Pros Holdings Inc (PRO) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2013 PROS Holdings, Inc. earnings conference call. My name is Jackie, and I will be your coordinator today.

At this time, all participants are in a listen-only mode. Following the prepared remarks, we will have a question and answer session. (Operator instructions.) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the conference over to Charlie Murphy, Executive Vice President and Chief Financial Officer. 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 2013.

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 2013, 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 and 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 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 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, which 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, and thanks to all who are joining us on today's call.

PROS delivered another quarter of solid performance, with revenue exceeding the high end of guidance at $35.5 million, a 26% year-over-year increase. Non-GAAP operating income also exceeded the high end of guidance at $4.9 million, and non-GAAP EPS was $0.12 per share.

These results reflect the continued demand for PROS solutions as more companies recognize that their big data can be a powerful source for sales growth. According to a study by PwC, a majority of CEOs believe their greatest growth opportunities will come from expanding their customer base, and they are increasingly looking to predictive and prescriptive big data technologies like PROS to uncover high yielding growth opportunities based on a deeper understanding of customer behaviors.

We believe PROS big data science and technology help give companies a competitive selling advantage which can result in higher win rates and increased sales. For example, an article in CRN magazine spotlighted HP, a PROS customer, and how they've recently experienced increased win rates in the sales channel through the use of new pricing tools.

Even in an uncertain macroeconomic environment, companies are looking for strategic technology partners that provide meaningful impact on sales growth. We believe our market leading big data solutions, our strong history of delivering substantial and tangible results, and our unmatched customer referenceability continue to create differentiation and preference for PROS in the market.

Our ongoing investment in our stated growth strategy continues to drive our momentum in the market. We remain focused on accelerating awareness and adoption of our solutions, extending our product leadership position, and increasing our global reach and scale. I will share a few highlights from each of these areas.

Our investments in accelerating awareness and adoption are working, resulting in a stronger pipeline and increased demand. We experienced strong response to our recently held PROS OUTPERFORM big data event in Europe. Like our North America OUTPERFORM event, we saw record attendance and increased willingness from our customers to share the success they've had with our solutions.

Guests heard presentations from PROS customers, including 3663, HP, Johnson & Johnson DePuy, Novozymes, and Volvo Trucks. One customer in the distribution industry described how they've increased gross margins 260 basis points, five times higher than their goal. Another reported that they've increased their average selling price by 6% during the same time one of their competitors saw their average selling price fall by 11%.

Results like these are fueling increased recognition in the marketplace of PROS as the leader in big data applications for sales growth. For example, PROS was recently spotlighted in a story in the Wall Street Journal about technology that can help companies achieve a competitive advantage.

We believe PROS' value proposition is unique and relevant at a time where more and more companies recognize that big data can be an untapped source of sales growth. To capitalize on this opportunity, we will continue to invest in sales and marketing strategies that increase awareness and adoption of PROS.

Innovation remains a key differentiator for PROS, and we continue to invest in extending our product leadership position in the market. We recently expanded our midmarket SaaS offerings with the introduction of PROS Step, complementing our Quote2Win product for deal quoting.

Step brings the power of PROS data science and prescriptive analytics to the cloud, providing pricing and selling recommendations through a self-serve model that's easy to set up and use in a matter of minutes. Step uses data science to reveal new high yielding revenue opportunities based on customers' buying patterns and preferences, arming sales reps with greater focus, confidence, and agility.

Alliance Laundry Systems selected Step to provide science driven pricing and selling guidance to help their sales teams capture greater value for their 20,000 parts and improve responsiveness to customers. Innovations like Step strengthen our midmarket offerings and extend our overall product leadership position. We expect recurring subscription revenue from Step to provide another source of sustainable long term growth for PROS.

We also continue to innovate in the travel industry with our new group pricing solution that allows airlines to automate large group bookings on their websites in real time, powered by data science. This helps airlines like Swiss, for example, improve their customer experience and increase business agility. This is just another example of our ongoing commitment to innovation that helps customers outperform in their markets.

The third pillar of our growth strategy is to expand our global reach and scale through direct sales coverage in our partner ecosystem. We ended the second quarter with 42 quota carrying personnel, up 35% year-over-year. We expect to achieve our goal of approximately a 30% increase in quota carrying personnel in 2013 to meet the demand for solutions.

Our strategic partnership with Microsoft continues to play an important role in driving awareness and differentiation for PROS in the market. In the second quarter, PROS won the 2013 Microsoft Application Development Partner of the Year Award, this a result of our shared vision and collaboration in helping companies turn big data into a competitive advantage through innovation technologies.

We are honored to be recognized for demonstrating excellence in innovation and implementation of customer solutions based on Microsoft technology. We appreciate the support and confidence of Microsoft and look forward to a continued strong relationship.

Our partnership with SAP provides visibility and differentiation for PROS in big data solutions. At SAP's SAPPHIRE NOW conference, we prominently showcased our SAP HANA OEM partnership and our market leading integration with SAP ERP and SAP CRM.

We believe SAP customers choose PROS because we provide the most complete and seamless integration experience in the SAP market. In fact, more than half of our B2B customers run SAP. We believe this indicates strong preference for PROS big data applications for pricing and sales effectiveness in the SAP community.

Q2 was a solid quarter for PROS. We are pleased with our execution against our three stated growth strategies. Looking ahead, we remain confident in our business for the rest of the year, and we're maintaining our full year guidance.

Demand for our solution continues to grow, 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. We believe PROS is in a strong position to capitalize on this sizeable market opportunity.

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 third quarter and full year 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 second quarter with total revenue of $35.5 million, exceeding the high end of guidance, an increase of 26% from a year ago.

License and implementation revenue was $24.2 million, up 33% from a year ago. Maintenance and support revenue was $11.4 million, up 14% from a year ago, and represents the largest component of revenue from recurring sources. Total recurring revenue, which includes maintenance and support revenue and a number of term license contracts, was 37% of total revenue in the second quarter.

Non-GAAP gross margins in the second quarter were approximately 71% as compared to 74% for the second quarter of 2012. Gross margins can and do vary from period to period, primarily due to the level of implementation services required relative to the total contract value.

In addition, gross margins have been impacted by investments in personnel, particularly across our professional services teams in anticipation of future revenue growth.

Total non-GAAP operating expenses for the quarter was $20.4 million compared with $16.5 million a year ago, an increase of 23%. Non-GAAP operating income in the second quarter was $4.9 million compared with $4.4 million a year ago, an increase of 11%.

Non-GAAP operating margins for the quarter were 13.8%, which reflect continued investments across our business in support of our growth. We will continue to invest to capitalize on what we believe is a very large market opportunity.

Non-GAAP effective tax rate for the second quarter was approximately 27%, resulting in non-GAAP net income of $3.5 million for the quarter, an increase of 26% over the prior year.

Non-GAAP earnings per share exceeded guidance and was $0.12 per share compared to $0.10 per share a year ago. GAAP earnings per share for the quarter were $0.02 per share compared to $0.04 per share a year ago. 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 cash equivalents of $88.2 million, an increase of $5.8 million from the end of the first quarter.

Capital spending for the second quarter was $800,000. We expect capital spending for the year, which includes infrastructure and facility improvements, to be approximately $8 million.

Gross accounts receivable at the end of the quarter was $37.6 million. Days sales outstanding were approximately 103 days, a seven day improvement from the first quarter.

We generated operating cash flow of $6.7 million in the quarter, yielding a cash flow margin of 18.8%. Year-to-date operating cash flow is $7.9 million, a 14% increase over last year. This yields a cash flow margin of 11.5% year-to-date. For the year, we expect our annual operating cash flow to approximate our annual non-GAAP operating income of approximately 13% to 13.5%.

Finally, headcount, including outsourcing, at the end of the quarter was 770, up from 620 on June 30th, 2012, an increase of 150 or 24%. We continue to increase our sales, marketing, engineering, professional services, and administrative resources, which reflect continued confidence in our long term opportunity.

Before I turn to our guidance for the third quarter and the full year, let me provide you with some additional information related to our business. We continue to invest in awareness initiatives to drive our B2B business, which is the key growth driver for our Company.

As a result of our investments, we continue to see solid growth in the United States primarily from our B2B business, which represented 48% of total revenue for the quarter, an increase of 54% over the same period last year, as compared to 39% of total revenue in the second quarter of 2012.

Revenue from rest of world continues to perform well and is up 19% compared to last year. It made up 30% of total second quarter revenue.

Revenue from Europe was 22% of total revenue in the second quarter as compared to 28% of total revenue in the second quarter of 2012. We faced some sales execution challenges which impacted our growth in Europe.

We continue to make improvements in our go-to-market initiatives in this region. We are confident about the enhanced team we now have in place, and we feel good about the opportunity in Europe going forward.

Overall, our business continues to have positive tailwinds driven by the large, growing, and significantly underpenetrated B2B markets we serve. Interest levels in our big data solutions remain high, and we continue to benefit from our diversification across many industries and geographies.

Our plan remains to continue to make strategic investments to drive our future growth, particularly in sales and marketing, product development, professional services, and administration in 2013. We are seeing the benefits of these initiatives, and we believe these investments will further increase our leadership position and enable us to capture 20% plus top line revenue growth over the next few years.

Now turning to our outlook, we continue to be optimistic while mindful of the global economic environment. For the third quarter, we anticipate revenue in the range of $36.2 million to $36.8 million, approximately 22% growth at the midpoint from the third quarter of 2012.

We expect total expenses to be approximately $32 million, up from $28.1 million in the third quarter of 2012 as we continue to make strategic investments in our business.

We expect non-GAAP operating income margins of approximately 12.3%, at the midpoint of revenue guidance.

With a tax rate of approximately 27% in the third quarter, we anticipate non-GAAP earnings per share of $0.10 to $0.11 based on an estimated 30.3 million shares outstanding.

On a GAAP basis, we expect operating income margins of approximately 1.4% and GAAP earnings per share of $0.01 per share.

With the Research and Experimentation Tax Credit for 2012 and 2013, both recorded in 2013, we expect the 2013 full year non-GAAP tax rate to be approximately 20%. And for the third and fourth quarters, we are modeling non-GAAP tax rates of 27%.

For GAAP, we are modeling the 2013 full year tax benefit of approximately 32%, and we are modeling GAAP tax rates for the third and fourth quarters of 27%.

For the full year, we continue to expect revenue growth of approximately 23%. Our non-GAAP operating margin guidance continues to call for approximately 13% to 13.5% as we invest in the significant opportunity we see ahead. We continue to believe that, long term, we will be seeing increasing operating margin leverage as our business scales and we realize the benefits of our investments.

In summary, our performance in the first half of the year reflects that our growth strategies are working, our products deliver tangible results for our customers, and we are capturing the opportunity for real-time big data solutions.

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

Ladies and gentlemen, we are ready to open the lines for your questions. (Operator instructions.) Jesse Hulsing with Pacific Crest.

Thanks, guys. Charlie, you touched upon some execution issues in Europe. And just looking at your guidance, it looks like Q3 would be somewhat seasonally soft on a sequential growth basis relative to prior Q threes. Did you see any disruption to your bookings trends, which had been ticking up for the last few quarters? And maybe you could give us a little bit of -- some insights into how your bookings are trending on a year-over-year basis and how confident you are there.

Sure, absolutely.

Hi, Jesse. This is Andres. I'll start with Europe. So, Europe did not meet our expectations for the second quarter. We did see sales execution challenges which we have addressed. We've actually assigned Wagner Williams to the interim GM role within Europe. He started our European operations in 2007 and led that region through Q1 2012.

We are confident for the remainder of the year, because we feel we have a great team in place and we see strong leading indicators both in the pipeline and in demand.

Yes, I guess I'd like to say, Jesse, is that really with the exception of Europe, that Andres has commented on, we're really pleased with the performance of the Company during the first half of the year. And quite frankly, we're pleased with the guidance that we're continuing to provide.

At the beginning of the year, we started with 22% to approximately 23%, and we're holding at the approximately 23% as we go into the third quarter. We believe that's going to be good growth for the Company this year, and we don't think that -- we still believe we're well positioned to have 20% revenue growth, and next year and likely the year beyond that as well.

So, fundamentally we don't see anything that's really changed the business. Our confidence remains the same.

Yes. One last thing I will add is we had solid bookings this quarter, and we continue to see our pipelines being strong and a lot of deal activity lined up for the second half, which traditionally has been our strongest seasonality, is the second half is the strongest for us.

So, overall really nothing has changed. We believe very strongly about our 23% growth for the full year and 20% beyond that.

Thanks. And you mentioned, Andres, a new solution for the airline industry. Do you see any indication that that could drive something of a product cycle in that segment, which has traditionally been slower growing?

Yes. So, we've communicated in the past that we've been investing in our growth strategies around the travel industry. And one of those areas is around product innovation. We believe we can expect to achieve a low double-digit growth in that industry and that sector through these new innovations that are very competitive and very innovative in the market.

Got it. So, it sounds like you do expect something of a product cycle from your new solutions. Is that fair?

Yes. I mean, we have -- we definitely expect these new solutions to drive increased demand in that particular sector. And we're always investing in innovation. That's part of our DNA.

Got it. Thanks, Andres.

Thank you.

Tom Roderick with Stifel Nicolaus.

Yes. Hi, this is Matt Van Vliet for Tom. I just had a quick question on the progress of some of the new developments or maybe even some of the technical aspects of the new big data products that you think further differentiate the business and your offering to your clients.

Yes. So, we're continuing to make investments. So, if you're referring to our new Step product in the midmarket, a lot of the innovation went in that solution in being a true multitenant SaaS solution with machine learning technology.

And a lot of our innovations in this space is making it very easy for midmarket companies, companies between $100 million and $500 million in revenue, to be able to adopt this technology very fast to drive their sales growth and confidence in selling.

We're also -- in our enterprise platform product, we're continuing to invest both in our sales oriented quoting technology and other technology like customer attrition algorithms that allow customers to be able to predict when they have risk of customer attrition.

So, in many of the areas around our big data platform, we continue to invest in allowing us to drive prescriptive capabilities that help companies achieve their sales growth and drive their sales growth and profitability improvement.

Okay. And then, a follow up to that, you mentioned the travel industry. Were there any other specific industries where you saw some strong development or have new products in the pipeline that might make an equally big splash in the market?

I would say we're continuing to invest in innovation across all of our industries, and these are just samples of the innovations that we've made. Step is an example in the B2B midmarket, but we're continuing to make innovation across all of the markets that we serve.

Okay. Thank you.

Thank you.

Joe Fadgen with Craig-Hallum.

Hey, guys. Thanks for taking the question. On here for Chad today. So, looking at that Step solution and the cloud big data solution, can you let me know, I guess, how significant are cloud solutions to SaaS offerings as a part of your business right now? And then also, I guess kind of driving this, when you go talk to your customers, do you have customers really asking you for more SaaS solutions, cloud solutions, or is this something that you're kind of doing on your own, bringing to the market, and hoping it'll work?

Yes. So, on the enterprise side, we also offer a private cloud solution, and we have for some time. And we see some particular industries -- like high tech we see has had interest in our cloud solution.

But, as a whole, at the enterprise level, haven't seen any meaningful shift where customers prefer cloud versus on-premise. We definitely have a very robust enterprise private cloud solution for that market, and it's something that we offer.

In the midmarket, we're only going to offer our product in a cloud multitenant. And we see that as a way to more easily penetrate that market.

Okay. And then, going back to last quarter, you had kind of the HANA integration running on SAP and OEM'ing that. I guess a quarter later or so, kind of what's been the reaction from your customers, from the market, as far as good, bad, and especially kind of around the functionality it provides, namely the real-time capabilities?

Yes. So, we've seen a positive reaction from the market, both from our customer base and prospects. I would say that a lot of them are still trying to learn about HANA, and I would say are interested in leveraging the technology but want to see it continue to mature.

And we definitely see a lot of customers wanting to adopt technology like HANA. But, at this point, we've seen not a large use in production of the technology thus far.

Okay. And then, one last one real quick kind of following up on the issue with Europe and some of the sales execution issues there. So, you guys have been pretty aggressive on your hiring the last year, year and half, and obviously you're continuing that. I guess just general rule, how much churn do you see in a given quarter or year or whatever of your sales teams? Like when you add three in a quarter, is that you add or hire five and two leave, so it's net three, or is it pretty much -- is everyone kind of hanging around? What's that look like?

Yes, this is Charlie. Overall, the Company's turnover experience is very, very good. I think probably typically of software companies, our turnover in the sales organization typically is higher than the rest of the Company, and that continues. That was true for the first six months of this year, and we anticipate some of that as we go through our planning for the year.

So, we're still, we believe, on track to get our number of sales higher as full-time position fill between now and the end of the year. But, your point's well taken. There's higher churn on the sales organization than there are in the other parts of the organization.

Yes. And I would say we're continuously focus on calibrating the sales organization and continuing to improve our overall sales organization.

And that's something that -- as you mentioned, we've grown the sales organization significantly over the last three years. And we believe strongly in top grading and continuing to calibrate our overall sales organization. So, I would say some of that is part of our strategic direction.

Okay. That'll be all for me. Thanks, guys.

Great. Thank you.

Sterling Auty with JPMorgan.

Yes, thanks. Hi, guys. So, I want to revisit Europe as well. You mentioned that you implemented a person as interim General Manager. What's the process that you're looking at for a permanent placement? And is there additional turnover that you're expecting at that next layer down?

Yes. So, we don't expect any additional turnover at the next layer down. We feel we really have a very special team there that's very strong.

We are actively recruiting for the GM position, but I would say that Wagner will remain leading at least for the next six months after we hire the new GM in helping through the transition. So, we're pretty active in the recruiting, expect to fill the position probably within the next quarter. But, definitely Wagner will continue and help support the new leader to achieve success.

Okay. So, if there's not additional turnover a layer down, in terms of sales execution, do you have a finger on was it the way that the pipeline was being scrubbed? Was it close process? What are the things that you think you should see improvement on under Wagner?

Yes, I would say it's definitely around the management and leadership process and the expertise. I would say that that was a newer organization. We invested a lot in growing North America, and I would say the Europe sales organization was less mature. And bringing more experience to help them be successful is going to be a key to our long term success.

But, overall I would say in terms of demand when we look at our pipeline, and the activity remained strong. And that's what makes us confident about the second half.

Okay, that makes sense. And last question would be, in terms of the investments that you're making, can you give us -- what was headcount at the end of the quarter? And how should we think about hiring for the remainder of the year?

Yes, headcount at the end of the quarter was 770 personnel. I think as we mentioned, that was up 150 people from this time last year as well.

And we're still looking at growing the organization somewhere in the mid 20%'s, 24% to 25% headcount growth between now and the end of the year. And that's obviously factored into our guidance, into our expense run rate.

Okay. Thank you.

Thank you.

Scott Berg with Northland Capital Markets.

Hi, Andres and Charlie. Congratulations on what appears to be a good quarter.

Thank you.

Thank you.

Yes. Just a point of clarification really quick is Europe was a little bit of a disappointment, but you seem overly happy with the US and the rest of the geographies. On a net-net basis, was the total deal flow in the quarter below, in line, or above your expectations going into the quarter once you kind of account for all those different areas?

Was the question deal flow itself?

Yes, deal flow being --.

I would say that -- yes. I would say taking out -- obviously we don't feel like we executed as well in Europe as we should have. Taking that out, we're pleased with where we ended up in the second quarter.

Okay. So, on a net basis though, even including that, was it still kind of in line or above your expectations going into the quarter?

I would say it was in line.

Okay, great. And then, can you talk a little bit about up-sell versus new logo wins in the quarter? You had this interesting trend last year where 75% of your deals, roughly, were new business. Is that a trend that continued in the quarter, or were up-sells kind of better or weaker than expected?

Yes. So, overall we did see good new business in the quarter, but we also saw very strong existing business. And it's something that, to us, is a true testament to the ROI that our solutions provide. And our customers continuing to want to leverage our technology across other geographies or be able to adopt other modules.

I would say overall for the first half the mix is tracking similar to last year in terms of new business. And we expect for the full year new business will outpace existing business, as we've stated in the past. So, I don't see that trend changing, but definitely we're very pleased with existing business as well.

Great. And then, the last question I guess I have is on the newly announced Step product. Is -- sounds like initial indications for the product are strong, especially with the customer that you quoted. Should we be thinking about this as more of an impact to revenues in maybe the back half of '14 or '15, or do you see some more opportunities before that to kind of help accelerate the growth story even further?

Yes, I would say that's a good way of looking at it, at the back half of '14 and '15. As we said, a lot of this investment in the midmarket is to drive long term growth.

So, this has been part of our part of our strategies of ensuring that we're investing in solutions that help us drive growth three to five years out. This is a SaaS recurring revenue model. So, as you can imagine, it takes time for the revenue to build up. But, definitely looking at the back half of '14 and '15 is a good way of looking at it.

Great. That's all I have at the moment. I'll jump back in queue. Thank you.

Thank you.

Greg McDowell with JMP Securities.

Great. Thanks very much. I have one question for you, Charlie, and one question for you, Andres. Maybe you first, Charlie. When I look at the balance sheet, the deferred revenue declined maybe a little bit more than usual. So, I was hoping you could just help us reconcile the commentary on solid bookings in most geographies with sort of the steep sequential decline in deferred.

Yes, sure. I'd be happy to talk about that. We've actually commented in the past, Greg, that deferred revenue in and of itself is really not a good indicator of revenue growth for the Company. And we go back to the example in 2011 where deferred revenue was relatively flat for the whole year, and revenue growth was over 25%.

But, nonetheless, there's obviously -- there's some variability here with respect to the business from period to period that does influence the amount of deferred revenue and receivables in a particular quarter. Let me give you an example.

For the second quarter this year, the maintenance billings that renewed were much lower in the second quarter than they were in the first quarter of the year. So, the first quarter got the benefit of much higher maintenance billings in the first quarter than we got in the second quarter. That in no way changes maintenance revenue. It's all about what goes on the balance sheet.

Another example is we had more term deals in the second quarter this year than the first. And historically, as you'd expect, we actually get better billings off a perpetual deal than you would off of the term deal. So, the mix, really on the timing of when milestone billings occur, is the major explanation as to what happens to deferred revenue from one period to the next.

Now, with that, on the margin, and we have commented and we've discussed on the call, that there were some challenges in Europe. But, with that said, we're confident in the changes we made in Europe and we expect to be stronger in the second half in Europe as well.

So, we still feel good about our 23% guidance for the year. And hopefully that gives you the kind of color you're looking for.

Yes, that's very helpful. I know you guys do talk about the backlog once a year, so thank you for that explanation.

And then, Andres, maybe a question for you. I would love to hear your thoughts on the competitive environment and whether there have been any changes, especially as you move more and more and do SaaS pricing optimization type solutions. Thanks.

Yes. No, we have not seen any real changes in the competitive environment. It continues to be the same with our -- I would say we have to give it some time with our new Step offering to see if we see any changes. But, we really are not expecting any meaningful changes in the competitive landscape.

I do believe that the Step product's very differentiated to what's being offered in the market. So, I think it may be a case that there isn't a clear one to one competitive position on that product.

Great. Thank you, gentlemen.

Thank you.

You're welcome.

Ross MacMillan with Jefferies.

Thanks. Hi, Andres. Hi, Charlie. I had a question on maintenance, actually. I heard your comments on maintenance billings, but maintenance revenue growth was a little slower than I expected. And I just wondered, is there any factors on that?

And foreign exchange hasn't been talked about at all today. And I know you don't have a lot of foreign exchange exposure, but I just wondered -- given the airline base that you have, I wondered if it was anything from a currency standpoint that could be impacting that.

From a currency standpoint, the -- we actually had a loss. It was less than $100,000 in the quarter. So, on currencies, I don't think it's a major element here, Ross, in our revenue, whether it's maintenance or license and implementation revenue.

I don't see that as -- if you're looking at the maintenance change from this year to last year, we did have -- and last year we had a one-time item that benefitted the maintenance in Q2 of 2012. And that is that we had a catch-up from a customer that we had put on hold because of slow payments, and then they paid. That was approximately $400,000 last year.

And under our rev rec, of course, if you don't expect to collect, you don't recognize the revenue. We've got good disciplines around that. And then, ultimately this customer paid so we actually had a little bit of a pick up in Q2 of last year.

If you take that out, the year-over-year is about 19%. So, the year-over-year is fine, if that helps on the explanation.

Yes, I didn't -- yes, I was going to say I didn't recall that. So, that explains it, I think, pretty much in entirety.

Yes. I don't want anyone to think that it has anything to do with our maintenance renewal rates. The maintenance renewal rates continue to be best in class at over mid 90%.

That's great. And then, just on two data points, I guess, you gave us the breakout between airlines and the manufacturing, distribution, and service as a percentage of revenues. Am I right? I'm looking -- my math suggests the manufacturing, distribution, and service piece was growing in the mid 50%'s year-over-year. Is that math right? Because that definitely seems to be a further acceleration relative to last year.

No, Ross, actually the percentages that we gave were percentages by geography. We were talking about the United States. And of course, the United States is experiencing very good growth year-over-year. And that's obviously predominantly because of our B2B business because we have very little travel business here in the US.

Then we talked about the rest of world and we talked about Europe. Those were revenue numbers by geography that we were discussing.

Okay. All right. So, I guess the answer, then, is the domestic business, the North American business, I mean, that is growing in the 50% range, and that's all MSD. So, one could sort of infer from that that's the sort of pace of growth that you might be having in that business, at least here in the US.

Yes, expect for it's not all B2B. It's predominantly B2B. You could infer that the B2B, from that, is doing well. And we've been saying B2B is doing well and B2B is the growth engine.

We do have some business in travel in the United States. I just want to be clear here, that within the US there is some travel but it's predominantly B2B. And as we've said, B2B is expected to be the growth driver for the Company, and we absolutely -- it is the growth driver for the Company.

Having said that, I want you to know that travel is doing well. And we had said last year we hoped to get travel up into the high single digits, maybe low double digits. And we actually have an opportunity to get there this year.

Great. Thank you.

You're welcome.

Ladies and gentlemen, that concludes our question and answer session. I would now like to turn the presentation back to the Mr. Andres Reiner for closing remarks. Mr. Reiner, you may proceed.

Thank you for your participation in today's call. We feel good about the second quarter. We're confident going forward because our growth strategies are working and more companies are recognizing that their big data can be a powerful source for sales growth.

With our legacy of innovation, market leading solutions, and unmatched customer referenceability, PROS is in a strong position to capitalize on the growing market opportunity.

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

We look forward to speaking with you on our next call. Thank you, and good-bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.