Pros Holdings Inc (PRO) 2015 Q1 法說會逐字稿

Good day, and welcome to PROS Holdings Inc. first quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Stefan Schultz, CFO. Please go ahead, sir.

Thank you Operator. Good afternoon everyone. Also thank you for joining us today for the PROS Holdings financial results conference call for the first quarter of 2015. I am Stefan Schultz, 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 first quarter, 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, our strategy, 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 based on present information and are subject to numerous and important factors, risks and uncertainties, which could cause actual results to differ materially from the results implied by these or other forward-looking statements. 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.

Additional information concerning risks and other factors that may cause actual results to differ materially 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. We encourage everyone to review this additional information. Finally, I would like to point out that in addition to reporting financial results in accordance with Generally Accepted Accounting Principles, or GAAP, PROS reports certain financial results, as well as forward-looking guidance on a non-GAAP basis. A reconciliation of each non-GAAP measure to the most directly comparable GAAP measure to the extent available without unreasonable effort, is available in the tables accompanying the press release distributed earlier today, which is available in the Investor Relations section of our website. With that, I would like to turn the call over to Andres.

Thank you Stefan. Thanks to all who are joining us on today's call. First I would like to welcome Stefan to PROS as our new CFO. We are excited to have him on our team, and I look forward to working with him, as we continue to execute on our long-term growth strategy. I will now address our first quarter results. Non-GAAP revenue came in at $44.8 million, up 5% over the same period last year. Non-GAAP operating loss was $3.1 million, and non-GAAP loss per share was $0.09. Our [short] volume revenue was primarily driven by a higher mix of subscription bookings than expected. Which had an impact on our recognized revenue in the quarter, and which we anticipate will be recognized in future periods. Our momentum from 2014 continued into the first quarter. With 24% year-over-year bookings growth. In growth new customers wins outpaced overall bookings growth. We believe we're in a stronger leadership position in the market coming out of the first quarter. Over the past several years demand for cloud solutions has steadily increased, as we have been investing in our cloud strategy through innovation and acquisitions. Historically we have led with the on-premise solutions and we have offered cloud solutions as an option. As we have added new cloud solutions and combined them with our other products to provide end-to-end solutions, customers are now expressing more preference for unified cloud deployment. We reached an inflection point for cloud demand in the first quarter. We believe this is another signal that market sentiment has changed. Based on what we are seeing in the market, we're now accelerating our cloud strategy, shifting from an on-premise first approach to a cloud first approach. We're excited about this shift, because it's great for our customers and for investors. Being a cloud first company brings us closer to customers, while enabling us to deliver new innovative capabilities to help them outperform. We believe this strategy will drive even greater customer value. We also believe this will help accelerate adoption, expand our addressable market, and provide more predictable revenue. While revenue and profitability will be impacted initially, we believe recurring revenue and total lifetime customer value will expand long-term value for PROS and our shareholders. This is an exciting time for PROS as we have laid the foundation of our cloud strategy over several years. We have successfully sold, implemented and supported cloud solutions for more than 70 B2B and B2C customers. The shift we're making in our strategy is not new, but rather an acceleration that aligns with the trend we're seeing in our market. I am confident this shift enhances our ability to grow our business over the long-term. As we accelerate our cloud strategy, we will continue to provide more transparency and clarity, with additional metrics that make it easier for people outside of the business to appreciate our momentum. Stefan will provide more details in his remarks, and we will provide an update on our cloud strategy for analysts and investors towards the end of this quarter. We're pleased with the overall progress we're making in our long-term growth strategy, and we are on track to achieve our bookings objectives of better than 18% growth for the year. I will now share a few highlights from the first quarter that reflect our underlying momentum as we continue to execute on our long-term strategy of accelerating awareness and adoption, extending our product leadership position, and increasing our global reach and scale. We are pleased that our initiatives to accelerate awareness and adoption continued to pay off. In the first quarter we added a record number of new customers across multiple industries, including KapStone Paper and Packaging, L-com Global Connectivity, St1 Nordic, and WABCO, among others. We also deepened and broadened our partnerships with existing customers, such as Brussels Airlines, Emirates, and Qantas Airways, among others. We are pleased to partner with so many great companies to help them outperform.

We believe the increasing customer adoption reflects growing recognition that smart applications are a must-have to compete in the modern marketplace. This was a common theme at a recent outperform conferences in the US and Europe, where attendance for the combined events was up more than 40% year-over-year. Guests heard presentations from customers such as Adecco, Bausch + Lomb, Brasil Foods, Cardinal Health, Clariant, and HP, among others. One customer described how they identified $18 million margin leak with better precision from PROS data signs and analytics, enabling them to prioritize their pricing and selling strategies on a strategic KPI. Another customer accelerated deals and time to revenue by reducing quote turnaround time from days to less than 24 hours with a streamlined quote to contract process from PROS.

These are just two examples that underscore our mission of helping customers outperform, with smart applications that combine analytics, automation, and data time. We continue to innovate with our solutions to further extend our product leadership position in the market. In the first quarter we announced availability of our CPQ solution from Microsoft Dynamic CRM. We now offer native integration with Salesforce.com and Microsoft Dynamic CRM, the two leading CRM platforms in the market. The integrated solution provides an end-to-end opportunity to revenue platform that increases quoting speed and accuracy, drives incremental profitability, and enables sales teams to win more business. We believe we're setting the standard for what customers should expect from a quoting solution. And that the market is beginning to recognize that automation alone is not good enough. Smart applications are all about helping the user be more successful, which drives greater impact in ROI for our customers. For example, a B2B customer recently noted that their new pricing strategy powered by PROS smart application contributed to a margin improvement of more than 400 basis points in their last quarter. Results like these are consistent with the type of real tangible value PROS provides, and why we continue to invest in our market leading innovation. Another key part of our long-term growth strategy is increasing our global reach and scale through our partner ecosystem. In the first quarter we closed deals sourced by partners for the fifth quarter in a row, while also receiving a record number of new opportunities into our pipeline from partners.

At our outperform events, partners such as Accenture, Salesforce.com, Simon-Kucher, SpringCM, and Microsoft played prominent roles by sharing their own PROS success stories, helping us drive greater awareness in the market and further validating our partner strategy. Our technology partners continued to help differentiate PROS in the market. In March we announced a partnership with SpringCM, to provide integrated contract management with our CPQ solution. The combination provides an end-to-end opportunity to revenue platforms, including CPQ, PriceOptimization, and contract management for Salesforce.com and Microsoft Dynamics CRM. We are pleased to partner with SpringCM to help customers drive better business performance.

We will continue to invest in our partnership ecosystem to further differentiate PROS in the market, and to increase our global reach and scale. Overall we are pleased with our underlying business performance in the first quarter. Looking ahead we are reconfirming our guidance of better than 18% bookings growth for the year, on the strength of our pipeline and continued product leadership in our incredible people. Our value proposition continues to resonate in the market, and we are confident our cloud first strategy will drive deeper customer partnerships and greater customer value. We believe we are in a strong position to capitalize on the large underpenetrated market opportunity, as we execute on our long-term growth strategy. I will now turn the call over to Stefan, so he can provide you with a review of our financial results, and our outlook for the second quarter and full year of 2015.

Thanks Andres. I am thrilled to be part of the PROS team, and I look forward to expanding upon the great foundation laid by Charlie as CFO. Also before I get into the financials, I want to remind everyone that I will be mostly discussing non-GAAP results. A full GAAP to non-GAAP reconciliation is included is our earnings release, which can be found on our website in the Investor Relations section. As Andres mentioned in his prepared remarks, we were pleased to see the total bookings momentum from 2014 extend into the first quarter of 2015. However, the higher mix of subscription bookings was different from what we originally anticipated. As a result on April the 16th we lowered our initial Q1 revenue guidance range to $44.3 million to $44.8 million. Our first quarter revenue was $44.8 million, which was a 5% increase over the prior year. Our total revenue growth was negatively impacted by approximately 3%, or $600,000 due to foreign currency changes from the same quarter last year.

Looking into the components of total revenue license revenue decreased by $700,000 to $11.2 million, a decline of 6% from the same period a year-ago. This decline was primarily driven by the decline in upfront license revenue from contracts signed in the quarter. Our license revenue recognized upon contract execution was 6% of total revenue for the quarter, compared to 9% in the same period last year. Services revenue decreased to $10.7 million, which represents a decrease of 19% from a year-ago. A couple of factors impacted our services revenue when comparing the results year-over-year. We closed out some large implementations during 2014 that contributed to services revenue in the first quarter last year, which were not in the first quarter results this year. Also, our more recent services engagements are either part of subscription agreements which can delay the start of revenue recognition, or are a part of our pre-packaged offerings that are smaller in size and rates which led to lower services revenue amounts in the first quarter.

Shifting to our recurring revenue, which is comprised of two components, subscription and maintenance revenue, our subscription revenue increased from $4.9 million to $7.4 million, an increase of approximately 50% over the same period a year-ago. There are two primary drivers to this increase. First, we had several cloud deployments that commenced during the second half of 2014. Second, many of our earlier subscription bookings were initially deferred until the implementation was completed, and therefore recognized over a shorter period of time. This had the effect of accelerating subscription growth in Q1. As we build a larger base of subscription revenue, prior year comparables will become more consistent. In the meantime we expect variability in subscription revenue growth rates for the next couple of quarters. Maintenance revenue increased $2.7 million to $15.6 million for the quarter, a 21% increase over the same period a year ago, and represented the largest component of revenue from recurring sources. All together our first quarter recurring revenue increased by $5.1 million, or 29% over the prior year, and represents 51% of our total revenue. Our non-GAAP operating loss in the first quarter was $3.1 million, which was impacted by higher subscription bookings, and lower than expected revenue recognized. Finally, at the end of the quarter, headcount including outsourcing was approximately 1,030 people, which increased approximately 5% from last year.

Now before I discuss guidance for Q2 and the full year, I want to define a new metric that we will be providing each quarter during the early shift to a cloud first model. This metric is total bookings, which is a metric we have given color to in past earnings announcements, and is a measure the Company has been utilizing internally for a number of years. The total bookings metrics we are providing today includes the value within contracts executed in the period, where we believe firm commitments to provide our software and solutions and related services exist. These contractual amounts may be related to perpetual license and the related first year maintenance, term licenses, SaaS, cloud services, or implementation services. Contracted maintenance beyond the first year in annual maintenance renewals are not included is our total bookings metric. Subscription booking terms typically range from one to five years. Keep in mind that the MPV from a lifetime of subscription bookings will exceed that of the MPV of perpetual bookings, inclusive of all maintenance. Certain components of total bookings may also be included in our revenues, or in our deferred revenues. Other components of bookings may not be included within our financial statements, as an accounting driver may not exist to record such components. We provide a written definition of our total bookings metric in our press release, and in our filings with the SEC. For Q1 our total bookings were $26.5 million, which was a 24% increase over total bookings in the first quarter last year, which is on track with our better than 18% bookings growth guidance for the year. Within our earnings release, we have provided a schedule of new metrics, which includes current and historical quarterly bookings amounts.

Finally, one last point on total bookings. Historically our bookings have been lumpy quarter to quarter, and that is primarily due to deal execution timing. In most quarters we book a relatively low volume of deals, but with relatively high ASPs. With ASPs of approximately $2 million, the closing of one deal in one quarter versus another could have as much as an 800 basis points impact on our growth rates, in either one or the two quarters impacted. Because of this, our bookings guidance ranges in the short-term will be fairly wide, and we recommend you look at our bookings over several quarters.

Over the course of this year we are confident that the market opportunities in our pipeline should support annual bookings growth that is better than 18%, which is consistent with the guidance we provided last quarter. Once we have successfully navigated the early part of the transition to a recurring business model, we will introduce business metrics that are more in line with a subscription company, and we will stop reporting total bookings.

With that introduction I will get into the guidance for the second quarter and full year. For the second quarter we expect total bookings to be flat to up 15% over last year's bookings of $33.1 million. We anticipate non-GAAP revenue in the second quarter to be in the range of $40 million to $42 million, which at the midpoint will be down 12% from the second quarter of 2014. In the second quarter last year license at contract represented 12% of total revenue, and we expect only 6% to 7% in the second quarter this year. As Andres mentioned in his remarks, we expect our cloud first sales model to negatively impact the end period revenue recognized from our total bookings in Q2. And as I mentioned earlier, growth rates in our subscription revenues will be variable, and we do not expect this shift in bookings to reflect significantly higher subscription revenues in the second quarter.

This is mostly due to the deferral and related timing and recognition from our subscription bookings beginning one quarter to one year after the subscription contract is closed. We expect to see subscription revenue growth in Q2 at about 5% to 10%. We expect total second quarter non-GAAP expenses in the range of $46 million to $47 million, an increase of approximately 8% from the second quarter of 2014, as the strategic investments made in 2014 will remain in place, in order to capture the growth opportunities within our business. With an estimated tax rate of approximately 36% in the second quarter, we anticipate a non-GAAP loss per share of $0.13 to $0.15 per share, based on an estimated 29.5 million basic shares outstanding.

For the full year we continue to expect total bookings to exceed 18%, but with a higher mix of subscription bookings. We anticipate the amount of licenses at contract to come down by 50% compared to last year. Our non-GAAP revenue is now anticipated to be within the range of $178 million to $183 million, which would be a decline of 7% year-over-year at the midpoint. This range includes a negative impact of approximately $3.3 million from the strengthening of the US dollar, based on today's exchange rates. We also anticipate subscription revenue growth to be between 10% to 20% for the full year. Although we will continue to invest to grow our business with lower revenue expected in 2015, we intend to decrease certain variable costs, and adjust spending levels in non-strategic areas. In total we expect to lower our expenses by $10 million to $12 million from our initial guidance. Our non-GAAP operating margins for the full year are now expected to be a negative 6% at the midpoint of guidance. On a non-GAAP basis we expect the tax rate to be approximately 36%, and the non-GAAP cost per share between $0.30 and $0.37 per share. We are excited about the opportunities this model can unlock for our business, and we would like to spend more time sharing these benefits with you. Towards the end of this quarter, we will host what we're calling a cloud first update for our analysts and investors. The purpose of this session will be to provide you with a better understanding of why we believe this is the time for us to make this shift, and why this will benefit our customers, PROS, and our shareholders over the longer-term. We will also provide additional metrics that will help you track our progress. So with that, let me turn the call back to the operator for questions. Operator.

Thank you. (Operator Instructions). Our first question comes from Bhavan Suri from William Blair.

Hey guys. Thanks for taking my questions.

Hey.

I guess just to first start off with the pivot here, the core business was very heavy licensed, integration, all the rest of it, and that business looks like it's sort of somewhat stagnant. Help me understand A, how that transition to subscription, given the product itself and everything else? And B, sort of is there some slowness there because customer adoption is slower, sort of just help me walk through some of that first, before we get into the CPQ side, and then the part that was naturally cloud?

Yes. So to give you a little bit more of a view, I commented on my script that we had over 70 cloud customers both in B2B and B2C. Approximately 70, about 50% our core customers, so not just, they acquired companies Cameleon and SignalDemand. So we made big progress in having existing customers and new customers adopt our core technology in the cloud. And that's something that we have seen. More importantly, as we look at Q1, one of the things that we saw is that mix shift that we talked about. Subscription bookings in Q1 were 3 times higher than last year, and about 60% more than what we expected when we gave guidance. But more importantly, as we look it's not really about Q1 it's where we're looking ahead, and when we look at Q2 and beyond, we're still seeing more demand from customers who want a full solution in the cloud, and that's what became clear to us, that this was a tipping point in demand, but the core is definitely growing well, and we actually see the fundamentals across very strong. In fact, I commented that the number of new customers actually exceeded the booking growth of 24%.

Andres, so what would be helpful is if you look that subscription revenue, $7-odd million, if you could break out how much came from the core business versus the CPQ, B2B/B2C may not make as much sense given you are selling some of the B2C stuff to enterprises, but some sort of sense of what was from the core data science products versus the CPQ business?

Yes. So I would say the core is growing as well, and I would say it's probably going to approximate similar to the split, where we said the core approximates about 50% of the customers probably in total we're seeing the core grow well.

Okay. And then when you look at the cloud offering you have built, just help me understand the gross margins in that business and sort of the offering in terms of the multi tendency versus isolated tendency model, again for the core, optimization offerings?

So this is Stefan. I will answer that, but I also want to address the question you asked earlier as well. If you think about the subscription bookings that we were in the quarter, and your question was how much of that was CPQ versus how much of it was part of our core. What we can say is that well over 80% of the subscription bookings were related to our core business. So we can give you that color.

Okay. That's helpful. Thanks.

Yes. Alright. Then getting to your question around gross margins.

Yes.

So obviously with the model shift our profile is changing as well, and so while we have been, as a business looking at margins of somewhere around in the low 70s in terms of gross profit, I would say in the near-term as we look at 2015, that will probably fall to roughly the mid-60s, and how that plays out over time obviously we do expect those to improve as the benefits of the subscription model takes place within our financial model, and when we get together here in the next couple of months or next few weeks, we'll provide more insights into how that plays out as you model us into 2016, 2017 and 2018.

Okay and then one last one from me before I turn it over, is billings obviously were down pretty dramatically year-on-year, and I didn't sort of see collections in AR potentially to help offset that, but you had solid bookings, so help me with the average duration of the contract. You said sort of one to five years, but sort of on average what would it look like, and how much of that cash has been collected sort of vis-a-vis the subscription length?

Yes. So good question. Most of our subscription bookings are going to be annual in advance type billings, so they're not going to be, we typically don't get a significant amount of payment upfront in those, which is very customary in looking at these types of transactions, but in terms of our AR collection action we actually had a good collection quarter, because if you go back and look at our AR at the end of Q4, given the strong bookings we saw in Q4 we actually collected the large majority of that in the quarter.

Okay. Okay. Alright. I'll get back in queue. Thanks, guys.

Thank you.

Thank you.

Our next question comes from Tom Roderick with Stifel.

Yes. Hi Matt VanVliet on for Tom. I guess the first question we started to see some good momentum from partners helping out, bringing some deals in. How does the shift impact that, and how much was maybe pushed by one or the other, and you kind of met and announced new partnerships kind of all in conjunction here?

I think, positively contributing as we have seen in our selling our cloud offerings we have partners implementing those cloud offerings. I would say our partners are trained to implement both on-premise and on cloud, but really at the end, the shift is more centered on customer preference, and what customers want in our alignment. So it's not the partners pulling us one direction or another, but naturally if you see in the Salesforce.com CRM space, partners are very used to deploying solutions in the cloud, and our solutions integrate natively with CRM. We have seen many customers that have invested in CRM, that are now going and getting value our of their CRM investment with our CPQ and price optimization technologies integrated, and it's more about them wanting to have that full solution all in the cloud, rather than components on-premise and components in the cloud.

Okay. And then it seems like it was about a year ago maybe a little bit more that you talked about you were moving towards the term in subscription, and that there was a lot of customer preference there, and then we got to the end of the year, and we kind of got it flipped around, and there was a huge increase in license deals. How are we supposed to think about this shift again as you guys push for cloud first, and then in sort of a traditional enterprise buying cycle it might happen again, where at the end of the year you hit with a big license quarter again? What is really going to change in the sales process this time?

Yes. Let's go back about to Q3, Q4 of 2013 with the time when we were able to actually separate the license from implementation, because we have had partners implement successful, therefore the delivery of our solution wasn't integral to the license, and that's when we went to more of an up front license model. We were always traditionally a license first in an on-premise first model. When we had commented on a while back is that we were trying to drive more recurring business, but our business model was always to go in with an on-premise model. We had seen more demand from cloud and little by little over the years, but we also during that time we acquired two cloud companies, which also has we have integrated those solutions natively between our products, and we're selling the combined offering, I think that's also pushing the need where customers are wanting to use our technology more.

I will also share another example, where we have a long-term customer over a decade with PROS, always been a traditional on-premise model, and in Q3 of last year wanted to test our cloud offerings, core cloud offerings within a small subsidiary. That was a huge success, and now they are planning on moving their whole global implementation to our cloud solutions. And I think we're seeing across the globe and in multiple parts of our business, where there's more of an interest towards the cloud, and that's what gave us the strength in the years that we have been developing our cloud capabilities, the over 70 customers that we have and approximately 50% in the core, plus the others in the new acquisitions, gave us confidence that this is the right time. Especially looking at Q2 and beyond, and trying to see from more outperform events, talking to customers, and what they're looking for, we feel that this is the right time for PROS. So we don't feel that this is a shift for the short-term, but this is the right model long-term for our customers, our employees, and our shareholders.

Okay. And then just one quick question. You mentioned $3.3 million FX headwind in the 2015 guidance now, is that incremental to what you were before, or is that the total number? And I guess can you just remind us what you had expected in the guidance before?

Yes. Good question. So it is not incremental. It's basically a revision to the number we gave last quarter, and it's about a $300,000 increase. So last quarter we talked about a $3 million impact. Now we're saying it's about $3.3 million, based on what's happened in the currencies between 90 days ago and now.

All right. Great. Thank you, guys.

Thank you.

Our next question comes from Greg McDowell with JMP Securities.

Hi, guys. Is this Rishi Jaluria dialing in for Greg McDowell. Thank you for taking my questions. First I wanted to start off with in terms of your 2015 revenue guidance significantly lower than what you provided on the last earnings call. Now is the lowered guidance entirely FX headwinds and the lower amount of license revenue that you can recognize on contract, or are there other factors built into that lower guidance as well?

Yes. So not much in terms of FX in terms of the shift. As I was just commenting previously, the only shift that occurred in FX is about $300,000. So your second point is the primary driver. So with the shift to the cloud first model, we're expecting about $34 million, $35 million less in licensed up front recognition during 2015. That clearly represents the largest majority of the shift in the revenue guidance, but there's a second component. It's a smaller component, but it makes up pretty much the rest of the delta, and that has to do again with the subscription bookings. Because even if we were not going to book it up front, we would more likely have booked it on a percentage of completion basis, and we would have recognized a good portion of that in 2015. Now with the deployment of a subscription model, and when that revenues comes online, it comes online a little later than when a percentage of completion contract would have, and we end up getting less of that in 2015. So as a result, even though we're talking about the same amount of bookings, we're talking about a far less amount of revenue to be recognized in the period.

Okay. That's very helpful. And kind of just to go on top of that so you had mentioned that you intend on providing new metrics for analysts and investors for your cloud first strategy.

Yes.

I'm not asking for you to name the numbers or the actual metrics, but I guess for any of us that follow other SaaS companies, can you give what sort of hint of what metrics we should start thinking about, and how it should shape our understanding of the model going forward?

Absolutely. One thing we wanted to do is first of all we wanted to make sure we bridged the gap, bridged the transition. So for example we had given color to bookings, so we decided to expose bookings to a greater extent, so you didn't feel like we were shifting things around, and trying to hide any underpinnings going on with the business. We didn't want that to happen at all. We wanted to make sure that you saw that nothing has changed with the momentum of the business. That's the first data point, and that's why we selected total bookings here in the interim, but secondly, we will be looking at some of the more traditional metrics to your point, such as annual recurring revenue metrics. That will be something that we'll be looking to put in there, we'll also be putting out key renewal metrics, in terms of our ability to renew the subscription contracts. And quite honestly, we're open to feedback that you might have as to your point, you have looked at other SaaS companies. We would be interested in your feedback, and incorporate that as we go and plan out our cloud first update, that we will do here in probably six to seven weeks.

Okay. Great. Thank you so much. And then one more question. So you have talked a little bit about your model, high ASP, low volume. What sort of differences are you seeing in ASP between your core business and this kind of CPQ side of the business?

Yes. So it depends on the solutions that we're selling. I would say that depending on the scope when you're starting out in a CPQ solution, you may start with a lower number of users up front and expand further. We have talked about in the past that the ASP for CPQ is lower than our average ASP, and it remained consistent. It hasn't changed. What we are seeing more is customers buying our CPQ and our price optimization integrated as a core offering, and those will drive more similar ASPs than PROS' traditional penetration Al ASPs. But I did comment that we did have more, that the customer growth was higher than the booking growth, so clearly we are seeing more new customers as we're growing 24% on the bookings.

Okay. Great. Thank you all. I will jump back in the queue.

Okay. Great. Thanks.

(Operator Instructions). Our next question comes from Chad Bennett with Craig-Hallum.

Great. Thanks for taking my questions. So the total bookings growth and number that you give, I'm just making sure that I understand it right, that's just from a subscription standpoint, just annual subscriptions, right? It's not a three year deal that's included is the bookings number, right?

So, Chad, this is Stefan. No. It is pretty much the contractual commitment that where we believe a commitment is made on our behalf to a customer, and it could be one year, two years or three years, or not often, but it could go up to five years, and it's all of the components--

So there are multiple year deals?

They are multi-year deals, yes. That is as I said earlier, Chad, we realize that is not the perfect metric to be providing as we go into a cloud first type of a model ,and do more of a recurring model, we will be shifting metrics but in this transition, we wanted to particular with a metric you had actually heard us use before, and you heard us give color to before. That's the only reason we're using it in the interim.

Okay. And then so I'm trying to reconcile, and maybe this is kind of another way of asking a previous question, how literally I think you reported that the fourth quarter in mid-February let's say, and we were talking about up front license revenue this year going up significantly on a percentage, from a percentage standpoint, and now we're talking about it being cut in half year-over-year. I guess how, let's just take it until the end of March, how in 1.5 months does that change so much?

Yes. Great question, Chad. I commented that subscription bookings in the quarter were 3 times higher than last year, and 60% greater than what we expected when we gave guidance. Obviously, we wouldn't need to cut as much as we cut. It's us looking proactively as we look at Q2 and beyond what do we see, because we take this change very seriously, and we look at customer preference. And as we looked at Q2, we saw a similar effect to Q1, and we could obviously have kept guidance higher, much higher, and still assume we're going to book a lot more up front, but based on the data we have on our pipeline looking out the remaining of the year, it gives us strong indication that there's a change in customer wanting the combined offerings. I would say also, the more recent is when we have been selling the combined offering in CPQ and price optimization. And when customers are receiving those two offerings, we have seen a strong preference for them to have them all combined in the cloud. And as I commented another example, that we have seen even in our travel industry where historically it was all on-premise, or predominantly on-premise, we are seeing customers and CIOs come to us, and this is when the last 60 days saying they would be interested in moving them to the cloud. So it's us more aligning to what customers want, and what they need. We also believe that this is a strategic move for PROS. We believe that if the market is more open, and the success that we have had in the cloud, we can actually drive more innovation to our business users. And we will be able to drive innovations that will drive more shareholder value long-term.

So what percentage of the bookings this quarter were CPQ and pricing combined?

I don't have that specific metric pulled together. We did comment earlier that roughly 80% of our bookings were of the organic nature, and 20% were of more or less the CPQ side, but I don't have exactly how much that was when we sold them two together. We'll have to get back to you on that, Chad.

Fair to say it's probably pretty small?

In the quarter probably so, but there was certainly some, and I will have to get you that number.

Okay. And so I guess my next question is, I have been through kind of a number of these transition models, and typically it's a multi-year transition from a revenue stabilization standpoint, and from an achievement of profitability and cash flow breakeven. Is there any reason why you would be the at a more accelerated pace than the normal license to SaaS transition that I have seen in the past?

So I think we will be a little better than the average that you're talking about, and the reason for that is, I think Andres mentioned, we already have a significant number of customers on the cloud platform or on a subscription basis, and I commented in my prepared remarks, we have over 50% of our revenue is of a recurring nature. So even though we have had in the past a significant amount of up front licenses, what we're seeing this year, and as we model this year out, we're already 50% of the way there from a recurring basis, so I think it will be a little easier for us as we make that transition.

Okay. Thanks for taking my questions.

Thank you, Chad.

We have a follow-up question from Greg McDowell with JMP Securities.

Hi, guys. This is Rishi again. Just two more quick questions. So not to harp too much on the issue of license revenue recognized upon contract, but just in terms of, if that number were to go up closer to where you thought it was last quarter, and in terms of growing beyond 12%, I guess what needs to happen in order for that percentage to increase? Is it based on success in the partners ecosystem with implementation, or are there other things that would need to happen for that number to go up?

Well, our focus is not, I guess what we're saying our focus is not to have that number. Strategically we're deciding that based on customers real requests for cloud that we're going to lead with a cloud first model, and ultimately at the end, it's really respective of the partner ecosystem. Our partner ecosystem to a system integrator, whether it's an Accenture, whether it's on-premise, or in the cloud, it really doesn't matter. At the end of the day, it's really the customer preference, it's what does that customer want, both the business and more importantly the CIO, and where in the past we saw more reservation, we have not seen that happen more recently, and as we look at the deals in Q2 and beyond, we're seeing that. I will give you another example in a more recent deal where we have been selected as vendor of choice, at the last moment, the CIO in a meeting I had directly one-on-one requested that we convert it to cloud, and this is a common occurrence. This is not just one time. It's just a common trend that they would rather us provide it in the cloud, and we believe that at the end this will drive more customer value, and this is this the right strategy for PROS, and we have been preparing for this for a long time, and that's why we've been investing in our cloud capabilities for several years.

Okay. Great. And then just kind of a quick follow-up, and then I will be done. You have kind of hinted that the openness or willingness to make future acquisitions, especially with expanding offerings, and it would go beyond pricing and CPQ, I was just wondering, given where things are, and especially with the shift to a cloud first model, is that similarly your stance, or is it more focused on organic growth and organic bookings side?

I would say obviously right now we're focused on our cloud first strategy, and that's our prevailing focus now. M&A is really about where we're taking our solution and tied to our vision, which we're also doing innovation internally. We don't expect anything in the near-term, but we're always open to the right opportunities, but right now everyone at PROS is really focused on our cloud first strategy.

Okay. Great. Thank you. Very helpful. Thank you so much.

Thank you.

That does conclude our question-and-answer session. I would like to turn the call over to Andres Reiner for closing comments.

Thank you for your participation in today's call, and for your support of PROS. We're excited about our cloud first strategy, to bring even more innovation and value to our customers faster, and to create more long-term value for PROS and shareholders. I would like to thank our PROS team worldwide for their continued passion and commitment to innovation and customer success. Thank you also to our customers, partners, and shareholders. We look forward to seeing you on our next call. Thank you, and good-bye.

Once again that does conclude today's call. We appreciate your participation.