Revenue and Expense Recognition at NetSuite, Inc.

Teaching Objectives: 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.