NetSuite's (NYSE:N) shares climbed nearly 6% last Friday after the company's Q4 results beat on revenue, non-GAAP EPS, and operating cash flow. However, the billings number of $256.8 million came in below the Wall Street view of $260 million. To the company's credit, when adjusted for foreign currency and duration, calculated billings were $261 million ($1 million above consensus). On the macro front, NetSuite is seeing no signs of challenges, and in fact described some improving quarter-over-quarter trends (i.e., improving aging of receivables), and both enterprise and mid-market teams had a strong fourth-quarter bookings performance, and pipeline commentary was healthy.
Fiscal 2016 guidance was the highlight of the call, and came in above the Street view and well above expectations. NetSuite issued 2016 guidance calling for revenues of $950 million- $970 million, versus consensus of $959 million, representing 28- 31% growth. But more importantly, guidance called for EPS in the range of $0.40-0.45, above Street expectations of $0.35. Operating cash flow guidance was also strong at $135-140 million, above the Street at $128 million, which marks 35-40% growth year-over-year and a roughly 14.4% margin. All metrics surprised nicely to the upside, although the earnings outlook was perhaps the most surprising, as it is the first time in several years the company has indicated it will show margin expansion.
- NetSuite reported 4Q:15 revenue of $206.2 beat the Street's $204.4 million and was above management's guidance of $202 million-$205 million.
- FY16 non-GAAP EPS guidance was initiated at $0.40-0.45, well above the Street estimate of $0.35.
- NetSuite added 616 net new customers in the quarter, growth of 23%, which is the highest it has been for over a decade. Moreover, the company signed the most million-dollar plus deals in company history. As of the end of 2015, NetSuite had more than 10,000 customers running their ERP products.
- CEO Nelson noted that the first signs of slowdown back in 2008 showed up in the firm's installed base, but that in the current environment, it couldn't be more opposite - in other words, the demand environment remains healthy.
- While the fundamental story of the business is strong, the billings results this quarter are likely a bit disappointing for investors. As NetSuite moves up-market, the company can continue to drive growth but will have to compete with more vendors that may be prone to discounting.
NetSuite continued to benefit from a shift in buying patterns away from on-premise software towards the cloud. The company's 4Q:15 billings growth of 28% was a miss, but management expects to drive productivity of its expanded distribution network in FY16. While competition is increasing, NetSuite continues to benefit from the company's move up-market, which is acting to make S&M spend more efficient, and the company's ongoing partner expansion is helping to generate growth from a broader swath of the market.
That said, shares should move nicely higher, as expectations were incredibly low going into the print, and fiscal 2016 guidance surprised nicely to the upside. Although the competitive landscape is evolving and will be a key area to watch this year, the company is very well positioned.
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