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NetSuite (N)

Q3 2012 Earnings Call

October 25, 2012 5:00 pm ET

Executives

Ronald Gill - Chief Financial Officer and Principal Accounting Officer

Zachary Nelson - Chief Executive Officer, President and Director

Analysts

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Jason Maynard - Wells Fargo Securities, LLC, Research Division

Philip Winslow - Crédit Suisse AG, Research Division

Laura Lederman - William Blair & Company L.L.C., Research Division

Stan Zlotsky - Deutsche Bank AG, Research Division

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

Jennifer A. Swanson - Morgan Stanley, Research Division

Presentation

Operator

Thank you, everyone, so much for holding, and welcome to the NetSuite Reports Third Quarter 2012 Financial Results Conference Call. Just a quick reminder, today's call is being recorded. [Operator Instructions] And now, at this time, I'll turn things over to Mr. Ron Gill, Chief Financial Officer. Please go ahead, sir.

Ronald Gill

Thank you, operator. Good afternoon, everyone, and welcome to NetSuite's third quarter 2012 financial results conference call. A more complete disclosure of our results can be found in our press release issued about an hour ago, as well as in our related Form 8-K furnished to the SEC earlier today. To access the press release and the financial details, please see the Investor Relations section of our website. As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call.

On the call with me 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.

During the call, we'll be referring to both GAAP and non-GAAP financial measures. The reconciliation of our GAAP to non-GAAP financial information is provided in our press release, which is available on our website. All of the non-revenue financial measures we will discuss today are non-GAAP, unless we state the measure is a GAAP measure.

The primary purpose of today's call is to discuss our third quarter 2012 results. However, some of the information discussed during this call, including any financial outlook we provide, may constitute forward-looking statements within the meaning of U.S. federal securities laws. These statements are subject to risks, uncertainties and assumptions and are based on financial information available as of today. We disclaim any obligation to update any forward-looking statements or outlook.

Risks and uncertainties that would cause our results to differ materially from those expressed or implied by any such forward-looking statements include those summarized in the press release that we issued today. These risks and additional risks are also described in detail in reports that we file from time-to-time with the SEC, including our most recent 10-K and 10-Q filings, which I encourage you to read.

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

Zachary Nelson

Thank you, Ron, and thank you all for joining us today. I'm really excited to announce our results for the third quarter of 2012. Third quarters are typically somewhat difficult, with summer vacations, much of the quarter's activity is delayed into the third month of the quarter. In NetSuite's case, last year's Q3 was remarkably strong, making the comparison even more difficult. As I described that quarter on this call a year ago, I characterized our results as setting a record for records. Hence, given the traditional Q3 challenges and the tough comparison period, we planned Q3 2012 to be relatively flat. I am very happy to report that our planning assumptions were wrong, and today, we are reporting a very strong quarter that exceeded our stated outlook on every measure. On the top line, non-GAAP, bottom line and cash flow. Also, total deferred revenue grew at 40% year-over-year, the fastest growth rate ever since we became a public company.

I am also pleased to announce that, based on the results of this quarter, our new business growth and the record customer revenue retention we have experienced in 2012, we will be raising our outlook for the remainder of the year for revenue and non-GAAP EPS. And finally, we are excited today to give you a first glimpse of our 2013 business outlook, which is well above the current top line consensus analyst estimates. Let me start with some detail around the financial and strategic highlights of Q3 2012.

On the top line, our revenue grew by 31% year-over-year, to a record $79.8 million for the quarter. We achieved record levels of non-GAAP operating income in Q3 as operating income grew 49% year-over-year to $6.4 million. At $5.7 million, our non-GAAP net income also grew 49% over the year-ago quarter. Our non-GAAP EPS of $0.08 in Q3 2012 was a new record and ahead of analyst estimates of $0.05 per share.

In addition, we saw another quarter of very healthy year-over-year growth in operating cash flow. Q3 operating cash flow was $15.2 million, up 61% from $9.4 million in Q3 of 2011. We now have more than $175 million in cash on hand.

And finally, as I indicated earlier, our year-over-year total deferred revenue grew an impressive 40%. In addition, short-term deferred revenue accelerated from approximately 30% year-over-year growth in the year-ago quarter to 40% year-over-year growth in the current quarter. Calculated billings, defined as quarterly revenue, plus the change in deferred revenue, grew 34% year-over-year.

A deeper look at some key metrics reveals what is driving this momentum, and a big part of our success can be attributed to our move upmarket, both in terms of selling to larger midsized companies, as well as to continued success of our two-tier ERP strategy in large enterprises. In total, in Q3 2012, we added approximately 300 new customers. Average selling price across all of our offerings continued to grow and was up more than 11% over the prior year. This growth in average selling price across our full product line reflects the increasing value customers place on our powerful offering, as well as our continued success in moving upmarket and our suite strategy.

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