Saba's SEC saga hangs heavy despite settlement

Profile picture for user slauchlan By Stuart Lauchlan October 1, 2014
Summary:
An SEC settlement has been struck over accounting allegations, but it's left to CEO Shawn Farschi to keep spirits up as revenue restatement continues.

In the increasingly febrile HCM cloud wars, Saba Software has perhaps kept a lower profile of late, overshadowed by accounting fraud allegations and a Securities and Exchange Commission (SEC) probe.

But at the end of last month, the firm announced a deal to pay the SEC $1.75 million in a settlement in relation to allegations involving the falsification of employee timesheets to help the company hit its quarterly financial targets. According to the SEC, Saba overstated its pretax earnings by about $70 million from

Screen Shot 2014-10-02 at 10.40.45
October 2007 to January 2012.

Saba’s India-based consulting group, was at the heart of the problems, referred to throughout the organization as a “black box” in recognition that US and European managers signed off time records of India-based consultants for revenue recognition purposes but had little visibility into who was performing what work and when.

Jina L. Choi, Director of the SEC’s San Francisco Regional Office, noted:

Saba Software used off-shore operations to cut costs, but also cut corners on its internal controls over financial reporting,” said. “Weak internal controls create greater opportunity for accounting fraud, and investors are left holding the bag.

At the same time, former CEO Babak "Bobby" Yazdani has been presented with a bill to reimburse the company to the tune of $2.5 million in bonuses and stock profits. (Sarbanes-Oxley rules mean that CEOs and CFOs can be forced to return money earned during a period when their company is later found to be misleading investors even if they themselves are not accused of misconduct, which Yazdani has not been.)

The next task is to complete the restatement of results with an aim of closing that off in the fourth quarter.

But still the shadow of the recent past hangs over the firm, with Farschi and other executives not fielding analyst questions on the quarterly conference call this week.

The ongoing restatement also means that the firm can’t break out detailed financial information, although there were some nice numbers to spread around:

  • First quarter new cloud bookings grew 84% year-over-year.
  • Total cloud bookings in the first quarter grew 15% year-over-year.
  • Renewal rates for the quarter were in excess of 90%.

Keeping the spirits up

Still that's short on detail, so CEO Shawn Farshchi’s main task is being upbeat and confident about the overall state of the nation and holding the line:

We had an outstanding first quarter to begin our fiscal year. Our win rate against the competition continues to climb on both a dollar basis and account basis. Thanks to the continued execution of the Saba team, new cloud bookings grew 84% in the first quarter of fiscal year 2015 over the year ago period. North America SMB and the growth markets were all primary drivers behind our strong results and higher win rates.

472537539_295x166
Among the 38 new customers signed in the past 3 months, he cited Adobe, Washington University and PetroChina, while also highlighting continued upsell and additional spend by the existing subscriber base, including CVS Caremark, Nissan and Shell.

That ability to upsell is crucial, suggests Farschi, who cites a recent customer in the financial services sector as a case in point:

During the visit to one of the largest financial institutions, our discussion concerning upgrading their LMS solution to Saba Cloud quickly expanded to a lengthy conversation concerning all aspects of talent management suite.

The customer was pleasantly surprised by the functionality and capabilities of our talent management suite as they always only consider Saba for their LMS needs. Our innovations around the artificial intelligence coupled with our deep analytic capabilities was a primary driver behind their decision to consider replacing their existing talent management providers and standardizing on Saba for their entire talent management needs.

Educating many of our long time customers that Saba offers a very competitive and complete talent management suite would require some undertaking, but we believe our strategy of upgrading our customers from their on-premise or hosted solution to Saba Cloud will greatly accelerate this undertaking and give us a great opportunity to address their talent management needs.

The overall message? Look beyond the dodgy numbers and the regulatory issues and feel the quality of our offering. This quality-first message also extends to the firm’s pricing model, adds Farschi:

It is clear that when we get invited to a deal, we hardly ever lose especially when the evaluation is based on innovation and functionality. We do lose when we get invited to a deal and the decision is based solely on the price. We have a margin target that we operate to and we do not believe in selling just to win a deal.

On the whole, we find customers to be very knowledgeable about the requirements and the solutions they need to solve their business needs, and it is our ability to solve customers’ needs at the high end of the enterprise as well as the SMB segment that clearly differentiates us from the competition.

My take

Not out of the woods yet I fear.