NetSuite Takes a Nosedive

SAN FRANCISCO -- Although on-demand software supplier NetSuiteN posted posted good results Thursday, shares tumbled Friday after the company outlined plans to limit earnings growth.

The stock plunged $3.45, or 15.5%, to $18.86 in recent trading. The 12-month consensus target price was listed at $24.50 by Thomson Financial. On Thursday, it had been $27.

After achieving profitability in coming quarters, NetSuite plans to hold bottom-line growth to 2% a year, reinvesting any "overachievement" into the business, CFO James McGeever said on the company's conference call late Thursday. He acknowledged that analyst forecasts have assumed higher bottom-line growth. "Our current plan to reinvest in growing the business would not make that likely," McGeever said.

Accordingly, some analysts lowered one-year price targets Friday.

JMP Securities analyst Patrick Walravens lowered his one-year price target Friday to $24 from $32 after NetSuite lowered its 2009 profit expectations. JMP does not make a market in NetSuite shares.

Likewise, Credit Suisse lowered its target to $25 from $29. Analyst Philip Winslow cited a $1.5 million drop in long-term deferred revenue in the quarter to $8.9 million and lower-than-expected short-term deferred revenue.

NetSuite reported total deferred revenue of $76 million for the quarter.

"In our opinion, NetSuite will continue to produce revenue growth that outpaces the overall market while delivering ongoing operating margin and cash flow improvement," Winslow wrote. NetSuite is an investment banking client of the firm.

"We estimate that NetSuite recorded $32.6 million in Q1 2008 bookings, representing year-over-year bookings growth of 41.1%," wrote Sanford Bernstein analyst Charles Di Bona. Although 41% is substantial, Di Bona said he had expected 64%. "The company met our revenue expectations by drawing down total deferred revenue balances. This figure bears watching to see if it develops into a trend," he added. Sanford Bernstein's price target is $23.