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NetSuite Inc. (N)

Q1 2009 Earnings Call

May 4, 2009 5:00 pm ET

Executives

James McGeever – Chief Financial Officer

Zachary Nelson – Chief Executive Officer

Analysts

Adam Holt - Morgan Stanley

Brendan Barnicle - Pacific Crest Securities

Tom Roderick - Thomas Weisel Partners

Mark Murphy - Piper Jaffray

Bryan McGrath - Credit Suisse

Laura Lederman - William Blair & Company, LLC

Michael Huang - ThinkPanmure

Greg McDowell - JMP Securities

Michael Nemeroff - Wedbush Morgan Securities Inc.

Terry Tillman - Raymond James

Presentation

Operator

Good day and welcome to the NetSuite first quarter 2009 financial results conference call. Today's call is being recorded.

At this time I would like to turn the conference over to Jim McGeever, Chief Financial Officer of NetSuite. Please go ahead, sir.

Jim McGeever

Thank you. Good afternoon, everyone, and welcome to NetSuite's first quarter 2009 financial results conference call. By now you should have received a copy of our press release issued today after the market closed and furnished on Form 8-K to the SEC.

Joining me on the call today is Zach Nelson, our Chief Executive Officer. Zach and I will begin with prepared remarks and then we will open up the lines for questions.

As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call. To access the press release and the financial details please access our Investor Relations website at www.NetSuite.com/Investors.

During this call we will be referring to both GAAP and non-GAAP financial measures. The GAAP reconciliation to our non-GAAP information is provided in the press release and on our website. All of the non-revenue financial measures we will discuss today are non-GAAP unless we state that the measure is a GAAP number. These non-GAAP measures exclude share-based compensation expenses and the amortization of intangible assets. Any non-GAAP outlook we provide has not been reconciled to the comparable GAAP outlook because we cannot readily estimate the impact of our future stock price and our future share-based compensation expenses.

Some of the information discussed during this call, including any financial outlook we provide, may constitute forward-looking statements within the meaning of the U.S. federal securities laws. These statements are subject to risks, uncertainties and assumptions and are based upon information available as of today. We disclaim any obligation to update any forward-looking statements.

The risks and uncertainties that would cause our results to differ materially from those expressed or implied by any such forward-looking statements are summarized in the press release we issued earlier today. They're also described in detail in the reports that we file from time to time with the SEC, including our most recent 10-K filing, which I encourage you to read. All of those filings are available in the Investor Relations section of our website.

With that, I will now turn the call over to Zach.

Zachary Nelson

Thank you, Jim.

Combining the facts that Q1 is our seasonally slowest quarter with the continued uncertainty in the global economy, we were cautious as we moved into Q1. Today as we report our Q1 2009 numbers we are pleased with the results we are presenting to you.

We delivered results that met or exceeded our state outlook and we also believe our results indicate that we continue to take market share and execute on our strategic initiatives of moving up market and extending the NetSuite platform. Our bottom line result exceeded out stated outlook, nearly doubling our record non-GAAP profitability we reported in Q4. We posted a non-GAAP net income of $1 million or $0.02 per share.

These results are especially impressive given the turbulent macroeconomic environment and Q1's seasonal increase in expenses due to items such as annual audit fees and resetting of payroll taxes. In addition, headcount was essentially flat from Q4, so this improvement was not the result of reducing our work force but rather represents excellent fiscal management across the entire organization.

We also improved cash flow in Q1. As you will recall from our Q4 '08 earnings call, our objective for this calendar year was to improve cash flow to breakeven for FY 2009. Our focus paid off during the first quarter, where we posted strong sequential improvement in cash flow from operations, with a positive $3.1 million improvement over Q4 of 2008.

On the top line we delivered results within our target range, with revenue growing 22% year-over-year to $41.6 million. And on another positive note, recurring revenue increased at a faster rate and was 29% year-over-year. If you recall from our Q4 call, we said we were going to focus on enhancing recurring revenue at the expense of nonrecurring revenue like professional services, and that indeed happened during the quarter.

It's useful to view this 22% year-over-year top line growth in light of the comparable growth rates of legacy providers of mid-market ERP suites. By comparison, traditional ERP vendors such as SAP, Epicor, Lawson, Deltek, and Sage experienced year-over-year total revenue growth ranging from a positive 1.9% to double-digit negative growth. In terms of new license revenue growth, all of those competitor vendors declined by more than 20% year-over-year.

These comparisons reveal that NetSuite's low cost of ownership, faster implementation times and value proposition is resonating with the market. We believe that NetSuite will continue to take market share from our competitors. Our leading product functionality is propelling NetSuite ahead of the pure play private competitors as well, and our 10-year technology lead in delivering an integrated suite of web-based applications and our expertise in cloud computing continued to deliver enormous value to customers around the globe. So in terms of revenue, profitability and cash flow, we met or exceeded our plans.

On the short-term deferred revenue front, like most of our SAS peers, we saw the impact of the macroeconomic headwinds during the quarter. That said, short-term deferred revenue did grow year-over-year. Whereas bookings were not as strong as we would have liked, we are seeing some encouraging business trends that I'll talk about in my closing remarks.

We added 240 customers during the quarter. Certainly this new customer count also shows the impact of the macroeconomic environment; however, as our customers do get larger over time, we may see a smaller count than our historic averages as we move forward. And we did add large customers during the quarter, showing that our strategic initiative to move up market continues the momentum we experienced last year.

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