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NetSuite Announces First Quarter 2014 Financial Results

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SOURCE NetSuite Inc.

- Record Q1 Revenue of $123.0 Million, a 34% Year-over-Year Increase

- Record Q1 Operating Cash Flows of $19.1 Million, a 30% Year-over-Year Increase

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,

2014



December 31,

2013



September 30,

2013



June 30,

2013



March 31,

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




(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:




March 31,

2014


December 31,

2013


September 30,

2013


June 30,

2013


March 31,

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,

2014


December 31,

2013


September 30,

2013


June 30,

2013


March 31,

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


NetSuite. Where Business is Going.

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