Pros Holdings Inc (PRO) 2014 Q4 法說會逐字稿

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

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 full year 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 fourth quarter of 2014 and then I will review the financial results and our outlook before we open up the call for questions.

Before we begin we must caution you that some of today's remarks including our guidance for the year, our competitive position due to 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 and other forward-looking statements. Also, these statements are based solely on present information and are subject to risks and uncertainties that can cause actual results to differ materially from those subjected 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 segment on our website at PROS.com.

Finally, PROS has provided in our 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 occurred, 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 accounts principals, or GAAP, PROS reports certain non-GAAP financial results.

Investors are encouraged to review the reconciliation of each non-GAAP measure to the more directly comparable GAAP measure in the tables accompanying the press release distributed earlier today which can also be found on our website in the Investor Relations section. With that, I would like to turn the call to over to Andres.

Thank you, Charlie and thanks to all who are joining us on today's call. 2014 was another outstanding year for PROS. We entered 2015 with more confidence in our winning strategy than ever before. The incredible team worldwide delivered great results in the fourth quarter on the strength of record bookings for the full year.

We exceeded revenue guidance in the fourth quarter with non-GAAP revenue of $55.6 million, a 43% increase over the same period last year. Non-GAAP operating income was $8.5 million for the fourth quarter and non-GAAP earnings per share was $0.21. For the full year we exceeded guidance with non-GAAP revenue of $193.6 million, a 34% increase over 2013. Marking our fourth consecutive year of better than 20% revenue growth.

Non-GAAP operating income for 2014 was $18.3 million. Non-GAAP earnings per share was $0.39. The 2014 performance was the result of ongoing investments in our diversified growth strategy. Initiatives to accelerate awareness and adoption paid off. We added a record number of new customers including twice as many now B2B customers than in the year before.

In 2014 we were selected by Annexer, Brazil Foods, Cargill, (inaudible), Hub Group, Debt Air Ways, QANTAS, YRC, among others. We believe this indicates an ongoing preference for PROS by companies seeking a strategic partner to turn their data into better business performance. Several factors drove this growth in new business. First, we invested in demand generation strategies to grow our pipeline, resulting in a record number of our RSPs, and twice as many new opportunities than in the previous year.

Second, we increased our reach in the market by growing our direct sales team. We ended the year with 64 quota carrying personnel, up 39% from the previous year. I'm proud of a world class sales team for their outstanding performance in 2014. We will continue to invest in recruiting, training and onboarding to further increase scale and productivity.

Finally, we made it easier to buy and implement our solutions with new package offerings that include prescriptive best practices resulting in faster sales cycles in 90-day implementations. We believe this approach will continue to accelerate sales cycles, time to value, and market adoption. As strong as your new customer growth was in 2014, our growth in existing customer business was just as impressive.

We broadened and deepened our partnerships with a record number of existing customers. Such as Avis Budget, Cardinal Health, (inaudible) Airways, Hertz, (inaudible) and Mopar among others. The driving force behind customer expansion is the high value of predictive and prescriptive solutions can deliver. A recent study by PWC revealed that companies who are persistent in analytics for sales and marketing outperformed during the (inaudible) years in sales growth, margin growth, and profit growth by more than two times and showed an 8 times better total shareholder return on capital.

We have helped companies outperform like this for many years. For example, in 2014 we spoke about how we helped HB compete and win by reducing quote turn around times by 25%. And improving margins by more than 200 basis points. We also had a B2B customer in Europe achieve 6% incremental profitability with our solutions.

These are just two of many examples where PROS helped create a competitive advantage and drove hundreds of millions of revenue and margin increases. We're honored to be a key solution that executives depend on to drive better business performance. At the heart of our customer success is our heritage of innovation. In 2014, we continued to set the standard of innovation by introducing two new data-driven solutions that combined the power of analytics, automation and intelligence.

We delivered a first of its kind CPQ solution with integrated price optimization. This breakthrough solution helps customers improve the ease, speed and effectiveness of the quoting process to win more deals profitably. We also introduced group sales optimizer, a real time booking solution for travel customers that integrates dynamic pricing with powerful sales effectiveness, revenue management, and contract management capabilities. These solutions are two more examples of how PROS is redefining what customers should expect from an enterprise application.

Our efforts are being noted. PROS was recently named a winner of the prestigious CRM watch list award which recognizes those companies that are making a meaningful, positive impact on customers with sales and marketing technology. Out of more than 140 companies reviewed, PROS was joined only by salesforce.com and Microsoft in achieving elite winner status. According to the analysts who researched the companies for this award, to win elite status, a company must not only have a strong impact in 2014 but also be built for the future too.

We're proud to be recognized alongside two great partners for making a noticeable difference in the sales and marketing technology space. I'm proud of our entire product organization for empowering our innovation advantage in the market. We will continue to invest in this area to further extend our leadership decision. Overall 2014 was an outstanding year for PROS and we're confident in our long-term growth outlook for several reasons.

First, our large underpenetrated B2B market is emerging and gaining momentum as evidenced in the uptick of new customer wins, existing customer expansions and demand. We believe B2B will continue to be the biggest driver of our growth for PROS. Second, our partner ecosystem is getting stronger and it's contributing to growth. Partners delivered an increasing number new opportunities throughout the year. We closed deals sourced by partners.

We are pleased with early wins from the partners and look forward to continued success going forward. Finally, our solutions are more differentiated, more valuable and more relevant than ever before. An article in Forbes identified data driven applications and as an emerging category of software that combines data science expertise with a deep understanding of business problems. This has been our mission from the very beginning because we believe that smarter is better. The age of data driven applications has arrived and few companies have PROS pedigree in turning these solutions into real customer value.

We believe we have the key ingredients for sustainable long-term growth and we will continue investing in our diversified growth strategy to capitalize on the large market opportunity. Before I close, I would like to acknowledge and thank Charlie Murphy for his 16 years of passion and dedication as our CFO. His contributions to PROS have been incredible and will be long lasting.

We wish Charlie all the best in his retirement after he gets one last chance to discuss our details financial results with you. We're pleased to announce that Stefan Schultz will join PROS as our next Chief Financial Officer on March 3rd. Stefan is a great leader whose extensive experience in driving global scale will be instrumental to our long-term growth strategy. Stefan is a great addition to our team and I look forward to working closely with him.

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 of 2015.

Thanks, Andres. I will be discussing our financial results on a non-GAAP basis. As I mentioned, at the beginning of this call, a full GAAP to non-GAAP reconciliation is included in our earnings release which can also be found on our website in the Investor Relations section. This was a significant year for PROS as we were able to expand our recurring revenue contribution while at the same time satisfy the needs of our customers and the resulting increase in licensed revenue recognized at contract.

Turning to our fourth quarter results, we are pleased with our performance with total non-GAAP revenue of $55.6 million, exceeding the high end of our guidance and an increase of 43% from a year ago. The $55.6 million of non-GAAP revenue included organic revenue of $48.4 million, or 25% organic growth over the same period in the prior year. Non-GAAP revenue was negatively impacted by approximately $300,000 because of foreign currency changes in the period.

We are pleased to see the improvement in our organic revenue which was positively impacted by the strength of our B2B bookings throughout the year as well as very strong license revenue recognized by contract. As I note beginning next quarter, both Chameleon and Signal Demand will have been part of PROS for a year and their revenue will no longer be broken out separately. Licensed revenue increased $11.4 million to $22.5 million, an increase of 103% in the same period a year ago.

Licensed revenue recognized upon contract execution was approximately 29% of total revenue for the quarter compared to 8% in the year ago period. As expected, the fourth quarter was our strongest bookings quarter for the year and we expect the seasonal trend will continue similar to other enterprise software companies. Services revenue of $11.3 million, a decrease of 9% from a year ago due primarily to timing of implementations. As communicated, regarding services revenue, our strategy has been to introduce package offerings with faster sales cycle times and shorter implementation periods. This has the effect of reducing services revenue.

In addition, our strategy is to drive increasing license revenue by utilizing our partners for both lead generation and implementation services. As a result, we expect services revenue to have modest growth in 2015. Subscription revenue increased $3.7 million, to $7 million, an increase of 109% over the same period a year ago. Our acquisitions for the primary contributors to our subscription revenue growth. Maintenance revenue increased $2.8 million, to $14.7 million for the quarter.

A 23% increase over the same period a year ago and represented the largest component of revenue from recurring sources. Our fourth quarter recurring revenue increased 42% over the prior year. Non-GAAP gross margins in the quarter with approximately 75% as compared to 74% in the fourth quarter of 2013. Total gross margins vary from period-to-period primarily due to 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 were $33.3 million, compared with $22.1 million a year ago, an increase of 51%. Non-GAAP operating income in the fourth quarter was $8.5 million compared with $6.5 million a year ago, an increase of 30%. Non-GAAP operating margins for the quarter were approximately 15%. Note that in addition to the $6.3 million of non-cash stock based compensation expense and an impairment charge of $1.9 million, also excluded from our non-GAAP results, were amortization of intangibles and acquisition integration of related expenses of $1.6 million.

The non-GAAP effective tax rate was approximately 22% in the fourth quarter and compares to 21% in the prior year. The effective tax rate in fourth quarter includes the renewal of the research and experimentation tax credit for 2014. The credit has not yet been renewed for 2015. Non-GAAP net income was $6.4 million for the quarter compared to $5 million in the prior year, an increase of 28%. Non-GAAP earnings per share was $0.21 compared to $0.16 per share a year ago.

The non-GAAP earnings per share of $0.21 exceeded the high end of our guidance by $0.04 per share. Before turning to our GAAP earnings, I want to discuss a $1.9 million impairment charge that has impacted our GAAP loss per share in the fourth quarter by $0.07. As a result of the integration of our product lines, we have determined that the (inaudible) value of certain internally developed software on the balance sheet should be reduced and the expenses reflected in our fourth quarter financial statements.

GAAP earnings per share in the quarter were a loss of $0.60 compared to a break even a year ago. The earnings per share decrease is primarily the result of establishing a $16.2 million valuation allowance against our deferred tax assets. Acquisition expenses of $1.6 million, which includes $1.2 million amortization of intangibles, and an impairment charge of $1.9 million and a $2 million increase in non-GAAP stock based compensation.

Turning to our strong full year results, total non-GAAP revenue increased $48.8 million to $193.6 million as compared to $144.8 million in 2013, an increase of 34%. Non-GAAP revenue was negatively impacted by approximately $800,000 because of foreign currency changes throughout the year. Licensed revenue was $58.6 million, an increase of 42% from the same period a year ago.

Services revenue was $53.5 million, an increase of 11% in the same period a year ago. Subscription revenue was $25.9 million, an increase of 181% from the same period a year ago. Our maintenance renewal rates continue to be best in class exceeding 95% and adding to our future revenue disability. Maintenance revenue was $55.7 million, an increase of 21% over the prior year.

Our annual recurring revenue was $81.5 million, a 47% growth over 2013 and represented 42% of total revenue in 2014 compared to 38% in 2013. Non-GAAP gross profit was $138.4 million for the year, yielding gross margins of approximately 71% compared to gross margins of 72% a year ago. The decrease was expected and driven principally by the revenue from the acquisitions.

Non-GAAP operating income was $18.3 million for the year, a decrease of $3.6 million as compared to $21.9 million in 2013. Operating margins were 9.4% in 2014 inclusive of absorbing two acquisitions as compared to 15.1% in 2013. During 2014 we also increased our investments relative to 2013 in sales, marketing, product innovations, to drive our long-term revenue growth.

We believe these investments were effective and reflective in our strong results, growing pipelines, expanded offers and increased market awareness. A non-GAAP effective tax rate was 29% for the year as compared to 19% in 2013. There was two years of research and experimentation tax credit recorded in 2013 because of the timing of the statement and one year in 2014. Annual non-GAAP earnings per share for the year was $0.39 compared to $0.58 in 2013. On a GAAP basis, loss per share was $1.27 compared to a profit of $0.11 per share last year.

Now moving to the balance sheet. We ended the year with cash and cash equivalents of $161 million compared with $44.7 million as of December 31, 2013. During the first quarter, we issued comparable senior notes which netted us their $126 million after transaction costs. Cash flow used in operations for the fourth quarter was $1.4 million and cash flow generated from operation was $1.8 million for the year. As I previously discussed, cash flow during 2014 was principally impacted by one-time items related to our acquisitions and the significant increase in recurring revenue bookings last year which spread out cash collections over several years.

Finally, at the end of the quarter, head count including outsourcing was approximately 1,010 which increased 19% from last year. Before providing guidance for the first quarter in 2015, I would like to provide some additional metrics related to our business. Revenue from the United States for the year was $85.6 million, an increase of 31% over prior year and represented 44% of total revenue in 2014.

Revenue from Europe was $47.8 million and increase of 42% over prior year and represented approximately 25% of revenue. Revenue from the rest of the world was $50.2 million, an increase of 31% over the prior year and roughly approximately 31% of total revenue. Overall, geographies performed well and represented about the same proportion of total revenue as in 2013.

Organic revenue growth was 14% for the year with a significant improvement in the second half of the year particularly in the fourth quarter. As we previously discussed, organic revenue growth for the year was negatively impacted by the significant increase in reconsidering revenue bookings in 2013 which, while contributing to long-term revenue had a negative impact on 2014 revenue. Our non-GAAP backlog at the end of 2014 was $199 million compared to $203 million at the end of 2013 which was on a pro forma basis to include the backlog of Chameleon.

Of this $199 million we expect to recognize $136 million in 2015 with a remaining $63 million extending beyond 2015 continuing to give us good long-term revenue visibility. As previously discussed, licensed revenue recognized at contract does not contribute to backlog or backlog growth. License revenue recognized the contract in 2014, increased and was $27 million which negatively impacted any backlog by approximately $16 million.

Also, the significant decline in the basket of European currencies in which we operate we do see our backlog by approximately $3 million. Had license revenue recognized the contract but not a (inaudible) basis and exchange rates remained flat, year-end backlog would have been approximately $218 million. We are pleased to say that our B2B sales performance has continued to perform well and remains the major long-term growth driver for PROS. We are now starting to experience even more synergies between our B2B and B2C businesses with B2B products being sold to traditional B2C customers.

The lines are being blurred as we are incurring even more ways for our customers to use our technologies. Because of this we do not believe it is meaningful to break this out. And now (inaudible) to provide meaningful metrics for our investors, I would like to discuss bookings performance which speaks to the underlying momentum for our business. We had very good sales performance in 2014 which drove total bookings growth of past event 30% in organic bookings growth of greater than 20% which excludes the impact of Chameleon CPQ and (inaudible). We feel very good about this performance and continue to be very optimistic about the current market potential and long-term growth prospects to the Company.

Now, turning to outlook for the first quarter and year. We anticipate non-GAAP revenue in the range of $47 million to $49 million, approximately 12% growth at the mid point from the first quarter of 2014. We expect total non-GAAP expenses in the range of $49.5 to $50 million, an increase of approximately $7.5 million from the first quarter of 2014. As we continue to make strategic investments in our business in support of our belief in the growth of opportunities ahead.

The first quarter also includes a significant seasonal expense for employment taxes which is up approximately $2 million over the fourth quarter. We expect a non-GAAP operating loss of approximately $1.75 million at the mid point of revenue guidance. As a result of our convertible debt issuance, we expect cash interest expense of $750,000 in the first quarter and each subsequent quarter during the year. With an estimated tax rate of approximately 36% in the first quarter, we anticipate a non-GAAP loss per share of $0.04 to $0.07 based on an estimated 29 million basic shares outstanding.

Non-GAAP operating income excludes approximately $6.5 million of stock-based compensation expenses, amortization of debt to discount and issuance cost of approximately $1.5 million and $1.2 million amortization of intangibles. For the full year we expect non-GAAP revenue in the range of $222.5 to $228.5 million which represents growth of approximately 16% at the mid point including approximately $4 million of non-GAAP revenue. This is inclusive of approximately $3 million of negative impact from the strengthening of the US dollar against the basket of currencies that we conduct business in.

But for this, our revenue growth would have been approximately 18% at the mid point. A non-GAAP operating margins for the full year are expected to be between 9.5% and 10%. This guidance reflects approximately 50 basis points of improvement over our 2014 results in line with what we have previously communicated. We are pleased that the mid point of guidance provides for a 21% growth in our operating profit over 2014. Our non-GAAP operating income excludes approximately $29 million of stock-based compensation expense, $6 million non-cash accretion of the discount from the comparable offering and $4.7 million of amortization of intangibles.

On a non-GAAP basis we expect the tax rate to be approximately 36% for the full year compared to 29% for 2014. Our non-GAAP tax rate is higher in 2015 than 2014 as a result of the earning credit not being renewed in 2015. While we expect a good start for the year, our first quarter revenue will reflect seasonality as do many other enterprise software companies who recognize license at contract. We have always talked to you about our bookings being lowest in Q1 and strongest in Q4.

These expectations for 2015 remain the same but with more license revenue recognized at contract, our revenue is expected to reflect more of this seasonality as well. Given the large market opportunity ahead for us, we are continuing with our pace of investment in order to drive meaningful growth and scale. Overall, our business continues to be strong driven by the increasing need for companies to better leverage their data to help grow revenue and improve profits.

In addition, we are benefiting from the investments we have made to drive awareness and adoption and expand our solutions to address a larger market opportunity. But we're also pleased with our ability to expand our customers existing base develops recurring our revenue streams. In summary, we are confident that our growth stages and assessments across the business are working and we are pleased with our performance in 2014 and outlook for 2015. With that, let me turn the call back to the Operator for questions. Operator?

Thank you. (Operator Instructions). We'll go first to Mr. Scott Berg with Northland Capital Markets.

Hi, Andres and Charlie. Congratulations on a very good fourth quarter.

Thank you, Scott.

First question Andres is on the guidance for the year. So, your organic bookings growth were greater than 20% in 2014 and clearly, the commentary around the deal environment is positive but how much do you get back to a 20% revenue growth rate? What happens or what needs to happen in the business to kind of reaccelerate to get to that level that you guys saw for several years before 2014?

Yeah, so definitely we talked about the momentum, the key in both number of net new wins and sell back into our customer base. We're very pleased with the performance of last year and continuing on this year maintaining similar growth rates on an organic basis. So from a momentum and scale, we feel we have what it takes to drive long term 20% plus growth.

We had as we talked about in effect of the foreign currency impact of approximately $3 million which at the mid point would have brought our overall guidance around 18% at the mid point. So we feel if it wasn't for that, we would be at the high end at 20% but again, we're very confident with the results with the momentum with the wins and with the incredible team we have.

We'll hear next from Tom Roderick, with Stifel.

Hi, gentlemen. Do we still have you out there?

We are here.

All right. Excellent. You cut off at the end there. Okay. We'll first of all Charlie, let me start off by wishing you the best of luck in your next endeavors. It's been a pleasure working with you. Best of luck and get some sunshine for the rest of us.

Thanks, Tom.

The question I had is more on seasonality. I mean you guys had a great fourth quarter and you're guiding for a sharper seasonal down tick in Q1 and I think some of this probably has to do with you establishing the SOE last year and probably having some bigger deals that were broke down on a more traditional perpetual bases in Q4. Can you take us through the dynamic of what you're seeing with that partner community and how that's driving some of that seasonality? And, can you just repeat also what the organic growth number was for revenue growth in the fourth quarter?

The revenue growth in the fourth quarter was 25%. That's the organic revenue growth was 25%. So we're very pleased with that. We have said as we go through 2014 we expected to see that growth trend up. Then we have the benefit in the fourth quarter of the very strong seasonably high bookings and we executed well on that. The sales team did a great job. We really executed perhaps even outperformed a bit and drilled the organic growth up very nicely.

Before Andres talks about the component, I think you mentioned, Tom it's the seasonality that's beginning us the lower Q1 compared to certainly Q4. It's still up over Q1 of last year but with the seasonality in our bookings with Q1 traditionally being the lowest bookings quarter for the Company and Q4 being the highest bookings quarter, you are going to see more of a seasonality in our revenue which is very consistent with other enterprise software companies.

On the partners as we discussed, we've continued to see each quarter improve disability to number of opportunities being brought in from the partner community. We also talked about wins with a partners ecosystem and partner in that implementation so we feel we made very good progress last year and we feel that the momentum will continue to accelerate in 2015.

Got it. When you talked about bookings for the year, you said 30% growth overall and I think it's 20% organic bookings growth. If I think back to the midyear update you provided on an apples to apples basis, I think that you were talking about greater than 30% organic growth for the first half of the year. What do you attribute the slow-down to in bookings if that's the proper way of looking at that. First of all maybe the first question is, is that an apples-to-apples comparison, that greater than 30 for the first half as compared to the greater than 20 for the full year?

And if that did drive or you did see a slow-down, what would you attribute that to out there in the marketplace?

Yeah, so we did not see a slow-down. We said in the first half we said better than 30% booking growth and we said for the full year, better than 30% booking growth on an overall basis. And then on an organic basis, we commented better than 20% for the full year. So overall, we had a very strong second half and we did not see a slow-down.

Just on the mechanics of that, Tom, what happens when you have a large bookings quarter but a large portion of that booking is absorbed by revenue, you get a bit of a distortion as to the relative relationship of revenue growth versus bookings growth in a quarter. So, as Andres mentioned, really, great strong bookings performance, wealthy year. but that seasonality revenue recognition of license to contract is split somewhat, the relationship between the first half and second half between those two.

Great. Got it. Okay. Last quick question from me. Cameleon, you've not got a year under your belt with that and you've got the opportunity now to bring that product, that team into the US where CPQ seems to be a relatively hot topic. What do you need to do to staff up Cameleon in the US? What have you done so far, and how optimistic are you that business can continue to outpace the core growth of the Company?

Yeah, so we're very optimistic about our CPQ offering in all of our investments surrounding integration from the team integration to the technology innovations that we made last year, so we feel last year we really built a platform for future growth. Definitely we believe they have a very differentiated product that not only incorporates the price optimization in data science but really can scale for large enterprises. So we feel we have the best solution for large enterprises as well as our whole team available to help drive the growth.

Thank you, again.

Both in North America and Europe.

Thank you again. Appreciate it.

Thank you.

We'll hear next from Ben McFadden with Pacific Crest Securities.

Hi, guys. Thanks for taking my call. I actually dropped off the call a little bit at the middle due to a phone malfunction. But I wondered if you mentioned anything on the call as far as how currency affected actually Q4? I heard the bookings guide for 2015, the $3 million but I was wondering if you gave any color as far as what you saw in the quarter?

Yes, in the fourth quarter the impact on revenue was approximately $300,000 negative impact on revenue for the full year it was $800,000. And when you take in the overall impact on the Company's EPS because we had significant cash balances sitting over there for the Cameleon tender, the impact on the EPS overall for the full year was about $0.04. We don't expect that in next year because we're not going to have as many assets concentrated in EUROS because of the acquisition as we did this year. But 300,000 impact on fourth quarter revenue negative, 800,000 for the year.

Okay. And as we look at the 2015 guide, how are you viewing it from growth rates as far as segment goes, airlines versus the B2B segment, what do you expect to see in 2015? And then with that, does the airline segment need additional solutions to kind of maintain the growth rate that it's achieving right now, or can it maintain that growth rate based upon the solutions you have today?

Yeah, so we expect B2B to be the main growth driver for 2015 and beyond that. That's where the large market opportunity is and that's growing significantly faster pace than our traditional travel business. We've continued to invest in tools like our (inaudible) group sales booking tool. And we're continuing to invest in new innovations around real time pricing capabilities to help drive growth in that sector in travel. As well as bring in some of our B2B capabilities back into travel for say cargo business and logistics, other areas of the business where we can incorporate our solution as well as bringing in the CPQ solution. What we're trying to do is leverage the incredible customer base that we have very loyal for decades and bring them more value through the use of our pricing technologies as well.

Okay.

So it's not going to be growing at the same time pace of B2B but we have a lot of opportunities within the foreseeable future to drive growth in that market.

Okay. And then lastly I was just wondering going back to the seasonality question. I was just wondering if you can provide any color as far as how we should be thinking about license recognized up front either as a percentage of total revenue or license as the channel continues to become a larger portion of your business and you're recognizing less and less on that percentage of completion basis.

Absolutely. We do expect to see an increase in the license and contracting recognized in 2014. We had a very good increase as you know in 2015. I'm sorry, 2015. And a very good increase in 2014 as you know, and overall license growth was 42% last year which is absolutely terrific. It's been part of our strategy to drive license growth up and drive the services growth down. So as far as what do we expect?

We expect to see similar growth in license at contract in 2015 as we had in 2014 and have that grow to approximately 20% of total revenue the next year.

That's license at contract. We feel good about that and based upon the execution we've experienced so far and I think you've seen that with the performance of 2014. And I think maybe a little bit more context too. Just the strategy is increase license. So you should expect as we look at our models going forward, the largest percentage growth we're going to have in 2015 will be in license. Services are going to be a small growth contributor for us in the 2015 for the reasons we've mentioned before. We've sharpened up off implementation times. We've packaged offerings.

We have partners getting more engaged with us. We expect to be taking more implementations in 2015 so our strategy relative to services is working very nicely and that is to lower services (inaudible) a proportion of the Company's overall growth. You should expect that to go smaller. And then, revenue from recurring services from the way we look at our models, looking at that growing about the same as our guidance. We're saying our guidance mid-point 16%, maybe 18% the high. We would expect the recurring revenue to grow around that range. License, good growth up to approximately 30%. Services, very, very modest growth. And then recurring revenue consistent with our overall guidance over revenue. Is that helpful?

Yeah, very helpful. Thanks a lot.

Okay.

(Operator Instructions). We'll hear next from Chad Bennett with Craig Hallum.

Thanks for taking my questions. I think guidance question has been asked ten different ways but I'll try 11th. I've never really seen a company successfully manage growing subscription revenue and license revenue consistently. Can you talk about how you're going to manage that growth between products and kind of billing terms and stuff like that?

Yes, certainly. That's a great question because that's exactly what we've been saying we want to do. We've been saying this the last couple years is that we want to obviously continue as we always have and a true products company get the model aligned with a true products company model which is getting the license revenue recognized on an accelerated basis while at the same time we do want to increase our recurring revenue source.

The acquisitions weren't down just a because they were predominantly (inaudible) but we consider that as one of the consideration steps that we wanted to in our acquisition strategy to drive more recurring revenue into the Company's model. We were very fortunate that you can just about take maintenance and take it to the bank so we've got a very predictable stream on the maintenance.

We're layering in some of our own subscription offerings. That's how the we plan on building up the subscription side of the business, I.E. the recurring side. On the license side it a clear momentum in the marketplace. We're looking at the momentum first in the marketplace that we're seeing that we experienced in 2014 looking ahead to see what the pipe looks like so we've got great confidence based upon the momentum that we see that we've got some very good no longer having a headwind against us, we kind of feel like we have tail winds now helping us. That's relative to our growth. But that's why it's not higher than 18%. It's a mixed model. We've got a base of recurring revenue we're trying to build which doesn't build historically at those kind of rates for a kind of ASP that we have and you've got a nice perpetual model as well.

And I'll add a little bit more color on this good market strategy. So where we're seeing is from sales oriented tools to think about our CPQ product, a pretty good acceptance of that being cloud first and mostly SaaS. And that's our goal if we can drive 100%, it may not be because there are areas in Europe where they were strong preference from a data privacy to go with on premise and we're open to that model but it's closer to a hundred of the sales oriented tools be cloud oriented.

And the pricing supporting both models, both cloud and on premise, we still see mostly strong preference for all of the pricing and analytics engines to be on premise closer to the RP solution and then on the travel since that part continues to be percentage completion, driving both percentage completion and recurring revenue within the travel business. So we're managing this kind of on end user persona which areas we see. And that's why we're confident of continuing to drive 20% or better long-term growth.

Okay. I think you would characterize or always have characterized the pricing business or industry as a 20% plus grower and I know that CPQ industry is 25 plus. Depends on some competitors growing faster than that. Is it just explainable in the model shift and the way things are working in the financial model why both segments industry wise are growing above 20, why you guys aren't?

Yes, that's what we said, absolutely. And the other part that we did comment is the B2B industries are growing better than 20%. So that's pretty obvious that the B2B industries are growing better than 20% in 2015.

The other piece, we touched on this already, the travel business for us is a good business but we never said that the travel business is going to grow at the rate of B2B or CPQ. For us it's a great business. It's steady Eddy. Some years it's better than other years. Over time we think it's a nice 10% to low teens grower. Some years it's a little higher, some years it's lower. Travel in this sense is weighting us down a little bit, but I don't want to take away from the travel business.

It's fabulous business for us. We're highly regarded and highly respected. We believe it helps us open opportunities particularly as we get to the far east and such. It's a true asset to the Company. It's just the growth rate is just not there because of the maturity. So we have a segment of our business that's just not going to grow at the rates of B2B or B2C. It's weighting us down little bit but a great business.

Okay. Sorry, one last one for me. Charlie, did Cameleon contribute at all to the license revenue line this quarter?

Not very much. We're trying to drive it to more of a recurring revenue model. It's not a big driver to the license side. That may change. They may have a couple of deals where they want to have a license but we are trying to get it to be a SaaS. The license growth in the fourth quarter was really driven by the Company's core business. Our B2B business and somewhat less by our travel business. But B2B is what drove it.

That's what I figured. Thank you.

Yes, okay.

Thank you.

We'll hear next from Sterling Auty with JPMorgan.

Thank you, it's Darren Jue on for Sterling. I had a question on the full year guidance but I wanted to ask you about the margin guide. Just wondering if you could give us a bit more color on where the traditional investments were going just because we had been modeling more in the way of margin expansion for the year?

We are providing some margin expansion. We're going from 9.4% to approximately 10% for the year. It would be easy for us to go higher if we chose to because we have very good gross margins so our flexibility really continue to invest with the large market opportunity which really comes down to the sales and marketing spend and the product innovation spend. So our goal is to continue to invest in those areas. So the market opportunity is huge.

We're building out some additional cloud infrastructure so we're pleased that we have a model that I think is very, very encouraging, good gross margins. Really good gross margins for a company of our size. And then, we're investing. We could choose not to but we don't think that's in the best interests of the shareholders. We think 10% operating margins on a non-GAAP basis is a good level for us. We targeted that as our target and it's still going to throw off some very nice operating in terms of absolute dollars, operating growth in 2015 compared to 2014. Just on the terms of percentage.

Okay. And then, Charlie, you mentioned cash flow in 2014 was impacted by a couple acquisition costs and one-off items. I wonder if you could talk about what your expectations are for 2015?

That's absolutely right. Plus we also had the large percentage of recurring revenue bookings in 2014 which spreads cash out over a period of time. That's much more normalized now as we go into 2015. So we do expect that cash flow from operations is definitely going to improve and should represent maybe approximately 8% of revenue in 2015 compared to being a very modest amount in 2014.

Okay. Thanks.

We'll hear next from Scott Berg with Northland Capital Markets.

Hey, guys be I had to jump back in because somehow I got cut off there earlier.

We thought you had more than one question.

Funny I've got a laundry list but we'll just start with one or two more here.

Okay.

My question was on the operating margin guide. Charlie, you talked about the mix of revenue growth next year was going to be stronger on the license side, less on the services side. And that revenue mix shift to me suggests higher gross margins for 2015 in general. Why wouldn't not more of that trickle down to operating margin expansion?

That's some of the gross margins. From our standpoint looking at gross margins about the same as 2015 as 2014. Maybe up a little bit but not up a lot. One of the reasons is we are investing more as we go into 2015 in our cloud operations. We see that as a big opportunity for us. It's growing. More customers are looking to companies like PROS to take more responsibility relative to the IT side.

We want to compete in that space. So that piece of our business is going to incur some additional cost. That's one factor. So the gross margins aren't going to improve a lot. They should improve somewhat but not a lot but then the operating income, we want to continue to invest. And we can control that if we wanted to. We could pull back on that if we wanted to which is what we don't want to. We don't think it's good for long-term value.

Fair enough. And then the last question I had, Andres is how do you view growth in your sales team this year in 2015? Increased 30% year-over-year some of that I'm sure came from the acquired companies. How do you look at that for 2015 and from a geographic perspective how do they get balanced in the USA versus EMEA.

We're focusing continuing to expand in the active markets as we are and as we communicated in the past, North America and Europe are the areas with more concentration so we're continuing to expand in both of those markets. Approximately 75 quota carrying personnel. It's our goal for the year so approximating similar to our revenue growth number for the year. And a big focus on the quota carrying personnel is continuing to focus on productivity. It's been a big focus last year and we're continuing on the enablement and training on boarding and productivity within the sales organization. So we're pleased with the growth numbers.

Great. That's all I have. I will jump in the queue, thank you.

Great.

We'll hear next from Bhavan Suri with William Blair.

Hey, guys. Thanks for taking my question. Can you guys hear me okay? It was good to see the organic number come back. That was nice. Just a couple for me I think you addressed kind of the margin stuff which I was wondering about. On the product side, just a couple questions. You released an update to Cameleon in the back half of 2014 that embedded prescriptive guidance into the quoting process. Just a little color of how the initial market reaction has been and how is uptick trending versus our expectations?

It's been very positive. This brings really the only solution in the market that really can for the enterprise market with embedded data science capabilities and we know that's really the capability that drives better performance for our customers in terms of revenue growth and possibilities. So far, the market reaction has been positive. And we expect that to continue within 2015, just looking at our overall demand.

Okay. Okay. You obviously had a good quarter in terms of number of customers but you also called out previously a record number of RFPs that happened over the first nine months of the year. As I look at what you closed, is that pipeline still as healthy as it sounded last quarter? Did you close some of this quarter and it's sort of rebuilding the pipeline? How should we think about that?

Our pipeline continues to get stronger and stronger and as we talked about overall demand last year, it doubled. Our pipeline continues to be the strongest ever. And that's what gives us confidence going into next year and we are and very pleased with the guidance we're providing and with the progress that we made. That's what we're confident saying that bookings will outpace revenue growth next year.

You mean in 2015?

For 2015, yes.

Great. One last one from me sort of in the same vein. You had seen some implementations pushing into 2015 due to kind of atypical customer specific circumstances. Has anything changed with those customers? Do you expect those deals to now close this year?

Yes. Really, other than what we talked about in the second quarter there's really no changes on implementations which we expected with somewhat anomalous of the normal, we expect those implementations to proceed in 2015.

Okay, great. That's it for me, guys. Thanks again.

Thank you.

At this time, there are no further questions in the queue. I would like to turn the conference back over to Andres Reiner for any additional or closing remarks.

Thank you for your participation in today's call. 2014 was an excellent year for PROS. Our growth strategies are working and we're in a strong position to capitalize on the large market opportunities. I would like to thank our PROS team worldwide for their relentless passion and commitment to customer success. Thank you to our customers, partners and shareholders for your support of PROS. We look forward to speaking with you on our next call. Thank you and goodbye.

That does conclude today's conference. Thank you for your participation.