Pros Holdings Inc (PRO) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2012 PROS Holdings Inc. earnings conference call. My name is Jeff and I will be your coordinator for today. At this time all participants are in a listen-only mode. Later we will facilitate 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, Chief Financial Officer. And you have the floor, sir.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today for the PROS Holdings financial results conference call for the fourth quarter and year end of 2012. 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 fourth quarter and full year of 2012, and then I will provide the review of the financial results and our outlook before we open up the call to questions.

Before we begin, we must caution you that some of today's remarks, including our guidance for the year, our competitive position, future business prospects, revenue growth, market opportunities, as well as 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. Additional information concerning risks and other factors that may cause actual results to differ can be found in the Company's filings with the SEC. Also, please note that a replay of today's webcast will be available in the Investor Relations section of our website at www.pros.com.

Finally, PROS has provided in its earnings release and will provide in this conference call forward-looking guidance. We will not provide any further guidance or updates on our performance during the year, unless we do so in a public forum. PROS does not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they are made.

I would like -- I would also like to point out that in addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, PROS reports certain non-GAAP financial results. Investors are encouraged to review the reconciliation of each non-GAAP measure to the most directly comparable GAAP measure 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 would like to turn the call over to Andres.

Thank you, Charlie, and thanks to all who are joining us on today's call.

PROS delivered great results in 2012. We saw increasing momentum throughout the year, and we believe we enter 2013 in a stronger position than at any time in our history. Our business is more diverse, our markets are expanding and our customers in more than 30 subindustries increasingly rely on PROS to monetize their big data. The investments we are making in our people, solutions, and go to market strategies are working, and we expect to continue down this path to capitalize on the significant market opportunity ahead.

Turning to the high-level financial details, fourth-quarter revenue exceeded the high end of guidance at $32.7 million, a 25% year-over-year increase. Non-GAAP operating income was $4.9 million for the fourth quarter, and non-GAAP EPS was $0.11 per share. For the full year 2012, we also exceeded the high end of guidance for revenue. We finished the year with $117.8 million in revenue, a 22% increase over 2011. Underpinning this growth was a 40% increase in revenue from our B2B industries of manufacturing, distribution, and services.

Non-GAAP operating income for the full year was $17.8 million, resulting in non-GAAP operating margins of 15%, and full year non-GAAP earnings-per-share were $0.42. Our strong performance drove end of year backlog to a record $146.5 million, up 18% year over year. And backlog revenue expected to be recognized in 2013 is $108 million, up 26% over the prior year. This represents approximately 75% of our expected 2013 total revenue, giving us a very high level of predictability and visibility similar to subscription-based recurring revenue models.

I am very proud of the PROS team for delivering such outstanding results in the fourth quarter and for the full year. We continue to invest in our people to meet the thriving demand for our big data applications that optimize sales, pricing, quoting, rebates, and revenue management.

Our strong performance in 2012 was driven by a notable uptick in new customer accounts in the B2B industries. In the fourth quarter, PROS was selected by such great companies as American Standard, Guardian Analytics, O'Reilly Automotive, Panduit, Sichuan Airlines, Stramit Building Products, and Volvo Group Trucks, among others. These companies joined those who selected PROS earlier in the year, including ARUP Laboratories, Ecolab, Hewlett-Packard, Kimberly Clark Professional, Nexidia, Oman Air, TE Connectivity, and Zimmer, among others.

We believe this is further validation not only of PROS' attractive value proposition, but also that more and more companies are investing in big data applications to drive sales growth and create a competitive advantage in their markets.

Entering 2012, we made the strategic decision to accelerate investments in support of our three stated growth strategies -- to accelerate awareness and adoption, extend our product leadership position, and increase our global reach and scale. These investments were very successful as evidenced by our new customer signings, expanded customer relationships, and strong year-end backlog. We believe these investments improve our ability to drive meaningful growth over the next few years. Let me share a few highlights from each of our growth strategies.

In 2012, we invested in numerous sales and marketing initiatives to accelerate awareness and adoption of PROS big data applications for pricing and sales effectiveness. These investments are paying off with our exceptional revenue growth in our B2B industries, strong uptick in new customer wins, and increased media coverage. We made great progress in distinguishing PROS in the market as our value proposition aligned with the needs of a growing and maturing market for big data applications that utilize data science.

In 2012, PROS was featured in more than twice as many media stories than in the prior year, including several big data stories in leading publications like CNBC Online, Financial Times, and Forbes.com, to name a few. This media coverage is helping to propel our B2B growth from companies who are looking to extend their leadership position as well as those facing economic pressures.

Underscoring this interest is the PROS story is recognition that predictive and prescriptive solutions that guide real-time decisions in B2B industries are fast becoming a source of competitive advantage. A recent article in Harvard Business Review stated that "performance improvements and competitive advantage arise from analytics models that allow managers to predict and optimize outcomes." PROS has been predicting and optimizing sales outcomes for more than two decades with applications that connect data to key business actions, all in real-time.

Innovations like these are the foundation of our strategy to extend our product leadership position in the market. In 2012, we continued to make incredible progress in innovations that help our customers outperform. We filed six new patents, introduced a new product - Rebate Optimizer, and released new innovations across all of our big data applications. We also continued to lay the foundation for long-term success with our Quote2Win product in 2012 by signing new customers, creating a dedicated mid-market sales team, and increasing awareness and interest in the market.

We also continue to invest in big data technologies that incorporate real-time, prescriptive capabilities powered by data science. For example, our solutions leverage parallelization and machine learning technology for analyzing data in real-time. By connecting data, PROS can apply data science to identify patterns and correlations that guide key business actions. For example, our intelligent quoting capability gives sales reps far more confidence when negotiating deals by providing data-driven insights into their customers' buying preferences, allowing them to tailor offers and quotes that are more likely to win.

The third pillar of our growth strategy is to expand our global reach and scale through direct sales coverage and our partner ecosystem. We finished the year with 38 quota-carrying personnel, a 36% increase over 2011. We now have a stronger sales force than at any time in our history, and believe we are in a strong position to capture our share of what we believe is a large underpenetrated market.

Our partner ecosystem also continues to contribute to our global reach and scale. Our system integration partners actively participated in over 40% of our B2B implementations in 2012, compared to 30% in 2011. We believe it is important to have experienced partners that can help us scale our services as we accelerate growth with new and existing customers.

From a technology partner standpoint, we made great progress in 2012. Microsoft played a key role in driving awareness and differentiation for PROS in the market. Microsoft selected PROS as a launch partner for SQL Server 2012, with in-memory database technology to support our real-time big data applications. PROS was also spotlighted at numerous Microsoft enterprise customer events, welcomed into Microsoft's Chemical and Discrete Manufacturing Reference Architecture Programs, and selected for the Microsoft Dynamics ISV program. Microsoft will continue to be an important partner going forward.

We also continue to invest in our SAP partnership, as we have done for the past seven years. In 2012, we achieved new SAP product certifications that set the standard for the most complete and seamless integration experience with SAP. We believe our depth of integration with SAP ERP and SAP CRM is a key reason why SAP customers choose PROS. In fact, approximately 2/3 of our new B2B customers signed in 2012 run SAP. We believe this indicates strong preference for PROS big data applications for pricing and sales effectiveness in the SAP community. Our SAP partnership continues to be an important part of our strategy.

Overall, 2012 was an outstanding year for PROS. We are privileged to have such incredible people, customers, and partners who recognize the outstanding value we deliver. I am very proud of how the PROS team outperformed once again. This is a testament not only to our people, but also to the high value and strategic nature of our big data solutions.

Looking ahead to 2013, we are targeting another year of strong revenue growth. Our revenue growth of approximately 60% since the end of 2010 validates that our growth investments are working. This puts us in an excellent position to accelerate investments in our growth initiatives in 2013 in order to capitalize on this market opportunity. We are doing this from a position of strength, and we believe our accelerated investments will enable sustainable topline growth of more than 20% for the few years ahead.

We remain confident in our business because demand for our solutions has never been stronger, our customers are realizing high value, our partner ecosystem is strengthening, and we continue to set the pace of innovation in the market. Our real time big data applications are more relevant than ever before as companies across diverse industries look to outperform in their markets with big data science and solutions as their advantage. We are excited about the outlook for 2013 and look forward to another strong year.

Now let me turn the call over to Charlie so he can provide you with a review of our financial results and our outlook for the first quarter and full year of 2013.

Thanks, Andres. 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.

We are pleased with our performance in the fourth quarter, with total revenue of $32.7 million, exceeding the high end of our guidance and up 25% from a year ago. License and implementation revenue was $22.2 million, up 27% from a year ago. Maintenance and support revenue of $10.5 million was up 21% year-over-year and represents the largest component of revenue from recurring sources.

Non-GAAP gross margins were approximately 72% for the fourth quarter, as compared to 74% for the fourth quarter of 2011. Margins can vary from period to period, primarily due to the level of implementation services required relative to the total contract value. Margins also have been impacted by increases in personnel, particularly across our professional services teams, in anticipation of future revenue growth.

Total non-GAAP operating expenses for the quarter were $18.6 million, compared with $14.8 million a year ago, an increase of 26%. Non-GAAP operating income in the fourth quarter increased 7% to $4.9 million, or a non-GAAP operating margin of 15.1%. Our non-GAAP operating income reflects investment across our business in support of our growth.

The non-GAAP effective tax rate was 33.7% and non-GAAP net income was $3.2 million for the quarter, unchanged from the prior year. Non-GAAP earnings per share were $0.11, higher than our guidance. This compares to $0.11 per share a year ago.

GAAP earnings per share for the quarter were $0.05, compared to $0.08 last year, reflecting an increase in non-cash stock-based compensation expense in 2012. A reconciliation of GAAP to non-GAAP is provided in our press release.

Turning to our full year results, revenue was $117.8 million compared to $96.6 million in 2011, an increase of 22%. License and implementation revenue increased $14.7 million, or 23% over last year, and maintenance revenue increased $6.5 million, or 19% over last year. These are very strong results, and we are pleased with our execution during the year.

Our maintenance renewal rates continue to be best in class at approximately 95%, adding to our good revenue visibility. Total recurring revenue, which includes maintenance and support revenue, a number of term license and cloud service contracts, was approximately 42% of total revenue for the year.

Non-GAAP gross profit was $85.4 million for the year, yielding gross margins of approximately 73%, compared to gross margins of 74% for the year ended 2011. Our non-GAAP research and development expenses increased $1.6 million to $25.7 million or 22% of revenue. Non-GAAP selling, general, and administrative expenses for the full year were $41.9 million or 36% of revenue, an increase of approximately $10.1 million over 2011.

During 2012, we increased our investments relative to 2011 to support the growing demand for our big data solutions and to drive long-term revenue growth. We believe these investments were very effective and are reflected in our strong year-end backlog and 2013 revenue guidance. We will spend more time on both of these in a moment.

Non-GAAP operating income was $17.8 million for the year, up 14% as compared to 2011, resulting in non-GAAP operating margins of 15.1%. This compares to operating income of $15.6 million and operating margins of 16.2% in 2011.

Our non-GAAP effective tax rate was 32.5% for the year, as compared to 30.5% in 2011.

Non-GAAP earnings per share for the year was $0.42, compared to $0.39 in 2011. In 2011, the research and experimental credit contributed $0.03 to earnings per share. On a GAAP basis, net income was $0.17 per share.

Now moving to the balance sheet. We ended the year with cash and cash equivalents of $83.6 million, an increase of $15.1 million from last year. Capital spending for the year in facility expansion costs and improvements and IT infrastructure was $8.1 million. We expect spending in 2013 will also approximate $8 million.

Gross trade accounts receivable at the end of the year were $39.3 million. Day sales outstanding were approximately 119 days, an eight-day improvement from the prior quarter.

We generated operating cash flow of $13.8 million in the fourth quarter, yielding a cash flow margin of 42%. For the full year, operating cash flow was $24.7 million, yielding cash flow margins of 20.9%. In 2012, cash flow benefited from a tax refund of $5.1 million in the second quarter. On a normalized basis, cash flow margins were 16.6%.

Before providing guidance for the first quarter and full year, I would like to provide some additional insights into our 2012 performance across geographies, our B2B and B2C industries and our revenue visibility going into 2013.

As we have been discussing with you, we have been investing in our quota carrying sales people, primarily in the United States, and in awareness initiatives to drive our B2B business, which is the key growth driver for our Company. As a result of our investments, our full year B2B revenue increased 40% to $66.2 million. The success of our investments is also evident in our results this year with United States revenue increasing 49% and making up 44% of revenue for the year, compared to 36% last year.

Our legacy Travel B2C business, which is predominantly outside of the US continues to perform well with full year 2012 revenue of $51.6 million, an increase of 4% year-over-year and inline with our expectations of single-digit growth.

We continue to realize healthy demand across Europe in both our B2B and B2C industries. Revenue from Europe was 27% of total revenue in 2012, as compared to 28% of total revenue last year, and showed 19% growth over last year. The rest of the world made up 29% of revenue and decreased slightly by 2 points.

We are particularly pleased with our backlog at the end of 2012 of $146.5 million, compared to $124.1 million at the end of 2011, an increase of 18%. The portion of our 2012 ending backlog estimated to be recognized as revenue in 2013 is $108 million, an increase of 26% over 2011.

At the end of 2012, headcount, including outsourcing, was approximately 700, which increased 30% from the end of 2011. This reflects our increased investments in sales, marketing, professional services, engineering, and administrative personnel to drive growth.

The B2B markets we serve are large, growing and remain significantly underpenetrated. Interest levels in our big data solutions remain very high, and we continue to benefit from our diversification across many industries and geographies.

Because of all these positive tailwinds and our position of strength, we continue to believe making strategic investments to drive our future growth is the right thing to do. As you know, based on our percentage of completion revenue recognition model, we believe investments we make today will positively impact revenue down the road and will be evident in our backlog. With our strong year-end backlog, we have seen tangible evidence that our 2012 investments paid off. We believe accelerating our spending across the Company in sales and marketing, development, and implementation services and G&A in 2013 will further increase our leadership position and enable us to become a much larger company for years to come. More specifically, we think these investments will enable us to capture 20% plus topline revenue growth over the next few years.

At the same time, our long-term growth could also be enhanced by acquisitions, considering our strong balance sheet. While we have no specific activity to announce at this time, we will consider acquisitions that support our strategic long-term objectives.

Our focus on running a profitable and positive cash flow company remains a key underpinning of our financial strategy. While in 2013 we are accelerating investments which will impact margins year over year by approximately 150 to 200 basis points, our expectation is that we will deliver a modest operating income increase in 2013, and modest operating margin improvements in 2014 of approximately 50 basis points. This will still enable us to significantly invest to drive a stronger business while further realizing the long-term potential of the operating model.

I would also like to make one comment on the research and experimental tax credit which was renewed for both 2012 and 2013 in January of 2013. The total 2012 credit will be reflected in the quarter and year it was reinstated, as required by GAAP, which is the first quarter of 2013. Therefore, the entire estimated 2012 research and experimental tax credit will be reflected in our first quarter and full year of 2013 tax rates.

Now, turning to our outlook. We continue to be optimistic while mindful of the global economic environment. We enter 2013 with a record revenue performance in 2012 and very strong backlog. For the first quarter, we anticipate revenue in the range of $32.7 million to $33.3 million, approximately 22% growth year over year at the midpoint. We expect total expenses to be approximately $29.3 million. This includes higher overall personnel levels based on our prior quarter hiring in support of our strong backlog, expected first quarter employee additions and planned strategic investments in sales and marketing in support of our business.

In addition, it also includes a seasonal expense for employment taxes in the first quarter which is up approximately $1 million over the fourth quarter. We expect non-GAAP operating income margins of approximately 11% at the midpoint of our revenue guidance.

With the full-year impact of the 2012 research and experimental credit recorded in the quarter, on a non-GAAP basis there is essentially no tax provision in the quarter. Including the 2012 research and experimental tax credit in the first quarter of an estimated $0.04, non-GAAP earnings per share is expected to be $0.12 to $0.14 based on an estimated 29 million shares outstanding. On a GAAP basis, we expect operating income margins of approximately 2% at the midpoint of our guidance. Including the 2012 R&E credit in the quarter, there is a tax benefit of approximately $1.1 million. GAAP earnings per share is expected to be in the range of $0.05 to $0.06, including stock-based compensation expense of approximately $3.1 million.

For the full year, we expect revenue growth of approximately 22% to 23%. Our estimated backlog revenue at December 31, 2012 to be recognized in 2013 represents approximately 75% of 2013 annual revenue guidance. This is good visibility going into the year.

Including the investments we will be making this year that Andres and I addressed, we expect non-GAAP operating income margins of approximately 13% to 13.5%.

For gross margins we expect to maintain our solid gross margins attained this year and expect gross margins of approximately 71% to 72%. With the research and experimentation tax credit for 2012 and 2013 both recorded in 2013, we expect the full-year non-GAAP tax rate to be approximately 21%, and for the second through fourth quarters we are modeling non-GAAP tax rates of 27%. Excluding the 2012 R&E credit, we expect the tax rate to be approximately 27% for the full year 2013.

For GAAP we are modeling the full-year tax benefit of approximately 10%, and we are modeling GAAP tax rates for the second through fourth quarters of 18%. Excluding the 2012 research and experimental credit, we expect the 2013 GAAP tax rate to be approximately 18%.

In summary, we are pleased with our performance in the fourth quarter and the full year and believe we are very well-positioned for a strong performance in 2013. We are confident that our growth strategies are working, and that we are well-positioned to capture the growing opportunity for real-time big data solutions.

With that, let me turn the call back to the operator for questions. Operator?

(Operator Instructions). Chad Bennett, Craig-Hallum.

Nice quarter.

Thank you.

Bear with me, I am in an airport. So, I just want to dig into the backlog number, was really impressive. I guess I am trying to understand if we dig into it a little deeper, how should we assume the growth in your L&I revenue and maintenance revenue mirrors the composition that they play in backlog at this point? Hello?

Mr. Bennett, are you there?

Yes, I am.

Please proceed.

Can you hear me, guys? Hello?

I believe we may have lost our speakers. Mr. Murphy, are you there? All right. Pardon the interruption, looks like we lost our presenters. Just one moment here.

Ladies and gentlemen, if you please, just remain on the line. It appears that we have lost our presenters. If you wouldn't mind staying on the line for us here and we will remain with Q & A. Mr. Bennett, we will start with you when we get our presenters back in.

Thank you for your patience. Your conference will begin momentarily. Once again thank you for your patience and please remain on standby.

Hi, Chad.

All right, ladies and gentlemen, it appears that our speakers are back on the phone lines now. We are going to go ahead and resume the Q&A portion of our call. Mr. Bennett is going ahead and start with you. Please proceed.

Nice job on the quarter and the backlog number was really impressive. I just want to dig a little deeper in the backlog since it is the time of year that you talk about it and report it. I guess if we look at the short-term backlog in the year-over-year growth that you ended up at for the year, if we look at that year-over-year growth throughout the year, did backlog pretty much grow at that year-over-year rate throughout the year or did it grow at a faster rate ending the new year in the second half? Or is there any way to look at it linearly from a year basis?

I would say it grew -- certainly we gave I think good indications we had a good Q2, a good Q3 and a good Q4. So it grew very nicely during each of those quarters and Q4 was actually a little better quarter than we had expected from a backlog standpoint. So we are very pleased with the results for the year.

Great. And also was -- is SaaS anything meaningful in the backlog number to speak of?

No, not really know. We booked about the same amount of business this year as we did last year.

And in the second half you really pushed the big data pitch around the products more. And I know it is probably tough to quantify, but do you think you really -- the backlog reflects your efforts in big data at this point or do you think it is too early?

I would say I think it is still early, but we definitely are seeing that companies really are looking for solutions that help them drive their business decision and help them monetize big data. So we definitely see that we are aligning better to companies' challenges and we help them solve them. So we definitely see organizations in sales and pricing, really, be interest (technical difficulty) technology whether the company is performing well or going through challenging times.

And is it fair to say obviously your MDS business grew substantially this year and it is great that you kind of sliced that out and gave us some transparency there. I am assuming that that business is even a bigger portion of backlog than it was as a percentage of revenue ending the year. Is that fair to say?

Yes, that is fair to say. Because we have been saying that travel is a very good business for us, but it is more of a single-digit growth story. So, think that the backlog translates for B2B more than it does for the B2C business. That is correct.

Great. And last one for me, Charlie, and I was kind of on and off the call, I am at the airport right now. But regarding investments heading into 2013, remind me again. What could you say an operating margin expansion, did you say 50 bps?

For 2014 we were talking about 50 bps in the margin. 2013 we are talking about the margins coming down from 15% non-GAAP to approximately 13% to 13.5% non-GAAP coming down to 13%, 13.5%.

And that reflects what type of investment in quota carrying sales people? Did you explain that?

No we haven't, but we are planning on expanding our quota carrying sales people just as we did last year and the year before and we expect that headcount to be up approximately 30%.

Similar type, okay. That is good. Great job on the quarter. Thanks.

Thanks.

Thank you.

Tom Ernst, Deutsche Bank.

Good afternoon. Nandan Amladi on behalf of Tom. Question on your system integration ecosystem. How big is that community now, relative to this time last year? And what are your plans this year in terms of balancing between hiring people internally and growing the system integration community?

Yes, we talked about the system integration program and system integrators are a key strategy around scaling the business and we are very pleased that we reported that over 40% or approximately 40% of our projects this year we had a system integrator partner involved. We still focus on our key system integrator partners and we want to continue to expand those programs moving forward. We are pleased with the progress and continue to invest in that area as we continue to scale the business.

And the other half of that is that we are planning on continuing to grow our own professional services organization in support of our implementations. And we actually accelerated some of that growth late in the fourth quarter and early in Q1 based upon the uptick and demand that we saw going into 2013. So as Andres mentioned it is going to be a balance of additional activities with our systems integrators, but also we are expanding our internal capabilities as well to keep up with the growth.

John DiFucci, JPMorgan.

Thank you. I echo, nice job. Charlie, first question is on CAPEX. I noticed on the cash flow statement there was a change in the label for the CAPEX line to include capitalized internal use offer development cost.

That's correct.

And I also noticed that that line was $9.5 million which is $1.5 million greater than the $8 million you guided to for the year. What is going on there and with that $1.5 million in the past, would that just automatically go right to the income statement? Are you looking at things a little differently now?

Yes, I think there's several pieces to that and that is that GAAP, the GAAP cash flow statement is what you actually have paid in cash for CAPEX spending, whereas the numbers that if you reconcile CAPEX -- I'm sorry, capital assets at the beginning of the year to the end just the number I referred to. So part of it is just how the cash flow reflects capital ex, which is on a cash basis whereas as you know capital spending is really on an accrual basis.

The other part and I am glad you brought this up because we disclosed this as well is we did have approximately $2 million of capitalized development cost in support of internally developed software. That is the piece you just mentioned. So that is included in cap spending on the balance sheet, but also if you took that out it would be an indication of how much development grew on a comparable basis from 2012 to 2013. You would have to add that back to the R&D spend that we reflected on the income statement.

Does that make sense?

Yes, no, it does. I am just curious why you started to do it this way? Why would you (multiple speakers) put it into R&D? I mean, I know that you have -- in some cases you have a choice to do it this way, but I'd -- never had done it before like this.

Yes. This really gets to internally developed software as opposed which is the SaaS model, okay. Under the SaaS model you do capitalize the development cost. So as we mentioned, we have a SaaS initiative and we talked about [quote doing it] as one of our SaaS initiatives that we have. So for the development of those types of products, customary with GAAP and customary with other companies do you capitalize those development cost. Whereas other development costs that are not in association with internally developed software just general R&D continues to get expensed.

So we are quite frankly just following GAAP. We are not leading this in any direction. This is GAAP.

But you don't have to do that. You could have expensed that, couldn't you?

No. No, my understanding -- no, no, my understanding is no, this is GAAP.

Great. And a question I guess for Charlie and Andres. Either. Given your backlog at the end of 2012 and the amount to be recognized in 2013, it implies (technical difficulty) have to grow your new revenue by about 13% in 2013. That was down from about 30% last quarter -- last year. I guess just general question is is this a reflection of simple prudent conservatism on your part. Because it sounds like there's a lot of momentum in the business. Or I guess have to ask the question, or is it a slowdown in that new business momentum?

No, yes, no, I think we don't expect a slowdown in new business, but we are being prudent here. There's still a lot of global uncertainty. We don't want to get ahead of ourselves. And we are obviously very pleased with the position we are going into -- going into the year, but we still have a whole year ahead of us. There is economic uncertainty, we feel it is best to be a bit prudent.

But also to look at it another way, if you look at the relative proportion of backlog revenue to total revenue, last year and what is expected this year, they are not that different. Last year meaning going into 2012 we had about 73% of our actual 2012 revenue booked going into the year. This year, we are saying it is about 75%. So, relatively about the same. 72% to 75%. Obviously 75% is better than 73%, so it is just we are pleased.

But we just feel like this is the right guidance to be providing. We think 22% to 23% revenue growth in 2013 is very good growth in this economic environment. But it is not reflective of our confidence. We feel positive about the business.

That all makes sense. Thanks.

Tom Roderick, Stifel Nicolaus.

This is Chris Koh for Tom. Good job on the quarter.

Thank you.

Thank you.

You're welcome. Just a quick question regarding the investments. I know you have talked quite a bit about that, but maybe get a better handle on what you expect to ultimately get out of that. Because I think we could certainly understand investing even 200 bps in 2013 to generate the 22 plus percent revenue growth, but it sounds like you may even be expanding that into 2014 if you are only targeting 50 bps worth of margin growth.

So is this something where you fell like maybe your long-term margin profile should -- maybe should be a little bit lower than you previously have been viewing it, or is this purely just a -- we see such a huge opportunity that we are going to go after it aggressively?

Yes, it is really that we see a huge opportunity and that has, I think, been validated by the increase in awareness and our strong backlog position going into 2013. It's that. It is not that the fundamental model has changed. We believe we can drive operating margin growth.

But we think the growth opportunity on the top line is really terrific and we want to invest to achieve that. So this is really fundamentally, I think, it is a positive statement for the Company. I know it may be viewed a bit differently by perhaps certain investors, but this is a very positive statement.

We could keep operating income at 15% if we chose to. It is not the right decision for our investors. It really isn't. The topline growth is there. We have demonstrated that in 2011 and 2012 and now we are going after 2013 in a very strong position.

So we want to take advantage of the market opportunity ahead of us. And we have the balance sheet to do it, by the way, as well. And we did generate good positive cash flow last year. We got lots of assets we can bring to bear here and whether we have another $3 million or $4 million of cash on the balance sheet at the end of 2013 is not going to help our shareholders.

But if we can take that investment and put that into the initiatives we will do fabulous.

Great, and -- go ahead.

Yes. one other point that I would like to bring is we talked about our B2B industries, manufacturing distribution and services growing at 40%. We believe we want to maintain that same growth as we move forward. And a lot of the initiatives that we put in place around sales and marketing are specific around those new industries and we have been talking about the startup we have seen in more mature business and we are continuing to develop those areas.

So as we are seeing momentum, we want to make sure we are taking advantage of that momentum and (multiple speakers).

Excellent. Thank you, Andres. No one will blame you for playing offense if you see an opportunity, I think. So that is good to hear that you see that opportunity. So just to maybe frame our expectations is this something where you fell like there is enough opportunity where this could go even from a 20% grow to maybe more in the 25% range? I don't want to put you guys in a corner obviously, but I think that it would be important to maybe measure the results as they come.

I think for right now we think the guidance of 22% to 23% is the right guidance for the reasons we mentioned. But we are optimistic about the business. We just feel like we are giving the right level of guidance. And we also have said and we have said that we believe that it's a 20% plus growth opportunity for the next few years. So it's not like we are looking at this as a 2013 year. We are looking at this as 2013, 2014, and 2015. We just can't get too far ahead of ourselves as far as getting too far into the future.

But if you go back and you think about the fundamentals, a large underpenetrated market which is our B2B market space and we have got the opportunity to get more than our fair share of that and we want to go out and take it. And it is a very good position to be in. It is not without risk, certainly, but it is a very good position to be in.

Great. Good job. Thank you.

Thank you.

Jesse Hulsing, Pacific Crest.

First, on the sellside, how are your sales, new hires ramping on the productivity basis versus your expectations?

The ramp-up has been according to our expectations. We have invested quite a bit on our onboarding program within the last two years and we are seeing good results. We still see the average ramp-up time in the nine-month range. But we are pleased with the maturing of the organization. We are also pleased that we are improving our quota at payment year over year. So all of our metrics internally definitely improved year over year.

And, Charlie, how did your --? Last quarter you mentioned that your growth in new customers was actually stronger than existing customers, I believe. Did that trend continue in Q4 and do you expect that trend to continue into Q1 as well? Based on your pipeline?

It did continue in Q4. We are obviously very pleased with that. As you know under our model we generally do not do an enterprise license. We license a segment of the business. We may license just certain products. May lessen by geography. So every new customer acquisition we think gives us an opportunity to go back and sell in and we have had a very successful track record of doing that.

But, just to be more specific on your question. Yes, new customer acquisition is up. We are very pleased. We believe with the awareness of the marketplace that has taken place during 2012 and going into 2013, we expect to see a continuation of that. We expect 2013 growth will come primarily from new customer acquisitions, and then of course we will continue to sell back in.

And based on your year and the calls that we have had through the year, it sounds like bookings may be accelerated in the second half. Would you say that is the case versus the first half? And based on the sales reps that you are bringing in and the ramp time do you expect that pace to continue?

We did see bookings accelerate in the second half. We did see a strong second quarter as well. So we were very pleased that we saw a very strong Q2, Q3 and Q4 in our business and that is what is also driving confidence as we look forward into 2013.

Great. Thank you.

Ross MacMillan, Jefferies.

Congrats from me as well.

Thank you.

One question that hasn't been asked on the backlog number, I am curious about the flat known current, does that reflect -- what does that reflect, if anything? Is it that you're implementation time frames are shortening or is there anything else I should read into the flat noncurrent backlog?

No, I really wouldn't read anything into it. We are actually pleased that the deferred revenue each quarter in 2012 actually increased. Increased perhaps more modestly in the fourth quarter compared to three, but what's unusual for us if you go back and look at the history to have every quarter actually go up. And that gets back to the timing of milestone billings and, of course, contracts. The timing of the contracts close. But I wouldn't read anything into that kind of a shift that you are referring to.

That's helpful. Second question I had was just on cash flow you had a really strong Q4 cash flow. Just as we think about framing cash flow from operations growth in 2013, is that approximation to the growth in non-GAAP operating income still a good benchmark to think about cash flow from operations growth?

It is. It is. I think that has been a good benchmark for us. So to be specific so everyone understands what we are talking about, the non-GAAP operating income and we think cash flow will approximate that perhaps modestly better than that which was certainly in 2012, it was. It was 16.5% on an adjusted basis compared to 15.1% in operating income. So 2013, if we are talking 13% to 13.5% in non-GAAP operating income we would expect the cash flow to be modestly better than that.

That's helpful. Couple of -- if I could to Andres. Number one, I am just curious about your product mix and, in particular, I think what you have done over the last year, year and a half has expanded into quoting. You have moved into rebate management. It seems like there are more products SKUs building in the portfolio, probably some that you haven't talked to us about yet. Can you just talk about that as a way to drive incremental growth adding products to the portfolio?

Yes, definitely, we have talked a lot about focusing on how do we drive sales growth for our customers and that is why division has been to continue on driving pricing effectiveness. Driving sales effectiveness in those areas by quoting rebate pricing and we see other opportunities. So, it is really tied to bringing the connected data together with predictive and prescriptive analytics and helping while the sales organization marketing and pricing drive their sales growth and their profitability improvement. And we are always innovating in our core products and we are continuing those innovations.

Should we expect to see more product SKUs emerge this year?

I would say we are always innovating and, obviously, those are areas we are looking into expanding whether it be through a build or a buy. We have talked about our vision of driving sales growth and that to complete this vision we see other areas of opportunity.

So, that was my last question. It sounded like you were leaning more towards a potential in organic path for something here. I am just curious, competitively I think we know who you have competed with historically, but as you start to think about potential opportunities from an M&A standpoint, might they be different product areas, I guess, that can leverage the data that you already -- or are leveraging for pricing? Or maybe the bigger question is just how are you thinking about your M&A strategy? Is it geographic? Is it product? Is it customers? Anything there would be helpful. Thanks.

Yes, that is a great question. We have said that our M&A strategies around adjacencies that help complete our vision around bringing the connected data with predictive and prescriptive guidance to organizations. So it is really around real time big data, powered by data science capabilities to drive sales growth. And Rebate Optimizer is a good example of a great adjacency that makes the full solution much more powerful. And it allows our customers to start first with analytics and price optimization, but then expanding to Rebate Optimization and quoting or start with Rebate then move to Price Optimization.

It gives us more paths to start in accounts and bigger differentiation because all of these components are connected together. And they are leveraged on the same data model, the same real-time architecture.

That's helpful. Maybe one very last one. Your quota carrying heads up 36%, I think, was about in line with your target. I was just curious within that number, has that been a pretty stable gross number to get to that net? In other words has there been much turnover in the quota carrying heads?

Yes we have had some turnover. But it is within normal ranges. And absolutely.

That's helpful. Thank you so much. Congrats again.

Thank you.

Thank you.

Greg McDowell, JMP Securities.

This is [Bill Black] filling in for Greg. Congratulations on a great quarter. I understand you guys are offering a discovery inside service to your select prospects. Could you provide some color to us today how this program has improved your run rate? And have you seen this increase your overall cost of sale?

Yes. So this program helps us identify the opportunities that customers have within their environment and helps them lay out the best path to move forward with implementing our technologies, really understanding their business processes in areas that we can provide specific, very prescriptive guidance as which steps will drive the highest value for that given customer, and be able to generate a good business case with a strong ROI case around the value within a fast time to value to implement the solution. We have seen this differentiate us in the market and that is part of our strategy, to really partner with customers to help them outperform and help them drive their growth strategies.

I think our experience of having strategic consultants in addition to our technology specialists differentiate us in the market and it is an industry best practice.

Yes, it really doesn't impact our gross margins because this is handled by our solution consulting teams, which are part of the sales organization primarily. They do get some support from other disciplines, but it is not significant. It really is a sales expense.

Andres, you mentioned earlier you guys launched a mid market approach in 2012. What -- can you share with us some of the results? Are you satisfied with the approach? What are you looking to improve on? What do you see as the things you might want to continue with this fall?

Yes, so, over the last few years we really focused on driving awareness and adoption of our technologies and we started programs around marketing, demand generation, improving our sales organization, growing our sales organization. These areas you can see the results by the overall growth that we have experienced, specifically around the B2B industries and overall it is a business. But a lot of these initiatives have been aligned around these new market opportunities that we have talked about growing at a much faster pace than our legacy or more mature part of our business within travel.

So you can see in the number of net new customers as well as the 40% growth that we talked about in the B2B industries this year which, we believe, we can maintain that level of growth going into this year.

Did you mentioned how are you defining the market? A certain type of revenue? Are you up to like $2 billion in revenue or a certain vertical you are going after? How are you defining that approach?

Yes, so the midmarket we are defining between $100 million and $500 million in revenue. It's our current definition of the midmarket.

Any certain verticals that you want to specialize in and continue to go forward? Are you approaching new verticals that you are trying to attack?

It is the same verticals we are focusing the enterprise. I would say that manufacturing and distribution is where we are seeing more of the adoption industries like high-tech is one of the areas that we have seen good adoption.

And final question as I have to jump off real quick, of your revenue can you -- Charlie, maybe that's a good question for you, how much is B2C versus B2B?

Yes. We actually gave I think some pretty good disclosures in the financial statements. We said $66 million is the B2B. The balance which is a little over $50 million is the B2C, the travel business. So and what is important about that is that is a nice shift over the last several years. It has been increasing. We have set our growth opportunities has been in the B2B business and manufacturing distribution and services. So it is trending exactly as we had expected it would trend. And we are obviously very pleased with the growth in the B2B side of our business in 2012 and we expect that to continue. And I think it is a validation of the investments we have made. It is the a validation of the awareness that is increasing throughout 2011, 2012 and going into 2013 which we have obviously invested very heavily into our marketing programs.

But also just in general, there's so much out there particularly in 2012 about big data, sales effectiveness, the ability to use analytics to help improve sales. We fit right into that. We have been doing that for 25 years.

So I think we are very nicely positioned as far as being able to drive revenue. And we have said, just, we love our travel business. We are very pleased with it, but we have said for a long time that is a single-digit revenue growth business for us. So when you look at the growth in -- of 22% last year and one piece of single-digit it is why the B2B growth is 40%. And that is the startup within the mature organization that we have been talking about on previous calls.

So we are pleased with the trend and we hope and expect that that trend will continue.

Yes, that's what I figured. Last thing, Andres, if you could tell everyone on the call today what is your number one goal as CEO of PROS you want to accomplish for 2013 and how do you plan to go about accomplishing that?

Yes, so, my number one goal is to continue to drive the passion around driving customer success within our business. This is something that really has created PROS to where it is today -- our passion in helping our customers outperform -- and continue to drive that growth in the business.

It, for us, it is very important to maintain this momentum and as we scale and as we increase our headcount to keep the culture that customers are the center of our success and if we make them successful, we are going to continue to prosper and drive our growth. And a lot of focus from the executive team. I am very proud of how close we work together to maintain the culture and the passion for the success and how we have driven the business and not looking at the economic environment as an excuse, but driving our strategies that we have proven over the last few years and continuing to expand on those strategies and accelerate those strategies. And the way we are going to measure is by looking at the results in our growth and our success in driving the business.

How you do define that customer success though? You mentioned that. How -- what are you putting in place to define that?

We track a net promoter score around our customers. But more importantly from a financial perspective, we talk about the maintenance renewal rate which we believe is best in class over 95%. But we also have a very high level of reference ability. In fact we usually tell our prospects, we show our customer, listen, we ask them to call any customer that they are shown and do their own reference check on their own.

And that is our standard. We want any customer to be able to call or any prospect to be able to call any customer and achieve a good reference. And that's a very high standard that we have set for ourselves. But we obviously have a customer success organization that measures net promoter score and measures improvement which we have seen improvement year over year and those are areas that, through surveys, we can measure how well we are doing. How many are promoters and how we are improving our programs.

I would say one thing is that we look at referenceability as a clear differentiator between us and our competitors. And as Andres has mentioned we are very open about references and we have -- I mean, thanks -- we have customers that are very passionate about PROS which we are very proud of. But that gets back to Andres' number one goal, which is passion for customer success. So it comes back. When you show that passion it comes back and references and long-term relationships and it has always been that way at PROS.

Thank you very much.

Ladies and gentlemen, that concludes the time we have for questions. I would now like to do the presentation back over to Mr. Andres Reiner for concluding remarks.

Thank you for your participation in today's call and for your support of PROS. We are confident that our growth strategies are working. As more and more companies look to PROS to monetize their big data, we continue to invest in innovations and our go to market strategies in order to drive long-term sustainable growth.

I would like to thank our PROS team worldwide for an incredible 2012. I am proud of their relentless passion and commitment to innovation and customer success. Thank you also to our customers, partners and shareholders for your support of PROS.

We look forward to a strong 2013 and to speaking with you on our next call. Thank you and goodbye.

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