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Article by DailyStocks_admin    (05-01-13 10:26 PM)

Description

Filed with the SEC from Apr 18 to Apr 24:

Saba Software (SABA)
Emancipation Capital said it owns 1,946,402 shares (6.5%) after buying 243,903 from Feb. 21 through April 15 for $6.43 to $8.84 each. It didn't disclose any plans or proposals but said it believes Saba "should now consider appropriate strategic alternatives."

BUSINESS OVERVIEW

Saba is the premier provider of a new class of learning and talent management solutions providing a unified set of People Cloud Applications that include: enterprise learning, talent management, testing and assessment and collaboration solutions delivered through the Saba People Cloud. Today’s people-driven enterprises are using our solutions to mobilize and engage people around new strategies and initiatives, align and connect people to accelerate the flow of business, and cultivate, capture, and share individual and collective knowhow to effectively compete and succeed. We enable organizations to build a transformative workplace where they can leverage their people networks to become more competitive through innovation, speed, agility, and trust.

The Saba People Cloud consists of a full suite of integrated People Cloud Applications, an open, flexible, service-oriented architecture, a world-class multi-tenant people cloud infrastructure, and a vast people cloud community of human capital experts, partners, practitioners and thought leaders. The Saba People Cloud enables organizations to transform the way they develop, engage and inspire their people network of employees, partners and customers, to achieve sustainable competitive advantage and high impact performance. The Saba People Cloud does this by specifically providing solutions that help clients to:

MOBILIZE THEIR PEOPLE NETWORK —to seize new opportunities through complete talent visibility, mobility and connection. The Saba People Cloud provides organizations with visibility into all of the skills, experience, competencies and connections of the people in their people network, the ability to quickly align them to new business initiatives and inspire them to greatness.

CULTIVATE A DEVELOPMENT CULTURE —inside and outside their organization to arm their people network with the knowledge they need, when they need it to excel at their jobs, advance in their careers and drive higher performance.

ACCELERATE INNOVATION AND CREATIVITY —by tapping into social and mobile capabilities to find and connect people and ideas throughout people networks to drive new ideas and faster time to market.

LEVERAGE A UNIFIED, FLEXIBLE, MULTI-TENANT CLOUD —architecture and infrastructure that reduces costs, shortens time to benefit and provides the flexibility to scale globally and adapt locally to fit any organization’s unique operational and financial needs.

We were incorporated in Delaware in April 1997. We are a global company headquartered in Redwood Shores, California.

On the Investor Relations page of our web site http://investors.saba.com, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: our Annual Report on Form 10-K; our Quarterly Reports on Form 10-Q; our Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The filings on our Investor Relations web page are available to be viewed free of charge. Information contained on our web site is not part of this Annual Report on Form 10-K or our other filings with the Securities and Exchange Commission. We assume no obligation to update or revise any forward-looking statements in this Annual Report on Form 10-K, whether as a result of new information, future events or otherwise, unless we are required to do so by law. A copy of this Annual Report on Form 10-K is available without charge upon written request to: Investor Relations, Saba Software, Inc., 2400 Bridge Parkway, Redwood Shores, California 94065.

Evolution of Our Market

Most of today’s human capital management systems were built to support knowledge age learning and talent management processes and strategies, top down management, and a culture focused on operational efficiency and automation rather than the collaboration, innovation and creativity of the networked economy. Sequential steps that were consistent and repeatable, such as formal training and rigid performance reviews were the keys to successful execution. Many systems were built to support these processes on highly rigid, linear, transactional frameworks, making them poorly suited for dynamic people-focused strategies and a “networked” work style. Even newer software as a service (“SaaS”) based talent management systems are typically assembled through multiple acquisitions to support individual processes such as recruiting, performance management or learning, and because they are not organically built and unified they cannot provide the type of complete talent visibility and process unification required of today’s human capital management systems.

While business fundamentals have not changed, the environment in which organizations operate has changed dramatically and will continue to change at an accelerating pace. Business success now depends less on talented and knowledgeable individuals than on the power of the collective intelligence and influence of their personal and professional people networks. Much of this change is driven by technology such as the internet, mobile computing and the emergence of social networking technologies for business and commercial use. This continuous and dynamic change will continue to be highly disruptive to organizations that have not built a transformative workplace that is much more networked and agile. Organizations that have built this type of transformative workplace will be able to compete more effectively in the new networked economy, characterized by:

•

Globalization —new opportunities and challenges are arising from developing countries in a world that is more interconnected—where employees, suppliers, customers or partners cross borders.

•

Hyper-Competition —the ubiquity of the internet means every competitor has global reach and can be a fast follower or has the ideas and means to invent new business models.

•

More Demanding Consumers —are now the rule in the networked economy. Consumers can use the internet to learn anything and everything about a company, a product or a service and they can instantly compare products in the store on their smart phone or read public consumer ratings and reviews or get advice instantly from their personal network.

•

Closer Government Oversight —in a highly networked and global environment, disasters and mistake are no longer limited to local areas. In many cases, environmental issues like oil spills or the latest financial crisis have global implications. This has driven tighter government oversight and regulation in most industries.

•

Shorter Product Lifecycles —the networked economy means that new ideas for products and services are “crowd sourced” every minute of every day and produced and adopted at blinding speed.

While these trends are changing organizations from the outside, the workforce is simultaneously evolving to change organizations from the inside. Organizations are adopting a modern and networked way of working, where the norms are transparency, concurrent projects with real-time updates, and continuously connected people, including customers, contractors and partners, who can operate successfully in a fluid and fast changing environment.

The Saba People Cloud

Leveraging a rich history of innovation, domain expertise and experience serving clients of all sizes, in all industries around the world, the Saba People Cloud is a unique combination of industry leading learning and development capabilities, unified talent management and embedded enterprise social networking and online collaboration capabilities

The Saba People Cloud consists of Saba People Cloud Applications and Saba People Cloud Platform.

Saba People Cloud Applications


Saba People Cloud Applications are all unified on a single platform architecture with a shared people profile.



The Saba People Cloud Applications capabilities for Learning and Development include:

•

Learning Management —Enables organizations to deliver and manage critical knowledge and skills to improve productivity and achieve business results; supports certifications with multiple learning pathways; provides flexible audit trails; and supports e-signatures to meet a wide variety of stringent regulatory requirements,

•

Social Learning —Empowers a unique combination of formal course instruction with automatic social networking between learners and the ability for them to share ideas and content before, during and long after the formal class is complete,

•

Mobile Learning— Provides a mobile platform that lets people take their learning on the go by downloading, viewing, and interacting with standards-based courseware and knowledge content anywhere, anytime, regardless of network connectivity,

•

Learning Content Management— Helps organizations capture, consolidate, organize, manage, share and reuse all types of learning content through a learning object repository and automated content and project-management processes,

•

For Profit Learning —Provides support for optimized pricing, discounting schemes, marketing campaigns, branded certification programs, bundled training units and a variety of convenient payment methods for education businesses,

•

Publishing Tools— Allows users to create new courses, or repurpose courses, and publish them in HTML or standard learning formats, such as AICC or SCORM, quickly and efficiently,

•

Testing & Assessment —Provides an extensive array of content and capabilities to test and assess the skills, competencies, and abilities of people in the people network and provide more tailored and effective training to fill identified gaps,

•

Learning Metrics and Dashboards —Provides key metrics and insights into the efficiency and effectiveness of the organization’s learning programs and processes.

The Saba People Cloud Applications capabilities for Talent Management and Planning include:

•

Performance Reviews and Appraisals —Establishes a strategic, relevant performance review process that allows multiple raters to provide feedback on individualized goals and competencies to measure individual and team performance and identify areas for learning and development.

•

Goals & Objectives —Provides real-time ability to align goals and objectives at all levels of the organization, measure progress on critical organizational initiatives and make adjustments to changing market conditions.

•

Internal Recruiting —Enables critical insights into the skills, competencies, and experience inside your people network by leveraging the unified people profile to help identify critical talent for new initiatives.

•

Social Performance— Changes the way organizations look at delivering employee performance feedback from a stale, once a year compliance exercise to a vital opportunity for ongoing employee engagement, development and coaching.

•

Succession Planning —Identifies high performing and high potential individuals, evaluates their readiness gaps and helps organizations build bench strength for key leadership positions and pivotal roles.

•

Workforce Planning —Provides organizations with the strategic visibility to proactively match people plans to business plans to define their future workforce, increase overall agility and reduce risk.

•

Compensation —Empowers managers with measures of employee success from both formal and informal talent processes, and the ability to reward and inspire high performing teams and individuals.

•

HR Metrics & Dashboards —Provide critical talent insights and metrics to measure the effectiveness of people process.

The Saba People Applications capabilities for Enterprise Social Networking and Online Collaboration include:

•

Enterprise Social Networking —provides a secure, enterprise class social networking platform to connect the organization’s entire people network of employees, partners and customers to drive innovation and speed.

•

Online Communities —Enable people to connect with other people to share ideas, learn, provide mentoring, and develop their business network.

•

Ideas —Fosters crowd sourcing of new ideas and innovation.

•

Groups, Forums, MicroBlogs, Chat —Provides tools that connect people and enables efficient sharing and communication.

•

Video Channels —Makes everyone a content creator with easy ways to organize and share both formal and informal video content on important topics.

•

Social Graph Analysis —Gives insight into the “wirearchy” of the organization by showing who is connected to who throughout the people network.

•

Online Collaboration

•

Virtual Classroom —Enables live, interactive education sessions across many locations.

•

Webinar Software —Equips the organization with an efficient and cost-effective way to reach and engage large audiences quickly.

•

Online Meeting —Helps eliminate the difficulties of complex meeting coordination and the time and expense of business travel.

CEO BACKGROUND

The number of directors on our Board of Directors is currently fixed at nine. Our Certificate of Incorporation divides our Board of Directors into three classes designated Class I, Class II and Class III. The members of each class of directors serve staggered three-year terms. Our Board of Directors is currently composed of the following nine members:


Class: Directors: Expiration of Term
I Joe E. Kiani, Michael R. Abbott and Michael Fawkes 2013 annual meeting of stockholders
II Bobby Yazdani, Dow R. Wilson and William V. Russell 2011 annual meeting of stockholders
III William M. Klein, William N. MacGowan and Nora Denzel 2012 annual meeting of stockholders


At each annual meeting of stockholders, directors will be elected for a full term of three years to succeed those directors whose terms are expiring. Directors will be elected by a plurality of votes cast.

At the annual meeting, the stockholders will elect three Class II directors, each to serve a three year term until the election and qualification of a successor at the 2014 annual meeting of stockholders, until a successor is otherwise duly elected or appointed and qualified or until the director’s earlier resignation or removal. Our Board of Directors has nominated Bobby Yazdani, Dow R. Wilson and William V. Russell for election as Class II directors. Our Board of Directors has no reason to believe any nominee will be unable or unwilling to serve as a nominee or as a director, if elected.

William V. Russell was recommended as a Director to the Corporate Governance and Nominating Committee in January 2010 by a third party search firm retained by the Board of Directors.

Information Regarding the Nominee and Other Directors

Bobby Yazdani, Age:48

Principal Occupation and Business Experience: Our Chairman and Chief Executive Officer . Bobby Yazdani founded Saba, has been a Director of Saba since our inception in April 1997 and has served as Saba’s Chairman of the Board and Chief Executive Officer since September 2003. From February 2003 through September 2003, Mr. Yazdani served as Saba’s President and Chief Operating Officer. From April 1997 until February 2003, Mr. Yazdani served as Saba’s Chairman of the Board and from April 1997 until March 2002, Mr. Yazdani served as Chief Executive Officer. From 1988 until founding Saba, Mr. Yazdani served in various positions at Oracle, most recently as Senior Director. Mr. Yazdani holds a B.A. from the University of California, Berkeley. Mr. Yazdani’s status as founder of Saba, as well as his tenure as our Chief Executive Officer and Chairman of the Board of Directors, brings invaluable experience to the Board of Directors. Mr. Yazdani is uniquely familiar with our business, structure, culture and history, has deep domain knowledge of Saba’s markets and, as Chief Executive Officer, is most knowledgeable about the state of our business, the business risks we face and management’s strategy and plans for accomplishing the company’s goals.

Dow R. Wilson, Age:52

Principal Occupation and Business Experience: Executive Vice President of Varian Medical Systems . Dow R. Wilson has been a Director of Saba since August 2006. Mr. Wilson is Executive Vice President of Varian Medical Systems, Inc., a company that designs and manufactures advanced equipment and software products for treating cancer with radiation, and President of its Oncology Systems division. Mr. Wilson joined Varian in 2005, following a 19-year career with General Electric, a diversified industrial corporation, in a variety of senior management positions in both the United States and Europe. Most recently, Mr. Wilson served as CEO for GE Healthcare-Information and Patient Monitoring Technologies. Prior to that, he served as Global General Manager for a number of GE’s imaging businesses, including, X-ray, Functional Imaging, and Computed Tomography. He also ran GE’s Lexan Sheet business in Europe. Mr. Wilson holds a B.A. from Brigham Young University and a M.B.A. from the Amos Tuck School of Business at Dartmouth College. Mr. Wilson has been appointed as the Lead Director on Saba’s Board of Directors. Mr. Wilson has extensive executive management experience at large, global organizations providing him with critical insights to the operational requirements of a global company. As a result, Mr. Wilson brings to the Board of Directors knowledge of executive management, corporate and business unit strategies, and operational expertise.

William V. Russell, Age:59

Principal Occupation and Business Experience: William V. Russell has been a Director of Saba since January 2010. From 1980 to 2003, Mr. Russell served in a number of executive management roles in a 23-year career at Hewlett-Packard, including the leadership of HP’s Enterprise Systems Group, its Software Solutions Group, and its Global Alliances Organization. Mr. Russell serves on the Board of Directors of PROS and several private companies. Previously, Mr. Russell served on the Board of Directors of webMethods, and Cognos. Mr. Russell holds a B.Sc. from Edinburgh University. Mr. Russell is a member of the Audit and Compensation Committees of Saba’s Board of Directors. Mr. Russell’s tenure at Hewlett-Packard has provided him with extensive software industry experience. As a result of operating Hewlett-Packard’s multi-billion dollar software business, Mr. Russell has knowledge of large-scale software operations, including sales, marketing, development and finance, as well as strategic planning and leadership. In addition, Mr. Russell’s current and past service on the boards of other public and private companies also exposed him to best practices and approaches that are beneficial to us.

Incumbent Class I Directors Whose Term Expires in 2013

Joe E. Kiani, Age:47

Principal Occupation and Business Experience: Chairman and Chief Executive Officer of Masimo Corporation . Joe E. Kiani has been a Director of Saba since July 1997. Mr. Kiani is the founder of Masimo Corporation, a provider of signal processing and sensor technology to the medical device industry, and has served as its Chief Executive Officer and Chairman of the Board since Masimo’s inception in 1989. Mr. Kiani holds a B.S. and M.S. from San Diego State University. Mr. Kiani is a member of the Compensation and Corporate Governance and Nominating Committees of Saba’s Board of Directors. Mr. Kiani provides us with a wide range of operational and strategic expertise gained from his long standing service as a director of our company in addition to his experience as founder, chairman and chief executive officer of a publicly traded company. Mr. Kiani brings to the Board of Directors invaluable business and management experience.

Michael R. Abbott, Age:38

Principal Occupation and Business Experience: Vice President of Engineering of Twitter. Michael R. Abbott has been a Director of Saba since July 2011. Mr. Abbott is currently Vice President of Engineering at Twitter Inc., an online social networking and microblogging service, a position he has held since May 2010. Previously, Mr. Abbott served as Senior Vice President, Applications Software and Services at Palm, Inc., a provider of mobile products, from April 2008, where he led the webOS application platform and services department. Prior to joining Palm, from December 2006 to April 2008, Mr. Abbott was the General Manager of .NET Online Services at Microsoft, Inc., a provider of computer software, services and solutions, where he was responsible for delivering a services platform that facilitated the development of large-scale Internet-based services. In January 2006, Mr. Abbott founded Passenger, Inc., a provider of online services to build and manage social networks, where he served as Chairman until December 2006. Mr. Abbott holds a B.S. in biochemistry from California Polytechnic State University. Mr. Abbott is a member of the Compensation Committee of Saba’s Board of Directors. Mr. Abbott has extensive operational and technical expertise from serving in executive and other senior management positions at leading technology companies. As a result, Mr. Abbott brings invaluable expertise as we transition and grow our cloud business.

Michael Fawkes, Age:60

Principal Occupation and Business Experience: Operating Partner of VantagePoint Capital Partners. Michael Fawkes has been a Director of Saba since July 2011. Mr. Fawkes brings more than 30 years of experience to the Saba Board. Currently, he is Operating Partner at VantagePoint Capital Partners, a leading global investor in energy innovation and efficiency, information technology and healthcare, a position he has held since February 2008. Prior to joining VantagePoint Capital Partners, Mr. Fawkes spent 29 years at Hewlett-Packard Company, a leading global provider of products, technologies, software, solutions and services to individuals and businesses, serving in various executive roles in operations and finance, including Senior Vice President of Operations for HP’s Imaging and Printing business. Prior to joining HP, Mr. Fawkes was a CPA with Arthur Andersen. Mr. Fawkes holds a B.B.A. and a M.A. in Finance from the University of Iowa. Mr. Fawkes is Chairman of the Corporate Governance and Nominating Committee of Saba’s Board of Directors. He is also a member of the Audit Committee of Saba’s Board or Directors. Mr. Fawkes has extensive operations and finance experience at large global technology companies. In addition, his involvement as an investor in public and private companies provide him with the insight into technology trends and best practices that are beneficial to us.

Incumbent Class III Directors for a Term Expiring in 2012

William M. Klein, Age:54

Principal Occupation and Business Experience: William M. Klein has been a Director of Saba since September 2009. Mr. Klein served as Chief Financial Officer of BEA Systems, Inc., a world leader in enterprise application and service infrastructure software, from January 2000 to February 2005 and was in charge of Corporate Development for the company from February 2005 until it was acquired by Oracle Corporation in April 2008. Prior to joining BEA Systems, Mr. Klein held senior management positions with Hewlett-Packard Company from 1986 to 2000 including Vice President and Chief Financial Officer of the Inkjet Imaging business. Prior to Hewlett-Packard, Mr. Klein was a Senior Manager with PricewaterhouseCoopers LLP. Mr. Klein holds a B.S. in accounting from California State University, Chico and is a Certified Public Accountant. Mr. Klein is Chairman of the Audit Committee of Saba’s Board of Directors. Mr. Klein’s service as both the chief financial officer and vice president of corporate development of a publicly traded, high growth software company has given him expertise in planning, operations, mergers and acquisitions, compliance and finance matters. As a result, Mr. Klein brings to the Board of Directors invaluable financial, business and management expertise.

William N. MacGowan, Age:54

Principal Occupation and Business Experience: Executive Vice President Human Resources of Newmont Mining Corporation. William N. MacGowan has been a Director of Saba since September 2009. Mr. MacGowan has served as Executive Vice President, Human Resources & Communications for Newmont Mining Corporation, one of the world’s largest gold producers, since February 2010. Prior to joining Newmont Mining Corporation, Mr. MacGowan served as the Chief Human Resources Officer and Executive Vice President of People and Places of Sun Microsystems, Inc., a provider of network computing infrastructure solutions, from April 2006 to January 2010. Mr. MacGowan joined Sun in April 1998 and, prior to his appointment to serve in his last position, he served in various executive and senior management human resources positions, including Senior Vice President, Human Resources, from April 2004 to April 2006, Vice President, Human Resources, Global Centers of Expertise, from May 2002 to April 2004, Vice President, Human Resources, Engineering and Operations, from May 2001 to May 2002, and Vice President, Human Resources, Enterprise Services, from May 1998 to May 2001. Prior to joining Sun, Mr. MacGowan held executive and senior management human resources positions at Quest Diagnostics Incorporated, Allergan, Inc. and Northrop Grumman Corporation. Mr. MacGowan holds a B.A. in political science from Claremont McKenna College. Mr. MacGowan is Chairman of the Compensation Committee of Saba’s Board of Directors. Mr. MacGowan has deep domain expertise in our principal markets from service in executive level human resources positions at large, global organizations. As a result, in addition to knowledge of general business operations at these organizations, Mr. MacGowan possesses expertise in human resources best practices as well as insight into the community of human resources executives that provide a critical perspective regarding our solutions.

Nora Denzel, Age:49

Principal Occupation and Business Experience: Senior Vice President Marketing of Intuit. Ms. Denzel has been a Director of Saba since September 2011. Ms. Denzel has served as Senior Vice President, Big Data, Social Design and Marketing for Intuit Inc., a provider of cloud business and financial management software, since August 2011 and prior to that time served as Intuit’s Senior Vice President, Small Business Payroll Services since February 2007. From August 2000 to February 2006, she held several executive level positions in technology with Hewlett-Packard Company, a global manufacturer of computing, communications and measurement products and services, including Senior Vice President/General Manager Software Global Business Unit from May 2002 to February 2006, Senior Vice President Adaptive Enterprise from June 2004 to May 2005, and Vice President Storage Organization from August 2000 to May 2002. Prior to joining HP, Ms. Denzel served as Senior Vice President of Product Operations from February 1997 to August 2000 at Legato Systems, Inc. Her initial corporate experiences were at International Business Machines Corporation, where she began her career as a software engineer and then served in several marketing, engineering, and executive level positions, including the business line manager of IBM’s portfolio of storage management software products. Ms. Denzel also serves on the board of directors of Overland Storage, Inc. Ms. Denzel is a member of the Corporate Governance and Nominating Committee of Saba’s Board of Directors. As a result of Ms. Denzel’s experience as an officer or director of these companies, Ms. Denzel provides insight into developing and marketing data systems and employment management solutions that are beneficial to us.

MANAGEMENT DISCUSSION FROM LATEST 10K

General

We are the premier provider of a new class of learning and talent management solutions providing a unified set of People Cloud Applications that include: enterprise learning, talent management, testing and assessment and collaboration solutions delivered through the Saba People Cloud. Today’s people-driven enterprises are using our solutions to mobilize and engage people around new strategies and initiatives, align and connect people to accelerate the flow of business, and cultivate, capture, and share individual and collective knowhow to effectively compete and succeed. We enable organizations to build a transformative workplace where they can leverage their people networks to become more competitive through innovation, speed, agility, and trust.

The Saba People Cloud consists of a full suite of integrated People Cloud Applications, an open, flexible, service-oriented architecture, a world-class multi-tenant people cloud infrastructure, and a vast people cloud community of human capital experts, partners, practitioners and thought leaders. The Saba People Cloud enables organizations to transform the way they develop, engage and inspire their people network of employees, partners and customers, to achieve sustainable competitive advantage and high impact performance.

Background

We commenced operations in April 1997 and, through March 1998, focused substantially all of our efforts on research activities, developing our products and building our business infrastructure. We shipped our first Saba Enterprise Learning products and began to generate revenues from software license fees, implementation and consulting services fees and support fees in April 1998.

Commencing in fiscal 2011, we experienced an accelerated shift toward increased customer adoption of SaaS transactions from perpetual licenses. To further accelerate the transition, in July 2011, we announced a strategy to offer new customers solely cloud-based subscriptions to our products. Assuming this strategy is successful, we expect that the increased adoption of SaaS by our customers will lead to greater predictability in our quarterly revenue and our results of operations. However, the shift from software licenses has had an impact on our total revenue and results of operations during the last few quarters in part because we recognize revenues from SaaS over the term of the subscription agreement whereas revenue from a software license sale is generally recognized in the period in which the software arrangement is completed and the software is delivered to the customer.

Our corporate headquarters are located in Redwood Shores, California. We have an international presence in Australia, Brazil, Canada, France, Germany, India, Japan and the United Kingdom through which we conduct various operating activities related to our business. In each of the non-U.S. jurisdictions in which we have subsidiaries, other than India, we have employees or consultants engaged in sales and services activities. In the case of our India subsidiary, our employees primarily engage in software development and quality assurance testing activities.

Sources of Revenue

We generate revenues from the sale of subscription services, software licenses and professional services.

Subscription Services

Subscription revenue includes revenue from delivery of our products in the cloud and revenue from license updates and product support. Customers that desire to access our products in the cloud generally sign subscription agreements with terms typically ranging from one to three years. License updates and product support include the right to receive future unspecified updates for the applicable software product and technical support. We typically sell license updates and product support for an initial period of one year concurrently with the sale of the related software license. After the initial period, license updates and product support is renewable on an annual basis at the option of the customer. Our subscription revenue depends upon both our sales of additional subscription services and renewals of existing agreements.

We believe that subscription revenue will grow steadily for the foreseeable future as we anticipate that the majority of our customers will renew their annual contracts and we will continue to add new subscription customers.

Software Licenses

Although we expect that our new customers will primarily purchase our products in the cloud on a software as a service basis, we will continue to license our products on a limited basis primarily to existing customers. When we license our software, it is included in multiple-element arrangement that includes a combination of our software, license updates and product support and/or professional services. A significant amount of our license sales are for perpetual licenses. Our license revenue is affected by, among other things, the strength of general economic and business conditions, as well as customers’ budgetary cycles and the competitive position of our software products. In addition, the sales cycle for our products is typically six to twelve months. The timing of a few large software license transactions can substantially affect our quarterly license revenue.

Professional Services

Our professional services business consists of consulting and education services. Consulting and education services are typically provided to customers that have purchased our products directly from us. These consulting and education services are generally provided over a period of three to nine months after the product purchase. Accordingly, our consulting and education services revenue varies directly with the levels of new product bookings generated from our direct sales organization in the preceding three to nine month period. In addition, our consulting and education services revenue varies following our commercial release of significant software updates as our license customers may engage our services to assist with the implementation of their software update. We provide consulting services on a time and materials basis and on a fixed fee basis. Generally, consulting services related to software implementation are not considered essential to the functionality of the software.

Impact of Adoption

Prior to adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update No. 2009-13 Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements (A Consensus of the FASB Emerging Issues Task Force) (ASU 2009-13), our professional services, when sold with cloud based offerings, did not qualify as separate units of accounting and were recognized as revenue ratably over the longest subscription period in the arrangement. Under subscription accounting, we also deferred the associated professional services costs and recognized them on a straight-line basis over the same subscription period. This resulted in the deferral of professional services revenue and professional services cost of revenue.

With the adoption of ASU 2009-13, arrangement consideration is allocated using the relative selling price method and recognized as individual deliverables in accordance with the guidance described in the Critical Accounting Policies. Additionally, we expense the direct cost related to the professional services as incurred.

Total revenues for the year ended May 31, 2011 were $116.7 million with the adoption of ASU 2009-13. If we did not elect an early adoption of ASU 2009-13, our total revenues would have been $113.7 million for the year ended May 31, 2011. The increase in total revenues was primarily due to an increase of $2.7 million in professional services revenue that we recognized based on the adoption of ASU 2009-13.

Cost of revenues for the year ended May 31, 2011 was $43.0 million with the adoption of ASU 2009-13. Cost of revenues would have been $41.2 million for the year ended May 31, 2011 had we not adopted ASU 2009-13. The increase in cost of revenues was the result of expensing direct costs related to the professional services as incurred.

As of May 31, 2011, our deferred revenue was $45.8 million. Our deferred revenue would have been $48.8 million had we not adopted ASU 2009-13.

The impact of our adoption of ASU 2009-13 will vary, in the future, based on the nature and volume of new or materially modified arrangements.

Cost of Revenue

Our cost of revenue primarily consists of compensation, employee benefits and out-of-pocket travel-related expenses for our employees, and the fees of third-party subcontractors, who provide professional services. Cost of revenue also includes external hosting fees and depreciation and amortization charges related to the infrastructure required to deliver our products in the cloud, third-party license royalty costs, overhead allocated based on headcount and reimbursed expenses. The amortization of acquired developed technology, which is comprised of the ratable amortization of technological assets acquired in acquisitions, is also included in the cost of revenue. Many factors affect our cost of revenue, including changes in the mix of products and services, pricing trends and changes in the amount of reimbursed expenses. Because cost as a percentage of revenues is higher for services than for software licenses, an increase in services, including subscription services, as a percentage of our total revenue would reduce gross profit as a percentage of total revenue.

We classify deferred revenue and deferred costs on our condensed consolidated balance sheet as current if we expect to recognize such revenue or cost within the following twelve months. As of May 31, 2011, the deferred balance of the professional services revenue related to such subscription offerings and the related deferred costs was $1.4 million and $0.8 million, respectively, related to contracts that were entered into prior to adoption of ASU 2009-13 and 2009-14. Deferred revenue and deferred costs related to contracts that were entered into prior to June 1, 2010 continue to be recognized and amortized ratably over the subscription period provided that such contracts were not subsequently modified.

Operating Expenses

We classify all operating expenses, except amortization of purchased intangible assets and restructuring, to the research and development, sales and marketing, and general and administrative expense categories based on the nature of the expenses. Each of these three categories includes commonly recurring expenses such as salaries (including stock-based compensation), employee benefits, travel and entertainment costs, and allocated communication, rent and depreciation costs. We allocate communication, rent and depreciation costs to each of the functional areas that derive a benefit from such costs based upon their respective headcounts. The sales and marketing category of operating expenses also includes sales commissions and expenses related to public relations and advertising, trade shows and marketing collateral materials. The general and administrative category of operating expenses also includes allowances for doubtful accounts, and administrative and professional services fees.

In the third quarter of fiscal year 2011, we voluntarily changed our accounting policy for sales commissions related to non-cancellable annual or multi-year SaaS contracts, from recording an expense when incurred, to deferral and amortization of the sales commission in proportion to the revenue recognized over the non-cancellable term of the contract. All other sales commissions are generally expensed as they are earned per the terms of the sales compensations plans. We believe this method is preferable because commission charges are so closely related to the revenue from the non-cancellable contracts that they should be deferred and charged to expense over the same period that the related revenue is recognized. Furthermore, the adoption of this accounting policy enhances the comparability of the Company’s consolidated financial statements by changing to the predominant method utilized in our industry. For additional discussion related to the sales commission accounting policy change, refer to Note 2 of the Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) as set forth in the Financial Accounting Standards Board’s Accounting Standard Codification (the “Codification”) and consider the various staff accounting bulletins and other applicable guidance issued by the SEC. GAAP, as set forth within the Codification, requires us to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. While a number of accounting policies, methods and estimates affect our financial statements, areas that are particularly significant include revenue recognition policies, the assessment of recoverability of goodwill and purchased intangible assets, share-based payments, income taxes and business combinations. We have reviewed the critical accounting policies described in the following paragraphs with the Audit Committee of our Board of Directors.

Revenue recognition

In October 2009, the FASB issued ASU 2009-13 which amends the revenue recognition for certain multiple element revenue arrangements excluding license arrangements to:

•

provide updated guidance on whether multiple elements exist, how the elements in an arrangement should be separated, and how the arrangement consideration should be allocated to the separate elements;

•

require an entity to allocate arrangement consideration to each element based on a selling price hierarchy, where the selling price for an element is based on vendor-specific objective evidence (“VSOE”), if available; third-party evidence (“TPE”), if available and if VSOE is not available; or the best estimate of selling price (“BESP”), if neither VSOE nor TPE is available; and

•

eliminate the use of the residual method and require an entity to allocate arrangement consideration using the relative selling price method.

Although the amended standards were not required to be adopted by us until June 1, 2011 (the beginning of our fiscal year 2012), we elected to early adopt this accounting guidance retrospectively to the beginning of its first quarter of fiscal 2011 for transactions entered into or materially modified after May 31, 2010. We generate revenues from the sale of software licenses, subscription services and professional services and recognize revenues when all of the following conditions are met:

•

persuasive evidence of an agreement exists;

•

delivery has occurred;

•

the fee is fixed or determinable; and

•

collection is probable.

Subscription Services Arrangements


Subscription services arrangements generally include a combination of our products delivered via an internet-based cloud architecture, and product updates and support related to licenses and professional services. Subscription revenue includes revenue from cloud-based offerings and product updates and support related to licenses.


Revenue from cloud-based offerings that are integrated offerings pursuant to which the customers’ ability to access our software is not separable from the services necessary to operate the software (and customers are not allowed to take possession of our software) are recognized ratably over the term of the arrangement as delivered. We do not grant our resellers the right of return and do not recognize revenue from resellers until an end-user has been identified and the other conditions of ASC 985-605 are satisfied. Revenue from product updates, support and hosting services related to licenses are recognized ratably over the term of the arrangement as delivered or on an as-used basis if defined in the contract.

When subscription services arrangements involve multiple elements that qualify as separate units of accounting, we allocate arrangement consideration in multiple-deliverable revenue arrangements at the inception of an arrangement to all deliverables based on the relative selling price method in accordance with the selling price hierarchy, which includes: (i) VSOE if available; (ii) TPE if VSOE is not available; and (iii) BESP if neither VSOE nor TPE is available.

We determine VSOE based on its historical pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for these services fall within a reasonably narrow pricing range. We limit our assessment of VSOE for each element to either the price charged when the same element is sold separately or the price established by management, having the relevant authority to do so, for an element not yet sold separately.

When VSOE cannot be established for deliverables in multiple element arrangements, we apply judgment with respect to whether we can establish a selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of services with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor services’ selling prices are on a stand-alone basis. As a result, we have not been able to establish selling price based on TPE.

When it is unable to establish a selling price using VSOE or TPE, we use BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We determine BESP for deliverables by considering multiple factors including, but not limited to, prices we charge for similar offerings, market conditions, competitive landscape and pricing practices.

We have not historically priced our cloud-based offerings within a narrow range and limited historical renewal rate information is available based on the life cycle of these offerings. As a result, we use BESP in order to allocate the selling price to cloud-based deliverables. In general, we use VSOE in order to allocate the selling price to professional service deliverables.

Certain cloud-based offerings include arrangements with customers that have separately licensed and taken possession of our software. When these offerings are part of a multiple element arrangement involving licenses, we recognize revenue in accordance with ASC 985-605.

Software License Arrangements

Software license arrangements generally include a combination of our software, license updates and product support and/or professional services. A significant amount of our software license arrangements are for perpetual licenses.

We recognize revenue earned on perpetual software license arrangements in accordance with FASB’s ASC 985-605, Software-Revenue Recognition. When software arrangements involve multiple elements, we recognize license revenue, using the residual method, in accordance with ASC 985-605. Under the residual method revenue is allocated to undelivered elements based on VSOE of fair value of such undelivered elements and the residual amount of the arrangement is allocated to delivered elements. Accordingly, assuming all other revenue recognition criteria are met, revenues from perpetual licenses are recognized upon delivery using the residual method. We limit our assessment of VSOE for each element to either the price charged when the same element is sold separately or the price established by management, having the relevant authority to do so, for an element not yet sold separately.

License revenues from licenses with a term of three years or more are generally recognized on delivery if the other conditions of ASC 985-605 are satisfied. License revenues from licenses with a term of less than three years are generally recognized ratably over the term of the arrangement. In arrangements where term licenses are bundled with license updates and product support and such revenue is recognized ratably over the term of the arrangement. We allocate the revenue to license revenue and to license updates and product support revenue based on the VSOE of fair value for license updates and product support revenue on perpetual licenses of similar products. We do not grant our resellers the right of return and do not recognize revenue from resellers until an end-user has been identified and the other conditions of ASC 985-605 are satisfied.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

General

Saba is the premier provider of a new class of learning and talent management solutions providing a unified set of People Cloud Applications that include: enterprise learning, talent management, testing and assessment and collaboration solutions delivered through the Saba People Cloud. Today’s people-driven enterprises are using our solutions to mobilize and engage people around new strategies and initiatives, align and connect people to accelerate the flow of business, and cultivate, capture, and share individual and collective knowhow to effectively compete and succeed. We enable organizations to build a transformative workplace where they can leverage their people networks to become more competitive through innovation, speed, agility, and trust.

The Saba People Cloud consists of a full suite of integrated People Cloud Applications, an open, flexible, service-oriented architecture, a world-class multi-tenant people cloud infrastructure, and a vast people cloud community of human capital experts, partners, practitioners and thought leaders. The Saba People Cloud enables organizations to transform the way they develop, engage and inspire their people network of employees, partners and customers, to achieve sustainable competitive advantage and high impact performance. The Saba People Cloud does this by specifically providing solutions that help clients to:

MOBILIZE THEIR PEOPLE NETWORK —to seize new opportunities through complete talent visibility, mobility and connection. The Saba People Cloud provides organizations with visibility into all of the skills, experience, competencies and connections of the people in their people network, the ability to quickly align them to new business initiatives and inspire them to greatness.

CULTIVATE A DEVELOPMENT CULTURE —inside and outside their organization to arm their people network with the knowledge they need, when they need it to excel at their jobs, advance in their careers and drive higher performance.

ACCELERATE INNOVATION AND CREATIVITY —by tapping into social and mobile capabilities to find and connect people and ideas throughout people networks to drive new ideas and faster time to market.

LEVERAGE A UNIFIED, FLEXIBLE, MULTI-TENANT CLOUD —architecture and infrastructure that reduces costs, shortens time to benefit and provides the flexibility to scale globally and adapt locally to fit any organization’s unique operational and financial needs.

Evolution of Our Market

Most of today’s human capital management systems were built to support historic learning and talent management processes and strategies, top down management, and a culture focused on operational efficiency and automation rather than the collaboration, innovation and creativity of the networked economy. Sequential steps that were consistent and repeatable, such as formal training and rigid performance reviews were the keys to successful execution. Many systems were built to support these processes on highly rigid, linear, transactional frameworks, making them poorly suited for dynamic people-focused strategies and a “networked” work style. Even newer software as a service (“SaaS”) based talent management systems are typically assembled through multiple acquisitions to support individual processes such as recruiting, performance management or learning, and because they are not organically built and unified they cannot provide the type of complete talent visibility and process unification required of today’s human capital management systems.

While business fundamentals have not changed, the environment in which organizations operate has changed dramatically and will continue to change at an accelerating pace. Business success now depends less on talented and knowledgeable individuals than on the power of the collective intelligence and influence of their personal and professional people networks. Much of this change is driven by technology such as the internet, mobile computing and the emergence of social networking technologies for business and commercial use. This continuous and dynamic change will continue to be highly disruptive to organizations that have not built a transformative workplace that is much more networked and agile. Organizations that have built this type of transformative workplace will be able to compete more effectively in the new networked economy, characterized by:

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Globalization —new opportunities and challenges are arising from developing countries in a world that is more interconnected—where employees, suppliers, customers or partners cross borders.

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Hyper-Competition —the ubiquity of the internet means every competitor has global reach and can be a fast follower or has the ideas and means to invent new business models.

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More Demanding Consumers —are now the rule in the networked economy. Consumers can use the internet to learn anything and everything about a company, a product or a service and they can instantly compare products in the store on their smart phone or read public consumer ratings and reviews or get advice instantly from their personal network.

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Closer Government Oversight —in a highly networked and global environment, disasters and mistakes are no longer limited to local areas. In many cases, environmental issues like oil spills or the latest financial crisis have global implications. This has driven tighter government oversight and regulation in most industries.

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Shorter Product Lifecycles —the networked economy means that new ideas for products and services are “crowd sourced” every minute of every day and produced and adopted at blinding speed.

While these trends are changing organizations from the outside, the workforce is simultaneously evolving to change organizations from the inside. Organizations are adopting a modern and networked way of working, where the norms are transparency, concurrent projects with real-time updates, and continuously connected people, including customers, contractors and partners, who can operate successfully in a fluid and fast changing environment.

Background

We commenced operations in April 1997 and, through March 1998, focused substantially all of our efforts on research activities, developing our products and building our business infrastructure. We shipped our first Saba Enterprise Learning products and began to generate revenues from software license fees, implementation and consulting services fees and support fees in April 1998.

In fiscal 2011, we experienced an accelerated shift toward increased customer adoption of SaaS transactions from perpetual licenses. In recognition of this trend, we announced a strategy in July 2011 to offer new customers primarily cloud-based subscriptions to our products, which we expect will further increase the shift in customer adoption of SaaS over perpetual licenses. Assuming this strategy is successful, we expect that the increased adoption of SaaS by our customers will lead to greater predictability in our quarterly revenue and our results of operations. However, the shift from software licenses has had an impact on our total revenue and results of operations during the last few quarters in part because we recognize revenues from SaaS over the term of the subscription agreement whereas revenue from a software license sale is generally recognized in the period in which the software arrangement is completed and the software is delivered to the customer.

Our corporate headquarters are located in Redwood Shores, California. We have an international presence in Australia, Brazil, Canada, France, Germany, India, Japan, Morocco, Switzerland and the United Kingdom through which we conduct various operating activities related to our business. In each of the non-U.S. jurisdictions in which we have subsidiaries, other than India, we have employees or consultants engaged in sales and services activities. In the case of our India subsidiary, our employees primarily engage in software development and quality assurance testing activities.

Sources of Revenue

We generate revenues from the sale of subscription services, professional services and software licenses.

Subscription Services

Subscription revenue includes revenue from delivery of our products in the cloud and revenue from license updates and product support. Customers that desire to access our products in the cloud generally sign subscription agreements with terms typically ranging from one to three years. License updates and product support include the right to receive future unspecified updates for the applicable software product and technical support. We typically sell license updates and product support for an initial period of one year concurrently with the sale of the related software license. After the initial period, license updates and product support is renewable on an annual basis at the option of the customer. Our subscription revenue depends upon both our sales of additional subscription services and renewals of existing agreements.

We believe that subscription revenue will grow steadily for the foreseeable future as we anticipate that the majority of our customers will renew their annual contracts and we will continue to add new subscription customers.

Professional Services

Our professional services business consists of consulting and education services. Consulting and education services are typically provided to customers that have purchased our products directly from us. These consulting and education services are generally provided over a period of three to nine months after the product purchase. Accordingly, our consulting and education services revenue varies directly with the levels of new product bookings generated from our direct sales organization in the preceding three to nine month period. In addition, our consulting and education services revenue varies following our commercial release of significant software updates as our license customers may engage our services to assist with the implementation of their software update. We provide consulting services on a time and materials basis and on a fixed fee basis. Generally, consulting services related to software implementation are not considered essential to the functionality of the software.

Software Licenses

Although we expect that our new customers will primarily purchase our products in the cloud on a software as a service basis, we will continue to license our products on a limited basis primarily to existing customers. When we license our software, it is included in multiple-element arrangement that includes a combination of our software, license updates and product support and/or professional services. A significant amount of our license sales are for perpetual licenses. Our license revenue is affected by, among other things, the strength of general economic and business conditions, as well as customers’ budgetary cycles and the competitive position of our software products. In addition, the sales cycle for our products is typically six to 12 months. The timing of a few large software license transactions can substantially affect our quarterly license revenue.

Cost of Revenue

Our cost of revenue primarily consists of compensation, employee benefits and out-of-pocket travel-related expenses for our employees, and the fees of third-party subcontractors, who provide professional services. Cost of revenue also includes external hosting fees and depreciation and amortization charges related to the infrastructure required to deliver our products in the cloud, third-party license royalty costs, overhead allocated based on headcount and reimbursed expenses. The amortization of acquired developed technology,

which is comprised of the ratable amortization of technological assets acquired in acquisitions, is also included in the cost of revenue. Many factors affect our cost of revenue, including changes in the mix of products and services, pricing trends and changes in the amount of reimbursed expenses. Because cost as a percentage of revenues is higher for services than for software licenses, an increase in services, including subscription services, as a percentage of our total revenue would reduce gross profit as a percentage of total revenue.

For contracts that were entered into prior to adoption of ASU 2009-13 and 2009-14, we classify deferred professional services revenue and the related deferred costs, when such services were related to subscription offerings, on our condensed consolidated balance sheet as current if we expect to recognize such revenue or cost within the following twelve months. As of November 30, 2011, the deferred professional services and deferred costs balances were $2.2 million and $1.3 million, respectively. Deferred revenue and deferred costs related to contracts that were entered into prior to adoption of ASU 2009-13 and 2009-14 continue to be recognized and amortized ratably over the subscription period, provided that such contracts were not subsequently materially modified.

Operating Expenses

We classify all operating expenses, except amortization of purchased intangible assets and restructuring, to the research and development, sales and marketing, and general and administrative expense categories based on the nature of the expenses. Each of these three categories includes commonly recurring expenses such as salaries (including stock-based compensation), employee benefits, travel and entertainment costs, and allocated communication, rent and depreciation costs. We allocate communication, rent and depreciation costs to each of the functional areas that derive a benefit from such costs based upon their respective headcounts. The sales and marketing category of operating expenses also includes sales commissions and expenses related to public relations and advertising, trade shows and marketing collateral materials. The general and administrative category of operating expenses also includes allowances for doubtful accounts, and administrative and professional services fees.

We capitalize sales commissions related to non-cancellable annual or multi-year SaaS contracts and amortize the sales commission in proportion to the revenue recognized over the non-cancellable term of the contract. All other sales commissions are generally expensed as they are earned per the terms of the sales compensations plans.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) as set forth in the Financial Accounting Standards Board’s Accounting Standard Codification (the “Codification”) and consider the various staff accounting bulletins and other applicable guidance issued by the SEC. GAAP, as set forth within the Codification, requires us to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. While a number of accounting policies, methods and estimates affect our financial statements, areas that are particularly significant include revenue recognition policies, the assessment of recoverability of goodwill and purchased intangible assets, share-based payments, income taxes and business combinations. We have reviewed the critical accounting policies described in the following paragraphs with the Audit Committee of our Board of Directors.

Revenue recognition

The Company generates revenues from the sale of subscription services, professional services and software licenses and recognizes revenues when all of the following conditions are met:

•

persuasive evidence of an agreement exists;

•

delivery has occurred;

•

the fee is fixed or determinable; and

•

collection is probable.

Subscription Services Arrangements

Subscription services arrangements generally include a combination of our products delivered via an internet-based cloud architecture, product updates and support related to licenses and professional services. Subscription revenue includes revenue from cloud-based offerings and product updates and support related to licenses.

Revenue from cloud-based offerings that are integrated offerings pursuant to which the customers’ ability to access the Company’s software is not separable from the services necessary to operate the software and customers are not allowed to take possession of the Company’s software are recognized ratably over the term of the arrangement as delivered or on an as-used basis if defined in the contract. Saba does not grant its resellers the right of return and does not recognize revenue from resellers until an end-user has been identified and the other conditions of software revenue recognition guidance are satisfied. Revenue from product updates, support and hosting services related to licenses are recognized ratably over the term of the arrangement as delivered or on an as-used basis if defined in the contract.

When subscription services arrangements involve multiple elements that qualify as separate units of accounting, the Company allocates arrangement consideration in multiple-deliverable revenue arrangements at the inception of an arrangement to all deliverables based on the relative selling price method in accordance with the selling price hierarchy, which includes: (i) vendor-specific objective evidence (“VSOE”) if available; (ii) third-party evidence (“TPE”) if VSOE is not available; and (iii) best estimate of selling price (“BESP”) if neither VSOE nor TPE is available.

The Company determines VSOE based on its historical pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices for these services fall within a reasonably narrow pricing range. The Company limits its assessment of VSOE for each element to either the price charged when the same element is sold separately or the price established by management, having the relevant authority to do so, for an element not yet sold separately.

When VSOE cannot be established for deliverables in multiple element arrangements, the Company applies judgment with respect to whether it can establish a selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, the Company’s go-to-market strategy differs from that of its peers and its offerings contain a significant level of differentiation such that the comparable pricing of services with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor services’ selling prices are on a stand-alone basis. As a result, the Company has not been able to establish selling price based on TPE.

When it is unable to establish a selling price using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company determines BESP for deliverables by considering multiple factors including, but not limited to, prices it charges for similar offerings, market conditions, competitive landscape and pricing practices.

The Company does not have VSOE on its cloud-based offerings. As a result, the Company uses BESP in order to allocate the selling price to cloud-based deliverables. In general, the Company uses VSOE in order to allocate the selling price to professional service deliverables.

Certain cloud-based offerings include arrangements with customers that have separately licensed and taken possession of the Company’s software. When these offerings are part of a multiple element arrangement involving licenses, the Company recognizes revenue in accordance with software revenue recognition guidance.

Professional Services

Professional services revenues are generally recognized as the services are performed. Although the Company generally provides professional services on a time-and-materials basis, certain services agreements are provided on a fixed-fee basis. For services performed on a fixed-fee basis, revenues are generally recognized using the proportional performance method, with performance measured based on hours of work performed. For contracts that involve significant customization and implementation or consulting services that are essential to the functionality of the software, the license and services revenues are recognized using the percentage-of-completion method or, if Saba is unable to reliably estimate the costs to complete the services, Saba uses the completed-contract method of accounting in accordance with software revenue recognition guidance and relevant guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-35 Construction-Type and Certain Production–Type . A contract is considered complete when all significant costs have been incurred or the item has been accepted by the customer.

If the requirements of software revenue recognition are not met when the Company bills a customer or a customer pays the Company, the billed or paid amount is recorded as deferred revenue, which is a liability account. As the revenue recognition criteria of software revenue recognition are satisfied, the requisite amounts are recognized as revenue.

The Company classifies deferred revenue and deferred costs on its consolidated balance sheet as current if the Company expects to recognize such revenue or cost within the following twelve months. When the revenue from professional services is recognized ratably over the subscription for transactions entered into prior to adoption of Accounting Standards Updated 2009-13 Revenue Recognition (Topic 605) Multiple Deliverable Revenue Arrangements (A Consensus of the FASB Emerging Issues Task Force) (“ASU 2009-13”), the Company allocates the revenue to professional services revenue and to subscription revenue based on the VSOE of fair value for similar professional services that qualify as a separate element of the arrangement. The Company’s judgment as to whether the consulting services qualify as a separate unit of accounting may materially affect the timing of the Company’s revenue recognition and results of operations.

Software License Arrangements

Software license arrangements generally include a combination of the Company’s software, license updates and product support and/or professional services. A significant amount of the Company’s software license arrangements are for perpetual licenses.

The Company recognizes revenue earned on perpetual software license arrangements in accordance with software revenue recognition guidance . When software arrangements involve multiple elements, the Company recognizes license revenue, using the residual method. Under the residual method revenue is allocated to undelivered elements based on VSOE of fair value of such undelivered elements and the residual amount of the arrangement is allocated to delivered elements. Accordingly, assuming all other revenue recognition criteria are met, revenues from perpetual licenses are recognized upon delivery using the residual method. The Company limits its assessment of VSOE for each element to either the price charged when the same element is sold separately or the price established by management, having the relevant authority to do so, for an element not yet sold separately.

License revenues from licenses with a term of three years or more are generally recognized on delivery if the other conditions of ASC 985-605 are satisfied. License revenues from licenses with a term of less than three years are generally recognized ratably over the term of the arrangement. In arrangements where term licenses are bundled with license updates and product support and such revenue is recognized ratably over the term of the arrangement, The Company allocates the revenue to license revenue and to license updates and product support revenue based on the VSOE of fair value for license updates and product support revenue on perpetual licenses of similar products. The Company does not grant its resellers the right of return and does not recognize revenue from resellers until an end-user has been identified and the other conditions of software revenue recognition are satisfied.

Recoverability of goodwill and purchased intangible assets

We account for goodwill under ASC 350-20 Goodwill (“ASC 350-20”). Our goodwill balance at November 30, 2011 was $41.2 million. We account for purchased intangible assets under ASC 350-30 General Intangibles Other than Goodwill . Amortization of purchased intangible assets, including acquired developed technology, was $0.8 million and $0.9 million for the three months ended November 30, 2011 and 2010, respectively. Amortization of purchased intangible assets, including acquired developed technology, was $1.6 million for the six months ended November 30, 2011 and $1.9 million for the six months ended November 30, 2010. As of November 30, 2011, our purchased intangible assets balance was $7.1 million, net of accumulated amortization. The total expected future amortization related to acquired intangible assets will be approximately $2.7 million for the year ended May 31, 2012 and $0.9 million for each of the years ended May 31, 2013, 2014, 2015 and 2016.

ASC 350-20 prescribes a two-phase process for impairment testing of goodwill. The first phase requires us to test for impairment, while the second phase, if necessary, requires us to measure and allocate for the impairment. We consider Saba to be a single reporting unit. Accordingly, all of our goodwill is associated with the entire company. We perform the required impairment analysis of goodwill annually or on a more frequent basis if indicators of impairment arise or circumstances otherwise dictate. A significant and extended reduction in our enterprise fair value to below the recorded amount of our stockholders’ equity could indicate a change in our business climate and under ASC 350-20, we could be required to write down the carrying value of our goodwill and record an expense for an impairment loss.

CONF CALL

Roy Lobo - Vice President of Investor Relations

Thank you, Mary. Good morning, everyone. Welcome, and thank you for joining us on today's conference call. With me on the call today are interim CEO and COO, Shawn Farshchi; and our interim CFO, Mike Shahbazian. If you have not received yesterday'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 outlook, future performance and expectations of future events. These statements are based solely on 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, 2011, and subsequent Saba periodic reports, which are made 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 statement.

Please keep in mind, we are still in the midst of completing our restatement and are limited in our disclosure. 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 and business metrics.

With that, I would now like to turn the call over to Shawn.
Shawn Farshchi - Interim Chief Executive Officer

Thanks, Roy. Good morning. Let me start off by saying that while we have experienced a lot of positive momentum in our business, I am extremely disappointed that the restatement is not complete. Completing the restatement is my #1 priority. Mike will elaborate further on our progress and update you on our business.

Let me spend the rest of my time talking about what I'm pleased about. We have experienced a lot of positive momentum. And despite the adversity we faced over the last year, we have been able to continue to win business, both new and renewals, and deliver innovative solutions to the market. Because of the tireless efforts of our employees, our business momentum remains healthy. Our new customer signing continue to grow at a brisk pace. In our fiscal year 2012, we signed 141 new customers. In just the first 9 months of fiscal year 2013, we have signed 146 new logos, including Toyota Motors; BDO, one of the largest retail bank in the U.K.; Ross Stores; LogMeIn, a global leader in the medical technology field; TomTom International; and Thoratec Corporation.

Our pipeline remains strong as prospects realize that Saba's expertise in solving customers' challenges in the learning and talent management arena and meeting customers' complex requirements and need to scale is unmatched in the industry. At the high end of the market, we continue to experience our greatest success, although, in some instances, our pending restatement is lengthening the sales cycle.

We are also investing in SMB to mid-enterprise market that remains largely untapped and has tremendous growth opportunity. We have created a dedicated inside sales team to address these markets, and I'm pleased with their traction to date. A further testament that customers view Saba as their strategic supplier and talent management platform of choice is evidenced by our new renewal rate remaining above 90-plus percent on a quarterly and a year-to-date basis.

Before I turn the call to Mike, let me just quickly highlight our users conference and some product innovations we announced. A number of you attended our Saba -- our People 2013 Global Summit User Conference that we held in San Francisco in early March. It would have been difficult to walk away with a feeling other than exuberance. We, our customers, our prospects and our partners were all extremely energized coming from the summit, and we plan to leverage all the tremendous leads and feedback we received.

At summit, we had many exciting product announcements. We announced the latest update of Saba People Cloud, which is our next-generation people development platform and the focus of innovations moving forward. Saba People Cloud now delivers both formal and informal learning, next-generation performance management, mobile, e-commerce and collaboration capabilities that leapfrog our competition. A very important takeaway to appreciate is that Saba People Cloud was architected as a platform to deliver unified applications, mobile, social and extended enterprise solutions. We believe this modern platform will fundamentally change the way our customers and industry think about development -- people development.

We have -- we had early adopters of Saba People Cloud talk enthusiastically about their experience with the platform, and this is very exciting for us. So our customers take advantage of the Saba People Cloud, we announced the Saba Leap program, that is a quick-start turnkey program to rapidly move our customers to Saba People Cloud. Announcement of the Saba Leap program was well received and is generating immediate customer interest.

While Saba People Cloud is next-generation people development platform, we will continue to support our existing customers and continue investment and innovation in our Saba Enterprise offering. At summit, we announced the availability of Saba Enterprise Release 7, a major update to our existing people development platform. Key advances in Saba Enterprise Release 7 include the brand-new user experience, unified testing and assessment engine, support for mobile learning, people analytics and a new integration studio. Saba Enterprise Release 7 also includes a number of key advances in learning, performance and talent management processes.

Our business and product strategy is based on core belief that people development is the key challenge facing organizations looking to thrive in today's world of work. People development requires a set of processes that must be transcended learning, performance, succession, mobile and analytics. We cannot, after all, develop people by delivering learning and then not providing performance feedback. You cannot develop people without being able to tie critical succession plan with learning interventions. You cannot develop people without the ability to assess their competencies and direct them to the right resources. You cannot develop people without allowing them to collaborate across physical boundaries.

We are focused on people development challenge, and with availability of Saba Enterprise Release 7, we announced a revolutionary new way to go to market. Customers upgrading to Saba Enterprise Release 7 in our cloud will now get access to our core people development platform in one easy accessible offering. Based in part on this strong customer interest that we have received in 7 upgrade program, we believe the new offering is clearly aligned with the strategy of our customers.

At summit, we also announced the release of latest updates to our Saba Meeting and Saba HumanConcepts product lines. The product innovation and programs that I just described were very well received by customers, prospects and analysts in attendance. Our customers and prospects have come to expect leading-edge innovation from Saba. As a result of our continued investment, we are proud to be considered as a strategic supplier of mission-critical people development solutions to the world's most successful organizations.

As we look into the future, we have a number of initiatives to further streamline the business, simplify our message and gain greater efficiencies. We plan to reinvest these efficiency gains into our sales and marketing efforts to capture growth and capitalize on our growing pipeline.

With that, I will turn the call to -- over to Mike.
Michael Shahbazian - Interim Chief Financial Officer

Thanks, Shawn. Let me reiterate Shawn's comments that despite some of the headwinds we have faced, we have experienced continued business momentum. Before I discuss some of the business metrics, let me give you an update on the restatement. I share Shawn's disappointment in not being able to complete the restatement by the April 4 deadline. The primary reason for the delay is the sheer amount of information we need to review in order to complete the restatement. We believe we will complete the restatement and regain compliance with our SEC filing requirements in the next few months.

To help shed light on why the restatement process is taking so long, let me provide some detail around where the bulk of our efforts have been focused. In connection with the restatement, we discovered that, in some instances, we were not capturing hours worked by our consultants after completion of the customer engagements. Customers, after building a relationship with our team during consulting engagement, continued to work with our consultants post engagement. To help ensure customer success, our consultants continue to assist these customers.

There, obviously, is not an issue helping customers, which we continue to do. The issue arises when the additional hours are not captured in a manner that is directly attributable to the underlying project. Because we are unable to determine with precision the number of hours expended on each customer engagement from an accounting perspective, we need to restate our services revenue from recognition on a proportional performance basis to recognition on a contract complete basis. To do this, we need to establish a completion date for each of our consulting projects over the last 5 years.

During this period, there were approximately 3,000 consulting projects. Approximately 1,000 of these projects were fixed-fee projects with established completion dates. The other 2,000 projects were time and material projects. For these time and material projects, we need to undertake an exhaustive search to determine the completion dates from the best evidence available to us. This search encompasses information on a number of our IT systems, including e-mails, our CRM system and our code development versioning system.

We have hired outside consultants, as well as a data mining company, to work alongside our finance team to complete this restatement as soon as possible. We have made substantial progress on establishing project completion dates and as indicated earlier, believe we will complete the restatement and regain compliance with our SEC filing requirements in the next few months. I do want to reiterate that the restatement will only change the time period during which effective revenues will be recognized. The restatement will not result in changes to cumulative revenue to be recognized or cumulative cash flow from operations.

Now let me discuss the progress we have made on the business front. Please keep in mind that because we're in the midst of the restatement, we are limited in our disclosure of financial information and metrics. The business as a whole has executed well on the strength of our customer base and our strong renewals. We experienced healthy organic growth in new customer signings. As Shawn stated earlier, we signed 146 new logos in just the first 9 months of fiscal 2013 compared to 141 new customers in all of fiscal 2012.

In the first 3 quarters of fiscal year 2013 ended February 28, 2013, cloud bookings, which we define as the annual contract value of new and renewal cloud arrangements booked in the quarter, grew 23% over the respective 9-month period a year earlier. Our cloud billings, which we define as cloud revenue plus the change in cloud deferred revenue, remained relatively flat. Cloud billings growth was negatively impacted by a multimillion dollar upfront payment we received in the third quarter of fiscal year 2012. Excluding this impact, cloud billings would have grown in excess of 10%.

We ended the third quarter of fiscal 2013 with $12.1 million in cash, and this amount reflects approximately $7.5 million in payments associated with the accounting review and restatement. Our debt remains the same at $25 million. Cash flow from operations, excluding cost associated with the accounting review and restructuring, was approximately breakeven for the 9 months ended February 28, 2013, and is expected to be approximately breakeven for the fiscal year May 31, 2013.

Now with that, I will turn the call back to Roy.
Roy Lobo - Vice President of Investor Relations

Thank you, Mike. This concludes our prepared remarks. I will turn the call back to the operator for closing. Operator?

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