Acct 354 - Netsuite Inc. Financial Statement Analysis

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ACCT 354: Financial Statement Analysis

Fall 2016

Julia Scott  

TEAM 19

Emilie Granger (260682678)

Laure Gaudry (260634438)

Evan A. Weiser

Renaud Déronzier-Bédard         

Term Paper due by E-Mail Dec 1st 2016 8h30AM

December 1st 2016                                                                                         NetSuite Inc. (NYSE:N)

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Executive Summary

The cloud computing industry, and more precisely the SaaS industry, is expected to grow in future years. Despite the barriers rising from concerns on data privacy and national security, this $72 billion industry is expected to enter in a hyper growth phase to reach a $200 billion market capitalization by 2020

Intelligent, Integrated and Simple. Offers a less expensive, faster business application, and modular implementations alternative.

NetSuite Inc.’s quality of earnings is situated on the lower half of the spectrum; being within GAAP, but comprising many biased choices. NetSuite Inc. is shaping information in order to maximize sales, and minimize earnings. This practice is not unseen in the industry, the preferred approach to shareholder value for tech companies is revenue growth and earnings stability which is exactly what NetSuite Inc. is seeking to do through its management of earnings.

NetSuite Inc. is relatively more profitable than its industry pears with a gross profit margin of close to 70%. The S&P 500 Information Technology Index has a gross profit margin of 50%, which is considered relatively more profitable than other S&P 500 industries. NetSuite Inc. is relatively in line with its industry pears with a current ratio of 2.14x.  NetSuite Inc. is still considered in the growing phase and as debt is a cheaper source of financing than equity, it is expected to have higher leverage.

NetSuite will be able to generate enough cash flows to cover the maturing debt in both 2018 and 2019. Which implies that the increase in NetSuite Inc.'s solvency and its ability to meet long term obligations and repay interest-bearing debt is not concerning.

The increase in subscription and support revenues was mainly due to NetSuite's effort to broaden their offerings by increasing their direct and indirect sales efforts in order to grow their customer base.

NetSuite Inc. is currently trading at $86.88. NetSuite Inc. fair value should be at $97.62, which offers a fairly interesting entry opportunity with a potential upside of 12.1%.

Table of Contents

Executive Summary        2

Industry Overview        4

Company Overview        4

Intelligent, Integrated and Simple        4

Why NetSuite?        5

Revenue Recognition        5

Cost of Revenue        5

Deferred Commissions        6

Financial Analysis (Exhibit 3)        9

Profitability Analysis        9

Liquidity Analysis        10

Solvency Analysis        11

Cash Flow Analysis        11

Valuation        12

Overview of financial performance        12

Discounted Cash Flow Analysis (Absolute Valuation)        12

Final Thoughts        13

Exhibits        14

Exhibit 1 – SWOT Analysis        14

Exhibit 2 – Deferred Commission        14

Exhibit 3 – Ratio Analysis        15

Exhibit 5 – Cash Flow Statement        17

Exhibit 6 – Income Statement        18

Exhibit 7 – WACC        19

Exhibit 8 – Valuation        19

Sources        20

Industry Overview

Cloud computing uses the internet to deliver software applications from a centrally hosted computing facility to end users through a web browser. According to the U.S. Department of cloud computing is “a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources) that can be rapidly provisioned and released with minimal management effort or service provider interaction” (Mell & Grance, 2016). Software-as-a-service (SaaS) allows user to access software applications from a cloud provider that management their multiple business operations.

The cloud computing industry, and more precisely the SaaS industry, is continuously growing as expansion in sales and business acceptance is expected to keep on expanding through the near future. Despite the barriers rising from concerns on data privacy and national security, this $72 billion industry is expected to enter in a hyper growth phase to reach a $200 billion market capitalization by 2020 (King, 2016). I also expect the continued growth of SaaS technologies to extend market reach quicker both in terms of sales and global resource allocation.  Forecasts predict that SaaS technologies will generate more than $130 billion, which makes it an industry with growing investment opportunities (Columbus, 2016). Global cloud computing markets are driven by American companies which are in a position of supremacy given their innovative and competitive advantage both in domestic and foreign markets (Pardo, Rose, & Flavin, 2016).