Pros Holdings Inc (PRO) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2013 PROS Holdings, Inc. earnings conference call. My name is Tahitia and I'll 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 call over to your host for today, Mr. Charlie Murphy, 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 fourth-quarter and year-end 2013. This is Charlie Murphy, Executive Vice President and Chief Financial Officer at PROS. Joining me on today's call is Andres Reiner, President and Chief Executive Officer.

In today's conference call, Andres will provide a commentary on the fourth quarter and full year of 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, 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 on a non-GAAP basis. We are not able to reconcile these non-GAAP financial measures to those directly comparable GAAP measures, because the information needed to complete a reconciliation is unavailable at this time without unreasonable effort.

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. I'm pleased to report that 2013 was another great year for PROS. We achieved a number of key milestones across the business, including producing several new products, announcing our first two acquisitions, and strengthening our leadership team to position us for long-term growth.

Our business is more diverse; our markets are expanding; and our customers, in more than 40 sub-industries, increasingly rely on PROS to turn their big data into a selling advantage. I would like to thank our incredible people at PROS for their relentless passion and commitment to innovation and customer success.

I would also like to extend a warm welcome to the employees, customers, and partners of SignalDemand. On December 16, we announced our acquisition of SignalDemand, a big data SaaS company that provides predictive and prescriptive analytics to help companies make product mix decisions in resource-based and commodity-driven industries. We are excited to work together to deliver compelling and innovative solutions to the market.

Turning to the high-level financial details, fourth-quarter revenue came in at the high end of guidance, at $38.9 million, a 19% year-over-year increase. Non-GAAP operating income exceeded the high end of guidance at $6.5 million for the fourth quarter, up 31% year-over-year. Non-GAAP EPS was $0.16.

For the full year 2013, we achieved $144.8 million in revenue, a 23% increase over 2012. Non-GAAP operating income for the full year was $21.9 million, resulting in non-GAAP operating margins of 15.1%. Full-year non-GAAP earnings per share was $0.58.

We are pleased with these strong results, which were driven by the diversified growth strategy we have implemented over the past three years to drive consistent, annual revenue growth of 20%-plus. For example, in late 2012, We invested in a dedicated customer success team to provide deeper and broader support for our expanding customer base.

By continuing to focus on helping our customers outperform, in 2013 this team achieved a record level of business from existing customers. We expanded relationships with customers such as Ecolab, Lufthansa, Panduit, Penske, Southwest, and Swiss, among others. We continue to invest in our ongoing commitment to customer success to ensure our customers realize unmatched value from their PROS partnership.

In 2013, PROS won the STAR Award for Innovation in Service by the Technology Services Industry Association, recognizing PROS' ongoing commitment to customer success through professional services excellence. In addition, Gartner Research noted in their 2013 MarketScope report on price optimization that PROS received the highest grades overall in ease of use, ease of deployment, and overall satisfaction. We are pleased with these results, and will continue to expand our partnerships with existing customers to help them outperform.

In 2013, we were very pleased with our performance in our B2C industries. The revenue growth of 21% year-over-year; this was fueled by investments to accelerate growth in new product innovations across new and existing airlines. In 2013, we welcomed Air Berlin, Air Seychelles, and Virgin Australia, among others, to the PROS community. We are confident we will continue to grow our B2C industries, given the strength of our product portfolio and our leadership position in the market.

We are proud of our performance in B2B. Over the past three years, we have more than doubled our B2B revenue. And in 2013, B2B revenue grew 25%. Underpinning these great results was our expansion with existing customers, as well as the addition of new B2B customers such as ABB, Airgas, Alliance Laundry Systems, B.W. Rogers, Gates Corporation, Great Lakes Cheese, Sterling Infosystems, and TRW, among others. We believe this is further validation of our attractive value proposition, and that more companies are investing in big data applications for sales growth.

As solid as we performed in our B2B industries in 2013, we believe we could have done even better. We experienced some execution challenges like those we've previously discussed in Europe. However, the pipeline remains strong, and we are confident that the achievements we have already made will result in even better performance in 2014.

With the acquisition of Cameleon, we realigned the European leadership team to capitalize on the growth opportunity and leverage Cameleon's strength in this market. We recently announced the promotion of Sebastian Mamro to lead Europe as our General Manager. Sebastian is a proven leader inside [of PROS] who displayed a key role in driving better execution in the region. Sebastian has spent the past six years successfully supporting our sales and customer strategies as Head of Professional Services in Europe. His deep understanding of our customers is a great asset for growth in Europe. Sebastian is complemented by a strong European leadership team from Cameleon.

In addition, we are scaling our leadership team to meet our long-term growth goals, with the recent addition of Blair Crump as our Chief Operating Officer. In this newly created role, Blair will lead our sales, marketing, and professional services organizations globally. Blair has a tremendous track record of helping companies grow, having served most recently as the President of salesforce.com's Global Enterprise business group. Prior to that, Blair let a team of more than 5000 people at Verizon Business as the President of Worldwide Sales and Consulting Services. We welcome Blair to the team, and look forward to working with him to drive sustainable, long-term growth.

In 2013, we (technical difficulty) through new innovations and through acquisitions. According to Gartner, our acquisition of Cameleon nearly doubled the size of our market. And with the acquisition of SignalDemand, we are broadening our core offering to create even more value for our customers. We are making investments across these businesses to capture the expanded opportunity. These acquisitions complement our internal innovations, which remains a key driver of our success, and one of the three pillars of our growth strategy.

During 2013, we introduced three new products to the market. We doubled our number of patents, bringing us to 27 patents. Our data science patents centered on turning big data into actionable insights to improve sales and pricing performance. For example, one patent covers how we improve prescriptive capabilities for cross-sell and upsell opportunities in B2B selling environments. Innovations like these help give customers better confidence in their decisions and actions, as well as a performance advantage in their markets.

In terms of new products, we expanded and strengthened our midmarket SaaS offerings with the introduction of PROS Step. Step arms sales reps with greater focus, confidence, and agility, by bringing the power of PROS data science to the cloud to review revenue opportunities. We continued our strong legacy of innovation in the travel industry with the introduction of PROS Group Tool and PROS Availability Server, both of which help airlines leverage big data to further enhance their competitive advantage. We will continue to invest in extending our product leadership position to further differentiate PROS, and to drive long-term growth.

Our strategy for accelerating awareness and adoption of PROS big data applications are paying off, evidenced by our strong pipeline and further recognition by third parties that PROS is a market leader. In the fourth quarter, Gartner Research gave PROS the highest rating possible in their MarketScope report on B2B price optimization.

Gartner also validated our strong leadership position with the acquisition of Cameleon, noting that our combined organizations will pose a real threat to pure play CPQ and price optimization vendors. We are honored to be recognized for our market-leading innovation and commitment to customer success.

Equally important is having more of our customers tell their stories. In 2013, we were privileged to have our customers share their PROS experiences. This contributed to our great attendance at our 2013 Outperform events in North America and Europe. Guests heard presentations from PROS customers such as 3663, American Standard, Arrow Electronics, Ecolab, Johnson & Johnson/DePuy, HP, Novozymes, Panduit, and Volvo. One customer described how they increased gross margins 260 basis points, 5 times higher than their goal. Another reported that they 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 further recognition of PROS as a market leader. We are proud to have so many passionate and committed customers share their great PROS experiences. We will continue to invest in driving awareness and adoption of PROS to drive long-term growth.

In 2013, we continued to expand our global reach and scale through direct sales coverage and our partner ecosystem. We finished the year with 46 quota-carrying reps, up 21% year-over-year. We expect to grow our number of quota-carrying reps by approximately 40% in 2014 to meet the sizable market opportunity ahead.

We also made great progress with our partners in 2013. From a technology partner standpoint, we are pleased to have been named the Microsoft Application Partner of the Year, in recognition of our continued commitment to co-innovate with Microsoft across their platform. Our Microsoft partnership remains a key differentiator for PROS, and we will continue to broaden and deepen the relationship.

We also continued to invest in our SAP partnerships, as we have done through for past eight years. In 2013, we joined SAP's OEM partnership program for HANA, enabling PROS to offer HANA's real-time analytics engine embedded in PROS big data applications.

We achieved the latest SAP product certifications that set the standard for the most complete and seamless integration experience with SAP. We believe our depth of integration with SAP RP, SAP CRM, and SAP HANA is a key reason why SAP customers choose PROS. With more than half of our enterprise B2B customers running SAP, we believe this indicates strong preference for PROS in the SAP community.

Overall, we are pleased with the progress we are making against our stated growth strategies, and we are proud of our team for their many accomplishments in 2013. We entered 2014 a stronger and more diversified company, with an expanded value proposition and deeper product portfolio, a larger geographic presence, and an extended go-to-market reach.

Today we are also announcing that Charlie Murphy will retire at the end of January 2015. Charlie will stay on as an advisor through the end of January 2016 to assist with the CFO transition. We will be initiating a search for his successor. Charlie has been the CFO of PROS since 1998, and has been instrumental in our success, guiding PROS through a successful IPO, creating a track record of strong financial results, and providing outstanding leadership. He embodies our PROS values and culture of integrity, pride, and commitment to customer success.

I want to personally and publicly thank Charlie for his significant contributions and dedication to PROS over the years. I have been privileged to work with him for more than a decade, and I look forward to working closely with Charlie through this transition.

I will now turn the call over to Charlie so he can provide you with a review of our financial results, and our outlook for the first-quarter and full-year 2014.

Thanks, Andres. I appreciate your kind words. PROS is a great company that I am proud to have helped build. I look forward to working with the team and our analysts and investors throughout this year and into the next. Now back to our results.

I will be discussing some of 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. As a reminder, our GAAP consolidated results include the impact from the acquisition of SignalDemand which closed on December 16, as well as some transaction-related costs for the acquisition of Cameleon. We close the Cameleon acquisition on January 8, and currently control approximately 91% of the outstanding capital of Cameleon, and will be integrating their operations with ours in 2014.

We are pleased with our performance in the fourth quarter, with total revenue of $38.9 million, which was at the high end of our guidance, and an increase of 19% from a year ago. This includes approximately $200,000 in revenue from SignalDemand. License and implementation revenue was $26.9 million, up 21% from a year ago. Maintenance and support revenue was approximately $12 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 39% of total revenue in the fourth quarter. Non-GAAP gross margins for the fourth quarter were approximately 74% as compared to 72% in the fourth 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.

Total non-GAAP operating expenses for the quarter were $22.2 million compared with $18.6 million a year ago, an increase of 19%. Non-GAAP operating income in the fourth quarter was $6.5 million compared with $4.9 million a year ago, an increase of 31%. Non-GAAP operating margins for the quarter were 17%. Our non-GAAP operating income exceeded guidance as a result of lower compensation and related expenses from the timing of new employee hiring.

I'd also like to note that approximately $1.5 million of acquisition and integration expenses associated with the Cameleon Software and SignalDemand acquisitions is being excluded from our non-GAAP results.

The non-GAAP effective tax rate for the fourth quarter was approximately 22% compared to 34% last year, resulting in non-GAAP net income of $5 million for the quarter, an increase from $3.3 million in the prior year.

Non-GAAP earnings per share exceeded guidance, and was $0.16 per share compared to $0.11 per share a year ago. GAAP earnings per share for the quarter was breakeven compared to a $0.05 profit in 2012, reflecting an increase in non-cash stock-based compensation expenses in 2013, and acquisition and integration costs associated with our recent acquisitions.

Now, turning to our strong full-year results, revenue was $144.8 million compared to $117.8 million in 2012, an increase of 23%. License and implementation revenue increased $21.1 million, or 27% over 2012; and maintenance revenue increased $6 million or 15% over 2012. Our maintenance renewal rates continue to be best-in-class, exceeding 95%, adding to our future revenue visibility.

Total recurring revenue, which includes maintenance and support and revenue from a number of term license and cloud-based service offerings, was approximately 38% of total revenue for the year. We had strong growth in term license and cloud-based service offerings bookings in 2013, which helps us with our long-term revenue visibility.

Non-GAAP gross profit was $103.8 million for the year, yielding gross margins of approximately 72% compared to gross margins of 73% for the year ended 2012. Our non-GAAP research and development expenses were $29.3 million or 20% of revenue, an increase of $3.6 million from the prior year. Non-GAAP selling, general, and administrative expenses for the full year were $52.6 million or 36% of revenue, an increase of approximately $10.7 million over 2012.

During 2013, we increased our investments, relative to 2012, to support the growing demand for our big data solutions and to drive long-term revenue growth. We believe these investments were effective, and are reflected in our solid year-end backlog, growing pipelines, expanded product offerings, and increased market awareness.

Non-GAAP operating income was $21.9 million for the year, an increase of 23% as compared to 2012, resulting in non-GAAP operating margins of 15.1%. This compares to operating income of $17.8 million and operating margins of 15.1% in 2012. Our non-GAAP effective tax rate was 19% for the year as compared to 32.5% in 2012. Our 2013 annual non-GAAP effective tax rate includes both the 2012 and 2013 research and experimentation tax credits.

Non-GAAP earnings per share for the year was $0.58 compared to $0.42 in 2012. The 2012 R&E tax credit that was recorded in the first quarter of 2013 contributed $0.05 to 2013 earnings per share. On a GAAP basis, earnings per share was $0.11. We generated operating cash flow of $5.8 million in the fourth quarter, yielding a cash flow margin of 14.9%. For the full year, operating cash flow was $17 million, yielding cash flow margins of 11.7%.

Now moving to the balance sheet. We ended the year with unrestricted cash and cash equivalents of $44.7 million, a decrease of $39 million from 2012. At year-end, there was restricted cash on our balance sheet of $39.7 million related to the Cameleon Software tender offer. Our year-end unrestricted cash and cash equivalents balance also reflects the $13.5 million we paid for the acquisition of SignalDemand in the fourth quarter of 2013.

Capital spending for the year, which includes infrastructure and facility improvements, was $4.5 million. We expect capital spending in 2014 will approximate $8 million. Gross accounts receivable at the end of the year were $46.8 million. Days sales outstanding were approximately 107 days, within the range that we have experienced in previous quarters.

Before providing guidance for the first quarter and full year, I would like to provide some additional insights into our 2013 performance across geographies, our B2B and B2C industries, and our revenue visibility going into 2014. For the full year 2013, our B2B revenue increased 25% to $82.4 million, and we are pleased with our ongoing growth strategy and the opportunities we see across our B2B markets.

Our B2C business increased 21% to $62.4 million for 2013. Our travel B2C business, which is predominantly outside of the United States, continues to perform well, driven by our ongoing innovation, new product introductions, and investments in our go-to-market initiatives.

Our United States revenue increased 26%, and made up 45% of revenue for the year compared to 44% in 2012. Revenue from Europe was 23% of total revenue in 2013 as compared to 27% of total revenue in 2012, and grew 7% as compared to 2012. Europe contributed to our sales executions challenges which impacted our B2B growth. We have made, and continue to make, improvements in our go-to-market initiatives in this region, and we feel good about the opportunity in Europe going forward. In addition, with the acquisition of Cameleon, we have more presence and scale across Europe to strengthen our go-to-market strategy.

The rest of the world made up 32% of revenue and increased by 33%, which was driven by strength in our travel B2C business. We are pleased with our non-GAAP backlog at the end of 2013 of $182 million compared to $147 million at the end of 2012, an increase of 24%. Our term and cloud services business increase significantly in 2013 compared to 2012, contributing to recurring revenue visibility more than one year out.

The portion of our 2013 ending backlog estimated to be recognized as revenue in 2012 is $122 million. Including Cameleon, our total non-GAAP backlog is approximately $206 million, and the portion of our total backlog revenue estimated to be recognized as revenue in 2014 is $132 million. We are pleased with this good revenue visibility going into 2014.

Also, we had visibility to approximately $75 million of revenue beyond 2014, which is almost twice as much visibility beyond one year then we had when we entered 2013, which we believe positions us well for long-term growth.

At the end of 2013, headcount, including outsourcing, was 848, which increased 20% from the end of 2012. This reflects our increased investment in sales, marketing, professional services, engineering, and administrative personnel to drive growth, as well as the addition of SignalDemand.

The markets we serve are large and expanding, and we are pleased with the return on our investments as we continue to execute on our diversified strategy.

I wanted to make a few comments on the acquisitions of Cameleon and SignalDemand. We believe these are highly attractive acquisitions and are consistent with our goal of investing our strong cash flow to improve long-term shareholder value. Both companies will contribute to recurring revenue growth, and will contribute to our strategy of growing the business at 20%-plus over the long-term.

From a revenue perspective, Cameleon's revenue comes from a combination of on-premise licenses, maintenance, SaaS, and services, with a growing percentage coming from SaaS. SignalDemand's revenue has been all SaaS and the associated services. Our expectation is that for the calendar year 2014, the acquisitions will contribute between $17 million and $19 million in non-GAAP revenue. More on this in a moment.

Both companies were relatively small; and, as such, they were not able to invest enough in sales, marketing, and services staff to realize their full potential. We plan on making investments in these areas, as well as incremental integration investments, to ensure that we set ourselves up for continued growth in 2014 and beyond.

When you consider the investments we are making in the first year and the revenue impact of converting from IFRS to GAAP, the acquisitions are expected to be dilutive to non-GAAP operating margins by approximately 400 basis points in 2014, and to become accretive on a non-GAAP basis in 2015.

If it were not for these items related to the acquisitions, we would expect our organic business to achieve operating margins of approximately 14%, which is in line with what we discussed with you a year ago, and includes ongoing investments to support PROS growth, as well as spending on some programs and hiring that we moved from 2013 to 2014.

Now turning to guidance; commencing in 2014, we will be providing guidance only at a non-GAAP basis, which we believe is more reflective of the performance of our business, and provides for more meaningful comparison of results between periods. In addition, we plan on reporting non-GAAP revenue in 2014, which will include the amount of the acquired deferred revenue that was adjusted down due to purchase accounting.

Our estimate of the preferred revenue adjustment is approximately $13 million, of which approximately $10 million will flow through 2014, with the remainder recognized over the next few years. As a result, reported non-GAAP revenue will be higher than GAAP revenue in 2014. Non-GAAP expense items in 2014 will include stock-based compensation, amortization of acquired intangibles, employee retention incentives, and other one-time acquisition- and integration-related costs.

Now turning to outlook. We continue to be optimistic while mindful of the global economic environment. We entered 2014 with solid backlog, strong pipelines, and a good contribution from SignalDemand and Cameleon. For the first quarter, we anticipate non-GAAP revenue in the range of $41.5 million to $42.5 million, approximately 25% growth year-over-year at the midpoint. We expect a total non-GAAP operating loss in the range of $200,000 to $700,000.

This performance reflects higher overall personnel levels based on our prior-quarter hiring in support of our strong backlog, expected first-quarter employee additions, and planned strategic investments in sales and marketing in support of our business, including in our acquisitions of Cameleon and SignalDemand. In addition, it also includes a significant seasonal expense for employment taxes in the first quarter, which is up approximately $1.6 million over the fourth quarter.

Non-GAAP operating income excludes approximately $4.5 million of stock-based compensation expenses and $3.5 million of acquisition-related costs, including amortization of intangibles, retention payments, and others. On a non-GAAP basis, we expect the tax rate to be approximately 45% in the first quarter. Non-GAAP earnings per share are expected to be a loss to $0.01 break even, based on an estimated 28.7 million basic shares outstanding.

For the full year, we expect non-GAAP revenue in the range of $190 million to $194 million, an increase of 33% at the midpoint. Organic revenue growth is expected to be approximately 20%. Non-GAAP operating income is expected to be approximately 10%. Non-GAAP operating income excludes approximately $23 million of stock-based compensation expenses and $8.5 million of acquisition-related costs, including amortization of intangibles, employee retention payments, and others.

On non-GAAP basis, we expect the tax rate to be approximately 45% for the full year compared to 19% for 2013. Our non-GAAP effective tax rate will increase in 2014 over 2013, principally as a result of the R&E credit not being renewed for 2014, and expected foreign operating losses from Cameleon, our newly acquired foreign subsidiary. The R&E credit reduced 2013 taxes by approximately 15%. The estimated foreign operating losses in 2014 is expected to increase the consolidated effective tax rate by 13%.

In summary, we are pleased with our performance in the fourth quarter and the full year, and believe we are very well positioned for a strong performance in 2014. We are confident that our growth strategies and investments across the business have been working, and expect to continue this in the future with accelerated investments in Cameleon and SignalDemand, which we believe positions us well to capture the growing opportunity for real-time big data solutions.

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

(Operator Instructions). Chad Bennett.

A couple -- I guess, first thing -- not that you're leaving anytime soon, Charlie -- but it's been great working with you over the past several years, and you've done a great job of scaling the business and growing the business. So hopefully when you're done, you'll have more fun in the sun in Miami. So it's been a pleasure.

Thanks, Chad. I appreciate it. And I will have more fun in the sun in Miami.

Good for you. So I think some housekeeping things for me. The $17 million to $19 million of revenue from Cameleon and SignalDemand for this year -- Charlie, can you give us a rough idea, on a non-GAAP, basis how much of that is in the L&I line versus maintenance?

Well, it's interesting, because SignalDemand is going to be -- is all SaaS. Until we get to a point where SaaS is a predominant portion of our business, that's currently in the L&I line. Cameleon is going to be a mix, but it's going to be predominantly in the L&I line as well, as Cameleon has perpetual which should be in the L&I. It has SaaS and it has maintenance, so it's going to be predominantly in the L&I line.

Okay. And how should we think about -- this is probably more of a question for Andres, but how should we think about -- are you going to sell those products primarily on a standalone basis, at least for the next couple quarters, and not necessarily go after integrating with your pricing optimization product? Or is SignalDemand more likely to be more integrated sooner than the CPQ solution? Any idea of what the roadmap is there?

Yes, no, that's a great question. No, we see good opportunities to provide integration with both solutions; especially, for example, on the SignalDemand bringing the strength of our analytics platform integrated with their technology will drive significant value for their customers.

On the CPQ area, we have very well-defined interfaces to integrate with quoting solutions, so we're going to leverage those integration points to provide seamless integration into the Cameleon platform. And we're actively working on embedding our data signs capabilities.

So at the beginning, you can see that technologies can run standalone and customers can buy Cameleon only, or they can buy combined offerings that are integrated, using more Web service APIs.

Okay. But there's probably not a huge amount of customer overlap there. Not that Cameleon is a huge company, but there's probably not much. Is that fair to say?

Yes, that's fair to say. There's a few customers that overlap, but for the most part, they are complementary customers in same industries that we can see bringing value. (multiple speakers) And the great thing about our product offering, getting back to you, is that a customer of Cameleon may choose to enable our analytics capabilities together with their quoting solution to bring more insights around deal compliance, deal performance. And that is one of the areas where we've seen weaknesses in the market in the CPQ space, is the strength in analytics, and we want to complement that quickly.

Okay. And are the salespeople, Andres, going to be selling all three products, or are you going to have specialists for the other ones?

Yes, that's a great question. We will have our sales organization selling the full product portfolio. We have [SEs] that have experience and are trained on the different product sets, so think about the SE team having more specialization. But, overall, the sales reps are selling the full product portfolio.

Okay. Okay. And then one last one for me, if I may. Should we think about the growth rates of SignalDemand and Cameleon, as I assume differently than maybe your organic pricing optimization business? And if so, can you give us an idea of that?

Yes. The expectations that we want to set is our focus in our diversified growth strategy as having every part of our business grow at 20%-plus. And we're confident that both of these acquisitions can grow at those rates.

Okay. All right, guys. Thanks. Good job, again.

Thank you.

Bhavan Suri.

Just a follow-up on the questions around the product. As you look at the midmarket Step offering and the potential integration with configure price quote, and then with a sales force automation tool, is that the natural progression there? So that if you were to embed this on force.com, the sales guy in force could use this to use the analytics to drive the right pricing and configuration? Am I thinking about that correctly? And how are you approaching the CRM vendors in that space?

Absolutely, and that's why we been investing on the CRM. And as you said, that's probably the most important part of this strategy, is that it is integrated with the CRM platform in providing those insights to help guide the sales organization into what products they should be selling in which accounts, which customers have the biggest opportunity, and at what price points they can win, and bringing this easier, faster, and smarter approach on top of automating the process of lead to quote. So those are the areas that we've been innovating on, and both of these actually bring those capabilities.

And so, Andres, if you were to look at the CRM systems out there -- obviously salesforce, Microsoft Dynamics, Oracle SAP -- which ones are you integrated in today?

Yes, so, today we are integrated with salesforce.com, Microsoft Dynamics and SAP CRM. And our focus is to maintain the integration points with these three CRM solutions, which, based on our customer and market insights, they are the leading providers for sales-oriented CRM solutions.

Sure, sure. And then as you look at the Step offering, you've targeted it towards midmarket, but a little color on maybe some of the customers you added. Where they across manufacturing and services? And maybe a little bit on the size of them, too, would be helpful, I think.

Yes, so, we've seen -- well, a mix. So we've seen some that have been in the $50 million to couple hundred million in revenue, standalone businesses, both in distribution and manufacturing. We've also seen some that may be a small division of maybe a larger company, maybe a $0.5 billion company a small division starting to use. So that's the power of Step, is that we can see a different size of customers and different paths to begin to really leverage these strong capabilities quickly.

A couple of examples that I talked about in the script are Alliance Laundry Systems and B.W. Rogers, which one is in manufacturing and one is in distribution.

And then one thing that's surprising -- and maybe you guys can both touch on this -- was obviously you gave nice guidance on the top line for 2014, but you've talked about some of the services shifting to the SIs. And I would've thought maybe some of that implementation work might shift out this year to the SIs. Help me understand that. Is that still happening, and growth is still pretty solid? Or are you still thinking that the SIs may still be a little ways out?

No, we've made good progress in the SI community, and I would say we are more bullish on that today. And we continue as part of our core strategic initiative, it's really to leverage the SI community. And we are starting to see success in that, and expect to continue in 2014.

Okay, great. That's helpful. Thanks for taking my questions, guys. Nice job.

Thank you.

Jesse Hulsing.

Charlie, did I hear you correctly when you said your backlog likely to be recognized in 2014 was $122 million?

Yes. With Cameleon, it was $132 million. Yes, with Cameleon it was $132 million.

$132 million or $122 million?

$132 million with Cameleon.

Okay, yes, got it. (multiple speakers)

Yes. Go ahead.

And organic perspective is $122 million, right? So up about 13% year-over-year?

I think that's about right. Yes.

I guess the next logical question from that is, from a coverage perspective, a coverage ratio perspective, you're a bit lower than you have been the last few years, as far as from just an organic perspective. What gives you comfort that you can get to that 20% organic (technical difficulty) coverage ratio? And maybe give us an update on how Europe is trending within that broader coverage ratio perspective question.

Sure, absolutely. Yes, absolutely. Actually the coverage ratio was about 69%, which we feel good about. We feel -- historically, if you go back beyond 2012, 70% was generally about the average, and we feel good about 69%. And of course as we go into next year, we just talked about the SIs. We'd expect SIs to give us an opportunity for us to have more end-year revenue.

And, in general, we see a trend towards a bit more end-year revenue, from 2011 to 2012, to 2012 to 2013, to 2013 to 2014. So we're pleased with that, so the end-year revenue is going to allow us I think comfortably to get to what we believe is the overall guidance that we're providing.

As far as Europe, Europe actually had a good fourth quarter when you take a look at the numbers. And that fourth quarter in Europe was supported by both our B2C and B2B business, and we're pleased with that.

And just in general, we expect really good growth in both the United States and in Europe as we're going forward into 2014.

Okay. From a B2C versus B2B perspective, when you look at that organic 20% growth rate, what's embedded in your expectations for those two groups?

Yes. The expectation really hasn't changed. We are still expecting B2C to be the growth driver for the Company. And we're looking at the -- I'm sorry, the B2B to be the growth driver for the Company. And within the B2B, we're looking at mid-20% revenue growth. And B2C, we're thinking about mid-teens. And we'd be very pleased with mid-teens for the B2C business in 2014 and, again, continuing with over 20% revenue growth for the B2B.

Thanks, that's helpful. And when I looked at Cameleon before they were acquired, they were doing about EUR9 million year-to-date, I think, through the first three quarters of the year; so maybe EUR12 million, EUR13 million through Q4, which would be $15 million or so in 2013. So, are you expecting much growth? Because, when combined with SignalDemand, that would indicate you're expecting flattish growth from Cameleon. Is that how you are thinking about it as you integrate?

Well, the one thing that has changed here is, of course, Cameleon was reporting under IFRS standards, which is absolutely appropriate. In fact, everything we looked at during the due diligence, their revenue recognition was absolutely appropriate under IFRS. However, under GAAP, their revenue recognition does change a bit for Cameleon. And what happens under US GAAP is revenue is actually deferred over a longer period of time than it is under IFRS. So it's really difficult to go from a metric like you're quoting, which is the EUR9 million under IFRS, and convert that to a comparable GAAP number.

So we're talking GAAP as opposed to IFRS. And we're seeing growth in 2014 over 2013, but the number is going to be different than you would have had under IFRS.

Got it. That's very helpful. Great, guys. Thanks for taking my questions.

Ross MacMillan.

Hello, guys. Asham on for Ross. Can you maybe talk a little bit about the competitive environment? Is Vendavo still the primary competitor that you see out there, or have anybody else come up more recently?

Yes, the competitive environment hasn't changed at all. It continues to be predominantly with Vendavo we see certainly and in some cases, but it really has had no change.

Okay. And then just in terms of implementation times, I believe you have certain modules which typically -- you can get customers up and running pretty quickly. Have you seen any trend in lower implementation times across your (multiple speakers)?

Yes, that's been a continuous initiative over the last three years, really, to drive faster implementation times. So we typically see, right now, about approximately 4 months per module, the implementation time. And we've had customers up with the full solution obviously in less than that. But that's been an initiative that we've had within our professional services organization that creating a much faster time to value than any competitor in the space. And it's one of our competitive differentiators.

Okay, great. Thanks a lot.

Scott Berg.

Congratulations on some continued success here. Couple questions. First of all, Andres, on the sales side, I believe you guys went into 2013 expecting to increase your sales quota-bearing headcount by 30%, and did not achieve that goal.

Two-part question -- first of all, what was the delta there in achieving that goal, and I guess why wasn't it met? And then, secondly, you're guiding to 40% growth here in 2014. Is that just a little bit of catch-up, maybe, from some of the headcount in 2013 that wasn't added? And on a normalized basis, should think of it as, say, 30% and 30% growth between the two years?

Yes, I would say that we definitely -- our expectations with 30% growth, and we came in at 21%. We feel that that's an area -- we invested in our hiring process, training, and development areas around the sales organization. And we feel the investments we've made will allow us to stay more on track. In terms of the 40% growth in quota-carrying headcount, it's more reflective of what we see as the overall market opportunity, especially when we start to see CPQ and price optimization as a combined offering and differentiated offering. We feel this is the opportunity to really invest to capture this large market opportunity.

So, some of it could be due to the shift, but it really it's related to us looking at the overall pipeline and the demand that we see, and making sure that we really filled out the right sales organization to capitalize on the opportunity.

All right, great. That is helpful. And then on the growth of the B2B business for the year slowed substantially in 2013 versus 2012. I believe it was up 40% year-over-year in 2012, and 25% in 2013. And obviously the challenges in Europe were well-documented over the last year. But was the growth in the US business in line -- better, faster, slower -- than expectations going into 2013?

I would say we've more than doubled US revenue over the past three years, and we are pleased with the 26% US growth last year. I think this is definitely an area that we believe we could have done better. We do have a larger team now. And we are confident that with the changes we've made -- specifically around hiring on the leadership, development, onboarding, and training programs, as I discussed earlier -- we believe this will drive higher growth and better consistency and performance as we capitalize on this opportunity. Our outlook through 2014 is very positive in the US. We expect it to be strong growth.

Fantastic. And then the last question I had, Charlie, was on gross margins. They were substantially higher in the fourth quarter. And I know they do bounce around for you guys on a quarter-by-quarter basis, but that was much stronger than anything in the last couple of years. I assume this gross margin level shouldn't be held consistent, especially with the two acquisitions and the investments required for those? We're just trying to think about how we should look at them, either on an individual line item or a blended basis moving forward.

No, that's correct. Yes, that's correct. The Cameleon and the SignalDemand gross margins are less than the PROS gross margins. If you're thinking about PROS, you probably want to think about the historical -- around 72%. And then when you combine the two acquisitions, it'll be a bit lower, perhaps very, very high 60s; 69%, perhaps.

But there will be some deterioration of the overall gross margins as we (technical difficulty) acquisitions, at least initially. As we ramp up our investments in this (technical difficulty).

Great. That's all I have. I'll jump in the queue. Thanks.

Matt Van Vliet.

Yes, hello, for Tom this afternoon. First question, in terms of the sales headcount growth for 2014, does that include bringing in Cameleon people? Or is that excluding that addition?

Yes, it does include bringing in the Cameleon people as well.

Okay. And then in terms of training for those salespeople, how expensive is that? And then on the flip side, for the existing PROS sales, how much of a learning curve is there to more effectively sell the Cameleon product? Or are they all pretty well-versed in that aspect of the CPQ?

Yes, I would say that one of the areas that obviously we've been investing as part of the integration is on the training programs, and we've made pretty good progress on those areas. In terms of our sales organization selling CPQ, we don't believe that's going to be so different than selling our current solutions and our offering sets. But we're definitely enabling them with the right training programs that we need, as well, for onboarding new reps. So that is an area that we've had a team dedicated to not only build out, but help with the training and development programs around both our CPQ and our overall product offerings. And that's an area where we have built an organization already around the PROS offerings that we're leveraging.

Okay. And then what kind of internal timeframe are you looking at, to feel as though the -- with all three companies fully integrated into just one PROS platform?

Yes, so I would say 6 to 12 months is the right timeframe to be fully integrated. For us, it is very important that we have one customer experience, both from a sales, from a services, from a PS; and also one employee experience for all of our customers.

A lot of emphasis is around the one PROS, and having -- really, to reach our full potential, every organization has to standardize. And the great thing is that we are very aligned from a cultural perspective. And we all believe in this large market opportunity, which is helping us to align in every area across the organization, to bring really a larger platform for both of these companies.

Okay. And then lastly, could you just talk a little bit about some of the management changes that we've seen in Europe, and what drove those over the last few months?

Yes, so, Eric Allen, which was a previous General Manager, really was not there long enough to make an impact. We brought him in in the last month of Q3; and right after we announced two big changes, both Cameleon and bringing Blair in, and this certainly influences personal decision to leave.

At the same time, we really saw an opportunity to promote within, and to bring Sebastian with his great success within PROS, because he knows customers really well and has the experience to lead, as well as complementing the organization with the Cameleon leadership. And it was part of bringing the one PROS in the organization. So we're pretty excited about having Sebastian lead in Europe, and having a combined team with the Cameleon organization.

All right, great. Thank you.

(Operator Instructions). Greg McDowell.

Hello, guys. Andres, my first question is for you. I do want to understand or dig a little bit into the need to bring on a COO. When you look at Blair Crump, what does he bring to the organization that you felt was lacking before? And what are some of the marching orders you've given to Blair Crump to help grow the business? Thanks.

Yes, no, that's a great question. I think one of the things -- why we've achieved the growth that we've achieved over the last three years, and doubling the business, is because we're constantly thinking of the end-stage, 3 to 5 years out. And for me, it's very important that as we see our scaling the business we are complementing our leadership team with the right talent. And I had the privilege of getting to know Blair and his experience in running large-scale organizations, and felt that this was the right time to bring a leader like him to help us scale as we move forward.

So, he definitely understands the space we are in. He was very excited about the capability of bringing intelligence to the selling process, and seeing that as the next generation of technology. And we're very excited to have him here. My plan for him is to really help us build a very scalable organization and draw up our three-year strategy around scale and growth of our business. It was also very important, the experience around the partner ecosystem and global experience that he has, which really complement us very well.

Great. And, Charlie, maybe one quick question for you. How should we think about free cash flow margins in 2014? And maybe a second part of that question is -- could you help us understand maybe some of the cash collection characteristics of SignalDemand and Cameleon? And would they do three-year deals, but you'd collect all the cash up front? If you could just help us understand that. Thanks.

Yes, let me start with Signal, then at Cameleon. Then they do a three-year deal that would be the annual one-year contract value that would be billed up-front, not the full three years. That's been the model that they have been on. So if that helps you with thinking through those businesses.

As far as cash flow for 2014, we expect to continue to generate good operating cash flow, as we have historically. But it's expected to be less than our historical non-GAAP relationship. [To circle] we've been pretty close in cash flow from operations, according to our non-GAAP operating income. We expect it's going to be a little less than that going forward. And this takes into effect the one-time non-GAAP items that we have, such as retention and other cash acquisition expenses.

So, if you back those out, the cash flow would be probably in line with non-GAAP operating income again. But we are going to have those costs. They are cash, so they are included in our cash flow. And we do also expect to have some significant CapEx spending. Now, that's outside of cash flow from operations; but, nonetheless, if you're looking at free cash flow, that's going to have an impact on the free cash flow.

So, net-net, we expect to continue to be positive cash flow. But because of the CapEx and because of the -- and also even just taxes on stock grants; they're increasing each year as well. So the non-operating cash flow elements are going to have an impact on our cash flow generation for the full year.

Cash flow from operations, if you could add back the non-GAAP items, I think we'd be back in line with operating income. Does that help?

That helps. Thanks, guys. That's all I had.

All right, ladies and gentlemen, we have no more questions in the queue. I would now like to turn the conference back over to Andres Reiner for any closing remarks.

Thank you for your participation in today's call, and for your support of PROS. We are confident that our growth strategies are working. We believe there is a big market opportunity, as more and more companies look to PROS to monetize their big data. We continue to invest in our diversified growth strategy in order to capitalize on the market opportunity and to drive long-term, sustainable growth.

I would like to thank our PROS team worldwide for an incredible 2013. I'm proud of their relentless passion and commitment to innovation and customer success. Thank you also to our customers, partners, and shareholders, for your support of PROS. We look forward to a strong (technical difficulty) to speaking with you on our next call. Thank you and goodbye.

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