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Executives

Roy Lobo - VP of Investor Relations

Shawn Farshchi - President, Chief Executive Officer

Mark Robinson - Chief Financial Officer

Analysts

Saba Software, Inc. (OTCPK:SABA) Q4 2014 Business Update Call July 14, 2014 5:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Q4 and Fiscal Year 2014 Business Update Call for Saba. At the request of our host, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Roy Lobo, Vice President of Investor Relations. Please go ahead.

Roy Lobo

Thank you, Ernie. Good afternoon, everyone. Welcome and thank you for joining us on today's conference call. With me on the call are Shawn Farshchi, President and CEO, and Mark Robinson, our CFO. If you have not received today's press release, you may download a copy from our website at investor.saba.com.

Before I turn the call over to our executives, I would like to remind everyone that during the course of this conference call we will be making forward-looking statements regarding our business momentum, future performance, restatement process and objectives, restatement progress and objectives, anticipated date of regaining SEC compliance 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, 2011, and similar disclosures and subsequent reports filed with the SEC, which are available through the Investor Relations section of our website or through the SEC's website at sec.gov. We assume no duty or obligation to publicly update or revise any forward-looking statements.

Please keep in mind, we are still in the midst of completing our restatement and are limited in our disclosures. For this reason, we will not be taking any calls after our prepared remarks.

Our press release and the comments we make on today's call are very detailed and will be the extent to which we can elaborate regarding our business momentum, business metrics and restatement.

With that, I would now like to turn the call over to Shawn Farshchi, our CEO.

Shawn Farshchi

Thanks, Roy. Good afternoon. When I took over as the Interim CEO in March 2013, I was very excited to lead a company whose customer base is the envy of the talent management industry, with customers such as Dell, EMC and Hitachi in high tech, Subway, Weight Watchers and Home Depot in retail CPG industry; Bupa, Sanofi and Novartis in the healthcare life sciences industry; Standard Chartered Bank, Credit Suisse and Sberbank in the banking and financial services industry, truly marquee names in every industry we play in. But after seating in the seat for a few months, it became clear to me that what was needed for Saba was to emerge as the leader in the talent management space.

I needed to change the company and its culture in pursuit of a clearly defined and focused strategy and I knew a change in the culture would bring about a change in the company. While I did not just want to change the culture at the executive management level, I wanted to make sure that changes would have a positive impact for every employee, especially for those employees at the line level.

I wanted to empower every employee, no matter where they were in the organization to bring about change that could further the company's strategy. That strategy, which you have heard from me speak of many times is based on three tenets. One, increased business philosophy, which will help improve sales execution to grow bookings. Two, continue product innovation that shifts the company from a product-focused approach to a market-centric approach, with a single product strategy namely Saba Cloud, and offer best-in-class service to become the benchmark in the customer satisfaction for our industry.

The result of these yearlong cultural changes has yielded the following. One, fourth quarter new cloud bookings being the highest in any quarter in company's history with over 100% year-over-year growth. I will remind everyone that our Q2 fiscal year '14 cloud bookings was our second-highest cloud bookings quarter in the company's history.

Two, new cloud bookings growth of 76% for Q2, Q3 and Q4 of fiscal year '14 over Q2, Q3, Q4 of fiscal year '13, exceeding our guidance of 60% we gave at our Summit.

Three, an SMB business that delivered solid results this quarter, the SMB business in North America has really caught on fire, delivering the largest dollar bookings since the creation of the dedicated sales team about two years ago. The North American SMB team signed 60 new logos in the quarter, including Shutterfly, Guidewire, PubMatic, Westcon Group, Mercury and Up2Us, a leader in sports-based youth development movement.

Four, a win rate for the quarter that far exceeded our historical win rate. Our win rate on an opportunity and dollar basis has steadily increased every quarter in fiscal year '14.

Five, an additional 47 new customers in the fourth quarter, 174 new customers were added in fiscal year 2014, new logos include Bank of New York Mellon, Virgin Atlantic, Northwestern University and Blue Care.

Six, a record number of customers migrating to Saba Cloud in Q4, customers that are in the process of migrating include Intel, Standard Chartered Bank, Allina Health and URS Corporation.

We are extremely pleased with the strong results we delivered in the fourth quarter and the accelerated momentum we experienced for the last three quarters. We have demonstrated our ability to succeed, some would say excel in the face of ongoing restatement against all the thought about the death of the company and against pure play vendors in the SMB market and against the stodgy ERP vendors at the high-end of the market.

The catalyst behind our winning strategy are the changes in culture that I spoke of earlier, product innovations, platform innovations and efficiencies, coupled with focus on sales execution. Having our pure play competitors acquired by the legacy ERP vendors has meant the death of innovation and development for customers seeking a talent management solution. In contrast, Saba has been innovating at a breathtaking pace.

In fiscal year '14 alone, we introduced recruiting, marketplace and TIM, The Intelligent Mentor. We plan to continue to innovate and develop our technology ahead of the industry, which we believe would gain us the mind, hearts and wallet share of customers.

Turning my focus to fiscal year '15, let me discuss our strategy to grow faster than the industry and faster than the competition. As you all are aware of the three tenets of my strategy: growth, innovation and customer success, let me take a moment to delve into each one of these areas.

We have already communicated that given market opportunity and demand environment that we are experiencing, we feel confident in our ability to grow bookings north of 30%. For fiscal year '15, we are focusing on four factors to grow our business.

First, new business, we plan to focus investment in marketing. I plan to make brand awareness one of my top priorities for fiscal year '15.

Our increasingly strong win rate against other pure play and [inaudible] competitors give us the confidence in our ability to beat the competition in every deal we get invited to. Now, we just need to make sure we get invited to more and more of these deals.

Our marketing initiative for fiscal year '15 will focus on increasing the demand and awareness of Saba amongst the talent management buyers.

We also plan to continue to increase our sales staff in fiscal year '15. As word has gotten around that Saba has become an exciting place to work, we have had a good fortune of attracting top talent. Over the last few quarters, we have added a number of new quota-carrying sales rep and plan to continue to add in fiscal year '15.

The new team will further enhance our efforts to sell broader into the talent management market as this has been their forte at their previous employment.

Second, license customers migrating to Saba Cloud, at our @Work user conference this past April, we introduced the latest version of our Saba Cloud. The latest version of Saba Cloud included our rich consumer grade user experience, a single user interface across our entire talent management suite of learning, performance, succession, workforce planning, collaboration, testing and assessment, recruiting, continuous engagement of the system through a gamification, predictive intelligent talent development capabilities and drag-and-drop integration through marketplace.

Once our behind the firewall customers were exposed to our Saba Cloud platform, with service level agreements at top of the industry at three nine, their interest in moving to Saba Cloud was sparked.

I noted above that we experienced a record number of customers migrating to cloud and we are still in a very early innings of the ballgame. Remember, we have a tremendous installed base of customers behind the firewall and their interest is creating a healthy pipeline.

Third, mid-market business. A few quarters ago, we tested our [interest into some] [ph] SMB market. We created a dedicated sales team to address this market and we have always been pleased with their achievement, but their result this quarter as I indicated earlier was absolutely amazing.

Having the confidence that we came up with a right formula to penetrate markets beyond the large enterprise space, where we dominate, we plan to focus our efforts into penetrating the mid-market. We define mid-market at 2,000 to 7,000-employee companies. We have created another dedicated sales force to address this segment and a number of new quota-carrying sales reps that I mentioned earlier were hired to complete this team.

Their focus will be to lead with full talent suite and cross-sell talent suite into the mid-market installed base. Their experience selling talent management solution prior to joining Saba should bode well for the strong contribution we anticipate from them in fiscal year '15.

The one big advantage they will have at Saba is that they will have the best product in the industry with Saba Cloud. With all of the latest innovations in the product we are extremely bullish about our ability to compete on the feature or functionality basis. One of the best aspects of Saba Cloud product is that it can scale from 50 users to 1 million users with no change in the platform or no change required to the code base.

Fourth, verticals. We spoke with you last January about benefits we gained from signing large multinational companies as our customers.

One benefit of becoming the strategic vendor to these large multinational companies is that we also have the opportunity to become the strategic provider to their ecosystem of suppliers and partners.

We talked about strengthening the telecommunication and automotive industry. In fiscal year '15, we have planned to focus on a number of these industries and higher subject matter experts for specific verticals. These subject matter experts will have a wealth of knowledge and experience in a particular industry and we will be best suited to address the talent management challenges of that vertical and how our solution can help them overcome those obstacles.

As you can see, we believe we have a number of levers to deliver healthy booking growth in fiscal year '15 and beyond.

Now let me switch gears and comment about our innovation. Our Intelligent Talent Management platform provides companies with a solution that adapts to their ever-changing business environment, constantly learn about the people and provides personal and relevant recommendation to individuals, managers and HR professionals.

Our Intelligent Talent Management platform is an open personal approach to workplace engagement, growth and designed to inspire people. Unlike traditional talent management solutions that were prescriptive and topped out our focus on processes and the needs of the HR administrators Saba's Intelligent Talent Management platform leverages machine learning what we refer to as the Intelligent Mentor Team to provide intelligent and predictive recommendations across the entire Saba Cloud suite of products to help employees find the information and expertise they need to succeed while guiding, managers, administrators to better decisions.

TIM also helps organizations to be agile by providing timely suggestion about what to learn, what goals to have, who to hire et cetera, identifying options that they would not have otherwise considered.

TIM makes personal and relevant recommendations on what content employees should consume and what courses they should consider. Tim also identifies people with similar skills and interest they should follow or use as mentors.

TIM helps hiring managers with the intelligence recommendations on people to hire and TIM helps HR identify successors for key positions on high performance. In addition to TIM, we have also introduced a number of innovations in the fiscal year '14, including the introduction of our recruiting solution to the market.

While we are one of the new comers in this market, we leapfrogged the incumbents with our video recruiting solution and by adding machine learning to source candidates externally as well as internally.

Our recruiting solutions also offers customers with the ability to create a recruiting workgroup that allows interviewers to collaborate on feedback for various candidates, a patent pending SmartHire Assistant that rate and ranks every candidate on an advanced candidate assessment that allows for pretesting of candidates.

Another key innovation we introduced was marketplace. Marketplace offers a single drag-and-drop integration for numerous applications across recruiting, talent, assessment learning and HRIS/HRMS in a single interface.

While we’ve integrated with hundreds of different vendors over the years, what makes Marketplace different is that it eliminates the need for any involvement from IT or third-party consultants. With Marketplace, we have revolutionized the way customers integrate with applications much the same way Apple revolutionized how customers buy music.

We plan to continue to build our marketplace by increasing the number of drag-and-drop integrations that we have with third-party applications.

We recently announced the addition of OpenSesame for content and HireRight for employee screening, adding to our diverse ecosystem of third-party applications from TalentBin, SimplyHired and Broadbean for recruiting, Monster and LinkedIn for sourcing, Salesforce and Microsoft Dynamics for CRM and Workday for HRIS.

Even though we have hundreds of vendors in our content ecosystem that we can help customers integrate with through the help of IT consultants, our goal is to one day move them all into a simple drag-and-drop capability that customer can access through our marketplace.

We have also introduced major innovations on the platform itself. We have introduced service level agreement that are at the top of our industry. This was possible because the platform choices we made utilizing Java, HTML 5, Big Data and other open-source standards.

We are one of the few vendors in talent management space that can offer the customers three nine service level which has proven to be quite a competitive differentiator and has contributed to winning a number of deals.

On the customer success front, our new Chief Customer Officer, Paige Newcombe, who I spoke to you about last quarter has been busy traveling and meeting with our customers. Our goal is to continue to partner with our customers and expose them to the best practices of utilizing our talent management suite in ways which will ignite transformative change in their organization that leads to happier and more engaged employee and deliver better business results.

Furthermore the cultural shift that I spoke of earlier, places the obligation of customer success not just on Paige or the sales team, but also on engineers, product designer, marketeers and even the finance team.

Basically I’ve asked everyone at Saba to place customer success at the center of everything we do. We plan to keep on working proactively with our customers and personalize the approach we take with each one of them.

In summary, we had a spectacular finish to our fiscal year. I would like to congratulate our team here at Saba for an outstanding performance. I also want to thank all of our customers.

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

Mark Robinson

Thanks, Shawn. Let me walk everyone through some of the selected financial metrics for our fourth quarter and fiscal year 2014.

Please keep in mind that because we are in the midst of the restatement we are limited in our disclosure of financial information and metrics.

As Shawn alluded to earlier, we finished the year on a very high note. Our fourth quarter new cloud bookings grew 100% year-over-year. If we eliminate the third quarter slipped deals that on our last call we announced are already closed, new cloud bookings growth for the fourth quarter was still robust growing at 71% year-over-year.

Coming off of a week first quarter, we transitioned to a high caliber sales team with domain expertise in talent management and the business gained momentum throughout the rest of the fiscal year. This change contributed to 76% growth in new cloud bookings for the last three quarters of fiscal year '14 over the same period in the prior year and as Shawn mentioned ahead of our 60% guidance we gave at Summit.

New cloud bookings growth of fiscal year '14 grew 25% over fiscal year '13. We are extremely pleased with our execution capabilities, our momentum, we built towards the latter part of fiscal year '14. We believe we can build on both of these fronts in fiscal year '15. Given the business environment and initiatives that Shawn outlined, deliver year-over-year new cloud bookings growth north of 30%.

Moving to business investment, we successfully instituted a number of steps in fiscal year '14, which improved gross margin. During fiscal year '15, we plan to continue to consolidate our global data centers and scale cloud platforms thereby reducing unit costs. We expect the combined impact of these initiatives will further improve gross margin.

Gross margin improvements will allow us to rebalance our investments with focus in fiscal year '15 on sales and marketing and continued product innovation.

Turning to the balance sheet, we ended the third quarter with approximately $27 million in cash and this amount reflects payments of approximately $3 million associated with the accounting review and restatement and approximately $1 million associated with the non-recurring items.

Total debt at the end of May 31, 2014 was approximately $69 million. Cash flow from operations was positive $2 million in the quarter excluding cost associated with restatement.

On the restatement front, we are making good progress in completing the audits of prior periods and fiscal year 2014. Consistent with our April 2nd communication, we anticipate regaining SEC compliance during the fourth calendar quarter of this year.

We also plan to hold an Annual Stockholder Meeting as soon as practical after regaining compliance with our SEC filing requirement.

I will now turn the call back to Roy.

Roy Lobo

Thank you, Mark. This concludes our prepared remarks for today. I will turn the call back to the operator to close.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 4 pm today until August 14, 2014 at midnight. You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701 and using the access code 329942.

International participants may dial in using 1-320-365-3844, and again using the access code 329942. Again, those dial-in numbers are 1-800-475-6701. International dial-in is 1-320-365-3844, access code 329942.

That does conclude our conference for today. Thanks again for your participation and for using AT&T Executive teleconferencing services. You may now disconnect.

Question-and-Answer Session

[No Q&A session for this event]

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