Saba Software, Inc. F2Q09 (Qtr End 11/30/08) Earnings Call Transcript

Saba Software, Inc. (SABA)

F2Q09 Earnings Call

January 8, 2009 5:00 pm ET

Executives

Bill Slater - Chief Financial Officer

Bobby Yazdani - Chief Executive Officer

Analysts

Eric Martinuzzi - Craig-Hallum Capital

Kevin Liu - B. Riley & Company, Inc.

Presentation

Operator

Welcome to the Saba Software second quarter 2009 earnings release conference call. (Operator Instructions) I would now like to turn the conference over to your host, Saba SFO, Bill Slater.

Bill Slater

Good afternoon. Welcome and thank you for attending Saba Software’s second quarter fiscal 2009 conference call. With me today is Chairman and Chief Executive Officer, Bobby Yazdani.

If you have not received today’s earnings release you may download it at www.saba.com.

During the course of this conference call we will be making forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements regarding Saba's future performance and financial and cash projections, Saba's ability to maintain its leadership position, Saba’s ability to meet its profitability objectives, Saba’s belief that its On Demand business will grow steadily in the coming quarters, Saba’s ability to enter into or complete any strategic transaction, the timing of Saba’s ability to release Saba Social, the ability to timely adjust our business model in response to any further economic contraction. These statements are based solely on information available to us today, reflect management’s current expectations and beliefs, and are subject to numerous risks and uncertainties. It is important to note that our actual results could differ materially from such forward-looking statements. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our annual report on Form 10-K for the year ended May 31, 2008, and similar disclosures in subsequent Saba periodic reports. Copies of these reports may be obtained from the SEC.

In addition, we intend to discuss today both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP results is included with the financial statements accompanying our earnings release. Saba's management believes that non-GAAP information is an additional meaningful measure of operating performance because it measures the principal operating results that can be directly influenced by management and provides more consistent comparability to our financial results against historical results and the reported results of other software companies.

I will now turn the call over to Bobby Yazdani, Chairman and Chief Executive Officer of Saba Software.

Bobby Yazdani

Thank you and good afternoon everyone. In today’s call I will cover the second quarter highlights as well as guidance for fiscal year 2009. I will then turn the call over to Bill who will provide details on our second quarter financials and I will return to wrap up before taking questions.

First, I would like welcome Bill as our Chief Financial Officer. Bill brings to Saba more than twenty-five years of experience in financial management and operations at high growth organizations. Prior to joining Saba, Bill served as Executive Vice President and Chief Financial Officer at Symmetricom. Bill has a proven track record in building and managing efficient and profitable operations for global organizations. My team and I are looking forward to working with Bill to maintain a disciplined approach to financial management across our business and enhance operational excellence.

During our fiscal second quarter ending November 30, 2008, we witnessed a significant slowdown in the approval process for a number of customer transactions that we expected to complete as many businesses and public sector entities began experiencing the impact of scaling economic contraction.

We also felt the unfavorable impact of the stronger U.S. dollar during the same period on our international sales.

As a result of the lengthening sales process and impact of a stronger dollar, we posted revenue $25.8 million, which is up slightly from the prior quarter and down slightly from the prior-year period. However, we continued to add new customers and delivered improved non-GAAP profitability. Non-GAAP EPS came in at a $0.04 per share improvement from the prior quarter and a $0.02 per share improvement for the prior-year period.

We continue to focus on our priorities to maintain Saba’s leadership in the ATM market and manage our business to meet our profitability objectives. In order to maintain ATM market leadership we have continued to enhance and grow our product suite and added a number of significant new customers.

This quarter we delivered important updates to our two major product lines, Saba Centra and Saba Enterprise Suite.

We also announced Saba Social Social at our annual users conference providing customers the opportunity to see demonstrations and evaluate the oncoming product, which is expected to be introduced in our next fiscal year.

Saba Social will integrate comprehensive social networking with traditional learning performance and talent processes and provide real-time collaboration through Saba Central.

This will lower the cost of organizational learning and training programs as well as increase organizational productivity and performance by better connecting people with expertise.

Saba Social will be a new product that is part of Saba Enterprise and will be sold both stand-alone and in conjunction with our other solutions.

The product innovations in these new releases have been recognized by awards from Cielo Magazine and highly positive product assessment by the industry analyst firms, Bersin & Associates and IBC.

On the customer side, we signed new contracts with important customers around the world during the second quarter, including Aircel, Calpers, Credit Suisse, Federal Bureau of Prisons, Graham Group, Novartis, Sonic Automotive, Santa Clara County, Standard Chartered Bank, Vodafone, and Volkswagen South Africa.

Our primary focus for the remainder of the year is to manage our business to meet our profitability objectives while preserving the appropriate level of R&D investment.

With that, we anticipate that our non-GAAP EPS will range from approximately $0.18 per share to $0.23 per share.

Let me now turn the call over to Bill to review the financial results.

Bill Slater

Total revenues in the second quarter of fiscal 2009 were $25.8 million compared to $26.7 million in the same quarter last year. The most significant factor impacting revenue was the delay in the customer decision-making process that occurred during the quarter from a number of customers as they evaluated purchases in light of current economic conditions.

This was markedly illustrated in our license revenue line, which fell from $5.7 million last year to $3.0 million this year. On Demand revenue of $5.3 million for the quarter represented a bright spot as we increased On Demand by 18% over the prior-year quarter.

License updates and product support revenue of $8.8 million was approximately flat with the prior year, while professional service revenue of $8.8 million increased 16% over the prior-year period, due primarily to continued expansion of our solutions within our customer base.

The gross margin for the fiscal second quarter came in at 60% as compared to 65% for the same period last year. The erosion in gross margin came as result of mix shift away from our high gross margin license revenue, which typically has gross margins in excess of 90%, in favor of lower gross margin On Demand revenue and service revenue, which typically have gross margins under 50%.

In addition, the company has built up additional infrastructure to support future growth in the On Demand segment, which has caused On Demand margins to fall from the mid-60 range to the mid-50 range.

Operating expenses of $15.9 million for the fiscal second quarter are $2.5 million, or 13%, below prior year, which is indicative of the cost-cutting opportunities the company has undertaken over the past year in the sales and marketing area.

R&D expenses of $4.6 million are up 15% from the prior year and G&A expenses of $3.9 million are also up from the prior year by 18% due to higher incentive compensation and legal fees.

The company benefited on the interest income and other line from some foreign currency-related gains of $300,000.

The net loss for the quarter of $355,000, or $0.01 per share, represents an improvement over the prior-year loss of $1.0 million, or $0.04 per share.

Non-GAAP net income for the quarter of $1.067 million for the quarter, or $0.04 per share, is up from prior-year results of $579,000, or $0.02 per share.

We ended the second quarter with $12.9 million in cash compared to $16.6 million at the beginning of the year. The decline in cash is principally attributable to a loss of two collection days at the end of November, which we estimate reduced collections by $1.2 million, capex spending higher than our depreciation by $500,000 to support our On Demand infrastructure build-out, the impact of a strong U.S. dollar on foreign currency exchange of approximately $1.2 million, and other balance sheet changes of $700,000.

Both current and long-term deferred revenue of $27.3 million declined by $4.0 million from the beginning of the year. The decline is principally attributable to foreign exchange impact of $600,000 and the timing of our renewal billings which have skewed more heavily toward the second half of the fiscal year.

For fiscal year 2009 we expect GAAP EPS to range from a loss of $0.02 per share to a loss of $0.07 per share and non-GAAP EPS to range from earnings of $0.18 per share to $0.23 per share. This assumes stronger software license revenue in the second half of the year than we experienced in the first half of the year. We have already seen some large deals that slipped out of the second quarter close in December, which we believe bodes well for the second half.

We expect our gross margins to improve in the second half due to mix towards higher software licenses than we saw in the first half. We also expect that our operating expenses will run between $15.0 million and $15.5 million per quarter for the remainder of the year. We expect to be cash-flow positive for the year as well.

I would now like to hand the call back to Bobby for his closing remarks.

Bobby Yazdani

I believe we have taken the appropriate actions to manage our expenses tightly for these turbulent times but at the same time continue to implement our most strategic priorities.

With that said, should we see additional economic contraction, we will take appropriate actions to refine our business model.

I want to thank everyone for joining us today. This concludes the prepared portion of our presentation. Bill and I will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Eric Martinuzzi - Craig-Hallum Capital.

Eric Martinuzzi - Craig-Hallum Capital

As we came out of Q1 you gave a couple of metrics that were very helpful of the $28.0 million and 15% year-over-year. Do you have the equivalent numbers coming out of Q2?

Bill Slater

I do not have that in front of me but I can get that for you.

Eric Martinuzzi - Craig-Hallum Capital

On the license, obviously very tough environment. This is the second quarter in a row we have been below $3.0 million on the license. I understand you expect growth there in the back half of the year, but any help at all on the total revenue for the year? Because coming out of Q1, again, we were looking for in the neighborhood of $116.0 million total top line with $51.0 million in the bag for the first half of the year. That would imply a pretty significant uptick in the back half of the year, unless you are stepping away from the $116.0 million.

Bobby Yazdani

If you recall, what we emphasized on our last call is that our focus is going to be on earnings. And what we guided primarily was to come north of $0.20 in terms of the non-GAAP earnings for the year.

We have also suggested at the time we didn’t have enough visibility around the currency, we know as we stand today with respect to the second quarter, we had a fairly significant currency impact that we are realizing today in terms of the revenue, in excess of the second half of the year we are looking at $4.0 million just coming out of the revenue impact because of the currency impact we are experiencing.

So we are focused on earnings the second half of the year. We are going to focus on profitability. We have guided around $0.18 to $0.23 non-GAAP earnings and that is going to be the primary focus of the business, is to generate that level of profitability.

In terms of the revenue, this particular license revenue, as Bill indicated we had a very good December so we have decent visibility in terms of what our expectations are around license revenue for the second half of the year. So we have December in the bag looking into the last five months, essentially, of the year.

There are some license serving that is going to come on the deferred line. There are also some sets of projects that based on obligations we will be able to count on, that we expect that the clients would execute that purchase based on their contractual obligation and existing projects. So we have good visibility along those sets of activity.

So in a nutshell, the support, On Demand, and traditional services, you are looking at a run rate business, you are looking at a backlog, off the deferred revenue or off balance sheet backlog, that we have good visibility along those, in terms of the license revenue, as I indicated. December was a fairly good month for us. We have good visibility on a number of existing projects and existing customers. But absolutely you are right, there is the biggest risk to the forecast, the license revenue.

Eric Martinuzzi - Craig-Hallum Capital

You saw some pretty terrific margins there on the professional services. I have it calculated at about 37.5%, which is better than anything I see looking back at the past two years. How sustainable is that? Where do you expect services margins to be?

Bobby Yazdani

It could drop off slightly but as I have also indicated we have moved our professional services to [inaudible] revenue model. We are selling more what we call application managed services as professional services, so you are seeing the impact of that line of business within our AMS, our support services line.

Really, we have built a lot of efficiency in terms of building tools and methodologies to execute and getting benefit from that. The product is quite robust. We have a seasoned consulting organization now on board and as you know, we have a large customer base. As we stand today we are running some 80 projects worldwide. I think the scale is using the right level of efficiency, the application management services as a part of our support services is also yielding some good efficiencies.

But our expectations would stay north of 30% going forward.

Operator

Your next question comes from Kevin Liu - B. Riley & Company, Inc.

Kevin Liu - B. Riley & Company, Inc.

In term of the deferreds, you mentioned that they were down from the beginning of the year but then for the most part you are expecting some stronger renewals in the back half of the year, from seasonality. And then given that some of the license revenues are going to come out of the deferreds as well, in terms of your overall general expectations will 2009 deferred revenues be up from 2008?

Bill Slater

Yes. I think if you look at the trends on a quarter-by-quarter basis typically the second quarter is a pretty significant dip and we have a lot of billings in the third quarter. So if I refer to last fiscal year, we went up from about $28.0 million and change in the second quarter, up to $31.0 million in the third quarter. So we are going to get those renewal billings out pretty heavily this quarter so we would expect deferred revenue to start moving up from this point.

Kevin Liu - B. Riley & Company, Inc.

And in terms of the strong trends you’ve seen in December so far, can you just give us any sort of sense on what percentage of the slipped deals out of Q2 were closed in December and then also kind of how the business was split between On Demand and the traditional.

Bobby Yazdani

November was a very difficult month. Essentially we have quite a few contracts that we’re sitting on with the clients that we didn’t really get the signature on until the first two weeks of December.

We had I would say in excess of 7 major contracts that concluded in December and there were a number of seven-figure contracts that were also concluded in the month of December. This is the total size of the contract.

In terms of the split, I think we are seeing again a fairly good split, 50/50 split. I could be off be a few percentages, but you are seeing a fairly good split between On Demand and the traditional Enterprise software business.

Kevin Liu - B. Riley & Company, Inc.

I just wanted to touch on the partnerships you have announced over the past few quarters. Certainly it sounds like some of that is supposed to start coming through in the second half of the year. But if you could give us any sort of update in terms of the size of that pipeline or the opportunities you see today.

Bobby Yazdani

You know, our largest pipeline is with IBM, on a global basis. And we are working very closely, also, with HP, building up our pipeline with them in a number of geographies outside the United States and well as the United States. And we already have seen some of those concluded in December. We expect a similar pattern as some of these are infrastructure large commitments that have been working with clients over the past year or so, that we expect to come in between now and the end of our fiscal year.

So the pipeline with IBM I can say has grown year-over-year, as well as to say the same with HP.

Operator

There are no further questions in the queue.

Bobby Yazdani

We are available here at our headquarters. So if we can be of any assistance to any of you, please don’t hesitate to reach out to myself or Bill. Thank you very much for attending the call with us today.

Operator

This concludes today’s conference call. This call will be made available for replay after 4:00 pm today until Saturday, January 31, 2009, at midnight. You may access AT&T Executive Playback Service at any time by dialing 1-800-475-6701 and entering the access code of 974622. International participants may dial 1-320-365-3844.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!