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Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Ladies and gentlemen, thank you for standing by. Welcome to the Saba first quarter fiscal year 2008 financial results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Thursday, October 4, 2007.
I would now like to turn the conference over to our host, Mr. David Lebedeff. Please go ahead.
DAVID LEBEDEFF, VP, IR, SABA SOFTWARE, INC.: Good afternoon and welcome to the Saba Software first quarter 2008 conference call. I am David Lebedeff, Saba's Vice President of Investor Relations. Today we will discuss our financial results for the first quarter ended August 31, 2007. With me today is Chairman and Chief Executive Officer, Bobby Yazdani, and Chief Financial Officer, Mike Martini.
Before I begin, I would like to point out that certain remarks made in the course of this conference call are forward-looking statements. These statements include but are not limited to, Saba's future performance and financial projections, increasing customer adoption of our OnDemand offerings, OnDemand solutions dominating our business over time, the percentage of quarterly bookings recognized in future periods, growing market interest in our solutions that support our 2008 revenue guidance, and our ability to grow our business and generate profits, expand our footprint to include compensation in workforce planning, drive revenue through indirect channels, including our newly expanded relationship with a large BPO company, and generate cash from operations.
These statements are based solely on information available to us today, and reflect management's current expectations and beliefs, and are subject to numerous risks and uncertainties. It is important to note that our actual results could differ materially from those contained in such forward-looking statements. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our Annual Report on Form 10-K for the year ended May 31, 2007, and in similar disclosures in subsequent Saba periodic SEC reports.
Copies of these reports may be obtained from the SEC. We disclaim any duty to update such statements. 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, and is available on our website at www.saba.com.
Saba's management believes that non-GAAP information is an additional meaningful measure of operating performance, because it measures the principal operating results that can be directly influenced by management, and provides more consistent comparability to our financial results against historical results, and the reported results of other software companies.
Let me now turn the call over to Mike Martini, Chief Financial Officer of Saba.
MIKE MARTINI, CFO, SABA SOFTWARE, INC.: Thanks, David. I will report today on first quarter 2008 results, and I will give guidance for second quarter and full year 2008. During my first quarter at Saba, I was able to make a number of calls to members of the investment community, in which I described my interest in joining Saba, and how I believe the Company is well positioned in the market.
Let me summarize those conversations by saying that I truly believe this Company has the right solutions at the right time, and is an excellent position to take advantage of the large, addressable market for human capital management solutions. Before I review the results, let me make a few observations on my initial impressions of the Company.
I am pleased to find that the software and services we offer are not only what our customers are looking for, but are also industrial strength enterprise-class software solutions. The core of any software company is its products, and Saba's software portfolio is in fine shape. In fact, we have the ability to deliver our products in any manner a customer wants to purchase them.
We sell them both together on a unified platform as an integrated suite, or we sell them a la carte. We sell them directly through our own sales force, or indirectly through our Saba alliances partners. We can sell them on a license basis, and let the customer run the software behind their firewall. This is the preferred and only way some of our large enterprise and governmental customers will purchase our software.
We also offer our software solutions on an OnDemand multi-tenant software as a service basis. This is the predominant method of sale to our middle market customers, and is gaining adoption with our Tier 1 customers. These OnDemand solutions will likely come to dominate our business over time, however we also believe we should sell our solutions in whichever models customers choose to buy.
Customers choose solutions, they don't buy business models. By selling our solutions, using licensed or OnDemand models, a hybrid approach, we believe that we have a greater competitive advantage to capture customers, and generate more revenue. I would also like to review with you how these models impact the balance sheet, and how sales flow into revenue, often by the way of the balance sheet.
In terms of our licensed businesses, there are actually three revenue flows, the software license sale, license update and product support, and professional services fees. License fees from licenses with a term of three years or more are generally recognized on a contract signing. License fees typically range anywhere from $50,000 to $2 million, with an average license fee of $200,000. In the metrics that I will provide, assume that license deals are recognized on contract signing.
License updates and product support revenues are recognized ratably over the term of the arrangement, typically 12 months. As such in any given quarter, only a small portion, say 8% on average of these revenues associated with new license sales will appear in revenue during the quarter, with the remainder going into deferred revenue on the balance sheet.
Revenue related to professional services is generally recognized as the services are performed. Although our customer engagements may represent contractual commitments stretching over several quarters, the majority of our current quarter revenue is from billable hours within the quarter, and only a small portion, about 5% on average, will go into deferred revenue on the balance sheet.
Revenue from our OnDemand offering is recognized as a service arrangement, whereby the revenue is generally recognized ratably over the term of the arrangement. Most contracts are one to three years in length. In this case, only a very small portion, less than 10% will be recognized as revenue in the quarter of booking, with the remainder going into deferred revenue on the balance sheet. The good news, revenue sits on the balance sheet awaiting release over a number of quarters. The bad news, the revenue sits on the balance sheet awaiting release over a …