1. | In your response to prior comment 1, the methodology for measuring renewal and churn rates that you envision appears to be based on comparisons of numbers of customers from one period to the next. It would appear your concern regarding disclosure of the requested information could be addressed if renewal and churn rates computed based on dollar amounts were provided, supplemented by explanatory text. Please provide your views in this respect. In the response letter, explain the basis for your conclusion that quantitative “disclosure of a customer “renewal rate” or “churn rate” metric may in fact provide misleading information about [y]our revenue trends.” |
• | A significant percentage of our customers enter into their initial contract term at dates other than the beginning or end of the quarter, so we recognize less than a full quarter of revenue in the first quarter of the initial contract term versus a full quarter of revenue in any subsequent quarter. As a result, the revenue basis included in a dollar-based renewal |
• | For the most part, our new customer contracts have multiple deliverables so we allocate the total contract value between the respective deliverables in accordance with Accounting Standards Updated (“ASU”) 2009-13, Multiple-Deliverable Revenue Arrangements. In instances when a contract value allocation is appropriate, we allocate revenue from the professional services element to the subscription services element in the initial contract term. As a result, in the initial contact term, subscription services revenue can be higher than subscription services revenue in the renewal term even if all subscription items are renewed on identical terms. This would cause an overstated dollar based churn rate and an understated renewal rate. |
• | A portion of our customers purchase additional products within a contract term and the subscription agreement renewals for all products occur on a co-term basis. In these instances, the renewal rate in the period in which the customer renews would be overstated and may not be comparable to the same period in the prior year depending on the level of upsell transacted during the prior term of the agreement. |
• | For the year ended December 31, 2011, 27% of our revenue was generated from international customers and a portion of the related customer contracts are denominated in currencies other than the US dollar. As such, changes in foreign currency rates affect our revenue and would affect the corresponding churn / renewal rate for the period reported resulting in churn / renewal rates that would not be comparable between periods. |
• | Changes in pricing upon renewal would affect the corresponding churn / renewal rate for the period reported even if our customers were to renew identical subscription items. This would result in churn / renewal rates that would not be comparable between periods. |
• | The Company is responsible for the adequacy and accuracy of the disclosure in the filings; |
• | Staff comments or changes to disclosure in response to Staff comments do not foreclose the Commission from taking any action with respect to the filings; and |
• | The Company may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
Sincerely, | |
/s/ Douglas P. Solomon | |
Douglas P. Solomon | |
Senior Vice President, General Counsel and Secretary |
cc: | Ronald Gill - Chief Financial Officer, NetSuite Inc. | |
Richard A. Kline - Goodwin Procter LLP |