Pros Holdings Inc (PRO) 2014 Q2 法說會逐字稿

Good day, and welcome to the PROS Holdings, Incorporated second-quarter 2014 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Charlie Murphy, Executive Vice President and CFO. Please go ahead, sir.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us today for the PROS Holdings financial results conference call for the second quarter of 2014. This is Charlie Murphy, Executive Vice President and Chief Financial Officer of PROS. Joining me on today's call is Andres Reiner, President and Chief Executive Officer.

In today's conference call Andres will provide a commentary on the second quarter of 2014, and then I will review 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 risk 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 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 we had a strong second quarter, with non-GAAP revenue exceeding the high end of guidance at $46.5 million, a 31% year-over-year increase. Non-GAAP operating income was $3.5 million and non-GAAP EPS was $0.06 per share. I'm proud of our entire team at PROS for delivering these results, capping off a strong first half.

I'm pleased to share that our bookings growth in the first half outpaced revenue growth, both on an organic basis and a total basis. This growth was driven by a record number of deals in a first half, of which approximately 70% were new customer wins. We believe this indicates increasing momentum in the market and is further substantiated by a continued increase in demand and a strong pipeline.

I would now like to share a few business highlights from the second quarter. In terms of new customer growth, our big data applications were selected by a number of new customers in the quarter, including Anixter International, Perstorp, Stahl, Qantas Airways, and YRC Worldwide, among others. I would like to highlight Perstorp as a particular example of how PROS can help companies outperform in their market.

Perstorp, a specialty chemical company in Sweden, is in a highly competitive environment and has made a commitment to winning more by better accommodating the needs of their customers. To do this, they turned to PROS to help them better understand and anticipate their customers' needs and preferences. Our big data applications integrated with Perstorp's SAP ERP solution will recommend products and prices best suited for each customer, all in real time to ensure a smoother and faster customer experience. We look forward to helping Perstorp achieve and exceed their objectives.

In the second quarter, we also continued to strengthen and extend our partnerships with existing customers, such as Etihad Airways, Mopar, and Swiss, among others. We're pleased that our customers are capitalizing on our continuous innovation to help them outperform in their markets.

I would like to share an example. PROS was selected by Hewlett-Packard to help them increase wins, reduce quote turnaround times, and increase margins. HP was facing stiff competition that continually undercut HP's prices and provided fast turnaround on quotes. The HP team, long believers in the power of big data to inform faster and smarter business decisions, turned to PROS to provide real-time targeted price quotes on a deal-by-deal basis, based on our patented data science technology. The results are impressive.

By empowering their deal teams with real-time and fact-based quotes, HP reduced their quote response times by more than 25%, often from hours to minutes. The result was more wins for HP and their partners, and a better buying experience for customers.

The financial impact is even more impressive. On deals where PROS was leveraged, HP realized a relative margin expansion in excess of 200 basis points. This is what happens when companies leverage big data to better understand their customers' unique buying preferences and to provide a better buying experience. We are pleased that PROS solutions are contributing to HP's turnaround strategy, focused on creating a more nimble and more customer- and partner-centric company that can successfully compete across a rapidly changing IT landscape.

We have numerous examples as well with our travel customers outperforming in their market. For example, Air Transport World recently reported their rankings of the largest and most profitable airlines in the world. We are proud that 18 of the 25 largest airlines by revenue and 16 of the 25 most profitable airlines are PROS customers. Similarly, Skytrax recently announced their top 10 best airlines in the world as voted on by customers. Each of the top 10 is a PROS customer, including Cathay Pacific at number one.

We're honored to have so many world-class customers in the travel industry. We will continue investing in this market to help our customers outperform and achieve our long-term growth objectives.

From a people standpoint in the second quarter, we continued to add breadth, depth, and focus to our leadership team with the addition of Jake Cleveland as our Senior Vice President of Worldwide Sales. Jake joins PROS following a 25-year career with EMC Corporation, where he most recently served as Senior Vice President of Global Sales Strategy for the Office of the Vice Chairman.

At the same time, we also announced that Chris Jones, who previously led sales, has taken on a new strategic role as Senior Vice President of Alliances and Partners. Our partner ecosystem is an important part of our growth strategy, and we're pleased that we've seen the number of opportunities coming in from SI partners increase in each of the last four quarters. Chris's success in driving sales over the past four years and his institutional knowledge of PROS give him a unique and powerful perspective to continue to accelerate our partnership opportunities.

Just as we're scaling our leadership team, we continue to scale our direct sales team. We finished the second quarter with 55 quota-carrying personnel, up 31% over the same period last year. Our sales execution is improving. We were pleased that Europe met our expectations in the second quarter. We expect the same for the second half of the year as we continue to invest in hiring, onboarding, and training programs.

Our acquisition integrations are progressing as planned with our team operating under a unified go-to-market strategy. Demand for CPQ solutions is up, driven by our strong footprint in the US, as well as our investments to accelerate awareness and adoption in the Salesforce.com community.

In the second quarter, we were a leading sponsor at seven Salesforce1 World Tour events in the US and Europe. During the keynote session at the Paris event, we demonstrated how our CPQ solution on the Salesforce1 platform helps our customers' sales reps optimize the opportunity-to-revenue process, enabling them to deliver faster quotes and improve sales effectiveness directly from their mobile devices. We will continue to invest in driving awareness and adoption in the CPQ market to deliver what we believe is a unique and powerful value proposition.

I would now like to comment on two factors that are impacting our near-term growth -- variability in the timing of implementations and the mix of recurring business.

In the second quarter, we experienced higher than normal variability on the timing of some implementations due primarily to changes in customers' internal operations, shifting revenue from those projects out of 2014 and into 2015. Part of our partnership approach with customers is to work through any unexpected challenges they face, and sometimes that means we're subject to timeline changes. Unfortunately, we had more of this occur in the second quarter than normal.

We believe this was an anomaly and doesn't reflect the positive momentum we're seeing in other parts of the business. We expect third- and fourth-quarter implementation timings to return to historic norms.

The other factor impacting our near-term growth is the mix of recurring business, which exceeded our expectations in the second quarter. While this modestly dampens near-term revenue, growth in recurring revenue is an important long-term objective, and we remain focused on the fact that PROS continues to be selected by world-class companies.

Even with the impact of these events on near-term revenue, we remain confident in our full year, given the tailwinds created by our strong first-half bookings, the performance of our acquisitions, and our strong pipeline. We recognize that our business is changing, and we believe it's changing for the better. As we expand or reach into new markets and innovate with new products we expect to add more recurring revenue. In fact, we expected to increase recurring revenue as a percentage of annual revenue from 38% in 2013 to mid-40% in 2014. Midway through the year, we're already at 43%. This is good for long-term visibility and for the overall health of the business.

Coming out of the first half, the fundamentals of our business are strong. We remain confident we will grow 20%-plus per year over the long term. Our team is deeper and broader. Our portfolio of world-class customers is growing. Our pace of product innovation continues. Our partner ecosystem is strengthening. And our acquisitions are performing well.

We will continue to invest in accelerating awareness and adoption, extending our product leadership position, and expanding our global reach and scale to capitalize on the large market opportunity.

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 third-quarter and full-year 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.

I want to point out that we have revised the presentation of revenue and cost of goods sold in our income statement to report license, services, subscription and maintenance revenue as separate line items. With the change in our business over the last several quarters, we believe this is more meaningful information and helpful to investors.

We are pleased with our performance in the second quarter, with total non-GAAP revenue of $46.5 million, exceeding the high end of our guidance and an increase of 31% from a year ago. As Andres noted, our bookings through the first half of the year have been strong, growing faster than revenue on both an organic and a total basis versus the prior-year period, which gives us confidence in our business overall.

The $46.5 million of non-GAAP revenue was made up of $8.3 million from acquisitions and $38.2 million from our organic business, an 8% organic growth over the same period in the prior year, consistent with our expectations. We are pleased with the revenue contribution from our acquisitions. As a reminder, we are now operating the business as one PROS with a single sales force and are offering Cameleon CPQ products in place of our legacy PROS quoting solutions.

In addition, as expected, our organic revenue growth rates continued to be impacted by the relative increase in recurring revenue bookings in the fourth quarter of 2013 and the first half of 2014, which are expected to be recognized over multiple years.

For the first half of the year, approximately 25% of our bookings, excluding maintenance, were from recurring business, which was significantly higher than during the same period in the prior year. We are pleased with this ongoing trend, which does have a negative short-term impact on our organic revenue growth, but adds to longer-term visibility.

License revenue was $12.3 million, an increase of $2.6 million, or 27%, from a year ago. License revenue recognized upon contract execution is in line with our expectations and was approximately 12% of revenue for the quarter. As a reminder, this revenue does not go into our backlog or our backlog to revenue metric disclosed at year end.

Services revenue was $14.2 million, an increase of $1.7 million, up 13% year from a year ago. Our services growth was impacted by the timing of implementations, as Andres previously commented on. In addition, our partners are taking on a greater portion of implementation services.

For the second quarter, subscription revenue -- subscription revenue is comprised of cloud services, SaaS, and term license contracts -- was $6.6 million, an increase of $4.6 million, or a 239% increase over the prior year. Our acquisitions were the primary contributor to our subscription revenue growth.

Maintenance revenue was $13.4 million and increased 18% over a year ago and represented the largest component of revenue from recurring sources. Total recurring revenue represented 43% of total revenue, driven by both organic and inorganic sources. This compares to 37% of total revenue in the prior year.

As I mentioned a few moments ago, our bookings growth for the first half of the year has been strong and our current organic revenue growth rates are not reflective of these positive trends. If you were to normalize the bookings from the last several quarters, which have been more recurring in nature, normalize for the increase in services going to our partners, and factor out the increase in license at contract revenue, our organic revenue growth rates would be approximately 16%, significantly higher than our reported revenue growth.

Non-GAAP gross margins in the second quarter were approximately 70% as compared to 71% in the second quarter of 2013. Total gross margins vary from period to period, primarily due to the level of implementation services required relative to the total contract value and the timing of license revenue recognition.

Total non-GAAP operating expenses for the quarter $29 million compared with $20.4 million a year ago, an increase of 43%. Non-GAAP operating income in the second quarter was $3.5 million compared with $4.9 million a year ago. Non-GAAP operating margins for the quarter were approximately 8%. Our non-GAAP operating income exceeded guidance primarily as a result of revenue outperformance.

I'd also like to note that in addition to our noncash stock-based compensation expense of $5.9 million that has been excluded from our non-GAAP results, we now have amortization of intangibles, the impairment charge, and acquisition- and integration-related expenses which are also excluded from our non-GAAP results, which total $5.5 million.

The non-GAAP effective tax rate for the second quarter was approximately 40%, compared with 27% last year, resulting in non-GAAP net income of $1.8 million for the quarter, a decrease from $3.5 million in the prior year. The increase in the effective tax rate is primarily because this year there is no research and experimentation tax credit.

Non-GAAP earnings per share exceeded guidance and were $0.06 per share compared to $0.12 per share a year ago.

Before turning to our GAAP earnings, I want to discuss an impairment which is impacting our GAAP loss per share in the second quarter by $0.05. As a result of integrating Cameleon into our operations and product line, we have determined that the carrying value of certain internally developed software on our balance sheet should be reduced, and the expense is reflected in our second-quarter financial statements.

GAAP earnings per share for the quarter were a loss of $0.24 compared to a profit of $0.02 per share a year ago. The decrease was primarily the result of the impairment I just mentioned, acquisition-related expenses, including amortization of intangibles, acquisition- and integration-related costs, and an increase in noncash stock-based compensation expense.

Now moving to the balance sheet, we ended the second quarter with unrestricted cash and cash equivalents of $30 million, a decrease of $16.8 million from the end of the first quarter. At quarter end, there was restricted cash on our balance sheet of $2.5 million related to the Cameleon software tender offer. We now own approximately 93% of Cameleon.

Capital spending for the second quarter, which includes infrastructure and facility improvements, was $3 million. We expect capital spending in 2014 will approximate $9 million.

Cash used in operations was $9.1 million for the six months and was impacted by one-time items related to our acquisitions and first-half seasonal items. Excluding these items, cash flow from operations would have been positive for the first half of the year. In addition, the increase in recurring revenue business over the last three quarters, with cash collections spread out over the multiyear contract term, has impacted cash flow for the first six months compared to prior periods. We also believe our second-quarter collection efforts could have been better, and we have taken steps to improve these efforts.

With the impacts of these behind us, we expect strong cash flow from operations in the third quarter and expect our full-year cash flow from operations to be positive.

Gross accounts receivable at the end of the quarter were $62 million. Days sales outstanding were approximately 110 days, above the range we have experienced in previous quarters.

Finally, at the end of the quarter, headcount, including outsourcing, was 970, which increased approximately 25% from last year. This reflects the addition of SignalDemand and Cameleon and our increased investments in sales, marketing, professional services, engineering, and administrative personnel to drive growth.

Before providing guidance for the third quarter and the year, I would like to provide some additional geographic information related to our business.

Revenue from the United States increased $5.2 million, or 30%, over the prior year and represented 48% of total second-quarter revenue in both 2014 and 2013. We are pleased with the increase in revenue from the United States and that our acquisitions are contributing to the performance in the region.

Revenue from Europe represented 26% of total revenue in the second quarter, as compared to 22% in the prior year. This increase was driven primarily by the Cameleon acquisition. While there has been improvement across our European sales and services organization, we continue to focus on better performance, and expect this region to meet our expectations for the last half of the year.

Revenue from the rest of the world represented 26% of total revenue as compared to 30% last year, and increased by 13% as compared to the prior year. Rest-of-the-world revenue is primarily travel, and we can have some quarterly variability in our travel business.

Overall, our business continues to have positive tailwinds driven by the large, growing, and significantly underpenetrated B2B markets we serve and continued positive performance by our B2C markets. Interest levels in our big data solutions remain very high, and we continue to benefit from our diversification across products, industries, and geographies.

We are also pleased with our strong bookings, the higher mix of new customer acquisitions, and the increase in recurring revenue during the first six months as compared to the first six months of last year.

Now turning to our outlook for the third quarter, we anticipate non-GAAP revenue in the range of $47 million to $48.5 million, approximately 30% growth at the midpoint from the third quarter of 2013. We expect our acquisitions to contribute approximately $8 million and our organic growth to be approximately 8% at the midpoint.

We expect total non-GAAP expenses to be approximately $44 million, up from $30.5 million in the third quarter of 2013, as we continue to make strategic investments in our business, as well as incurring the increased expenses coming from our two acquisitions.

We expect non-GAAP operating income margins of approximately 8% at the midpoint of revenue guidance. With a tax rate of approximately 40% in the third quarter, we anticipate non-GAAP earnings per share of $0.05 to $0.08, based on an estimated 30.4 million shares outstanding.

Regarding cash flow from operations, we expect a strong performance in the third quarter with a significant improvement over the first half, as the seasonal and one-time items mentioned previously are substantially behind us and we are experiencing better collection performance.

For the full year, we expect revenue growth of approximately 33% at the midpoint of our revenue range of $190 million to $194 million. Given the strength of our recent acquisitions, we now expect them to contribute approximately $29 million in revenue for the full year.

We continue to expect organic revenue growth to accelerate in the second half of the year to approximately 15% at the midpoint, resulting in full-year organic growth of approximately 12%.

Our confidence in this back half acceleration is due to several factors. First, we had strong first-half bookings and we have a strong pipeline with good visibility into second-half booking opportunities. Second, historically, from a seasonality perspective, our business is stronger in the last half of the year and especially in the fourth quarter, which remains our expectation.

Third, our license revenue recognized at contract signature from B2B deals was in line with our expectations for the first six months, and we expect to see an increased contribution from these deals in the second half.

And finally, we believe the sales improvements we have made together with the expanded leadership focused on sales and partners will have a positive impact over the next few quarters and will benefit our results going forward.

As previously discussed, these factors are being offset by the timing of some implementations that have extended into 2015. This has an impact on recognized revenue in 2014, but builds visibility into 2015.

Our non-GAAP operating margin guidance for the year continues to call for approximately 10%.

In summary, we are confident that our growth strategies and investments across the business have been working. We are pleased with our performance in the first half and our outlook for the year. We expect our opportunity for growth to continue in the future, as we capitalize on expanded market opportunity and improvements in our go-to-market initiatives, contributing to our outlook of 20%-plus revenue growth long term.

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

Thank you. (Operator Instructions) Scott Berg; Northland Capital Markets.

Andres and Charlie, congrats on the [new] sales momentum. Couple questions -- Charlie, I'm going to start with you. You talked about revenue from the acquisitions coming in at roughly $29 million for the year. I know when you guided at the beginning of the year that range was, I believe, $17 million to $19 million. Should we view the delta between that as stuff that's been signed on your paper, so it's more of an organic sale? Or is that just a reflection of maybe how conservative you were on the initial impact of the deals that were brought over during the acquisitions period?

Yes, Scott. I think it's a couple of factors here. One, initially we were thinking around $19 million to $20 million. And clearly at that stage, a lot of that was conservatism on our part because, as you know, we had just completed, I mean just completed, the Cameleon acquisition. And just 45 days prior to that we had completed the SignalDemand acquisition. So we wanted to be prudent about the prospects for both of those acquisitions as we went through the year.

I think with the momentum we've seen as far as bringing the sales organizations together, particularly on the Cameleon side, which is the bigger opportunity, because of the configuration price and quoting marketplace, we're seeing opportunities for improvement there. Obviously, we've combined the sales organization. We're there now. We are now selling their product, in fact, as a substitute in many cases for our product. And with the sales force that we have behind it, which obviously is much more substantial than their sales force, which I believe was maybe five to seven people, we see opportunities to improve the performance of that company as we go through the year.

So it's a bit of both. Admittedly, we were conservative. Again, we were -- just had completed the acquisitions. But now we're seeing the opportunity that the combined companies can bring.

We're also particularly pleased with just some of the services revenue that Cameleon was able to drive in the first half of the year. We saw a little of that in the first quarter; we saw more of it in the second. So things are trending in the right direction relative to the acquisitions.

Yes. One other comment that I will add is we've talked about on the RFP front we've seen a significant uptick in -- and on the demand for the CPQ solutions, as well as we've seen our customers and (inaudible) customers looking at buying also the complete offering, like Charlie talked about, our Scientific Analytics, Price Optimizer and CPQ solution. So we're seeing that resonate. And, again, having the overall unified sales force focus on this market and all of the demand gen activities from the Salesforce1 World Tour, we've seen definitely a strong uptick in demand year over year.

Okay, great. So then, getting to your comments, Andres, on the sales momentum in the first half, record deal flow in the first half, can you comment on the linearity of that strength between Q1 and Q2? Is that a reflection of a better Q1, better Q2, both of them? Just trying to understand how that has fallen during the six-month period.

I would say that Q1 was a strong quarter and Q2 was even stronger. And I would say that it's a reflection of continued momentum that we see on all fronts. Both -- on the RFP front we continue to see strength, so at the top end of the funnel in demand, as well active deals closing throughout. So in terms of number of deals as well as total booking amount, were records for us for first half. And they are outpacing the revenue growth for the full business.

Okay, great. And last question for me before I let -- someone else can jump in here is, can you just talk a little bit about maybe directionally or comment a little bit more on the amount of revenues that's going to move from fiscal 2014 to fiscal 2015 based on customers that are pushing out some of these services? Just trying to get an understanding of is -- you called it out so my guess is it's more than $10, for instance. Just trying to get an understanding of what this does in terms of impacting your organic growth for the year.

Yes, Scott, you're right. It's significant, otherwise we wouldn't have called it out. Because every quarter, every period, there's some variability. Some projects move in a little faster, some move out a little bit. Unfortunately for us, in Q2 we saw a change that's clearly anomalous for us, and is significant.

At this stage it could be approximately 4% to 5% of the backlog revenue coming into the year. That's a big number. Apart from that, obviously our organic revenue growth expectations this year would be much better than they are. The only -- the positive about this, of course, it's going to come back in 2015. And we obviously have some strength in our acquisitions and the overall strength in the business in the first half to help make up for it. But, no, it is significant. It's anomalous. I've been here 15 years and this is the first experience that I've had with this kind of a shift.

Maybe I should just give a little color on some examples here, maybe to just show how anomalous this is. We had a customer that actually paid in full for the license and their implementation services. They really wanted to proceed with this. But then they faced a challenge internally that necessitated them moving the project off to 2015. We had another customer that paid all the license and still had to move the project to 2015. Another customer actually experienced some significant events that have been in the newspapers recently, and that pushed not services off, but possibly maintenance revenue off until 2015.

So these are, to us, truly anomalous examples. In general, it's just that customers sometimes have third-party dependencies. We had a little bit more of that certainly in the second quarter that's pushing off their expectations of being able to proceed with the implementations. So it's a confluence of a few events.

But we do large deals. And all it takes is a few, a handful, a little more than a handful of deals that aren't customary to have a sig- -- have an impact on our revenue. Now, we've obviously doubled down. We've looked at every implementation we have ongoing. We just don't see this having an impact on Q3 and Q4. But nonetheless, for the full year with what we've seen here in the second quarter, there is a significant impact on the year.

Yes. And I would say, our focus continues to help these particular customers work through their challenges and making sure they come out stronger from them. And I think that's what's helped us build very strong relationships that span decades. I think this is our time to help them through their challenging times. And we know when they come out of it, they will come out stronger.

All right. Thanks for answering my questions.

Bhavan Suri; William Blair.

So let me jump right in. I guess the first question I have is, with the shift into more recurring revenue, which is great, the term and subscriptions, can you just talk a little bit about how the sales force is compensated to sort of push the transition? Or are they not and it's kind of left up to the customer?

Yes, that's a great question. Right now it's neutral for the sales force. And our focus is really around the customer preference. Where we have customers that prefer a private cloud or a SaaS delivery model, we want to be able to accommodate their preferences. What we're seeing is in certain scenarios customers want a faster start and with a cloud offering they feel they can achieve that. And we can see that they can achieve faster time to value than relying on their particular IT staff to provide the service.

But overall we're very pleased that we are pretty close to what our goal was for the year, of 44%, and that overall we're capturing good long-term business for us.

That's great. And then, could you talk a little bit about the Salesforce.com relationship and sort of the traction you're seeing on the Force.com platform for the offerings? Is there a time at which we could imagine the data science possibly running on the Force.com platform?

Yes, that's a great question. So Salesforce is one of our key partners on the CPQ and even extending other capabilities to bring data science and intelligence into their sales platform. So overall we've been very focused, as I talked about, on the Salesforce1 World Tour. We're going to play a big role in the Dreamforce. We're a platinum sponsor and we're working very close with them on those opportunities.

Long term we see -- the data science at this point will live in our own cloud and will not be embedded within the Force.com cloud. And predominantly the reason is for scale and performance. The amount of data that we process and the real-time nature where we're doing in millisecond response time is something that it would be hard to accomplish in the Force platform today.

For the customer it's the same benefit. It's seamless experience from a lead opportunity to quote. The whole user experience is native on the Force.com platform. But the intelligence that's injected into it, it's via a real-time call that happens in our engine. This also gives us, obviously, the flexibility to power other CRM platforms like Microsoft Dynamics and SAP CRM, which are still important for many of our customers.

So at the end of the day where we want to focus is on providing the best user experience with the most innovative data science capabilities to help that rep be more successful when they're quoting.

That's helpful, Andres. Thanks. And one last one from me -- as you look at the partner channel, obviously some of the organization you've done is driving bigger a bigger focus on that. When you think of the ideal partner, is it someone like Accenture or is it someone who's a little smaller and a little more boutique-y around sort of the price optimization, revenue optimization kind of space. And how are you tracking in terms of -- you gave some color, but a little more would be great -- in terms of getting these guys to start implementing the projects?

Yes. So obviously SIs like Accenture are perfect partners for us, and Accenture is one of our strongest partners. Especially since they preempted and saw the union of CRM and CPQ and price optimization coming together and driving a significant value to their customers. So we're very aligned with their own partner strategies around helping their customers with our offering. So they play a very good partner for us. They have a lot of certified consultants in implementing both our CPQ solution and our price optimization offerings.

But obviously we do see some boutique partners that could be very good partners, whether it be via region or because of certain capabilities they have, whether it be experience in price optimization or other areas. But overall, our real focus has been on our strategic partners like Accenture and the Deloittes, Capgeminis of the world. And they provide us a large scale for global enterprise customers.

Great. Thanks, guys.

Chad Bennett; Craig-Hallum.

So I guess I'll just kind of rattle through a few here. Charlie, on Cameleon specifically, can you mention did that contribute anything material to the license line this quarter? Or was it primarily subscription?

Well, that business is primarily a subscription business, so it's more the subscription side. But they do -- I think as we mentioned before, they still do deals on the perpetual side. But predominantly, as we want, it's more on the subscription side.

As I commented, they've also been particularly strong on services. They've been able to really drive some additional value-added services into the customer base.

Okay. And I'm trying to kind of understand a little bit more on the bookings side. So if we go back to the December quarter, I think you mentioned a fair amount of the December quarter bookings were recurring revenue bookings. And the issue with the first-half growth of this year was a fair amount, or sizeable amount, of those recurring bookings wouldn't be recognized until the second half of this year. Are any of the delays you're talking about related to bookings going back that far? And can you help me kind of understand the ins and outs of how those bookings aren't benefiting as much anymore? Is it just kind of the overall shift?

Actually, the bookings -- yes, let's talk about -- as far as the shift, the shift really impacts -- we have a portfolio of customers. Some of the deals could have been signed in the second quarter of last year and some of the deals could have been signed in the third and fourth quarters of last year. Many of these were -- the projects were proceeding, a phase or something completed, but then they ran into these situations where they had to make a change and shift it to 2015.

And to give you an example, on the travel side, there's lots of dependencies on the travel side with third parties. And these are very, very large applications they have. They use third parties, the [res] systems, et cetera. If they just get a little bit of a delay from a third party providing them what they need to help us complete our phase of the implementation, a project can get delayed. We clearly had more of that.

Then I gave some other examples where customers signed. One was in the third quarter of last year. One was in the fourth. Paid the cash, everything, but then for their own internal reasons had to move the project to 2015. So it's really spread across a number of examples and across our portfolio. Some was in travel, some was in B2B. I will say with absolute certainly, very anomalous. Our record of estimating backlog revenue at the beginning of the year has been incredibly good.

You're right. No, I understand. And then, I'm trying to understand better your thinking on the fourth-quarter implied guidance, obviously, since you just guided for the September quarter. By my math you need a sequential revenue growth of high teens versus historically it's kind of been high-single digits to 10% sequentially. And then to hit your op margin goal you need to go from I think you said 8% in the third quarter midpoint in the high teens. Are we expecting more -- based on your pipeline and how you see things closing today, are we expecting more kind of up-front deals to hit in the fourth quarter to get us there? How do we kind of get there?

Yes, I think the first way to get there, Chad, is -- we, like I'm sure many software products companies, the strongest quarter for us -- and historically this has absolutely been the case -- has been the fourth quarter, from a bookings standpoint. When we're talking -- a number of years ago when it was all percentage of completion it was hard to discern that. But now of course, with us moving more towards a true products company license model of recognizing license at contract, we, like many other products companies, will have a stronger fourth quarter than perhaps any other quarter in the year.

So it's just the seasonality of the business. Historically we've always been stronger in Q4 by usually a -- it's Q4. Then sometimes it's Q2. The sequence is Q4 is always the strongest. Then maybe Q2 or maybe Q3 and the quarter historically that's the weakest is Q1. That's been our historical pattern. It probably tracks very close to other companies as well. So first you have to -- do you accept that the seasonality here in the business and we will have a good strong fourth quarter as we've always had? That's the first piece.

The second piece -- we obviously had very good bookings for the first half of this year. We're very pleased with the bookings, have exceeded our revenue growth. We have momentum there. We're pleased with the momentum behind our new customers in the second quarter. And looking at the pipe and working with the sales team -- we've got a good sales pipe. We've got a stronger sales team. So we really feel that we're progressing very well.

Your question was, is it going to be more upfront? We expect, yes, there will be more upfront revenue recognized in the last half of the year than the first, but that really is because of the seasonality. The quarter's been the strongest are always the fourth. Sometimes it's the third. Sometimes it's the second. Never the first. So, yes, we expect to have more revenue recognized, at contract, in the last half of the year.

Okay -- (multiple speakers) --

And the fact that we tracked as well as we did for the first six months. Let me -- just one more thing, Andres. I'm sorry. We talked about this in the third quarter of last year as far as the model shifting with license and contract. We were pleased then. We were pleased with the fourth quarter. Good performance in the first quarter, the second quarter. So I think we've established a record here where, yes, you look at license at contract and it very much is going to be seasonally driven with the fourth quarter being the strongest quarter.

Yes. The only things that I would add is, it was in our model that Q4 would be stronger. So we're not changing our model.

The last thing I think in giving us confidence -- we spoke about the RFPs significantly up year over year. But another important factor is that approximately 70% of the business in the first half were new customers. And that's what's driving the confidence in the strength on new as well.

Okay. One last one for me, if I may. So I think you talked about, Charlie, going into this year license on contract, kind of upfront revenue rec, of roughly a $10 million number, if I remember correctly. Has that changed at all?

No, actually the number, Chad, was approximately 10% of revenue.

Oh, sorry, 10%.

Last year we did less than 5% of revenue. And that was predominantly in the third and fourth quarter. This year we had said it would be approximately 10%. Looking at it today with the progress we've made, it's very likely going to be 12% to maybe 13%, 14% of revenue.

Perfect. That's all I needed. Thanks for taking my questions.

Greg McDowell; JMP Securities.

I do like the new presentation of revenue. I think that's going to be very helpful. Along those lines, given the discussion on the variability of the timing of implementations, as it relates to your Q3 guidance, could you just help us in terms of the impact of that variability on how we should model maybe the individual components of revenue?

Okay, on the individual -- because the steady Eddie is going to be maintenance. That's the easiest, of course. You should just look at the historical trends on maintenance and I think that's a good pro forma of where the Company's business is likely to go.

The subscription, of course, should grow at some nice rate because that's analogous to maintenance. You should just logically expect to see some nice growth in subscription.

And then when you get to license and services the license would have more variability because we have the opportunity now, again, if all the contract terms are correct, on our B2B business we have the opportunity to recognize the license. So license is going to have more variability.

For services, the services I would expect should progress. You would progress from one quarter to the next, because we still have a substantial portion of our business that's percentage of completion. So all the travel business is recognized, the services are recognized over time. And really, on the B2B side the services are recognized over time as well. So if there's any line that's going to have more variability it's going to be the license line. And I think we've addressed that by talking about the momentum we're seeing in the marketplace, the fourth quarter historically being our strongest quarter (inaudible.) So does that help?

Yes, that is helpful. Thank you. And then, this 70% new customer wins, one thing I didn't entirely understand is where are those new customer wins coming from. Are those from the B2B business, the travel business, the Cameleon business, the SignalDemand business? Like, what drove most of those new customer wins?

The customer wins are driven by both -- by the combined business, both B2B, travel as well. I would say B2B is growing faster from a bookings standpoint than travel. And the organic part of B2B was the -- very strong. And the organic part of B2B grew faster than the combined -- than the full revenue growth of the business, so grew more than 30%.

Great, thank you. And then I'll squeeze one more in here. The normalized bookings -- and I understand why you are pointing out that in the quarter it was growing faster than revenue in organic, 16% on a normalized bookings basis. But could you tell us, is that an acceleration from Q1? Is it a deceleration from Q1? What's sort of that normalized bookings guidance? Or what's it imply for the second half of the year?

Sure. We're always reluctant to talk about bookings within one quarter because there's variability from quarter to quarter. But I think we'll say that the Q2 was stronger than Q1. But, again, I do want to go back to historical norms, too. So the Q1 is generally not the strongest quarter for the Company. But Q2 was stronger than Q1. And so we feel good about that, and we feel good that it exceeded our revenue growth.

You mentioned the normalization. I'm not quite sure I got the comment. But the reason we give the normalization from a revenue standpoint is we were actually asked about this by a number of investors after our first-quarter earnings call, and actually asked about this by a couple of analysts as well. And we thought actually we should address it. We should address the normalization. So we've done that. Hopefully it's helpful. It's going to be this year only, obviously, because we get to next year -- this is the year of the transition. This is the year of the change from one model last year to a new model this year. So next year everything will be normal. Is that helpful, Greg?

Yes, it is. I don't want to ask too many questions here, but what is -- mechanically, how are you normalizing it? What's sort of the basic math behind it?

Well, the math really is -- it's really straightforward. What we're doing is we're taking -- there are three components to this that impact what's different this year from the prior year and certainly the year before that. One is we have more recurring revenue business, which the uptick was substantially the fourth quarter last year. We have more upfront license business this year than we will have last year. It started in Q3 of last year.

And we've got more deals where we actually have the SI taking the lead on the full implementation. Previously, SIs participated in implementation. We were the prime. Now the SIs are actually taking the lead and they're taking the implementation. I'm not suggesting it's a lot. But it's started.

Now you think about our -- let me talk about the SIs for a moment. If you think about the size of our average ASP, being approximately $2 million. Half of that's services. So if it's an SI-led deal, the SI is getting substantially all that $1 million of services, half of the deal value.

So when you take those three items -- more recurring revenue, more upfront license, and the SI deals -- you factor all three of those in. And the way we did it is we took out the license at contract, take that out of revenue. Treat that as if it were a percentage of completion contract, which was the predominant model last year. So normalize that. Now, the recurring revenue increase over the previous year, if that had been more normal perpetual deals -- but let's go on a percentage of completion basis, normalize for that. Add in the services revenue we've lost because of turning the services over to SIs -- that was the basis for calculating the normalized organic revenue growth, which was 16% versus the 8% that we reported.

Yes. That's super helpful. Thank you so much.

Darren Jue; JPMorgan.

I'm on for Sterling Auty. I just wanted to drill in a little bit on the metric about 70% of your deals coming from new customers in the first half. And you spoke about the B2B and then travel segments. But I'm just wondering if part of that strength could have come from success that you're having moving in sort of the SMB segment. Can you comment on that?

Yes. I would say that the strength of this is coming predominantly on the enterprise market. And the SMB's still early. I would say that this is predominantly all the enterprise market.

Okay. Thanks.

(Operator Instructions) And it appears there are no further questions in the queue at this time.

Thank you for your participation in today's call and for your support of PROS. I would like to thank our incredible team worldwide for delivering great performance. I'm proud of our people, whose passion for innovation and customer success continue to fuel our growth.

Thank you to our customers, partners, and shareholders. We look forward to speaking with you on our next call. Thank you, and goodbye.

And this does conclude today's conference. We thank you for your participation.