Saba Software CEO Discusses F2Q2011 Results – Earnings Call Transcript

| About: Saba Software, (SABA)

Saba Software, Inc. (OTCPK:SABA) F2Q2011 Earnings Call Transcript January 6, 2011 5:00 PM ET

Executives

Roy Lobo – VP, IR

Bobby Yazdani – Chairman and CEO

Bill Slater – EVP and CFO

Analysts

Eric Martinuzzi – Craig-Hallum

Kevin Liu – B. Riley & Company

Michael Hahn – Bryn Mawr Capital

Operator

Ladies and gentlemen, thank you for standing by and welcome to the second quarter fiscal year 2011 earnings conference call. At this time, all lines are in a listen only mode. Later there will be an opportunity for your questions. (Operator instructions) And as a reminder, this conference is being recorded. I’ll now turn the conference over to Roy Lobo, Vice President, Investor Relations. Please go ahead, sir.

Roy Lobo

Good afternoon, everyone. Welcome and thank you for attending Saba Software second quarter fiscal year 2011 conference call. With me on the call today is Chairman and Chief Executive Officer, Bobby Yazdani, and our Chief Financial Officer, Bill Slater. If you have not received today’s earnings release, you may download a copy of the press release from our website at saba.com.

Before I turn the call over to our executives, let me remind everyone that during the course of this conference call we will be making forward-looking statements regarding our business outlook, future performance, and expectations of future events. These statements are based solely on the information available to us today and are subject to risk 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, 2010 and subsequent Saba periodic reports, 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. In addition, we intend to discuss both GAAP and non-GAAP measures. A reconciliation of GAAP to non-GAAP financial results is included with the financial statements accompanying our earnings release.

With that, I would now like to turn the call over to Bobby Yazdani, our Chairman and Chief Executive Officer of Saba. Bobby?

Bobby Yazdani

Thank you, Roy. Good afternoon, everyone. We had a strong second quarter with enterprise customers accelerating their preference toward our SaaS or what we refer to as our public cloud offerings. Let me remind everyone, in the first quarter, we saw a number of large enterprises opt for our public cloud offering as opposed to traditional licenses, which we refer to as our private cloud offerings. In the second quarter, we saw this trend accelerate.

Our bookings grew by 14% year-over-year, and our annual contract value of new SaaS bookings doubled year-over-year as well as from last quarter. Nine of our 12 largest deals in the quarter were from enterprises selecting public cloud offerings over private cloud offerings. The number of new transactions over $50,000 for our public cloud offerings increased three-fold over the same quarter last year. This is the second quarter in a row where we have experienced a three-fold increase in the number of new transaction over $50,000 for public cloud offerings.

A partial list of new public cloud customers in the quarter includes ACS, AFLAC, Brocade, Finning, Kellogg, and the State of Texas. We now support approximately 5 million subscribers on our public cloud. In the quarter, we also saw our total revenue reach $28.6 million, the second highest level of revenue we achieved in any quarter. We signed 42 new enterprise customers in the quarter setting a record for the company. 25% of these new enterprise customers purchased multiple modules.

It will probably surprise many investors to know that we have over 1.5 million users on our Saba Performance Suite, including HP, Cisco, Baker Hughes, Graham Group, and Intel, just to name a few. We have also been selling our People Collaboration Suite to such customers as the IRS, US Army, IBM and many more.

Now I would like to shift gears away from the quarter and speak about our strategy. We have a three-prong strategy at the company that focuses on growth, product innovation, and building and inspiring company and brand. On the growth front, we have a number of opportunities. We have created a dedicated market team to target to organizations that have been between 2,000 and 7,000 employees. The sole focus of this team is to sell our public cloud offering to these organizations.

We have seen good progress from the mid-market sales team and our product bookings have been growing every quarter. We also have created a dedicated install base team whose objectives are two-fold. First, ensure that the customer is standardized on Saba Learning Suite across the enterprise. This will expand our seat deployments within the company. And second, up-sell and cross-sell these enterprises on our performance and collaboration suites.

We are also focused on selling our entire portfolio of people systems beyond the enterprise to the extended enterprise. This extended enterprise includes customers, partners, resellers and distributors. We believe penetration of the extended enterprise is very nascent. There are a number of our customers that have deployed our solution to the extended enterprise, but penetration of the extended enterprise within our installed base is relatively small. We believe this provides a great opportunity for us.

The international markets are another growth area for the company. Latin America has been an area of growth for the company, and we are expanding into China, Southeast Asia and the Middle East. We have also expanded our global alliances and channel program to supplement our go-to-market strategy. We are expanding our indirect channels through new partner recruitment, accelerate partner enablement, and joint sales and marketing programs.

On the product innovation front, we introduced a unified architecture that imbeds our enterprise business networking capabilities and real-time collaboration into people learning and people performance. Over the next 12 months, we have a very active product development schedule. We plan to maintain our core principle of developing our people platform organically on a unified technology stack, which we will offer in both private and public cloud options.

On building and inspiring company and brand, we recruited a number of key executives to help strengthen and grow the company. In the quarter, we hired a new SVP of Engineering, Madhukar Gobindaraju, to lead our product strategy and expansion for cloud and mobile offerings. We also hired SVP of Corporate Marketing, Karen Steele, to grow our people system leaderships in the global marketplace.

We hired a Chief People Officer, Joan Cronin, to help us attract and develop world-class people and leadership for Saba. We also announced appointment of Laurent Pacalin. Laurent assumed the role of SVP and GM of our People Learning System business unit. We warmly welcome each of these people to Saba as we look to their talent to help us grow our company.

Turning to guidance, our business is seeing acceleration in the adoption of our public cloud offerings over traditional licensing, and customer demand is exceeding our expectations. This is positive for our business on several fronts. Over time, the revenue as well as the profitability from a public cloud transaction would be greater than a private cloud transaction. We expect that transaction subscription revenue and bookings growth also will be higher, our addressable market would be larger, and we will have better visibility and predictability into our revenue streams.

With that in mind, let me offer the following guidance for fiscal year ’11. Our revenues for fiscal year ’11 is projected to be in the range of $117 million to $120 million and our non-GAAP EPS is expected to be in the range of $0.10 to $0.15 per share. Our bookings, which we define as total revenue plus the change in deferred, is expected to grow in the range of 14% to 16% in fiscal year ’11 over fiscal year ’10.

In closing, I’m pleased by what we achieved in the quarter and the growth we delivered across many key metrics, including a record number of new customers, the average deal size greater than $50,000, doubling of our annual contract value for new public cloud bookings, and a three-fold increase in the number of new public cloud transactions over $50,000.

I am also pleased and excited about various initiatives we have instituted to grow the company from reaching new markets to product innovations to adding leadership talent. I believe we have a bright future ahead of us as we scale the company for growth.

We believe that the current market value of our shares does not accurately reflect underlying value of the company, particularly in the light of our increasing subscription business, bookings growth rate, and industry leadership. We have a high level of confidence in our strategy, growth prospects, and ability to execute.

In support of our ongoing commitment to increase stockholder value, our Board of Directors approved yesterday a $5 million increase to our share repurchase program. This program represents an attractive opportunity to deploy capital in a way that will benefit stockholders. With that, I will turn the call over to Bill to review the financial results.

Bill Slater

Thanks, Bobby. I will focus my review on our non-GAAP financial results and year-over-year growth rates unless otherwise stated. Total revenues in the second quarter were $28.6 million, an increase of 4% compared to $27.5 million in the same quarter last year. As Bobby mentioned, this was the second highest level of revenue we achieved in any quarter.

Subscription revenue, which includes our public cloud business and our updates and product support business, increased 10% to $15.6 million in the second quarter compared to $14.1 million in the same quarter last year. Annual contract dollar value for our new SaaS business more than doubled in the quarter over the year-ago period as well as over the last quarter.

Our deferred revenue grew 20% at the end of the quarter to $36.7 million, and our bookings, which we define as total revenue plus the change in deferred revenue, increased 14% to $30.8 million in the quarter.

Renewal rates on our subscription business were 94% in the quarter compared to 95% in the prior year period. Professional service revenue was $8.3 million, up 18% from the same period in the prior year. License revenue for the same quarter was $4.7 million, 26% lower than the same period in the prior year. As we noted earlier, we continued to see an accelerating preference for our public cloud offering.

During the quarter, we added 42 new enterprise customers, a record number for the company compared to 30 new customers in the same period of the prior year. One out of every four customers purchased multiple modules, and the dollar value of the average deal size on a total contract value basis is the highest we have seen.

Operating expenses were $18.4 million for the fiscal second quarter, up 12% or $1.9 million above the second quarter of the prior year. The increase in operating expenses was primarily related to sales and marketing expense, which supported our total bookings growth. The net income for the second quarter was $543,000 or $0.02 per share. We ended the second quarter with $28.9 million in cash compared to $22.9 million in the second quarter of last year, but down from $33.2 million at the end of last quarter.

The seasonality of new bookings as well as renewals skewed cash generation towards the second half of the fiscal year as evidenced in each of our last two fiscal years. Our days sales outstanding were 64 days, in line with what we saw in Q2 of last year and four days down from last quarter. The company repurchased 163,225 shares of stock during the second quarter for $961,200, as announced. The Board of Directors has authorized an additional $5 million to be added to the stock repurchase program, bringing the total available for repurchase to $8.2 million.

With regard to guidance and reminding everyone of Bobby’s comments concerning our enterprise customer adoption of our public cloud offering, we are projecting total revenues to be in a range of $117 million to $120 million for fiscal year 2011. This guidance is based upon a license contribution of approximately 18% of total revenue.

To help investors gain greater visibility into our business, we are also guiding analysts to our total bookings growth for the year. We are projecting total bookings to grow between 14% and 16% in FY ’11 over FY ’10. This would represent roughly a four-fold increase from FY ’10 year-over-year bookings of 4% and a six-fold increase from fiscal year ’09 year-over-year bookings.

We are projecting GAAP net loss per share to be in the range of $0.10 to $0.15 per share and non-GAAP fully diluted earnings per share to be a profit in the range of $0.10 to $0.15 per share for fiscal year 2011.

With that, let me turn the call back to Roy.

Roy Lobo

Thank you, Bill. I would like to thank everyone for joining us today. This concludes our prepared remarks, and we would be happy to take questions from the audience. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions)

Roy Lobo

While the operator is polling the audience for questions, I would like to inform everyone that Saba will be presenting at the Needham Growth Conference on Wednesday, January 12th. In addition, Saba’s management team will also be marketing in New York on Tuesday, January 11th, and in Boston on Thursday, January 13th. Thank you. Operator?

Operator

Our first question will come from Eric Martinuzzi with Craig-Hallum.

Eric Martinuzzi – Craig-Hallum

Thanks for taking my question. I’m just curious to know, obviously those nine out of those top 12 deals coming in SaaS was something that you weren’t expecting when you gave the outlook or at least I assume you weren’t expecting when you gave the outlook back in September. What was it that caught you off guard? What was it that changed in your demand environment just from a customer perspective?

Bobby Yazdani

You mean in terms of the ratios, Eric? It’s –

Eric Martinuzzi – Craig-Hallum

Right. I assume when you’re looking at your pipeline, you are assuming –

Bobby Yazdani

Yes. I mean, the pipeline, when we started at the beginning of the year and we were looking at the rolling 12 months. We were looking at 60% kind of traditional licenses versus 40% SaaS, and that had just absolutely accelerated. I mean, most of our deals right now in the pipe that we are closing our SaaS deals, and even the large customers are very, very confident with our solution – SaaS solution that we are offering. And these are really large enterprise customers that you would traditionally expect. They would be able to – they deploy or manage these solutions themselves. Now the market is adopting the SaaS lot faster than we’ve originally started the year. And you will see that in our deferred revenue a lot of that bookings are now moving into the deferred as we book this business on real-time.

Bill Slater

I would also add to that that in the public sector, which was always strictly licensed, we’re now also seeing SaaS deals coming through the public sector, which has been a surprise to us.

Bobby Yazdani

I mentioned one of our largest deals was the State of Texas. That was a SaaS deal that we didn’t anticipate. As a matter of fact, as part of the RFP, I don’t believe that we’ve offered in the RFP process, but as we went through the sales cycle, they were very comfortable with the SaaS solution.

Eric Martinuzzi – Craig-Hallum

Okay. And then just doing the math on your guidance there for the 18%, and the midpoint, based on my math, it looks like you are still expecting a license bump-up in Q3 and Q4. Based on your license execution for the first half of the year, you’ve been averaging about $4.5 million, $4.7 million on the license. It looks like that –

Bobby Yazdani

It would be slightly higher in the second half of the year, but you will see also a pretty decent bump essentially on the subscription side as well. I mean, based on the guidance we’ve given you, we’re going to cross the $30 million mark next quarter and we’re going to grow from there.

Eric Martinuzzi – Craig-Hallum

Okay. And then just talking about the expense side, the sales and marketing line, that was still a big number. I understand now that you are amortizing the commissions that are tied to SaaS sales and apparently that’s in line with the way other people do to have a primarily SaaS model, but that was still up large. So given that you’re amortizing it, why was that up so much?

Bill Slater

Early in the year, the capitalization impact on SaaS commissions is relatively swell because we’re paying at a lower level. So that was a $200,000 impact. I think the greater impact is we feel the need to build brand awareness and grow our bookings and let people know that we are more than just a learning company. So we’ve been spending a lot of time and effort reaching out to customers to make sure that they are aware of our talent suite and our collaboration suite.

Bobby Yazdani

And Eric, Q2 is typically when we have our users conference, and we charge essentially all the costs in that quarter.

Eric Martinuzzi – Craig-Hallum

Right. Okay. And then just the headcount in your sales organization, I’m talking about quota-bearing sales reps. Where is that now? How does it compare before your start of the year?

Bobby Yazdani

Yes. We’ve 40, we are up to 50 – over 50, and we are still hiring and our goal is to end the fiscal year around 60, north of 60.

Eric Martinuzzi – Craig-Hallum

Okay. So you’re saying that start in June 1st was 40, we’re at 50 –

Bobby Yazdani

That’s right. About – that's right. We’re now increasing by 20%, then we’ve added – in addition to that expansion in the sales organization, we’ve added management in the channel organization, we’ve added of course the support organization around our sales team, including the solution consultant our sales engineers needed. We have added a variety of support function in our sales and field operations globally. There has been quite a bit of investment to accommodate the size of the team that we are assembling here, and we’ve spent quite a bit of time and investment in training the organization last quarter and we’re going to continue doing that for the remainder of the year.

Eric Martinuzzi – Craig-Hallum

Yes. And I’m saying it in the double-digit bookings. I don’t want to take that away from you –

Bobby Yazdani

Yes. I mean, just it’s – that’s the way – you know, we have now gone into a mid-teens bookings, and then our goal is to get it higher than that. And we want to keep this momentum that we have built.

Eric Martinuzzi – Craig-Hallum

Okay. Thanks for taking my questions.

Bobby Yazdani

Thank you, Eric.

Operator

We will go next to Kevin Liu with B. Riley & Company.

Kevin Liu – B. Riley & Company

Hi, good afternoon, guys.

Bobby Yazdani

Hi, Kevin.

Kevin Liu – B. Riley & Company

It’s nice to see the ACD kind of doubling in terms of your commentary. I’m wondering if you could provide a little bit more color around that either in terms of what the cumulative ACD on your public cloud offerings looks like today are perhaps just what the amount booked in this current quarter was versus the prior year.

Bill Slater

The number of transactions has gone up substantially. It’s gone up about three-fold year-over-year. So I think we’re happy to talk about that in those terms. But we haven’t broken that out of subscription revenue. We want to keep subscription revenue pretty simple.

Kevin Liu – B. Riley & Company

Okay. And going back to the question on the sales and marketing, if we look at kind of the year-over-year growth in that expansion rate, that was somewhere in the neighborhood of 30% and you guys are targeting mid-teens bookings growth and obviously you expect that to accelerate here. But just curious as to whether you feel like you are getting the productivity out of the additions over the past few quarters and why you are so confident that continuing to ramp the headcount here and increase that spend level as appropriate.

Bobby Yazdani

So we look at the given number of things. First of all, the acceleration in terms of the net new customers has increased tremendously. So we’ve – as we mentioned, 42 was the highest last quarter. The pipeline looking ahead is the highest we’ve had in the history of the company. So not only we are seeing productivity in terms of the net new customers that we are signing up, we are also seeing the contribution of our team in terms of the pipeline expansion that we are building into the future. So we are going to see a good productivity this year. We’re going to see a better productivity next year. I mean, you’ll see that trickle down to the revenue sometimes next year and the following year in terms of double digits – solid double-digit growth. But we are pleased with – just look at the deferred revenue growth of about 20%, look at the – we look at also the – the total contract value has been substantial. If there is a multi-year contract, you only see essentially the first year contract in the deferred revenue.

Bill Slater

That’s right. And our contracts are averaging three years or greater.

Kevin Liu – B. Riley & Company

Professional services has remained fairly strong here, now north of $8 million a quarter. Are these still tied to some of the large license transactions you won over the past, say, 6 to 12 months, or is there still a fair amount of services that gets attached to your SaaS sales?

Bobby Yazdani

It’s – these consulting or the growth in the consulting professional services are mostly coming from business consulting, which you change management, process improvement and expansion essentially of deploying new functionality or capabilities of the platform. And also a project management, as many of our customers are now gone from, let’s say, North America deployment to a global deployment. So we are seeing very good expansion of the solution within our existing customers that we have offerings around our initial SaaS deployments in $30,000 to $50,000 range. We wanted to remove the barrier for our customers to adopt our new public offerings. So – and we’ve done that.

We have very good packages, service packages. So, honestly the growth of the professional service is coming across globally across all of the segments. Both new customers sign up, and as I said, a number of these new customers are truly large enterprises that are deploying our cloud offerings. And we are seeing deployment of this solution north of 10,000 employees. So it does have a significant amount of project management and change management, communication that needs to be organized around these projects. And customers are looking to our advice of how to deploy these solutions on a global basis.

Kevin Liu – B. Riley & Company

And last one for me, in terms of the competitive landscape, obviously some transactions of other LMS suppliers, particularly at the mid-market, I’m curious how you’re seeing the landscape change, whether there have been displacement opportunities that have come out of, say, the Learn.com transaction or whether you anticipate any from the recent acquisition announced by SumTotal?

Bobby Yazdani

I mean that – yes, we are seeing a consolidation within the customer base, meaning that the customers could have multiple solutions and they are essentially adopting our solution to be an enterprise standard within their businesses. So we are seeing a very good displacement market. We are seeing our pipeline essentially even market is growing. So I believe that also the learning market organically, the growth of that market have accelerated hence the interest of a number of companies to acquire the learning management providers. So I think the core of the market is growing nicely globally as well as there is a consolidation opportunity within the enterprise. And we are participating in both. So we have signed a number of new learning management customers that it’s supposed to be – this is supposed to be a better growth market. It is a growth market. The learning management is a growth market and it’s growing very nicely.

Kevin Liu – B. Riley & Company

Okay. Thanks for taking my questions.

Bobby Yazdani

Thank you.

Operator

(Operator instructions) We have Michael Hahn with Bryn Mawr Capital.

Michael Hahn – Bryn Mawr Capital

Hi, good afternoon. A couple of questions. You talked about the desire to grow the suite organically, which you have done in the past. What areas would you think you would expand into potentially? Where would you be taking that organic effort?

Bobby Yazdani

Michael, there are a number of things that’s coming up the next 12 months. We have a very good pipeline of offstage of our suite. We’re going to ask a major refresh essentially of the entire suite, the learning suite, the performance suite and the collaboration suite scheduled on two drops that are coming up. One is going to be in April next year and then subsequently there would be a September release. Again, these are public cloud essentially updates where all these are going to be available in our cloud offerings, both for existing as well as new customers. For instance, we are reiterating our compensation management solution. We’d be working with a number of our customers and advisors to rev that to the next level and take the compensation management process as a global solution.

We are working in the area of embedding business networking into learning, hence our social learning as a key initiative. So what we believe is that the learning management that originally was organized around formal learning is going to transform to become a more and more important informal learning activities in the enterprise. So we are revving essentially our learning market to accommodate this increased interest by the market around the social networking. We are doing a similar set of uptake in the performance management. We believe that performance management is going to become more bottoms-up than top-down. And we are updating our suites to accommodate the business networking, the performance.

We are revving our central product with a brand new user interface, self service as self-provisioning infrastructure on Saba.com. So there is a lot of good work going on so that customers can sign up and self-provision these solutions of Saba.com and many of our solutions over the next 12 months. So the pipeline and the activities in there, this is – their goal is to increase the differentiation and the addressable market for Saba. That’s how we’ve organized those initiatives.

Michael Hahn – Bryn Mawr Capital

Thanks for that. And then you talked about the opportunity and the extended enterprise. And I know some of your larger enterprise customers utilize the product for partners and distributors and so forth. As you push into that – and you also talked about the opportunity to do more in the mid-market – as you push into those two areas, is that – is the extended enterprise more of an opportunity for learning or is it also – because I think that's where some of your big enterprise customers are more active. Or is it something that performance and collaboration can go into that opportunity too? And what kind of – how much do you think this increases your market if you are successful with these efforts?

Bobby Yazdani

It’s a very good question. So in terms of the extended enterprise initiative, learning and collaboration – and when I refer to collaboration, I’m talking about also the business networking as well as real-time collaboration, and learning both managed or formal learning certification compliance as well as social learning, which is more collaborative learning. And that is a significant opportunity to enable such processes and system for large companies who have a large extended enterprise.

Process manufacturers like Ford, Caterpillar, Cisco, IBM, the companies in pharmaceutical industries, the companies who provide medical devices, they have large extended enterprise and they want to lower the cost of their product cycles in their value chain on the extended enterprise. It’s a core, mission-critical sort of application that can service that market. We believe that it’s going to rejuvenate the growth in the learning market by having such solutions for the customers. The customers are doing it in some shape or form themselves today in a very extensive fashion. And we believe those type of solutions would be relevant and is going to increase the footprint.

In terms of the mid-market, since we have created this dedicated organization that essentially sells our public cloud offering, our multi-tenant solution, it’s a significant growth market. We have very good solution, and those mid-market customers typically actually adopting the entire suite because they want to have a single vendor, they want to have a single solution, and we believe that’s also a very important significant growth.

And don’t forget, in my prepared comment I suggested that we are expanding in emerging markets. So Brazil has been a focus for us. We’ve made significant progress in Brazil. We are making significant progress in China. We are making significant progress in Australia, Canada and the Middle East. And all of those would be target and we have brought in sales leadership as well as expertise in those markets to grow our business. Some of them are newer. It takes longer to invest in some of these territories, but we believe that they are going to turn into a very productive investment for Saba.

Michael Hahn – Bryn Mawr Capital

And as you go into the mid-market, does that – are you coming up against the different set of competitors, perhaps some of the traditional cloud guys who have been more focused in the smaller enterprises? Or is it a different set of competitors or basically the same?

Bobby Yazdani

No. They are different set of competitors as you are mentioning. We see the success factor in the mid-market. We see people like Learn.com or people like Taleo in the mid-market where they have a cloud offering, and we compete head-to-head with them.

Michael Hahn – Bryn Mawr Capital

And any comments you could make in terms of – it sounds like you’re already having some level of success, but any – when you've had success against them, when you have competed with those players, what's been the differentiation that's allowed your product to win?

Bobby Yazdani

I would say the three areas that are our focus area to differentiate us. Number one, we have a unified platform that’s organically been built. We didn’t put together hodgepodge of solutions and create user interface with the segregated information architecture or the user experience that’s clunky as you go to different sets of applications. So we’ve done a very good job building a unified solution and offer it to this market. Secondly, the mid-market, they need the same level of expertise that the enterprise market needs. So we believe that our expertise is relevant and we would want to – our process expertise, our know-how about these markets, we use that clearly as a differentiator. This is not about integration of technology. This is about advice to our client of how to best deploy the solution for increased productivity.

And then lastly, we’re just very easy to do business with. We want to remove barrier in the mid-market for our organization to do business with. We want to make it easy for people to have access to our solution. They can pilot it. They can take a look at it and get comfortable with this solution and then ultimately after they are confident of the solution, they would be able to deploy it. So our goal is to make it easy for people to do business with us, lower the barrier to access of the technology. For instance, today you can go to Saba.com and self-provision access to Centra and have a free trial of our technology. We want to move our company towards that direction when it comes to the mid-market.

Michael Hahn - Bryn Mawr Capital

Okay. And in terms of – any changes in the quarter – Cisco, of course, talked about some public sector weakness. It seems like not only are you selling more cloud to the public sector, but also had a big deal – I think you mentioned the State of Texas. Any changes in kind of the breakdown of the wins in the quarter and what sectors are strong and what sectors are weak?

Bobby Yazdani

I would say that you’re taking the right one. I think the US Federal has been, I would say – the best I could say it, it’s been at a pause because of the change of leadership in the Congress or what have you. So – and also the extension of the budget that has taken place several times. So, yes, there were some holding. We’ve been on a holding pattern in a number of large important contracts in that sector, and what Cisco saw, we saw, a number of our partners who we work within that market as well saw. Putting that aside, we are seeing very good public sector market in Canada, in Australia, as well as in Europe. It’s coming back. The state and local was pretty good in the US. We’ve actually done – more than the State of Texas, we have two other states that we did business with in the past quarter. The states are okay. And I think that the financial services are coming back, manufacturing is coming up. So the verticals – some of the verticals remain to be quite strong as well.

Michael Hahn - Bryn Mawr Capital

And last question on the sales force, and it seems clearly you are seeing an opportunity here, mid-market, extended enterprise, education growing again, and you are investing for that opportunity. There is a lot of other companies – you were in this space sooner than a lot of other companies. A lot of these other companies don't bring any earnings down to the bottom line, and you've almost made a full transition to subscription and still bringing earnings to the bottom line. As you invest for this opportunity, what are your thoughts in terms of – once you get to that 60 salespeople, what kind of revenue can that support? And will you do a better job than some of the other players in the space that get incredible eight-times revenues multiples, but never bring any earnings to the bottom line? Is that going to be an industry effect and just forever more constantly hiring sales and marketing and bringing nothing to the bottom line?

Bobby Yazdani

So, as I have shared, Bill and I, we both believe in this performing philosophy. First of all, the business needs to generate cash. And secondly, the cash that this generated has to have appropriate investment for shareholders. If you sign our earnings we believe right now, the best use of our cash is to expand our sales and marketing because we see an opportunity globally, and secondly, buy Saba shares. As you suggested, we believe that our share is a very good value and that’s where we are investing our money, buying our own shares back, essentially betting on Saba and also investing our own people and our own opportunity, which we believe in. We are going to do that while growing cash. We’ve – neither of us, as the executive of the company, would be comfortable to put the company in a place where it’s not generating cash. We believe that we need to generate cash and after the investments we’ve made for our shareholders. And we’re going to maintain that philosophy going forward.

Michael Hahn - Bryn Mawr Capital

And then in terms of what kind of revenue level you think you could score once you (inaudible)?

Bobby Yazdani

Yes. So this – I mean, our guidance suggests that we’re going to cross the $30 million mark a quarter next quarter into the second half of the year. So we’ve gone from a $25 million a quarter to a $30 million quarter literally in about four quarters. So you can see that kind of a growth.

Bill Slater

Right. And moving away from license towards subscription revenue, which is a higher quality revenue.

Bobby Yazdani

Yes. I mean, we believe we have a very smooth landing here even though there was – as you shift models, the challenges, and we believe that our team has done a good job training our people. Our product people have put a very strong product into the marketplace, and we are executing through this transition while staying profitable and generating cash and putting quality relationship with customers and quality essentially financial model in place. So you should see that the growth that you saw from $25 million a quarter to $30 million a quarter while moving to the subscription, we’re going to see the same type of growth. However, the license revenue is going to decline and the subscription is going to grow comfortably in double-digit numbers.

Michael Hahn - Bryn Mawr Capital

Okay. Thank you very much for your time.

Bobby Yazdani

Thank you, Michael.

Michael Hahn - Bryn Mawr Capital

Okay.

Operator

Thank you. (Operator instructions) We have no one else queuing up, Mr. Lobo. Please go ahead with any closing remarks.

Roy Lobo

Thank you, operator. I would like to remind everyone that a telephone replay of this conference call will be available. The replay number is 1-800-475-6701, and the access code is 184272. The replay can also be accessed from the Investor Relations page of the Saba website. If you have any questions, please do not hesitate to contact the Investor Relations department for any follow-up questions. We look forward to speaking with you. Thank you all for joining us on today’s conference call. And with that, I’ll turn the call back to the operator for closing.

Operator

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

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