Saba Software, Inc. F1Q10 (Qtr End 08/31/09) Earnings Call Transcript

Saba Software, Inc. (SABA)

F1Q10 Earnings Call

September 24, 2009 5:00 pm ET

Executives

Bill Slater – Chief Financial Officer

Bobby Yazdani – Chairman & Chief Executive Officer

Analysts

Eric Martinuzzi – Craig-Hallum

Kevin Liu – B. Riley & Co.

Presentation

Operator

Welcome to the Saba Software first quarter 2010 earnings release. (Operator instructions) I would now like to turn the conference over to Saba’s Chief Financial Officer, Mr. Bill Slater.

Bill Slater

Thank you for attending Saba Software’s first quarter fiscal 2010 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 performance and financial projections, Saba’s belief that first quarter professional service revenues hit a bottom, Saba’s promising relationship with IBM including a growing pipeline and Saba’s ability to complete major deals with IBM, Saba’s growing momentum, Saba’s ability to execute against its key growth strategies, and Saba’s ability to profitability grow its business.

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 statement 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 10-K for the year ended May 31, 2009, 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 and good afternoon everyone. In today’s call, I will cover our first quarter performance and significant milestones we achieved during the first quarter and our expectations for fiscal year 2010. I will then turn the call over to Bill who will provide details on our first quarter financials.

Let’s start with first quarter highlights. Fiscal first quarter revenue was $25.8 million, up 2% compared to $25.3 million in the same period of the prior year. License and on-demand revenue from sales of our unified people management solutions during the quarter were $11 million, a significant increase of 39% from the first quarter of the prior year. The impact of the growth in our product revenues was partially offset by lower professional services revenues. As with many of our peers, services engagements tapered off during summer as some companies deferred or reduced the size of their projects. We anticipate this to be a bottom for professional services revenue.

Gross margins improved to 65% in the first quarter of fiscal 2010 and recurring revenue for license updates and product support and on-demand services accounted for over 54% of the company’s total revenue. Our GAAP EPS improved to $0.03 per share on a fully diluted basis compared to a loss of $0.08 in the same period last year. Our non-GAAP EPS improved to $0.07 per share on a fully diluted basis compared with break even a year ago.

Bill will give you more details about the first quarter in the call later. I’d now like to elaborate on some of the major accomplishments in the first quarter. We added 20 new enterprise customers and expanded existing relationships with a number of organizations worldwide, including American Red Cross, Ampli-Phone, Briggs and Stratton, Cisco, Deloitte, Internal Revenue Service, Kraft, and the US Army. We also continued to improve our customer success metrics around both on-demand as well as license customers.

Our success with both new and existing customers has solidified our position as a clear leader and market standard in enterprise learning, with the highest market share in this space. Customers like HP and Cisco with complex, highly demanding requirements have not only selected Saba as their global learning standard, they are now also standardized on Saba for performance and talent management as part of a unified solution for people management. During the first quarter, we won a significant project at Cisco to deploy our entire people management suite. This win reflects the strength and completeness of our people management suite.

And Gartner Group again positioned Saba as the clear leader in its 2009 Magic Quadrant for corporate learning systems. This validation coupled with our strength and market momentum in the performance and talent management space reinforces our confidence in our ability to lead across the entire unified people management spectrum. Winning major deals for unified people management solutions, while meeting customer demand from one vendor that can provide a complete standardized solution across the people management spectrum, serves to validate our strategy.

Our partnership with IBM continues to show tremendous promise as we begin to engage on major deals across all geographic regions. Pipeline with IBM is solid and growing, and builds on successes we are having with several other important alliance partners across all regions.

We believe our growing momentum has served as a magnet for new top tier talent to join Saba. Adding to the pool of top talent already at Saba, I’m very pleased to announce another significant management team addition as we continue to strengthen and invest in a world-class sales and marketing capabilities. During our first quarter of fiscal 2010, Andrew Salzman joined Saba as our chief marketing officer. Andrew possesses more than 25 years of global enterprise software and on-demand experience across marketing products and alliances including CMO position at E2open and Information and Resources and over 7 years in corporate markets at Siebel Systems.

We also announced two new additions to the Saba Board of Directors in Bill Klein and Bill MacGowan. Bill Klein served as Chief Financial Officer at BEA and Vice President of Corporate Development until the company’s acquisition by Oracle in 2008. Prior to BEA, Bill spent 13 years at Hewlett Packard in senior management positions. And Bill MacGowan currently serves as Chief Human Resource Officer at Sun Microsystems. Prior to Bill’s 10 years at Sun, he served in executive HR roles at Qwest Diagnostics, Allergan, and Northrop Grumman.

We are now squarely focusing on executing on all our key growth strategies. These include a greater focus on installed base cross sell opportunities around performance, talent, etc., a substantial increase in field sales and marketing coverage, ensuring excellent support for both our customers and key alliances worldwide, growing our market share across the unified people management solutions spectrum, and continuing to drive innovations through new unified people management solution that delivers significant and measurable business impact.

Finally, as we look out over the balance of the fiscal year, we have increased our non-GAAP guidance range for fiscal 2010 to $0.26 to $0.30 per share. We expect that due to seasonal nature of customer spending patterns, marketing program investment early in the fiscal year, and selective investments in building out our sales and marketing team, our earnings and cash flow would be more heavily skewed to the second half of fiscal 2010.

With that, I will turn the call over to Bill.

Bill Slater

Total revenues in the first quarter of fiscal 2010 were $25.8 million compared to $25.3 million in the same quarter last year. License revenue was $5.7 million, up 93% over the first quarter of the prior. License revenue benefited from strong customer demand and the net recognition of approximately $700,000 in license deferrals from our fourth quarter. License update and product support revenues in the first quarter of fiscal 2010 were $8.8 million, or 1.3% higher than the same period of the prior year. License update revenue had been impacted by lower license revenue in fiscal 2009. On-demand revenues for the quarter at $5.2 million were up 6.7% over the same period in the prior year, and professional service revenue was $6.1 million, down 30.6% from the same period in the prior year, due primarily to the completion and/or deferral of projects by some customers as seen with many of our peers.

The gross margin for the fiscal first quarter came in at 64.7%, compared to 56.3% for the same period in the prior year. The improvement is due to mix of revenue to a higher gross profit licenses and improvement in on-demand gross margins.

Operating expenses at $15.5 million for the fiscal first quarter were $900,000 or 5.6% below the first quarter of the prior year which reflects the expense reductions implemented by the company as well as certain one-time costs incurred by the company in the prior year period.

The net earnings for the first quarter of fiscal 2010 were $1 million or $0.03 per share on a fully diluted basis compared to a net loss of $2.2 million or $0.08 per share in the same period of the prior year. Non-GAAP net income for the first quarter of fiscal 2010 was $2.2 million or $0.07 per share, compared to breakeven for the same period in the prior year.

Our EBITDA margin for the first quarter net of non-GAAP adjustments was 12% compared to 3% for the same period of the prior year. We ended the first quarter with $21.6 million in cash compared to $26 million at the beginning of the year and $15.5 million at the end of the first quarter of the prior year. The primary use of cash in the quarter was the stock repurchase of 1,384,920 shares for approximately $4.9 million, or $3.50 per share.

Our days billing outstanding at 75 days at the end of the first quarter compared to 66 days at the end of the prior year. The increase in billing days outstanding reflects higher invoicing later in the quarter.

With regards to key metrics for the quarter, let’s start with invoicing. In the first quarter of fiscal 2010, we invoiced $23.4 million, compared to $25.2 million in the first quarter of the prior year. The decline in invoicing is attributable to lower professional services. Our renewal rate on license updates and product support for the first quarter of fiscal 2010 was 93% compared to 95% for the same period in the prior year. For our on-demand business, our renewal rate for the first quarter of fiscal year 2010 was 92% compared to 94% for the same period of the prior year. The number of product transactions greater than 50,000 was 31, compared to 29 in the prior year period.

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

Bobby Yazdani

I believe we have taken the appropriate actions to place Saba in a position to profitably grow its business. 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) The first question comes from the line of Eric Martinuzzi – Craig-Hallum.

Eric Martinuzzi – Craig-Hallum

This is your best license number going back about 18 months now. This $5.7 million, I’m wondering if we’re in the ballpark of a new run rate here. Is this one-time traditional lumpy license, hard to tell, or is November going to be up from August as far as license goes?

Bobby Yazdani

As Bill indicated, there was a transaction that we concluded in Q4 that was taken through revenue for about $700,000. I think overall, Eric, the pipeline when we look at rolling 12 months looks pretty strong. We have increased the coverage as we’ve indicated we will do. We’ve done that. We feel pretty good that you should see a better stronger license balance for the remainder of the year.

Eric Martinuzzi – Craig-Hallum

You talked about better coverage. How many more salespeople do you have here at the August snapshot versus May?

Bill Slater

Eric, we closed last year with about 30 people that carry quota. I think we closed the quarter with close to 40, and I think as we said in our last call, our goal is to get to 45.

Eric Martinuzzi – Craig-Hallum

Your IBM relationship, I know that’s one that over time we expect to be very fruitful. I also understand there are steps along the way including things like training and support. Where are we in those things because I know eventually that translates into pipeline which translates into new business?

Bobby Yazdani

We have made very good progress both in terms of building the pipeline, delivering training to IBM resources on a global basis, realigning our resources and their resources in each of their theaters that we compete as a team, and also we have announced a program for Lotus customers where we started to build a pipeline. We should see in the second half of the year a number of those deals getting translated into projects for us.

Eric Martinuzzi – Craig-Hallum

Were any of the 20 new enterprise customers via the IBM relationship?

Bobby Yazdani

Yes. There was a number of them. Mostly those came through what they call the managed business services. The Lotus relationship is a newer one, and that’s the one where the pipeline is fairly new. It’s only eight weeks since we’ve announced the program. Our plan is to translate that into new business in the second half of the year.

Bill Slater

Eric, we had our first migration deal in the quarter which will start to add to maintenance revenue, but as Bobby said, most of what we’re going to do with the software group is pipeline right now.

Eric Martinuzzi – Craig-Hallum

Do you have cash from operations, Capex, and depreciation?

Bill Slater

Cash from operations was about $700,000. Capex was about $100,000 in the quarter. Depreciation is about $600,000. Amortization of stock comp was about $300,000, and amortization of intangibles was about $900,000.

Operator

Your next question comes from the line of Kevin Liu – B. Riley & Co.

Kevin Liu – B. Riley & Co.

First of all on the Cisco deal, just wondering if that was a competitive win, and are you starting to see more of a trend towards some of your customers wanting to standardize an integrated management suite?

Bobby Yazdani

Roughly 30% of the pipeline requires a unified solution. Customers are looking to see learning management, performance management, succession planning, and talent management into a single solution. So yes, Cisco was competitive, very important reference win for us. They went through a very extensive evaluation of the solutions in the market place. We’re quite pleased with the outcome. We believe that our unified solution is both of course very complete, very robust, and the nature of unification of our technology is a lower cost of ownership for the customer. It was a very important reference win for us.

Kevin Liu – B. Riley & Co.

You guys are a little bit off the calendar year, but if you look at September for other companies, it’s typically a little bit of a stronger month for them. What have you seen so far through this month, and then also relative to the pipeline especially with integrated suite deals, just wondering how much of that you might expect to come in in Q3 and Q4 of this year.

Bobby Yazdani

September has been quite busy and very active. We have a full calendar for the month of September, both in terms of closing business as well as sales cycles. In terms of the pipeline, as I mentioned 30% of the pipeline is now what I would suggest as a unified platform. The type of customers we’re looking for these unifications are typically large customers who are looking to consolidate. They’re large enterprises, global enterprises, and again we’re hoping to translate a number of these deal in the pipeline into business for us in the second half of the year.

Operator

Gentlemen, we have no further questions. You may continue.

Bobby Yazdani

Thank you again for joining us today. Bill will be at the Maxim Conference in New York on September 29^th, and I will be at the HR Tech Conference in Chicago oon September 29^th and 30^th. We look forward to updating you on our progress at our next conference call.

Operator

Ladies and gentlemen, this conference is available for replay after 4 p.m. Pacific Time today through October 26^th at midnight. You may access the digitized replay service at any time by calling 1-800-475-6701 and enter the access code of 115023. International participants may call 320-365-3844, with the access code of 115023. That concludes our conference for today.

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