Pros Holdings Inc (PRO) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2007 PROS Holdings, Inc. earnings conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Charlie Murphy, Chief Financial Officer and Executive Vice President. Please proceed, Mr. Murphy.

Thank you very much. Good afternoon, everyone. Thank you for joining us today to review our financial results for the third quarter of 2007, our first full quarter as a public company.

With me on the call today is Bert Winemiller, Chairman and Chief Executive Officer. In today's conference call, Bert will make some comments on PROS' performance in the third quarter, and I will provide the review of the financial results. We will then open up the call to questions.

Before beginning, we must caution you that today's remarks contain forward-looking statements. These statements are based solely on the present information, and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements. Please refer to our prospectus, 10-Q and other filings with the SEC and the risk factors contain therein. Also, please note that a replay of today's webcast will be available in the Investor Relations section of our website.

With that, I'd like to turn the call over to Bert.

Thank you, Charlie, and thanks to those of your listing to our call this afternoon. We are pleased that we exceeded our target metrics in our first full quarter as a public company. The third quarter of 2007 marked record revenue, strong operating income and positive operating cash flow.

The momentum we are building in the pricing and revenue optimization market increases our confidence and optimism about our growth prospects for the future. Our confidence is supported by the fact that we have unparalleled experience and expertise in developing high-performance, real-time dynamic pricing technology, embedding world-leading science in our software products, our high-visibility revenue model and the impressive return on investment realized by our customers after implementing pricing excellence best practices and PROS' pricing and revenue optimization software.

The third quarter marked another very solid quarter for PROS, and we remain very confident in our future as a leading provider of pricing analytics, execution and optimization software products, as you will see from our outlook. We achieved record levels of revenue, operating income, net income and operating cash flow. Our third-quarter revenue of $16.4 million was slightly above the top end of our guidance, and was up 32% compared to quarter three of last year. $11.7 million or 71% of that revenue came from license and implementation, which we recognize on a percentage completion basis, and $4.8 million or 29% came from service and maintenance.

Operationally, our non-GAAP operating income was $3.3 million and was up 53% year over year. Our non-GAAP net earnings were $3 million, up 50% year over year, and an $0.11 per share on fully-diluted basis. In addition, we will the increasing our guidance for the remainder of the year, which reflects our confidence in the business.

These results reflect the PROS proven business model and PROS' high-visibility revenue model. PROS does not recognize any revenue at contract signing. The license and implementation revenue is bundled together, and the revenue is recognized using percent of completion over the 6 to 24-month implementation period.

The power of pricing continues to get the attention of CEOs. More CEOs are recognizing that traditional cost-plus and match-the-competition pricing strategies cause unnecessary discounting and destructive pricing policies. A McKinsey study showed a 1% improvement in price translates into an 11% improvement in operating profit, and pricing is the most strategic and powerful tool available to management.

PROS' early years were focused on the airline industry, the early adopters of science-based pricing optimization. Airlines have millions of business-to-consumer and business-to-business transactions that are individually priced every day. PROS' high-performance, real-time dynamic pricing products deliver all of the relevant pricing information at the time the price is quoted, the deal is negotiated and the sale transaction is actually made. PROS provides the pocket price, pocket margin, customer willingness to pay, customer cost to serve, win-loss ratios, market price, stretch price and other relevant information, so our customers can maximize revenue and profitability by using optimized prices.

PROS has successfully diversified, both geographically and across industries, by providing software products that dynamically price each individual transaction, which is very different from static retail pricing. PROS has blue chip customers in each of our target industries -- manufacturing, distribution, services, hotel crews and airlines. While these diverse industries provide a wide range of B2B and B2C products and services, what they have in common is the need to individually price each transaction optimally and dynamically.

We are thrilled with our third-quarter results. This achievement is the result of the hard work of over 300 employees of PROS who are smart, dedicated people doing great things to bring pricing excellence and high value to our customers.

Now, let me turn the call over to Charlie so that he can provide you with details on the financial highlights of the quarter.

Thanks, Bert. I will begin with a look at our income statement for the third quarter, which ended September 30, 2007. Then I will provide some commentary on the balance sheet and cash flow items before providing you with financial guidance for the fourth quarter and for the full year.

As Bert indicated, we are very pleased with our performance in the third quarter. Revenue for the third quarter of 2007 came in at $16.4 million, which is up 32% year over year and was slightly above the top end of the guidance range we provided in our last call.

Within revenue, license and implementation revenue, which is generally recognized as implementation services are performed on a percentage-of-completion basis, was $11.7 million or 71% of total revenue, and was up 41% year over year. Maintenance, which makes up the balance of revenue, was $4.8 million, up 14% year over year.

Note that we recognize maintenance revenue ratably and that maintenance revenue commences following completion of the implementation of the software, and therefore has lagged the growth of our license and implementation revenue. Our revenue is geographically dispersed, because we sell our solutions to a diverse base of global customers. Approximately [60]% of our revenue was generated outside of the United States during the quarter, and 65% year to date. This is consistent with past experience.

On a non-GAAP basis, gross profit was $11.9 million, yielding gross margins of 72.2% in the third quarter. This compares to gross profit of $8.3 million in the third quarter of 2006 or 66.5% of revenue. We are pleased with the improvements in gross margins.

Improvements in our implementation processes and the continued standardization of our products have contributed to improving license and implementation margins. As previously communicated, gross margins may vary from period to period, depending on factors including the amount of implementation services required to deploy our products relative to the total contracted price.

Margins have been improving. However, our guidance for the fourth quarter would not be based on increasing margins, because, while the overall trends for gross margins are up, we can't be certain that the previously mentioned factors which contributed to Q3 gross margins will have an impact in Q4.

Non-GAAP selling, general and administrative expenses for the quarter of $4.4 million were up 26% year over year. SG&A expenses increased in Q3, largely due to increased marketing and personnel expenses and to public company costs we are now incurring.

We also incurred less SOX-compliant costs in the third quarter than anticipated. With recent regulatory changes, it became evident that we should delay the bulk of our SOX third-party compliance program costs until recent guideline changes are better understood. We anticipate that lower SOX costs than previously expected will also benefit our operating income in the fourth quarter of 2007.

Non-GAAP R&D expense of $4.2 million was up 58% year over year, as we continued to invest in our pricing software solutions. R&D represented 25.7% of revenue, compared to 21.4% of revenue in the third quarter of 2006, as our planned R&D investments continue to develop.

This resulted in a non-GAAP operating income of $3.3 million for the quarter and a non-GAAP operating margin of 19.9%. These results are above the top end of our previous guidance of $2.3 million. This compares to operating income of $2.1 million in the third quarter 2006 and operating margins of 17.2% in that period.

In absolute dollars, operating income has increased $3.7 million year-to-date 2007 over 2006, or 84%. The improvement in non-GAAP operating margins from a year ago was principally attributable to higher gross margins.

On a non-GAAP basis, other income and expense was a net inflow of $492,000, primarily interest on our cash balances. Note that our GAAP other expenses includes expensing $397,000 of deferred financing costs in connection with the repayment of a debt facility that has been retired. We reported on this during our second-quarter call.

Our non-GAAP effective tax rate is 20% in the third quarter, compared to 20% in the prior year. Excluded in our non-GAAP tax expense for the third quarter of 2007 is a benefit of $1.1 million due to the reversal of a valuation allowance previously recorded against our deferred tax assets. The reversal is the result of our conclusion that it is more likely than not that the associated deferred tax assets will be realized.

Our effective tax rate historically has been lower than the statutory rate of 34%, largely due to the application of general business tax credits. We expect to continue to benefit from these credits for the foreseeable future. While we expect the effective tax rate to be approximately 21% in Q4, it appears that in 2008 our effective tax rate will increase to approximately 27% to 28%, due to the utilization of research and experimentation tax credit carryforwards in 2007 and to the higher levels of pre-tax income in relation to research and experimentation credits earned.

Non-GAAP net income of $3 million for the quarter compared to net income of $2.1 million for the same period in 2006. Non-GAAP net income per diluted share was $0.11, based on 26.2 million weighted-average shares outstanding, compared to $0.10 per share in the third quarter of 2006. 2006 reflects a lower pre-IPO share count of 20.9 million shares. 2006 earnings per share would have been $0.08, rather than the reported $0.10, using the post-IPO 2007 weighted average shares outstanding.

The previous information has been a report on our non-GAAP operating results, because we believe that excluding certain non-cash items such as stock-based compensation, deferred financing costs, the reversal of a valuation allowance against deferred tax assets and other one-time items provides you the best indicator of the health of the overall business. Also, this is how we measure the success of the business internally. That said, we appreciate that investors also need to analyze our results on a GAAP basis, so we have provided a reconciliation of the GAAP results and non-GAAP results as part of the earnings release.

Looking at our results on a GAAP basis, total expenses were $13.6 million for the third quarter, which included stock-based compensation expense of $423,000. This compares to GAAP expenses of $10.3 million in the third quarter of 2006. In 2006, there was no stock-based compensation expense.

GAAP net income was $3.5 million in the third quarter, compared with $2.1 million in the third quarter of 2006. In addition, stock-based compensation charges of $423,000, our GAAP net income in the third quarter differs from non-GAAP due to the one-time expensing of deferred financing costs of $397,000 and a benefit of $1.1 million due to the reversal of the valuation allowance previously recorded against our deferred tax assets.

These costs reflect the difference between our GAAP and non-GAAP results and totaled, after-tax, a $490,000 reduction to GAAP net earnings. Our third-quarter GAAP diluted earnings per share was $0.13. As I mentioned earlier, a full reconciliation of GAAP to non-GAAP measures is provided in our earnings press release.

Moving to our balance sheet, we ended the third quarter of 2007 with cash and equivalents of $40 million, which includes net IPO proceeds of $52 million excluding operating expenses. A portion of the IPO proceeds were used to repay $20 million of debt in the third quarter.

Accounts receivable at the end of the third quarter were $14.9 million, a decrease of $1.1 million from the prior quarter. Trade accounts receivables DSOs were approximately 75 days, which is in line with our typical DSOs. Accounts receivable balances can vary in a quarter, based on the timing of invoicing of milestone billings under our contracts, which, again, can vary from quarter to quarter.

Deferred revenue at the end of the third quarter was $27.5 million, compared to $27.2 million at the end of the second quarter. As with receivables and cash flow, deferred revenue can fluctuate on a quarter-to-quarter basis, depending on the timing for milestone billings under our contracts. Because deferred revenue is not tied to total contract value, we do not believe it is a meaningful forward indicator. Additionally, maintenance revenue for the most part is billed monthly, and as such generally has little effect on deferred revenue, even though it contributes meaningfully to overall visibility.

Let me now turn to cash flows. Operating cash flow in the third quarter was $5.6 million, compared to $3.6 million in the third quarter of 2006. As with receivables, there is variability in cash flow, as it is impacted by the timing of invoicing for milestone billings under our contracts, which can result in some quarter-to-quarter lumpiness. Capital expenditures in the quarter were $1 million, which includes expenditures to expand our existing facility.

Overall headcount at the end of Q3 was 337, compared to 280 a year ago, as we continue to increase is staffing throughout the organization in order to support our continued growth.

Now, let me turn to our guidance for the fourth quarter and full year. For the fourth quarter of 2007, PROS anticipates total revenue in the range of $17 million to $17.3 million, representing a growth rate of 30% from 2006, at the midpoint of our guided range. We are projecting non-GAAP operating income of $2.9 million to $3.2 million, and we are anticipating non-GAAP net income of $2.6 million to $2.9 million and non-GAAP diluted earnings per share of $0.10 to $0.11, based on an estimated fully-diluted share count of 26.4 million shares. The earnings-per-share guidance reflects an increase in diluted shares outstanding compared to Q4 2006 of 5.1 million shares from shares issued at the initial public offering.

The GAAP EPS guidance in the press release was stated as $0.08 to $0.009. It should have been $0.08 to $0.09. The press release filed in the 8-K will be corrected.

Non-GAAP operating income and net income for the fourth quarter excludes estimated FAS 123(R) stock option expense of $0.5 million. As a public company, we are now incurring public company costs, including higher audit and legal fees, directors' compensation, directors' and officers' insurance and SOX compliance costs. These costs, including our expectation of reduced near-term SOX compliance costs, have been factored into the operating income guidance I just provided.

Using the guidance figures I just provided for the fourth quarter, for the full year 2007, we expect total revenue in the range of $61.3 million to $61.6 million, or a growth rate at the midpoint of 34% compared to the prior year. We are projecting non-GAAP operating income of $11 million to $11.3 million. We are projecting non-GAAP net income of $9.6 million to $9.8 million and non-GAAP diluted earnings per share of $0.41 to $0.42. Non-GAAP operating income and net income for the year excludes estimated FAS 123(R) stock-option expense of $1.4 million, expensing of deferred financing costs of $400,000 and a benefit of $1.1 million, due to the reversal of the valuation allowance previously recorded against our deferred tax assets. Diluted shares outstanding for the year are estimated at $23.4 million.

This fourth-quarter and full-year guidance is based on our current expectations, given our sales pipeline at this time. With continued business momentum, we are increasing our full-year bookings forecast for 2007 to a range of $42 million to $44 million.

With that, let me turn the call back to the operator so we can take your questions.

(OPERATOR INSTRUCTIONS). Adam Holt, JPMorgan.

Congratulations on the quarter. My first question has to do with the raised bookings targets for the year. I was hoping maybe you could give a little bit more detail as to whether or not it was strength of deal closures in the quarter that gives you that confidence. Is it about the pipeline for the fourth quarter, a combination of both? Maybe a little bit more detail there would be terrific.

Let me start, I guess. That's a great question. What we've done is the pipeline opportunities remain strong, and our close rate in Q3 was probably a little better than we had expected a quarter ago. If you look at our overall pipeline, it's about the same level of robustness as a quarter ago, but we have been able to hard circle a few deals earlier than we had thought, which certainly has built our confidence for the full year.

So with that, we brought the guidance up from $38 million to $42 million to $42 million to $44 million. It really is confidence in bookings closed year to date that gave us the ability to raise our guidance.

Another factor behind bookings is obviously your distribution. Could you update us as to where you are with your direct sales at the end of the quarter? How do you feel about productivity related to some of the headcount adds that you brought on over the last quarter or two?

That's a great question. Why don't I take this opportunity just to review the bookings and contracts, and how we look at them and how we manage the business and developed a proven track record over the last nine years.

There's really three key factors related to bookings and contracts. One is the high-visibility revenue model; second, the high average sales price; and then the mix of business and diversification. These hit directly to the question.

The high-visibility revenue model -- we do not recognize revenue when the license and implementation contract is signed, so there is no motivation to discount or agree to onerous terms in a contract at the end of a quarter. We do not try to drive bookings or number of contracts in a quarter so we can report the numbers, and we have chosen not to disclose those numbers. Our experience shows that managing to an annual bookings goal is the best way to achieve our target revenue growth with strong profitability. Also, we recognize revenue over the implementation period of 6 to 24 months. So bookings in a quarter are not unnecessarily a good indicator of future revenue timing.

The next item is the high average sales price. Our average selling price of a deal is high. PROS' pricing and revenue optimization software products are purchased by the CEO and CFO. The ASP is high, much higher than most software product purchases, and actually require in most cases CEO and CFO approval. This is good, because we're not automating a current process.

When you look at spreadsheets and cost-plus and match the competition and those destructive practices, clearly, you want CEO and CFO sponsorship and leadership, and that becomes a key to achieving pricing and revenue optimization success. So, if we start discounting to achieve a bookings or contracts quarterly metric, we definitely would be sacrificing our long-term goals for short-term results.

The final is the mix of business and diversification. The pricing and revenue optimization software products market is still in its early lifecycle. The first-mover, innovative CEOs are driving the adoption rates and growing momentum. These adoption rates can vary across our target industries from quarter to quarter, so reporting bookings and number of contracts each quarter by industry might give investors the wrong impression. Also, we have effectively diversified our business from our early years of focus on the airline industry to our target industries.

Our year-to-date 2007 non-airline license and implementation revenue was 66%. In the third quarter, 69% of our license and implementation revenue was from manufacturing distribution services, hotel crews. So we are very pleased with our global diversification and industry diversification.

We've committed to give guidance and qualitative comments on annual bookings. Obviously, we are very pleased to announce the increased guidance from $38 million to $42 million range to $42 million to $44 million range. We feel managing the annual bookings number is the most effective way to achieve our long-term goals.

We generally don't break out our headcount by organization, but our overall headcount was 337 compared to 280 at this time last year, as we are increasing staffing in all areas. Regarding our sales group, which includes sales personnel, solutions, consultant, business development, marketing, we had 29 at the end of last year, and we're on our plan. We have communicated in the past that we're increasing that, and we are on target for our plan for headcount in the sales and marketing area.

If I could just ask one last question on the tax rate, obviously a relatively material forward-looking increase in the tax rate. Charlie, could you just spend another minute walking through the variables there, and whether or not that is a best guess at this point, or you've got relatively detailed buildup for that number going up?

That's a great question. I'd say we've got good detail for building up the rate. We've spent a fair amount of time on this. Really, going back to why is it rate increasing in 2008, it's for the first time in 2007, we've utilized all of our carryforwards we had on our research and experimentation credits.

Also, the relative R&D spending relative to the Company's pretax profit is lower now than it was in earlier years. So we're actually generating -- while we are still generating significant credits, the amount of credit generated relative to the acceleration of our profits is narrowing. So what's happening is that the rates are going up.

At this point, I would say it's our best estimate. We'll certainly give very updated guidance on this when we close the fourth quarter of this year, but I think we have done what we can. I think it's good guidance. We had previously expected it might have been 23%. Now we're looking at 27% to 28%.

Tom Ernst, Deutsche Bank.

Following up on that, I think, as you brought the IPO to investors, how is your look-forward, then, in terms of the build of momentum into 2008? I realize you're not giving guidance, but do you feel as strongly know about your positioning for growth with your pipeline as you did then, into 2008?

I think we would like to, obviously, stay away from anything specific until we get to the end of the year and we get the books closed, we get a chance to give guidance, which will be early February. What I will say, though, is that sometimes it's difficult, I think, for everyone to fully understand the PROS model, and how can you even be thinking about increases in 2008 or 2007 at the levels that you were?

I think there are some components that are worth emphasizing, and that is that we're not relying entirely on the bookings in 2007 to drive revenue in 2008. There are some elements to this. As we've mentioned before, the implementation time is 6 months to 18 to 24 months for each contract booked. So contracts signed in 2006 can still be contribute to our revenue in 2008. This is very typical. It's not just the rent contracts signed in 2007 that are contributing to 2008; it's contracts signed in 2006 as well.

The other is that we do have (inaudible) not a lot of term licenses ranging from three to five-year terms. So a term license signed prior to 2007 or a license signed during 2007 would contribute to revenue in 2008 and beyond. So that's another element that helps, as far as the momentum behind the Company and its ability to drive revenue in forward years.

Also, maintenance has two components to it. First, maintenance has increased each year by a cost of living adjustment in our contracts, so that's a fairly modest increase in maintenance, but nonetheless an increase. Second, maintenance starts when the implementation is completed. Some individuals think of maintenance as just being replaced each year, but for PROS it grows each year.

So maintenance in Q4 of 2006 was $4.2 million, and it was $4.8 million in the current quarter. On an annualized basis, this is an additional $2.4 million increase in revenue. We expect maintenance -- as you have seen in the numbers, maintenance will continue to increase. We would expect the fourth-quarter maintenance in 2007 to be higher than the third quarter. So when you annualize the fourth-quarter maintenance, you're going to see another increase of growth and year-over-year maintenance.

With those components, it's not just the bookings in 2007. It's not just the pipeline in 2007. It's all of those components that build towards the next year's revenue targets.

Obviously, we are very rigorous. We are very thorough. We anticipate what could happen. We look at every component of our business, and obviously we feel good about the future prospects. So that's why, in my quote, we specifically mentioned that the momentum we are building in the pricing and revenue optimization market increases our confidence and optimism about our growth prospects for the future.

That helps. I guess the biggest surprise in this quarter, though, is that incredible beat on the gross margin side. So I recognize you mentioned that it's not reoccurring, but can you parse that out for us a little bit? Because, with the 400 basis points beat in the gross margin and, in particular, when you look at the license implementation consulting services, my math says that was 72%, whereas last year it was 59% on the year in total.

How much of that is driven by improved utilization versus perhaps revenue mix shift to some of the newer products that don't carry as much services? What is sustainable and what might be a little lumpy for us?

That's a great question. I think we even put some cautionary words in my script to make sure we don't get to a point where we start anticipating this kind of growth in gross margins as we go forward.

I'd say about maybe half of the improvement that we've seen in the third quarter was inherent profitability in the projects themselves, the types of projects the Company is doing, compared to the past, which answers your question, is it more the new types of products we're deploying on the new platform. The other half would be perhaps the level of just efficiencies we're getting as we continue to deploy products.

As you know, we are focused on people, process and product, and how do we leverage ourselves in the future for scalability and increased efficiencies. We are getting some economies of scale.

What sort of utilization rates do your implementation and consulting services run at now?

Well, the utilization rates for our professional services people are very high, because we're in a growth mode. We are, obviously, hiring people as the revenues continue to grow. But I don't have a specific percentage to give you. But no one's (multiple speakers).

And we are moving to more time and materials, and we are also looking at some new processes. Obviously, over time, we want to significantly increase the efficiency of our professional services implementation staff through improved automated tools. As you know, we have a single-source code platform, and configuring that platform, we're building some tools around enhanced automation of that configuration. So we think that we're going to be able to increase the efficiency of those people. But without giving you a specific number, the utilization rate is high.

Tom Roderick, Thomas Weisel Partners.

You gave some metrics earlier around the non-airline revenues. When you look at the bookings within the quarter, can you just talk maybe -- maybe even just talk about a couple of anecdotal instances of new deals on the manufacturing and distribution and services side. What sort of trends on the bookings front were you seeing, and any metrics you can offer us around that to support not only just the revenue number but also that new sales trend to continue to support the growth segment of the business?

Absolutely. As I mentioned earlier, quarter-to-quarter measurement doesn't always give you a clear picture, or the correct picture, of the momentum in the business. As I mentioned earlier, overall we're seeing an increasing demand in the marketplace for pricing and revenue optimization software products.

We saw this starting in 2005. It continued in 2006, and we're seeing continued momentum in 2007. We focused on very specific target industries, because those were the industries that had the individual pricing challenges on each transaction, the kind of pricing problems that are complex, that are hard, but the problems that we had solved in the past.

So as we continue to see the CEO awareness, that a-ha moment, we will continue to see growing momentum in the marketplace. That said, we still have a long sales cycle. We have not only good visibility into our revenue; we also use a lot of statistical metrics to manage our pipeline. We think we have one of the best quantitative and risk-assessed, world-class pipeline management approaches. So we've got great visibility out into our pipeline and into the future, so we can have the right number of salespeople, sales solutions people, industry domain experts, in order to facilitate the sales cycle and especially at the CEO level, because selling to the CEO is very different than an IT sale.

So we're seeing momentum. We're seeing momentum across our markets, and we feel good about the increased awareness at the CEO level and the kind of activity we have got going in the marketplace.

Charlie, I want to follow up on Adam's question from earlier regarding the tax rate here. Just in terms of a couple of components that are driving that rate up, you mentioned that you're going to -- the higher-than-anticipated profits here will enable you to utilize those credits earlier, force you to use those credits earlier, but also that the R&D spend would be down on a percentage-of-revenue basis.

So in terms of what has changed over the last quarter and the last few months, which element of that is really driving that tax rate up more predominantly? Is it just the fact that profits are higher and forcing you to utilize those credits, or do you anticipate that R&D spend will come in a little bit next year to get more leverage out of the model?

It's more the profits are higher. It's that spread between increasing profits relative to increasing R&D spend. Clearly, the profits in the third quarter of this year were clearly very good, and the profitability level is such that utilization of all credit carryforwards occurred in the third quarter, and then you had to re-evaluate the deferred tax assets. As we did the re-evaluation, looking at next year's R&D projected spending and level of profitability, we think it's prudent to be providing guidance at approximately 27% to 28%.

Just to be clear that I understand you, as your profits come in better than expected, that is forcing you to ratchet up that rate. So is it possible that that rate could even higher if profits continue to come in better than expected?

It could, but we've done some sensitivity analysis on this, and that's why the 27% to 28%. We've done some sensitivity analysis. It could come in higher, but we're comfortable with the 27% to 28% at this time, and we'll give you an update again at the end of the year. But sitting here today, I don't expect it's going to change.

I did want to comment again on the bookings. Remember, our bookings can be lumpy from one quarter to the next. So the business is doing well, but we do have lumpy bookings. I just want to remind everyone on the call that it's difficult for this company to project bookings from one quarter to the next.

We're managing the company to an annual bookings number.

Absolutely, absolutely.

Robert Schwartz, Jefferies.

A couple of clarifications. Let me start with what you just said about managing the annual bookings. How do we think about that $42 million relative to the kinds of revenue that could be supported? If I would look at the bookings that you had in 2006, how would that relate to the revenue we're looking at for this year? And is that a fair comparison?

Yes, I would say it's probably a fair comparison, because in any year that we have, of course, the bookings patterns change a bit from quarter to quarter. The size of contracts can very a bit from quarter to quarter, even from year to year. So it is difficult to get the straight comparability. I think the way to look at it is that, as I mentioned before, the bookings in 2007 are clearly very important. But it isn't just 2007 that drives future revenues; it's 2006 drives future revenues, just as 2005 drove -- 2006 and 2005 is still driving some of 2007. You get the layering effect, because of the implementation periods being six months to two years. Than, of course, you get the layering effect, as I mentioned, of the maintenance as the maintenance continues to build quarter over quarter. When you start to annualize that from year to year, the maintenance growth can be fairly significant.

So it's the combination of layering in of bookings and layering in the maintenance that has allowed PROS to grow at a very good rate in 2006 and, based upon the guidance we're providing for 2007, at a very good rate in 2007. 2006 was about 30% revenue growth. Midpoint of our guidance is about 30% revenue growth this year, and we've reported, obviously, good numbers for 2006 and then reporting good numbers for 2007. So it gives us, directionally, confidence as to where the Company is going.

You talked -- when Tom asked about the sustainability of the gross margin improvement, you said about half was due to inherent profitability in those projects and half was due to efficiencies. I'm assuming it's the half that's in the efficiencies that's repeatable. What is it about the projects? They were just bid well, that the other half isn't repeatable?

I think one element to it is it's the relative level of implementation services to the total contract price. That's going to drive the inherent profitability in a project, so in a quarter or for a couple of quarters, you could have some projects that inherently have a lower level of implementation services relative to the total contract price, the margins are going to be higher. If you had a quarter that moved on you a bit and you had a number of projects that had a little more implementation than the prior quarters did, the margins could move down on you. Then we still have the efficiencies that are hopefully continuing to give us the opportunity to drive margins up.

The reason we're being cautious about this is you can go back and look at the last, say, three years, maybe four years, and you will see quarter-over-quarter gross margin improvements. But this quarter happens to be a margin improvement, as Tom mentioned, that clearly is very good for the Company. We're just being cautious as to how we communicate that as we go forward. It's been a history of profitability through gross margin improvements for a number of years.

Would that profitability be affected by -- in your control, in some sense, by what kinds of the products you're selling, whether you're selling analytics or price optimization? How do we think about what you have in terms of your ability to influence that part that's low implementation, high profit, high gross margin?

Absolutely.

Yes, I think you're absolutely right.

Good point.

Yes, absolutely. If a project had one or two of our modules that had less implementation, such as an optimization project typically would have more implementation services, you may see some variations in margins.

So as you get deeper into customers and sell more optimization, we're likely to see margins go up? Is that a fair summarization?

I'm not so sure I would say that that's fair. I'm not so sure that that's fair. I think that the way the model works is, if someone came in and they signed for all of the products, under our model the margins are going to be consistent across the entire revenue recognition period. Because, remember, the revenue is recognized based on the total efforts that are expected over the entire implementation. So if you're expecting 12 days of effort and you have one day incurred, you're going to recognize [one-twelfth]. If that's all products, you're all going to have the same margin. If the customer signs for one product and then comes back and signs for two or three more, you could have a little difference in the margins of those two contracts.

As you know, a substantial amount of our license and implementation revenue comes from add-on products into our existing customer base, and we are very pleased with that. One of the things that happens is that that add-on product can come in a number of different dimensions.

One, it can be the same the product but deployed in another division. You know that's -- the classic example is Disney World going to Disneyland, going to Disney Hong Kong. Now, obviously, the second deployment has very high gross margins versus a whole new project, and in that particular customer, we've got other projects which are the implementation of a new product in a new division.

So it can vary, just like you said; you're absolutely right. It can vary by product. It can vary but what's the implementation, is it across the scope of new geography or new divisions, or is it a whole new product going into a new division?

When you talked about -- you gave a long discussion of your model. You mentioned that one of the things that people have to keep in mind is the average sales price. Historically, you've talked about it being about $1.8 million.

I'm wondering, one, if you could talk about how stable that has been through the quarter, in recent times; and, two, which verticals you might have seen more strength; and then, three, have you seen any change in the buying behavior this quarter versus the last time you talked to us?

Great question. First of all, we communicated that our ASP on a deal was $1.8 million. Even though, back in 2005, we expected that to go down, it really hasn't. We're experiencing a consistent -- and that represents 2.2 products. Also, the momentum we're seeing, if you look at it over an annualized basis, we are seeing continuing momentum in each of those industries.

The reason really is that pricing in those industries is so dysfunctional. Consequently, it is easy to find high-value business cases, and it's easy to find where you can get a dramatic return on investment. That, obviously, is very compelling to a CEO, regardless of the state of the economy or what other factors. We've had a number of customers, to your point, that have felt pressure in the marketplace, and even though they felt pressure, they embraced very eagerly implementing pricing and revenue optimization, because they saw it as a way to drive their top line and to create efficiencies in their pricing that would generate profitability in margins.

So, overall, it feels very good, and we are not seeing a deterioration in our ASP per deal at this time.

And just two words on the buying environment?

Activity is good. The overall market activity is growing. If you look at the buying environment today versus six months ago or a year ago or a year and a half ago, there's definitely more activity, more awareness, more people interested. As you know, we have our webinar series, and attendance at our webinars over the last three months is much higher than it was, say, six months ago or a year ago.

At this time, I would like to turn the call back over to management for closing remarks. Please proceed.

Well, we're thrilled to bring you these results for the third quarter of 2007. Obviously, we feel good about where we are and good about the future. As a result of that, we've increased our guidance.

We also want to take this time to thank the investors that have shown confidence in PROS. We've had an opportunity to meet with a number of you post-IPO, and your feedback and comments help us to understand how to manage the business and be more professional. We want to be the very best that we can be. We appreciate very much your confidence, and we appreciate your feedback. We have had some investors visit us here at our Houston headquarters, our center for pricing and revenue optimization excellence, and you are invited to visit us at any time that is convenient for you.

With that, thank you very much.

Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.