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NetSuite Inc. (N)

Q2 2009 Earnings Call

July 30, 2009 5:00 pm ET


James McGeever – Chief Financial Officer

Zachary Nelson – Chief Executive Officer


[Unidentified Analyst] - Deutsche Bank Securities

Rich Baldry - Canaccord Adams

Michael Huang - ThinkPanmure

[Calvin Wu] - Morgan Stanley

Laura Lederman - William Blair & Company, LLC

Sasa Zorovic - Janney Montgomery

Andrew Shaw - Raymond James

Mark Murphy - Piper Jaffray

Bryan McGrath - Credit Suisse

Tom Roderick - Thomas Weisel Partners


James McGeever

Good evening, everyone, and welcome to NetSuite's second 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 line 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

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 say the measure is a GAAP number. These non-GAAP measures exclude stock-based compensation expenses, expenses relating to the amortization of intangible assets, and transaction costs relating to acquisitions.

Any non-GAAP outlook we provide has not been reconciled to the comparable GAAP outlook because we cannot readily estimate our future stock-based compensation expenses, which are dependent on our future stock price, and also cannot readily estimate expenses relating to the amortization of intangibles from our recent acquisition.

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 risk, 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 are 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.

In my closing comments at the end of our Q1 conference call I said we were encouraged about new business activity during the remainder of the year based on positive trends in some of our leading indicators, namely lead flow, conversion of leads to prospects, and a greater percentage of our revenue coming from recurring revenue sources. In addition, I felt Q2 would provide insight into how our customers were being impacted by global economic conditions.

Based on the results we will report today, we do indeed have greater insight into how global market conditions will impact NetSuite in the coming quarters and we are generally optimistic about what the trends portend.

On the positive side, new business trends were encouraging. Average selling price and number of customers closed during the quarter both improved over Q1. In addition, the shift to more revenue coming from recurring rather than nonrecurring sources continued in Q2.

In our installed base, however, we saw the impact of turbulent economic conditions on some of our customers. Churn picked up slightly over Q1 and our analysis indicates that was due to continued financial challenges facing some of our customers that came to a head during the quarter.

Taken together, these trends still resulted in an overall positive quarter; in fact, we beat our stated outlook or consensus analysts' opinion on all of our core financial metrics, namely, revenue, profitability and cash flow. Our bottom line results exceeded our stated outlook. We posted non-GAAP net income of $687,000 or $0.01 per share. Our continued strong bottom line performance is especially impressive given the foreign exchange headwinds we faced and the fact that more than $0.02 of profitability was eliminated as we ceased revenue recognition of some fees related to the localization and distribution of our Japanese product during the quarter.

We also generated significant positive cash flow from operations during the quarter. The $1.4 million of cash generated from operations in the quarter was well ahead of our internal plans as well as most analysts' models. As you'll recall from statements at the beginning of the year, our objective was to improve cash flow from operations to breakeven for fiscal year 2009 and given our overachievement on this metric in Q2, we are well on our way to meeting that goal.

On the top line we also delivered results above our stated outlook. Revenue grew 10.3% year-over-year to $40.3 million. More importantly, recurring revenue growth significantly outpaced growth in nonrecurring revenue. Recurring revenue grew 20% year-over-year when factoring in the impact of foreign exchange.

And once again our top line growth when compared with the double-digit negative new license growth for traditional ERP vendors indicates a continued shift in customer demand from on-premise stand-alone accounting packages to NetSuite's cloud-based business applications suite.

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