Pros Holdings Inc (PRO) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the second-quarter 2011 PROS Holdings, Inc. earnings conference call. My name is Cristalyn and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions.) As a reminder, today's conference is being recorded.

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, Operator. Good afternoon everyone, and thank you for joining us today for the PROS Holdings financial results conference call for the second quarter of 2011. This is Charlie Murphy, Executive Vice President and Chief Financial Officer of PROS.

Joining me on today's call is Andres Reiner, President and Chief Executive Officer. In today's conference call, Andres will provide a commentary on the second quarter of 2011, and then I will provide the review of the financial results and our outlook before we open the call to questions.

Before beginning, we must caution you that today's remarks, 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 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 earnings release, 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 at prospricing.com.

I would also like to point out that the Company's use of non-GAAP financial measures is explained in our earnings release distributed earlier today, and a full reconciliation between each non-GAAP measure and the most directly comparable GAAP measure is provided in the tables accompanying the release, and can also be found on our website in the Investor Relations section.

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

Thank you, Charlie. We are pleased to see our momentum continue into the second quarter, with revenue and earnings that were above expectations. With healthy backlog levels, a growing pipeline, and continued execution towards our growth strategy, we remain optimistic about 2011 and beyond.

Revenue in the second quarter came in above guidance at $23.8 million, an increase of 33% from a year ago. Non-GAAP operating income was also up, with an increase of 80% over last year. Strength in revenue was reflected in net income, which was $0.09 per share on a non-GAAP basis, also above guidance.

Our strong performance was the result of continued execution of our strategy. We are pleased to have increased both revenue and operating margins in the second quarter, even as we continued to invest in our key growth initiatives, which are to accelerate awareness and adoption of pricing software, to further extend our product leadership, and to increase our global reach and scale.

Our focus on accelerating the awareness and adoption of pricing solutions is reflected in the new and existing customer signings, renewals, and third-party recognition of PROS as the market leader. Since our last call, Novozymes, Sunoco, Ural Airlines, Pluna, and others, selected PROS as their pricing and revenue management partner of choice. Among existing customers, we continue to see healthy sell-back opportunities and a maintenance renewal rate above 95%.

We are also excited to have announced that PROS recently received the highest rating possible from Gartner in their newly released MarketScope report for B2B pricing optimization and management software, authored by Michael Dunne. According to the report, our new rating of Strong Positive was earned on the strength of our products, services, vision, and competitive position in target B2B segments. We believe the Gartner report clearly underscores why pricing software has become a strategic and mainstream business tool that should be evaluated by organizations around the world, and we're proud to have received the highest rating possible.

In addition to the Gartner rating, PROS was prominently highlighted in an article in the June edition of CFO magazine. The article included comments from our customer, McKesson, about the value they received from PROS. Since partnering with PROS, McKesson's Medical-Surgical business unit has gone from declining and volatile margins to consistent margin expansion with a very fast payback. We are pleased that McKesson was recognized in a marquee business publication like CFO magazine.

We believe these accomplishments distinguish PROS as the market leader with a compelling value proposition. Our strategy to increase awareness and adoption of PROS solutions is having a positive impact on our profitable growth and we are continuing to invest in this initiative.

The second element of our strategy is to further extend our product leadership through innovation. We released the latest version of our PROS Pricing Solution Suite, delivering prescriptive pricing capabilities designed to enhance customer profitability, increase business agility, and improve controls and compliance. Our innovative enhancements help drive our high maintenance renewal rate and create an even more compelling value proposition to attract new enterprise customers. We believe each release of our solution further distinguishes PROS in the market by increasing customer ROI, lowering total cost of ownership, and accelerating time to value.

In our last call we announced the release of our new cloud offerings for the mid-market. We are making progress in building and empowering a partner ecosystem for these solutions. We're seeing interest from software resellers, integrators, and pricing consultants in bringing the power of pricing to the mid-market. We expect momentum to build as we showcase Quote2Win and Price2Profit as a gold sponsor at salesforce.com's Dreamforce event later this month. We believe our investments in R&D have been a key reason why leading companies have selected PROS as their partner in pricing excellence, and we will continue to invest in product innovation.

The third element of our strategy is to increase our global reach and scale through direct and indirect sales channels. Our direct sales force now numbers in the mid-20s, as planned. During our last call, we discussed the launch of our new Reseller Channel Program and its partners. We are pleased to announce the addition of a new reseller to further strengthen our presence in the Asia-Pacific region. We recently signed on Integritas Pacific, who has over 500 employees in Beijing, Shanghai, Hong Kong, and Singapore. Integritas has a long-standing history of providing enterprise software to our target industries in the Asia-Pacific region. We're excited to welcome them to our growing reseller program, which now encompasses Latin America, Asia, Europe, and North America.

In summary, we are pleased to see our combination of growth drivers contribute to our strong performance in the second quarter. In addition to signing new customers in our target markets, we continued to deepen and broaden our partnerships with existing customers. At the same time, we are excited with the progress from our investments in product innovation, as well as the continued development of both direct and indirect sales channels that expand our global reach.

We are optimistic that we will continue to see revenue growth, and that as our business scales, we will drive increased profitability as well.

Now, let me turn the call over to Charlie for details on our financial performance and outlook.

Thanks, Andres.

We are pleased with our financial results for the second quarter. I will be discussing our financial results on a non-GAAP basis. A full GAAP to non-GAAP reconciliation is included in our earnings release which can be found on our website in the Investor Relations section. I have abbreviated my comments somewhat from the past.

We are pleased with our performance in the second quarter, with total revenue of $23.8 million, which was up 33% from a year ago and exceeded the high end of our guided range. License and implementation revenue was $15.1 million, up 45% from a year ago, increasing primarily from the growth in the number of implementations. Also, as in the first quarter, revenue in Q2 benefited from revenue from contracts executed in the first quarter with shorter delivery timelines. License and implementation fees are bundled together and revenue is generally recognized on a percentage completion basis over the implementation period, with no revenue recognized at contract signing.

Maintenance and support revenue of $8.7 million was up 17% year-over-year and represents the largest component of revenue from recurring sources. Total recurring revenue, which includes a number of term license contracts, was 44% of revenue in the second quarter. In addition to contracts commencing maintenance, during the second quarter we had one customer renew a maintenance contract that had lapsed from the prior year, resulting in a retroactive increase in maintenance revenue of approximately $400,000 in the quarter.

We are excited about the launch of our cloud-based offerings targeted at mid-market customers. While we do not anticipate revenue contribution from these subscription-based products in 2011, over the longer term we believe that revenue from recurring sources can become a more meaningful contributor to overall revenue.

Gross margins in the second quarter were 74.1% on a non-GAAP basis, compared to 74.6% from a year ago. Margins can vary from period to period primarily due to the level of implementation services required relative to the total contract value.

Looking at operating expenses, total non-GAAP operating expenses for the quarter were $13.9 million, compared with $11.3 million a year ago, with the increase reflecting ongoing planned investments in our growth.

With revenue that was slightly above the top end of expectations, and overall expenses slightly below target, primarily due to the timing of hiring, non-GAAP operating income exceeded the high end of our expectations. Non-GAAP operating income in the second quarter increased from $2 million a year ago to $3.7 million, an increase of 80% for an operating margin of 15.5%.

Based on an effective tax rate of 33%, non-GAAP net income was $2.5 million for the quarter, or $0.09 per share, exceeding the high end of guidance. On a GAAP basis net income was $0.05 per share. A reconciliation of GAAP to non-GAAP is provided in our press release.

Now moving to the balance sheet, we ended the second quarter with cash and equivalents of $64.4 million, an increase of $2.9 million from the end of the first quarter.

Gross accounts receivable at the end of the quarter were $24.8 million. We have changed the way we calculate day sales outstanding to reflect changes in accounts receivable from the beginning of the quarter to the end of the quarter, versus from the beginning of the year, as had been our previous practice. We expect this to result in higher calculated day sales outstanding, though our historically reliable collection patterns remain unchanged. Under this method, day sales outstanding were approximately 92 days, in line with our historical average, which considers normal variations in accounts receivable, and the timing of collections and invoicing of milestone billings under our contracts.

We continue to generate operating cash flow, with approximately $2.7 million of operating cash flow generated in the quarter, yielding cash flow margins of 11% in the second quarter. Year-to-date operating cash flow was $8.6 million, yielding cash flow margins of 19% year-to-date. We expect annual operating cash flow to be slightly above our non-GAAP operating income on a full-year basis. In addition, we are expecting a tax refund this year of approximately $2.8 million. We expect capital spending to increase to approximately $4.5 million to $5 million as a result of increased infrastructure investments and facility costs.

Finally, headcount at the end of the quarter was 480, up from 465 at the end of the first quarter, as we continue to add to our sales, marketing, professional services, administrative, and engineering resources. This is consistent with our planned investment to support our long-term growth objectives. Headcount includes both contract and employee personnel.

Now turning to our outlook, we continue to be optimistic. For the third quarter, we anticipate revenue in the range of $24.3 million to $24.8 million, representing 30% growth at the midpoint over the third quarter of 2010. We expect non-GAAP operating income of $3 million to $3.5 million, with non-GAAP expenses of approximately $21.3 million. We anticipate non-GAAP earnings per share in the range of $0.07 to $0.08.

On a GAAP basis, we expect operating income of $1.3 million to $1.8 million and GAAP earnings per share in the range of $0.03 to $0.04.

At this time, we can be more specific about the full year. On a full-year basis, we are raising our total revenue expectations for 2011 and anticipate revenue in the range of $95 million to $96 million, which at the midpoint is a 29% increase in revenue over full-year 2010. We expect non-GAAP operating margins to be slightly higher than last year's operating margins of 12.9%, and we expect operating margins to expand further as revenue scales in future years.

We continue to view 2011 as an investment year, and are balancing continued investments in our future growth with profitability. We are excited about the successes we are seeing from our continued investments in our growth and believe that as our business continues to scale, we will be able to drive long-term increases in revenue, margins, and profitability levels.

And with that, let me turn the call back to the operator for questions.

(Operator Instructions.) Thomas Ernst; Deutsche Bank.

Hi good afternoon, I'm Nandan Amladi on behalf of Tom. Thanks for taking my questions. Being that we're still in an early-stage market, but also recently your recognition by Gartner and other consultants, how much of your sales effort is still missionary versus one where the target customer base is more aware of the product?

Hi. This is Andres. It's still -- I wouldn't say that. It's not as much missionary, but we feel that definitely by the type of questions in the RFPs, as we've commented in the past, it's much more structured. Customers clearly understand better the pricing capabilities and are more educated than they have been in the past. In addition to that, awareness is increasing significantly, as we talked about -- the CFO magazine article, pricing events, there's a lot more attendance in pricing events, consultants and the SI system integrator ecosystem is definitely investing more in the area of the value of pricing technology. So we feel for all of those areas, definitely it is more structured than it has been in the past.

So in summary, it's less missionary than it has been, certainly three, four years ago, even two to three years ago.

Okay, thanks. And a small follow-on, if I might. Any commentary on the macro environment, particularly in Europe?

Yes. In Europe we're obviously sensitive to what's happening and are monitoring it closely. So far we've had a strong year in Europe. And we see our pipeline very healthy. So we continue to invest and we have invested in sales, additional sales positions as well as marketing positions within Europe. We're very confident in our team in the market. So, so far we have not seen an impact in the target countries within Europe that we're focused.

Okay, thank you.

I think one benefit we have perhaps in Europe is that the concentration of our business in Europe is in the stronger economies. Our business is predominantly in the countries such as the UK, Germany, and the Nordic region. And we do have some business in other countries within Europe, but that's predominantly where our business is, so I think we're fortunate in some regards that we're in the strongest economies relative to our business.

Right. Thank you very much.

Chad Bennett; Northland Securities.

Nice quarter. Just a couple questions, maybe for Charlie first. So the increase in sales and marketing sequentially in the June quarter, can you characterize, Charlie, how much of that was kind of headcount-related versus kind of trade show seasonal stuff? I just don't know if there was any of that in there.

It's both, actually, yes. The headcount is up and we also do have a number of events that we did attend in the second quarter of this year. But we also expect to have a number of events in the third quarter as well. So I wouldn't expect to see seasonality between quarters such as two and three. Events for us tend to slow down a bit in the fourth quarter. But for now it's predominantly headcount growth and we've accelerated, as you know, our marketing initiatives coming into this year. And we're putting increased emphasis on marketing to help us achieve one of our primary strategies which, of course, is increasing the awareness and the adoption of our technology.

Got it. Okay. And then, I think you said you're at roughly in the mid-20s or 25 sales people. I can't remember which. I think the goal was to basically add 9 from your 19 base kind of starting the year. Is that -- it seems like you made a lot of headway there. Is that still the goal or are we going to keep adding above that?

So far we're maintaining the same goal of 28. We may increase in the future, but so far we're still tracking towards our goal. And, as we said, we wanted to hire earlier in the year for growth into 2012 and beyond. And we're tracking to our plans.

Okay. On the maintenance and support line, obviously if you back out the customer that came back on maintenance, the $400,000, your maintenance line was up, oh, I guess about $500,000, $600,000 sequentially. Is maintenance now going to start to catch up to the accelerated license growth you've seen over the past few quarters? I guess what I'm asking is, $500,000, $600,000 sequentially, is that a good way of looking at it, Charlie?

Actually, Chad, no, I would not look at the sequential maintenance growth as being at that level. I think you need to ratchet it down to the Company's normal level of maintenance growth, so approximately $200,000 a quarter, plus or minus. We do have quarters -- an example is the second quarter of last year we had an uptick of maintenance by about $500,000 as compared to the other quarters, which were only up around $200,000 a quarter. And it's just really a function of when actually maintenance starts on these projects.

Got it. And last one for me and then I'll jump off. Andres, can you talk about the competitive environment and win rates and kind of how that -- how you performed in the quarter relative to the deals out there?

Yes. So it's pretty much the same as last quarter. We haven't seen any meaningful shifts in the competitive landscape. We are pleased with our sales execution. And we believe we're winning our fair share of the deals. We feel we are in a strong competitive position. So really I would say no change.

Okay. So no dramatic --

I would say like last time, we're really focused on the market, in increasing the awareness and adoption. Not to say that we don't respect our competition, we're not focused on them. But really it's all about the 95% of the market that is not taking action. That's where we're focused about. From the competitive we believe we're strong. I'm very proud of our sales organization and their execution. And we're always continuing our initiatives and our investments in those areas.

Okay. And no reason for pricing pressure or anything like that, considering the penetration rate. Right?

No.

No.

Okay. All right. Thanks, guys.

Tom Roderick; Stifel Nicolaus.

Nice job on the quarter. Wanted to start with maybe where we left off last quarter. There's a couple of areas that you were holding a little bit of caution onto that I didn't hear it in particular on this call. And I think last quarter you mentioned a couple projects in the Middle East as a region that maybe some caution was warranted. Now that you have another 90 days under your belt, would you kind of remove some of that caution as you saw some of those pockets from last quarter, maybe just an update on some areas where you were thinking maybe not as aggressively at the end of last quarter?

That's absolutely -- absolutely, Tom. Last quarter of course, just as we were announcing we had the earthquake in Japan and the tsunami, all of that. So that was a concern to, I think, lots of companies. And of course we had the turbulence in the Middle East, which is still continuing today, but probably settled down a bit compared to 3 or 4 months ago. As far as impacting our business, we're pleased to say we haven't seen any indications of slowing down the implementations that we have in Japan and in the Middle East. So we're pleased with that. So we put that caution out. I didn't comment on it today because I feel less concerned about it today now that we've had another 90 days behind us.

Got it. And in looking at the model, maybe with those specific reference points about the license and implementation line, I look at that line and it's 45% year on year, so a big number there. Now you're coming up against tougher comps in the coming quarters. But might be a good time to review sort of how much of that number in a given quarter is visible and how many quarters out you have that visibility, just with respect to projects that are flowing through the income statement here. I'm just trying to get a better handle on how long we can kind of think about 30%-plus growth on the license and implementation line there.

Actually, we're probably back to the model we were I think pre-recession, where we'd have likely 90% visibility into the quarter going into the quarter. I recall a few years ago we commented on that metric. So we feel good about that. And then of course that visibility declines in subsequent quarters, as you'd expect to see the sales backlog revenue rolling off. I don't really want to comment too much on the sequential over last year other than I think total revenue at the midpoint of our guidance is at probably the mid-20% range, I mean for revenue growth next year -- sorry -- for Q3. Close to 30%.

Right.

The 30% at the midpoint of our guidance. So we feel good about that. You're right. The comps are getting harder because we did have a good uptick in Q3 and Q4 of last year.

Got it. And last, a real quick one for me, if you think about where you're going to sort of exit the year on an operating margin basis, sort of implies, I guess, by our math you're kind of somewhere in the mid-teens, 14.5%, 15.5% range on operating margins. Should we think about 2012 -- I know it's too early for all of guidance, but should we think about that as a year where margins do expand from that second-half level? Or do you just want to keep investing in the business while growth remains as optimistic as it is right now?

On the first part, as far as the -- kind of we've given some indications where we expect this year to come out. And we expect slightly higher than the operating income we had last year on non-GAAP basis. Last year, Tom, it was 12.9%, so we expect to be slightly higher than that as far as a benchmark going into next year. Clearly I think we've signaled hopefully on the call today and the last several calls, we plan to continue to invest. We still see a tremendous growth opportunity for PROS. There's a big market ahead of us. So we're looking -- so our overall strategy is continuing to invest to support growth for the business. So we're not encouraging a lot of margin expansion going beyond 2011.

And we don't really have anything specific to say right now for 2012. But we will comment on that when we get to our year-end call. But you should think of PROS as good growth opportunity. I think we're investing prudently. We have a philosophy of wanting to be profitable. We're actually quite proud of the level of profitability we've been able to drive for the first 6 months of this year. And we're pleased with our outlook for the last 6 months. But from our model's standpoint for this year, we're really planning on investing.

Got it. That's perfect. Thanks so much.

Nabil Elsheshai; Pacific Crest Securities.

I'm sorry if I missed it. Did you guys give the split between airline and non-airline?

Actually we didn't give the split between the airline and the non-airline. And I can give you some comments on that if you'd like.

That would be awesome.

All right, great. Listen, we're looking at the business much more as a total business today as opposed to previously we tended to want to talk about travel versus non-travel, et cetera, et cetera. I can give you some color, though.

Airline -- not airline -- travel has done very well coming out of last year. I think we commented on that previously. Q2 was a particularly good quarter for the travel group relative to revenue. And that's because you can get these shifts depending on timing of bookings and what those bookings mean relative to future revenue in subsequent quarters. So for the first half of the year, travel was just about 50% of L&I revenue. But now as we go forward -- because this is based on the timing of when bookings take place between different industry groups -- as we go forward, based on sales year to date, we expect that manufacturing, distribution and services will be outpacing travel, and outpacing travel significantly.

Okay. And that's based on the bookings you've seen kind of late last year and the first half of this year?

That's correct, Nabil. And we want to start getting away from the idea of thinking about the Company as different -- because we're really not. We treat the Company as one group. Our technology is now moving across all of our industries. And so we're really not -- we don't really want to be talking about how is manufacturing versus distribution or services and such. But I think we're happy to give you the kind of color we gave you today. Does that help?

Yes. Absolutely. So since we're in the mood to color, I know you guys don't give any bookings numbers, but obviously your license and implementation growth is going to be exceptionally strong this year. I would imagine some of that's easy comps and make-up spending. So when you look at the bookings that's kind of setting up for the second half of this year and next year, how does that growth rate compare to what you saw last year?

I think as far as commenting specifically on bookings, we really have had a practice of not commenting on that. I think given the strength of our full-year guidance we're giving for this year at $95 million to $96 million, I think we're -- we feel good about the bookings the last half of the year. We believe that there's momentum here. We believe the pipeline's better today than it has been. And overall as a company we think we're in a much stronger position than we've ever been in. So we're very confident about where PROS is going over the next -- I'll at least say next several quarters. And certainly we'll talk about 2012 when we get there. But rather than talking about sales one period to the next, I think it's more a question of, I think, us talking about our confidence. And we feel very confident about the last half of the year.

Okay. I think you may have answered my next one, but I mean obviously I'm sure you saw the market today. There's a lot of concern on economic stability. Last time we went through this, these types of projects, the price optimization revenue management having been a fairly new market, seemed to get deprioritized. So what's your confidence that if things do start to weaken and we see IT budgets that that -- obviously, everybody will get hit, but this market's more mature and it won't get deprioritized as much.

This is Andres. We think -- part of the area -- we've been monitoring the market conditions. And so far, in terms of our leading indicators, leads and early stage opportunities in our pipeline, that's been up. So we haven't seen any shift anywhere in our pipeline that would concern us.

But a couple of points why we feel we're in a better or stronger position than we were in the past and that we've ever been. It's, one, we feel overall the awareness of pricing technology is up. We believe that the volatility of raw material costs and currencies helps justify the need for pricing technology. And even according to Gartner -- Michael Dunne mentioned in the Gartner MarketScope report that companies are increasingly viewing spreadsheets as harmful to pricing. He also mentioned another point around that pricing software is maturing and that third-party consultancies are raising the awareness level of pricing technology. And he said those are three key issues why pricing technology has increased awareness. So we feel in addition all of our investments around global reach and our partner ecosystem sales and marketing put us in a much stronger position than we have in the past.

We also saw in the last economic downturn where customers that adopted pricing technology actually were better off through the downturn and after because of the use of this technology. And for example, a high tech distributor customer of ours that started in January of 2009, within their first 6 months of implementation saw a 230 basis point improvement to their profitability. So we've built up case studies around those areas to show the value of our technology in helping companies navigate through these economic conditions.

I actually have a couple of other comments, I think, to add as well. Nabil, one thing that's changed from, say, 3 years ago or 3.5 years ago, is the validation of the ROI is much more firm today than it ever has been. I think we've mentioned before, 50% of our business for the last couple of years has come from our existing customers coming back after having successfully having seen a high ROI on their initial implementation. So to some extent I think our existing customer base may provide a safety net for us to allow us to continue to have growth. Obviously we're looking for the new customer acquisition as well. But I do think the combination of all of the points that Andres has made and the validation of the ROI, the validation that customers come back, that this is a very successful offering, I think should hopefully help sustain us should we enter another difficult economic period.

Great. And then last thing from me, over the last few quarters your license and implementation margins have started to trend back to really close to where they were prior to your making the SI investment. So are you -- is that just kind of increased productivity or are you ramping down the partner investments? How should we look at that? And how will that trend going forward?

Sure, okay. I would say we're not ramping down the partner investment, but rather what's happening is the impact of the partner investment, which was much stronger last year given the level of revenue we had last year, is just having less of an impact on the Company's overall margins. So I think period to period now that's kind of like neutralized itself. That's why I didn't comment on it. And I think what we're seeing is the opportunity for the Company to be able to drive some increasing margins based upon covering our fixed costs. Although we are investing. I want you to know we're still investing in scaling the Company through our professional services organizations.

But we're pleased with the margins that we've been able to achieve. And I do think long term there's an opportunity for gross margin improvement.

Okay. So it should kind of settle in around these levels? Is that a fair assumption then?

I think that's a fair assumption. Obviously we're looking for improvement longer term, but that's a fair assumption.

Yes, just for -- okay. And I guess related to that, on the SI side, any signs of them being kind of revenue generation engines for you? Or is it still -- are you still kind of setting that up for next year and out?

We feel that this, our focus on the SIs and the system integrators is -- we're invested to achieve scale and awareness. We feel our reseller program is the one that's going to drive growth in terms of selling. The system integrators are more playing a reference role in helping us increase scale, global scalability and awareness as well. But we don't see the system integrators being the ones that sell -- directly sell our solutions.

Okay. Thank you, guys, for taking my questions.

Ross MacMillan; Jefferies.

Congratulations from me as well. I think most of mine have been answered, but I just had a few. So maybe first, Charlie, was there any material FX impact in the quarter?

No, there wasn't. Actually, FX exposure is a little less going into Q3 than it was into Q2. But it's never really been significant, Ross.

Yes, that's what I thought. And then, you gave an implementation count number, I think, last quarter. Do you have something similar this quarter? We may have got that -- it may have been in the K -- sorry, the Q.

Let me take -- let's take a look at the Q. While we're looking that up, Ross, do you have another question?

Yes. I think my math would be correct if I said -- because you said 44% was maintenance plus term. So that would mean that term is about, I think, 7% of the mix? I don't know if you have that number to hand.

I can check.

And then the last thing was just on the timing of the tax refund. Any thoughts on when that will hit?

The tax refund I would expect in Q4. The number of implementations are approximately 80. Okay? And as far as the -- I don't have handy the mix between the term licenses and the maintenance. But I think we can do the math.

Yes, I got to 7%. I think that's about right for that.

(Inaudible - multiple speakers.)

And then, just maybe one other one. As I think about the pace of investment, outside of sales and marketing, I'm curious as to how much incremental investment do you need to make in R&D as we look out into the second half. And the reason I ask, is just sales and marketing is above the sort of run rate we were modeling, but R&D is actually a bit below the run rate we were modeling. I was just wondering if there's going to be a little bit more of a sort of rebalancing at all in the second half of the year. Thanks.

I think probably a safe estimate is to look at the run rate we've had over the last several quarters. We're going to continue to expand resources in development. And we came a little bit behind on our headcount at the end of Q2. That's one of the reasons we're a bit below. But we definitely want to continue to extend our product leadership, so you should look at R&D continuing to grow and probably at a level that's consistent with what our sequential growth has been over the last several quarters, maybe a couple hundred thousand dollars, $200,000, $250,000. That's being pretty specific. I think that's about what it would likely be.

Okay. That's great. And then, very last one. I know it's early days, but on the two cloud solutions you have, I'm just curious as to whether you've had any inbound inquiries or just what sort of interest levels there are there today. I know it's very early, but I was just curious.

Yes, we're definitely in the early stages of building out the market in the channel, but we are actively pursuing accounts with our launch partner. We're also seeing interest from resellers, integrators, and pricing consultants that want to focus on bringing PROS solution to the mid-market. So definitely we continue to focus on building the awareness and building the partner ecosystem and enabling the partner ecosystem.

Great. Thanks a lot.

(Operator Instructions.) John DiFucci; JPMorgan.

The margin guidance for the year is up and expenses were lower than expected this quarter on the hiring. Did something change with hiring expectations moving through the quarter?

No. No, no change in expectations. No change. I think we can attribute it more to the revenue increase, I think, as we're going through the periods.

Okay.

The other thing is I think I made a comment about if anything we have -- the headcount expectations haven't changed. We're just a bit behind, a few heads behind coming out of Q2, so that's obviously slowed down some of the spending in Q3 a bit. But no change in expectations.

Okay, great. Thanks, Charlie. And I did see maintenance saw a nice bump this quarter and I'm just curious. Were you -- is this something that we should have expected?

Yes, there are two elements to it. One -- we were expecting this -- but one was we had a renewal which we had factored into our guidance. And that was the renewal that I commented on during the call. That contributed about $400,000 to an increase in maintenance during the quarter. So that was kind of like a one-time increase. Now of course that maintenance will continue, not $400,000, but the quarterly component of that will continue going forward.

And the second is is that as we had in some other prior periods occasionally just because of the timing of implementations you can get an above normal increase in maintenance. In the second quarter of last year we had $500,000 increase to maintenance. Typically the quarterly increase is $200,000, maybe a little bit more, or a little bit less. This quarter, adjusting for the one-time event, we had a $700,000 increase in maintenance. But, again, that's an unusual increase in a period. I'd expect it to go back to its more normal $200,000 plus or minus sequential maintenance increases quarter over quarter.

Okay, great. Thanks, Charlie. Thanks guys, nice job.

I would like to provide clarification on a question that was asked earlier. The question was asked -- do you expect to see sequential growth in L&I given that the comps were a little bit higher. I wanted to make sure I was clear in my communication. The answer is yes, we do expect to see year-over-year increases in L&I. And I commented on about close to 30% overall revenue growth based at the high end of our guidance. And at the high end of our guidance you probably have close to year-over-year high 30s, 40-ish growth in L&I. I just wanted to be clear on that. I didn't want someone to think that the L&I year-over-year was 30. It's the overall is 30 at the high point and the L&I would be a higher component of that. Is that clear?

All right, thank you.

That does conclude our question-and-answer session for today. I would like to hand it back to Mr. Andres Reiner for closing remarks.

Thanks for your participation in today's call and for your support of PROS.

We are excited by our progress in the second quarter. We exceeded expectations in both revenues and earnings, while continuing to execute on our growth strategies. We added new customers to the PROS community and deepened our partnerships with existing customers. We received the top rating from Gartner, we were spotlighted in CFO magazine, and we expanded our direct and indirect sales channels.

These great accomplishments are a testament to the incredible customers, partners, and people that we have at PROS. We are primed to more aggressively build on our leadership position and capture a widening share of this growing market. We are excited about the significant opportunities that are ahead of us and believe that PROS is better positioned to capitalize on them than at any time in our history.

Charlie and I will be presenting at the Pacific Crest conference in Vail next week. We look forward to meeting with investors who will be attending, and we look forward to updating all of you on our next quarterly call. Thank you and goodbye.

Ladies and gentlemen, that does conclude today's conference. Thank you so much for your participation. You may now disconnect and have a great day.