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Saba's Slippery Shares

Saba Software's (Nasdaq: SABA  ) shares have taken investors on a wild ride in 2007, with last week's third-quarter earnings providing the latest sudden bump. The ups and downs suggest that Wall Street just can't seem to figure this company out.

Since early December, Saba's stock has spiked nearly 50% -- but a month ago, it hit the wall. Shares tumbled 21% to $6 after management announced disappointing guidance for the fiscal third quarter. But last week, shareholders got additional whiplash when that quarter's earnings release sent Saba's stock 6.7% higher.

Saba develops software to help improve employee productivity and education for customers such as Dell (Nasdaq: DELL  ) , Home Depot (NYSE: HD  ) , IBM (NYSE: IBM  ) , and Intel (Nasdaq: INTC  ) .

While fiscal third-quarter revenues increased 36% to $24.9 million, license revenues tumbled 25% to $4.5 million. License revenues are critical for growth, since they lead to ongoing maintenance and service fees.

With offerings that can easily cost more than $200,000, it can be tough for Saba to close sales. Management said that a "handful" of transactions spilled over into the fiscal fourth quarter.

That's why Saba's move into on-demand software, delivered via the Internet, is crucial. This technology has powered the growth of companies like (NYSE: CRM  ) and NetSuite. Instead of grinding out big contracts every quarter, on-demand software will let Saba pick up smaller customers and charge an ongoing subscription fee. That approach spares customers a hefty up-front investment, while creating tasty recurring revenue streams for Saba.

At least in its early stages, this new model seems to be gaining traction. Saba's on-demand revenues surged 172% in the fiscal third quarter, to $4.3 million.

I think Saba's on the right track with its on-demand strategy, which should lead to a more stable revenue ramp. Yet the transition to new customers and a new delivery model will likely remain a challenge. For now, Saba investors should expect the whiplash to continue.

Further Foolishness, on demand:

Dell, Home Depot, and Intel are all Motley Fool Inside Value picks. Discover more of the best bargains on Wall Street with a free 30-day trial subscription.

Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is ranked 2,719 out of 25,386 in Motley Fool CAPS. Dell is also a Stock Advisor pick. The Fool has a disclosure policy.

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