NetSuite Announces Second Quarter 2013 Financial Results

NetSuite Inc.

Condensed Consolidated Balance Sheets

(dollars in thousands)

(unaudited)

June 30, 2013

December 31, 2012

Assets

Current assets:

Cash and cash equivalents

$

454,895

$

185,859

Accounts receivable, net of allowances of $533 and $701 as of June 30, 2013 and December 31, 2012, respectively

62,377

64,861

Deferred commissions

27,570

26,959

Other current assets

17,945

9,049

    Total current assets

562,787

286,728

Property and equipment, net

42,159

27,210

Deferred commissions, non-current

5,432

4,784

Goodwill

63,378

35,661

Other intangible assets, net

21,423

12,420

Other assets

9,106

2,972

        Total assets

$

704,285

$

369,775

Liabilities and total equity

Current liabilities:

Accounts payable

$

6,824

$

3,476

Deferred revenue

171,571

154,051

Accrued compensation

17,809

18,806

Accrued expenses

14,005

11,974

Other current liabilities

13,798

9,948

      Total current liabilities

224,007

198,255

Long-term liabilities:

Convertible 0.25% senior notes, net

248,363

—

Deferred revenue, non-current

9,293

7,365

Other long-term liabilities

20,426

5,386

    Total long-term liabilities

278,082

12,751

      Total liabilities

502,089

211,006

Total equity:

    Common stock

741

727

    Additional paid-in capital

613,557

535,853

    Accumulated other comprehensive income

86

950

    Accumulated deficit

(412,188)

(378,761)

      Total equity

202,196

158,769

        Total liabilities and total equity

$

704,285

$

369,775

NetSuite Inc.

Condensed Consolidated Statements of Operations

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

(unaudited)

Three months ended

June 30,

2013

March 31,

2013

December 31,

2012

September 30,

2012

June 30,

2012

Revenue:

Subscription and support

$

80,239

$

73,960

$

68,534

$

65,329

$

61,049

Professional services and other

20,757

17,669

16,472

14,462

13,660

    Total revenue

100,996

91,629

85,006

79,791

74,709

Cost of revenue:

Subscription and support (1)

13,511

12,315

11,135

10,880

10,631

Professional services and other (1)

19,895

17,330

15,488

14,211

12,423

    Total cost of revenue

33,406

29,645

26,623

25,091

23,054

Gross profit

67,590

61,984

58,383

54,700

51,655

Operating expenses:

Product development (1)

18,796

16,650

14,429

13,943

13,277

Sales and marketing (1)

53,960

46,752

42,563

38,591

37,561

General and administrative (1)

13,429

11,745

10,134

9,458

9,897

    Total operating expenses

86,185

75,147

67,126

61,992

60,735

Operating loss

(18,595)

(13,163)

(8,743)

(7,292)

(9,080)

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

(1,795)

126

(878)

(692)

(833)

Net loss

(20,390)

(13,037)

(9,621)

(7,984)

(9,913)

Net loss per share

$

(0.28)

$

(0.18)

$

(0.13)

$

(0.11)

$

(0.14)

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

73,946

73,144

71,977

71,161

70,370

(1)

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

June 30,

2013

March 31,

2013

December 31,

2012

September 30,

2012

June 30,

2012

Cost of revenue:

Subscription and support

$

1,588

$

1,127

$

1,135

$

1,169

$

1,484

Professional services and other

2,452

1,846

1,612

1,688

1,504

Operating expenses:

Product development

6,342

4,848

3,999

4,035

4,060

Sales and marketing

7,379

5,175

4,283

4,142

4,204

General and administrative

5,613

3,946

3,148

2,686

3,415

Other income / (expenses) and income taxes, net

1,056

(1,119)

—

—

—

Total

$

24,430

$

15,823

$

14,177

$

13,720

$

14,667

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

June 30,

2013

March 31,

2013

December 31,

2012

September 30,

2012

June 30,

2012

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

Operating loss

$

(18,595)

$

(13,163)

$

(8,743)

$

(7,292)

$

(9,080)

Reversal of non-GAAP expenses:

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

20,264

15,196

12,503

12,584

12,566

Amortization of intangible assets and business combination costs (b)

3,110

1,746

1,674

1,136

2,101

    Non-GAAP operating income

$

4,779

$

3,779

$

5,434

$

6,428

$

5,587

Numerator:

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

Net loss

$

(20,390)

$

(13,037)

$

(9,621)

$

(7,984)

$

(9,913)

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

20,264

15,196

12,503

12,584

12,566

Amortization of intangible assets and business combination costs (b)

3,110

1,746

1,674

1,136

2,101

Non-cash interest expense on convertible debt (c)

1,056

—

—

—

—

Income tax benefit associated with business combination (d)

—

(1,119)

—

—

—

    Non-GAAP net income

$

4,040

$

2,786

$

4,556

$

5,736

$

4,754

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

73,946

73,144

71,977

71,161

70,370

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

2,144

2,371

2,999

3,051

3,152

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

76,090

75,515

74,976

74,212

73,522

GAAP net loss per share

$

(0.28)

$

(0.18)

$

(0.13)

$

(0.11)

$

(0.14)

Non-GAAP net income per share

$

0.05

$

0.04

$

0.06

$

0.08

$

0.06

(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, including employee severance 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.  In the second quarter of 2012, certain customers acquired in a previous business combination transitioned from their legacy service offering to a NetSuite service offering or terminated their service completely.  As a result, we recorded a $401,000 impairment charge related to the legacy product's developed technology intangible asset.  This impairment charge is included in amortization of intangible assets.  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 a small acquisition during the first quarter of 2013, we recorded an income tax benefit that reduced our income tax provision for the first quarter of 2013.  This income tax benefit is a non-cash item that would not otherwise have been incurred in the normal course of our business operations.  We believe that the exclusion of acquisition related items allows for financial results that are more indicative of our continuing operations and provide for a useful comparison of our operating results to prior periods and to our peer companies.

(e)    

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

NetSuite Inc.

Condensed Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)

Six Months Ended June 30,

2013

2012

Cash flows from operating activities:

Net loss

$

(33,427)

$

(17,623)

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

    Depreciation and amortization

7,208

5,208

    Amortization of other intangible assets

2,887

2,266

    Amortization of debt discount and transaction costs

1,056

—

    Provision for accounts receivable allowances

358

303

    Stock-based compensation

35,266

23,407

    Amortization of deferred commissions

25,839

21,981

    Excess tax benefit on stock-based compensation

(195)

(199)

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

        Accounts receivable

2,849

(5,538)

        Deferred commissions

(27,098)

(20,943)

        Other current assets

(7,511)

152

        Other assets

(484)

(174)

        Accounts payable

3,227

1,025

        Accrued compensation

(590)

(3,064)

        Deferred revenue

19,595

18,326

        Other current liabilities

691

937

        Other long-term liabilities

590

(328)

Net cash provided by operating activities

30,261

25,736

Cash flows from investing activities:

Purchases of property and equipment

(7,131)

(5,026)

Capitalized internal use software

(1,276)

(853)

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

(33,003)

(3,853)

Net cash used in investing activities

(41,410)

(9,732)

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

(370)

(360)

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

(1,366)

(772)

Payments to repurchase common stock

(30,000)

—

Excess tax benefit on stock-based compensation

195

199

RSU acquired to settle employee withholding liability

(123)

(111)

Proceeds from issuance of common stock, net of issuance costs

10,725

7,934

Net cash provided by financing activities

281,311

6,890

Effect of exchange rate changes on cash and cash equivalents

(1,126)

137

Net change in cash and cash equivalents

269,036

23,031

Cash and cash equivalents at beginning of period

185,859

141,448

Cash and cash equivalents at end of period

$

454,895

$

164,479