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Investors Punish NetSuite Despite Decent 4Q

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Posted February 5, 2010 By Larry Barrett     Feedback

Shares of the on-demand software company tumbled more than 15 percent Friday, one day after it posted sales and earnings in line with analyst estimates.

Shares of on-demand software provider NetSuite plunged more than 15 percent Friday as investors sold off the stock even though it posted fourth-quarter sales and earnings that were in line with analysts' consensus estimates.

NetSuite (NYSE: N) shares fell below $12 a share in early Friday trading before regaining some ground to trade off $1.85 a share, or 13 percent, to $12.66.

In its fourth quarter, the San Mateo, Calif.-based Software-as-a-Service (SaaS) provider posted a profit of $0.02 a share, excluding one-time items, on sales of $43 million -- exactly the results analysts surveyed by Thomson Reuters had predicted.

But including one-time items and charges, NetSuite posted a net loss of $6.5 million, or $0.10 a share, significantly wider than the $4.5 million, or $0.07 a share, it lost in the year-ago quarter.

As of early Friday afternoon, none of the 17 analysts tracking NetSuite had downgraded the stock in the wake of the fourth-quarter report.

But NetSuite executives probably shouldn't take Friday's stock slide too personally.

The sell-off comes after a number of high-profile tech sector bellwethers such as Google (NASDAQ: GOOG), Apple (NASDAQ: AAPL), Intel (NASDAQ: INTL) and Cisco Systems (NASDAQ: CSCO) all posted better-than-expected earnings in the past few weeks, only to watch their respective stocks plunge immediately after investors digested the good news.

However, a subtle shift in strategy may be prodding investors to take some of their profits off the table.

During a conference call Thursday, CEO Zach Nelson told analysts the company plans to shift its selling resources to the higher end of the on-demand enterprise resource planning (ERP) market, a move that will put it squarely in competition with the likes of Microsoft (NASDAQ: MSFT) and SAP (NYSE: SAP) for larger enterprise accounts and -- at least in the short run -- keep net income relatively flat in 2010.

"We are putting a lot more resources on the installed base to help them understand the value they can get from parts of the suite they may not be using," Nelson said, adding that NetSuite now expects sales growth of roughly 8 percent in 2010 to between $180 million to $185 million.

NetSuite and its investors will have a better opportunity to gauge the relative merits of its latest financial results when Salesforce (NYSE: CRM), the clear leader in the SaaS sector, reports its fourth-quarter results later this month.

In its most recent quarter, Salesforce easily topped analyst estimates and raised its sales forecast to between $340 million to $342 million.

In November, NetSuite generated quite a bit of buzz when it rolled out mobile enterprise resource planning (ERP) suite for the iPhone.

NetSuite shares were most recently upgraded from "underweight" to "equal weight" in January by Morgan Stanley and the stock is rated either a "hold" or "neutral" by 12 of the 17 analysts following the stock.

The stock peaked at $18 in January after falling to a 52-week low of $7.03 a share this time last year.

Larry Barrett is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.

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