NetSuite’s goal is to enhance their position as a leading provider of cloud-based financials/ERP software suites for medium-sized businesses. (NetSuite, 2014) Their strategy consists of the following elements: expanding their leadership in cloud-based, integrated business suites, further penetrate global enterprises, tailor their offering to customer needs, growing their customer base, continually developing the NetSuite partner network, addressing the multinational business requirements of their customers, and enabling their customers to deliver an Omni-channel customer experience. (NetSuite, 2014)
When we look at the balance sheet we can see that their assets have about doubled. This shows they are following their strategy. They have been able to purchase a few competitors, which in turn expanded their leadership and grew their customer base. In order to make these purchases they needed to enter into a long-term loan agreement, which is also reflected on the balance sheet. Both Liabilities and assets have about doubled. Most pronounced is the fact that they went from zero percent of total liabilities and equity being long-term debt to now about 33%.
NetSuite incurred a net loss due to the investments they made, and management expects a possible net loss in the future, since they will continue to invest and purchase more competitors. (NetSuite, 2014)
All in all they are following their strategy by increasing their assets and using long-term debt to do so.
- What is the best balance sheet for CRM using the current strategy as context?
Since growth all around is one of their main strategy points, the best way for them to do that is to invest. The best balance sheet would be seeing more increases in assets, but with less use of loans. Best would be if they could increase their sales as much as they increase their assets. Then their income could cover the investments. Currently this is not the case. They have been purchasing competitors, but have not been increasing their sales force as much as they maybe should.
Their intangible assets have more than doubled through the different acquisitions they have made, but also their investment in research and development. Now they need to expand their sales network and market to grow in these areas also. Since the market is highly fragmented it is important that they increase their intangible assets even more. By broadening their spectrum of products they could gain more market shares and more loyal customers, who will switch over to their variety of products. This will then increase sales as they need to.
The best balance sheet is the one they have, but with less debt incurred. Less debt will enable them to be more fluid and to invest some more.
NetSuite has increased their sales from $17.7 million in 2004 to $414.5 million in 2013. They have been growing steadily, which is part of their strategy. Their revenue comes mainly from their subscriptions and services. This is about 80% of their revenue, and is for this reason their cash cow. The rest of the revenue comes in with the professional and other services they offer as we can see below:
Since there are no other income sources their operating costs are higher than their gross profits, leading to an operating loss. This loss has been persistent over the past five years. Even though they incurred loses they do not receive any tax credits.
NetSuite bills their customers a month in advance with payment terms of 30 or 60 days of invoice. Amounts that were invoiced are recorded in accounts receivable and deferred revenue. As of December 31, 2013, they had deferred revenue of $224.6 million. Since their sales are subscriptions, they have a lot of backlog, which represents future billings. This amount of backlog is expected to fluctuate over the years due to various changes, like new subscriptions, or others being paid off for example. (NetSuite, 2014)
NetSuite also incurs revenue from other countries. These revenues tend to be unpredictable due to fluctuations in currencies. A total of 24% comes from international sales which is quite a chuck of their revenue.
The cost of revenues for subscription and support is made up mostly of hosting our application suite, providing customer support, data communications expenses, personnel and related costs of operations, stock-based compensation, software license fees, outsourced subscription services, costs associated with website development activities, allocated overhead which includes IT, facility and recruiting costs, amortization expense associated with capitalized internal use software and acquired developed technology, and related plant and equipment depreciation and amortization expenses. Cost of revenue for professional services and other things on the other hand consists mainly of personnel and related costs. Additionally, as they acquire new businesses and technologies, the amortization expense associated with this activity will be included in cost of revenues. The timing of these additional expenses will affect their cost of revenues, both in terms of absolute dollars and as a percentage of revenues, in the affected periods. (NetSuite, 2014)
Their operating expenses include product development and sales and marketing expenses. Their product research costs have increased as part of their strategy. They want to expand even more globally and this means they need to adapt their programs to the regulations in those countries, as well as translate them to the local languages.
Since they plan to continue to extend their services into other countries, they expect this cost to continue to rise. Expenses related to sales and marketing are mainly personnel and related costs. As NetSuite states in their SEC 10 K report “We expect to continue to invest in sales and marketing to pursue new customers and expand relationships
with existing customers. As such, we expect our sales and marketing expenses to increase in absolute dollars in 2014.” (NetSuite, 2014) NetSuite also has general and administrative expenses as we can see below:
Marketing expenses increased primarily because of a $4.8 million increase in on-line and corporate marketing expenses, made in order to develop “NetSuite” name recognition and product branding. The increase in personnel costs are primarily related to increases in commission and payroll expenses resulting from higher sales and an increase in headcount. Additionally, personnel costs include an $8.4 million increase in stock-based compensation coming mainly from the issuance of annual equity awards and grants to new employees.
2- What is the best income statement for NetSuite using the current strategy as a context?
NetSuite’s best income statement would show a much larger increase in revenue. They have grown in most other areas, but not so much in revenue. With more growth in revenue they would be able to finance the rest of their strategy better. They would then maybe even show a net income instead of a net loss. In order to grow revenue they need to increase their efforts in sales and marketing. They are planning on purchasing more competitors in order to also expand into their markets. For their other plans they need to invest more into developing of their products.
They have only been investing 18% of their revenue into product development. Yet their strategy includes many points of new and improved software solutions. Actually four out of their five strategy points are in need of product development. So this is where their biggest increase in spending should be. With that they could expand their customer base and secure current customers.
3- Basics of Analysis 10 most important questions
- Why is the net loss so much higher in 2012?
When looking at the income statements vertical analysis, we can see that in 2012 the net loss is much higher in percentage of sales. All other numbers have changed fairly equally, yet net loss is so high. This is due to the taxes related to operations. It pushed the net loss even higher than the past years. The percentage of tax to sales jumped up because the incentive for stock options went up too as we can see below, but sales didn’t increase at the same pace.
- Why the sudden spike in interest expense in 2013?
When looking at the horizontal analysis we can see a -2229% drop in interest expense compared to 2009. The years before that, it was just a few percent. This is the result of the sudden increase of long-term debt. Debt will increase the amount of interest a company will need to pay. NetSuite took out a long-term loan in 2013, which they didn’t have the years before, so the interest expense spiked.
3. Why the sudden drop in “other income expense” in 2011?
In the horizontal analysis we can see that the “other income expense” takes a big dip in 2011. It drops down to 10% while the other years are at over 100% of the 2009 values. The decrease in net other expense
is primarily related to a write-off of a loan for a principal amount of $250,000 to a partner in 2010 and foreign currency gains during 2011. (NetSuite, 2014)
4. Why the decrease in intangible assets over the years?
Looking at the vertical analysis we can see that intangible assets have decrease over the years as percentage of total assets. Even though the intangible assets have increased greatly in value, other assets have also increase.
The other assets are land they purchased and servers and other equipment. They have also increased their cash which affects this too. The purchase of various competitors has increased their tangible assets during the year, but also their intangible assets, but as a percentage of total assets not as much as the tangible assets.
- Why the increase in long-term liabilities for 2013?
NetSuite didn’t have any long-term debt from 2009 to 2011, but in 2013 they increased their long-term debt from 3.5% to 36.6% of total liability and equity. This was necessary in order to finance the purchase of various
competitors. The increase comes from convertible notes that were sold in order to raise cash for the purchases. These convertible senior notes can be converted to common shares and would then not be a liability any longer.
- Why does cash increase by so much in 2013?
When compared to the base year of 2009, we can see in the horizontal analysis that cash has increased tremendously. Cash is NetSuite’s primary source of liquidity together with accounts receivables. Their cash comes from various sources as we can see below:
We can see that cash has increase a lot in 2013, probably due to the purchase of a few competitors, but also the sale of stock and convertible senior notes.
7. Why did the other non-operating assets almost double in 2013?
In the horizontal analysis we can see that the other non-operating assets almost doubled. In this category I added the non-current deferred commissions when entering the data into our file. So why did the non-current deferred commissions almost double? According to the SEC 10K report, the Company capitalizes commission costs that are incremental and directly related to the acquisition of customer contracts. Commission costs are accrued and capitalized upon execution of the sales contract by the customer. Payments to partners and sales personnel are made shortly after the receipt of the related customer payment. (NetSuite, 2014) This means that they made new contracts and the deferred commissions increased because of that.
8. Why the sudden increase in net loss in 2013?
Over the past five years NetSuite has recorded a net loss, but in 2013 this loss was much higher than the years before. Compared to 2009 it increased by over 300% in the horizontal analysis. This is due to the fact that expenses increased faster than the revenue did. Operating expenses especially increase by a lot when compared to previous years. These expenses stem from hiring more personnel in order to increase sales. The sales haven’t caught up yet with the incurred expense.
9. Why the drop in current liabilities in 2013?
We can see in the vertical analysis a drop of percentage of the total current liabilities to the total liabilities and equity. This stems from the increase of long term debt which increases the total liabilities and equity. This increase was much larger than the increase in total current liabilities. So the base number increased more than the current liabilities did. In reality current liabilities also increased, but the increase in long-term debt reduced the percentage.
10. Why is there no value for long-term debt in the horizontal analysis?
So as the above discussions show, long-term debt has increased, yet in the horizontal analysis there is no value. This is because the base year of 2009 had zero long-term debt. We cannot divide the value of 2013 by zero, which is the value in 2009. So the horizontal analysis cannot include an analysis of long-term debt.