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Executives

Bill Slater

Bobby Yazdani

Analysts

Eric Martinuzzi – Craig-Hallum

Kevin Liu – B. Riley & Company

Saba Software Inc. (OTCPK:SABA) F4Q10 (Qtr End 05/31/2010) Earnings Call July 20, 2010 5:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter and Fiscal Year 2010 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions being given at that time. (Operator Instructions) As a reminder this call is being recorded.

I’d now like to turn the conference over to your host, Bill Slater. Please go ahead.

Bill Slater

Good afternoon. Welcome and thank you for attending Saba Software’s fourth quarter and fiscal year end 2010 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, we will be making forward-looking statements regarding our business outlook, future performance and expectations of future events. These statements are based solely on information available to us today and are subject to risks and uncertainties.

For information concerning factors that could cause actual results to differ materially from those in the forward-looking statements we encourage you to review our annual report on Form 10-K for the year ended May 31, 2009 and subsequent Saba periodic reports which are available through the Investor Relations section of our website at Saba.com or through the SEC’s website at sec.gov. We assume no duty or obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

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.

I will now turn the call over to Bobby Yazdani.

Bobby Yazdani

Thank you, Bill. Thank you and good afternoon, everyone. In today’s call, I will cover the fourth quarter and full year highlights for fiscal year 2010 as well as expectations for our fiscal year 2011. I will then turn the call over to Bill who will provide more details.

Saba had a strong fourth quarter and fiscal year 2010, in which we successfully executed on our plans. We delivered strong financial results, developed industry leading product innovations across Saba People System that encompass enterprise learning, people management and collaboration technologies, and acquired new customers worldwide that have partnered with Saba to realize their people-driven strategies.

Let’s cover the key financial highlights. Saba reported record top and bottom-line results. We delivered record Q4 revenue of $29.6 million, a 15.9% year-over-year increase and record fiscal year revenue of $109.6 million. For the year, we also delivered record bottom-line results with non-GAAP EPS of $0.30, an increase of 36.4% on our previous fiscal year and record GAAP EPS of $0.10 per share.

Saba signed a record number of 41 new enterprise customers in the fourth quarter compared to 22 last quarter, bringing our total number of new enterprise customers acquired in the year to 113. This brings Saba’s total customer accounts to over 1,400.

During the fourth quarter, Saba signed number of new customer contracts for Saba People Systems offerings and expanded existing relationships with a number of organizations worldwide, including BP Oil UK, Canada - Department of National Defense, Fiat Group, Fox Entertainment, Smart Technologies, Team Health, Thai Airways and Toyota Motors.

In fiscal year 2010, we experienced strong adoption of our Saba People Suite that encompasses a combination of Saba Learning, Saba Performance, Saba Succession and Workforce Planning for marquee customers, including Baker Hughes, Cisco, Sydney Waters, Queensland Health, and Royal Mail.

We also grooving in several key vertical industries with significant new customer wins and expansions in the public sector, financial services, high tech and energy industries during fiscal year 2010.

We experienced increased demand for our SaaS offerings, which is now serving over 4.5 million people from customer organization including Brinker International, E Trade Financial and Komatsu.

We continue to be at the forefront of product and technology innovation. In July, we announced the Saba Collaborations Suite, a real-time collaboration and enterprise business networking solution designed to enable social learning and collaborative people performance management.

During the fourth quarter, Saba introduced Breakthrough Mobility Capabilities to our people platform which makes it easy for mobile workers to meet at a moment’s notice, attend online webinars and learn on the go. These new solutions enable today’s global workforce to easily work together on an iPhone or in any web browser, both online and offline across the extended enterprise of employees, partners and customers.

Additional product innovation introduced by Saba in fiscal year 2010 include the announcement of the general availability of Saba compensation, broadening our people suite. During the year, Saba received much recognition from the industry analyst for our company leadership, our products and our customer satisfaction.

Specifically Saba was recognized for Bersin & Associates as a market share leader in Talent Management solutions for large enterprises as a leader in customer satisfaction for global enterprises.

Saba also received an award for excellence in social networks by Chief Learning Officers Magazine. I am very pleased with the progress we’ve made in fiscal year 2010. And we are well position for growth and innovation in the coming year.

Our plans for fiscal year 2011 are well on their way as we execute our strategies to grow our revenues, earnings and market share through new customer acquisition, strong focus on expanding our footprint in our -- within our own existing customer base expansion beyond the enterprise markets, market into the mid market an increase emphasis on strengthening our existing strategic alliances while establishing new ones.

Further more we plan to differentiate Saba through superior product quality and continuous growth breaking innovations. We are plans to innovate across all products delivering and delivery models and services to provide the best solution to the market. In fiscal year 2011, we intend to release a Saba Live the Saba Collaboration suite and the next generation of people, Saba People suite.

Finally our commitment to fastening and doing [ph] relationships with our customers, partners and our employees remains the foundation for Saba and all that we do. In the coming months, we will be aggressively marketing Saba solutions through three major initiatives. A 25 city global road show of executive events starting in August, a large presence at HR Technology in Chicago in September. And the People 2010 – Saba Global Summit our annual user conference being held in Boston on November 1st to November 4th.

For fiscal year 2011 Saba anticipates to revenue to be between 121 to 124 million. GAAP net earnings per share to range from $0.15 to $0.19 per share on fully diluted basis and non-GAAP net earnings per share to range from 0.34 to $0.38 per share on a fully diluted basis. At this time I will turn the call over to Bill.

Bill Slater

Thanks, Bobby. Total revenues in the fourth quarter at fiscal 2010 were 29.6 million an increase of 15.9% compared to 25.6 million in the same quarter last year. Approximately 36% of revenue in the quarter came from customers outside of the United States. In the fourth quarter of 2010, license revenues were $7 million, up 55.2% over the prior year. Subscription revenue was $14.9 million up 7.8% over the prior year, and Professional Service revenues were $7.8 million up 7.1 over the prior year.

The gross margin for the fiscal fourth quarter came in at 66.8% compared with 61.9% over the same period of the prior year. The gross margin improvements were principally generated from improved margins in subscription revenue and Professional Services of about 300 basis points each, coupled with favorable mix shift toward software licenses.

Operating expenses of 18.7 million for the fiscal fourth quarter were $3.3 million higher than the prior year period, all as a result of planned investments made in sales and marketing. G&A and R&D were approximately flat year-over-year.

Net income for the fourth quarter of fiscal 2010 was $800,000 or $0.03 per share compared to a net loss of $1.1 million or $0.04 per share in the same period of the year. Non-GAAP net income in the fourth quarter of fiscal 2010 was 2.3 million or $0.08 per share compared 2.2 million or $0.07 per share in the fourth quarter last year.

We ended the third quarter with $32 million in cash compared to $26 million at the beginning of the year. During the year, we repurchased 1.4 million shares of Saba stock for approximately $4.9 million.

Our days billing outstanding was 68 days at the end of the fourth quarter of fiscal 2010 compared to 66 days at the end of the prior year period.

Deferred revenue at the end of the fourth quarter increased to $37 million from $35.3 million at the end of the prior fiscal year.

With regard to invoicing, we invoiced 31.3 million in the fourth quarter compared to 26 million in the prior year period. For the fiscal year ended May 31, 2010, we invoiced a $115.9 million compared to $110.8 million for the prior year.

Our renewal rate on subscription services for the fourth quarter of fiscal 2010 was 94.4% compared to 88.3% for the same period in the prior year. And for the full year was 93.2% compared to 90.9% for the prior fiscal year.

During the quarter, we added 41 new customers compared to 35 new customers in the same period of the prior year and for the full year, we added a 113 new customers compared to 98 new customers for the prior year. The number of product transaction is greater than $50,000 was 40 compared to 31 in the prior year period, and for fiscal 2010 the number of product transaction is greater than 50,000 was a 131 compared to 116 for the prior year.

With regard to our revenue guidance of $121 to $124 million for fiscal 2011, we continue to see the trends toward stronger second half revenue based upon customer spending patterns. We also expect that the operating expenses run rate coming at a fiscal 2010 will continue into fiscal 2011 and grow slightly in the later half of the year.

We anticipate gross margin improvement in professional services and subscription areas on a year-over-year basis. Accordingly our earnings power will be skewed towards the second half of the year.

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

Bobby Yazdani

Thank you, Bill. In summary, we are pleased with the progress we have made this fiscal year in terms of our financial performance, our product innovations and customer success through the adoption of Saba People Systems.

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 poll the audience for questions. We have Chris is [ph]. Operator, are you on the line?

Question-and-Answer Session

Operator

(Operator Instructions) And I do have a question from the line of Eric Martinuzzi with Craig-Hallum. Please go ahead.

Eric Martinuzzi – Craig-Hallum

This is Eric Martinuzzi with Craig-Hallum. Congratulations on the strong Q4 and the good finished fiscal 2010.

Bill Slater

Thanks Eric.

Eric Martinuzzi – Craig-Hallum

I want to dive into the license, because, obviously, there was a bright point in the quarter, one of the areas of nice positive variance versus where I had modeled. If you can peel it back I’m going to ask you three ways in actually to comment on the sales force impact, but by product, by vertical, by geography, and then If you could talk to new sales highest contribution to Q4 license?

Bobby Yazdani

So, in terms of new versus existing, it was a 50-50 split. The product bookings came evenly from new customers as well as expansion within existing customers. Roughly, as Bill mentioned over 30% of the bookings came from international markets and somewhat under 60% came from North America, which includes both public sector as well as Canada.

In terms of the mix of products, I would say summering the 40.5% was in the enterprise learning market, about 40% was in the collaboration market and remaining over 10% came from the talent management, performance management market. That’s the split.

In terms of SaaS versus (inaudible) in the SaaS remain to be a very strong booking quarter for us, and we had a very good again evenly spread between license as well as the SaaS product bookings. Anything else, Bill?

Bill Slater

No.

Eric Martinuzzi – Craig-Hallum

I guess just the vertical commentary -- obviously anything, you know health care, financial services, public sector, anything stand out?

Bobby Yazdani

We had from what I recall, I think we had some 4, 7 figure bookings somewhere along those are 4 or 5, 7 figure bookings and it came from defense, health care, high tech, I think we would say along those lines.

Bill Slater

Yes, that pretty well covers it.

Eric Martinuzzi – Craig-Hallum

Okay. And then as I look out to 2011 you've a given a total company growth projection of 10 to 13% the bookings and I am assuming that same spilt would be maintained at between SaaS and the on-premise but do you expect that to grow with the same rate in that 10 to 13% range.

Bobby Yazdani

That’s good question I don’t have the details in terms of sales. You should assume that even we actually the SaaS likely higher.

Bill Slater

Yes. I think we're looking at a higher mix of SaaS revenue, of SaaS bookings but obviously because they've booked readably. We typically only see about a third of that hit [ph] revenue.

Eric Martinuzzi - Craig-Hallum

Okay, and then to the negative where I was surprised in my model were certainly on the sales and marketing I know you guys said you're going to invest but the inside there you talked about some of the marketing initiatives in fiscal 2011. Could you talked to just the headcount, are you at the sales headcount the quarter bearing headcount that you want or is there still initiative there?

Bobby Yazdani

We are now up to a 50 quota-carrying head count. We've added additional capacity in our alliances function; we've added additional capacity in our market development function, marketing areas. We are not where we wanted to be. We want to grow faster and that’s a focus of course for the first half of the year to increase capacity we feel that in number of our territories we are people constraint at this point, Eric.

Eric Martinuzzi - Craig-Hallum

So, perhaps 10% boost to that 50.

Bobby Yazdani

That would be very desirable even more than that for the remainder of the year.

Eric Martinuzzi - Craig-Hallum

Okay, thanks. I’ll get back in queue.

Operator

Thank you. We have a question Kevin Liu with B. Riley. Please go ahead.

Kevin Liu – B. Riley & Company

Hi, good afternoon, guys. Nice quarter.

Bill Slater

Hi, Kevin

Bobby Yazdani

Hi, Kevin

Kevin Liu – B. Riley & Company

First question here, just in terms of the license and may even the maintenance for the year, just curious what sort of contribution you guys ultimately saw from the arrangement with IBM Lotus Group?

Bobby Yazdani

It was a very strong finish, Kevin, and even though it was not quite the IBM quarter end. For the full year we were pleased, the metrics that we're shooting for the goals we had, we were pleased with the outcome of that arrangement. Going into the new year, we do expect that we’ll see a similar expansion going to the fiscal year 2011.

Kevin Liu – B. Riley & Company

Any sort of metrics you guys can give in terms of how many more of that added to your customers base or any sort of qualitative subject you can add?

Bobby Yazdani

Well, I think we announced earlier in the year that we had a large win-win, you know, credit and also a large win through their HR outsourcing with (inaudible). I think we saw a number of Lotus migrations throughout the year, still relatively small, probably about 30 migrations or so.

Kevin Liu – B. Riley & Company

Got it. And in terms of the sales flow and marketing headcount, it's seems like you guys should be getting a lot of those you guys productive here in Q1, Q2. I know seasonality pushes a few things out a bit. But is it safe to assume that we should see license revenues continue to grow sequentially from where you ended Q4.

Bobby Yazdani

No. Typically the Q4 has been a very strong, it's ending in May and Q1 being this summer and the first quarter is lighter. So, we do expect that it would pickup in the second quarter and again it will pickup in the fourth quarter.

Kevin Liu – B. Riley & Company

Yeah.

Bill Slater

You know, number of things impacted from the first quarter. You know, we're short of month in our EMEA arena. So, like that, you know that hurt just a bit.

Kevin Liu – B. Riley & Company

Got it. And then, maybe if you could just talk about the general conditions obviously everyone's way you done some things may be slowing down. Are you guys seeing any signs of that in your pipeline?

Bobby Yazdani

No. Kevin, the pipeline has grown over the past months, even though you know, there is a level of nervousness some of the market. It hasn’t quite or it hasn’t translated in any weakness in our pipeline. I mean, we tried of course, and not only the pipeline or also the activities in terms of the numbers of demos, RSTs [ph] visits we have with clients and we have not seen a weakness there.

Kevin Liu – B. Riley & Company

Got it. And in terms of the sequential jump in sales and marketing, just a dive in a bit more. I’m curious how much of that was just normal end of your accruals given a strong finish versus the acquisition otherwise permanent headcount?

Bill Slater

You know, our fourth quarter is typically one of our highest because we have commissions in there and people had their accelerators. So, that’s pretty significant but again I think I should said that we would see a continuation of this operating expense levels from the fourth quarter into the first half of fiscal 2011, we have a number of marketing programs going on, we have our summit, we have our sales kick off. Bobby mentioned 25-city tour or so. We’re maintaining the pressure on sales and marketing to produce.

Bobby Yazdani

Given, the first quarter is typically when we bring on board new talent and they go through a intensive training for the first couple of quarters. So, you should assume that we have increased headcount, sales and marketing headcount in the first quarter with the expectation of for the activity found in the second half of the year.

Kevin Liu – B. Riley & Company

Understood, and then just last question for me. Bob, you mentioned that you are seeing constraints in terms of being able to cover your pipeline in certain geographies. I just wondering why specifically those areas are, and then also it sounds like given the 25-city roadshow and now the sales capacity relatively [ph]. And it sounds like you guys may not actually expect and grow potentially be better than what you guided to, so just wondering if you can comment on how considerate your guidance might be?

Bobby Yazdani

We want to be a cautious, but I think we're also at the same time, I mean, hopefully the press release and this call implies our bullishness on our business. We are hiring, we are hiring to our existing business, plus we are hiring into new territories. Asia, you know is been a great market and we're going to continue to grow as well as opening up new territories in Asia.

We have a very strong franchise in Latin America, particularly in Brazil. We are expanding the investment in that territory. We are seeing demanding Middle East as well as India. So, they all ample areas that we can see don't fully cover. And we are conservatively investing in all of those areas and we are bringing on talent in all those. So, we are very positive in terms of opportunities for us both in existing franchises that we have as well as expanding and building new ones.

Kevin Liu – B. Riley & Company

Alright, sounds great. Thank you so much

Bobby Yazdani

Thank you

Operator

(Operator Instruction) And will go back to the line of Eric Martinuzzi with Craig-Hallum. Please go ahead.

Eric Martinuzzi – Craig-Hallum

Thanks. Just curious on the differed revenue, given the growth in the rest of the business, I would expect the differed revenue to be up little more than the 4.8% that it was year-on-year. Can you explain that variance?

Bobby Yazdani

Yes, we have on our web conferencing product; we have a slightly higher attrition. We have a very, very sticky product in Saba, in the high 90s but when you look at the attrition on Centra and (inaudible) area it pulled down our differed revenue growth.

Eric Martinuzzi – Craig-Hallum

Okay. And then some housekeeping items. Did you do any repurchases in Q4 and what share count should we use for Q1 or maybe the fiscal 2011?

Bobby Yazdani

Yes, I mean we get off to a very, very late start because we didn't have our accounts open, so we did minimal share repurchases, really actually bought back about 19,000 shares in Q4. I think our share count is probably around 299 going forward.

Eric Martinuzzi – Craig-Hallum

Okay. You paid little bit higher tax and I was projecting in Q4, what should we use for a fiscal 2011?

Bobby Yazdani

8.5% tax rate.

Eric Martinuzzi – Craig-Hallum

Okay, all right. And then the free cash flow, is there anything unusual in your projections for free cash flow for the coming quarter? Should we see a pattern similar to 2010?

Bill Slater

Our cash flow patterns are pretty typical over the last two years, the first half is relatively flat. We got at all of our revenue billings and invoicing in the second half and you should see the same thing this year, very strong second half in terms of cash generation and flattish first half.

Eric Martinuzzi - Craig-Hallum

Thanks.

Bobby Yazkani

Thank you Eric.

Operator

And I have no further questions in the queue.

Bobby Yazdani

Great. Well, thank you very much for attending our call this afternoon. Thank you, Operator.

Operator

Your welcome, and ladies and gentlemen this conference will be available for replay after 4 o’clock pm today through midnight on Friday August 13, 2010. You may access the replay service at anytime by dialing 1800-475-6701 and entering the access code 162131. international participants dial 320-365-3844 with the access code 162131. Those numbers again are 1800-475-6701and 320-365-3844 with the access code 162131. That does conclude your conference for the day. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.

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