Pros Holdings Inc (PRO) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter PROS Holdings, Inc.'s earnings conference call. My name is Brianna, and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Charlie Murphy, Executive Vice President and CFO. Please proceed.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today for the PROS Holdings financial results conference call for the third 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 third quarter of 2013, and then I will provide the review of the financial results and our outlook before we open up the call for 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 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 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 an attorney's 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'd 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 would like to turn the call over to Andres.

Thank you, Charlie, and thanks to all for joining us on today's call. I would like to extend a warm welcome to the great people, customers and partners of Cameleon Software.

On October 24, we announced our plans to acquire Cameleon, a market-leading configure, pricing quote software company headquartered in Toulouse, France. We're excited to work with Cameleon's team to introduce what we believe will be a powerful and unique value proposition to the market. I will share details of this planned strategic acquisition following my comments about the third quarter.

For the third quarter, PROS delivered solid revenue at the high end of guidance, coming in at $36.8 million, a 23% year-over-year increase. Non-GAAP operating income was also strong, exceeding the high end of guidance at $6.3 million and non-GAAP earnings per share was $0.15. These results reflect the continued investment in our three stated growth strategies -- accelerating awareness and adoption, extending our product leadership position, and increasing our global reach and scale.

Our investments in accelerating awareness and adoption are resulting in continued demand, a strong pipeline and new customers. In the third quarter, we added among others, new customers such as Air Berlin, B.W. Rogers and Unify formerly known as Siemens Enterprise Communications.

We also expanded our relationships with existing customers such as Ecolab, Panduit and Penske, among others. Awareness is being fueled by more customers and third-party experts sharing their perspective about big data for pricing and sales effectiveness.

For example, customers from Cardinal Health, Panduit, TE Connectivity and Volvo shared their stories at recent events like the European Aftermarket Parts Conference and the Professional Pricing Society Fall Conference.

In another example, Gartner recently produced a report on analytics that identified customer churn, cross-sell guidance, and price optimization as use cases for predictive and prescriptive analytics to help companies unlock the value of their big data. PROS has been innovating in these areas for many years, and we believe our investments in awareness and adoption will continue to attract more companies to PROS and our unmatched value proposition.

Innovation remains the key differentiator for PROS. In the third quarter, we introduced another next generation solution for travel customers. PROS Availability Server is designed to help airlines to improve revenue and reduce costs by providing real-time dynamic pricing engine direct to their airline distribution channels. Rather than these channels reflecting availability from the airline's inventory system, which drives up cost to the airline, these channels can now directly access PROS Availability Server. The effect is a much faster and more accurate response providing an improved customer buying experience.

We also filed two new data science patents centered on helping companies turn their big data into a competitive advantage. For example, during a price change process, many B2B companies want to achieve the best price realization and are uncertain as to how much they should change their list prices versus how much they should change discounts on a deal-by-deal basis. One of our new patent guides companies to how they should change both discounts and list prices simultaneously to achieve their desired objective. This gives sales reps even greater confidence that they can win the deal while also meeting the Company goals.

We are strengthening product innovation drives our value proposition for customers, and we will continue to invest in extending our product leadership position in the market to drive long-term growth.

We also continued to execute our strategy for increasing our global reach and scale through direct sales and our partner ecosystem. We ended the quarter with 43 quota-carrying reps. We also further strengthened our leadership team and go to markets strategies in Europe with the addition of Eric Allen, our new General Manager of EMEA. Eric brings a wealth of experience in leading EMEA teams, most recently as Head of EMEA Foreign Tours, where he grew the region from the ground up to become a significant contributor to the overall business. Eric is addressing our recent sales execution challenges in Europe, and we feel good about our opportunity in the region going forward.

Our partner ecosystem continues to strengthen. System integrators continued to certify their consultants to implement our solutions. As we have planned, we expect system integrators to play a more prominent role in our implementations going forward, allowing us to scale more quickly as the market grows.

From a technology partner standpoint, we recently achieved powered by HANA status from SAP. PROS was the first big data application for pricing and sales effectiveness to join their safety OEM program for HANA, and we now have officially achieved powered by HANA status. This is a part of our long-standing commitment to provide the most complete and seamless big data application for pricing and sales effectiveness in the SAP community.

We are pleased with the progress we are making against our stated growth strategies. We have also said in the past that M&A will play a strategic role in achieving organization. 10 days ago we announced a tender offer agreement to acquire Cameleon. We believe Cameleon is a great complement to PROS based on their people, their solutions, their geographic footprint and their industry focus.

Our planned acquisition of Cameleon represents another step in our mission to help customers outperform. CPQ solutions are a natural adjacency to PROS, and we believe the combination of Cameleon's CPQ solutions with PROS's big data applications will offer a powerful end-to-end sales effectiveness solution that helps customers drive sales growth. In fact, CPQ and price optimization were the only two technologies categorized as transformational in Gartner's 2013 hyped cycle for CRM sales reports.

Customers are seeking a single platform that combines the efficiency of sales execution with big data science to optimize the lead-to-order process. We believe this acquisition will bring our vision of improving both sales efficiency and sales effectiveness to a powerful new reality and will put PROS in a unique market position to provide a total solution for our customers.

Cameleon has a strong team of people. Their passion, energy, and teamwork are what makes Cameleon and PROS a great fit, and we will make PROS even stronger. We plan to retain and grow this talented Cameleon team under the continued leadership of Cameleon's Founder, President, and CEO, Jacques Soumeillan, who will lead the Cameleon CPQ product line.

Cameleon will add both geographic strength and industry strength to PROS. With headquarters in France, they increase our presence in Europe, while we provide a complementary reach to Cameleon in the US. They also serve a number of the same industries we already serve such as manufacturing, high tech, and telecommunications. Their strength in the insurance and financial services industries will allow us to expand our industry footprint and create cross-sell opportunities.

We are excited about the many opportunities to drive growth, differentiation and value in the market together with Cameleon. We will both exhibit at Dreamforce later this month, giving us an opportunity to introduce the value proposition to the market. We're confident in our strategy and look forward to when we can collaborate as a single team with a common vision and mission.

We believe we are setting new standards of innovation and value in the market and that the planned addition of the Cameleon team and their solutions will only make us stronger.

In closing, I want to thank our people at PROS for their passion, innovation, and commitment to customer success that has put us in a position of strength.

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 fourth quarter and full year of 2014.

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're pleased with our performance in the third quarter with total revenue of $36.8 million, which is at the high end of our guidance and an increase of 23% from a year ago.

License and implementation revenue was $25.1 million, up 29% from a year ago. Maintenance and support revenue was $11.7 million, up 13% 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 third quarter. Non-GAAP gross margins in the third quarter were approximately 71.5% as compared to 72.1% in the third 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 were $20 million compared with $17.3 million a year ago, an increase of 16%. Non-GAAP operating income in the third quarter was $6.3 million compared with $4.3 million a year ago, an increase of 47%. Non-GAAP operating margins for the quarter were 17.2%. Non-GAAP operating income exceeded guidance as a result of timing of new employee hiring and lower travel expenses as we better leverage our new travel management system.

In addition, approximately $700,000 associated with the Cameleon Software acquisition is being excluded from our non-GAAP results.

The non-GAAP effective tax rate for the third quarter was approximately 28%, resulting in non-GAAP net income of $4.6 million for the quarter, an increase compared to $3.2 million in 2012. Non-GAAP earnings per share exceeded guidance and was $0.15 per share compared to $0.11 per share year ago. GAAP earnings per share for the quarter was $0.03 per share compared to $0.05 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 third quarter with cash and cash equivalents of $90.8 million, an increase of $2.5 million from the end of the second quarter. Capital spending for the third quarter was $1.1 million. We expect capital spending for the year, which includes infrastructure and facility improvements, to be approximately $6 million.

Gross accounts receivable at the end of the quarter was $44.6 million. Days sales outstanding were approximately 102 days, in line with the second quarter.

We generated operating cash flow of $3.2 million in the quarter, yielding a cash flow margin of 8.8%. Year-to-date operating cash flow is $11.2 million, a 3% increase over last year. This yields a cash flow margin of 10.5% year to date. For the year, we expect our annual operating cash flow, excluding acquisition-related costs, of approximately 14%, at the midpoint of revenue guidance, which approximates our annual non-GAAP operating income.

Finally, headcount, including outsourcing, at the end of the quarter was 792, up from 770 as of June 30, 2013 and 665 on September 30, 2012. 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 fourth quarter and the full year, let me provide you with some additional information related to our business. Revenue for the United States increased 24% over the same period last year and represented 44% of total revenue for both the quarter ending 2013 and 2012. The primary driver for our growth in the United States remains our B2B business.

Revenue from rest of world continues to perform well and is up 40% compared to last year and represented 36% of total third-quarter revenue.

As we have discussed with you, while B2B remains our primary driver for revenue growth, B2C continues to represent a meaningful opportunity, and we're pleased to report that we've seen an uptick in our B2C revenue driven by strong overall demand and the recent release of new products. We continue to believe that B2C can be a long-term grower in the low teens, while it is possible that we see some fluctuations above and below this target on a quarterly basis.

Revenue from Europe represented 20% of total revenue in the third quarter as compared to 25% of total revenue in the third quarter of 2012. We've previously commented that we faced some sales execution challenges which are impacting our growth in Europe this year. We have made and continue to make improvements in our go-to-market initiatives in this region. We recently announced a new GM for Europe, and we're confident about the enhanced team we now have in place and feel good about the opportunity in Europe going forward.

In addition, with the announced acquisition of Cameleon, we see opportunity to leverage their presence and scale in Europe across the PROS business over time.

The sales execution challenges we have been facing in Europe the last few quarters has had an impact on ability to close business during the first nine months of the year. While we believe the leadership changes we made will show improvements in Q4 and in 2014, we still have some work to do. Even taking this into consideration, we continue to believe that approximately 23% annual revenue growth for 2013 is in range.

Overall, our pipelines remain strong, and we're focused on executing against our goals for a strong fourth-quarter close. We continue to believe the fundamentals of the business are strong, the market opportunity is growing, and the investments we're making to drive growth are positioning us well for the long term.

I wanted to make a few comments on the planned acquisition of Cameleon, which we expect to close in the first quarter of 2014. We believe it is a highly attractive acquisition, and it is consistent with our goal of investing our strong cash flow to improve long-term shareholder value.

From a revenue perspective, Cameleon reported revenue under international financial reporting standards, or IFRS, of approximately EUR10.4 million for the calendar year 2012 and unaudited revenue of EUR9 million for the nine months ended September 30, 2013, a 24% growth over the same period in 2012.

Cameleon's revenue comes from a combination of on-premise licenses, maintenance, SaaS and services with a growing percentage coming from SaaS.

From a profitability perspective, under IFRS, Cameleon generated EBITDA of approximately EUR500,000, or a 5% margin, for the full-year 2012 and approximately EUR700,000, or an 11% EBITDA margin for the six months ended June 30, 2013. Cameleon does not report profitability on a quarterly basis.

I wanted to note that until the acquisition is closed, we cannot complete our analysis relating to the determination of the deferred revenue write-down; valuation of acquired assets including goodwill and intangibles; the anticipated amortization charges that we will expect to take through the P&L; and differing accounting policies between IFRS and US GAAP, which will have an impact on some of their revenue recognition. Our expectation is that we will provide you with an update regarding Cameleon on our fourth-quarter conference call.

Now turning to our guidance for the fourth quarter and full year, for the fourth quarter, we anticipate revenue in the range of $38.3 million to $38.9 million, approximately 18% revenue growth at the midpoint from the fourth quarter of 2012. The fourth quarter of last year was a particularly strong revenue quarter and is a challenging comp. We expect total non-GAAP expenses to be approximately $33 million, up from $27.8 million in the fourth quarter of 2012 as we continue to make strategic investments in our business, particularly as we add expected headcount.

We expect non-GAAP operating income margins of approximately 14.5% at the midpoint of revenue guidance. Non-GAAP operating income excludes approximately $4.4 million of stock-based compensation expenses and $1.3 million of acquisition-related costs.

We anticipate non-GAAP earnings per share of $0.12 to $0.14 based on an estimated 30.4 million shares outstanding.

On a non-GAAP basis, we expect the tax rate to be approximately 27% in the fourth quarter and 21% for the full year, which includes the impact of recording both for 2012 and the 2013 R&E tax credit in 2013. On a GAAP basis, we expect the tax rate to be approximately 30% in the fourth quarter, and we are modeling a full-year tax benefit of approximately 19%.

On a GAAP basis, we expect operating margins of approximately 1% and GAAP earnings per share at approximately breakeven.

For the full year, we expect total revenue of $144.3 million to $144.9 million or growth of 22.5% to 23% and still in line with our prior guidance of approximately 23%. Our non-GAAP operating margin guidance is approximately 14.5% at the midpoint of revenue guidance, which is higher than our prior guidance. We continue to believe that long term we will see increasing operating margin leverage as our business scales, and we realize the benefits of our investments.

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

(Operator Instructions). Bhavan Suri, William Blair & Company.

Just a couple of questions on the European pipeline. You've seen the sales execution, and you've made some changes. But just any color on how that pipeline trended, and if some of the deals have fallen out of the pipeline or most of them are still there, and it's just a question of going through and closing those.

Overall the pipeline for Europe remains strong, and at all aspects at the NQL level all the way through the high pipeline, and we still feel very strong about the opportunities going forward.

It has not been about deals falling off of the pipeline and more as just execution issues and us moving the deals faster. So overall that's why we feel confident about the future and us executing better and driving those deals to closure.

Great. Thanks, Andres. And then as you look at the macro with the rest of world in emerging markets, any particular areas to call out, say, by vertical or geography in terms of pockets of strength or areas you may have seen some weakness?

And so overall, areas like manufacturing, we've continued to see very strong. And we've also seen positive impact in our travel industry in the B2C as they are looking to innovate with some of the new technologies that we introduced like the group pricing tool in our new past solution.

Great. And then one last one for me. Just a quick update on the mid-market offering and the use. Of that I know it's still early, but in mid-market customers and then as an onboarding ramp for some of your enterprise customers, any color on the interest there and the level of use would be helpful?

Yes, we have signed on new customers in the mid-market. We focused this year around building demand and awareness as this is a new market for us. It is still in the early stages, but we do see a bright future moving forward. We do see good interest in the solutions, and we've seen the customers have adopted driving value from the solution.

And are most of the customers there in manufacturing, too, or in business services, or are you seeing that a little more broadly?

We have seen both manufacturing and distribution. Like we spoke about, B.W. Rogers, who is the distributor in the service parts area, and we have seen both in distribution in manufacturing, as well as in services.

Great. I will jump back in queue.

Chad Bennett, Craig-Hallum.

So should we think about -- are you guys still thinking that more from a mid- to long-term perspective, the pricing optimization market is still a 20%-plus growth market, and the acquisition of Cameleon in the CPQ market, should we think about that being incremental to that growth?

So fundamentally we haven't seen any change in our prospects of the market, and we still believe strongly that price optimization is a 20%-plus growth market.

On the Cameleon front, I think it's a bit too early for us to comment over the overall impact moving forward. But according to Gartner, the CPQ space is currently about $300 million in annual spend, growing at about 25%. So we believe with our offerings we have a very competitive solution. And frankly, I would say a very innovative solution in the market that will allow us to capture a fair share of the deals.

Okay. And not to get ahead of ourselves, but Andres, the product roadmap or how you see at least the first year out of the gate with Cameleon in the fold, do you think you will be selling point products or Cameleon separate from your core pricing optimization solution for a while until you get the products integrated, or are you focused on integrating your pricing solutions with Cameleon very early?

We're focused on providing integration very early, and in the market we have integrated with other CPQ solutions and other quoting solutions in the past. So we have pretty robust APIs to allow ease of integration. So we expect the first component of integration to be very fast, and then we see the future is about embedding the data science capabilities, including both predictive and prescriptive guidance through the lead-to-order process. And we think there is where large differentiation will come.

But early on, we see selling those solutions that integrate with our PROS price optimization solution or independently.

A couple more questions. So how many people came with or will come with Cameleon, and specifically, how many quota-carrying salespeople do they have?

There are approximately 90 people globally, and in terms of quota-carrying sales, it is under [5].

And then a follow-up on the quota-carrying sales question, I think basically since the March quarter, you are up about 4 or 5 net quota-carrying salespeople, which is roughly up around 10% for the year, and I think the goal was to grow more like 30 from that standpoint. What should we expect in the fourth quarter here? I know we've been trying to catch up. Any prospects there, and how should we think about that?

So overall, the goal hasn't changed at all for the year. We are still focused on hitting the 49 goal, which would be up 30% over the 38 last year. I would say it's going to be a little bit more challenging given where we ended in Q3, but we're still focused on hitting that goal and have a lot of activity on the recruiting front.

Okay. Last one for me. Charlie, did anything incrementally benefit the third quarter, whether it's an acceleration and a milestone on the implementation or a deal or revenues benefited Q3 and maybe took out of Q4 from your planning standpoint?

No, actually, I can't recall anything specific on Q3 that was at all taken into Q4. It was just an average, normal quarter for us.

Okay. All right. Thanks, guys.

Jesse Hulsing, Pacific Crest.

Second half traditionally is a seasonally strong quarter or a seasonally strong half from a bookings perspective. I know you're having a little bit of disruption in Europe. Can you maybe shape the trends in your bookings relative to prior years and relative to the first half?

This is Charlie. I would say that we're expecting the fourth quarter to be a very good quarter for us as it is historically. If you go back over a number of years now, the fourth quarter has been the strongest quarter for the Company. We still have a fair amount of work to do to make sure all of that gets executed properly, but we do feel good about the pipe going into the fourth, and I wouldn't say anything out of the norm. We expect it to be big, and we're planning for that.

Okay. And then on the quota-carrying rep side, have you guys had any uptick in attrition? It seems like it has been a slow grind adding since March, maybe in Europe, given the slowdown there.

So, in terms of the quota-carrying reps, we have seen some churn within the sales force, and we focus on continuing to top grade the organization, and definitely we have seen some.

Yes, and I would say, we have been expanding aggressively the sales organization over the last couple of years. And it's up significantly, as you know, from just three years ago.

So the churn that Andres has mentioned is not at all I think unusual for where we are at our stage today. But it is making it a bit more difficult to get our overall goal for the end of the year, which is approximately 30% growth. And, as you know, that growth is not impacting this year. That growth is really for next year, the people we're hiring now based upon the training period it takes to get these people schooled up. And we do think we will be able to recover from that, and we've got a plan to do it. But, as Andres mentioned, it's a bit more challenging now that we're at 43 going to 49.

Got it. And Andres, maybe can you talk a little bit more about the product cycle that seems to be driving stronger than expected or strong as expected growth in travel? How long historically have these products cycles lasted? And maybe give us an idea of a little bit more how the product adds value to your airline customers?

Yes, we are focused -- we commented that we were not pleased with the low-single-digit growth on the travel. And part of our strategy to drive better growth in that market and to continue to leverage the incredible customers that we have in providing them more capabilities and helping them outperform was through innovation. And we brought these two new solutions, a group pricing tool and the PROS Availability Server as examples of technology that are really new generational technology that helps them drive significantly more value.

In both of these examples, I think one area that is similar is they are both around real-time decisions. If you look at the group pricing tool, now it allows airlines to take a group booking all dynamically very similar to the way they do a passenger booking. All in real time with real time data science driving the engine.

If you look at our PROS Availability Server, it is the next generation of what we used to call a real-time pricing engine but now also stores availability data so they don't have to hit the inventory system when they are making a real-time request. It allows you to have a better response time and better user experience to help the customers outperformance.

So in these areas, we believe these solutions are new in the market. There is a lot of interest, so we believe it will help to drive growth more in line in the future to where we want to get in the low teens to mid-teens level growth.

As far as -- you had asked a question about how long these products -- they last for a long time in this space, in the travel space. We will be licensing these products back into our existing customer base and new customers for a number of years to come. And I think we've started now with the early adopters that are looking for this new technology in airline. And we think we see some real opportunities in 2014 to get more business as we go from the real innovators to the next level.

So we're pleased with that. And as Andres just mentioned, we also feel good about this because it's not our overall strategy of investing in B2C to help us get to our overall revenue growth of about 20% going forward. It's an important part of that equation for us, and we're glad to see the progress we're making this year.

Appreciate the color, guys. Thank you.

Matt Van Vliet, Stifel.

On for Tom Roderick tonight.

First question is about the new GM in Europe and the sales execution that you are hoping to improve on, is there anything you can point to that either he has implemented or you guys overall have implemented and are already seeing traction on?

Yes, I would say that overall he is focused on just ensuring we are following our well-defined sales processes and enabling the right sales enablement tools within the new organization to ensure success. I think those are areas we have been emphasizing, and it hasn't been just Eric Allen. We talked about Wagner Williams who was a former GM lead in Europe has also taken an active role on helping the organization drive more consistent execution across all deals and all opportunities, and we seen an improvement in the overall execution.

And then early question on the Cameleon side, but in terms of adding the low number of sales heads or quota-carrying salespeople there, is it something that you would need to add even more if you are going to be able to sell those products effectively, or do you think that the existing salesforce can pretty much bolt on those capabilities and push that out to current and prospective customers?

We expect that between both our organization that sales is an area where we will have synergies. We expect that our sales team will be able to sell their solution and will give us higher coverage across the globe.

So the areas where we see their solution driving a larger market potential is around, obviously, current prospects in the target industries, as well as in new industries and the abilities to cross sell. And we think we complement each other well because they have strength in Europe and we have significant strength in North America.

And then lastly, on a couple of the new industries that you mentioned that you think Cameleon will help open up for the legacy products, is there anything from a technology standpoint that will have to be modified or really updated to be able to sell into those industries more effectively? Or is that more just being able to acquire those customer relationships that have been maybe more difficult in the past or just haven't been a focus in the past?

It's really more at the latter. As you said, these industries haven't been a focus in the past, and now it brings us customers that we can provide a service. The great thing about PROS's technology is it has been built on a platform that is very configurable. So it allows us to take our technology to various industries. And we are now in over 30 sub-industries, and this brings their know how of going into that industry to be able to provide the right configurations for those industries to drive strategic value for the customers. So we see that as a big opportunity, and we see the financial services and insurance markets as industries that need our type of technology.

All right. Great. Thank you.

Sterling Auty, JPMorgan.

This is Jax Nader in for Sterling. Most of my questions actually have been answered around the qualitative things from B2C compared to B2B, but if you guys -- I didn't catch a breakout -- if you disclose maybe what the breakout is maybe from the revenue side of B2C and B2B?

Actually, we will be doing that at the end of the year, which is what we have done for the last couple of years. And the reason is we get variability from quarter to quarter between geographies, as well as between B2B and B2C. And some of that even came up in this quarter here where we saw a very, very nice uptick in what is called rest of world, which is predominately B2C, not entirely, but primarily B2C. But I will use that as an example.

In the fourth quarter, we expect to see a little bit of a sequential decrease in the the rest of the world revenue. So it moves around so much that, Jack, we really feel it's best just to communicate that on an annual basis because of the variability.

Okay. Great. Thank you.

But we are pleased, though, with the business that we have done in B2C for the first nine months of the year and obviously very pleased with new product introductions that Andres just mentioned, and the outlook for that business as we go forward into 2014 is a big contributor to our 20% growth expectations.

Got you. Thank you.

Scott Berg, Northland Capital Markets.

Congratulations on another strong quarter. A couple of follow-ups to some questions that were out there. First of all, on the European sales challenges, remember on the last call, you had noted maybe two or three deals slipped from Q2 and where maybe hopefully going to be completed in Q3. But trying to quantify where that is all at. Is the Q stuff slipped into Q3 and was closed and Q3 slipped into Q4, or is it something a little bit different than that just single quarter shift?

I would say that we have seen some delay in the deals in Europe, and we did see some as well, in Q3. But we expect those deals to close in the fourth quarter. The good thing is we haven't seen the deals move out of the pipeline. It's just been the execution in moving them through closure.

Okay. Great. And then Charlie, you mentioned on the hiring front, you are behind in particular sales and marketing, and that challenge may be hitting the 49 goal by year end. But were there any other areas that you are behind in hiring for the year, or is that predominately it?

It is actually -- it is predominately more -- it was marketing. If I said that, I stand corrected. It is really more in the sales which Andres commented on. And also, one of the areas is development, which, by the way, represents more than half of the Company. And it's very interesting. Houston is a very challenging community to recruit into. You would think it would be easy being in Houston, Texas, but it's not. It's a very robust environment here, dominated by very large companies. If we have a challenge, it is recruiting in general in Houston and development specifically in Houston. It's a very highly-valued group of people here.

So we are a little behind in the development side. I don't think it's having a meaningful impact on our overall development plans. We're still well up over 20% of our R&D spend on development. And as we've mentioned, we just recently announced two new products just in the third quarter. So it's an area, though, that we've doubled down our efforts on, and we're looking to improve on in the fourth quarter.

Great. And last question for me, Andres, is on the Cameleon acquisition is, looking at their customer lists, they've got a wide swath of customers. Do you see this making more of an impact more in the enterprise segment or maybe more mid-market type customers?

I definitely see the impact more in the enterprise sector than the mid market. I think the mid market obviously has a potential, but the real focus area is the enterprise market, and that is where we see strong interest. And overall, we've had a pretty positive response from our customer base and prospects.

So we're pleased with the initial response. People definitely see the fit of the technologies and the complementary nature of having a single platform to deliver the end-to-end lead-to-order process. So definitely so far we have seen very positive feedback from the enterprise sector.

Great. Thanks for taking my questions. I will jump back in the queue.

Ross MacMillan, Jefferies.

I wanted to ask about the geographic revenues this quarter. By my calculations, the US revenue was down sequentially. Europe was down sequentially, and rest of world was up really big, sequentially. And I heard you comment on the strength of B2C, but just the magnitude of the uplift in that rest of the world business, is there anything else going in there, previously signed deals that are rolling out now or anything else that would explain that really big sequential there? That would be helpful.

Ross, this is Charlie. In our rev rec model, you book and then you recognize the revenue. And the travel group has had some very good bookings over the last 12 months. We're very pleased as, of course, with the B2B business as well, but we're really pleased with the uptick in the B2C business.

We commented I think at year end that we wanted to get that business up into the -- ideally below -- high single digits this year, low double digits next year. It looks like we're beating those expectations that we set for ourselves. It looks like it's going to be low double digits for the travel group this year, so we're very pleased with that. And that's really on the backs of these new product introductions that are really helping us to get that travel up to where we'd like it to be to help support our 20% revenue growth going forward.

So we're pleased with that. Europe, you are right. Europe was flat to down sequentially this quarter, but that really gets to the story that we have been talking about relative to our execution in Europe. Likely that is going to continue through the fourth quarter, plus or minus a little bit. But we expect to see improvement in that in 2014. And even the mix -- that is why it's really in our model. It's a little bit of a challenge. The Europe decrease year-to-date is really a travel decrease, but yet travel is doing fabulously well outside of Europe and rest of the world.

So it moves around a bit. I think next year we may see travel going back up a bit in Europe based on how the bookings seem to be coming in. But we do get this variability from quarter to quarter even six months to six months. So that is part of the explanation.

In the US, US is flattish from Q2 to Q3. We're still very pleased with the overall growth of 41% year to date. So we are very pleased with that, and it is outperforming the total company. And again, part of that is just mix within the quarter. But as Andres has mentioned, sales are tough. Those sales cycles are still long. And we're doing well, but we're really looking for, as we have in the past, a good fourth quarter. We have a lot of work to do to do that for the fourth quarter, but the pipe is there. It's not too much different than really last year and the year before that. So that is maybe more than you needed, but does that answer the question?

That is helpful. I guess the point is that rest of world business is really a reflection of bookings that have been signed in the last two or three quarters that are coming through to fruition and turning into revenue now.

That is correct. If you look back over like -- you're right, like a three-quarter period, the bookings are really good, they have been good, and it starts to move through the P&L.

So on another P&L questioned, when I think of the L&I line, on a trailing 12-month basis, which is probably a better way to look at it rather than quarter to quarter, that has been accelerating. But the maintenance revenues have actually been decelerating from a growth standpoint. Why is that dynamic happening? Why are we getting this acceleration in L&I, yet a deceleration as we support it?

Yes, and I think you may have asked this question on the second-quarter call, as well. We did have in the second quarter of last year one particular customer we had a credit history with that was not good. We put them on hold from a revenue recognition standpoint. That actually give us a bit of a pickup that would be the first nine months of last year. If you take that out, the growth for the nine months this year compared to last year would be about 17%, which is similar to what we commented on in the second quarter when you asked the question.

Nonetheless, maintenance growth does lag L&I growth. It does lag it. Part of it can be mixed though, too. We still have some situations going back in our legacy where it's been a bit of a challenge to get them on the latest convention relative to where maintenance starts. We're doing much better on that this year than we have even last year that we have in the previous years, but that little bit of a mix toward the travel is going to delay the maintenance a little bit as well, just as part of our overall mix of business.

On rate of attached and attrition, would you say those have been consistent? Better? Worst? How would you describe attach and attrition?

Yes, I'm sorry. I should have mentioned that. It has never been better. As far as -- if you are looking at the sequential growth in maintenance, it's not because of lack of retention. It has been very, very good.

And then on Cameleon, I'm curious we saw Oracle buy BigMachines and you buy Cameleon in the CPQ space. Why do you think -- why now is the question? Why are you doing this now?

We have been looking at it for a long time.

Yes, it is an area that --

I figured that.

Let me tell you, we have been looking at this for a while.

I would say that we have been focused on this for --

We've now on Jack for a couple of years now.

-- two years. And we've seen an interest. And I think it all comes down to customers, right? We see what customer needs are, and we saw this area as very strategic for our customers to drive there into a lead-to-order process in an integrated, real time way. And we felt that these solutions are very complimentary. And the only reason they really weren't fully integrated to drive the full value potential, even incorporating both the predictive and prescriptive, was because they are sold by different vendors.

And really, a lot of our product innovation and obviously achieving our vision is centered around helping our customers outperform and listening to our customers on what they're looking for. So we felt this was a very strategic direction in us driving our vision, and it's an area that we spend a lot of time looking at the solutions in the market and learning about the potential of these solutions being integrated.

Yes, and one of the points on Cameleon is we did want to take a good look at their product, and we're very pleased with the transformation they were making from entirely on-premise to SaaS. And they are going through that transformation as we speak, and they have been for the last couple of years. So we're really pleased with that. And we have been looking at CPQ now -- it's been -- one of the statements that is at the top of our list, when we say we've been looking at M&A for the last couple years, it has been at the top of the list.

And not that we are influenced by this, but Gartner did come out and say that there are two transformational technologies, though. We were looking at this independent of Gartner coming out with that. But Gartner did say that CPQ and price optimization are the two transformational opportunities for technologies for companies out there today.

That's helpful. Maybe one last one, Charlie. I know you are not guiding formally for 2014, but you said a few times on the call about your intention and plan to continue to drive forward at 20% organically. Is that a reasonable starting point as we think about next year just in terms of that long-term growth rate?

I think you're right. We're not giving guidance for 2014 now. It is just that we have been saying that we believe because of the stage of the market for B2B and our investments in B2C that we believe we can have a sustainable 20% revenue growth.

So I don't want to get beyond that, and I certainly don't want to get ahead of ourselves. We still have a lot of work to do here in the fourth quarter as we have for a number of years. So I'd rather just leave it as confidence relative to the long term in the 20% and for the reasons we mentioned and stay away from anything specific regarding 2014.

Okay. Appreciate the help. Thank you.

(Operator Instructions). Greg McDowell, JMP Securities.

I think I'm going to focus my questions on Cameleon. As I look at the sales force app exchange and query on CPQ, Cameleon is certainly on there and has a lot of positive ratings, but I also see your Quote2Win product. So I was wondering, how should we think about now that you essentially have two CPQ code bases, which product you are going to lead with and maybe what is the future for Quote2Win?

So if you think about the Quote2Win product, that is really not a full CPQ solution in that it is a pure quoting solution, but it does not have any configuration capabilities. And it is really focused on companies that are looking for very simple quoting without really any guiding, selling or configuration capabilities. We still see that as a market need for a segment of the market, whereas the Cameleon CPQ solution is a full-fledged solution that provides full configuration capabilities, including data science to provide the configuration capabilities.

Great. Thanks. And one quick Cameleon follow-up, and maybe this one is for you, Charlie, and I understand you are a little reluctant to talk about contribution to 2014. But as we translate Cameleon's revenue in euros to US dollars and look at their first half of the year growth trajectory, they talked about 19% revenue growth and a 72% increase in their software order book. Are you anticipating analysts to start to adjust their models upwards for 2014, incorporating Cameleon, and what sort of guidance would you give us for some of the puts and takes we should think about as we think about our models both on a revenue basis and whether it is dilutive or accretive to earnings? Thanks.

Thank you for the question because actually it's a great question. Right now, of course, IFRS revenue recognition standards can be very different than GAAP revenue recognition standards. So I would be very reluctant to be providing any guidance right now relative to Cameleon for 2014.

We're very pleased with their growth, IFRS to IFRS. We're very pleased with that. We're pleased that they were modestly profitable last year and a little bit more profitable the first six months of this year. But there's just too many moving parts here for me to figure out to put into a model. So I imagine the analysts would be very challenged to put Cameleon into a model for next year just because of the change between IFRS to GAAP.

Even their conventions, which is the very good convention they have, when they talk about their book, you mentioned their book of bookings, their concept is different than ours. That's not bookings themselves. That is their backlog at any particular point in time, which we communicate as well, at the end of the year.

And their backlog for whatever reason, their convention is to not include maintenance, whereas most companies here in the States will include the maintenance component. So the backlog isn't quite fully representative of their business, either.

So I just think -- and it's in a positive way, by the way, the backlog is actually higher than what they are communicating under a convention we use here in the States. So I just think there were too many moving parts at this point. It's just too early to be getting into what might their GAAP numbers look like as we go through 2014.

Obviously, we think it's going to be good, but between the deferred revenue writedown and everything else that is going to happen, it's just too early to make that call.

So I wouldn't encourage anyone to be speculating as to what that revenue would be under US GAAP.

Okay. That's fair. I appreciate the explanation. Thanks, guys.

Thanks. I did if I could. I'm sorry, Greg. Is that your last question?

Yes, that is it for me.

I do want to come back to one thing that Ross asked because he was asking about 2014. One thing I do want to comment on was that it's still early stage for us, but still there is some movement toward -- as you know, SIs have been participating in implementations for a period of time. Some of our SIs have actually done follow-on implementations with some of our customers. We talked about that. We've talked about what the implication of that might be for our model as we move forward. And the implication is basically faster revenue recognition. Because what would happen at some point in the banner, we'd have the license, and the SIs would have the services. Likely there is going to be some hybrid of that as we go through 2014 and maybe 2015, but we see it as a positive point for our model next year is that the whole relationship of backlog revenue to backlog is going to change as we start to be able to get SIs to participate in the implementation. So we will be able to cover that hopefully more wholesomely on the call at the end of the year.

So the good point is, faster revenue recognition. The negative side of it is, of course, less bookings because the SIs in my example would be actually getting the booking for the services.

So the model is getting a little bit more interesting as we move into 2014. And we also expect to see, just because of our existing customer base, more opportunities in 2014 than we've had in the past to actually see license extensions with our customers with no services.

So fundamentally there's a change that is taking place. We believe it's still a little early to make the call, but we have talked about this before, and I just thought since Ross brought up 2014, I would kind of mention that.

There is going to be a change in the overall relationship of our traditional model metrics as we go forward. It may not happen all in 2014, but we think it is going to start certainly at that point.

Ladies and gentlemen, this will conclude the question-and-answer portion of today's conference. I would now like to turn the call over to Mr. Reiner for closing remarks.

Thank you for your participation in today's call. These are exciting times for PROS, and we believe we are uniquely positioned to capitalize on the growing market opportunity.

The addition of the Cameleon team and their market-leading CPQ solutions will make PROS even stronger, enabling us to further shape our market and to further distance ourselves from the competition.

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 goodbye.

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