An Inside Look at NetSuite s Revenue Recognition Practices. Jim McGeever COO

Transcription

1 An Inside Look at NetSuite s Revenue Recognition Practices Jim McGeever COO

2 My Background NetSuite 15 th employee, CFO, now COO Clontech Corporate Controller Manufacturer of biotech research technologies Photon Dynamics Director of Finance Manufacturer of large high-tech capital devices Ernst & Young Audit

3 Who is NetSuite? Founded 1998 Background Publicly traded on NYSE: N Largest public SaaS cloud ERP provider Offices in 8 countries $230M+ revenue, employees High Growth 12,000+ organizations 3 years running named fastest growing Financial Management Solution by Gartner 2011 Billings growth ~30% Leading provider of cloud ERP solutions for software companies #1 Cloud Business Suite Industry Recognition Fastest Growing Top 10 FMS Vendor 3 rd Year Running Best Financial Management Top 10 Cloud Companies to Watch

4 Why is Revenue Recognition so Important? Remarks by Lynn Turner, Chief Accountant, SEC Revenue is typically the single largest item reported in a company's financial statements. As with the all important bottom line and cash flows, companies' reported revenues are not only significant to these companies' financial statements in dollar terms, but also in the weight and importance that investors place on them in making investment decisions. Trends and growth in the top line of a company's income statement are barometers investors use when assessing the company's past performance and future prospects.

5 Why is Revenue Recognition so Important? According to U.S. Government Accountability Office (GAO) Restatements for improper revenue recognition resulted in larger drops in market capitalization 38% of the announced restatements between 1997 and June 30, 2002 involved revenue recognition issues Revenue recognition was the primary reason for restatements in each year More than 50% of the immediate market losses following restatements were attributable to revenue recognition related restatements; and Approximately 50% of the SEC's enforcement cases have involved revenue recognition issues.

6 Numerous Proposed Changes will Impact Technology Companies Single revenue model for all contracts US GAAP & IFRS will have a converged model Revenue will be recognized when performance obligations are satisfied Transfer of control of assets will drive revenue recognition Huge Impact % complete method may no longer be used as a separate rev rec model Very Complex Performance obligations must be identified & separated The transaction price will be allocated to separate performance obligations This process MUST be automated Companies will be required to use estimates to reflect stand-alone selling prices Companies may have to change existing allocation and estimation methods Certain sales incentives may be treated as performance obligations Certain contract costs may no longer be capitalized Performance obligations may need to be remeasured over life of the agreement

7 NetSuite s Environment 1,200+ orders a month processed through NetSuite Lead => Estimate => Sales Order => Billing => Rev Rec New business, upsell, renewals Revenue on subscription, support and PS type items Price list of more than 300 items maintained in 8 currencies Governed under EITF Customers cannot take delivery of software Utilize ESP s for all items as no VSOE or TPE Subscription revenue amortized over term of contract PS revenue recognized on a % of completion basis

8 Best Practices Across End to End Process Granularity and accuracy Sales Order Management Sales and finance controls in place Revenue Forecasting Allocations EITF adoption ESP monitoring Revenue Recognition Schedule Management Controls and escalations Revenue Reporting

9 Benefits of an Integrated Approach Traceable Sales order Invoice Revenue recognition schedule Journal entries General Ledger Centralized Transaction history, including revenue recognition, stored in the customer records Efficient No need for reconciliations between multiple systems Visibility Real-time, fast, efficient research, reporting, and forecasting

10 Sales Order Management NetSuite Best Practice Utilize off-shore team composed of CPA s for high quality and cost efficiencies All team members process using standard desktop procedures QA all orders based on standard checklist Implementation Contract with off-shore 3 rd party and pull in-house after ramping to necessary growth Develop standard desktop procedures with timely updates and training Develop standard QA checklist within NetSuite SO form

11 Sales Order QA Checklist Sales / Quote Order Recognition Invoice Single Database

12 Cloud Supports Distributed Process Semi-offshored finance team, distributed sales Ideal for inherently distributed activities: Financial Planning Selling and Order Taking Decentralized finance team Facilitates off-shoring / shared services Easily supports temporary and home workers Same view into centralized data Browser access Paperless

13 ERP System Capabilities Supporting Supports initial ESP analysis Reporting on sales by item and average selling price Slices by currency, location, SO size, customer size, etc. Automates Allocations Automates EITF allocations using VSOE, TPE, or ESP Can restate prior periods or on prospective basis i.e. applying allocation to orders processed after adoption while leaving revenue from pre-adoption orders running as-is. Ongoing monitoring Real-time tracking of actual sales prices Alerts for sales outside set parameters

14 Sales Order Complexity Under Item Sales Price One-year subscription $ 2,000 Professional Services $ 800 Total $ 2,800 Under ESP the previous ESP rule Allocated (EITF 00-21) the total for subscription Ratio Value and PS was $ recognized 3,000 ratably 75% over $ the 2,100 one-year subscription period. $ 1,000 25% $ 700 $ $ ,000 recognized $ each 2,800 month Under 08-01, ESPs for each item are used to re-allocate the Sales Order values. $ 2,100 will be recognized over the subscription period ($175/month) $ 700 will be recognized when the Professional Services are delivered

15 We Monitor EITF Process and Ongoing Variances in Real-Time

16 Threshold and Controls Based Revenue Reporting NetSuite Best Practice Implementation All orders exceeding a given $ threshold are reviewed by a revenue accountant/equivalent Two meetings held each month w/revenue accountants and finance management to identify review items Monthly metric review Sales Order form configured to automatically defer revenue recognition until reviewed Created DRR SO search to identify review population as well as custom fields on SO form to document deferral reasons Case management for issues

17 Granular Revenue Forecasting NetSuite Best Practice Implementation Forecast from all existing revenue recognition schedules Down to customer level Achieve very low margin of variance between actuals and forecast Centralized in ERP system for easy access Layer on assumptions for new bookings and upsell 08-01: Revenue Forecast is Controlled by Finance, not Sales

18 Real-Time Deferred Revenue Reporting Process

19 What s Worked at NetSuite Sales to finance integration Tightly integrated reporting process Ongoing ERP customization Automated review processes Cloud ERP supports distributed team Automated upgrades w/customization

20 Lessons from the Trenches 1. Get a handle on stratification materiality 2. Consider contingent revenue 3. Review rules for linked orders 4. Plan for allocation when the value of one element is unknown 5. Review COGS and ensure expense allocations are appropriate

21 Thank You