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Revenue and Expense Recognition at NetSuite, Inc.

written by Graeme Rankine, fl. 2013 (Glendale, AZ: Thunderbird Global School of Management, 2016, originally published 2016), 12 page(s)

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James Amphlett, a financial analyst with Xenon Capital LLC, gathered information about NetSuite Inc., a company whose shares Xenon might purchase for its computer software portfolio. NetSuite provided cloud-based financial and enterprise resource planning software to customers for a recurring subscription fee. The company's stock price performance over the last few years was nothing short of spectacular, having increased from around $10 per share... James Amphlett, a financial analyst with Xenon Capital LLC, gathered information about NetSuite Inc., a company whose shares Xenon might purchase for its computer software portfolio. NetSuite provided cloud-based financial and enterprise resource planning software to customers for a recurring subscription fee. The company's stock price performance over the last few years was nothing short of spectacular, having increased from around $10 per share at the end of 2008 to over $110 per share at the end of 2013. NetSuite was one of many companies that provided cloud-based computing services, and were often referred to as software-as-a-service (SaaS) companies. NetSuite generated sales through both direct and indirect approaches, with most selling activities conducted over the phone by its sales force. Xenon's portfolio manager asked Amphlett to pay close attention to the company's accounting methods, particularly its revenue and expense recognition methods. Xenon had become quite wary of companies such as salesforce.com, ADT, and Pre-Paid Legal Services, which experienced significant stock price declines after popular press articles criticized their accounting policies. Such stories invited close scrutiny from the US Securities & Exchange Commission. (SEC). Teaching Objectives: 1. To understand how a company generates revenue, its business strategy for achieving this, and the implications for the company's financial performance, 2. To analyze a company's growth, its ability to generate cash flows, and its recent financial performance, 3. To evaluate a company's accounting methods and their impact on a company's financial performance, 4. To develop a communication and disclosure strategy for dealing with critics of the company's accounting policies, 5. To evaluate the intrinsic value of a company's equity security relative to its current stock price. Specifically, students are asked to consider several issues in the case. First, students are asked to explain NetSuite's business model, to evaluate its business strategy, and to evaluate how successful execution of this strategy is likely to be observable from the company's financial performance. Second, students are asked to analyze the company's cash flow situation, and recent financial performance, including its profitability, leverage, and liquidity. Third, students are asked to consider the impact on the company's financial statements of its revenue and expense recognition policy and whether they are consistent with GAAP. The company deferred revenue until services were performed. The company capitalized and amortized commissions paid to its direct sales force. Fifth, students are asked to consider the communication and disclosure issues the company faces in responding to analyst criticism of its accounting methods. Finally, students are asked whether NetSuite's shares are worth the target price of $125 per share. A price-to-earnings (P/E) or price-to-book (P/B) evaluation can be used to determine whether the company's stock price is under/over-valued. The case has been used successfully in MBA programs to cover corporate financial reporting issues on credit analysis and quality of earnings issues. Show more Show less

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Revenue and Expense Recognition at NetSuite, Inc.

Revenue and Expense Recognition at NetSuite, Inc.