NetSuite co-founder and CTO Evan Goldberg participating in the company's NYSE Disruption event last month. Credit: NetSuite.
Shares of NetSuite (N) fell in the wake of reporting disappointing results Thursday after the bell. Here's a closer look at the Q3 totals versus Wall Street's projections:
| N | Revenue | YOY Growth | EPS | YOY Growth |
|---|---|---|---|---|
| Consensus estimate | $193.52 million | 34.7% | $0.02 | (81.8%) |
| Q3 actual | $192.82 million | 34.2% | $0.03 | (72.7%) |
| DIFFERENCE | ($0.7 million) | (0.5%) | $0.01 | 9.1% |
Sources: S&P Capital IQ and NetSuite press release.
Commenting on the results, CEO Zach Nelson said in a press release:
NetSuite posted another great quarter following years of great quarters as we grew revenue year-over-year by 34 percent, our thirteenth consecutive quarter of more than 30 percent year-over-year revenue growth. Looking across all technology sectors -- hardware, software and platforms -- if you are a tech company that wasn't born on the Cloud as NetSuite was, you are in a world of trouble.
What went right: Profits came in $0.01 ahead of expectations, while cash from operations rose 68.7% in Q3. Also, product revenue grew just about as fast as services revenue, which means NetSuite is still winning new clients. Less clear at the time of the release was whether the company was writing larger deals. A 26.1% year-over-year gain in deferred revenue for the nine-month period ended on Sept. 30 would be a positive sign if total revenue growth hadn't slowed to just 9.9% during the same period.
What went wrong: Overall revenue came in lower than expected, a disappointment for investors used to seeing NetSuite outperform on the top line. Before Q3, the company had exceeded revenue expectations in each of the past five quarters, S&P Capital IQ reports. NetSuite had also enjoyed stable gross margin either at or above 68% before last quarter, when it dipped to just 66.6%. In Q3, gross margin came in at just 65.7%.
What's next: NetSuite didn't provide guidance in its press release. Nevertheless, analysts tracked by S&P Capital IQ had the company generating $208.03 million in revenue, and $0.06 a share in adjusted fourth-quarter earnings. That compares with $157.87 million and $0.10 a share in last year's Q4. Longer term, analysts have NetSuite growing earnings by an average of 18.45% annually during the next three-to-five years.
In the meantime, investors should watch the gross margin line, and keep tabs on product revenue growth and total revenue growth for the full year. Meaningful slowdowns in any of those categories could be a warning sign.
