Pros Holdings Inc (PRO) 2016 Q3 法說會逐字稿

Greetings, and welcome to the PROS Holdings, Inc. Third Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions)

It is now my pleasure to introduce your host, Stefan Schulz CFO. Please go ahead, sir.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us. With me on today's call is Andres Reiner, President and Chief Executive Officer.

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, bookings, 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 were made. Additional information concerning risks and other factors that may cause actual results to differ can be found in the Company's filings with the SEC.

Also, please note that a replay of today's webcast will be available in the Investor Relations section of our website at PROS.com. 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 on the press release distributed earlier today and in the Investor Relations section of our website.

So with that, I'd like to turn the call over to Andres.

Thank you, Stefan. Good afternoon everyone and thank you for joining us on today's call. 2016 has been a breakthrough year for PROS. We have fundamentally changed how we run our business and we're not clearly seeing the benefits of our cloud strategy.

Putting us in a much stronger position to capitalize on our large and growing market opportunity. We're also excited that our positive momentum is becoming clearer in our reported financials. As we now have also passed several milestones in our cloud transformation.

I'd like to share a strategic view of where we are as a business and why we're so excited about our outlook. Our innovation strategies will align with the rising trend around data science-driven solutions. As more companies shift to modern commerce and realize that automation isn't enough. Or decades of market leadership and experience has us positioned to help companies outperform in the digital era.

The growing excitement around algorithms, artificial intelligence and machine learning highlights the power of our data science to drive modern commerce. Real-time dynamic pricing, quoting, and offers are essential to creating personalized and frictionless customer experiences expected in modern commerce.

And data science is the key to unlocking it. We're thrilled because data science is our core strength. In a category we've pioneered and continued to lead.

Today, our unique technology and innovation strategy is fueling our momentum. In the third quarter, total revenue come in above guidance and was subsequently one quarter ahead of expectations.

Subscription revenue also came in above guidance and was up 43% compared to last year. ARR grew 22% which was above our expectations. And ACV bookings came within guidance of 25% in the third quarter and 35% year to date. I couldn't be more proud of our team for delivering these results.

I'd now like to share a few highlights from the third quarter that illustrate our innovation in cloud strategies are driving growth and adoption. First, investments we're making in technology and data science are paying off with customers getting real tangible value. Brasil Foods is a great example of how this helps distinguish PROS and our customers in the market.

In the third quarter, Brasil Foods won an award from Computerworld for their outstanding value they got from using our pricing solutions. The company leveraged our technology to improve accuracy on more than 20,000 price requests each day by using data science to drive better agility, accuracy, and customer responsiveness. Brasil Foods is a prime example of how we help companies shift to modern commerce.

Second, our innovation engine is vibrant and strong. We're relentlessly focused on innovation to enable modern commerce. In the third quarter, we released a new innovation that uses data science to detect B2B cross-sell opportunities based on patterns found in data. This can lead to a better customer experience with offers and products in line with the customer preferences across all channels.

In the third quarter, we also introduced new cloud analytics that leverages the Microsoft Cortana analytics suite to help airlines improve their group booking performance and experience. Airlines can quickly calibrate and tailor their group pricing strategies for customers and travel agents reducing friction in the buying process.

Third, we continue to strengthen our position in the CRM ecosystems as interest in machine learning, artificial intelligence, and data science grows. In the Microsoft market, we were once again showcased the data science innovator in a keynote presentation on cognitive computing. And our Smart CPQ solution was added to the Microsoft Marketplace for Azure solutions.

At Dreamforce a few weeks ago, I met with many customers who are striving to create better omni-channel commerce experiences. As companies build up through digital business they want customers to have a consistent experience across direct partner and ecommerce channels. This is where innovation sets us apart using algorithms that have been trained over decades where real-time dynamic pricing ensures rational, consistent, and personalized pricing across all channels.

We believe our Smart CPQ with integrated pricing science is redefining what Microsoft Dynamics and Salesforce.com customers should expect from a pricing and quoting solution. This combined with our industry focuses a key reason why CRM customers such as [Bostic], Honeywell, [Lamb Weston], and Waste Management selected PROS Smart CPQ in the third quarter.

Companies like these and many more are taking notice that PROS' market leading innovations are even more accessible and more valuable in the cloud. This is one of the reasons we've made great progress in our cloud strategy. In the third quarter, every new customer was a cloud deal. And more than 90% of our bookings were cloud. We continue to see strong land and expand business as the cloud make it easier for customers to start fast, get value, and then grow.

We had a great example of faster adoption in the third quarter with an industrial distribution company that sells 30,000 SKUs to more than 10,000 customers. To simplify their customer experience, the company wanted pricing that was both personalized for customers and prescriptive for their sales reps.

With our deep industry experience, improving data science made our cloud-based price guidance addition the right fit. In fact, the company went from discovery to purchase to the start of the implementation in less than 45 days. This is a great example of what can happen with simplified cloud offerings and our industry-focused approach.

We also have a good example of how the cloud enables us to extend our reach within existing customers. In the third quarter, one of our medical device customers expanded the use of our pricing and quoting solutions from three divisions to five divisions on the PROS cloud.

The cloud was the most effective way for them to standardize on PROS. And now they're evaluating additional opportunities to expand our solution to even more business units.

Success with our cloud strategy was the key factor behind our solid third quarter performance. We go into the fourth quarter confident we will continue to execute on our growth strategies. Demand is strong. Our solutions are at the heart of modern commerce. And more important our people are all in. I've spent a lot of time with our teams across the world. And the energy and passion I'm seeing is truly incredible.

Each new customer's success, each new innovation, and each new win further galvanizes our people around our strategy. We're seeing the benefits of delivering on our mission. And our culture is thriving. Ultimately, this is why we're so enthusiastic about our future and why we can create value for customers and shareholders.

With that, I will now turn the call over to Stefan to review our financial results and our outlook for the fourth quarter and full year of 2016.

Thank you, Andres. Before I discuss our performance, I would like to remind you that we will be holding our analyst day next Thursday, November the 10th in New York City. This event will also be available via webcast. You will have a chance to hear from several members of our leadership team as well as several customers. We are looking forward to next Thursday, and hope you can join us.

Now for the business update. I will start with an update on our cloud strategy and then move to details on the third quarter and outlook for the fourth quarter and full year. Our execution continues to improve and our cloud transformation continues to progress faster than we had planned at the beginning of the year.

As a result, we believe our revenues have now passed the low point that accompanies a transition from an on-premise software company to a SAS company. We achieved sequential revenue growth in the third quarter, and we now have line of sight to year over year revenue growth within the next few quarters.

While there may be modest variability from quarter to quarter, we believe we are now on an upward trajectory. A few quarters ago, we laid out two additional goals related to our cloud strategy. The first goal was to accelerate subscription revenue growth from approximately 20% in 2016 to approximately 40% in 2017. And then accelerate again in 2018.

With another strong quarter of subscription revenue growth in the third quarter of 43% we are ahead of schedule towards reaching that goal. The second goal was to cross over into sustainable positive free cash flow in late 2017, setting us up for full year free cash flow in 2018.

We're still tracking to that goal with another better than expected and positive free cash flow performance in the third quarter. Our free cash flow results have exceeded our expectations over the past five quarters. And that has only increased our confidence towards achieving our long-term goal of 20% free cash flow margins.

Our initiatives around working capital improvement, sales productivity, and operational excellence are making a difference. And will continue to drive our cash flow margins going forward. We are pleased with the progress we are making to drive long term sustainable value to our shareholders.

I will now provide color on our third quarter results focusing primarily on our cloud metrics and a few P&L highlights. ARR came in at $114.8 million in the third quarter, up 22% over the same period last year. Growth in subscription ARR continues to be the primary driver of overall ARR growth both sequentially and year over year.

Our ACV bookings in the third quarter were in line with our guidance range at $5.6 million up 25% from the third quarter of last year. ACV bookings with B2B customers was the primary driver of this growth.

Turning to our P&L, revenue for the third quarter was $38.4 million which was above the high end of our guidance range and a sequential increase. But an 8% decrease from last year. With our substantial outperformance on revenue for the third quarter we achieved sequential growth a quarter sooner than expected.

Because our Q3 growth was primarily due to revenue coming in sooner than planned, we expect our fourth quarter total revenue to be modestly impacted by this timing. Though nothing has changed in our full-year outlook on revenue.

Subscription revenue was $9.9 million for the quarter, above our guidance range of $9.3 million to $9.5 million. And an increase of 43% over last year.

Now for two quarters in a row, we have seen significant growth in subscription revenue. One of the factors driving this growth is better linearity of bookings within each quarter as we continue to focus on sales execution.

Maintenance revenue was $17.7 million up 12% over last year. This was better than our expectations and primarily due to the timing of cash collections. As we've mentioned before, some of our maintenance contracts are recognized on a cash basis. Which is why we continue to expect some variability in our maintenance revenue.

Combined subscription maintenance revenue make up our recurring revenue which represented 72% of total revenue in the third quarter and is a much larger component of our total revenue than last year when recurring revenue was made up of only 54% of total revenue. Recurring revenue was up 21% year over year.

From a margin standpoint, we remain focused on achieving our long term gross margin target range of 69% to 72%. In the early stages of our cloud transition, margins have been impacted by lower services gross margins and lower subscription gross margins. We believe both of these are short-term issues that will lessen as we build scale in our cloud business and as we continue to shorten our implementation services.

Subscription gross margins were in the mid-50s in the third quarter due to continued investments in our cloud infrastructure. We expect to take that up to the low 60s in 2017.

We also continue to emphasize operating expense discipline during our cloud transition. Total operating expenses were actually down from last year by $1.9 million or 6%. The decline was mostly within sales and marketing expenses and related to a small shift in spending on marketing programs. And an increase in the deferral of sales commissions resulting from increased subscription bookings.

Now turning to free cash flow, we are very pleased with the positive free cash flow of $531,000 in the third quarter. This was obviously better than we expected. And was driven primarily by strong execution on collections as well as continued focus on expense management.

Year to date, our free cash flow burn was $14.3 million. We are on track with our expectations that 2016 will be the low point of our free cash flow in our transition. And that we will cross over into positive free cash flow on a full-year basis in the year 2018.

Before I get into our outlook, I would like to step back and note that after six quarters of ACV layering into ARR we are starting to see both ARR and subscription revenue more closely reflect our growth activity. We are excited to reach this point, and look forward to getting past the transition-related difference between on-prem and cloud growth activity as well as reported revenue.

We believe this will give us the opportunity to reach one of our previously stated objectives of simplifying our reported metrics. We will discuss this topic in more detail at our analyst day next week.

Now for an update on our guidance. For the fourth quarter we expect ACV bookings to be in the range of $6.1 million to $8.1 million. We understand that our range for ACV bookings is relatively wide, but as we discussed in the past the exact amount and timing of ACV bookings is difficult to predict. Especially, when we're focused on ensuring our contracts generate sufficient value to us based on the proven value our products provide to our customers. With this Q4 range of $6.1 million to $8.1 million, we are reiterating our full-year guidance on ACV.

For ARR, we expect to be in the range of $119 million to $121 million, a 22% growth over last year at the midpoint. This is a $500,000 increase from our prior guidance due to strong customer renewals. We expect subscription revenue in the fourth quarter between $10.3 million and $10.5 million. We're also raising our guidance on subscription revenue for the full year to $37.5 million to $37.7 million, a 29% increase over 2015 at the midpoint.

As you can see, we're beginning to see the growth in subscription revenue that reflects momentum in our cloud strategy. Total revenue for the fourth quarter is expected to be between $37 million and $38.5 million. And for the full year, we expect total revenue to be between $150.3 million and $151.8 million.

We're improving our free cash flow and EBITDA guidance for the year. We're now estimating our free cash flow burn to be between $30.5 million and $32.5 million for the full year. An improvement of $3.5 million from prior guidance and $6.5 million from our guidance at the beginning of the year.

Lastly, we're estimating that our Q4 adjusted EBITDA to be a loss between $9.5 million and $11 million. For the full year, we expect adjusted EBITDA will be a loss between $36.3 million and $37.8 million, a $7 million improvement from guidance given last quarter. Our non-GAAP loss per share is expected to be in the range of $0.24 to $0.27 per share in the fourth quarter.

And finally, we will provide initial thoughts on several 2017 metrics at our analyst day next week. Overall, we are pleased with the third quarter and the progress we're making in helping our customers outperform. Our cloud strategy is helping new customers access our solutions and existing customers expand their PROS footprint.

We know that happy customers who get value from our solutions are the key to recurring revenue growth, positive free cash flow and strong customer lifetime value. We're making solid progress in each of these areas which we believe will create long-term value for our shareholders.

As we look ahead, I am confident in our outlook based on the health of our pipeline and the improvements we're seeing in execution. We believe we are making the right investments in innovation and our industry strategy to drive both sustainable growth over time, and to capture our share of the large market opportunity.

We are grateful for your support. And we look forward to seeing you at our analyst day next week.

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

Thank you. We will now be conducting a question and answer session. (Operator Instructions) Our first question today comes from Nandan Amladi of Deutsche Bank. Please go ahead.

Hi, good afternoon. Thanks for taking my question. So, Stefan, a question on the financials. The AVC growth came in line, but some of your other metrics are a lot stronger than we had modeled and you had guided to. So were there any one-time things that might have impacted the numbers because you've not taken up the full-year guidance?

Yes, so, Nandan, thanks for the call. A couple of things, first of all you're right we did take up our ARR guidance and that was in part because of an ACV result that we saw in Q3 and what we guided to in Q4. But also because we continue to see better renewals than what we had originally modeled. And so that played a part in our increase in our guidance for ARR.

On the P&L, we actually had a couple of things that we were really pleased with. One, on the subscription side, as you noted, we actually beat our guidance range by several hundred thousand dollars. And the biggest reason for that is the timing at which we're able to start our subscription services.

So we're doing much better at having linearity of bookings within a quarter. And then we're also doing a better job of once we sign a customer of getting them up and running faster, and getting their environments up and running so we can start recognizing that revenue. So those are two things that are actually helping us on the subscription side.

And then finally, on maintenance we also had some one-time benefits associated with cash collections. And we've mentioned in the past that we have a handful of accounts where we're on a cash basis because of regions or collectability trends that we've seen. And we actually had a nice inflow of cash from those types of customers in the third quarter. And that actually benefited our maintenance revenue line item to some degree.

Does that address what you were looking for, Nandan?

Yes, yes that's helpful. And if I might have a quick follow up for Andres? You talked about Brasil Foods as a customer. Is your B2C and B2B mix shifting a little bit? Brasil Foods I'm assuming is a [full region] or so. I don't know if you were in the B2B side of that business or on the B2C side. But can you talk about your cloud offerings and how the mix might be changing if at all?

Yes, so we continue to see a lot of strength in our B2B business. We have customers that are in our B2B segment that also had a B2C component, and Brasil Foods is an example of one of those. But we continue to see a lot of strength across all segments including B2B and I would say both in North America, Europe, and rest of world as well in our travel segment is performing well.

Okay, thank you.

You're welcome.

Our next question comes from Bhavan Suri of William Blair & Co., please go ahead.

Hi, guys. Thanks for taking my question. Can you hear me okay?

We can hear you perfect.

Great, thanks. And I apologize for the background noise as we [are in a] airport. But anyway, as I look at the pipeline you give some great color sort of about the cloud bookings and the mix there. When you look at existing customers and you look at that transition they're going through. Maybe a little color of how you guys are working with them through the transition?

Have you instituted a program to start asking them to start making the transition to cloud? Obviously, on the airline side you've seen a nice uptick of cloud. But just some color sort of how is that trending for existing customers and have you thought about putting a program in place to help the existing customers maybe accelerate their transition to cloud?

Yes, so some would say still our focus continues to be predominantly on net new acquisition and it's been for now. On existing customers, the areas that we're seeing great opportunity for expansion is where they're either adding on new divisions or adopting new solutions within their existing environment.

And we see those as great opportunities to move them to the cloud. And I would say that's why it's still few so far. But we see a lot of opportunities predominantly around expansions. Where they're really getting a lot of value out of our solution. They're looking to expand. And they may be expanding across divisions or across geographies or adopting new solutions. And they want to standardize on the cloud as a platform for those expansions. And you can expect that we'll continue to execute more programs around our customer migration going into 2017.

Got it, got it. That's helpful. Thanks, Andres. And then one other one maybe just on a strategic perspective. You know the B2C ecommerce place is pretty well [secured]. And B2B ecommerce sort of is starting to pick up. And not B2B commerce where you've got a large commoditized guy, pick [any] one of our customers there who may be standard transact online.

Dynamic pricing plays a part into it. Just give us some sense of where you guys are. Where do you fit in sort of the dynamic pricing on a B2B ecommerce space? And sort of what does that look like not today but in five years? Because it still feels pretty early today. But sort of how are you guys attacking it? And what does that opportunity look like in five years?

Yes, no that's a great question, Bhavan. That to us is one of the exciting areas is seeing how companies are thinking about modern commerce. And thinking holistically. What we've seen is a change historically that we'd see B2C as a separate channel.

And the way we're helping our customers think about is you're going to have direct sales. You're going to have your partner channel, and you're going to have ecommerce. And customers can begin their journey many different ways. And therefore, ecommerce can't be a one off. You have to have programs in place that are rational across all of your channels. And you have to drive dynamic pricing as a way to provide real-time experience through ecommerce.

So a customer may begin through a ecommerce channel, get support from a sales rep to complete a deal in a omni-channel experience. And then continue to expand their purchasing through ecommerce or through direct.

And that's the power of our platform and the capabilities that we've built to bring tools for sales for your channel as well as powering ecommerce. And that's, as you mentioned, to us one of the secret sauces in an area we've been innovating for decades is around dynamic pricing, cross sell, up sell, recommendations based on data science.

And I think that message is resonating well. And I think the companies that started in ecommerce in a small way to test are seeing good results and seeing they can expand beyond that.

Maybe one for Stefan. So is that a big part of the business today? And sort of I guess the question I was asking was just as a follow up was sort of three to five years out, what does that look like? What do you guys think that looks like as a sort of component of the business?

Yes, I would tell you, Bhavan, it's not a huge part of the business today. But that is clearly where we see our growth going and where our business is going. So I would say in the next two to three years as we look out especially -- actually it's not just even in B2B. It's also in B2C as well.

We see this as becoming a driver, if you will, for a lot of the growth that we are planning for the next several years.

Okay, great. Nice job, guys. And thank you for taking my question. Appreciate it.

Thank you.

The next question comes from Ben McFadden of Pacific Crest Securities. Please go ahead.

Hi, guys. Thanks for taking my questions. Andres, I want to start with you. You mentioned Dreamforce in your prepared remarks. Dreamforce this year there was a lot of different CPQ vendors. And of course now we have Salesforce selling their own CPQ solution through the SteelBrick acquisition.

So I wonder if you could just talk about what you are seeing from a demand perspective with CPQ? And any changes in the competitive landscape there?

Yes, what I would say is Dreamforce is a great event for us. And it continues to be, I would say, the Salesforce ecosystem continues to be a very vibrant environment and a vibrant ecosystem for us. I talked about in my prepared remarks around some of our wins like [Bostic] and Honeywell and Waste Management and [Lamb Weston] as examples of those buying our Smart CPQ.

What I would say is that the message around modern commerce and dynamic pricing is resonating well in companies thinking beyond the tools for sales. And I would say in our presence at the event that was a very predominant topic. And seeing the differentiation of our capabilities especially for the large enterprise market.

What I would say is from our perspective you probably notice we didn't have a booth at the event. And I would say our ROI measures really don't justify the big spend for the booth. But we felt that overall it was a very successful event for us.

Okay, great. And then, Stefan, I want to talk a little bit about this ACV guidance. I think in the past you've seen pretty strong seasonality at times in Q4. Especially when you were back on the license model. And as we looked at the license being booked on up front at contract.

So as we think about this guide to ACV bookings, I think at the high end it's about 28% of your year's guidance is going into your Q4 ACV at the high end. So I'm just curious how we should be thinking about seasonality in this cloud or subscription model in Q4 as it relates to ACV? And how confident you are as far as those potentially being conservative as we head into the end of the year?

Yes, so, Ben, it's a good question. You know last year our first year in the cloud, first transition we did not see the seasonality that we had historically seen in the on-prem model.

And one of the things that we noted at that point in time was we acknowledged that we had some execution issues that we needed to work through. And we've worked through a lot of those in the first part of 2016.

But we also commented on the fact that the CapEx budget issue for most companies is a driver. And we feel like we certainly benefited from that. And that's what accentuated the seasonality that we saw when we were an on-prem environment.

We don't think we're going to have the same level of seasonality that we used to see when we were an on-prem. So we have flattened that out a bit based on one year's data point that we saw last year. So when we gave guidance this year, our guidance was more of a flattish type of guide from the first half to the second half. And our guidance today reflects that as well as you can see.

So we will be looking forward to seeing exactly how the quarter ends. We're very encouraged the pipeline we have. We're very encouraged by the opportunities we have relative to our fourth quarter. But it remains to be seen exactly how those come down. So we feel good about the position we're in. But we'll learn quite a bit more as we get to our second data point here in terms of seasonality.

Great. Thank you.

Thank you.

The next question comes from Scott Berg of Needham & Company. Please go ahead.

Hi, Stefan and Andres. Thanks for taking my questions. I have two quick ones.

Andres, now that you've been in this transition for 18 months and you're starting to look at pipelines on a year over year basis that are a little bit more consistent year over year. A lot more subscription right now obviously than 12 months ago. How can you quantify or maybe can you give us some color on what pipeline growth looks like on an apples to apples basis year over year?

I would say that our pipeline growth continues to be strong. And it's reflective of our 20% plus growth numbers that we've talked historically of supporting our business. So the pipeline that we need to grow to continue to drive that level of growth. So I would say we feel very good about the pipeline.

In addition, I feel that the sales execution has greatly improved. The quality of pipeline is much greater. Our execution around deals in time to closure has improved. And that was one metric, frankly, that historically or time to close the deal had not improved. We've seen in the first three quarters of this year some slight improvement. And I talked about it in example of a deal entering the pipeline from start to actual beginning of the implementation in under 45 days. Which historically we never experienced that.

So overall, what I would say is we're pretty bullish about the pipeline. The activity that we have and the quality in execution of that pipeline. Which to me is as important as pipeline growth.

No, I would certainly agree with that definitely. And then my follow up, Stefan is your subscription revenues in the third quarter much higher than initially guided to based on the factors that you talked about. Obviously fourth quarter is going to be up there.

But as we start looking at 2017, do we still get 40% subscription revenue growth for the year as a whole over those raised number? I'm just trying to understand if that's the right way to still think about next year?

Yes, Scott, I'll provide a bit more color next week when we get together on analyst day. But yes, I think based on the momentum we're seeing in the second half of this year as we go into next year I think there's a good chance that we'll be slightly above the 40% number that we had talked about in the past. And again, I'll provide more color on that next week.

Excellent. Sorry, one real quick last one here. Is with the raise of subscription revenues in Q3 and Q4 you've essentially maintained your guidance range for the full year on total revenue [growth] (inaudible) and then just a little bit. What's giving in that model? If the subscription revenue has dropped but total is flat, what other line items are coming in to essentially maintain the total revenue number?

Yes, it's mostly license. So one of the things that we've been very, very happy with is the mix of bookings and how much of it has been subscription. And while we do still see some existing customers that will do an expansion that may want to buy a license from time to time. And we do see that.

The mix has exceeded our expectations on the subscription side. And so that's what's driving the pluses on the subscription side and then the minuses on the license.

So I would also say a little bit on the services. And the only reason for that is that as I mentioned earlier our implementation times are actually coming down a bit. And the attach rates that we're seeing with a lot of the bookings that we're doing today are actually a little lower than what we saw in the past. And we think those are all really good trends. But to your point, it is having a neutralizing effect on total revenue here I the short term.

Great. That's all I have. Thanks for taking my questions.

Thanks.

Thanks, Scott.

The next question is from Tom Roderick of Stifel. Please go ahead.

Yes, hi guys. Matt Van Vleet on for Tom. Thanks for taking the questions. You talked quite about sales execution improving. I was wondering if we could dig into that a little more. And just maybe what do you think are the biggest driving factors?

Obviously, there's been some management changes and we've talked about greater sort of sales training around the cloud process. But if you could give a few more details on maybe what metrics you're tracking to be confident [of its] execution.

Yes, so I would say several metrics around the time to close deals. We've talked about seeing an improvement there and on average from -- if you [still] remember 11 months to 12 months. To now getting closer to the 9 months which is a pretty significant improvement in execution when we look at attainment across our reps and the performance of our reps.

If you've seen our quota-carrying personnel has been slightly down versus last year while we're actually driving 35% booking growth. So that's a clear indicator that we're driving much better productivity at the quota-carrying personnel level.

And just in general our overall execution, I would say some of it has to do with the sales team is much more mature in selling our cloud solutions. And they've been through multiple sale cycles end to end. And that naturally helps them drive better execution.

But I feel that we have a great team. And they're continuing to improve and drive improvements in our execution. I still believe we can continue to drive better improvement heading even into next year.

And then following up on that, on the sales hiring trends and maybe what your outlook is for the remainder of the year. Do you expect sort of to continue to have a very low new hiring? And instead focus on productivity of the current sales reps?

Yes, I would say we're expected to really focus on productivity and execution. And what I would say is that you should expect in the fourth quarter and Q1 of us starting to add new reps into the business.

But I would say, we're very pleased with the results and our real focus on execution. I believe we have the team not only to hit the numbers this year, but also to hit the numbers next year with our expected growth. But we will be -- you can expect in the first half of next year to continue to layer on more sales reps.

And then lastly, on the productivity side. You've obviously made quite a rapid improvement there. Is there still another big leg up that you can capture? Or is it more going to be sort of organic in line with growth? And from there the factors really just continuing to add some head count and seizing on some opportunities?

I still believe we have room to drive even further productivity. As much progress as we've made as a team, I think as we become more effective in selling I think our sale cycle times can decrease from the average of nine months.

I still believe we should be able to drive another significant improvement to that. And as we're driving that, [we hope to] drive better productivity. So I still believe we have quite a bit of opportunity to drive more productivity.

All right, great. Thank you.

Thank you.

Your next question comes from Tim Klasell of Northland Securities. Please go ahead. Mr. Klasell your line --

Tim?

Mr. Klasell, your line is open. Please proceed. And we can move to the next question. Our question Sterling Auty of JP Morgan Chase. Please go ahead.

Hi, guys. This is Jackson Ader on for Sterling tonight. Thanks for taking our questions.

Hi, Jackson.

The first can we start with just a little bit of commentary around what you're seeing in the geography? It looked like Europe was a little soft year over year and the United States. But rest of world is growing pretty nicely. And any commentary on the geographic mix and the demand you're seeing?

We continue to see strong activity in just about all the geographies. I think last time we had a chance to talk to you guys, Brexit had just been announced. And there was some question about what the impact was going to be.

And I'll tell you, we've been very happy with the activity that we've seen there both in Q3 and as we look forward into Q4 and the next quarter. And I would tell you the same is true for the Americas and rest of world. We really haven't seen, honestly, any negative trends in any geography versus the other. The opportunities that are built in our pipeline are actually good across the board.

Okay, great. And following up on I think it was Matt's question about sales productivity and sales hiring. With deal cycles coming in and all of the new initiatives on training and getting people up to speed, do you expect now that when you do ultimately start to hire people how long is it going to take them to ramp completely up to speed with the rest of the sales force?

Yes, so historically we say a 6 month to nine month timeframe to ramp a new sales rep to productivity. I think with the programs we have in place and with the simpler solutions that we now have in the cloud it should be better than that. And I would say our goal would be under 6 months. But we want to really look at as we're layering in new reps seeing [more] improvements on rep productivity on the onboarding process.

But there's been a lot of focus around our solutions or industry focus that allows reps to drive productivity faster. And we've seen examples of that. Of sales reps joining and being able to drive productivity in a shorter amount of time than our historical norms. But we want to get that experience within before we comment on any lower timeframes.

I got you. And then one more if I can just squeeze it in quickly for Stefan. The ARR renewal rates that you said came in a little bit better than expected. So what are the historical ARR renewal rates either, I guess, on a customer or a dollar base? And how much better was it this quarter?

Yes, so historically we have always talked about maintenance renewal rates being over 95%. And we did not go so far as to stretch that when we did our initial modeling to say we could apply that same ratio to what we were seeing on subscription.

And part of that had to do with early experiences from some of the SAS transactions we had inherited from some of the acquisitions we did. Where we weren't focusing on a certain aspect of their business. And we saw a little more churn there.

So the question was, how much of that was because there was an orphaned customer on an acquisition we did versus that's really what we should be expecting from SAS contracts. And the reality is, to get to your question, the ARR in terms of the renewal rates and as it relates to subscription is actually quite similar to what we've experienced on the maintenance side at better than 95%.

So that's why we're actually able to raise our guidance on it because we were assuming slightly less than 95% overall as we got into the year. And we're actually achieving better than 95% now.

Okay. Thanks guys. That's all for me.

Thank you.

Once again, we have a question from Tim Klasell of Northland Securities. Please go ahead.

Yes, good afternoon gentleman. First question, on the sales and marketing expenses coming down obviously you'd mentioned that you'd been deferring the subscription. And then you had the marketing spend. Can you give us a little bit more color on the magnitude on [each]?

Yes, so they're both about the same amount of money and they were clearly the items that drew us from a growth side to a negative side without going into all the gory details, Tim.

As we've grown subscription and as we continue to grow the mix of subscription versus license we're deferring more of those commissions. And that is having an impact in terms of the dollars for our cost.

And then on the marketing side, that was merely just timing. So it's just a matter of actually seeing when programs and events occurred last year versus when they're occurring this year.

One example for everyone's benefit is last year Dreamforce was in the third quarter. This year it's in the fourth quarter. So there's just a number of things like that that are actually shifting. And so wouldn't read anything into us necessarily decreasing our overall marketing spend. We're actually still promoting and looking for ways in which we can push our marketing dollar to drive business. And it just happened to be in this case it was a difference in timing.

Okay, great. And then sort of a follow up on the improving sales cycles. How much do you attribute that to just greater experience in your sales force versus what seems to be an accelerating acceptance by the customer base for subscription deals?

I would say that selling subscription, from what we've experienced so far, is definitely it's an easier sell than a full-on premise solution because you can start small and grow. And that's definitely helped. But I would give the sales leadership a lot of credit in their programs they've put and their training around the organization has also driven improved performance.

But clearly, as we went through our pipeline last year, we're migrating a lot of deals. We still had a lot of deals that were mix some were on premise, some were cloud. As we're working this year, a lot of deals enter the pipeline as cloud and are being closed as cloud. So that becomes easier. And it's a third quarter in a row that 100% of the new deals have been cloud. And we commented that more than 90% of all deals were cloud. So I think that also helps drive better execution.

Okay. Great. Thank you.

Thank you.

(Operator Instructions) Our next question comes from Joe Fadgen of Craig-Hallum. Please go ahead.

Yes, thank you guys. I'm here for Chad today. I just wanted to dig a little bit into the subscription line and the gross profit there. It looks like it was a little bit lower than we had expected this quarter. And you spoke to that in your prepared remarks.

But if we looked at that line going forward and we expect that subscription revenue going to grow sequentially throughout 2017, should we also expect in that the gross margins would expand sequentially along with it? Or should we [expect] maybe a little bit more volatility or lumpiness in the margin profile going forward?

And then a quick clarification, I think you said you expected low 60% margin in that line in 2017. Is that an average for the year, or do you expect to exit the year at that low 60% range?

Yes, Joe. This is Stefan. Good question. I would tell you first of all your question about will we see it expand throughout the year next year. And the answer is yes. I would also tell you that it will not be a linear progression, there will be lumpiness to it.

One of the things that we're actually going through as we expand and reach scale within our subscription business is we're making investments in areas that are different from where we may have been investing last quarter or last year. So for example, one question that came in earlier was what are we seeing geographically? Are we seeing good momentum in Europe or in Australia or in the Far East?

And the answer is yes. And as you know, there are a number of requirements that are actually coming out almost every day about what kind of security, what kind of data center, and support that you need to have overseas. We're making those investments as we expand our opportunities in those regions as well. And so as we make those investments, that will drive some of the lumpiness that I'm talking about.

But to answer your final question, as we go through next year and we come out of the mid-50s and we get into the low-60s, I would say below 60s is going to be an average. And that's where when we expect to report 2017 results, we expect to talk about 2017 being in the low 60s.

Okay, all right. That will be all for me. Thank you.

Thank you.

Thank you.

There are no further questions at this time. I would now like to turn the floor back over to Andres Reiner for closing comments.

Thank you for your participation in today's call. We're pleased with our results for the third quarter and we're confident in our outlook for the year based on our momentum.

I would like to thank our incredible people at PROS for their passion and commitment to helping customers outperform. I would also like to thank our customers, partners, and shareholders for your continued support. We look forward to providing more details about our strategy and model updates at our analyst day next week.

And thank you, and goodbye.

This concludes today's teleconference. You may now disconnect your lines. Thank you for your participation.