Pros Holdings Inc (PRO) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2008 PROS Holdings Earnings Conference Call. My name is Rob and I will be your coordinator for today. (OPERATOR INSTRUCTIONS).

At this time, I would now like to turn the presentation over to your host for today's call, Mr. Charlie Murphy, CFO. You may proceed.

Thank you, Robert. Good afternoon, everyone and thank you for joining us today for the PROS Holdings financial results conference call for the first quarter of 2008. This is Charlie Murphy, PROS Executive Vice President and Chief Financial Officer. Joining me on today's call is Bert Winemiller, PROS's Chairman and Chief Executive Officer.

On today's conference call, Bert will provide a commentary on the highlights of the first quarter ended March 31st, 2008. And then, I will provide a review of the financial results and our outlook, before we open up the call to questions.

Before beginning, we must caution you that today's remarks on this discussion, including statements made during the question-and-answer session contain forward-looking statements. These statements are subject to numerous important factors, risks and uncertainties, which could cause actual results to differ from the results implied by these or other forward-looking statements.

Also, 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, Form 10-K and other filings with the SEC for the risk factors contained herein in other disclosures.

Also, please note that a replay of today's webcast will be available in the Investor Relations section of our website. I would also like to point out that the Company's use of non-GAAP financial measures is explained in today's earnings press release and a full reconciliation between each non-GAAP measure and the corresponding GAAP measure is provided in the tables accompanying the press release filed earlier today. It also can be found on our website in the Investor Relations section.

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

Thank you, Charlie, and thanks to those of you listening to our call this afternoon. We are very pleased that we have exceeded our revenue and earnings per share targets in the first quarter of 2008. These results are a validation of PROS's proven business model of delivering high return on investment, pricing and revenue optimization software products to our customers, and our high visibility revenue model. PROS's proven track record, proven processes and proven solutions are the keys to our success and drive our high level of customer satisfaction.

We are pleased with our strong first quarter results and believe it was a solid start to the year. Our first quarter results affirm the value of PROS's pricing revenue optimization software as a strategic innovation and a risk mitigation initiative in a challenging economy.

PROS reported first quarter revenue of $17.9 million, slightly above our guided range and a 33% increase from the first quarter of 2007. Non-GAAP operating income of $4.4 million was up 78%, demonstrating the leverage in our model, primarily from gross margin improvements. Non-GAAP earnings came in at $3.2 million or $0.12 per share.

We have successfully executed our growth strategy and enhanced our market leading position of experience and expertise in developing high performance, real time, dynamic pricing technology, embedding world-leading science in our software products and providing a high return on investment to our customers by implementing pricing excellence best practices and PROS's pricing and revenue optimization software.

We believe that the pricing and revenue optimization software industry is still in its early stage and that PROS is in the center of this shift to science-based pricing from spreadsheets and the current destructive pricing practices used at most companies. CEOs and CFOs are starting to recognize that traditional pricing strategies, such as cost plus and match-the-competition cause unnecessary discounting and destructive pricing practices and are especially harmful in a weak economy.

The natural reaction in a downturn is to retreat, cancel all new initiatives, go back to just the basics and tighten the ship. Some companies even accelerate unnecessary deep discounting. But companies that focus on price optimization projects during a challenging economic environment will be in a better position to remain profitable industry leaders as competitive opportunities arise and economic conditions improve.

The momentum we built in 2007 as a leader in the pricing and optimization market continued in the first quarter of 2008. Reflecting, last quarter I told you that our strategy for 2008 was going to be to further penetrate our five target vertical markets, continue to sell additional products to existing customers and extend our pricing thought leadership and technology leadership by applying science innovations to our products.

In the first quarter, we made headway in each of those areas. Q1 marked record revenue, driven by the market momentum that continues to build for pricing and revenue optimization software products. We are seeing increasing adoption of price optimization software products across all of our target industries, manufacturing, services, distribution, hotel/cruise and airline.

In Q1, we continued to execute on our strategy of further penetration and expansion into our five target vertical markets and we had sales in each of these target industries. In addition to diversification across our five target vertical markets, our revenue is also diversified geographically and between business-to-business and business-to-consumer pricing solutions.

In the first quarter, approximately 55% of our revenue came from outside the United States. We believe this diversification and multiple dimensions provides us with some level of protection from economic uncertainties, as we have been largely shielded from the recent concerns about the economic environment. It's also important to recognize that the pricing optimization industry, where we hold the leadership position, is still being driven by innovative companies and that our customers tell us that the return on investment benefits they receive by implementing our technology are just as important in a down market as they are in an up market.

Regarding successes and thought leadership, two weeks ago, we conducted our fourteenth annual pricing excellence summit and it was a resounding success. Many of the people on this call and participating on the call actually attended our pricing excellence summit and we appreciate that. We had over 500 attendees from 40 countries participating in over 80 sessions, with topics ranging from price strategies and tactics for a decentralized sales force to strategic price optimization for an uncertain economy. Customers and prospects from each of our five target vertical markets were in attendance. Keynotes and presentations were made by customers in these industries as well as other notable industry pricing experts.

What I observed at the conference was that regardless of what's happening in the economy, managers at innovative companies all over the world, across our five target vertical markets are recognizing the increasing value of pricing science and are adopting PROS's software-based pricing solutions to improve their bottom line.

Our products, PROS Scientific Analytics, Price Optimizer and Deal Optimizer were highlighted at the summit. These high-performance, real-time, dynamic pricing products deliver all of the relevant pricing information that a sales person needs to effectively negotiate a transaction at the time the price is quoted and the sales transaction is actually made. This is very different from static retail pricing.

PROS provides the pocket price, pocket margin, customer willingness to pay, customer cost to serve, win-loss ratios, market price, stretch price, and all the other relevant information so that our customers can maximize revenue and profitability by using optimized prices that reduce profit leaks.

PROS software products optimally and dynamically price millions of individual transactions every day. Our pipeline of opportunities in all of our target markets, manufacturing, distribution, services, hotel/cruise and airline continues to be healthy. We will continue to invest in sales and marketing and R&D so that we can continue to deliver against our strategies and objectives and build on the momentum we have generated as a leader in the pricing and revenue optimization industry.

We're thrilled with our first quarter results. This achievement is the result of the hard work of over 300 employees at PROS who are smart, dedicated people doing great things to bring pricing excellence and high value to our customers. Also, we have a very experienced management team.

Today on the call, I am very pleased to announce four promotions. These individuals are great leaders and have been exceptional high achievers at PROS for many years. PROS's Board of Directors has approved the promotion of Andres Reiner and Jeff Robinson to the position of executive officer and Bhavit Desai and [Oscar Marino] to Corporate Vice President.

Now, these individuals will introduce themselves.

Hello. My name is Andres Reiner. I joined PROS in 1999. I'm Senior Vice President of Product Development and I'm responsible for the PROS time-to-market activities. I lead product management, research and development, quality assurance, third-level support for all PROS pricing and revenue optimization of software products.

Hello. My name is Jeff Robinson. I joined PROS in 2000 and I'm Senior Vice President of Pricing Solutions. I'm responsible for sales, marketing, solutions and professional services for manufacturing, distribution, services and hotel/cruise. I provide executive leadership for PROS's time to value activities and world class sales and marketing best practices.

Hello. My name is Bhavit Desai and I'm the Vice President of Pricing Professional Services and I'm responsible for PROS's time to value activities. I joined PROS in 2001 and I lead the business professional services, technical professional services and customer support services for PROS's pricing and revenue optimization software products.

Hello. My name is Oscar Marino. I joined PROS in 1999. I'm Vice President of Product Development and responsible for PROS's time to market activities. I lead product development, quality assurance and third-level support for the PROS [Product] Solutions suite. The major products in this suite are the Scientific Analytics, Price Optimizer, Deal Optimizer and the Real-Time Integrated Science.

Thank you, gentlemen.

All of us at PROS feel good about our future prospects and we are confident we can capitalize on the market momentum we are experiencing. So now, I'll turn the call over to Charlie so he can provide you with the financial details and our outlook for the second quarter and the year.

Thank you, Bert. PROS had a solid first quarter and is off to a good start in 2008. Revenue for the first quarter of 2008 came in at $17.9 million, up 33% from the first quarter of 2007 and slightly above our guided range.

In accordance with our revenue recognition policy, PROS does not recognize any revenue or contract signings. License and implementation revenue is bundled together and recognized using percentage of completion over the implementation period. This provides visibility into future quarters' revenue. There can be variability, however, in revenue from quarter-to-quarter, not as a result of seasonality, but rather the timing of when an implementation starts or finishes, the implementation effort needed, the number of products being deployed and the contract size.

Within revenue, license and implementation revenue was $12.8 million in the first quarter, or 71% of revenue. This was an increase of 42% over the first quarter of 2007. Maintenance and support, which makes up the balance of revenue was $5.1 million in the first quarter and was up 15% over the first quarter of 2007.

Our revenue is diversified across many dimensions. Geography across our five target vertical markets and between B2B and B2C customers. In the first quarter, approximately 55% of our revenue was generated outside the United States compared to 63% for the full year 2007. It is also notable that over 90% of our airline revenue is from outside the United States.

Unless I indicate otherwise, my comments in our statement of operations will refer to results on a non-GAAP basis. Our earnings press release issued today includes a full GAAP to non-GAAP reconciliation and can be found in the Investor Relations section of our website.

Gross profit was $13.5 million in the first quarter, resulting in gross margins of 75.4% compared to gross margins of 69.1% in the first quarter of 2007. We are pleased with the continuing improvements in gross margins. We continue to see some of the same benefits in our gross margins that we saw in previous quarters, namely the continuation of improvements in our implementation processes, the continued standardization of our products and the amount of implementation services required to deploy our products relative to the contract price and the current mix of our business.

In addition, a foreign exchange gain of $129,000 in the first quarter added approximately 0.7% to our gross margin. We can't be certain that the previously mentioned factors, which contributed to significant gross margin growth, will continue to contribute to margins in 2008.

R&D expenses in the first quarter were $4.4 million, about 24.5% of revenue and increased 18.5% in the first quarter of 2007 as we continue to make investments in our suite of pricing and revenue optimization software products. As we continue to make these investments, we expect R&D spending will increase in absolute dollars in future periods.

Selling, general, and administrative expenses for the first quarter were $4.7 million or 26.1% of revenue and increased 51% from the first quarter of 2007. The year-over-year increase is partly due to public company costs as well as due to our planned increases in marketing and personnel expenses. We expect SG&A costs will continually increase in 2008, due to S-Ox compliance costs, a full year of other public company costs and our continued investment in sales and marketing activities and personnel in order to extend our leadership position in the market.

Non-GAAP operating income was $4.4 million in the first quarter, up 78% from a year ago, exceeding our guidance. Operating margin in the first quarter was 24.8%, compared to 18.5% in the first quarter of 2007. As in the fourth quarter, our year-over-year increase in operating margin was primarily attributable to increased gross margins.

Operating profits exceeded guidance as a result of gross margins achieving a record of 75.4%, including the $129,000 gain from foreign exchange and lower operating expenses. Lower operating expenses was the result of lower personnel growth early in the quarter, reduction in benefit costs as a result of changing health insurance carriers and other costs coming in less than planned.

Interest income was approximately $422,000 in the quarter, interest rates declined more than originally expected during the first quarter. While average cash balances increased, we experienced a decline in the average interest earned due to declining interest rates.

As discussed on our last call, Congress recessed for 2007 without extending the research and experimentation tax credit, which has bipartisan support for the credit. The Senate Finance Committee Chairman, with bipartisan supporting committee, unveiled legislation on April 17th to extend the credit to 2009. However, passage remains uncertain. The credit has expired a number of times since it was originally enacted in 1981 and each time, except for a brief period in 1995, it has been retroactively reinstated.

If the credit is reinstated in 2008, as we expect, and if it is retroactive to the beginning of the year, as has been the case in the past, then we would make a cumulative adjustment in the quarter in which the law was reinstated. If the R&D credit is passed, we believe our effective tax rate will be 28%.

On a pro forma basis, we are using a tax rate of 28% for the second quarter and the year 2008, expecting that the past 26 years of extending this credit will continue going forward. If it is not extended, our effective tax rate will be 35% until the credit is extended.

We are using a non-GAAP effective tax rate of 35% in the first quarter as the R&D credit has not been reinstated, compared to an actual tax rate of 21% in the first quarter of last year. Our effective tax rate historically has been lower than the statutory rate of 35%, largely due to the application of the research and experimentation tax credits.

The increase in a non-GAAP effective tax rate in 2008 compared to 2007 is due to the utilization of research and experimentation tax credit carry forwards in 2007 and to the higher levels of pre-tax income in relation to research and experimentation credits earned going forward.

Non-GAAP net income for the first quarter of 2008 was $3.2 million, or $0.12 using a 35% tax rate, per diluted share, exceeding our guidance. Diluted shares were 26.7 million. In the prior quarter, the non-GAAP net income was $2.4 million and $0.11 per diluted share. 2007 reflects a much lower pre-IPO share count of 20.2 million shares. 2007 earnings per diluted share for the first quarter would have been $0.09, using the post-IPO Q1 2008 weighted average shares outstanding of 26.7 million shares.

Had the R&D credit been restated retroactively during the three months ended March 31st, 2008, they would have had a $0.01 increase to non-GAAP diluted earnings per share to $0.13 per diluted share. As I stated earlier, the previous discussion was based on our results on a non-GAAP basis, which includes certain non-cash items, such as stock-based compensation expense.

During the first quarter, stock-based compensation expense was approximately $907,000. GAAP net income was $2.6 million, about $0.10 per diluted share in the first quarter at a tax rate of 35%. A GAAP to non-GAAP reconciliation is presented in our earnings press release issued today.

Moving to our balance sheet, we ended the quarter with cash and equivalents of $45.5 million, up approximately $1.1 million from the end of the fourth quarter. Accounts receivable at the end of the quarter were $19.8 million, up approximately $4.9 million from the prior quarter. Trade accounts receivable days, sales outstanding of 70 days was consistent with our 2007 full year DSOs. As we have stated in the past, accounts receivable balances can vary in the quarter based on the timing of invoicing contractual milestones, which vary from quarter-to-quarter.

Total deferred revenue at the end of the first quarter was $28.9 million, an increase of $2.8 million from the end of the fourth quarter. As with accounts receivables and cash flows, deferred revenue can fluctuate quarter-to-quarter, depending on the timing of contractual milestone billings. Deferred revenue balances do not correlate to total contract value and therefore, we do not believe it is a meaningful forward indicator.

Turning to cash flows, our operating cash flow in the first quarter was $1.3 million. As with receivables, there is quarter-to-quarter variability in operation cash flow due to variability of invoicing, contractual milestones and payments for accruals. Capital expenditures for the quarter were $369,000 and we expect capital expenditures for the full year to be approximately $1.8 million. Overall headcount at the end of the quarter was 355 compared to 342 at the end of December, and we continue to increase staffing throughout the organization to support our continued growth.

Since the close of the quarter, we had a customer action that you should be aware of, which is disclosed in our form sheet 10-Q filing that was filed along with our earnings release. Let me start by saying that PROS values very highly all of its customers and works tirelessly to deliver value to them through our solutions. We have a tremendous track record of successful implementations and are very proud of the work we've been able to do for our customers.

We were disappointed to find out that one of our customers is seeking to terminate a contract related to one of our implementations. We intend to enforce our contract and to defend ourselves vigorously against their claim. It's premature to say much more at this time, except to say that we believe the litigation to be incidental to our business and considered that in determining the guidance we're providing.

Now, let me turn to our guidance for the second quarter 2008 and the full year. For the second quarter, PROS anticipates total revenue in the range of $18.3 million to $18.5 million, representing a growth rate of 28% from 2007 at the midpoint of our guided range. We are projecting non-GAAP operating income of $3.3 million to $3.5 million. And we are anticipating non-GAAP net income of $2.6 million to $2.8 million and non-GAAP earnings per diluted share of $0.10 based on estimated fully diluted share count of 26.9 million shares and the estimated effective tax rate used was 28%. Non-GAAP operating income for the second quarter excludes estimated FAS 123(R) stock option expense of approximately $935,000.

For the full year 2008, our expectations are unchanged at the top line and we continue to expect total revenue in the range of $76 million to $78 million, or a growth rate at the midpoint of 24% compared to the prior year. We are projecting non-GAAP operating income of $15.3 million to $16.2 million. We are projecting non-GAAP net income of $12 million to $12.6 million and non-GAAP earnings per diluted share of $0.45 to $0.47. Non-GAAP operating income and net income for the year excludes estimated FAS 123(R) stock option expense of approximately $3.7 million.

Diluted shares outstanding at the end of the year are estimated at 26.9 million and the estimated effective tax rate used is 28%. The 2007 non-GAAP earnings per diluted share for the full year would have been $0.40, using estimated 2008 weighted shares outstanding, reflecting the post-IPO share count.

Considered in the guidance provided a cost associated with being a public company that will be incurring on a full year basis. These include higher audit and legal fees, directors' compensation, directors and officers' insurance and S-Ox compliance costs. In addition, the guidance includes other factors, including lower interest income, given the current interest rate environment and a non-GAAP effective tax assumption of 28%.

We remain confident in our full year expectations, which also include our forecast for full year bookings in the range of $53 million to $55 million, consistent with the guidance we provided last quarter. And as always, this bookings forecast is exclusive of maintenance and support.

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

Thank you, sir. (OPERATOR INSTRUCTIONS).

And your first question comes from the line of Tom Ernst of Deutsche Bank.

Good afternoon, gentlemen. Thanks for taking my question.

Hi, Tom.

Hi, Tom.

How are you?

Great.

Good. So, it seems like you're expressing a lot of optimism, enthusiasm for health of the business. I'm curious, did you see any signs at all of customer apprehension in the quarter in terms of the environment from the macro? And in particular, as you look across your product sets, you've got kind of the big new engagements with customers, where you go through some of the design pocket margin and pocket pricing and some of those deployments can be long. And then, you have some of the upgrades and the optimizer and some of the smaller initiatives that can go much quicker. Did you see a differential between those types of projects in terms of the customers' behavior and appetite as that shifted here in this quarter?

Tom, that's an excellent question. We monitor and measure all aspects of our business and we look at the entire make up of our revenue, which consists of maintenance, the revenue generated from already existing contracts with implementations in progress as well as the new business revenue needed from bookings in a quarter under a high-visibility revenue model.

We also have between 50 and 60 active projects going on at any particular point in time and we do a deep dive audit on every single project, every single month. The accounting department and the professional services team that is responsible for time to value and implementation get together and audit every single project. What we are seeing, based on all of the metrics that we use, is no indication at this time that the macroeconomic environment is affecting our business.

Now, you know we had an incredible attendance at our pricing summit. We continue with our aggressive marketing program, with webinars. Attendance at the webinars continues to be strong. You know and have reviewed our world-class sales best practices, which include a thorough evaluation of the sales pipeline on a regular basis, taking all of the companies that are in our target market as suspects and then monitoring very objectively with fact-based metrics how they move from suspect to prospect to C-account, B-account, A-account and forecastable.

And as a result of all of those activities, at this point in time, we obviously feel comfortable because we are reconfirming our annual guidance. Now, that's not to say things might not change in the future. But right now, based on our traditional way of managing our business, the traditional metrics that we have used, we are confident in the future prospects of our business and we are reconfirming our annual guidance.

Very helpful. I'll tell you, one of the things -- Wall Street doesn't expect the airlines category for you to be a growth driver. And I haven't expected that as well. So, one of the things that surprised me out of your user's conference was the number of customers in the airlines category that were talking about upgrading and talking about evaluating or actually have already purchased the O&D product. I'm curious, is there an inflection in that business? Is there new demand that you're seeing, particularly on the O&D product?

The airline business has always been a good business for us. The interesting profile characteristic about that is that 95% of our business is international. And what you saw - well, at the conference, we had over 40 countries represented. And the interesting thing is we had global representation in all of our industries. But the airline industry in 2007, outside the United States, actually was very robust. It was profitable. They were growing. They're buying A380s and they're expanding their networks. And what you read about the domestic characters here in the United States is not representative at all of what has gone on historically in -- with international carriers.

Now, they're facing -- all carriers face high fuel costs. All carriers are facing the same kinds of pressures on a global basis. But so far, and you know airlines are the most sophisticated and the most mature users of science-based revenue and pricing optimization systems, so they will innovatively and strategically invest in such things. And you mentioned, as our very advanced O&D network optimization system, they will continue to strategically invest even in an uncertain economic climate.

So, we were thrilled with our participation at the summit from all the industry groups. But our airline business continues to be healthy. We're pleased with it. And the kind of headlines you read here in the United States are not representative of what we're seeing in that particular target industry.

Okay. One final question if you'll take it and I'll let others ask. If -- you mentioned that the healthy environment you've seen may change, potentially. If it changes, what's your ability and flexibility to keep costs [in it] and continue to deliver profit expansion?

The -- I think that the answer to that question is historically, we've always benefited from the high visibility revenue model. I mean, it's been an incredible, powerful tool to allow us to manage the business prudently and properly. At the beginning of a year, we all -- typically have had 70% revenue visibility into our revenue goal for the year at the beginning of the quarter. We have 90% visibility into the revenue for the quarter. It's not obvious to us, just to sidebar on your question, it's not obvious to us that a down economy doesn't create demand for our products. We've actually seen companies that are facing economic uncertainties and as a result, they actually accelerate the implementation of our software products.

But, back to if the economy got to the point that it did affect our business on a slowdown basis, then we would continue to benefit from the high visibility revenue model. We would have great visibility into our future streams and as you know, we've got a very aggressive hiring program. We continue to invest very aggressively in sales and marketing and R&D and obviously, we could slow down that investment if we thought it was prudent to do so.

Okay. And your next question comes from the line of Ross MacMillan of Jefferies and Company.

Thank you. So, the first question I have is for you, Charlie. The gross margin number is really expanding very nicely here. And as we go forward, I can understand from your guidance what your overall cost assumptions are. But can you maybe just add some color as to how we should think about it between the gross line and the operating line? And I guess my assumption is that we shouldn't see any deterioration on the gross profit line from here on out. So, that what it implies is a lot more investment in operating line items, i.e. mostly headcount. Is that fair?

Ross, again, we don't provide guidance at the gross margin level. We provide the guidance at the operating profit level. And the reason for that is we want to maintain ultimate flexibility relative to the investments we're making. But also, there is variability. I mean, there is variability and the gross margins have improved very nicely over the last three years or so now. But the product mix is a factor in that. I mean, obviously the implementation of efficiencies is a factor, but that can change.

I'm not suggesting -- the implementation efficiencies will continue, but the actual current mix of business from one quarter to the next can change. So, we're not providing guidance on that because we're not comfortable giving guidance at the gross margin level. We're comfortable giving guidance at the operating margin level. And we are spending across the entire organization. So, we're spending on professional services, other groups that go into the cost of services such as our maintenance and support groups and of course, we're spending on sales and marketing and R&D as well.

So, we're -- our view is we should give guidance at the top line, guidance on operating profits and guidance of EPS.

Okay. Thank you. And then, just one on the customer, you mentioned the customer, I guess, litigation. I know you probably can't say much about it, but just I guess two questions. One is has this occurred before? And secondly, does it have anything to do with a new product or can you provide any color on whether it relates to a new product or an existing product? Thank you.

I appreciate that. I can't comment much on it because it just happened. I mean, this is an absolutely new event for us. A new development, I should say. Has it happened before? No. It has not happened before. Is it a new product? No. It's not a new product. Okay? This is an existing product, it's in production. There's circumstances surrounding this situation that we haven't quite been able to sort out, but we don't believe that this is -- the circumstance is related entirely to PROS. But this is still very early and we're just now getting, really just now, quite frankly, getting organized around this. This is a real surprise.

Okay. Well, that's helpful. Thank you.

And your next question comes from the line of Tom Roderick of Thomas Weisel Partners.

Hi, Bert. Hi, Charlie. Good afternoon.

Hey, Tom.

Hey, Tom.

I want to ask a little bit about the demand environment here. Charlie, you indicated that 55% of your revenues now are coming from international. But with respect to where your pipeline is building, where you're focusing your efforts, where some of your new deals are coming in. Can you speak to whether you're seeing stronger demand and in having that geographic diversity, is that really helping you out as the U.S. economy slows here?

Well, I'd say that's one, remember, our scope as far as our sales efforts, it's global, as they have been for many, many years. We get variability from period to period. We're not suggesting that the revenues on the entire year this year are going to be 55% domestic. There will be some changes from quarter to quarter, but I mean our initiative is a global initiative. We happen to have closed some contracts obviously.

But it's shifted some of that revenue towards domestic, which we think is terrific. It's not a bad growth story for us to have the domestic percentage of our business going up, when there's obviously sentiment out there that domestic business should be going down. But remember, our revenue lags our bookings. So, we book earlier, we recognize the revenue over the implementation period.

So I guess in summary, global scope as far as our sales and marketing efforts, we still expect to have a very substantial portion of our business to be international.

Great. And maybe a broader question for you both. You've indicated, of course, that your bookings are on target for the year and you've reaffirmed your guidance for the year. But knowing that you do bigger deals and that the sales cycle is longer for a PROS sale than for many other software sales out there, how -- what sort of signs will you be looking for to gauge customer behavior? How will you know if customers are slowing their purchasing cycles down or what will give you a sense that some of those bigger deals you might be counting on later on in the year may not close? How are you sort of monitoring that process and what signs do you look for to make sure that you're on track?

Great question, Tom. We have a very metric based, fact based sales cycle and territory management, world-class best practice process. And what we do is we use very objective metrics in order to measure how a company is moving through the sales funnel from suspect, prospect, C-to-B-to-A. Very specific activities. Like do they have a budget? Do they not have a budget? That's very objective. It's not subjective at all.

And we have a number of metrics that we use in order to measure how companies are moving through the sales cycle and then when they become an A account, it becomes very clear that in order to close the business, there's a number of other metrics, such as we have been selected after the decision making process, there are usually strategic purchasing people involved, there are usually the customer or the prospect's legal counsel involved. Are they involved, are they engaged? Have we had an initial conversation on terms and conditions and statement of work and are they consistent with our best practices in the past and do we have sea level sponsorship? This is very important because if you've got a CEO or CFO that gets it and they want it, and they recognize it has value, even in an uncertain economy, they can make it happen.

So, we go through this very objective analysis of the sales cycle. Then, we can -- when it gets to an A account, before it moves to forecastable. We have very specific criteria and I don't want to outline all of those because that's part of our best practices that we've developed here at PROS. But it's worked very effectively in the past. It gives us confidence in our assessment of what the sales pipeline is and we continue to manage that in exactly the same we have in the past. And as I mentioned in my earlier statements, right now, it's a healthy situation that we're in. Obviously if we were concerned, we would not be reconfirming our annual guidance.

That's great. That's very helpful. Thank you.

Thank you. And your next question comes from the line of Richard Davis of Needham and Company.

A question I had for you, with regard to, I guess it would be Deal Manager, but does that get pushed out to me if I'm a sales person? And do I get that on a wireless device? Or how am I accessing that? And if not or if so, how are you kind of keeping up with the increasingly diverse ecosystem on that kind of edge of the network?

The Deal Manager product, there's -- we've got a new generation of Deal Manager. It's primarily a web-based product where you come in through the web with a very thin client user interface. It obviously is there primarily for sales forces where you have a territory sales person that is either negotiating ad hoc single transaction deals or a series of deals. It can be used in a wide variety of ways.

One of the versions of our product actually has an auto-pilot version where the customer interacts and actually submits the request for the deal and then the deal is optimized and the deal is actually closed without any human intervention. So, we're looking for e-Commerce and electronic transactions and our deal optimizer capabilities as well as supporting sales forces.

But we think the big opportunity going forward and what we've seen is we've diversified into manufacturing distribution and services is the use by sales people when they're actually out doing a B2B transaction and they need all of the information, including willingness to pay, recent velocity of sales, cost to serve of a particular customer and you can present all of the information they need in order to actually quote and complete the sales transaction at that particular time.

So, the different ways of delivering that capability are obviously within our capacity and our architecture and technology, but right now the primary use, and there's tens of thousands of sales people using this product today, is that they interact with the system, put in certain information that is related to the order entry process and then we come back with an optimized price or an optimized set of products or an optimized bundle of products or an optimized offer that they should make to the customer. And we're -- we see that as a big market opportunity for us as we go forward.

On two of the kind of sub-verticals inside manufacturing are chemicals and petroleum, particularly the latter. Have you seen especially good uptake there? What is their kind of capital budget view? Because I mean, obviously, they kind of opened the windows now and money flies in the door. But I was just kind of curious if they're spending aggressively or what's your point of view there?

Now, with some of that money that's flying in the door, it's coming out the back window to PROS. We've got an excellent footprint in both of those industries. We've got global customers in both of those industries. We, as part of our diversification strategy, was to focus on both discrete and process manufacturing. And we're very pleased with the progress we've made in chemicals and petroleum.

Got it. Okay. Thanks very much.

Thank you. And your next question comes from the line of Nabil Elsheshai of -- my apologies. Nabil Elsheshai of Pacific Crest. You may proceed.

Hey, guys. People usually don't get caught up on my company name, it's usually my name.

Hi, Nabil.

So, a couple of real quick questions. On the verticals, is there any color you can give us, either in terms of numbers of airline versus non-airline business in the quarter? And then, any commentary on penetration and uptake in the verticals in some of your newer verticals and how that's progressing.

That's an excellent question, Nabil. As I mentioned in my comments, we had sales in every one of our verticals. We don't talk about sales contracts and bookings by industry, and the reason for that is it can vary from quarter-to-quarter. But I said that we thought our sales pipeline was healthy. You were at our summit. I mean, you could see there were companies there from all the industries that we have targeted and customers on panels. So, we have not seen one industry have really an accelerated demand pattern over another.

We're seeing steady awareness at a CEO, CFO level of the power of price optimization and the power of PROS software products, really, pretty uniformly across all the industries that we've targeted.

Okay. What was the top line currency impact in the quarter?

The foreign exchange impact was $129,000 gain that went through gross margins and contributed 0.7% to the gross margins in the first quarter.

Okay. I've got it. Okay. And then, any change in the competitive environment. Is it still selling in PROS or are there any newer guys out there that you see in the manufacturing side?

We track about 30 different companies that are either directly or indirectly in our space with some scientific capabilities or analytic capabilities. We continue to see the same competitors, 80% to 90% of the time. That's [Zilient] and [Bendavo]. And in the -- in the manufacturing distribution and services business. In that segment of the business. And that's been consistent for the last two years. So, we really haven't seen any change in the competitive landscape.

Okay. Thank you very much.

Thank you. And as we have no further questions in queue, I will turn it back over to management for closing remarks.

Everyone on the call, we thank you very much. We know your time is valuable and we appreciate you investing time to learn more about PROS. We look forward to meeting you at investor conferences. We're going to be at a number of conferences later this month and we look forward to continuing our communication with you. We're particularly thrilled with the results of the first quarter and we look forward to working with you in the future. Thank you very much.

Thank you.

Ladies and gentlemen, this concludes the presentation. Thank you for your participation in today's conference and you may now disconnect. Have a great day.