Pros Holdings Inc (PRO) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter Three 2008 PROS Holdings, Inc. Earnings Conference Call. My name is Nora, and I'll be your coordinator for today.

At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference.

(Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Charlie Murphy, Chief Financial Officer. Please proceed, sir.

Thank you very much. Good afternoon, everyone. And thank you for joining us today for PROS Holdings Financial Results Conference Call for the third quarter of 2008.

I am Charlie Murphy, the company's Chief Financial Officer. Joining me on today's call is Bert Winemiller, PROS' Chairman and Chief Executive Officer. On today's conference call, Bert will provide the commentary on the highlights of the third quarter ended September 30, 2008, and then I will provide the 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 in 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 could cause actual results to differ materially from those projected in the forward-looking statements. Please refer to our prospectus or form 10-K and other filings with the SEC for the risk factors contained herein, and 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, and 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 pleased that we have met the high end of our revenue target, and exceeded our earnings-per-share target in the third quarter of 2008. And we believe it was a solid performance, given the current challenging economic environment. These results are a validation of PROS' proven business model of delivering high return on investment, pricing-and-margin-optimization-software products to our customers, and our high-visibility revenue model.

Our third-quarter results reaffirm the value of PROS' pricing-and-margin-optimization software as a strategic innovation, and a risk-mitigation initiative when companies face uncertain, unpredictable demand and volatile costs. PROS' proven track record, proven processes and proven solutions are the keys to our success, and drive our high level of customer satisfaction.

PROS reported third-quarter revenue of $19.3 million, at the high end of our guided range, and a 17% increase from the third quarter of 2007. Non-GAAP operating income of $4.4 million was up 35%, demonstrating the leverage in our model. Non-GAAP earnings came in at $3 million, or $0.12 per share.

We continue to execute our growth strategy and enhance 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 pricing-and-margin-optimization software.

It's important to recognize that the pricing-optimization industry, where we hold the leadership position, is still in its early stage. PROS is in the center of this shift to science-based pricing from spreadsheets, and the current destructive pricing practices.

We are confident that the return-on-investment benefits received by implementing our technology are just as important in a down market, a challenging market, as they are in an up, positive market.

CEOs and CFOs are realizing 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 challenging economy.

The natural reaction in a downturn is to retreat, cancel all new initiatives, pull back to the basics, tighten the ship. Some companies even accelerate unnecessary deep-discounting. But companies that focused on margin optimization during a challenging economic environment will be in a better position to remain profitable industry leaders.

In a tough economy, with uncertain demand and volatile costs, CFOs choose PROS to help them weather the challenge and emerge stronger. We believe that PROS is the best and safest choice for pricing-and-margin-optimization software.

During our second-quarter conference call, we believed it was prudent to lower our guidance for 2008 bookings, to $46 million to $51 million. The current uncertain economic conditions make forecasting more challenging, but as of today, we are reaffirming our annual bookings guidance for 2008.

We're very pleased that we hosted our first European Pricing Forum in Germany, in September, and it was a resounding success. We had nearly 100 attendees from 15 different countries, participating in over 25 sessions. Some of the topics included "Building Pricing Capabilities in a Global Organization," "Value Pricing in Economic Downturns."

Customers and prospects from each of our five target vertical markets were in attendance. Keynotes and presentations were made by pricing practitioners, as well as industry pricing experts.

We believe the strong attendance of the European Pricing Forum demonstrates that regardless of what's happening in the global economy, executives at innovative companies worldwide are recognizing the increasing value of pricing science, and are looking for software-based pricing solutions to improve their bottom line.

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

PROS provides pocket price, pocket margin, customer willingness to pay, customer cost to serve, win-loss ratios, market price, stretch price, and all of the relevant information, so that our customers can maximize margins and profitability by using optimized prices that reduce profit leaks. PROS software products optimally and dynamically price millions of individual transactions every day.

Our strategy continues to be to further penetrate our five vertical markets, continue to sell additional products to existing customers, and extend our pricing thought-leadership and technology leadership through the incorporation of science and technology innovations into our products.

In the third quarter, we continued to make headway in each of these areas. Year to date, we have achieved record revenue that is diversified across our five target vertical markets. Our revenue is also diversified geographically, and between B-to-B and B-to-C pricing solutions.

In the third quarter, 56% of our revenue came from outside the United States. We believe PROS' diversification in multiple dimensions is particularly valuable in a challenging economy.

During the third quarter, we made two significant announcements. Mrs. Ellen Keszler has joined our Board of Directors, and will also serve as a member of the audit committee, as well as the nominating and governance committee. With the addition of our newest director, PROS Board has been expanded to eight directors, five of whom are independent.

Ellen's leadership experience as a technology-company executive, and her wealth of financial experience will add significant value to the PROS Board of Directors, and to our shareholders in her role as independent director.

Additionally, in late August, we announced that the PROS Board of Directors had authorized a stock-repurchase program for up to $15 million of PROS common stock. The decision to implement a stock-repurchase program reflects the confidence of both our Board of Directors and management in the company's value proposition. And we believe that the purchase of our own shares is a solid investment, and will add to long-term shareholder value.

Even during this time of economic uncertainty, and a challenging business environment, the power of pricing continues to gain visibility in the press, and with industry-analyst reports. Our awareness activity metrics continue to be very healthy, and we remain optimistic about the long-term demand for our pricing-and-margin-optimization solutions.

More CEOs and CFOs are recognizing that pricing is one of the most powerful tools available to them, and they are recognizing the strategic importance of science-based pricing and margin optimization in a challenging economy. We feel good about our future prospects, and are confident we can capitalize on the future market opportunity.

Despite the current uncertain economic conditions, we are pleased with our third-quarter results. This achievement is the result of the hard work of over 350 employees at PROS who are smart, dedicated people, doing great things to bring pricing excellence and pricing-and-margin-optimization capabilities through our high-value-software products to our customers.

I'll now turn the call over to Charlie, so he can provide you with the financial details, and our outlook for the fourth quarter and the year.

Thank you, Bert. PROS had a solid third quarter. Revenue for the third quarter of 2008 came in at $19.3 million, up 17% from third quarter of 2007, and at the high end of our guided range.

As previously communicated, in accordance with our revenue-recognition policy, PROS does not recognize any revenue or contract signing. License and implementation fees are bundled together, and revenue is recognized on a percentage-of-completion basis over the implementation period. This provides visibility as to future quarters' revenue. There can be variability in revenue from quarter-to-quarter or modest results from seasonality, but, rather the timing of when an implementation starts or finishes, the implementation effort required, the number of products being deployed and the contract size.

Consistent with our historical experience, we believe we continue to have approximately 90% of revenue visibility going into a quarter.

Within revenue, license-and-implementation revenue was $13.7 million in the third quarter, or 71% of total revenue. This was an increase of 18% over the third quarter of 2007. Maintenance-and-support revenue, which makes up the balance of revenue, was $5.6 million in the third quarter, and was up 17% over the third quarter of 2007.

A real strength of PROS is that our revenue is diversified geographically, across our five target vertical markets, and between B-to-B and B-to-C customers.

For the third quarter of 2008, our GAAP gross profit was $14.4 million, up 22%, and operating income was $3.4 million, up 19%, compared to a GAAP gross profit of $11.8 million, and operating income of $2.9 million for the third quarter 2007.

GAAP net income was $2.4 million, or $0.09 per diluted share in the third quarter, at a tax rate of 35%, compared to $3.5 million, or $0.13 -- diluted share -- in the third quarter of 2007, at a negative tax rate of 19%.

2007 tax rate reflects the benefits from research-and-experimentation tax credits, research-and-experimentation tax-credit carry-forwards that were fully utilized in Q3 2007, and the reversal of a valuation allowance against deferred-tax assets. Now, that explains the 19% negative tax rate in 2007.

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. The following comments and our statements of operations refer to results on a non-GAAP basis.

Gross profit was $14.6 million in the third quarter, resulting in gross margins of 75.5%, compared to gross margins of 72.2% in the third quarter of 2007. We are pleased with the improvements in our gross margins on a year-over-year basis. Gross margins benefited from 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 business.

We can't be certain that the previously mentioned factors, which have contributed to historical gross-margin growth, will continue. We are pleased with the improvements in gross margins, despite a foreign-exchange loss of approximately $300,000 in the quarter, that reduced gross margins by 1.5%.

Selling, general, and administrative expenses in the third quarter were $5.2 million, or 27% of revenue, and increased 19% from the third quarter of 2007. The year-over-year increase is primarily attributable to an increase in sales-and-marketing personnel, and an increase in the provision for doubtful accounts.

We expect SG&A costs will continue to increase due to our continued investments in sales-and-marketing activities in order to capitalize on future market opportunities.

R&D expenses in the third quarter were $4.9 million, or 25% of revenue, and increased 16% from the third quarter of 2007, as we continued to make investments in our suite of pricing-and-margin-optimization-software products.

Non-GAAP operating income in the third quarter was $4.4 million, an increase of 35% for the same period from a year ago, and exceeded our guidance. Operating income exceeded the high end of our guidance as a result of the continuation of good gross margins and lower-than-expected operating expenses.

Operating margins in the third quarter increased to 23%, compared to 20% in the third quarter of 2007. Other income was approximately $261,000 in the quarter compared to $492,000 in the third quarter of 2007. The decrease was attributable to a reduction in interest rates.

As we discussed on our second-quarter earnings call, Congress recessed for 2007, without extending the research-and-experimentation tax credit. Our effective tax rate historically has been lower than the federal statutory rate of 35%, largely due to the application of research-and-experimentation tax credits.

However, we are pleased to inform you that, in October, the credit was renewed retroactive to January 1, 2008, and continues through the year ended December 31, 2009. And this is consistent with the past historical experience regarding this credit.

Under GAAP, the cumulative effect of the reduction in the company's federal tax rate for 2008 will be recorded in the fourth quarter. As such, the GAAP effective tax rate for the third quarter of 35% does not reflect the benefit of the research-and-experimentation credit.

Since the credit was passed, we believe our non-GAAP effective tax rate of federal, state and foreign income taxes will be approximately 29% for the fourth quarter and full year of 2008. For our previous non-GAAP EPS guidance, we had been assuming the research-and-experimentation tax credit would be passed, and we have been using the lower tax rate.

Non-GAAP net income for the third quarter of 2008 was $3 million, or $0.12 per diluted share, using a 35% tax rate, exceeding guidance. In the prior-year quarter, non-GAAP net income was $3 million, or $0.11 per diluted share, using a 20% tax rate. The 2007 tax rate reflected benefits from our research-and-experimentation credits, and the research-and-experimentation tax-credit carry-forwards that were completely utilized in the third quarter of last year. Diluted shares were approximately $26.3 million for the third quarter of 2007 and 2008.

Moving to our balance sheet, we ended the quarter with cash and equivalents of $48.1 million, a decrease of approximately $800,000 from the second quarter. The decrease is primarily attributable to shares repurchases in the third quarter. In Q3, we repurchased 286,000 shares at a cost of $2.7 million. As of September 30, 12.3 million remained in our repurchase authorization.

Net accounts receivable at the end of the quarter were $21.8 million, an increase of approximately $4.9 million from the second quarter of 2008. Trade accounts-receivable day-sales outstanding were 72 days, compared with our 2007 full-year day-sales outstanding of 71 days. Additionally, we have had very good cash collection subsequent to September 30, 2008.

As we have stated in the past, accounts-receivable balances can vary in a quarter, based on the timing of invoicing contractual milestones, which will vary from quarter-to-quarter.

Total deferred revenue at the end of the third quarter was $23.5 million, an increase of approximately $2.3 million from June 30, 2008. As with accounts receivable and cash flows, deferred revenue will 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 for the three months ended September 30 was $2.3 million. As with receivables, there was quarter-to-quarter variability in operating cash flow, due to the variability of invoicing and subsequent collection of contractual milestones, and payments for various expense accruals.

Had the research-and-experimentation credit has been in effect all year, it would have been an approximately $800,000 increase in our year-to-date operating cash flows.

Capital expenditures for the quarter were approximately $300,000, and we expect total capital expenditures for the year to be approximately $1.5 million. Overall headcount at the end of the quarter was 384 personnel, compared to 342 at the beginning of the year.

Now, let me turn to our guidance for the fourth quarter of 2008, and full year. For the fourth quarter, PROS anticipates total revenue in the range of $19.6 million to $20.6 million, representing a growth rate of 13% over 2007, at the midpoint of our guidance.

We are projecting non-GAAP operating income of $4.1 million to $4.5 million. Also, we are anticipating non-GAAP net income of $3 million to $3.3 million, and non-GAAP earnings per diluted share of $0.11 to $0.12, based on the estimated fully diluted share count of 26.5 million shares, and using an effective federal, state and foreign tax rate of 29%. This 29% reflects the benefit of the research-and-experimentation credits.

Non-GAAP operating income for the fourth quarter excludes FAS 123-R stock-option expense of approximately $1.1 million. While the current economic conditions make forecasting more challenging, we are reaffirming our previous guidance for the full year, and we expect total revenue in the range of $75.5 million to $76.5 million, or a growth rate at the midpoint of our guidance of 22% over the prior year.

We are also reaffirming our previous guidance for bookings. And our full-year booking guidance is $46 million to $51 million. As always, our bookings forecast is exclusive of maintenance and support that commences at the time the implementation is completed.

For the full-year 2008, we are projecting non-GAAP operating income of $17.2 million t o$17.6 million, which represents a 38% increase over 2007 at the midpoint of our guidance. We are projecting non-GAAP net income of $13 million to $13.3 million in non-GAAP earnings-per-diluted-share guidance of $0.49 to $0.50. This is an increase from our previous guidance of $0.45 to $0.47 for the year. Diluted shares outstanding at the end of the year are estimated at $26.5 million, and the estimated effective tax rate used is the 29%.

The 2007 non-GAAP earnings per diluted share were $0.46, and would have been $0.41, using the estimated 2008 post-IPO-weighted average shares outstanding. Non-GAAP operating income and net income for 2008 excludes estimated FAS 123-R stock-option expense of approximately $4 million.

On a GAAP basis, we expect our effective tax rate to be approximately 13% for the fourth quarter, obviously reflecting the cumulative adjustment of the research-and-experimentation credits for the year, and 29% for the full year, after giving effect to the R&E credit being recorded in the fourth quarter.

The [syrupy] revenue growth for PROS has not been solely impacted by current-year bookings. Revenue growth is also impacted by four areas -- one, the duration of implementations, particularly those that exceed one year -- second, growth-and-maintenance revenue resulting from completed implementations -- third, enhancement efficiencies and implementation processes -- and, fourth, cost-of-living increases for maintenance services.

I will elaborate on these points. First, implementation durations -- as I have mentioned, PROS does not recognize any revenue or contract signing. And many contracts have extended implementation durations -- in some cases, greater than one year. For example, there are pre-2008 bookings that will generate license-and-implementation revenue in 2009.

Second, maintenance growth -- the increase in future maintenance revenue coming from completing in-process implementations -- for example, maintenance growth was 13% for the first nine months of 2007, compared with the first nine months of 2007. And it was 16% for the first nine months of 2008, compared to the first nine months of 2007. As implementations are completed, we expect maintenance revenue to continue to increase.

Third, implementation efficiencies -- the percentage of revenue recognized from bookings in a year has been increasing as a result of greater implementation efficiencies. This has resulted in an acceleration of the percentage of revenue recognized from contracts booked in the same year.

And last, annual maintenance cost-of-living increases -- generally, there is a provision in our contracts to increase maintenance fees annually. This increases maintenance revenue each year. It is the layering effect of bookings for more than one year -- the maintenance growth that has given PROS its high-visibility revenue model.

As a result of these factors, and a growing awareness of the need for pricing technology, and current activity levels, we remain confident that PROS has an attractive long-term opportunity.

There is [tightened-up] certainty regarding future expectations, given the current economic environment. The company has been in business for over 20 years. The PROS management team has experienced challenging periods in the past. And the company remained profitable and achieved positive cash flow during those periods.

While there are no assurances that past performance can be continued, our experienced management team, the financial strength of the company, and its high-visibility revenue model is particularly helpful during such periods.

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

Thank you.

Thank you. (Operator Instructions). And your first question come from the line of Thomas Earnest of Deutsche Bank. Please proceed.

Good afternoon. Thanks for taking my question.

Thank you, Tom.

Hi, Tom.

First question -- I guess the gross-margin performance, especially in light of an FX hit is surprising, in that it's -- continues to be strong and expanding. What is driving this? Is there a mix issue -- that you're getting more license consistently with time? What's happening to service margins within that blended revenue item you report?

Tom, this is Charlie.

Yes, we don't get into -- of course, in our guidance, we don't get into that level of detail, but let me give you some color on this.

Clearly, we benefit from increasing maintenance. And maintenance carries the higher gross-margin component, between license-and-implementation, maintenance is higher. And I think, generally, the mix between license-and-implementation really hasn't changed very much.

I think what it really comes down to is that the company's been able to maintain a prudent cost structure as we've gone into this period of Q3, and as we go into Q4. Obviously, historically, we've had good margin improvements as well, but I think it's a combination of the margin improvements on maintenance, the prudence that I think that we've demonstrated coming into the third quarter and going forward, and, again, the growth in overall revenue. And we've done a -- I think we've tried to do a good job of keeping our overall costs under control.

What's happening to your implementation and consulting-services margins? I know you don't disclose them, but is there an expanding trend there?

Well, I -- what I would say is that it's really difficult to carve out all of those components internally. But we do believe that, overall, since I made a comment that the implementation timelines are coming down, because it's becoming increasingly more efficient to deploy our products -- that has two benefits -- one, it allows to get more contract -- I'm sorry -- more revenue from a contract earlier. And if you could do that, then, obviously, there's some benefit to the margins as well.

Okay.

And, perhaps, expanding on this -- you mentioned one of the -- I think it was the third of your four areas -- that explained why revenue growth was different from bookings growth -- the enhancement of implementation efficiencies. How were you able to do this?

And I guess the primary thing I'm interested in first is -- is this something that's driven by customer demand? In other words, are -- is this something that might reverse itself in a weak macro, where the customers want to implement much slower? Or is this something you've been driving purely through your own implementation methodologies?

Yes, I -- Tom, this is Bert.

Our own implementation methodologies have become more and more efficient over the last two years. And when we were on the road show with the IPO, we said that we will continue to invest not only on the integration of science into our products and the pricing functionality, but also in the ability to get time-to-value quicker for our customers.

Now, the time-to-value faster is partly a result of some of the capabilities we've built into our software to implement -- configure -- more efficiently, more effective in a shorter period of time than we were able to do previously. So those implementation efficiencies have had a very positive impact on our gross margin, and we're going to continue.

We're an R&D company. We're a technology company. We're a science company. But we're not investing in R&D in just one area. We're investing in R&D in all of these areas. And we also recognize that customers are under incredible pressure in this uncertain economic environment, and they want results fast.

So we have implemented some advanced capabilities to configure our software in a much shorter period of time than we were doing even six or 12 months ago. And now we actually have some implementations where the first identification of price-based profit leaks are actually taking place in an actionable form within 30 days.

So there's a benefit in time-to-value, but there's also a benefit in implementation efficiencies.

I guess -- one more to probe that further -- is the improvement primarily system-and-technology driven, or is this training-and-people, cumulative-experience driven? I'm trying to get at how sticky you feel that those improvements and implementation efficiency are, even if, perhaps, people leave, or if these are things you can extend further with technology?

It's all of the above. Yes. It's all of the above. If you're software is easier to implement, it's easier to get value quicker, than it's easier to train and get users up to speed. And if it's easier for PROS Professional Services to implement a real-time integrated science capabilities with advanced science segmentation, and it's that -- the advanced price-optimization guidance that we provide -- all of those things come together.

So it's not one thing. It's the total package that's driving -- time-to-value is quicker, implementation is more efficient.

Okay. If you'll permit, I'll ask one more question in a different direction, then I'll let others go.

What is your expansion plans today? You mentioned the headcount -- 384 -- but are you hiring in this environment? And the flip side of that question is -- how quickly do you think you can control cost if demand slows even further than you think it might.

Okay. Tom -- good questions. "Are we hiring?" Yes. We've continued some headcount growth as we've gone into the fourth quarter of this year. The growth for the first nine months of the year -- you've got these numbers on different leases -- was approximately 12% headcount growth for the year. Going into the fourth quarter, that's slowing down. We're not going to maintain that level of headcount growth going into the fourth quarter. We want to be prudent as we move to the end of the year. That's the headcount-growth piece of it.

What was the second part of your question again?

It's our ability to manage.

Our ability to manage? Yes, okay. Tom, this gets back to the high-visibility revenue model. And, of course, as you know, we've got 40 to 50 implementations going on at any one particular point in time. All of those implementations are reviewed every month by our accounting group, along with the Professional Services team. And we monitor each of these projects very, very carefully.

So if we see these projects, for any reason, slowing down -- and we haven't yet -- we -- that would show up, obviously, in our revenue recognition. We'd have that visibility. And we'd be able to act accordingly.

Yes. Okay. Thank you, again.

Our pleasure. Thanks, Tom.

And your next question comes from the line of Aaron Schwartz of JPMorgan. Please proceed.

Good afternoon. I just had a sort of high-level question. But when you're out talking to customers, I assume those customers right now are very focused on the expense side in removing costs from their model. And I'm just wondering if you have to make a change in your marketing to really take the [I's] and move them from expenses to the pricing or revenue line, or -- you've taken a change in strategy about doing that?

Aaron, that's a great question. What we would say to you is there is more emphasis on margin optimization and cost of capital, and cash ramifications of deals than there might have been, say, two years ago. So when you think about pricing, you don't think about it as just the list price, but you think about all of the components in the price waterfall, all down to pocket margin.

And what we're seeing is CFOs, in particular -- where they're faced with this uncertain demand -- non-forecast-able demand, volatile costs. What they're really looking for is advanced science-based pricing optimization and margin optimization from PROS that will allow them, without wholesome changes in their pricing processes, to implement the proper price in order to optimize margins.

But, absolutely, the focus is on margin, taking into account volatility of costs. And the cost of capital and cash flow are much more sensitive in terms of the criteria that CFOs are looking at, vis--vis what was going on two years ago.

Okay. That's helpful. And if we look at the verticals that you're exposed to, certainly, some are probably in a little better health than others. And I'm just wondering, sort of -- if you look at sort of repositioning some of your sales-and-marketing folks on the verticals that are a little healthier -- one, if that is going on, sort of how quickly can you do that just to sort of optimize the yield that you have out of your spend?

Aaron, that's a great question. I think that's more answered better in terms of where we are in the lifecycle of the category. I mean, we're still dealing with innovators. We're still in a -- we're still dealing with the first movers. We're -- the CEOs and CFOs that get it, and understand the power of pricing and margin optimization are our buyers. That's who we're selling to.

But 98% -- 99% of the companies that are out there are still using spreadsheets. So we are so early stage in terms of the penetration of these industries, and there still is a continuing demand from the innovators and first movers, that we don't see any industry shift in terms of what's happening in our market today.

We think all of these industries need it. We think that it'll be a must-have application sometime down the road -- three to five years. But right now, the innovators and first movers -- where you could -- even in the face of a challenging economy are looking at margin optimization and how to capitalize on pocket margins, without wholesale attacks on their pricing policies -- that they actually end up being detrimental to their overall business strategy.

Okay. And last question for me -- I was just wondering if you could provide some color on sort of the assumptions you're making in terms of mix -- new versus, maybe, installed base -- sales going forward. I mean, does that change as the environment gets a little tougher -- and then, also, sort of the implication on margins there?

I think for the third quarter and year to date, it hasn't changed. And, historically, it's been one-third of our sales are back into our existing customer base. Approximately two-thirds are into the new customers. We haven't seen a change in that for the first nine months of this year.

You can have variability from quarter-to-quarter, but we haven't seen it -- we haven't seen the change.

Okay, great. Thanks for taking my questions.

Thank you, Aaron.

My pleasure.

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

Hey. This is actually [Guron], for Tom.

Hey, [Gur].

Hey. How are you guys doing?

Good.

Excellent.

So, guys, a lot of software companies out there are missing pretty dramatically -- showing a lot of signs of slowing down. How are you guys able to maintain the bookings guidance and the revenue guidance, especially given the fact that you guys do sell big deals?

I understand the visibility, but the bookings guidance is sort -- is a surprise to me.

I think it's outstanding executive management.

I'll support that.

No, listen, that's a great question.

Listen, we're monitoring -- as you know, we're a bunch of [quantus] here, and we monitor all the statistics and metrics in our business. And we are -- we're scrutinizing every aspect of our business, even greater than we did in the past. And what we are constantly looking for are any indicators of softening that would obligate us to change our guidance.

I think the other thing is that if you go back at the end of the second quarter, we felt, based on the commitments we had made during the IPO, and throughout our history as a public company -- to be transparent and to tell our investors anything that we saw that might be an indicator -- change our forward-looking outlook.

And what we did was we analyzed the situation. We decided it would be prudent to change and lower our annual bookings guidance at that time. When we looked at it and when we analyzed it, we analyzed all of the statistics and the facts and the metrics we had at that time. We lowered our guidance. And we also had an eye to being prudent so that we wouldn't have a continuous lowering of guidance quarter after quarter after quarter.

What we will tell you is that exactly what we anticipated based on the facts at that time -- we though were going to happen, happened. So now we are reaffirming our annual bookings guidance for the year.

Obviously, long term, we think this is a huge market, and a great opportunity. We're continuing to invest in R&D. We're continuing to integrate science into our products. We think, and we believe, that we're extending our leadership and pricing and margin-optimization capabilities.

And even in a down market, there are going to be CEOs and CFOs that recognize that they need pricing-and-margin optimization. And we think we're the best and safest provider. And we can do the best job of being their long-term partner to help them achieve pricing excellence.

That's great. And then, along those lines, are you seeing any sort of change from your competition? Are they getting more aggressive out there with pricing -- any sort of change in that dynamic?

We really haven't seen a change in the competitive landscape. I would say that, if anything, there's more sensitivity on buyers today -- the financial viability, the financial strength of PROS and the fact that we're a public company, and we adhere to good governance.

I mean we are absolutely committed to best practice in terms of good governance and transparency. And I -- and that's very much appreciated by CEOs and CFOs, when they're making a decision on a long-term partner.

That's great. And then one final question from me -- during the last slowdown, you sort of changed your strategy -- you didn't change it, but you diversified, and you went after some new verticals.

Do you have any plans, sort of as we kind of encounter some more economic slowdowns -- (inaudible) some of these newer verticals -- do you see any opportunity to go after some new markets here?

No.

Fair enough.

We've got a big opportunity right in front of us. The last thing we're going to do is distract ourselves.

I appreciate it. Thanks a lot, guys -- good quarter.

Thanks, Gur.

Thank you.

And your next question comes from the line of Richard Davis of Needham & Company. Please proceed.

Okay. First, an easy question -- if we're in the early adopter's phase -- if you're a believer in [Geoffrey Moore] and things like that, you have to cross the chasm. Are we close to the chasm -- miles from the chasm -- minutes from the chasm?

If I could forecast the future, Richard -- I mean, we don't know.

No?

We just know that there's a lot of activity. There's lots of CEOs and CFOs that get it. But where we are in that particular spectrum, we don't know.

So then I'll make the second part of this question harder, and -- because you know that I've written about this -- so with regard to '09 -- I know you didn't guide or anything like that -- do you have at least a sense of a banding of high, low, or anything like that, that you'd be willing to talk about in terms of outlook, at least in your opinion? Obviously, we'll make our own judgment. But do you have any thoughts there?

Richard, it's just too early for us to be talking about 2009. The first time we plan on giving guidance will be when we report the year-end results, which will be in February '09.

Got it. We can talk about '10 -- maybe '11.

Yes, absolutely -- 2011, 2012.

Yes, exactly. How's Q3 '12 looking? Okay, good. Those are -- most of the questions have been asked, so thanks so much.

Thank you, Richard.

Thank you, Richard.

And your next question comes from the line of Nabil Elsheshai, of Pacific Crest Securities. Please proceed.

Hey, guys. This is Nabil.

Hey, Nabil.

Hi, Nabil.

I've got to follow-up on that -- the kind of bigger-picture question. So when you guys lowered your guidance -- since then, obviously, some things have changed. We've heard from other software companies that, maybe, things got worse -- a lot worse -- in October.

If you were to look at your longer-term pipeline, have you seen changes in that? And in the past, you've given more qualitative commentary about levels of interest and webinar attendance, and those types of things -- and any commentary you could give this time?

Nabil, absolutely. You're on the right subject. What we have experienced over the life-history of the company is long sales cycles. And it's a big ticket. And our ASP is high. It takes a commitment on the part of a company in terms of process -- implementation of science-based pricing -- a complete rethink as they abandon spreadsheets. So we've always had long sales cycles.

What we have experienced, starting in 2005, up to and including 2008, is an increasing demand and an increasing awareness of the power of pricing. If we look at it over the long term, we would say "Every indicator, every metric" -- our European Forum, the number of people that are here in the building -- our conference rooms are busy -- all of those kind of indicators.

And if we didn't listen to CNN and all of those cable channels, it would be hard to translate what's going out in the economy to what we see in terms of tactical activity every day. Now, that said, we still know that there is an increasing scrutiny and a more intense approval process on deals than there was a year ago, in 2007.

If things remain the same, then you would say, "All looks great." If things get more intense, there's more levels of approval, then the sales cycles can change. But if you look at the facts the way we're looking at them right now, with the metrics, we're very comfortable with where we are, we're very pleased with our results year to date, and we are reaffirming our booking guidance for 2008.

Okay. Fair enough. And then -- you probably can't comment on this, but any update on the lawsuit -- the deal that was delayed or, potentially, canceled?

I can give you an update. It's going to be a protracted, long legal process. I think the last time we talked about this -- we don't expect much to happen from a substance standpoint until the fourth quarter of 2009 and, perhaps, going into 2010.

As of today, other than just passing documents back and forth -- the standard legal process -- there's really nothing to comment on.

Okay, great. Thank you very much.

Okay.

(Operator Instructions). And your next question comes from the line of Ross MacMillan of Jefferies. Please proceed.

Thanks. To Charlie -- you're guiding up on revenues, and I think your gross margin (inaudible), it would have been up sequentially as well. And it sounded like you were decelerating hiring into Q4, yet you're kind of guiding down sequentially in operating income.

Can you just kind of square the circle for me on that? Thanks.

The operating-income guidance that we provided -- and let me just get back to the numbers here. I guess through the -- and you're saying we're decelerating the operating-income guidance itself?

Well, the range is 4.1 to 4.5 -- so I guess at the midpoint or higher, it's in line with last quarter. But revenues are up. Your gross margins seem to be moving in the right direction as well, sequentially. And your hiring is slowing. I just thought you'd get more leverage, I guess, than that which you're guiding to.

That's not the way the numbers are rolling out. They're rolling out to what we've guided.

Okay.

The FX impact on gross margin -- is that -- was that -- when you said "a 1.5% impact," is that sequentially, or year-over-year?

That was within the quarter.

(inaudible).

It's 1.5 percentage points. So that's what I'd have to -- to normalize it, that's what I should think about.

It was 1.5 in the quarter.

Okay. And does -- and from an FX standpoint, overall, we're moving from a period of weak dollar comparables to stronger dollar comparables. How should we think about that? And, I guess, specifically -- I don't know if I've asked this before, but what's the -- have you had a benefit from FX as we look backward over the last few quarters? Has it been material, or how should we think about that? Thanks.

Historically, if you went back to 2007, it's a non-issue. It's nothing. Historically, we have not had many contracts denominated in currencies other than U.S. dollars.

We happen to have, coming into this year, a couple of contracts that were denominated in Euros. And for the first half of the year, there's really no material impact at all. There is little gain in the first quarter, a little loss in the second quarter.

As you may know, what happened is that as the crisis -- the financial crisis really hit very hard in the third quarter, there was a run to the U.S. dollar and the yen. And, across the board, other currencies just came down, and the U.S. dollar strengthened, as did the yen.

And so the question is, "Are we at the bottom? Have we strengthened as much as we're going to strengthen?" I don't know. I'm not a forecaster of foreign-exchange rates. But, as you know, it was a precipitous drop in the third -- precipitous strengthening --

Yes.

-- of the U.S. dollar in the third quarter. And that continued somewhat through the -- through the fourth quarter, to date.

So if -- I guess the question is if rates stayed the same, let's say, from now, we'd still have a negative impact in Q4 because, I think, on average, the rate's probably stronger for the dollar as of today, than it was for the average rate through Q3.

Right. And that -- and to the extent that -- yes, that's true. And that has been taken into consideration in the guidance that we --

That probably helps explain some of the original question.

Okay.

Last one -- just on EPS -- just to be clear, the non-GAAP EPS change reflects the adjustment through the prior quarters for the RE credit. That's right?

Well, no.

The non-GAAP EPS, from a guidance standpoint, is at 29% for the fourth quarter.

For the full year, though?

And for the full year, it's 29%.

Got it. So we should go back and restate the prior quarters at that rate? Is that the way to get to that full-year number?

Well, it was 28%, 28% -- just about 30% in the third quarter, and 29% in the fourth, and (inaudible) --

I've got it. So it's really no -- okay. No change, there.

No change there.

Okay, perfect. That's it for me. Thank you.

Thank you.

I'd now like to turn the call over to Bert Winemiller, Chairman and CEO, for closing remarks.

We went -- we know there were a lot of calls tonight. And we really appreciate you taking the time to get an update from PROS. We're, obviously, pleased with our results. And if you have any follow-up questions, feel free to call Charlie or Bert at any time. We want to be as transparent, as open with our investors, as we possibly can.

We also, for the employees that are on the call -- we want to thank all of our employees for just the outstanding job they're doing in delivering value to our customers. Thank you.

Thank you.

Thank you. Ladies and gentlemen, this now concludes your presentation. You may now disconnect. Have a great day.