Saba Software, Inc. F4Q09 (Qtr End 05/31/09) Earnings Call Transcript

Saba Software, Inc. (SABA)

F4Q09 Earnings Call

July 20, 2009 5:00 pm ET

Executives

Bill Slater – CFO

Bobby Yazdani – Chairman & CEO

Analysts

Eric Martinuzzi – Craig-Hallum

Kevin Liu – B. Riley & Co.

Presentation

Operator

Welcome to the Saba Software fourth quarter and fiscal 2009 earnings release conference call. (Operator instructions) I would now like to turn the conference over to our host, Saba’s Software’s Chief Financial Officer, Mr. Bill Slater. Please go ahead.

Bill Slater

Good afternoon. Welcome and thank you for attending Saba Software’s fourth quarter and 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, Saba’s ability to take advantage of the opportunities provided by the new IBM relationship, Saba’s ability to develop and timely release new products, Saba’s belief that we have taken the appropriate actions to achieve our most strategic priorities.

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 forward-looking statements is contained in our annual report on Form 10K 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 comparable 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 fourth quarter and full fiscal year highlights as well as expectations for fiscal year 2010. I will then turn the call over to Bill who will provide details on our fourth quarter financials before I return to wrap up.

Over the past year we managed to improve most aspects of our financial and business performance despite the impact of the faltering economy and a strong U.S. dollar. We are very pleased to report record annual non-GAAP earnings and cash generation while increasing deferred revenue and maintaining solid revenue results.

Let’s talk about the fourth quarter. Fiscal fourth quarter results included revenue of $25.6 million net of $1 million software license contract that will be recognized in the new fiscal year. GAAP EPS was a loss of $0.04 per share while non-GAAP earnings were $0.07 per share. We continued to generate cash, adding $6 million to cash balances in the quarter.

A noteworthy event in the fiscal fourth quarter was the completion of our expanded relationship with IBM. The IBM Software Group is discontinuing its learning management products and has adopted Saba Learning Products to form its new Learning Accelerator for Websphere Portal. This provides Saba with two opportunities. One, to convert with IBM’s assistance existing IBM customers. The more exciting opportunity would be to work with IBM Software to sell Saba Learning as part of IBM’s Websphere Portal to new customers. IBM and Saba products are a natural fit as learning and talent management activities can be woven into the everyday activities of employees, customers and partners.

Also noteworthy in the fourth quarter was the addition of Jeff Carr to the management team as President of Global Field Operations. Jeff brings to Saba more than 25 years experience in global enterprise software and OnDemand sales, marketing, services and operation including executive positions at People Soft and Taleo. Jeff has been asked to scale our worldwide operations to better support all our direct and indirect markets.

Saba OnDemand revenues continue to grow and the percent of our total revenues from our OnDemand have steadily increased. We now serve more than three million users globally with OnDemand solutions. Our returning revenue stream between product support and OnDemand revenue now represent 54% of the overall revenues in the quarter.

We signed a number of new contracts and expanded relationships with important customers around the world during the fourth quarter including Brinker International, Petrobras, Finning International, City of Houston, U.S. Army and Unum Group. A focus on customer success contributed to many of the add-on bookings we received during the quarter and we continue to measure an improve customer success metrics across both our OnDemand as well as our on-premise customers worldwide.

I would also like to note that during the fourth quarter Saba was recognized as the provider with the most experience in large scale LMS implementations according to the recently published Bersin and Associates study. This study recognizes Saba’s leadership in product functionality, product innovation and our ability to implement true global enterprise LMS.

During fiscal year 2009 we made significant progress in improving our finances, acquiring and ensuring the success of our customers and advancing our product innovations. From a financial perspective we increased our cash balance by 56% to $26 million and maintained strong revenue results and increased bookings in spite of a global economic recession and significant negative currency impacts.

Our deferred revenue at May 31, 2009 increased 13% to $35.3 million from $31.3 million at the end of the prior fiscal year, reflecting the continued strength in bookings. Finally, from a product perspective we continue to advance our leadership with new releases on Saba Centra and Saba Enterprise including the introduction of Saba Workforce Planning and innovative capabilities for internal recruiting. Our innovation was recognized with a Gold Award from CLO Magazine for Excellence in Learning and Bersin and Associates for Learning Leaders’ Award for vendor innovation.

The combination of successful execution from a financial, customer and product perspective has strengthened our company’s position during the past year. With regard to next year, we anticipate non-GAAP earnings for fiscal 2010 will range from $0.25 to $0.29 per share. We expect that due to the seasonal nature of our customers’ spending patterns coupled with select investments in building our sales and marketing team, earnings and cash will be more heavily skewed to the latter half of fiscal 2010.

Let me now turn the call over to Bill to discuss the financials in detail.

Bill Slater

Thanks Bobby. Total revenues in the fourth quarter of fiscal 2009 were $25.6 million compared to $28.2 million in the same quarter last year. On a constant currency basis, foreign exchange rates negatively impacted revenue in the fourth quarter fiscal 2009 by approximately $2.4 million compared to revenue in the same period last year. Approximately 32% of revenue in the quarter came from customers outside the United States.

In the fourth quarter of fiscal 2009 license revenue was $4.5 million, down 20% over the fourth quarter of the prior year primarily as a result of the deferral to future periods of license revenue from a significant license sale in the fourth quarter. License, update and product support revenues in the fourth quarter of fiscal 2009 were $8.6 million. Although renewal rates remain strong, as I will discuss in a moment, license update and product support revenues were down 3% over the same period of the prior year due to the impact of foreign currency rates.

In the fourth quarter of fiscal 2009, OnDemand revenue increased to $5.2 million, up 12% over the same period in the prior year. Professional service revenue was $7.3 million, down 20% from the same period in the prior year due primarily to a reduction in customer spending on consulting services.

Gross margins in the fiscal fourth quarter came in at 62% which is flat with the same period in the prior year. Operating expenses at $15.4 million for the fiscal fourth quarter were $1.7 million or 10% below the fourth quarter of the prior year which reflects the expense reductions implemented by the company over the past year.

The net loss for the fourth quarter of fiscal 2009 was $1.1 million or $0.04 per share compared to a net loss of $300,000 or $0.01 per share in the same period of the prior year. Non-GAAP net income in the fourth quarter of fiscal 2009 was $2.2 million or $0.07 per share, a slight increase from $2 million or $0.07 per share in the fourth quarter of the prior year.

Our EBITDA margin for the fourth quarter net of non-GAAP adjustments was 12% compared to 9% for the same period of the prior year. We ended the third quarter with $26 million in cash compared to $16.6 million at the beginning of the year and $20 million at the end of the prior quarter. The improvement in cash balances resulted from strong operating results coupled with a focus on receivables. Our days billing outstanding improved to 66 days at the end of the fourth quarter from 68 days at the end of the prior year. Deferred revenue at the end of the fourth quarter increased to $35.3 million or 13% from the end of the prior fiscal year.

The metrics we now will be providing to you include invoicing, which represent total billings the company performed in the period and is generally due within 90 days from invoice, renewal rates based upon dollars for license updates and product support as well as OnDemand services, the number of new customers added in the quarter and the number of product transactions in the quarter that were greater than $50,000.

Let’s start with invoicing. In the fourth quarter of fiscal 2009 we invoiced $26 million compared to $27.3 million in the fourth quarter of the prior year. For the fiscal year ended May 31, 2009, we invoiced $110.8 million compared to $114.8 million for the prior year. The value of invoicing was unfavorably impacted by currency for both periods.

Our renewal rate on license updates and product support for the fourth quarter of fiscal 2009 was 90% compared to 88% for the same period in the prior year. For the full year it was 93% compared to 91% for the prior fiscal year. For our OnDemand business our renewal rate for the fourth quarter fiscal 2009 was 84% compared to 79% for the same period of the prior fiscal year. For the full year it was 87% compared to 86% in the prior fiscal year.

During the quarter we added 35 new customers compared to 20 new customers in the same period of the prior year. For the full year we added 98 new customers compared to 105 new customers for the prior year. The number of product transactions greater than $50,000 was 31 compared to 47 in the prior year period. However, the average value of the transactions increased 6%. For fiscal 2009 the number of transactions greater than $50,000 was 268 compared to 306 for the prior year.

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

Bobby Yazdani

I believe we have taken appropriate actions to continue to implement our most strategic priorities. These priorities include a continued focus on large enterprise and public sector customers, continued delivery of our offerings either OnDemand or on premise at the customer’s requisite, support for our recently announced expanded relationship with IBM, organic expansion of our unified people management suite of products and build up our sales and marketing functions to take advantage of developing market opportunities.

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

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Eric Martinuzzi – Craig-Hallum.

Eric Martinuzzi – Craig-Hallum

The implied guidance or the guidance of the $0.25-0.29 suggested EPS for 2010, I am curious the revenue target for that. What I am wondering is it looks an awful lot like you just sort of annualized Q4 here with the $25-26 million and the $0.07 and that takes us to pretty much what you have guided for 2010. Was that the logic or have you given it a finer point than that?

Bill Slater

A couple of points. I think we indicated there would be some seasonality in the first half versus the second half of the year. We are not straight-lining the business. We are making some selective investments early in the year that we believe will pay off later in the year as well. As consistent with our last several quarters we decided we were only going to give earnings guidance.

Eric Martinuzzi – Craig-Hallum

Those investments you mentioned sales and marketing?

Bill Slater

Principally sales and marketing investments. We see some opportunities in some market segments. We have Jeff Carr on board. We believe now is the time to take advantage of these opportunities.

Eric Martinuzzi – Craig-Hallum

The sequential decline in OnDemand, what is the explanation there?

Bill Slater

We had a small outage with our Centra product and we have service level agreements. We gave out some credits. I think it was probably close to $250,000.

Eric Martinuzzi – Craig-Hallum

The expectation is that you will recover that in Q1?

Bill Slater

Absolutely. That was let’s call it a one-time blip.

Eric Martinuzzi – Craig-Hallum

The IBM impact, I would love to know how soon, how much. Any greater clarity we could get on both the installed base as well as the new prospect opportunities there?

Bobby Yazdani

We announced our relationship with IBM, the second half of May. Since the announcement the funnel is building very nicely across all territories. Of course we are going through the summer right now but our expectation is around anywhere between 6-9 months we are going to start seeing converting some of those opportunities into real opportunities for Saba.

Eric Martinuzzi – Craig-Hallum

That is on the maintenance side?

Bobby Yazdani

Both. A combination of new as well as existing. We are seeing the number of existing is also expanding in terms of products they are requesting to take a look at or expanding the footprint of the project.

Operator

The next question comes from Kevin Liu – B. Riley & Co.

Kevin Liu – B. Riley & Co.

Turning back towards your guidance for this fiscal year I know you are not giving any numbers out for the revenue line but in terms of your comments relating to the back half of your fiscal year being a little bit stronger I would assume that means the calendar year-end here. What does your pipeline kind of suggest is going on now amongst your enterprise customers? Are you expecting kind of an improved income on license revenues from where we are today? Or do you feel like the environment still remains fairly sluggish and it is still too early to tell?

Bobby Yazdani

The pipeline for the fiscal second quarter ending May remains quite healthy. We typically see strong activities as we get closer towards the calendar year towards our second quarter fiscal year. Then we expect again that would pick up in December/January for us in our third quarter. There is nothing essentially we are seeing in the pipeline that suggests business is weak. I would say business is cautious. We are cautious. I think we are expecting that both the effort that Jeff has undertaken in terms of expansion of the field organization as well as the new relationship with IBM should yield positively for us the second half of our fiscal year.

This is going through a summer period so we are being very cautious for the summer but as I said we are very excited about having Jeff on board, the IBM relationship and the pipeline remains healthy.

Kevin Liu – B. Riley & Co.

Turning to the sales and marketing line I think you mentioned some of those investments are being made earlier in the year. It looked like it jumped up a bit from the prior quarter as well already. How much more incremental investment do you see compared to Q4 levels and where exactly are you making that investment? Is it headcount or expansion of marketing programs? I just want to get a sense there.

Bill Slater

So the prior quarter was probably deflated a bit because we had a two week shut down period and it was a lower travel quarter. I think expenses came up to a more normalized rate this quarter. We added Jeff Carr in our fiscal fourth quarter. We are principally looking at adding quota-carrying sales reps and marketing activities that will help us develop new prospects. That is the core of our focus as well as supporting the IBM relationship.

Kevin Liu – B. Riley & Co.

If we look at the invoicing numbers you gave for Q4 here, how would that break out amongst your traditional learning management system versus some of the newer areas like performance, talent as well as the Centra product line?

Bill Slater

I don’t have those numbers in front of me right now.

Kevin Liu – B. Riley & Co.

Which areas are stronger than others?

Bill Slater

I think learning continues to be strong. We continue to focus and one of our focuses for fiscal 2010 is going to be performance and talent. What I can tell you is about half of our new customers coming in the door are OnDemand and half remain software licenses at this point.

Operator

I will turn it back to our presenters for any closing remarks.

Bobby Yazdani

Thank you very much for joining us this afternoon.

Bill Slater

Thank you everyone.

Operator

Ladies and gentlemen that does conclude our conference call today. We would like to thank you for your participation and for using AT&T’s Executive Teleconference Service. You may now disconnect.

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!