In the second quarter of this year Netsuite (N) changed its renewal agreement and its timing of booking accounts receivable and deferred revenues from renewals.
During the second quarter of 2012, we updated the terms of our standard renewal agreement form so that the legal obligation to pay by our customers occurs upon execution of the renewal agreement rather than on their renewal date. Based on our existing policy of recording amounts that have been invoiced in accounts receivable and deferred revenue where the customer has a legal obligation to pay, invoices from these renewal agreements are now recorded in accounts receivable and deferred revenue upon execution of the renewal agreement rather than at the start of the renewal period. – Netsuite’s 3rd Quarter 10-Q
Why would they change their renewal agreement and book receivables and deferred revenue much sooner? One reason is you get to say bad-ass things like this during your earnings call
And we finished with a record deferred revenue balance, up 38% year-over-year. – Zachary Nelson during Q2 2012 earnings call.
Also, total deferred revenue grew at 40% year-over-year, the fastest growth rate ever since we became a public company. – Zachary Nelson during Q3 2012 earnings call.
Moving on to calculated billings. If you’ve done the math, you see that calculated billings, defined as revenue plus the change in deferred revenue, were $84.5 million for the quarter, up 35% over Q2 of last year. – Ronald Gill during Q2 2012 earnings call.
As you can calculate from the financials published in the press release, calculated billings, defined as revenue plus the change in deferred revenue, were $85.4 million for the quarter, representing an increase of 33.8% over the third quarter of last year. – Ronald Gill during Q3 2012 earnings call.
The Cynical Reason
The other reason, the more cynical one, is when the value of your stock options and the vesting of your performance units are dependent on a higher stock price and higher operating cash flows you’re willing to pull forward from future quarters the booking of deferred revenues and accounts receivables. Especially, as they pertain to key growth metrics that you like to highlight in your earnings calls.
From Netsuite’s Proxy filed on April 20, 2012 highlighting their 2011 performance compensation.
The other 50% of the PSUs was based on TSR [Total Stock Return] performance measured against a group of comparable peer SaaS companies chosen in advance. TSR performance for these purposes was calculated using the average closing price of the common stock during each of the months of December 2010 and December 2011 to reduce the potential one-day variability impact of tying the calculation to a one-day closing price at the end of the year. Therefore, over the one-year measurement period, our stock price grew at an average rate of 72.5% while the average growth rate of our peer group companies was at 13.8%, resulting in achievement of the TSR component of 217.6% of target, however payout was capped at 175%.
The other half of Netsuite’s performance share units for 2011 were based on financial metrics. The financial metric portion is further broken down into the following: 60% on a GAAP revenue target, 15% on a Non-GAAP operating margin target, and 25% on a Non-GAAP operating cash flow target. The Non-GAAP operating cash flow target is measured the same as GAAP operating cash flow.
The excerpts above were for 2011 but if the 2012 compensation package is similar to 2011, and Netsuite’s 3rd quarter 10-Q lends to this view, then the majority of the management’s performance share units are positively affected by the change in the renewal agreement.