Saba Software's CEO Discusses Q1 2012 Results - Earnings Call Transcript

| About: Saba Software, (SABA)

Saba Software (OTCPK:SABA) Q1 2012 Earnings Call September 27, 2011 5:00 PM ET

Executives

Bobby Yazdani - Founder, Chairman of the Board and Chief Executive Officer

Roy Lobo - Investor Relations

William Slater - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Ian Kell - Northland Securities Inc., Research Division

Mark W. Schappel - The Benchmark Company, LLC, Research Division

Scott R. Berg - Feltl and Company, Inc., Research Division

Eric Martinuzzi - Craig-Hallum Capital Group LLC, Research Division

Kevin Liu - B. Riley & Co., LLC, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Saba First Quarter Fiscal Year 2012 Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to Roy Lobo. Please go ahead, sir.

Roy Lobo

Thank you, Gloria. Good afternoon, everyone. Welcome and thank you for attending Saba Software First Quarter Fiscal Year 2012 Earnings Conference Call. With me on the call today is Founder 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 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 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, 2011 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 financial measures. A reconciliation of GAAP to non-GAAP 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 Founder and Chief Executive Officer. Bobby?

Bobby Yazdani

Thank you, Roy. I am pleased to announce that the first quarter of fiscal year 2012 got off to a strong start. Total billings grew 18% in the quarter, which is at the high end of our fiscal year guidance of 16% to 18%. Total non-GAAP revenue grew 14% in the quarter to $30.9 million, ahead of analysts' expectations. Cloud billings grew 81% and Cloud revenue grew 59% in the quarter.

The strength we experienced in the quarter was spread across all geographies. In the current economic environment where job creation is very gradual and markets are global, organizations are looking to rapidly and continuously scale their people and transform the way they work and perform across their value chain. In addition, organizations are looking for a state-of-the-art, reliable, unified and complete solution delivered in the Cloud. Saba is uniquely positioned to address these requirements.

We are one vendor that can deliver on these tenets and we are establishing ourself as the vendor of choice and a strategic partner to our global enterprises, whether they are large enterprises or mid-market enterprises.

Our Saba People Cloud applications that include learning management, Talents Management, enterprise social networking and realtime collaboration enable organizations to leverage their people networks to transform the way that people work, collaborate and learn in order to maximize their competitiveness. In short we are not just a point vendor, but a strategic partner to our customers and we have been increasing our value to them over the past few years.

Let me give you a few examples. For one, we are no longer only selling learning management as a compliance tool to HR departments. We are successfully expanding beyond HR and can effectively sell to almost every line of business within an organization including sales, services, operations, customer support and channels. For another, we can sell enterprises, a broader set of innovative solutions including performance and Talents Management, virtual classroom, testing and assessment, realtime collaboration and enterprise social networking. This quarter, we saw a healthy attach rate of our collaboration solutions to LMS deals. And we saw a number of customers who had previously purchased our LMS solutions return to purchase our collaboration solutions including AstraZeneca, John Deere, Home Depot and FedEx.

We also saw a healthy contribution from our testing and assessment solutions, including customer wins at Merck and BMW. We are also increasing our value to our customers by being able to service them on a global basis. We have delivered our solutions in 195 countries and support 33 languages. We have 5 data centers around the world including 2 in North America, 1 in Canada, 1 in Australia and 1 in Europe. All in all, we are growing the engagement with our customers and increasing their adoption of our solutions.

To complement our direct sales, we are continuing to strengthen our channel strategy. In the quarter, we signed an agreement with Kronos, whom we will partner with for recruiting solutions. We also signed a deal with Accenture, who will be identifying opportunities with Saba's People Cloud applications on Accenture's BPO business to provide a strong value proposition to customers. In the quarter, we also announced Saba Content Connect, an innovative program that brings Saba content partners and customers together in an interactive online community. As we progress through fiscal year '12, we will continue our focus and our efforts on growing the business and increasing the strategic value to customers. With respect to growing our business, we will emphasize cross-selling performance and Talents Management, as well as our collaboration solutions to the install base. We also plan to expand our efforts to grow internationally. We have seen healthy growth from emerging markets and with our newly launched operations in China, we look to report strong progress from that region.

Our momentum in the mid-market should continue in fiscal year '12 as we look to extend our reach in this segment. The average growth rate in billings from our mid-market segment in fiscal year '11 was in excess of 30%, and our growth rate in the first quarter of fiscal year '12 was even stronger.

With respect to increasing our strategic value to customers, we intend to continue to provide global services with 100% focus on total customer satisfaction. We plan to increase our multi-language support and multi-channel access, and augment our customers' resources with service deployments. We will provide customers with subject matter expertise to implement best practices for the People solutions at every segment of their business.

In summary, we delivered strong results in Q1, and we outlined the initiatives we will undertake to continue to produce strong results throughout the remainder of fiscal year '12.

Before I turn the call over to Bill, I would like to comment about our guidance. We are reiterating our fiscal year '12 guidance, including our total billings growth of approximately 16% to 18% for fiscal year '12 over fiscal year '11.

With that, I'll turn the call over to Bill.

William Slater

Thanks, Bobby. I will focus my review on our non-GAAP financial results and year-over-year growth rate unless otherwise stated.

Total revenues in the first quarter reached $30.9 million, an increase of 14% compared to $27.2 million in the same quarter last year. Subscription revenues, which include our Cloud business and our update and product support business, increased 26% to $18.8 million in the quarter compared to $14.9 million in the same quarter last year.

Subscription gross margin expanded to 77% in the quarter from 74% in the same quarter last year. Our Cloud revenues grew 59% and accounted for 47% of the subscription revenues. Renewal rates on our subscription business were 94%. Professional service revenue was $9.3 million, up 19% from the same period the prior year. License revenues were $2.8 million, 38% lower than the same period in the prior year. Our deferred revenue grew 29% to $43.8 million and our billings, which we define as total GAAP revenue plus the change in deferred, increased 18% to $28.7 million. Testing and assessment contributed approximately 6% to overall revenues spread across license, subscription and professional services.

During the quarter, we added 32 new customers compared to 30 new customers in Q1 of FY '11. Operating expenses were $22.8 million for the quarter, up 34% over the same quarter last year. The increase in operating expenses was primarily related to the acquisition of Pedagogue and Comartis, hiring in the field to support bookings growth and higher R&D expenses in advance of our People Cloud release. The net loss for the third quarter was $3.3 million or $0.12 per share. The results for the quarter were better than expected because of a shift in some program expense to later quarters and higher license revenue contribution in the first quarter.

We ended the first quarter with $21 million in cash. Cash flow from operations for the quarter was a usage of $3.4 million. Now let me remind everyone, the historical pattern for the company is to use cash in the first half of the year and generate positive cash flows in the second half of the year due to stronger renewals and bookings in the second half.

With regard to guidance for fiscal year '12, we are reiterating our forecast for total GAAP revenues to be in the range of $130 million to $133 million, and total billings to grow in the range of 16% to 18% in fiscal year 2012 over fiscal year 2011. We will also reiterate our forecast for GAAP net loss to range from $0.39 to $0.45 per share, and non-GAAP net loss to range from $0.17 to $0.23 per share. We expect to return to non-GAAP profitability in the second half of fiscal year 2012.

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

Roy Lobo

Thank you, Bill. This concludes our prepared remarks and we will be happy to take questions from the audience. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]

Bobby Yazdani

While the operator is polling for questions, I'd like to inform everyone that Saba will host an Analyst Meeting at the HR Tech Conference in Las Vegas on Monday, October 3, from 2:00 p.m. to 4:00 p.m. in the Voyager Boardroom at the Mandalay Bay. During the quarter, Saba will also be presenting at the Craig-Hallum Conference on Thursday, October 6, and at the Robert Baird Conference on Tuesday, November 29.

With that, I'll turn the call back to the operator.

Operator

We do have a question from Eric Martinuzzi with Craig-Hallum.

Eric Martinuzzi - Craig-Hallum Capital Group LLC, Research Division

Just curious to know, I think you gave the number, but I wanted to make sure I had it. What was the contribution from the test and assessment, the impact of revenue this quarter from the acquisitions?

William Slater

It was about 6% of overall revenues came from test and assessment.

Eric Martinuzzi - Craig-Hallum Capital Group LLC, Research Division

Okay. So that was of the non-GAAP number?

William Slater

Yes.

Eric Martinuzzi - Craig-Hallum Capital Group LLC, Research Division

Okay. So that's roughly $1.9 million. Now I think, previously...

William Slater

It's a little less than that. It's sort of -- it's about $1.8 million.

Eric Martinuzzi - Craig-Hallum Capital Group LLC, Research Division

Okay. I think previously, you'd commented that it was -- you expected about a $5 million to $6 million impact for the fiscal year, is that correct?

William Slater

That's correct.

Eric Martinuzzi - Craig-Hallum Capital Group LLC, Research Division

Okay. And is that expected, this $1.8 million, does that just recur kind of quarter-by-quarter, it's a pretty steady number or is there some seasonality there?

William Slater

I think there's new business that comes in every quarter, but it seems to be reasonably steady business.

Eric Martinuzzi - Craig-Hallum Capital Group LLC, Research Division

Okay. And then on the -- you talked about good strength across all geographies. I'm curious about your vertical segments. Can you speak specifically to federal and financial services?

Bobby Yazdani

Yes. I mean, the -- there's really no change with respect to the federal, U.S. Federal. It's still, I think it's very slow and quite unpredictable. In terms of the strength, we've done quite well with global process manufacturing. Even financial services is doing fine. Done quite well with high-tech, done quite well with the life sciences industry, so it's broad-based. But the federal -- U.S. federal is still struggling. There's really no change, no different than what we have seen over the past 4 to 6 quarters.

Eric Martinuzzi - Craig-Hallum Capital Group LLC, Research Division

Okay. And then on the operating expense I had been a little bit, probably too conservative in my own estimates as far as the sales and marketing, but given that we now have sort of a full quarter of the integrated merged operation, what should we be looking for, for kind of just strictly on R&D and G&A? And then I want to talk about sales separately. Are those absolute dollar amounts going to be roughly steady for the remainder of the year?

William Slater

Yes, yes, definitely. We don't expect a huge amount of variability, but we'll go up or down $1 million quarter-by-quarter. We have some quarters where we invest more heavily in marketing programs, and then our fourth quarter tends to have a spike up for commissions.

Eric Martinuzzi - Craig-Hallum Capital Group LLC, Research Division

All right. And then your customer conference is when?

Bobby Yazdani

We have 2 customer conference. The European customer conference is going to take place in the second quarter, and the North American major conference is going to take place essentially in the Q4. Some of the costs would be incurred also in Q3.

Eric Martinuzzi - Craig-Hallum Capital Group LLC, Research Division

Okay. And then on the sales as a percent, I guess given the revenue, a slightly better revenue than I was expecting, I would've thought the sales and marketing would've been higher. Is there any -- were there any one-off items in there or was that all pretty much variable comp?

William Slater

There were really no one-off items in there.

Bobby Yazdani

There were some programs that we planned to...

William Slater

Yes. There were some programs that slipped out to later quarters but other than that, I would say none, not anything huge.

Eric Martinuzzi - Craig-Hallum Capital Group LLC, Research Division

Okay. And then lastly, as much as I've enjoyed working with Bill, I know his time is limited with Saba. Can you update us on the CFO search?

Bobby Yazdani

Yes. We're making very good progress. We have a number of qualified, well-experienced candidates that the Board and myself are talking to. And we are hoping to conclude Bill's replacement over the course of the remainder of the year, calendar year.

Operator

Mark Schappel with Benchmark Company, please go ahead.

Mark W. Schappel - The Benchmark Company, LLC, Research Division

Bobby, I was just wondering if you can just give us a brief update on your new or soon-to-be-released next-generation product line that's supposed to be coming out later this fall.

Bobby Yazdani

We've been making very good progress. Really, it's a couple of very important points around this very important transforming, I guess, release for the company. It's a unified platform, it's a single architecture. It's designed for a Cloud offering. It's designed so that it has an open interface where customers can easily get access to the services and extend essentially the usage of the platform. So architecture of this platform is quite advanced. We have had a number of internal releases of the product concluded. The product is going to be released to limited customers toward the end of the year. As we've promised, we are working really hard to conclude that effort by the end of the year. The March conference, Saba Global Summit March conference would be the first opportunity that we are going to expose our entire customer base to the release of People Cloud. We would be having a number of our partners and of course some of our early customers that we would be -- the business case we would be demonstrating this release. So it has all of the elements that I talked about; learning management, Talent Management, Enterprise social networking, realtime collaboration, as well as test and assessment. It has essentially all the components that we currently cover on our price list essentially will be offered in this new Cloud offering. There would be a complete developer's kit that would be shipped with this product so others can build applications and extend essentially our platform. We would support 33 languages. We are going to support self-provisioning of the technology on -- for our Cloud offering, and this is an effort that we're hoping to conclude by the end of this calendar year.

Mark W. Schappel - The Benchmark Company, LLC, Research Division

Okay, great. And while I'm still on the product theme here, I realize it's still a little bit earlier, early days, but how did the social learning product do during the quarter?

Bobby Yazdani

We've actually have now sold multiple customers, and we are examining the way we would like to position that product, not necessarily as a standalone product anymore, and embed it across the entire suite of our application, if I can get into more details around that. But what we are seeing is that the Social [Saba Social] is not a standalone really offering. It's really embedded in all the business processes that Saba supports whether they are learning processes, they're performance and both an objective management processes, whether they are collaborative processes. We are now embedding all the Social capabilities in all aspects of our product. It's actually becoming the product or the base product itself.

Mark W. Schappel - The Benchmark Company, LLC, Research Division

Okay. And Bill, moving over to you. I believe in your prepared remarks, you noted that expenses came in a little bit lighter and I think it was -- I think your term was due to a shift in program expenses to later quarters. I was wondering if you can elaborate on that.

William Slater

Certainly. We had some marketing programs that were delayed in the first quarter that will pick up in the second and third quarter. Probably the impact is somewhere in the vicinity of about $0.03 impact in the first quarter.

Mark W. Schappel - The Benchmark Company, LLC, Research Division

Okay. And did you say $0.03?

William Slater

Yes, yes. About $1 million.

Mark W. Schappel - The Benchmark Company, LLC, Research Division

Okay. And then with respect to deferred revenue, what percent is SaaS subscriptions?

William Slater

I don't have that in front of me right now. I can get that for you.

Operator

Scott Berg with Feltl & Company. Please go ahead.

Scott R. Berg - Feltl and Company, Inc., Research Division

Let's start the high level on the macro view. I just heard there's a lot of concern on potential slowing pipelines kind of across the space in general. Can you tell us what you're seeing maybe so far into September or maybe at the end of August? You obviously reiterated guidance which implies something positive, but in commentary, that would be great.

Bobby Yazdani

Scott, the emerging markets, it's holding quite steady and we're making good progress in terms of niche, new opportunities in the pipeline. We are cautious with Europe, especially the Southern Europe, but the Northern Europe, the Nordic, as well Germany, as well as U.K., they remain quite strong. North America, and taking the federal government out of the equation and state local government somewhat out of the equation, again on the state government, it's been fairly steady. We are not seeing necessarily softness, but we are being very cautious just based on the headline. We've adding new pipeline, we are adding new opportunities. Year-over-year, pipeline is up. Year-over-year, net new opportunities are up. The number of RFPs and the demos remain to be also quite good. So I don't -- I cannot -- I don't have a negative view yet.

Scott R. Berg - Feltl and Company, Inc., Research Division

Okay, great. Turning to your guidance really quick, you reiterated your guidance for the year. Are you also reiterating your 110% year-over-year growth in your SaaS bookings?

William Slater

Yes, that would be correct. So the first quarter on our SaaS bookings came in at about 146%. So we're still very comfortable with our SaaS bookings and of course, we expect the preponderance of our bookings as we go forward to move towards SaaS.

Scott R. Berg - Feltl and Company, Inc., Research Division

Great. And I guess my last question for you, Bill, is around gross margins for the quarter. I didn't catch it in the commentary with regards to gross margins on the professional services line. That's your best Q1 or fiscal Q1 in about 3 years. Any commentary as to why those expenses were lower than the last -- at least as a percentage over the last couple of years?

William Slater

We had a great deal of efficiency, we had a much higher utilization than we've seen. Typically, professional service margins have bounced around. We had a difficult fourth quarter, but we've recovered 29% our margins that we've hit before, and again, just good utilization in the quarter.

Operator

Ian Kell with Northland Capital Market.

Ian Kell - Northland Securities Inc., Research Division

I just got a couple of quick ones here. Just on the software release coming out here in the fall, I guess I would've expected that R&D would trend down here over Q3 and Q4. It sounds like that might not be the case. Am I understanding that correctly?

Bobby Yazdani

That's correct. I mean, we have -- we're going to continue the release of new capabilities as well as globalizing the platform. We are supporting 33 essentially languages and local addition of the product and that work is going to continue for the remainder of the year.

Ian Kell - Northland Securities Inc., Research Division

Okay. All right. And then, I think you spoke a little bit about the mid-market space and your progress there. Just -- I wonder if you could go back to that and give us a little more detail there. And is there any way to sort of quantify, I don't know, your pipeline or what percent your pipeline is made up by kind of that mid-market group?

Bobby Yazdani

The mid-market group is roughly 1 year old. We started this essentially segment last fiscal year. The team essentially grew the booking last year roughly 30%. The segments -- by the way, we define it companies between 2,000 to 7,000 employees. That's sort of how we define mid-market. And typically these companies, they have in excess of $500 million in revenue. We've -- we are adding team members in that segment. This program was focused in North America, we were hoping to be able to increase that significantly over the next few years. The pipeline in that segment is growing very nicely, in excess of 30%, 40%. I mean this is an area that we've never played in it, it will be a growth area for us. And we've learned how to essentially have a very light sell cycle for this segment onto market. We've changed our push to the market, we've changed our lead generation for this market. We are getting very good at approaching this market. And this should be definitely a growth engine for the company going forward.

Operator

[Operator Instructions] And we'll go to the line of Kevin Liu with B. Riley.

Kevin Liu - B. Riley & Co., LLC, Research Division

Historically, the first quarter has been your weakest license quarter. I was just wondering with this transition of the SaaS model, would you anticipate that to remain the case and have license revenues ramp from here?

William Slater

I don't think license revenues ramp from here. I think if anything, license revenues are flat to down. We gave guidance at the end of the last quarter that said we'd expect license revenue to fall by 50% from FY '11, and we think we're on that glide path.

Kevin Liu - B. Riley & Co., LLC, Research Division

Got it. And you guys kind of decided, being able to cross-sell collaboration in your learning base and vice versa. I was just wondering if what you're seeing in terms of uptick of other modules such as Performance and Talent, and curious if there's any sort of shift given the current macro picture?

Bobby Yazdani

No, it's a fairly similar pattern. We continue to sell suite deals, we continue to sell multiple modules in a sales cycle. We've added more customers in our Performance management and Talent Management. We've added more customers where they've adopted the entire suite. We are going back to our, of course, our existing customers and giving them access to these other modules that we have to offer. We are very excited about essentially the fall release that's coming up. Of course, the unified approach to the entirety of these application suite I think is going to be quite attractive for our customers to adopt not only a single module, but essentially the entirety of the solutions that the Cloud offers. We normally are going to be talking about honestly the specific application area, we're going to be talking about the Cloud and all the services that available in the Cloud. And the customer will decide what is the best approach for them and subscribe essentially to the appropriate level of services or the capacity of services that they need.

Kevin Liu - B. Riley & Co., LLC, Research Division

Just a question on the competitive landscape with one of your key competitors, Plateau, having just been bought within the past month, a few months. I'm wondering what that's done in terms of displacement opportunities or changes to the overall landscape?

Bobby Yazdani

We don't like to typically like to layout our game plan against a specific competitor but as you know, we continue to do quite well. Again such additional competitors, we see them often and our win rate remain to be quite strong, specifically in the enterprise learning market. In the enterprise learning market, the fact that we have a complete collaboration suite, we have a complete content management, testing assessment suite, the fact that we have very strong growth flexibility across multiple verticals, across global service capabilities, it's continued to be a very strong set of differentiators for us. We are very good at executing enterprise learning projects, and we are well known for it and we continue to win in that market.

Kevin Liu - B. Riley & Co., LLC, Research Division

And in this particular quarter, there were just a couple of small severance charges. Wondering if there are any potential cost savings associated with that or any other costs you might be able to wring out either from this operation -- or these acquisitions or your core operations.

Bobby Yazdani

No, there was just some realignment of potentially overlap areas. And from time to time we're going to go through this realignment, but there's nothing significant there.

Kevin Liu - B. Riley & Co., LLC, Research Division

And then just lastly for me, the peso buybacks slowed down from prior quarters. With your stock price here, just wondering if you can comment on your appetite for further repurchases.

William Slater

Well, I think our appetite is high. I think we're looking to get back to generating cash before we reconsider buyback. We discuss it every quarter and we knew we were going to be down this quarter in cash, so we slowed down the buyback pace.

Operator

There are no additional questions at this time, please continue.

Roy Lobo

Thank you, operator. A telephone replay of this conference call can be accessed by dialing 1 (800) 475-6701. The access code is 216573. You can also access the replay of this call by going to the Investor Relations section of our website at investor.saba.com. A replay will be available through October 27 of this year. Thank you, everyone, for joining us on today's conference call, and I'll turn the call back to the operator for closing remarks.

Operator

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

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