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NETSUITE INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
This Annual Report on Form 10-K contains "forward-looking statements" that
involve risks and uncertainties, as well as assumptions that, if they never
materialize or prove incorrect, could cause our results to differ materially
from those expressed or implied by such forward-looking statements. Such
forward-looking statements include any expectation of earnings, revenues or
other financial items; any statements of the plans, strategies and objectives of
management for future operations; factors that may affect our operating results;
statements concerning new products or services; statements related to future
capital expenditures; statements related to future economic conditions or
performance; statements as to industry trends and other matters that do not
relate strictly to historical facts or statements of assumptions underlying any
of the foregoing. These statements are often identified by the use of words such
as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend,"
"may," or "will," and similar expressions or variations. Such forward-looking
statements are subject to risks, uncertainties and other factors that could
cause actual results and the timing of certain events to differ materially from
future results expressed or implied by such forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to those discussed in the section titled "Risk Factors" included in Item 1A of
Part I of this Annual Report on Form 10-K, and the risks discussed in our other
SEC filings.
We urge you to consider these factors carefully in evaluating the
forward-looking statements contained in this Annual Report on Form 10-K. These
statements are based on the beliefs and assumptions of our management based on
information currently available to management. The forward-looking statements
included in this Annual Report are made only as of the date of this Annual
Report on Form 10-K. All subsequent written or oral forward-looking statements
attributable to our company or persons acting on our behalf are expressly
qualified in their entirety by these cautionary statements. We do not undertake,
and specifically disclaim, any obligation to update any forward-looking
statements to reflect the occurrence of events or circumstances after the date
of such statements except as required by law.
Overview
We are the industry's leading provider of cloud-based financials/ERP software
suites. In addition to financials/ERP software suites, we offer a broad suite of
applications, including accounting, CRM, PSA and Ecommerce, which enable
companies to manage most of their core business operations in our single
integrated suite. Our "real-time dashboard" technology provides an easy-to-use
view into up-to-date, role-specific business information. We also offer customer
support and professional services related to implementing and supporting our
suite of applications. We deliver our suite over the Internet as a SaaS model.
In 1999, we released our first application, NetLedger, which focused on
accounting applications. We then released Ecommerce functionality in 2000 and
CRM and sales force automation functionality in 2001. In 2002, we released our
next generation suite under the name NetSuite to which we have regularly added
features and functionality. In December 2007, we went public. In 2008, we
acquired OpenAir, and in 2009 we acquired QuickArrow Inc. ("QA"), both of which
offer professional services automation and project portfolio management
products.
Our headquarters are located in San Mateo, California. We were incorporated in
California in September 1998 and reincorporated in Delaware in November 2007. We
conduct our business worldwide, with international locations in Canada, Europe,
Asia, Australia and Uruguay.
During 2012, we acquired the following two companies to further develop our
Ecommerce vertical. In connection with these acquisitions, we incurred
transaction costs totaling $1.2 million.
In November 2012, we purchased certain assets from Retail Anywhere ("RA"), an
on-line retail solution service provider. We purchased RA to expand our retail
software solutions in our Ecommerce vertical. RA software allows us to expand
our Ecommerce services to brick and mortar store point of sale terminals. The RA
assets and operating results are reflected in our consolidated financial
statements from the date of acquisition. On the closing date, we paid $5.0
million in cash. Additional consideration of $1.3 million in cash is being
withheld for up to the next 15 months following the close of the transaction as
protection against certain losses that we may incur in the event of certain
breaches of representations and warranties covered in the purchase agreement.
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During the second quarter of 2012, we completed the purchase of all of the
outstanding equity of two small South American companies ("SAC") that specialize
in Ecommerce technology and services. We also purchased certain assets from two
entities related to the SAC. The SAC workforce will augment our existing
professional services and product development teams. On the closing dates, we
paid $4.0 million in cash. Additional consideration of $2.2 million in cash is
being withheld for various periods up to the next 10 years following the close
of the transaction as protection against certain losses we may incur in the
event of certain breaches of representations and warranties covered in the
purchase agreement. During the second quarter of 2012, we recorded $736,000 in
operating expenses related to transaction costs associated with this business
combination.
Key Components of Our Results of Operations
Revenue
Our revenue has grown from $17.7 million during the year ended December 31, 2004
to $308.8 million during the year ended December 31, 2012.
We generate sales directly through our sales team and, to a lesser extent,
indirectly through channel partners. We sell our service to customers across a
broad spectrum of industries, and we have tailored our service for
wholesalers/distributors, manufacturers, e-tailers, services companies and
software companies. The primary target customers for our service are
medium-sized businesses and divisions of large companies. An increasing
percentage of our customers and our revenue have been derived from larger
businesses within this market. For the year ended December 31, 2012, we did not
have any single customer that accounted for more than 3% of our revenue.
We are pursuing a number of strategies that we believe will enable us to
continue to grow. The goals of those strategic objectives are to continue to
move up-market, to increase the use of NetSuite as a platform, and to extend the
verticalization of our product line. Although we have made progress toward our
goals in recent periods, there are still many areas where we believe that we can
continue to grow. To achieve these goals, we are focused on the following
initiatives:
• Growth of sales of OneWorld, our platform for ERP, CRM, PSA and
Ecommerce capabilities in multi-currency environments across multiple
subsidiaries and legal entities, which supports the needs of large,
standalone companies, and divisions of large enterprises;
• Strengthening our offerings for targeted industries such as
wholesale/distribution, manufacturing, e-tail, retail,technology and
professional services by adding deeper verticalized functionality; and
• Developing our SuiteCloud ecosystem to enable third parties to extend
our offerings with their vertical expertise or horizontal solution.
We experience competitive pricing pressure when our products are compared with
solutions that address a narrower range of customer needs or are not fully
integrated (for example, when compared with Ecommerce or CRM stand-alone
solutions). In addition, since we sell primarily to medium-sized businesses, we
also face pricing pressure in terms of the more limited financial resources or
budgetary constraints of many of our target customers. We do not currently
experience significant pricing pressure from competitors that offer a similar
cloud-based integrated business management suite.
We sell our application suite pursuant to subscription agreements. The duration
of these agreements is generally one to three years. We rely in part on a large
percentage of our customers to renew their agreements to drive our revenue
growth. Our customers have no obligation to renew their subscriptions after the
expiration of their subscription period.
We generally invoice our customers in advance in monthly, annual or quarterly
installments, and typical payment terms provide that our clients pay us within
30 to 60 days of invoice. Amounts that have been invoiced where the customer has
a legal obligation to pay are recorded in accounts receivable and deferred
revenue. As of December 31, 2012, we had deferred revenue of $161.4 million.
Backlog was approximately $110.4 million and $95.3 million as of December 31,
2012 and 2011, respectively. Of the $110.4 million in backlog as of December 31,
2012, $73.4 million was short-term backlog and $37.0 million was long-term
backlog. The $95.3 million in backlog as of December 31, 2011 included $67.6
million in short-term backlog and $27.7 million in long-term backlog. Backlog
represents future billings under our subscription agreements that have not been
invoiced or have not been recorded as deferred revenue. We expect that the
amount of backlog may change from year-to-year for several reasons, including
specific timing and duration of large customer subscription agreements, varying
billing cycles of non-cancelable subscription agreements, the specific timing of
customer renewals, foreign currency fluctuations, the timing of when unbilled
deferred revenue is to be recognized as revenue and changes in customer
financial circumstances. For multi-year subscription agreements billed annually,
the associated backlog is typically high at the beginning of the contract
period, zero immediately prior to expiration and increases if the agreement is
renewed. Low backlog attributable to a particular subscription agreement is
typically associated with an impending renewal and is not an indicator of the
likelihood of renewal or future revenue of that customer. Accordingly, we expect
that the amount of backlog may change from year to year depending in part
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upon the number of subscription agreements in particular stages in their renewal
cycle. Such fluctuations are not reliable indicators of future revenues.
During the second quarter of 2012, we updated the terms of our standard renewal
agreement form so that the legal obligation to pay by our customers occurs upon
execution of the renewal agreement rather than on their renewal date. Based on
our existing policy of recording amounts that have been invoiced in accounts
receivable and deferred revenue where the customer has a legal obligation to
pay, invoices from these renewal agreements are now recorded in accounts
receivable and deferred revenue upon execution of the renewal agreement rather
than at the start of the renewal period. Had we not revised the terms of these
renewal agreements, we would have recorded approximately $10.0 million less in
accounts receivable and deferred revenue as of December 31, 2012.
Our subscription agreements provide service level commitments of 99.5% uptime
per period, excluding scheduled maintenance. The failure to meet this level of
service availability may require us to credit qualifying customers up to the
value of an entire month of their subscription and support fees. In light of our
historical experience with meeting our service-level commitments, we do not
currently have any liabilities on our balance sheet for these commitments.
Revenue by geographic region, based on the billing address of the customer, was
as follows for the periods presented:
Year ended December 31,
2012 2011 2010
(dollars in thousands)
United States $ 227,975 $ 172,527 $ 143,607
International 80,850 63,799 49,542
Total revenue $ 308,825 $ 236,326 $ 193,149
Percentage of revenue generated outside
of the United States 26 % 27 % 26 %
Employees
As of December 31, 2012, our headcount was 1,778 employees including 518
employees in sales and marketing, 687 employees in operations, professional
services, training and customer support, 393 employees in product development,
and 180 employees in a general and administrative capacity.
Cost of Revenue
Subscription and support cost of revenue primarily consists of costs related to
hosting our application suite, providing customer support, data communications
expenses, personnel and related costs of operations, stock-based compensation,
software license fees, outsourced subscription services, costs associated with
website development activities, allocated overhead, amortization expense
associated with capitalized internal use software and acquired developed
technology, and related plant and equipment depreciation and amortization
expenses.
Professional services and other cost of revenue primarily consists of personnel
and related costs for our professional services employees and executives,
external consultants, stock-based compensation and allocated overhead.
We allocate overhead such as rent, information technology costs and employee
benefit costs to all departments based on headcount. As such, general overhead
expenses are reflected in cost of revenue and each operating expense category.
We expect cost of revenue to remain constant as a percentage of revenue over
time; however, it could fluctuate period to period depending on the growth of
our professional services business and any associated increased costs relating
to the delivery of professional services and the timing of significant
expenditures.
Operating Expenses
Product Development
Product development expenses primarily consist of personnel and related costs
for our product development employees and executives, including salaries,
stock-based compensation, employee benefits and allocated overhead. Our product
development efforts have been devoted primarily to increasing the functionality
and enhancing the ease of use of our on-demand application suite as well as
localizing our product for international use. A key component of our strategy is
to expand our business internationally. This will require us to conform our
application to comply with local regulations and languages, causing us to incur
additional expenses related to translation and localization of our application
for use in other countries.
At our product development facility in the Czech Republic, we participate in a
government program that subsidizes us for employing local residents. Under the
program, the Czech government will reimburse us for certain operating expenses
we incur. During the year ended December 31, 2012, we reduced our product
development expense for eligible operational expenses we expect the Czech
government to reimburse. On a quarterly basis, we will accrue our expected
subsidies for the duration of the program.
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In 2013, we expect product development expenses to increase in absolute dollars
as we continue to extend our service offerings in other countries, and as we
expand and enhance our application suite technologies. Such expenses may vary
due to the timing of these offerings and technologies.
Sales and Marketing
Sales and marketing expenses primarily consist of personnel and related costs
for our sales and marketing employees and executives, including wages, benefits,
bonuses, commissions and training, stock-based compensation, commissions paid to
our channel partners, the cost of marketing programs such as on-line lead
generation, promotional events, webinars and other meeting costs, amortization
of intangible assets related to trade name and customer relationships, and
allocated overhead. We market and sell our application suite worldwide through
our direct sales organization and indirect distribution channels such as
strategic resellers. We capitalize and amortize our direct and channel sales
commissions over the period the related revenue is recognized.
We expect to continue to invest in sales and marketing to pursue new customers
and expand relationships with existing customers. As such, we expect our sales
and marketing expenses to increase in terms of absolute dollars in 2013.
General and Administrative
General and administrative expenses primarily consist of personnel and related
costs for executive, finance, human resources and administrative personnel,
stock-based compensation, legal and other professional fees, other corporate
expenses and allocated overhead.
In 2013, we expect our general and administrative expenses to increase in terms
of absolute dollars as we continue to expand our business.
Income Taxes
Since inception, we have incurred annual operating losses and, accordingly, have
not recorded a provision for income taxes for any of the periods presented other
than provisions for minimum and foreign income taxes.
Critical Accounting Policies and Judgments
Our consolidated financial statements are prepared in accordance with GAAP in
the United States of America. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, costs and expenses and related
disclosures. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. In many
instances, we could have reasonably used different accounting estimates, and in
other instances changes in the accounting estimates are reasonably likely to
occur from period-to-period. Accordingly, actual results could differ
significantly from the estimates made by our management. To the extent that
there are material differences between these estimates and actual results, our
future financial statement presentation, financial position, results of
operations and cash flows will be affected.
In many cases, the accounting treatment of a particular transaction is
specifically dictated by GAAP and does not require management's judgment in its
application, while in other cases, significant judgment is required in selecting
among available alternative accounting standards that allow different accounting
treatment for similar transactions. We consider these policies requiring
significant management judgment to be critical accounting policies. These
critical accounting policies are:
• Revenue recognition;
• Internal use software and website development costs;
• Deferred commissions;
• Accounting for stock-based compensation; and
• Goodwill and other intangible assets.
A description of our critical accounting policies and judgments for those areas
are presented below. In addition, please refer to the Notes to Consolidated
Financial Statements for further discussion of our accounting policies.
Revenue Recognition
We generate revenue from two sources: (1) subscription and support services; and
(2) professional services and other. Subscription and support revenue includes
subscription fees from customers accessing our cloud-based application suite and
support fees from customers purchasing support. Our arrangements with customers
do not provide the customer with the right to take possession of the software
supporting the cloud-based application service at any time. Professional
services and other
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revenue include fees from consultation services to support the business process
mapping, configuration, data migration, integration and training. Amounts that
have been invoiced are recorded in accounts receivable and in deferred revenue
or revenue, depending on whether the revenue recognition criteria have been met.
For the most part, subscription and support agreements are entered into for 12
to 36 months. In aggregate, more than 90% of the professional services component
of the arrangements with customers is performed within 300 days of entering into
a contract with the customer.
The subscription agreements provide service-level commitments of 99.5% uptime
per period, excluding scheduled maintenance. The failure to meet this level of
service availability may require us to credit qualifying customers up to the
value of an entire month of their subscription and support fees. In light of our
historical experience with meeting our service-level commitments, we do not
currently have any liabilities on our balance sheet for these commitments.
We commence revenue recognition when all of the following conditions are met:
• there is persuasive evidence of an arrangement;
• the service is being provided to the customer;
• the collection of the fees is reasonably assured; and
• the amount of fees to be paid by the customer is fixed or determinable.
In most instances, revenue from a new customer acquisition is generated under
sales agreements with multiple elements, comprised of subscription and support
fees from customers accessing our cloud-based application suite and professional
services associated with consultation services. We evaluate each element in a
multiple-element arrangement to determine whether it represents a separate unit
of accounting. An element constitutes a separate unit of accounting when the
delivered item has standalone value and delivery of the undelivered element is
probable and within our control. Subscription and support have standalone value
because we routinely sell it separately. Professional services have standalone
value because we have sold professional services separately and there are
several third party vendors that routinely provide similar professional services
to our customers on a standalone basis.
In October 2009, the FASB amended the accounting standards for multiple-element
revenue arrangements ("ASU 2009-13") to:
• provide updated guidance on whether multiple deliverables exist, how
the elements in an arrangement should be separated, and how the
consideration should be allocated;
• require an entity to allocate revenue in an arrangement using estimated
selling prices ("ESP") of each element if a vendor does not have
vendor-specific objective evidence of selling price ("VSOE") or
third-party evidence of selling price ("TPE"); and
• eliminate the use of the residual method and require a vendor to
allocate revenue using the relative selling price method.
We early adopted this accounting guidance on April 1, 2010, for applicable
arrangements entered into or materially modified after January 1, 2010 (the
beginning of our fiscal year).
Prior to our adoption of ASU 2009-13, we were not able to establish VSOE or TPE
for all of the undelivered elements. As a result, we typically recognized
subscription and support, and professional services revenue ratably over the
contract period, and allocated subscription and support revenue and professional
services revenue based on the contract price.
As a result of the adoption of ASU 2009-13, we allocate revenue to each element
in an arrangement based on a selling price hierarchy. The selling price for a
deliverable is based on its VSOE, if available, TPE, if VSOE is not available,
or ESP, if neither VSOE nor TPE is available. We have been unable to establish
VSOE or TPE for the elements of our sales arrangements. Therefore, we establish
the ESP for each element primarily by considering the weighted average of actual
sales prices of professional services when sold on a standalone basis and
subscription and support including various add-on modules when sold together
without professional services, and other factors such as gross margin
objectives, pricing practices and growth strategy. The consideration allocated
to subscription and support is recognized as revenue ratably over the contract
period. We have established processes to determine ESP, allocate revenue in
multiple arrangements using ESP, and make reasonably dependable estimates of the
percentage-of-completion method for professional services.
The consideration allocated to professional services and other is recognized as
revenue on a percentage-of-completion method. The total arrangement fee for a
multiple element arrangement is allocated based on the relative ESP of each
element unless the fee allocated to the subscription and support under this
method is less than the fee subject to refund if the performance conditions are
not met. In most multiple element arrangements, the relative ESP of the
subscription and support is less than the contractual amounts subject to the
performance conditions. In these instances, pursuant to ASU 2009-13, since the
professional services are generally completed prior to completion of the
subscription and support, the allocation of the fee for subscription and support
is at least equal to the contractual amounts subject to the performance
conditions.
Prior to adoption of ASU 2009-13, in multiple element arrangements where we
determined that a subset of professional services was essential to the customers
use of the subscription services ("Essential Professional Services
Arrangements"), we deferred the commencement of revenue recognition for the
entire arrangement until we have delivered the essential professional services
component or made a determination that the remaining professional services were
no longer essential to the customer. With the adoption of ASU 2009-13, we
recognize revenue for subscription and support services in
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such arrangement over the contract period commencing when the subscription
service is made available to the customer and for professional services on a
percentage-of-completion method.
For single element sales agreements, subscription and support revenue is
recognized ratably over the contract term beginning on the provisioning date of
the contract. Prior to April 1, 2010, professional services revenue generated
under single element sales agreements, was immaterial and therefore was
recognized when fully delivered. As of April 1, 2010, the date of adoption of
ASU 2009-13, we recognized professional services revenue based on a
percentage-of-completion method for both single and multiple element
arrangements since we now separate the professional services revenue from
subscription and support revenue. Cost related to professional services is
recognized as incurred.
Internal Use Software and Website Development Costs
The costs incurred in the preliminary stages of development are expensed as
incurred. Once an application has reached the development stage, internal and
external costs, if direct and incremental, are capitalized until the software is
substantially complete and ready for its intended use. Capitalization ceases
upon completion of all substantial testing. We also capitalize costs related to
specific upgrades and enhancements when it is probable the expenditures will
result in additional functionality. Capitalized costs are recorded as part of
property and equipment. Training costs are expensed as incurred. Internal use
software is amortized on a straight line basis over its estimated useful life,
generally three years. Management evaluates the useful lives of these assets on
an annual basis and tests for impairment whenever events or changes in
circumstances occur that could impact the recoverability of these assets. There
were no impairments to internal use software during the years ended December 31,
2012, 2011 or 2010. We capitalized $4.1 million, $1.3 million and $96,000 in
internal use software during the years ended December 31, 2012, 2011 and 2010,
respectively.
Deferred Commissions
We capitalize commission costs that are incremental and directly related to the
acquisition of customer contracts. Commission costs are accrued and capitalized
upon execution of the sales contract by the customer. Payments to sales
personnel are made shortly after the receipt of the related customer payment.
Deferred commissions are amortized over the term of the related non-cancelable
customer contract and are recoverable through the related future revenue
streams. We believe this is the preferable method of accounting as the
commission costs are so closely related to the revenue from the customer
contracts that they should be expensed over the same period that the related
revenue is recognized. We capitalized commission costs of $50.5 million, $44.4
million and $27.6 million during the years ended December 31, 2012, 2011 and
2010, respectively.
Accounting for Stock-Based Compensation
We recognize the fair value of stock-based compensation in financial statements
over the requisite service period of the individual grants, which generally
equals a four year vesting period. We recognize compensation expense for stock
option awards, restricted stock awards and restricted stock unit awards on a
straight-line basis over the requisite service period. We recognize compensation
expense related to performance share awards based on the accelerated method
which recognizes a larger portion of the expense during the beginning of the
vesting period than in the end of the vesting period. Estimates are used in
determining the fair value of stock option awards using a Black-Scholes model.
The fair value of restricted stock, restricted stock units performance share and
performance share units is generally determined based on the intrinsic value of
the award on the grant date. Our 2011 performance share unit grants included a
market condition performance criteria so we used a Monte Carlo simulation model
to determine their fair value. Changes in the estimates used to determine the
fair value of share-based equity compensation instruments could result in
changes to our compensation charges. Additionally, our 2011 performance share
unit grants vest 1/12 per quarter with the initial vesting event on February 15,
2012. In 2012, performance metrics for certain performance shares awarded for
2013 and 2014 had not been set by our Board of Directors. As such, there is no
accounting for these awards until the performances metrics are set.
In recent years, we have awarded more restricted stock, restricted stock units
and performance share units than granted stock options. Consequently, our
restricted stock, restricted stock units and performance share units stock-based
compensation expense represents a larger portion of total stock-based
compensation expense recorded in our financial statements than stock options.
As a result of our stock-based compensation activity, we recorded $48.4 million,
$38.3 million and $31.3 million of stock-based compensation during the years
ended December 31, 2012, 2011 and 2010, respectively.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired. We allocated a portion of the purchase price of the acquisition
of our acquired businesses to intangible assets, including customer
relationships, developed technology and trade names that are being amortized
over their estimated useful lives of one to seven years. We also allocated a
portion of the purchase price to tangible assets and assessed the liabilities to
be recorded as part of the purchase price. The estimates we made in allocating
the purchase price to tangible and intangible assets, and in assessing
liabilities recorded as part of the purchase, involved the application of
judgment and the use of estimates and these could significantly affect our
operating results and financial position.
We review the carrying value of goodwill for impairment annually and whenever
events or changes in circumstances indicate that the carrying value of goodwill
may exceed its fair value. We evaluate impairment by comparing the estimated
fair value of the reporting unit to its carrying value. We estimate fair value
based on our market capitalization and the market
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multiples of revenue and gross profit for publicly traded peer companies. Actual
results may differ materially from these estimates. The estimates we make in
determining the fair value of the reporting unit involve the application of
judgment potentially affecting the timing and size of any future impairment
charges. Impairment of our goodwill could significantly affect our operating
results and financial position. Based on our most recent assessment, there was
no goodwill impairment.
We continually evaluate whether events or circumstances have occurred that
indicate that the estimated remaining useful life of our long-lived assets,
including intangible assets, may warrant revision or that the carrying value of
these assets may be impaired. Any write-downs are treated as permanent
reductions in the carrying amount of the assets. We must use judgment in
evaluating whether events or circumstances indicate that useful lives should
change or that the carrying value of assets has been impaired. Any resulting
revision in the useful life or the amount of impairment also requires judgment.
Any of these judgments could affect the timing or size of any future impairment
charges. Revision of useful lives or impairment charges could significantly
affect our operating results and financial position.
In 2009, we acquired QuickArrow ("QA") for approximately $19.4 million and
assigned $3.3 million to the developed technology intangible asset. The QA
developed technology was being amortized over a four year period to cost of
revenue. QA computing solutions for professional services businesses has
advanced our cloud computing application suite for services-based companies.
In the second quarter of 2012, certain QA customers transitioned from the QA
service offering to a NetSuite service offering or terminated their service
completely resulting in the carrying value of the QA developed technology assets
exceeding the revised undiscounted expected future cash flows for the service.
As a result, we recorded a $401,000 impairment charge based on the excess of the
carrying amount of the QA developed technology over the fair value of such asset
as of June 30, 2012. We amortized the remaining $481,000 net carrying value of
the asset over the second half of 2012 which was the period the intangible asset
generated revenue.
There were no impairment of goodwill during the years ended December 31, 2012,
2011 or 2010.
Results of Operations
Revenue and Cost of Revenue
Our revenue, cost of revenue, gross profit and gross margin was as follows for
the periods presented:
Year ended December 31,
2012 2011 2010
(dollars in thousands)
Revenue:
Subscription and support $ 252,903 $ 199,579 $ 163,964
Professional services and other 55,922 36,747 29,185
Total revenue 308,825 236,326 193,149
Cost of revenue (1):
Subscription and support 41,857 33,083 26,908
Professional services and other 53,706 37,777 34,741
Total cost of revenue 95,563 70,860 61,649
Gross profit $ 213,262 $ 165,466 $ 131,500
Gross margin 69% 70% 68%
(1) Includes stock-based compensation expense and amortization of
intangible assets of:
Cost of revenue:
Subscription and support $ 4,691 $ 3,568 $ 3,598
Professional services and other 5,978 4,138 3,802
$ 10,669 $ 7,706 $ 7,400
2012 compared to 2011
Revenue for the year ended December 31, 2012 increased $72.5 million, or 31%,
compared to the same period in 2011.
Subscription and support revenue: Subscription and support revenue for the year
ended December 31, 2012 increased $53.3 million, or 27%, compared to the same
period in 2011. The increase was primarily the result of a $47.6 million
increase in revenue resulting from the acquisition of new customers including
the continued adoption of OneWorld, and a $5.7 million
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increase in revenue from existing customers. Additionally, subscriptions and
support revenue increased during the year due to an increase in customer usage
and an increase in the average selling price on deals for new customers.
Professional services and other revenue: Professional services and other revenue
for the year ended December 31, 2012 increased $19.2 million, or 52%, compared
to the same period in 2011. The increase was primarily the result of a $36.6
million increase in revenue resulting from the acquisition of new customers. The
increase in professional services and other revenue was partially offset by a
$17.4 million decrease in revenue from existing customers related to services
purchased in connection with the initial implementation of our product in 2011
that did not recur for those customers in 2012. Additionally, demand for our
professional services, particularly from our enterprise customers, has increased
during 2012. Our consulting rates for professional services also increased in
2012.
Revenue generated outside of the United States was $80.9 million, or 26%, of our
revenue during the year ended December 31, 2012, as compared to $63.8 million,
or 27%, during the same period in 2011. Revenue generated outside the United
States increased primarily due to our increased international sales efforts
particularly in Australia.
Cost of revenue for the year ended December 31, 2012 increased $24.7 million, or
35%, compared to the same period in 2011.
Subscription and support cost of revenue: Subscription and support cost of
revenue for the year ended December 31, 2012 increased $8.8 million, or 27%,
compared to the same period in 2011. The increase was primarily the result of a
$4.3 million increase in personnel costs which resulted from an increase in
headcount and wages, a $1.7 million increase in data center expenses resulting
from enhancements to our product delivery infrastructure, a $1.2 million
increase in depreciation expense associated with new equipment and a $1.6
million increase in overhead and other operational expenses due to an increase
in amortization expense associated with intangible assets. The increase in
personnel costs includes a $630,000 increase in stock-based compensation
resulting from the issuance of equity awards to both existing and new employees.
Professional services and other cost of revenue: Professional services and other
cost of revenue for the year ended December 31, 2012 increased $15.9 million, or
42%, compared to the same period in 2011. The increase was primarily the result
of a $10.3 million increase in personnel costs which resulted from an increase
in headcount, salary increases and other personnel costs, a $2.6 million
increase in external consultants costs which resulted from an increase in
customer demand for our professional services and $2.7 million increase in
allocated overhead and other operational expenses due to an increase in
allocations associated with an increase in headcount. The increase in personnel
costs includes a $1.8 million increase in stock-based compensation resulting
from the issuance of equity awards to both existing and new employees.
Our gross margin was 69% during the year ended December 31, 2012 and 70% for the
same period in 2011. The decrease in our gross margin resulted primarily from an
increase in demand for our professional services which represented a larger
percentage of total revenue in 2012 compared to 2011.
2011 compared to 2010
Revenue for the year ended December 31, 2011 increased $43.2 million, or 22%,
compared to the same period in 2010.
Subscription and support revenue: Subscription and support revenue for the year
ended December 31, 2011 increased $35.6 million, or 22%, compared to the same
period in 2010. The increase was primarily the result of a $32.4 million
increase in revenue resulting from the acquisition of new customers including
the continued adoption of OneWorld, and a $3.2 million increase in revenue from
existing customers. Additionally, subscriptions and support revenue increased
during the year due to an increase in customer usage and an increase in the
average selling price on deals for new customers.
Professional services and other revenue: Professional services and other revenue
for the year ended December 31, 2011 increased $7.6 million, or 26%, compared to
the same period in 2010. The increase was primarily the result of a $25.2
million increase in revenue resulting from the acquisition of new customers. The
increase in professional services and other revenue was partially offset by a
$17.6 million decrease in revenue from existing customers related to services
purchased in connection with the initial implementation of our product in 2010
that did not recur for those customers in 2011. Additionally, our customer
demand and consulting rates for professional services also increased in 2011.
Revenue generated outside of the United States was $63.8 million, or 27%, of our
revenue during the year ended December 31, 2011, as compared to $49.5 million,
or 26%, during the same period in 2010. Revenue generated outside the United
States increased primarily due to our increased international sales efforts
particularly in Australia.
Cost of revenue for the year ended December 31, 2011 increased $9.2 million, or
15%, compared to the same period in 2010.
Subscription and support cost of revenue: Subscription and support cost of
revenue for the year ended December 31, 2011 increased $6.2 million, or 23%,
compared to the same period in 2010. The increase was primarily the result of a
$3.0 million increase in personnel costs which resulted from an increase in
headcount and wages, a $1.8 million increase in data center expenses resulting
from enhancements to our product delivery infrastructure, a $1.2 million
increase in depreciation expense associated with new equipment and a $664,000
increase in overhead expenses partially offset by a $567,000 decrease in
amortization of intangibles. The increase in personnel costs includes a $510,000
increase in stock-based compensation resulting from the issuance of equity
awards to both existing and new employees.
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Professional services and other cost of revenue: Professional services and other
cost of revenue for the year ended December 31, 2011 increased $3.0 million, or
9%, compared to the same period in 2010. The increase was primarily the result
of a $1.9 million increase in personnel costs which resulted from an increase in
wages and other personnel costs and a $1.4 million increase in external
consultants' costs which resulted from an increase in customer demand for our
professional services. These cost increases were partially offset by a $300,000
net decrease in other expenses. The increase in personnel costs includes a
$336,000 increase in stock-based compensation resulting from the issuance of
equity awards to both existing and new employees. For the years ended
December 31, 2011 and 2010, our professional services and other costs of revenue
was greater than the professional services and other revenue. We view
professional services as an investment in customer success to ensure that we
continue to secure recurring subscription and support revenue.
Our gross margin was 70% during the year ended December 31, 2011 and 68% for the
same period in 2010. The increase in our gross margin resulted primarily from an
increase in demand for our professional services which were more profitable in
2011 compared to 2010 as a result of higher consulting rates.
Operating Expenses
Operating expenses were as follows for the periods presented:
Year ended December 31,
2012 2011 2010
Amount % of revenue Amount % of revenue Amount % of revenue
(dollars in thousands)
Operating expenses (1):
Product development $ 52,739 17 % $ 43,531 18 % $ 35,019 18 %
Sales and marketing 154,294 50 % 120,172 51 % 92,814 48 %
General and administrative 38,469 12 % 31,951 14 % 29,232 15 %
Total operating expenses $ 245,502 79 % $ 195,654 83 % $ 157,065 81 %
(1) Includes stock-based compensation expense, amortization of
acquisition-related intangible assets, transaction costs for business
combinations and costs associated with the settlement of a patent dispute as
follows:
Year ended December 31,
2012 2011 2010
(dollars in thousands)Product development $ 15,301 $ 12,015 $ 9,723
Sales and marketing 16,588 13,437 10,249
General and administrative 11,803 9,662 8,565
Total
$ 43,692 $ 35,114 $ 28,537
2012 compared to 2011
Product development expenses: Product development expenses for the year ended
December 31, 2012 increased $9.2 million, or 21%, as compared to the same period
in 2011. The increase was primarily the result of a $10.0 million increase in
personnel costs resulting from an increase in headcount, annual salary
increases, payroll tax increases and an increase in stock-based compensation.
The increase in personnel costs includes a $3.2 million increase in stock-based
compensation resulting primarily from the issuance of annual equity awards to
employees. Additionally, allocated overhead expense and other costs increased by
$1.9 million due to higher overhead costs which are primarily facility costs and
other operational costs associated with product development headcount. These
cost increases were partially offset by expense reductions related to a $2.0
million employment development subsidy from the Czech Republic government for
the period from November 2010 to December 31, 2012 and a $1.3 million increase
in capitalized product development costs associated with new product
functionality.
Sales and marketing expenses: Sales and marketing expenses for the year ended
December 31, 2012 increased $34.1 million, or 28%, as compared to the same
period in 2011. The increase was primarily the result of a $24.4 million
increase in personnel costs, a $7.0 million increase in marketing and other
costs and a $2.7 million increase in allocated overhead expense. The increase in
personnel costs related primarily to an increase in headcount, commission
expenses related to an increase in sales and a $2.8 million increase in
stock-based compensation resulting from the issuance of equity awards to both
existing and
29--------------------------------------------------------------------------------
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new employees. Marketing and other expenses increased primarily due to higher
on-line marketing costs, an increase in costs associated with our annual user
conference, higher trade show fees and other promotional events.
General and administrative expenses: General and administrative expenses for the
year ended December 31, 2012 increased $6.5 million, or 20%, when compared to
the same period in 2011. The increase was primarily the result of a $3.6 million
increase in personnel costs and a $2.9 million increase in other operational
costs. The increase in personnel costs resulted from an increase in headcount,
an increase in merit pay and an increase in other payroll costs such as
recruiting. Other operational costs increased primarily due to an increase in
costs related to general administrative services and $797,000 in additional
sales taxes, partially offset by a decrease in patent costs due to a $720,000
patent settlement expense recorded in 2011, but not incurred in 2012.
Additionally, we incurred $1.2 million in transaction costs in connection with
our acquisition of SAC and RA during the year ended December 31, 2012. We also
experienced a $6.7 million increase in overhead expenses that are allocated to
other departments due to an increase in costs such as facility costs,
information technology costs and recruiting costs.
2011 compared to 2010
Product development expenses: Product development expenses for the year ended
December 31, 2011 increased $8.5 million, or 24%, as compared to the same period
in 2010. The increase was primarily the result of a $9.0 million increase in
personnel costs and a $1.1 million increase in overhead allocations and other
costs, partially offset by a $1.5 million decrease in outside professional
services and an increase in the capitalization of internal software development
costs during the year. The increase in personnel costs includes a $2.3 million
increase in stock-based compensation resulting from the issuance of equity
awards to both existing and new employees. Personnel costs also increased during
2011 due to an increase in headcount and wages.
Sales and marketing expenses: Sales and marketing expenses for the year ended
December 31, 2011 increased $27.4 million, or 29%, as compared to the same
period in 2010. The increase was primarily the result of a $24.5 million
increase in personnel costs, a $2.2 million increase in overhead costs
allocations and a $704,000 increase in marketing and other costs. The increase
in personnel costs related primarily to an increase in headcount, commission
expenses related to an increase in sales and a $3.5 million increase in
stock-based compensation resulting from the issuance of equity awards to both
existing and new employees.
General and administrative expenses: General and administrative expenses for the
year ended December 31, 2011 increased $2.7 million, or 9% ,when compared to the
same period in 2010. The increase resulted primarily from a $2.4 million
increase in personnel costs resulting from an increase in wages and other
payroll related costs and $720,000 in costs associated with the settlement of a
patent dispute. (See Note 7. in Notes to our Consolidated Financial Statements)
The increase in personnel costs includes a $400,000 increase in stock-based
compensation resulting from the issuance of equity awards to both existing and
new employees.
Non-operating items, including interest income and expense, other income /
(expense), income taxes and the effect of net loss attributable to
noncontrolling interest were as follows for the periods presented:
Year ended December 31,
2012 2011 2010
Amount % of revenue Amount % of revenue Amount % of revenue
(dollars in thousands)
Interest income 158 - % 167 - % 209 - %
Interest expense (192 ) - % (181 ) - % (129 ) - %
Other expense, net (412 ) - % (34 ) - % (615 ) - %
Provision for income taxes 2,543 1 % 1,771 1 % 1,380 1 %
Noncontrolling interest - - % - - % 14 - %
2012 compared to 2011
Other expense, net for the year ended December 31, 2012 increased $378,000 as
compared to the same period in 2011. The increase in other expense, net is
primarily related to foreign currency losses during 2012.
Our provision for income taxes increased $772,000 during the year ended
December 31, 2012 as compared to the same period in 2011 primarily due to
foreign taxes.
2011 compared to 2010
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Net other expense for the year ended December 31, 2011 decreased $581,000 as
compared to the same period in 2010. The decrease in net other expense is
primarily related to a write-off of a loan for a principal amount of $250,000 to
a partner in 2010 and foreign currency gains during 2011.
Our provision for income taxes increased $391,000 during the year ended
December 31, 2011 as compared to the same period in 2010 primarily due to
foreign income tax.
Quarterly Results of Operations
The following tables set forth our unaudited quarterly condensed consolidated
statements of operations data for each of the eight quarters ended December 31,
2012. The data has been prepared on the same basis as the audited consolidated
financial statements and related notes included in this Annual Report on Form
10-K and you should read the following tables in conjunction with such financial
statements. The table includes all necessary adjustments, consisting only of
normal recurring adjustments that we consider necessary for a fair presentation
of this data. The results of historical periods are not necessarily indicative
of future results.
Three months ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2012 2012 2012 2012 2011 2011 2011 2011
(dollars and shares in thousands, except per share amounts)
(unaudited)
Revenue:
Subscription and
support $ 68,534 $ 65,329 $ 61,049 $ 57,990 $ 54,191 $ 51,334 $ 48,240 $ 45,814
Professional
services and other 16,472 14,462 13,660 11,329 9,902 9,625 9,593 7,627
Total revenue 85,006 79,791 74,709 69,319 64,093 60,959 57,833 53,441
Cost of revenue:
Subscription and
support (1) 11,135 10,880 10,631 9,211 8,741 8,627 8,084 7,631
Professional
services and other
(1) 15,488 14,211 12,423 11,584 10,327 9,658 9,390 8,402
Total cost of
revenue 26,623 25,091 23,054 20,795 19,068 18,285 17,474 16,033
Gross profit 58,383 54,700 51,655 48,524 45,025 42,674 40,359 37,408
Operating expenses:
Product development
(1) 14,429 13,943 13,277 11,090 11,916 11,257 10,911 9,447
Sales and marketing
(1) 42,563 38,591 37,561 35,579 31,963 30,279 30,469 27,461
General and
administrative (1) 10,134 9,458 9,897 8,979 8,112 7,622 8,340 7,877
Total operating
expenses 67,126 61,992 60,735 55,648 51,991 49,158 49,720 44,785
Operating loss (8,743 ) (7,292 ) (9,080 ) (7,124 ) (6,966 ) (6,484 ) (9,361 ) (7,377 )
Other income /
(expenses),
net,including the
effect of
noncontrolling
interest and income
taxes (878 ) (692 ) (833 ) (586 ) (649 ) (445 ) (430 ) (295 )
Net loss
attributable to
NetSuite Inc.
common stockholders $ (9,621 ) $ (7,984 ) $ (9,913 ) $ (7,710 ) $ (7,615 ) $ (6,929 ) $ (9,791 ) $ (7,672 )
Net loss per
NetSuite Inc.
common share $ (0.13 ) $ (0.11 ) $ (0.14 ) $ (0.11 ) $ (0.11 ) $ (0.10 ) $ (0.15 ) $ (0.12 )
Weighted average
number of shares
used in computing
net loss per common
share 71,977 71,161 70,370 69,324 68,285 67,477 66,489 65,384
31--------------------------------------------------------------------------------
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(1) Includes stock-based compensation expense, amortization of acquisition-related intangible assets, transaction costs for business combinations and
costs associated with the settlement of a patent dispute as follows:
Three months ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2012 2012 2012 2012 2011 2011 2011 2011
(in thousands)
Cost of revenue:
Subscription and
support $ 1,135 $ 1,169 $ 1,484 $ 904 $ 870 $ 807 $ 919 $ 972
Professional
services and other 1,612 1,688 1,504 1,173 1,083 1,067 1,024 964
Operating
expenses:
Product
development 3,999 4,035 4,060 3,207 3,316 3,422 3,097 2,180
Sales and
marketing 4,283 4,142 4,204 3,958 3,528 3,402 3,422 3,085
General and
administrative 3,148 2,686 3,415 2,554 2,253 2,089 2,956 2,363
Total $ 14,177 $ 13,720 $ 14,667 $ 11,796 $ 11,050 $ 10,787 $ 11,418 $ 9,564
Liquidity and Capital Resources
As of December 31, 2012, our primary sources of liquidity were our cash and cash
equivalents totaling $185.9 million and $64.9 million in accounts receivable,
net of allowance.
In the year ended December 31, 2012, cash flows from operations generated $54.3
million of cash. Despite the possibility of such fluctuations in operating cash
outflows, management believes its current cash and cash equivalents are
sufficient for the next 12 months and into the foreseeable future thereafter to
meet our operating cash flow needs.
We intend to use our cash for general corporate purposes, including potential
future acquisitions or other transactions. Further, we expect to incur
additional expenses in connection with our international expansion. We believe
that our cash and cash equivalents are adequate to fund those anticipated
activities.
While we believe that our uncommitted current working capital and anticipated
cash flows from operations will be adequate to meet our cash needs for daily
operations and capital expenditures for at least the next 12 months, we may
elect to raise additional capital through the sale of additional equity or debt
securities, obtain a credit facility or sell certain assets. If additional funds
are raised through the issuance of additional debt securities, these securities
could have rights, preferences and privileges senior to holders of common stock,
and terms of any debt could impose restrictions on our operations. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders and additional financing may not be available in
amounts or on terms acceptable to us. As we believe that our cash and cash
equivalents are adequate to fund our operating and investing cash flow needs for
at least the next 12 months, we have not found it necessary to reassess our
capacity to generate cash from financing cash flows in the current economic
climate. If additional financing becomes necessary and we are unable to obtain
the additional funds, we may be required to reduce the scope of our planned
product development and marketing efforts, potentially harming our business,
financial condition and operating results. In the meantime, we intend to
continue to manage our cash in a manner designed to ensure that we have adequate
cash and cash equivalents to fund our operations as well as future acquisitions,
if any.
Restricted cash totaled $541,000 and $494,000 at December 31, 2012 and 2011,
respectively. These restricted cash accounts secure letters of credit applied
against certain of our facility lease agreements. Of the $541,000 restricted
cash balance as of December 31, 2012, $266,000 is classified as current other
assets and $275,000 is classified as long-term other assets. The $494,000
restricted cash balance as of December 31, 2011 was classified as long-term
other assets.
As of December 31, 2012, we had an accumulated deficit of $378.8 million. We
have funded this deficit primarily through the net proceeds raised from the sale
of our capital stock.
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Our cash flow activities were as follows for the periods presented:
Year ended December 31,
2012 2011 2010
(in thousands)Net cash provided by operating activities $ 54,298 $ 36,273
$ 18,232
Net cash used in investing activities (24,105 ) (11,252 ) (6,463 )
Net cash provided by / (used in) financing
activities 13,732 12,175 (3,888 )
Effect of exchange rate changes on cash
and cash equivalents 486 (46 ) 62
Net change in cash and cash equivalents $ 44,411 $ 37,150
$ 7,943
2012 compared to 2011
Cash provided by operating activities was driven by sales of our application
suite and costs incurred to deliver that service. The timing of our billings and
collections relating to our sales and the timing of the payment of our
liabilities have a significant impact on our cash flows. Cash flows from
operations increased during the year ended December 31, 2012 as compared to the
same period in 2011 primarily as a result of an increase in deferred revenue
resulting from an increase in billings associated with the increase in bookings.
This increase was offset by the increase in deferred commission and an increase
in accounts receivable resulting from the increase in sales activity.
Cash used in investing activities during the year ended December 31, 2012 was
related to capital expenditures for property and equipment, consisting of the
purchase of software licenses, computer equipment, leasehold improvements and
furniture and fixtures as we develop and enhance our infrastructure. Cash used
in investing activities during the year ended December 31, 2012 increased
primarily due to the acquisition of two small professional service companies and
an on-demand retail services company for a total of $9.2 million. Our property
and equipment capital expenditures and our capitalized internal use software
costs also increased in 2012 compared to 2011. Included in the 2012 capitalized
internal use software costs is a $1.3 million payment associated with the
purchase of developed technology to enhance our data center production
environment.
The net cash provided by financing activities during the year ended December 31,
2012 increased primarily due to an increase in proceeds from the issuance of
common stock as a result of the exercise of stock options.
2011 compared to 2010
Cash provided by operating activities was driven by sales of our application
suite and costs incurred to deliver that service. The timing of our billings and
collections relating to our sales and the timing of the payment of our
liabilities have a significant impact on our cash flows. Cash flows from
operations increased during the year ended December 31, 2011 to the same period
in 2010 primarily as a result of an increase in deferred revenue resulting from
an increase in billings associated with the increase in bookings. This increase
was offset by the increase in deferred commission resulting from an increase in
sales activity.
Cash used in investing activities during the year ended December 31, 2011was
related to capital expenditures for property and equipment, consisting of the
purchase of software licenses, computer equipment, leasehold improvements and
furniture and fixtures as we develop and enhance our infrastructure. Cash used
in investing activities during the year ended December 31, 2011 increased
primarily due to the acquisition of a small on-demand software company and
developed product technology related to an on-line property, plant and equipment
solution. We also increased our capital expenditures for property and equipment
and capitalized costs for internal use software.
The net cash provided by financing activities during the year ended December 31,
2011 increased primarily due an increase in proceeds from the issuance of common
stock as a result of the exercise of stock options. During the year ended
December 31, 2010, financing activities included a payment for the purchase of
the remaining ownership equity in NetSuite Kabushiki Kaisha ("NetSuite KK"),
payments to acquire shares upon vesting of RSUs to settle employee withholding
liability and payments on capital leases.
Contractual Obligations
We generally do not enter into long-term minimum purchase commitments. Our
principal commitments consist of obligations under capital leases for equipment,
notes payable used for purchase of equipment, operating leases primarily for
office space, and other purchase obligations consisting of maintenance support
contracts on leased or owned equipment and other general purchase obligations.
The following table summarizes our commitments to settle contractual obligations
in cash as of December 31, 2012, for the next five years and thereafter.
33--------------------------------------------------------------------------------
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Less than 1 More than 5
Total year 1 to 3 years 3 to 5 years Years
(dollars in thousands)
Capital lease obligations $ 1,010 $ 761 $ 249 $ - $ -
Debt obligations 2,016 1,613 403 - -
Total accrued contractual
obligations 3,026 2,374 652 - -
Operating lease obligations 34,212 8,020 11,540 8,014 6,638
Purchase obligations 15,075 10,003 5,072 - -
Total off-balance sheet
contractual obligations 49,287 18,023 16,612 $ 8,014 $ 6,638
Total contractual obligations $ 52,313 $ 20,397 $ 17,264 $ 8,014 $ 6,638
Off-Balance Sheet Arrangements
During the years ended December 31, 2012, 2011 and 2010, we did not have any
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off balance
sheet arrangements or other contractually narrow or limited purposes.
Recent Accounting Pronouncements
See Note 2. in Notes to our Consolidated Financial Statements "Significant
Accounting Policies".
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