The following discussion and analysis is intended to provide greater details of our results of operations and financial condition and should be read in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this document and the discussion contained in our Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the SEC on March 13, 2009. Certain statements in this Quarterly Report constitute forward-looking statements and as such, involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include any expectation of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements concerning new products or services; statements related to future capital expenditures; statements related to future economic conditions or performance; statements related to the integration of acquired companies statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," or "will," and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed in the section titled "Risk Factors" included in Item 1A of Part II of this Quarterly Report on Form 10-Q, and the risks discussed in our other SEC filings.

We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. These statements are based on the beliefs and assumptions of our management based on information currently available to management. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

Overview

We provide a cloud computing business management application suite that provides Accounting / ERP, CRM and Ecommerce functionality to medium-sized businesses and divisions of large companies. We also offer customer support and professional services related to our suite. We deliver our suite over the Internet as a subscription service using the software-as-a-service ("SaaS") model.

In 1999, we released our first application, NetLedger, which focused on accounting applications. We then released Ecommerce functionality in 2000 and CRM and sales force automation functionality in 2001. In 2002, we released our next generation suite under the name NetSuite to which we have regularly added features and functionality. In 2008, we acquired OpenAir which offers both professional services automation and project portfolio management products. In July 2009, we acquired QuickArrow to further expand our suite for services-based companies.

Our headquarters are located in San Mateo, California. We were incorporated in California in September 1998 and reincorporated in Delaware in November 2007. We conduct our business worldwide, with international locations in Canada, Europe, Asia and Australia.

Key Components of Our Results of Operations

Revenue

Our revenue has grown from $17.7 million during the year ended December 31, 2004 to $152.5 million during the year ended December 31, 2008.

We generate sales directly through our sales team and, to a lesser extent, indirectly through channel partners. We sell our service to customers across a broad spectrum of industries, and we have tailored our service for wholesalers/distributors, services companies and software companies. The primary target customers for our service are medium-sized businesses. An increasing percentage of our customers and our revenue has been derived from larger businesses within this market. For the nine months ended September 30, 2009, we did not have any single customer that accounted for more than 3% of our revenue.

We are pursuing a number of strategies which we believe will provide us with significant prospects for future growth. The goals of those strategic initiatives are to continue to move up-market, to increase use of NetSuite as a platform and to extend the verticalization of our product line. Although we have made progress towards our goals in recent periods, there are still many areas in which we believe that we can continue to grow. To implement these goals, we are focused on the following initiatives:

• Growth of sales of OneWorld which supports the needs of large, standalone companies, and divisions of very large enterprises.

• Strengthening our professional services automation verticalization with the July acquisition of QuickArrow.

• Developing our SuiteCloud ecosystem strategy to enable third parties to extend our offerings with their vertical expertise.

We experience competitive pricing pressure where our products are compared with solutions that address a narrower range of customer needs or are not fully integrated (for example, when compared with Ecommerce or CRM stand-alone solutions). In addition, since we sell primarily to medium-sized businesses, we also face pricing pressure in terms of the more limited financial resources or budgetary constraints of many of our target customers. We do not currently experience significant pricing pressure from competitors that offer a similar cloud computing business management suite.

We sell our application suite pursuant to subscription agreements. The duration of these agreements is generally one year. We rely in part on a large percentage of our customers to renew their agreements to drive our revenue growth. Our customers have no obligation to renew their subscriptions after the expiration of their subscription period.

We generally invoice our customers in advance in annual or quarterly installments, and typical payment terms provide that our clients pay us within 30 to 60 days of invoice. Amounts that have been invoiced where the customer has a legal obligation to pay are recorded in accounts receivable and deferred revenue. As of September 30, 2009, we had deferred revenue of $69.5 million.

In most instances, revenue is generated under sales agreements with multiple elements comprised of subscription fees for access to our application suite and customer support, and fees for professional services. We have determined that we do not have objective and reliable evidence of fair value for each element of our sales agreements that contain a subscription to our application suite and customer support, and fees for professional services. As a result, the elements within our multiple-element sales agreements do not qualify for treatment as separate units of accounting. Accordingly, we account for fees received under multiple-element arrangements as a single unit of accounting and recognize the entire arrangement ratably over the term of the related agreement, commencing upon the later of the agreement start date or when all revenue recognition criteria have been met.

Our subscription agreements provide service level commitments of 99.5% uptime per period, excluding scheduled maintenance. The failure to meet this level of service availability may require us to credit qualifying customers up to the value of an entire month of their subscription and support fees. In light of our historical experience with meeting our service level commitments, we do not currently have any reserves on our balance sheet for these commitments.

As part of our overall growth, we expect the percentage of our revenue generated outside of North America to increase as we invest in and enter new markets. Revenue by geographic region, based on the billing address of the customer, was as follows for the periods presented:

                                            Nine months ended September 30,              Three months ended September 30,
                                             2008                    2009                  2008                    2009
                                                                       (dollars in thousands)
Americas                                $        90,219         $       101,177       $        33,228         $        34,687
International                                    20,856                  22,399                 7,176                   7,018

Total revenue                           $       111,075         $       123,576       $        40,404         $        41,705

Percentage of revenue generated
outside of the Americas                              19 %                    18 %                  18 %                    17 %

During June 2009, we acquired the assets of our Australian distributor. This acquisition has been accounted for as a business combination. During July 2009 we acquired QuickArrow an Austin, Texas based software maker of cloud computing software for professional services businesses. These acquisitions are not expected to have a material impact on our 2009 revenue or operating expenses, except for the estimated $1.7 million in transaction costs for QuickArrow which were expensed in the third quarter of 2009.

Employees

The number of full-time employees at September 30, 2009 was 975 as compared to 971 at December 31, 2008 and 959 at September 30, 2008. As of September 30, 2009, our headcount included 283 employees in sales and marketing, 445 employees in operations, professional services, training and customer support, 138 employees in product development, and 109 employees in a general and administrative capacity.

Cost of Revenue

Cost of revenue primarily consists of costs related to hosting our application suite, providing customer support, data communications expenses, personnel and related costs of operations, support, professional services and training personnel, stock-based compensation, software license fees, costs associated with website development activities, allocated overhead, intangible asset amortization expense associated with capitalized internal use software and acquired developed technology and related plant and equipment depreciation and amortization expenses. The cost associated with providing professional services is significantly higher as a percentage of revenue than the cost associated with delivering our software services due to the labor costs associated with providing professional services.

We allocate overhead such as rent, information technology costs and employee benefit costs to all departments based on headcount. As such, general overhead expenses are reflected in cost of revenue and each operating expense category.

We expect cost of revenue to decrease slightly as a percentage of revenue over time; however, it could fluctuate period to period depending on the growth of our professional services business and any associated increased costs relating to the delivery of professional services and the timing of significant expenditures. Additionally, we expect to further increase data center capacity in 2010, which will further increase our cost of revenue. We may also incur additional expenses associated with the acquisition of additional database software licenses.

Operating Expenses - Product Development

Product development expenses primarily consist of personnel and related costs for our product development employees and executives, including salaries, stock-based compensation, employee benefits and allocated overhead. Our product development efforts have been devoted primarily to increasing the functionality and enhancing the ease of use of our cloud computing application suite as well as localizing our product for international use. A key component of our strategy is to expand our business internationally. This will require us to conform our application to comply with local regulations and languages, which will cause us to incur additional expenses related to translation and localization of our application for use in other countries.

We expect product development expenses to increase in absolute dollars as we extend our service offerings in other countries and as we expand and enhance our application suite technologies. Such expenses may vary due to the timing of these offerings and technologies.

Operating Expenses - Sales and Marketing

Sales and marketing expenses primarily consist of personnel and related costs for our sales and marketing employees and executives, including wages, benefits, bonuses, commissions and training, stock-based compensation, commissions paid to our channel partners, the cost of marketing programs such as on-line lead generation, promotional events, webinars and other meeting costs, amortization of intangible assets related to tradename and customer relationships, and allocated overhead. We market and sell our application suite worldwide through our direct sales organization and indirect distribution channels such as strategic resellers. We capitalize and amortize our direct and channel sales commissions over the period the related revenue is recognized. The commission expense for customer renewals is at lower rates than for sales to new customers. As such, we expect our commission expense to decline as a percentage of revenue going forward as a larger percentage of our recognized revenue is expected to result from customer renewals.

We intend to continue to invest in sales and marketing to pursue new customers and expand relationships with existing customers. Our sales and marketing expenses have decreased both in terms of absolute dollars and as a percentage of total revenue over the past quarter. Despite this decrease, we expect our sales and marketing expenses to increase in absolute dollars for the foreseeable future.

Operating Expenses - General and Administrative

General and administrative expenses primarily consist of personnel and related costs for executive, finance, human resources and administrative personnel, stock-based compensation, legal and other professional fees and other corporate expenses and allocated overhead.

We expect our general and administrative expenses to increase in absolute dollars as we expand our business.

Income Taxes

Since inception, we have incurred annual operating losses and, accordingly, have not recorded a provision for income taxes for any of the periods presented other than provisions for minimum and foreign income taxes.

Critical Accounting Policies and Judgments

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period-to-period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application, while in other cases, significant judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We consider these policies requiring significant management judgment to be critical accounting policies. These critical accounting policies are:

• Revenue recognition;

• Internal use software and website development costs;

• Deferred commissions;

• Accounting for stock-based compensation; and

• Goodwill and other intangible assets

A description of our critical accounting policies and judgments appears in our 2008 Annual Report on Form 10-K under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Judgments." In addition, please see Note 2 to Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q and Note 2 of the Notes to Consolidated Financial Statements included in our 2008 Annual Report on Form 10-K for a description of our accounting policies.

Results of Operations

Revenue and Cost of Revenue

Information about revenue, cost of revenue and gross profit was as follows for
the periods presented:



                                                 Nine months ended              Three months ended
                                                   September 30,                  September 30,
                                               2008            2009            2008            2009
                                                              (dollars in thousands)
Revenue                                      $ 111,075       $ 123,576       $  40,404       $ 41,705
Cost of revenue (1)                             35,513          41,084          13,733         14,493

Gross profit                                 $  75,562       $  82,492       $  26,671       $ 27,212

Gross margin                                        68 %            67 %            66 %           65 %


(1)  Includes stock-based compensation
expense and amortization of intangible
assets of:                                   $   1,932       $   3,655       $   1,113       $  1,373

Nine Months Ended September 30, 2008 as Compared to the Nine Months Ended September 30, 2009

Revenue for the nine months ended September 30, 2009 increased $12.5 million, or 11%, compared to the same period in 2008. The overall increase in revenue was primarily the result of $18.5 million in new revenue as a result of acquiring new customers (customers acquired after September 30, 2008), the introduction of new products, an increase in average selling price per new customer and the incremental customer revenue resulting from the acquisition of OpenAir and QuickArrow. New revenue during the same period in 2008 was $25.2 million. The increase in new revenue was offset by a $7.3 million decrease in revenues from existing customers and other sources including our Japanese distribution rights. The decrease in revenue from existing customers resulted primarily from a $9.2 million decrease in professional services revenue from those customers as a result of the nonrenewal of those services. The nonrenewal of professional services by existing customers is a natural occurrence as such services are most frequently purchased in connection with the initial implementation of our product by new customers. Existing customers' purchases of additional user subscriptions and modules (or "upsell") largely offset the impact of customer churn and decreases in subscription and support revenues (or "downsell") for existing customers. We believe that the increase in both churn rate and downsell that we have recently experienced are a result of global economic conditions. The overall change in revenue was also impacted by a $2.5 million reduction of revenue recognized from our Japanese distribution rights agreement, as described above.

Revenue generated outside of North America was $22.4 million, or 18%, of our revenue during the nine months ended September 30, 2009, as compared to $20.9 million, or 19%, during the same period in 2008.

Cost of revenue for the nine months ended September 30, 2009 increased $5.6 million, or 16%, compared to the same period in 2008. The increase was primarily the result of a $3.6 million increase in personnel costs and a $671,000 increase in amortization of intangibles. The increase in personnel costs includes a $995,000 increase in stock-based compensation and is primarily associated with an increase in the number of employees required to support our growing client base.

Our gross margin decreased to 67% during the nine months ended September 30, 2009 compared to 68% for the same period in 2008. This decrease was primarily due to additional expenses related to hiring additional employees in our services organization.

Three Months Ended September 30, 2008 as Compared to the Three Months Ended September 30, 2009

Revenue for the three months ended September 30, 2009 increased $1.3 million, or 3%, compared to the same period in 2008. The overall increase in revenue was primarily the result of $9.2 million in new revenue as a result of acquiring new customers (customers acquired after September 30, 2008), the introduction of new products, an increase in average selling price per new customer and the incremental customer revenue resulting from the acquisition of OpenAir and QuickArrow. New revenue during the same period in 2008 was $13.1 million. The increase in new revenue was offset by a $5.5 million decrease in revenues from existing customers and other sources including our Japanese distribution rights. The decrease in revenue from existing customers resulted primarily from a $4.2 million decrease in professional services revenue from those customers as a result of the nonrenewal of those services. The nonrenewal of professional services by existing customers is a natural occurrence as such services are most frequently purchased in connection with the initial implementation of our product by new customers. Existing customers' purchases of additional user subscriptions and modules (or "upsell") largely offset the impact of customer churn and decreases in subscription and support revenues (or "downsell") for existing customers. We believe that the increase in both churn rate and downsell that we have recently experienced are a result of global economic conditions. The change in revenue was also impacted by a $1.4 million reduction of revenue recognized from our Japanese distribution rights agreement, as described above.

Revenue generated outside of North America was $7.0 million, or 17%, of our revenue during the three months ended September 30, 2009, as compared to $7.2 million, or 18%, during the same period in 2008.

Cost of revenue for the three months ended September 30, 2009 increased $760,000, or 6%, compared to the same period in 2008. The increase was primarily the result of a $490,000 increase in personnel costs. The increase in personnel costs includes a $201,000 increase in stock-based compensation and is primarily associated with an increase in the number of employees required to support our growing client base.

Our gross margin decreased to 65% during the three months ended September 30, 2009 compared to 66% for the same period in 2008. This decrease was primarily due to additional expenses related to hiring additional employees in our services organization.

Operating Expenses

Operating expenses were as follows for the periods presented:



                                           Nine months ended September 30,
                                             2008                    2009
                                                  % of                    % of
                                       Amount    revenue       Amount    revenue
                                                (dollars in thousands)
         Operating expenses (1):
         Product development          $ 14,590        13 %    $ 20,927        17 %
         Sales and marketing            57,427        52 %      56,539        46 %
         General and administrative     17,038        15 %      21,950        17 %

         Total operating expenses     $ 89,055        80 %    $ 99,416        80 %


                                           Three months ended September 30,
                                             2008                    2009
                                                  % of                    % of
                                       Amount    revenue       Amount    revenue
                                                (dollars in thousands)
         Operating expenses (1):
         Product development          $  6,056        15 %    $  7,369        18 %
         Sales and marketing            20,221        50 %      19,478        47 %
         General and administrative      6,426        16 %       8,323        19 %

         Total operating expenses     $ 32,703        81 %    $ 35,170        84 %

(1) Includes stock-based compensation expense, amortization of acquisition-related intangibles and transaction costs for business combinations as follows:

                                       Nine months ended       Three months ended
                                         September 30,           September 30,
                                        2008        2009        2008         2009
                                                 (dollars in thousands)
        Product development          $    2,178   $  4,502   $    1,147    $  1,709
        Sales and marketing               2,136      4,908        1,234       2,242
        General and administrative        2,133      5,743        1,048       3,054

        Total                        $    6,447   $ 15,153   $    3,429    $  7,005

Nine Months Ended September 30, 2008 as Compared to the Nine Months Ended September 30, 2009

Product development expenses for the nine months ended September 30, 2009 increased $6.3 million, or 43%, as compared to the same period in 2008. The increase was primarily the result of a $6.0 million increase in personnel costs. The increase in personnel costs is associated with an increase in the number of employees. The increase in personnel costs also includes a $2.3 million increase in stock-based compensation resulting from the issuance of equity awards to both existing and new employees. Product development has increased as a percentage of . . .