Saba Software, Inc. F3Q09 (Qtr End 02/28/09) Earnings Call Transcript

Saba Software, Inc. (SABA)

F3Q09 (Qtr End 02/28/09) Earnings Call Transcript

March 31, 2009 5:00 pm ET

Executives

Bill Slater – CFO

Bobby Yazdani – Chairman & CEO

Analysts

Kevin Liu – B. Riley & Co.

Ryan Burgin [ph]

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Saba Software third quarter fiscal 2009 earnings release conference call. (Operator instructions) I would now like to turn the conference over to our host, Saba’s Chief Financial Officer, Mr. Bill Slater. Please go ahead.

Bill Slater

Good afternoon. Welcome and thank you for attending Saba Software’s third quarter fiscal 2009 conference call. With me today is Chairman and Chief Executive Officer, Bobby Yazdani. If you have not yet 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 projections and financial projections, the continuing acceleration and growth as well as increasing contribution from our OnDemand business, Saba's ability to grow and increase market share, increasing contribution from our partners, Saba’s 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 Bill. Thank you and good afternoon everyone. In today’s call, I will cover the third quarter highlights as well as guidance for the remainder of the fiscal year 2009. I will then turn the call over to Bill, who will provide details on our third quarter financials.

During our fiscal third quarter, we benefited from the results of tuning our business model for greater profitability as well as a focus on cash generation. I am very pleased to report record quarterly profits at GAAP earnings of $0.05 per share fully diluted and non-GAAP earnings of $0.11 per share on revenue of $26.1 million.

In addition to improved profitability, we also increased our cash levels from $12.9 million at the end of the prior quarter to over $20 million at the end of this quarter. I would also like to note that our deferred revenues both short and long term increased from $27.3 million at the end of the prior quarter to $34.3 million at the end of our fiscal third quarter.

These results reflect the continued acceleration of our OnDemand business, success of our sales efforts with our existing customers, and increased contribution from global partners, and our disciplined focus to pursue profitable growth.

Because Saba serves leading global companies and government entities, we will continue to offer and promote both an on-premise and OnDemand offering to our customers. We have seen many instances where the mission-critical application nature of our application caused a strong demand for the application to on-premise.

At the same time, Saba OnDemand continues to grow and the percentage of total revenues from OnDemand is steadily increasing. We now serve more than 3 million users globally via OnDemand solutions, and continue to demonstrate superior scalability through 15 global deployments with more than 50,000 users.

We're achieving the best of both staff and license models by leveraging a single enterprise class product platform for both OnDemand and on-premise customers, and providing careful management of processes to share an optimized cost wherever possible.

We signed a number of new contracts and expanded relationships with important customers around the world during the third quarter including Allianz, BDO Stoy Hayward, Canada School of Public Service, Gwinnett County, L-3 Communications, McDonald’s, Medtronic, Nomura Research Institute, and the Queensland Government in Australia.

Our focus on customer success contributed to many of the add-on sales we received, and we continued to measure and improve customer success metrics across both our OnDemand and on-premise customers worldwide.

Another important trend in the quarter was the influence of our partners on new product sales. As we adjust our business for growth in a challenging economy, leveraging partners to resell and extend our solution is a critical strategy for Saba. Partners we sold or influenced more than 30% of our new customer revenue during Q3, and we expect the contribution of partners to continue to increase.

As companies continue to seek ways to optimize their spending in people, training and compliance processes and examine how to manage and deliver learning online, we believe Saba is uniquely positioned to help them increase effectiveness, while reducing costs. Our Saba Centra product is a unique asset in people management markets with the opportunity to provide organization with immediate ROI.

During the quarter, we extended or sold new contracts to over 70 Saba Centra customers. I would also like to note several acknowledgements that we received during the third quarter. We received a Bersin & Associates Learning Leaders Award for vendor innovation, which recognized the Saba Knowledge Center for its ability to deliver Web 2.0 collaboration, recommendation and search capabilities that improve learning effectiveness.

Our customers represent the world's most respected enterprises and by listening closely to their needs, we will continue to develop and deliver new capabilities that accelerate high-quality knowledge exchange and information flow to advance learning across the extended enterprise.

For performance and talent management, Saba was positioned in the Visionaries Quadrant of the 2009 Gartner Magic Quadrant for Employee Performance Management Software. (inaudible) placement confirmation of the value of providing our customers with robust innovative people performance management and successful planning solution that help improve organizational performance and deliver immediate ROI.

In summary, our ongoing focus in profitable growth is bearing fruit. We moved early to adjust and control costs for a challenging economy, and now have a stable base to build growth and increase market share in the coming quarters. Our recognized product innovation and profitable business model across both OnDemand and on-premise, position us for future growth and success. Based on the progress we have made this fiscal year, we are reaffirming our non-GAAP earnings guidance range of $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

Thanks Bobby. Total revenues in the third quarter of fiscal 2009 were $26.1 million compared to $27.4 million in the same quarter last year. On a positive side, OnDemand revenues of $5.3 million for the quarter increased by 16% from prior-year revenue of $4.6 million.

License updates and product support revenue of $8.5 million was flat with the prior year. License revenue of $4.7 million was down $1.3 million from the prior-year revenue of $6 million and professional service revenue of $7.6 million was down 9% from prior-year revenue of $8.3 million. Approximately 30% of revenues in the quarter came from customers outside of the United States.

The gross margin for the fiscal third quarter came in at 62% as compared to 63% for the same period last year. The slight decline in gross margin came as a 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 margin OnDemand revenue and slightly lower gross margins on our service business this quarter.

Also impacting third-quarter service gross margin were some additional spending in the Japanese market. Without the impact of the additional spending, professional service gross margins would have been back into the low 30 range, and overall gross margins would have been a full point higher.

Operating expenses of $14.3 million for the fiscal third quarter are $2.5 million, or 15% below the prior year, which is indicative of the expense-reduction opportunities the company has undertaken over the past year.

The net income for the quarter of $1,335,000, or $0.05 per share, represents an improvement over prior-year net income of $158,000 [ph], or $0.01 per share.

Non-GAAP net income for the quarter of $3,230,000 million or $0.11 per share is up from prior-year results of $1,717,000 million or $0.06 per share.

Our EBITDA margin for the quarter was 15% compared to 9% for the same period of the prior year.

We ended the third quarter with $20 million in cash compared to $16.6 million at the beginning of the year and $12.9 at the end of the prior quarter. The improvement in cash balances resulted from strong operating results coupled with a focus on receivables. The dramatic strengthening of the dollar during this fiscal year unfavorably impacted our cash balance by approximately $2 million.

Our days billing outstanding fell to 63 days at the end of the third quarter from 68 days at the end of the prior quarter.

Combined current and long-term deferred revenue of $34.3 million increased by $0.3 million or 10% from the beginning of the year primarily due to increased OnDemand and support invoicing.

The metrics that we will now be providing to you include invoicing, which represents total billings that the company performed for the quarter and is due within 90 days, renewal rates for enterprise software maintenance and OnDemand services, the number of new customers and the number of new product transactions greater than $50,000 in value.

Let us start with invoicing. For the third quarter, we invoiced $32.8 million compared with $30.4 million in the prior year period. On a year-to-date basis, we invoiced $84.7 million versus $87.4 million for the prior year. Our renewal rate on enterprise software maintenance for the third quarter was 94% compared to 91% for the prior year, and on a year-to-date basis was 94% compared to 93% for the prior year period.

For our OnDemand business, our renewal rate for the third quarter was 81% compared to 94% for the same period of the prior year, and on a year-to-date basis was 88% compared to 90% in the prior year. Our OnDemand renewal rate for the third quarter was impacted by a loss of several Centra customers primarily due to budget reductions.

During the quarter, we added 24 new customers compared to 25 new customers in the same period of the prior year. The number of new product transactions greater than $50,000 was 28 compared to 37 transactions in the prior year period. However, the average value of the transaction increased 14%.

We continue to see a strong pipeline for the business and reiterate prior non-GAAP guidance for fiscal 2009. We expect GAAP EPS to range from a loss of $0.05 per share to $0.10 per share, including charges for restructuring and extension of the life of underwater options from 6 to 10 years. The non-GAAP EPS range remains unchanged from our prior quarter guidance at $0.18 to $0.23 per share.

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

Bobby Yazdani

In Q4, we intend to continue to execute our business plan and conservatively manage capital expenditures and non-sales costs to provide financial flexibility given the risk of the current economic environment.

I want to thank you and thank everyone for joining us today. I also like to let everyone know that they will be present at the RBC Conference in June. This concludes the prepared portion of our presentation. Bill and I will now take questions. Operator, you can poll the audience for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And we will go to the line of Kevin Liu. Please go ahead.

Kevin Liu – B. Riley & Co.

Hi, congratulations on a nice quarter, and thanks for taking my questions.

Bill Slater

Hi Kevin.

Bobby Yazdani

Hi Kevin.

Kevin Liu – B. Riley & Co.

I guess the first question, the deferred revenue growth as you mentioned was extremely strong this quarter, could you just give us a sense for where that came from, was that just your typical seasonality in terms of getting some maintenance renewals in there or where you are seeing a lot of traction either OnDemand or maybe some license revenues that can get recognized during the quarter?

Bill Slater

You know, I think it came from both areas. It was both strong maintenance billings and our OnDemand deferred revenue was up as well.

Kevin Liu – B. Riley & Co.

Okay, and then in terms of the maintenance number that was down sequentially. So I was wondering if you could just help us reconcile what was going on kind of quarter-to-quarter on the maintenance line.

Bill Slater

Well, against the prior year we had a special pickup in the prior year of about $900,000 related to a complex transaction with a major customer. So when you look at the prior year services – when you look at the prior that is somewhat distortive, but I think the maintenance has been tracking for the last two quarters roughly at $8.5 million.

Kevin Liu – B. Riley & Co.

Okay, and then mainly in terms of the new product transactions that you talked about, I was wondering if you could give us a sense for where the demand is, is that more around the learning products, are you seeing some traction on either performance or from Centra. Just wondering if any particular product line is driving some of the new business.

Bobby Yazdani

Still then, given that the majority of the new deals are coming from the learning products, we have also had a number of up sell to existing customers with the performance on the talent management products. So it is a very good mix. It is not really, nothing unusual from what we have seen in the past, roughly about 40% to 45% of the bookings come from Saba Centra product, 40% to 45% comes from the learning product, and the reminder essentially is coming through the up sell of performance and talent management to existing customers.

Kevin Liu – B. Riley & Co.

Okay, and just one last question on the sales and marketing line. I was wondering kind of how you guys were able to manage that down so much, just wanted to get a sense for how much of that was headcount versus maybe discretionary or marketing spend, and then any color you could provide.

Bill Slater

Sure, we have – we have managed the cost both in terms of the marketing program, a fairly significant amount is coming out of the marketing programs. We have may maintain the quarter-to-quarter roughly the same number of sales reps and the number of the same sales engineers to support them. We have, of course, have made, since the beginning of the year we have made some adjustments in terms of the management. So we have done quite a few adjustments on that front, and now we are essentially yielding the cost savings out of that.

Kevin Liu – B. Riley & Co.

Great. Thanks a lot.

Bill Slater

Thank you.

Operator

Next we will go to the line of Ryan Burgin [ph]. Please go ahead.

Ryan Burgin

Good afternoon guys.

Bill Slater

Hi, Ryan.

Bobby Yazdani

Hi Ryan.

Ryan Burgin

Can you give us an idea of what the March month looks like compared to January and February?

Bill Slater

You know, March has been a good month you know, we've not – actually January we had a very, very rough start in the beginning of the month. We also had a rough year-end, essentially in December. Things came back end of January. February was okay, and I would say March is also – we are not at all seeing a – the activities remain quite right. It is okay.

Ryan Burgin

I know you are not giving revenue guidance for the remainder of the year, but do you guys think you can get to $1.03 [ph] for total revenue number?

Bill Slater

Yes, we feel comfortable that we are managing the business quite conservatively. We are managing the cost essentially to a very moderate; I would say revenue quarter-over-quarter increase.

Ryan Burgin

And then could you talk a little bit more about the additional spending that is spent in the Japan market with the professional services?

Bobby Yazdani

You know, we had some additional spending to do on the professional service area that lower our margins in the Japanese market. We don't expect to this to be re-occurring. We have a pretty strong discipline around margins on professional services. It was violated in this particular instance. So the impact was fairly significant. It was about $300,000 on the gross margin line, and, of course, that is a full point of gross margin, and it would be a penny of EPS as well.

Ryan Burgin

So you said last quarter you expected professional services margin to remain north of 30.

Bobby Yazdani

Right.

Ryan Burgin

Do you think that is still consistent with that metric?

Bobby Yazdani

That is consistent. We would have been between 32 and 33 without the hiccup in the Japanese market.

Ryan Burgin

Okay, and then with the operating margin, obviously you had a good operating margin this time. Where – how sustainable is the margin that you had this quarter, say next quarter and looking out through 2010?

Bill Slater

You know, I think this quarter, the third quarter had some benefits in it. There was a holiday season, there was slower travel, but I think that overall we are looking to run margins in the mid-teens on an EBITDA basis. So I think that is our goal. of course, it will be greatly influenced by our product mix, but I think this is probably the first quarter we hit our goal in terms of hitting our margins. So our goal is to sustain that. We have taken some expenses out. We will be adding some expenses back in as well that strategically supports the business, but I think our goal is to continue to be in the mid-teens on an EBITDA basis.

Ryan Burgin

Where do you expect to take out expenses?

Bill Slater

Well, I think we have taken out some expenses across the board during the last quarter. We announced that we had a restructuring charge of about $0.02 that was about 30 people, and it basically came from all functional areas. But I think sales and marketing may be an area that we may decide to add some things back into as we see opportunity.

Bobby Yazdani

Right, and the other area that we are going to continuously emphasize is the gross margin, specifically on the OnDemand margin. We're seeing an improvement quarter-over-quarter, every quarter we have kind of moved that up by a few points and definitely an area the focus has not gone away. We like to get that to mid-60s. That is the mark is – the target for that business.

Ryan Burgin

And then, forgive me if I missed this, but wondering what cash flow from operations in CapEx was for the quarter?

Bill Slater

Yes, you know CapEx was about $300,000 and cash flow from operations was about $8 million.

Ryan Burgin

Great. Thanks guys.

Bill Slater

Okay.

Operator

And there are no more questions in queue.

Bill Slater

With that, again I like to thank you for attending our call this afternoon. Thank you very much operator.

Operator

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.

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