NetSuite put on quite a show at its annual user conference. Source: NetSuite.
Shares of NetSuite (N) were unchanged after hours Thursday, as investors deliberated how to react to the company's mixed second-quarter results. Here's a closer look at the Q2 totals versus Wall Street's projections:
| N | Revenue | YOY Growth | EPS | YOY Growth |
|---|---|---|---|---|
| Consensus estimate | $171.96 million | 30.5%Math=((171.96/131.79)-1)*100 | $0.03 | (50%) |
| Q2 actual | $177.28 million | 34.5%Math=((177.28/131.79)-1)*100 | $0.02 | (66.7%) |
| DIFFERENCE | $5.32 million | 4% | ($0.01) | (16.7%) |
Sources: S&P Capital IQ and NetSuite press release.
Commenting on the results, CEO Zach Nelson said in a press release:
NetSuite's strong financial results, not just this quarter but over the last several years, validate our belief that to survive, all businesses need to transform their operations with cloud-based business application suites. While NetSuite saw particular strength in our retail, manufacturing and wholesale distribution verticals, what is truly amazing is the breadth of companies transforming their operations and their industries with NetSuite.
What went right: Gross margin from subscription and support revenue rose form 83.9% in last year's second quarter to 84.1% during the last three months. Cash flow from operations improved 28.5% during the same period.
What went wrong: Growth is proving to be costly. For example, sales and marketing expense rose 37.4% year over year, outpacing revenue growth by nearly three percentage points. General and administrative expense soared 81.8% during the same period. No wonder profits have been tough to come by.
What's next: NetSuite declined to include a third-quarter forecast in its press release. Nevertheless, analysts tracked by S&P Capital IQ have the company generating $190 million in revenue, and $0.05 a share in profit after accounting for stock-based compensation and other noncash items. That compares with $143.66 million and $0.11 a share in last year's Q3.
Longer term, analysts have NetSuite growing earnings by an average of 22.66% annually during the next three to five years.
In the meantime, investors should pay close attention to gross margin on subscription and support revenue, as well as cash from operations. Continued improvement in both areas should bode well for the future of NetSuite stock.
