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NetSuite Inc. Continues to Prove That Cloud Computing Is the Future

By Brian Feroldi – Jan 30, 2016 at 7:40AM

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Shares of the cloud-based software provider jumped on a better-than-expected earnings report.

Image source: NetSuite.

Investors in NetSuite (N) are having a good day as shares of the cloud-based software provider rose on Friday after the company released its fourth-quarter earnings report.

NetSuite results: The raw numbers

 Q4 2015Q4 2014Change %
Revenue $206.2 million $157.9 million 31%
Non-GAAP Net Income  $4.3 million $7.5 million -43%
Non-GAAP EPS $0.05 $0.10 -50%

Data source: NetSuite.

NetSuite managed to best analyst expectations on both revenue and earnings per share.

What happened with NetSuite this quarter?
Beyond the headline numbers, this report gave investors plenty of reasons to smile.

Highlights include:

  • 616 new customers joined the platform, including several larger companies like Snapchat, Lucky Brand, and American Express Global Business Travel. 
  • Recurring revenues grew 30% over the year-ago quarter to $164.5 million and now comprise 80% of total revenue.  
  • Non-recurring revenue was $41.7 million for the quarter, growing 34% over the same period last year.  
  • The company continues to make in-roads in the international market and 25% of its total sales are now derived from overseas markets.
  • Deal size grew 10% when compared to last year and the company signed a record number of deals valued at more than $1 million during the period.
  • The quarter produced a new record for cash collections and operating cash flow came in at $21 million.
  • NetSuite continues to enjoy a strong balance sheet, ending the year with $379 million in cash on its books.

NetSuite's overall results looked solid, but the report wasn't flawless. The company continues to ramp up spending by adding another 1,246 employees to its workforce during the year and building three new data centers. Those additional costs ended up crimping profitability. Gross margin for the quarter was 70.2%, down slightly from the 71.3% it reported a year ago. 

What management had to say
CEO Zach Nelson had a lot of great things to say about the company's performance, and he thinks that the momentum will continue in the year ahead:

In 2016, the wind is at NetSuite's back as the world transitions from a time just a couple years back, when few believed that businesses would run mission critical core business applications in the cloud, to today when companies in many industries can't get there fast enough.

Nelson also highlighted that it continues to compete well, even against the giants in its space as its solutions replaced those offered by SAP (SAP 4.88%) 17 times during the quarter. He attributed that fact to the companies' fundamentally different models:

If you look at SAP, it's built on a mainframe model of manufacturing materials driven. We're built on a business process model of manufacturing, and that's why we're growing so rapidly in the manufacturing space for next-generation start-ups 

Looking forward
The company continues to see good things happening in the coming quarter and the year ahead. Next quarter, management forecasts revenue to grow to between $212 million to $214 million and non-GAAP EPS will come in around $0.02 to $0.03. The company also projects that it will generate more than $22 million in operating cash flow during the period.

The picture looks equally bright for the full year as revenue is projected to grow to between $950 million to $970 million, representing growth of 28% to 31% versus 2015.

Management expects that investments it made in 2015 will start to pay off as it has plans to expand its margins during the year. Combine those two together and the company thinks that its non-GAAP EPS will grow to a range of $0.40 to $0.45, representing growth of 80% and 100%.

Brian Feroldi has no position in any stocks mentioned. The Motley Fool recommends American Express and NetSuite. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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