Shares of NetSuite (NYSE: N) are up more than 8% over the past five days on the strength of a good fourth-quarter report and even better 2012 outlook.
The company, which specializes in providing accounting, inventory management, and other operational software over the Web, projected $0.19 to $0.21 in adjusted earnings on $295 million to $300 million in profits. All figures represented an increase over earlier estimates and topped Wall Street's projections.
Yet for as good as that news is, it's a small part of what makes NetSuite a wonderful growth story:
|
Metric |
2011 |
2010 |
Y-o-Y Growth |
|---|---|---|---|
| Revenue (millions) | $236.3 | $193.1 | 22.4% |
| Adjusted profit per share | $0.15 | $0.13 | 15.4% |
| Free cash flow (millions) | $27.69 | $11.87 | 133.3% |
| FCF as a % of revenue | 11.7% | 6.1% | 5.6 points |
| Cash / debt (millions) | $141.45 / $0 | $104.3 / $0 | 35.6% |
Source: NetSuite press release.
Pay particular attention to the cash-flow and balance-sheet data. While revenue and adjusted profits grew nicely, free cash flow and liquidity grew outrageously, thanks to having more customers paying cash upfront for access to NetSuite's platform.
Where this gets most interesting for me as an investor is in comparing NetSuite's free cash flow yield with that of its primary competitors in business software:
|
Metric |
Microsoft |
Oracle |
SAP |
salesforce.com |
|---|---|---|---|---|
| Revenue (millions) | $72,052 | $36,704 | $18,489.1 | $2,091.5 |
| Free cash flow (millions) | $26,735 | $12,629 | $4,327.4 | $96.2 |
| FCF as a % of revenue | 37.1% | 34.4% | 23.4% | 4.6% |
Source: S&P Capital IQ.
There are two ways to look at this data. First, NetSuite badly trails Microsoft (Nasdaq: MSFT) and Oracle (Nasdaq: ORCL) when it comes to generating cash from revenue. Second, it's the only one of the two major cloud-computing providers -- with salesforce.com (NYSE: CRM) being the other -- to produce a double-digit yield that expanded more than 5 percentage points year. Which is more important? Growth, which is why earlier today I made an outperform CAPScall for this stock.
Do you agree? Disagree? Either way, it makes sense to study how the Internet has changed computing. The Motley Fool recently dug into this trend in a video research brief titled "The Two Words Bill Gates Doesn't Want You to Hear." the report is free, but only for a limited time, so watch it now.
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