Pros Holdings Inc (PRO) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2009 PROS Holdings, Incorporated Earnings Conference Call. My name is Janeida and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Charlie Murphy, Executive Vice President and CFO. Please proceed.

Thank you very much, operator. Good afternoon everyone and thank you for joining us today for the PROS Holdings financial results conference call for the third quarter of 2009. Joining me on today's call is Bert Winemiller, PROS' Chairman and Chief Executive Officer. In today's conference call, Bert will provide a commentary on the highlights for the third quarter of 2009 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 and 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 Forms 10-Q, Form 10-K, and other filings with the SEC and the risk factors contained therein. 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 distributed earlier today, and can also 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 with our financial performance in the third quarter of 2009, as revenue of $16.5 million met the high end of our revenue guidance. Non-GAAP operating income, at $2.6 million, was 15.5% of revenue and exceeded the high end of our guidance. Non-GAAP earnings came in at $1.9 million, or $0.07 per diluted share, also at the high end of our guidance. This was a solid performance given the current economic environment.

PROS is a global company with revenue diversified across geographies and our target industries. We believe our diversification in multiple dimensions provides us with a competitive advantage in the pricing and margin optimization market and benefits us especially in difficult economic environments.

Revenue that came from outside of the United States represented 61% of third quarter 2009 revenue and 59% of third quarter license and implementation revenue came from our target industries of manufacturing, distribution, and services.

As we have stated on past conference calls, we believe the market for pricing and margin optimization software is still in the early innovator stage and the Gartner Group has stated that market penetration is in the low single digits. Innovative executives are recognizing that pricing is one of the most strategic and powerful tools available and it is resonating that a small improvement in pricing can have a large impact on operating profit. To realize the high return on investment and fast time to value, C-level executives must embrace pricing excellence best practices, focus on optimizing margins, and implement PROS science-based pricing and margin optimization software.

A Fortune magazine article earlier this year highlighted pricing as a key area of focus during a recession. The article stated, "the most important decisions businesses must make in this recession is what to do about prices. The matter is critical because it affects not only immediate results but also longer-term competitive positions." The article closed with, "Pricing is always important, but in booms you don't have to get it exactly right. Now you do."

The return on investment benefits of pricing optimization software are especially important in a challenging down market when demand is more difficult to predict and costs are more volatile. We believe more companies will turn to proven science-based pricing and margin optimization solutions in the future. We also believe PROS is in the center of this shift to science-based pricing from spreadsheets and current destructive pricing practices.

The increased recognition of the value of pricing, increased analyst coverage and third party interest in pricing is creating a viral network interest in pricing optimization. PROS software products deliver significant benefits to companies that have a large number of B to B customer segments or products. PROS optimizes price lists for companies with published list prices, price volume agreements, dynamic price lists, group purchase organization pricing, complex product family and category pricing, and other complex pricing challenges.

PROS also specializes in transaction price optimization, such as optimized prices for negotiated deals, optimized price guidance for sales forces with pricing power, customer-specific price quotes, multi-tiered distribution channels, and other complex transaction-level B to B pricing challenges. PROS believes there are thousands of companies that have one or more of these pricing needs and as a result, we believe there is a multi-billion dollar market opportunity for PROS to capture.

PROS' proven track record, proven processes and proven solutions are the keys to our long-term success and drive our high level of customer satisfaction. We continue to develop strong partnerships with our customers based on successful implementations, including replacing competitors in all of our target markets. We are continuing our focus on sales and marketing to position us to take advantage of the large market opportunity as the economy improves.

Along those lines, I am pleased to announce Chris Jones, our newest addition to the PROS leadership team. Chris is an experienced enterprise software sales executive and will lead global sales efforts in our manufacturing, distribution and services markets. Chris brings valuable leadership experience as a technology company executive who led a business unit with over $600 million in annual revenues. We expect his wealth of experience in generating revenue growth and building strategic business relationships will add significant value to our sales efforts.

We are also focused on our strategic goals of delivering significant value to our customers early in our implementations, and then increasing return on investment over time, and at a low total cost of ownership. Thus, we continue to invest in people, product and processes to drive our science and product innovation and to increase our competitive advantage, as demonstrated by our continued heavy R&D investment, which was at 29% of revenue for the third quarter on a non-GAAP basis.

Many customers have identified several million dollars of profit opportunity within the first 30 days of a PROS scientific analytics implementation. They do not have to wait until all the PROS software product modules are in full production to achieve a return on their investment. The return on investment they receive increases with each phase of the implementation.

PROS' products are high performance and scalable with a single application database and a single set of integration interfaces. Our continued investment in R&D is focused on improving our configuration capabilities and our common code platform that allows us to make rapid enhancements and innovations that continually increase the return on investment for our customers.

We are thrilled to be able to provide fast time to market product enhancements that are generally available to all PROS pricing solution suite customers. These releases are the result of a rigorous development methodology with world-class quality assurance, automated installation and an efficient update process.

PROS' industry-specific templates and platform-based configuration allows users to tailor our software products to their specific business requirements with no custom coding. PROS also has very flexible integration options with ERP, SCM, CRM, BI and data repository systems. We have all of the required SAP certifications and we have implemented our software for some of the largest SAP customers in the world. PROS commitment to lowest total cost of ownership has been the key reason many CIOs have approved PROS as their standard for enterprise pricing software.

As a thought leader in pricing science and software, we continue to be an active member and sponsor of two well-respected professional organizations dedicated to pricing. We are Pricing Technology Expert members of both the Professional Pricing Society, PPS, and the European Pricing Platform, ePP. We present and exhibit at these societies' conferences and conduct co-branded educational webinars in addition to our own webinar series.

Let me describe our approach to managing the company in this economic environment. First, PROS has proven management experience. PROS has maintained its track record of profitability and positive cash flow for the past ten years.

Second, while PROS has a strong balance sheet with $55.9 million in cash and no debt, we are using our strong balance sheet to make prudent investments.

Third, as I stated earlier, PROS has a diversified revenue mix across industries and geographies.

Fourth, we can proactively manage expenses and resources due to revenue visibility resulting from our percentage of completion revenue recognition model.

Fifth, PROS employees' experience and expertise in pricing is unequaled and PROS' best-in-class products and services are exemplified by our high maintenance renewal rates. While maintaining profitability and positive cash flow, we continue to invest in people.

And lastly, we believe PROS has a superior product strategy that supports our strategic goals of shortest time to value, highest return on investment, and lowest total cost of ownership. As one of our manufacturing customers recently told us, "We identified over $5 million in opportunities in the first 30 days with PROS."

Let me provide some insight into how our business is being impacted by current economic conditions. As we have said previously, during these difficult economic times, CEOs, CFOs, and COOs, who are the ultimate decision makers for pricing software, have been focused on broadly reducing costs. This has caused a downward trend in our revenue during the first three quarters of 2009; however, as we described on our last quarterly call, we have seen sales stabilize and we continue to expect a slight sequential increase in Q4 revenue. Other drivers contributing to this revenue improvement are - implementation projects are proceeding on schedule, and maintenance renewals continue with best-in-class maintenance renewal rates.

While the macro economy continues to be challenging and forecasting for the longer term remains difficult, we believe interest in PROS science-based pricing and margin optimization software continues to increase. Sales related activity levels continue to be good with increasing participation by prospects at our sales events and webcasts. However, sales cycles are still long, approval processes are still rigorous, and with added scrutiny towards expenses, it remains difficult to close deals.

As we highlighted on our second quarter earnings call, industry analyst coverage of the price optimization market is helping to educate companies about the types of pricing problems that can be solved by our software.

Companies implement PROS' pricing and optimization software as a strategic innovation and a risk mitigation initiative as they face unpredictable demand and volatile costs in this economy. We believe that with our market leadership position, PROS will be the pricing partner that companies turn to as market adoption increases and companies focus on setting and executing optimal pricing strategies using science-based software products.

In summary, we are pleased to have met the high end of our guidance for the third quarter of 2009, given the macro economy's continued pressure on our prospective and existing customers. This achievement is the result of the hard work of over 350 smart, dedicated people doing great things to bring pricing excellence and high value to our customers.

We are also pleased that for the second year in a row, we have been named to the Forbes 200 Best Small Companies List. We have an experienced management team that we believe is focused on the right strategies. We think we are well-positioned and will continue to invest appropriately to capitalize on what we believe is a fantastic long-term market opportunity.

We continue to be prudent about our spending in this economy, but with a strong balance sheet, we are in a unique position to invest in our products, processes, and sales and marketing to improve our relative competitive position as a leading vendor in the pricing and margin optimization market. Now let me turn the call over to Charlie, so that he can provide you with a review of our financial results and our outlook for the fourth quarter of 2009.

Thanks, Bert. PROS had a solid third quarter. I will begin with a review of our financial results for the quarter and then provide some commentary on the balance sheet and cash flow before providing you with financial guidance for the fourth quarter of 2009. I will be discussing our financial results on a non-GAAP basis. Our earnings press release includes a full GAAP to non-GAAP reconciliation, which can be found on our website in the Investor Relations section.

As Bert stated, we are pleased with our performance in the third quarter, with revenue at the high end of our guided range at $16.5 million, operating margins at 15.5%, another quarter of positive cash flow, and a continuing strong balance sheet. Also EPS of $0.07 per diluted share was at the high end of our range.

In accordance with our revenue recognition policy, PROS does not recognize any revenue at contract signing. License and implementation fees are bundled together and the revenue is generally recognized on a percentage-of-completion basis over the implementation period. There can be variability and license and implementation revenue from quarter to quarter, not as a result of seasonality, but rather the implementation effort needed in relationship to the contract value, the number of ongoing implementations, the number of products being deployed and the timing of when an implementation starts or finishes. With the number of active implementations in a quarter, our subscription and high maintenance renewal rate, we have good visibility into near-term revenue.

Revenue of $16.5 million in the third quarter was down 14.4% year-over-year and down 4.7% sequentially. As Bert mentioned, our prospects have focused on reducing costs, which has resulted in a downward trend in revenue. However, as we communicated during our second quarter call, we do expect a slight increase in Q4 revenue over Q3.

Maintenance revenue increased $0.7 million, or 11.5% from the third quarter of 2008. This increase was a result of the completion of a number of implementations of our software products, following which we begin to recognize maintenance and support revenue. We are pleased that our maintenance renewal rate continues in the best-in-class mid-90% range.

Our total revenue continues to be diversified geographically and spread across our five target vertical markets.

On a non-GAAP basis, gross profit was $12.4 million in the third quarter, resulting in gross margins of 75.4%, compared to gross margins of 75.5% in the third quarter of 2008. License and implementation margins of 72.4% decreased by nearly 1% over the same period last year and maintenance margins of 80% decreased by approximately one percentage point over the same period last year.

Last year's license and implementation gross margins were negatively impacted by two percentage points by the effect of foreign currency. As we have indicated in the past, license and implementation gross margins vary from period to period depending on factors such as the amount of implementation services required to deploy our products relative to the total contract value.

Non-GAAP R&D expenses in the third quarter were $4.7 million and decreased approximately 200,000 or 3.5% from the third quarter of 2008. We continue to maintain our research and development staffing levels. However, with declines in quarterly revenue, we have taken actions to closely manage operating expenses and were able to reduce non-personnel related R&D spending by approximately $200,000 over the same period last year. Research and development expenses were 28.7% of revenue during the quarter, as we continue to invest in product development as part of our strategic initiative to drive future revenues.

Non-GAAP selling, general and administrative expenses for the third quarter were $5.1 million or 31.2% of revenue, and spending decreased 1.2% from the third quarter of 2008. The primary drivers of the decrease were non-personnel related expense reductions, partially offset by an increase in sales personnel expenses.

Non-GAAP operating income, which exceeded the high end of our guidance, was $2.6 million or 15.5% of revenue in the third quarter, compared to $4.4 million or 23% of revenue in the same period last year. As we have previously communicated, we have not had any headcount reductions as we continue to believe there is a significant future market opportunity. This has impacted our margins.

Interest income for the quarter was approximately $30,000, a decrease of approximately $231,000 from the same period last year. The lower interest income was the result of lower interest rates despite higher average cash balances. This reduction in interest income lowered EPS by approximately $0.01 in the third quarter of 2009 versus the same period last year.

Our effective tax rate was approximately 28.6% in the third quarter of 2009, compared to approximately 35% in the same period last year, primarily due to the timing of the reinstatement of the research and experimentation tax credits, which were extended in the fourth quarter of 2008 through the end of 2009.

Non-GAAP net income for the third quarter of 2009 was $1.9 million or $0.07 per diluted share, at the high end of our guidance, with 26.4 million diluted shares as compared to $3 million or $0.12 per diluted share with diluted shares of 26.3 million in the same period last year.

GAAP income from operations was $1.1 million in the third quarter of 2009, as compared with $3.4 million from the same period last year. Net income in the quarter was $800,000 or $0.03 per diluted share compared with $2.4 million or $0.09 per diluted share in the same period last year on a GAAP basis.

Now moving to balance sheet items. We ended the quarter with $55.9 million in cash and cash equivalents. Total deferred revenue at the end of the third quarter was $20.4 million, an increase of approximately $1.4 million from the end of the second quarter. Deferred revenue is not tied to total contract value and therefore is not a meaningful forward indicator of financial performance.

We continue to generate operating cash flow, with approximately $2.6 million of operating cash flow generated in the quarter. Trade accounts receivable days sales outstanding were approximately 70 days, which is well within our historical range. Cash flow, accounts receivable balances, and deferred revenue can vary in a quarter based on, among other things, the timing of collections and invoicing of milestone billings under our contracts.

Headcount at the end of the third quarter was 393, compared to 381 at the end of last year, a modest increase.

Now, let me turn to our guidance for the fourth quarter of 2009. We are encouraged as the global economy is showing some signs of improvement and although our revenue has declined for the last three quarters, as we communicated during our second quarter call, we do expect a slight increase in Q4 revenue over Q3. In addition, sales related activities continue to be good.

For the fourth quarter, we anticipate total revenue in the range of $16.6 million to $17 million compared to $16.5 million in the third quarter. We are projecting non-GAAP operating income of $2.3 million to $2.7 million. And we are anticipating non-GAAP diluted earnings per share of $0.06 to $0.07, based on an estimated weighted average of 26.8 million diluted shares outstanding, and an estimated effective tax rate of 29%.

The Company is projecting GAAP income from operations of $900,000 to $1.3 million and GAPP diluted earnings per share of $0.02 to $0.03.

Non-GAAP operating income and net income for the fourth quarter excludes estimated non-cash stock-based compensation expense of approximately $1.5 million.

While there are no assurances that past performance can be continued, our experienced management team, the financial strength of the Company, and our revenue recognition model help us manage the Company's profitability during difficult periods.

In summary, given the current economy environment, we are pleased to have achieved the high end of our revenue and EPS guidance for the third quarter. We believe we are in a strong competitive position and with the continued growing awareness of the benefits of high ROI pricing optimization software, we remain confident that PROS has an attractive long-term growth opportunity and believe we are effectively positioning the Company to take advantage of that opportunity.

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

Thank you.

(Operator Instructions)

Your first question comes from the line of Ross MacMillan with Jefferies and Company. Please proceed.

Great. This is Horacio in place of Ross. Just wondering what you guys are seeing in terms of the close rates in the environment right now. It sounds like you're a little bit more bullish on the revenue next quarter. Did you see sort of a linear improvement, month-to-month, in Q3 in the environment? Or is it just the pipeline that's making you a little bit more optimistic here? Thanks.

This is Charlie. I would say, at this stage, it's the pipeline that's making us a little more optimistic. As Bert commented during his comments, sales cycles are still long. The focus still tends to be focused on costs, as far as CIOs and CEOs, but we are encouraged by the pipeline activity. And we're also encouraged somewhat by the improving economy. That's what's leading us to our exhibited optimism relative to Q4.

Do you anticipate guiding to bookings for next year on the next call? Or do you think you're going to give some indication of what you think billings or bookings could be next year?

We think it's premature, Ross. Way too early to tell. We continue to monitor the situation on a quarter-to-quarter basis. But, as we've stated in the past, given the current economic situation, the current situation and sales cycles and what it takes to close business, right now, we don't anticipate giving out annual bookings any time soon.

Great. Thank you very much.

Your next question comes from the line of David Hynes with Needham and Company. Please proceed.

Hi, guys. Just one question for me. Richard and I have met with a number of players in and around your space. And they're kind of expressing similar optimism. My question is, as outsiders, what should we, as analysts and investors, be looking for, I guess, from a macro perspective? Are there any sign posts that would indicate kind of a next leg-up in the business? I guess that's really the question.

Well, I think a good reference point is the Gartner report. Gartner really established credibility and legitimized the category with their report. And as a result, I think that's generated some interest. Also, there's a number of, as I mentioned, viral network effects from just publicity about pricing and third parties that are getting interested in pricing and think that it's going to be a really good area for C-level executives to focus on in the future. So I think those third party network kinds of activities are a good indicator. And you could continue to monitor those as some kind of leading indicator for the potential of the market.

Got it. And then, Bert, you had mentioned competitive displacements in your prepared remarks. Who are those coming from? Is there a particular vendor? Who have you guys had success in displacing? I guess, what's driving those decisions?

Over time, we've benefited from having customers that decided to change from their current vendor to PROS. Obviously, what we'd like to do is get prospects to choose PROS in the first place and that's the investment we're making in sales and marketing. But we have benefited -- and it's happened in every one of our industries over time.

You look at it. You look at the way we've approached the business, long-term partnerships, world-class release management, the ability to go in and build the relationship over time with no custom code and constantly improving return on investment. But we have benefited, in 2009, from replacing our competitors in some industries and then all industries over time.

And all I would say is that we see that as a real indicator of our strengths, our commitment to time to value, time to market, lowest total cost of ownership, long-term partnerships. And we're particularly proud of our very high customer satisfaction in place that we have never been replaced by one of our competitors. So it's something we're very, very proud of.

Got it. That's it for me. Thanks, guys.

Your next question comes from the line of John DiFucci with JPMorgan. Please proceed.

Hi. Thanks. Hi, Bert and Charlie. Given your revenue model with license and implementation recognized on a percentage-of-completion basis, should we read anything at all into you hitting the high end of guidance, here, at least on the top line? Were things a little bit better than you anticipated coming into the quarter?

I would say, John, that we always have a little bit of cautiousness. We're always a little concerned will some projects slow down. It didn't happen in the third quarter. We were pleased with that. But, really, all projects essentially stayed on track. We're pleased, of course, that the fourth quarter guidance is higher than the third quarter.

John, I would say this. You know we're very metric driven. And we track very closely our customer satisfaction, our maintenance renewal rates. We have lots and lots of active projects going on at any point in time. And we're particularly pleased that in 2009 we haven't had any projects stop, and projects have continued on their original project plan in terms of milestones, deliveries, dates and implementation schedules. What we do is we look at all those metrics, including sales that are going to contribute in a quarter. We look at all those metrics and we do a risk analysis around each one of those revenue drivers. And in the third quarter, we just got the benefit of some of those things improving a little better than what you would statistically consider the expected value for each one of those categories.

Okay. That's helpful. And Bert, I think you'd said that -- and Charlie, in last quarter -- you'd said that sales activity and bookings improved last quarter. I guess, are you seeing any change on the margin this quarter from last quarter? Because, from a lot of other software companies, both applications and infrastructure, we're hearing things have stabilized out there. But, we're not seeing much improvement, yet.

Yes, we would say the same. We're saying that the business has stabilized. And we consider that a very good thing. We also are looking at all the sales activities that are going on. But, it's clearly too early to say we're back to where we were before the economic downturn. But, clearly, things have stabilized and our comfort obviously has gone up, given the fact that we gave increased guidance for the fourth quarter over the third quarter revenues. So, those are the indicators we have at this point in time, John.

Okay. Thanks a lot guys.

Absolutely. Thank you.

Your next question comes from the line of Nabil Elsheshai with Pacific Crest. Please proceed.

Hey, guys.

Hey, Nabil. How are you?

Good. How are you? Just a follow-up on John's question, actually. So, as he said, you guys indicated things had improved and, therefore, Q4 would be up sequentially on the last call. So, can you give any color on Q1 of next year? Will that be up sequentially and, perhaps, indicate a continued booking strength?

Nabil, this is Charlie. What we've decided is that we're not going to be giving guidance against 2010 until we get to 2010. So, we'd like to just stay away from any specific comments. Now, we do feel like, as Bert said, we feel like the business has stabilized. It's still a little bit too early to make a definitive call. We are pleased that revenue is up in Q4 compared to Q3. But we would just like, not today, to be talking about 2010.

Yes, I think if you look at 2009, Nabil -- and I know you've been tracking this very, very close. Earlier in the year, we were very concerned about our maintenance renewal rate. We were very concerned about projects getting delayed. We had a lot of concerns. And I'd say our team really stepped up to that challenge.

We've had just tremendous success this year with getting implementations completed and getting products into production. Our time to value in 30 days program has been a huge success for us. I don't think there's any question we're a stronger company today than we were entering 2009. Our customer satisfaction is higher. And then you can see that, how it manifests itself in the maintenance, in terms of renewal rates, the stickiness of the app. So, in a lot of the fundamentals that exiting 2008 were huge concerns, we've put a lot of focus on it. And we're very proud of what we've accomplished.

At the same time, even though things have stabilized and we feel like our relationships with our customers are stronger than ever, our product is better, the releases we put out this year are absolutely world-class in terms of quality, our quality assurance and general availability release program, our customers being able to take advantage of new enhancements and capabilities, the real-time integrated science that's in our production releases. There's just a lot of fundamental things that we're particularly proud of.

Now, you remember at the beginning of the year, we raised concerns about all these issues. And we also said that we really wanted to try hard to not have layoffs, not have projects stopped, keep projects on schedule, protect our maintenance and improve our customer satisfaction. And we have done a really, really good job on those things.

Okay. Looking at the costs, I'm assuming the movement around on the line items between different operating and cost of goods lines is just some of the guys I think you had put out in the field, some R&D people last quarter, maybe. Have you put those back in R&D, or, could you explain?

Yes, that's correct, Nabil. As we commented on the call for the second quarter, we had brought some of our R&D resources into some of the implementation projects we had. We've now moved them back. They're back in R&D. It's about the same was $13.9 million in Q2. It's $13.95 million in Q3. The only substantive change is just that little shift. And as I commented on the call, G&A expenses have been coming down, but sales costs have been going up, which is consistent with where we want to take the company.

Okay. And then on the competitive front, I think the two primary ones in the past have been two privates. Is that still the case? Because, I've heard from some people that one of them, maybe, has been a little less active or competitive. So, have you seen any change in the competitive landscape?

We would say that we're monitoring the competitive situation closely. Obviously, difficult economic times have different effects on different companies. But, we're not taking anything for granted and we consider that the historical competitors are still very active. And it's a competitive battle to get deals.

Okay. And then just housekeeping -- I didn't get the split of airline to gross verticals.

Yes, we have not been providing that split. What we have commented on is the component of license and implementation revenues for manufacturing, distribution, and services. And I believe we said it was 59%.

Okay. That was the number I was looking for.

Thank you.

Okay. Great. Thank you very much.

Thank you, Nabil.

Your next question comes from the line of Chad Bennett with Northland. Please proceed.

Yes. Hi, guys. Thanks for taking my call. This is Ian in for Chad, today.

Hi, Ian. And tell Chad "Thank you", by the way.

I will, all right. I just want to get back to bookings, one more time. I know you guys don't like talking about it. But, any further color on what bookings look like in the quarter in terms of -- was it about what you thought it would be, was it maybe slightly better? Just any further color you can give there.

Yes, what we've said from the road show IPO all the way through to investor meetings we've had over the last three months is that sales on a quarterly basis are not a good indicator of the health of our business because of the variability. We've got a high ASP of $1.8 traditionally, historical. And quarterly bookings have varied a lot from quarter to quarter over the years. So, we specifically have not made any comments about quarterly bookings.

And the only thing that we communicated in August, after the second quarter results, is the business has stabilized and our confidence level had gone up. And as a result of it going up, we indicated that there would be a slight increase in the fourth quarter revenue over the third. But because of our high ASP and because of the variability, quarter to quarter, it's really misleading to talk about quarterly booking numbers for PROS.

All right. Point taken. And then, on the L&I gross margins, is that just typical implementation cycles mix in there? Or is there anything in particular that improved that this quarter?

No, I think just to pick up on the point that Nabil mentioned, in the second quarter, we did have some of our other resources supplementing our professional services group and some implementation activities. We did not have that in the third quarter.

Sure. So that's it. And then last one, real quick. Where did you add headcount this quarter?

The headcount currently is 393. I believe it's probably up about a handful of people compared to the second quarter.

Any particular spot that they were added?

Our focus has been more on client activity sales and solutions. Think of sales activities.

All right. Thanks, guys.

It could be inside sales, direct sales, solutions.

All right. Thank you.

At this time, there are no further questions. I would now like to turn the call back over to Bert Winemiller for any closing remarks.

Thank you, operator. In closing, we are pleased with our third quarter 2009 results and we believe we have the product, science, and implementation expertise and resources to continue to deliver innovative, high return on investment products to our customers and as a result, we intend to extend our leadership position in the pricing and margin optimization market.

We plan to continue investing appropriately to capitalize on what we believe is a fantastic long-term market opportunity. Thank you very much. We appreciate you taking your valuable time to listen to the call and we'll talk to you soon. Bye-bye.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.