 30,
                                                                                 -------------------------

                                                                                2014                            2013
                                                                                ----                            ----

    Cash flows from operating activities:

    Net loss                                                                           $(45,397)                     $(33,427)

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

    Depreciation and amortization                                              9,269                           7,208

    Amortization of other intangible assets                                    4,050                           2,887

    Amortization of debt discount and transaction costs                        6,332                           1,056

    Provision for accounts receivable allowances                                 663                             358

    Stock-based compensation                                                  43,873                          35,266

    Amortization of deferred commissions                                      34,699                          25,839

    Excess tax benefit on stock-based compensation                             (369)                          (195)

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

    Accounts receivable                                                      (3,760)                          2,849

    Deferred commissions                                                    (38,060)                       (27,098)

    Other current assets                                                       1,224                         (7,511)

    Other assets                                                             (1,720)                          (484)

    Accounts payable                                                         (1,678)                          3,227

    Accrued compensation                                                       2,681                           (590)

    Deferred revenue                                                          27,475                          19,595

    Other current liabilities                                                (1,176)                            691

    Other long-term liabilities                                                (390)                            590
                                                                                ----                             ---

    Net cash provided by operating activities                                 37,716                          30,261
                                                                              ------                          ------

    Cash flows from investing activities:

    Purchases of property and equipment                                     (10,326)                        (7,131)

    Capitalized internal use software                                        (1,049)                        (1,276)

    Cash paid in business combinations, net of amounts
     received, and equity investment                                               -                       (33,003)
                                                                                 ---                        -------

    Net cash used in investing activities                                   (11,375)                       (41,410)
                                                                             -------                         -------

    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                                                                  -                        (7,750)

    Payments under capital leases                                              (155)                          (370)

    Payments under capital leases and long-term debt -
      related party                                                          (1,713)                        (1,366)

    Payments to repurchase common stock                                            -                       (30,000)

    Payments related to business combinations                                (2,293)                              -

    RSU acquired to settle employee withholding
     liability                                                                  (53)                          (123)

    Excess tax benefit on stock-based compensation                               369                             195

    Proceeds from issuance of common stock, net of
     issuance costs                                                            4,668                          10,725
                                                                               -----                          ------

    Net cash provided by financing activities                                    823                         281,311
                                                                                 ---                         -------

    Effect of exchange rate changes on cash and cash
     equivalents                                                                 450                         (1,126)
                                                                                 ---                          ------

    Net change in cash and cash equivalents                                   27,614                         269,036

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

    Cash and cash equivalents at end of period                                          $479,191                       $454,895
                                                                                        ========                       ========

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SOURCE NetSuite Inc.