NetSuite Failed to Generate an Increased Margin Year-over-Year
An Analysis of NetSuite's 3Q15 Earnings
Costs incurred from services were high
A cloud solutions provider in ERP (enterprise resource managing) and other businesses, NetSuite’s stock price fell by 4.4% in after-hours trading on an announcement of its 3Q16 earnings.
NetSuite reported revenue of $192.8 million compared to $140.9 million in the same period last year. Revenue from subscriptions and support showed an increase of 33.5% compared to the previous year and an increase of 9.8% compared to the previous quarter.
Costs related to subscriptions and support were $26.0 million compared to the previous year’s costs of $22.5 million, a growth of 40.3%. Moreover, costs related to professional services remained at $40.1 million compared to $36.7 million in the same period last year, a relative increase of 6.4 percentage points.
This caused total costs to increase by 43.7% over the previous year and brought the company’s gross margin down to 65.7% compared to 68.0% from the same quarter in the previous year, a fall of 2.3 percentage points.
Strategic moves
In 2Q13, Netsuite issued senior convertible notes of $310.0 million, for which it needs to pay non-cash expenses to the lender. Moreover, in the second quarter they acquired Bronto Software, for which Netsuite needs to amortize part of its expenses over a certain period.
However, reducing all these non-core expenses, NetSuite’s non-GAAP (generally accepted accounting principles) gross margin remains below the previous year’s margin. The company’s non-GAAP gross margin for this quarter came in at 69.7% compared to 71.4% in the previous year, and it remains unchanged.
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