Pros Holdings Inc (PRO) 2018 Q1 法說會逐字稿

Greetings, and welcome to the PROS Holdings First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Stefan Schulz.

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, note that some of the information we will discuss during this call will consist of forward-looking statements, including, without limitation, our guidance, our strategy, future business prospects, revenue, margin and market opportunities. Actual results could differ materially from our current forecast. Please refer to the risks and uncertainties as well as other factors described in our filings with the SEC for more information. PROS assumes no obligation to update any forward-looking statements to reflect future events or circumstances. Also, during the call, we will discuss financial results in accordance with Generally Accepted Accounting Principles, or GAAP, as well as certain financial results and 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 at pros.com. A replay of today's call is also available there, and we encourage everyone to review this additional information. So with that, I will turn the call over to Andres.

Thank you, Stefan. Good afternoon, everyone. Thank you for joining us on today's call. I'm pleased to report that we delivered another outstanding quarter, exceeding the high end of guidance on our growth metrics. We started out with strong momentum in 2018, and I'm really excited by what we're seeing in our market. I'm hearing more and more customers and prospects talk about digital transformation and what it means for their go-to-market strategy.

Industry analysts are also recognizing this shift as Forrester estimates that more than 10% of B2B sales took place online last year, and they're predicting that B2B e-commerce will reach $1.2 trillion in the next 4 years. This creates a huge opportunity for those companies that embrace digital transformation. It also creates an incredible growth opportunity for us, as we leverage our real time platform and AI solutions to help companies reimagine how they sell, grow and outperform.

On our last call, I discussed how we're committed to driving growth and scaling our business by focusing on 4 strategic pillars: innovation, market adoption, operational efficiency and migrations. I'd like to share a few highlights from these areas. First, we're delivering innovations that empower our customers with unmatched real time and high-availability capabilities. Greyhound is an excellent example of a customer that's embracing our newly released real time dynamic pricing platform to power its digital shift. Greyhound is an iconic brand and a 100-year-old company with a vision to transform its digital platforms to outperform low-cost competition entering the market. Greyhound is committed to competing on customer experience, and recognize that they need to meet customers where they want to buy, online and from their mobile devices.

PROS is helping Greyhound realize this vision by enabling them to respond to millions of price quotes daily in real time with sub-second response times across all channels. We're delivering the same kind of high-availability and real time capabilities with our travel solution platform, to help our airline customers outperform their market. Today's travelers have more options than ever for booking travel and are conducting dozens of searches across several sites before making a purchase. This has created an exponential increase in the number of prices and availability requests airlines must process to be competitive. A real-time dynamic pricing solutions for airlines enables carriers to manage extraordinary transaction data volumes across all of their channels. For example, in March alone, we processed 88 billion transactions in this cloud solution. To put this in perspective this transaction volume annualizes to 9x more transactions than Visa processed in all of 2017.

Our teams are continuously innovating to ensure solutions, delivering industry-leading performance, while processing these massive data volumes. And our latest release of Real Time Dynamic Pricing for airlines is delivering 4 nines availability in response times faster than a blink of an eye. Second, we're combining the power for cloud platform, next-generation solutions and industry expertise to both accelerate market adoption and drive sales efficiency. Our latest B2B multitenant solutions were born in the cloud and designed to deliver an intuitive user experience that enables customers to both self-serve as well as leverage our AI personal assistant, Monet.

As we continue to increase our focus on selling faster and smarter, we see these solutions as exceptionally well suited for a lighter touch sales process. We're already beginning to see customers recognize the value of these solutions quickly. For example, last quarter, a tire distributor selected our next-generation guidance solution just 2 months after seeing our solution showcased as a leading technology for manufacturing companies looking to fast track through digital transformation in one of Microsoft Technology Centers. We began our partnership with this customer just 2 weeks after our first meeting.

Another example of a customer recognizing the benefits of bringing together our industry knowledge and next-generation guidance solution is Compass Health. Last quarter, Compass Health partnered with us to counteract margin erosion they're seeing in their medical equipment and suppliers market. We're excited to leverage our AI capabilities to deliver personalized market-driven customer quotes that will enable them to compete and win on customer experience. And lastly, our cloud innovations and modern commerce vision continue to inspire our customers to move to the cloud. Today, nearly 50% of our customers are on the cloud. The migration program that we rolled out at the beginning of the year is further growing our cloud business. Close to 30 customers have already moved to the cloud, with strong representation from both B2B and B2C. Among our airline customers, we're seeing strong momentum as customers are seeking out our latest shopping and merchandising solutions to regain control of their distribution channels, drive more business through their airline.com and ultimately, get closer to their customers.

Since we introduced these solutions as part of PROS less than 8 months ago, we've had more than a dozen travel customers adopt them, including founding members of both One World and Star Alliances. I'm incredibly excited by the way customers are using our solutions to power their digital transformation, and I look forward to what our team will accomplish this year as we help customers make the shift to modern commerce.

We have an incredible market opportunity in front of us and I'd like to thank our employees, customers, partners and shareholders for their continued support, as we deliver on our mission of helping people and companies outperform. Now I'd like to turn the call over to Stefan to comment on our financial performance.

Thank you, Andres. Before covering our first quarter results, I'd like to start by sharing a few more highlights from our strategic pillar of operational excellence. As we drive more growth in our business, we continue to lay the foundation to further scale our operations. In customer success, we are leveraging our global footprint to better serve our customers around the world. For example, we are expanding our Sofia, Bulgaria office to take advantage of the local technical expertise and to provide a closer source of support and service to our international customers.

Also, as Andres mentioned, we continue to improve our sales efficiency by selling faster and more virtually. In some instances, we're selling our next-generation solutions after just 1 or 2 in-person sales meetings. Finally, our accounts receivable team continues to improve cash collections, which helped us achieve record lows in our days billing outstanding in the first quarter. As we progress throughout the year, we plan to build on these accomplishments across our business to improve our performance and help drive us towards our goal of improving free cash flow by $26 million this year.

Now I'll move on to our first quarter results, and then we'll discuss our guidance for the second quarter and the full year. Total revenue for the first quarter was $47.9 million, up 19% and exceeded consensus estimates by $1.8 million. Subscription revenue was the primary driver of this better-than-expected performance and was up 72% year-over-year, which exceeded consensus estimates by $1.5 million. As a reminder, this is the first quarter, where we are reporting the results of our business under the new revenue recognition rule, ASC Topic 606. While we are seeing some impact from the new standard through a reclassification of subscription revenue to maintenance and license revenue as well as longer amortization periods of capitalized incentive compensation, the overall impact of 606 on both our total revenue and overall business is minimal.

Subscription and maintenance revenue combined make up our recurring revenue. First quarter recurring revenue was 78% of total revenue, which is flat quarter-over-quarter. This is the first time that we saw a meaningful decline in our maintenance revenue, which was $16.6 million for the quarter and down 8% year-over-year. This decline in maintenance was expected and primarily driven by migrations, which also helped our subscription revenues in the quarter. The recurring portion of our deferred revenue was $87.7 million and the trailing 12-month calculated billings were up 24% year-over-year.

Moving on to margins. Our Q1 gross margins were 63%, which is up from 61% in the first quarter last year. This improvement was primarily driven by improved margins in subscription and services. Our first quarter adjusted EBITDA loss was $6.7 million, an improvement of $3.3 million from last year, and was in line with our guidance.

Now turning to free cash flow. In Q1, we burned $6.8 million in cash, which was a $6.4 million improvement from last year, and keeps us on track to deliver our free cash flow estimate for the full year. This strong year-over-year improvement was driven by a combination of our overall operating results, higher deferred revenue and strong cash collections in the quarter.

Now turning to guidance. I'll start with the second quarter guidance and then discuss full year. For the second quarter, we expect subscription revenue to be in the range of $21.25 million to $21.75 million, up 60% over the second quarter of 2017 at the midpoint. We expect Q2 total revenue to be in the range of $46 million to $46.5 million, a 14% year-over-year increase at the midpoint, driven by our strong improvement in subscription revenue. We expect our second quarter adjusted EBITDA loss to be in the range of $6.7 million to $7.7 million. And with an estimated non-GAAP tax rate of 22% in the second quarter, we anticipate a non-GAAP loss per share between $0.21 and $0.19 in the second quarter, based on an estimated 32.6 million basic shares outstanding.

Now turning to the full year. We are increasing our guidance for total revenue by $1 million to $188 million to $191 million. We are also increasing our full year guidance on subscription revenue by $500,000 to a range of $90.5 million to $91.5 million, which is now up 50% at the midpoint. We are reiterating our full year guidance for ARR, adjusted EBITDA and free cash flow. Overall, we are pleased with our first quarter financial performance and see this as a strong start to 2018.

Thank you for your support of PROS, and we look forward to speaking with you at our upcoming events. So with that, let me turn the call back over to the operator for questions. Operator?

(Operator Instructions) Our first question comes from the line of Scott Berg from Needham & Company.

I guess, I've got two. Well, I'll start with one and then a follow up. I guess, Andres, let's start with sales productivity. Your comments in the quarter, or maybe they were Stefan's, it highlighted some faster selling activities. Just the question is, is this something that's sustainable with some of these quick turnarounds for deals? You've mentioned them a couple of times, so the answer probably is yes. But then also where are we on the life cycle sales productivity, because I know you've went through a lot of changes with the cloud migration? Historically, you said you're probably not quite where you want to be at. But I probably figure you've got to be close to that kind of peak optimization or peak productivity levels.

Yes, now that's a great question. What I would tell you is that we're continuing to improve. As I talked in my prepared remarks, we were excited to see some of the deals that closed in the quarter having shorter sales cycle time, including the deals that we actually were referred from the Microsoft Technology Center, and we were able to close in a very short amount of time within the quarter. I would say that, that's part of our strategy in going to this commercial solution selling model and focusing a team on this initial land, and we're seeing good progress of that. I would say, it's early stages. I wouldn't say we're doing a lot of deals yet under this model. But this is a new growth area we're investing in that we think, long term, is going to really pay off and in this virtual mode, where we're doing 1 to 2 visits max, if any. And I think it's going to take a while to perfect, but I like how we started. And I think we have a good potential there, and I think our solutions are in a great fit to drive this sales motion. So overall, really pleased with sales productivity. But I would tell you, and I've said this always, there is always room to improve. And I still think there's room to even drive better sales productivity as we move forward.

Great. And a follow up to that one would be around ASP trends now as you're, kind of, getting through what I consider to be the trough phases of this migration. You're fully selling cloud, you're into the -- you're in kind of the third full year, where most of your pipeline or all of your pipeline is cloud. Are you seeing any changes around ASP trends relative to that productivity?

Yes. I would tell you, ASP hasn't changed dramatically, maybe slightly down but very slightly. I would tell you, in general, ASPs have maintained fairly constant. And as I said it's a mixture, because we do have the land motions and the smaller deals, but we also have large enterprise deals as well. So I would say, overall, we have a more healthy mix in between, and, maybe, a slightly lower ASP but not significant.

Fantastic. And I'm going to slide one more quick one in for Stefan. You had a pretty big beat in the quarter and most of it was on the subscription line, it looks like. Where did that all come from because on a percentage basis, that's a pretty big beat on the prior guidance number?

Yes, Scott, it was. We also had large services number in the quarter as well. And it really had to do with the timing of go-lives of some of our subscription solutions that were -- that went live, sorry, I couldn't get that out. But what happened was we saw a similar trend happening in Q4. We had a similar occurrence in the first quarter as well, and we were able to recognize more services revenue but then it is also more subscription revenue. And that was the primary driver behind it.

Our next question comes from the line of Tom Roderick from Stifel.

Matt Van Vliet on for Tom. I wanted to look at some of the geographic performance in the quarter and maybe you could just help us a little bit with reconciling how some of the spending has been and maybe where that might shift throughout the year, just depending on timing of certain projects.

Yes. So Matt, this is Stefan. I'll take that one. So when you -- when we -- when you look at our business, first of all, from a revenue perspective, we have been about 1/3 U.S., 1/3 Europe and 1/3 rest of the world. And that tweaks a little bit here and there but the first quarter was very similar. As for investments, one of the things that I commented on in my prepared remarks is that we are taking advantage of our Sofia, Bulgaria location. And we are expanding that location for a lot of technical talent, both on the development side and also on the customer success side. So you're going to see us overtime, building a bigger presence there, primarily to help service and support our international customers. Not just those in mainly Europe but also in the Middle East. Sofia, Bulgaria is very strategically located to help support both areas, which are very strong geographical regions for us. But you're going to see us continue to invest in our sales teams in the different parts of the world. We're going to do some more investments in Asia as well. We'll continue to invest in our primary markets like Europe and North America, and we're going to continue to invest where we see the opportunities. And quite honestly right, as we speak now, we see strength in all of the geographies, in Americas, Europe and in Asia.

Great. And then thinking about the migrations, I think you've mentioned you've done over 30 of them now. And then, Andres, I think you said, 50% of your customers are using the cloud in some sort. What's the breakdown of those 30 customers, relative to how much they have moved to the cloud? Are those 30 that had moved entirely to the cloud? And then as you look out into the rest of '18 and even into '19, how many more have you already, sort of, scheduled and are working towards versus still having to, sort of, upsell the idea of moving to the cloud and wanting to provide that extra value that you've talked about in the past to get them to move?

Yes, so what I would tell you is on the approximately 30 that we've moved so far, I would tell you that it's interesting that about 50% are coming from our travel, 50% from our B2B-related industries. I would say not all of them have migrated every solution they have to the cloud but some have migrated fully to the cloud. Also in terms of sizes, some have been -- some of our largest customers, they've deployed quite extensively global and some have been smaller. So on purpose, what I would tell you that a lot of our strategy with migrations has been to cover the spectrum in terms of industries as well as size of customer to really fine-tune our process. And I would say our team has done a really, really good job. But I would tell you what's really driving a lot of the migrations is the new innovations. Our next-generation guidance technology, our next-generation real time dynamic pricing engine on the travel side, these types of solutions are really driving a lot of interest in the market, and our customers want to adopt the latest and greatest science. So we continue to see as we push through the year, what I would tell you is we're pretty confident in the number we gave at the beginning of the year, which we said about $5 million in migrations. We're very confident of that number and continue to see very positive interest from our customers in the new technology.

Our next question comes from the line of Jackson Ader from JPMorgan.

A question from us, if I can just follow up on the migration. On the B2B side, with, I think, some of your customers there being maybe less -- not less mature but have been PROS customer for a less amount of time than some of your travel customers, I mean, how much of an improvement in the product is there in the cloud versus maybe some B2B customers that have just signed on in the last 5 years or so?

Yes, that's a great question, Jackson. So I would tell you the next-generation guidance product in our cloud additions are totally new science technology. It's a pretty different product from a user experience and science underneath. Much more advanced science algorithms around auto segmentation and auto calibration of the price guidance. So I would tell you it's a pretty significant improvement. Also, the time to adopt, because these new solutions were born in the cloud, native cloud solutions, it's not taking the on-premise model and now hosting it. It's truly a native cloud solution. They can adopt it quite quickly, but be able to leverage a lot of their configuration capabilities that they had prior. So I would tell you -- the other thing that I would tell you is we have quite a bit of customers in the B2B side also. They've been with us a decade. So I wouldn't say they're all fairly recent. We have quite a few that have been with us a long time and have upgraded previously on an on-premise model quite frequently to adopt the latest innovation. And I would tell you, a hallmark of PROS is innovation. I mean I think that we have an amazing R&D and science team that are always pushing the limits on the volumes of data that we can process in our AI machine learning algorithm. And our customers, because they're innovators, they want to adopt these latest innovations.

Okay, all right. That's fair. And then just a follow-up, can you remind us, if I'm a salesperson at PROS, is there any migration upsell that's factored into my compensation? Am I incented to migrate existing customers?

Yes. So there is an incentive program tied to migrations and there's goals that we measure tied to that, absolutely.

Our next question comes from the line of Chad Bennett from Craig-Hallum.

Steven -- Stefan, I think you pointed out maintenance, this was kind of the first, I don't know if you said, kind of, meaningful decline year-over-year, which net-net is a positive, I think. And I think you effectively kind of -- or Andres talked about $5 million contribution from migrations this year that you're comfortable with that. So have expectations for maintenance decline this year changed in your mind and am I correct that, that $5 million of your subscription kind of guide for this year is conversion-based?

Yes. So Chad, you're exactly right. I would tell you that we're not changing our view on the amount of maintenance that we're ultimately going to recognize for the year. We talked about upper single-digit percentage decline. We're still comfortable with that type of an estimate for the year. And so I think what you're hearing us talk about is that we had some early migrations that give us even more confidence in some of the things that we talked about at the beginning of the year, but at this point in time we're not estimating a different ending number beyond what we had guided to a quarter ago.

Perfect. And so if I -- we think about that upper kind of mid -- upper single digits year-over-year decline in maintenance. And that's, call it, round numbers, I don't know, $6 million, roughly. Let's say, $5 million, $6 million, and then $5 million are -- I mean, the conversion ratio -- and maybe it's just the pure timing of when you can recognize revenue. I would think that, that would convert at a much higher multiple than $5 million in SaaS revenue. Is it just purely timing?

Well, there is some timing in there for sure, but it's -- the decline in maintenance is not just from migrations. We do have churn that's occurring in our base. And if you think about it, we're really not adding anything to the maintenance base that we started with at the beginning of the year, so any amount of churn we have is going to be felt in that total number. So when you break it down, you're looking at about half of the decline in maintenance is going to result in subscription migrations and the other half is going to roughly be from churn.

Got it, makes sense. Okay. And then maybe one more for me, again, probably for Stefan. Subscription gross margins ticked up again sequentially, which is nice to see. Kind of expectations there exiting the year changed at all or any kind of update there on where you hope to end the year at or exit the year at?

No, nothing really changed there, Chad. It's an area that we obviously focus on quite a bit, and we feel like there's been a good progress made in the last year. Our cloud team and our R&D team have done a tremendous job. And I think Andres has commented earlier on a question that was asked about potential improvements, and we see -- we do see that but I would tell you that, that's probably not going to manifest itself all in 2018. So how we're seeing our subscription margin now, where we're expecting that to be relatively flat, may be slightly up as we go throughout the year, but think about it being relatively flat.

Got it. Okay. And then maybe one more, I guess I lied. So the other thing just, kind of, through our checks, we've heard that maybe there's been a little bit of kind of restructuring, reshuffling on the sales side in the New Year. Is that just kind of normal course, just normal course of a new year? Or has anything changed on the sales side go-to-market wise heading into this year versus last year?

Yes. I would tell you, look, every year we make changes within our sales organization aligned to our strategies. And we talked about moving from a pure enterprise sales focus to bringing a couple of growth driver opportunities within sales, one a bit more focused on our large strategic global accounts. And we've aligned some leadership around that. And another area is the solution selling or think of commercial inside sales organization around the land motion. So if you think about it, we went from a fairly singular enterprise model, which we are very, very good at, I would tell you that's the hallmark of PROS, into incorporating a large strategic account program and an inside sales. What I would tell you is mainly the changes continuing to drive improvement and focus on where we're going, 3 to 5 years. So we are really happy with the quality of talent we're able to attract. I would tell you that regrettable churn in sales is down. So I think we're keeping the great sales team that we have, and really we're excited about the amazing team that we have and the potential going forward.

(Operator Instructions) Our next question comes from the line of Rishi Jaluria from D.A. Davidson.

First let me start with Stefan, just going back to the guidance. Just help me understand, I mean, if I back into the full year subscription guidance and look at Q1 and Q2, it's implying a pretty steep decel on the back half of the year. I recognize there's some impact from lapping the Vayant acquisition. And Stefan, you talked a little bit earlier about some earlier-than-expected recognition of some subscription revenue but can you maybe help us understand some of the moving pieces for why we should be modeling a pretty steep decel on subscription?

Well, yes, so you're right, we had the Q1 acceleration but that is going to stick with us throughout the year. So it wasn't a onetime event on the subscription side. So I think part of it, when you think about the decel, you're talking about a decel in growth rate, not a deceleration in the total revenue, because actually subscription revenue we do see accelerating throughout the year. But to your point, because we had the acceleration of revenue that was recognized in Q1 and Q4, a lot of that is being played out and it does have an impact of showing a "lower" growth rate throughout the balance of the year. And you're right, Vayant had an impact on that as well. But when we step back and look at the trajectory of the business and we look at the growth rate from last year going into this year, we're actually very happy with the trend there. And raising our actual number from upper 40% to 50% growth, we feel pretty good about that. And we feel very good about how we'll exit this year based on that guidance as we go into next year.

Okay, got it. That's helpful. And Andres, can you maybe give us a little bit of an update in terms of the progress so far with the Vayant acquisition and how it's trending relative to your initial expectation, fully acknowledging that it's still relatively early in the process?

Yes. What I would tell you in terms of Vayant is that their flight search and merchandising capabilities have been accepted very well within the market. I would tell you it's probably exceeding some of our initial expectations, but, overall, we've seen very positive reception within our customer base. And I would tell you that in general, across all areas, both from an integration, innovation and from a customer success, I think across all areas, we're very, very positive. And we've had over 12 deals closed since the acquisition, and a fairly short amount of time within our customer base. So very excited about the potential.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Andres Reiner for closing remarks.

Thank you for your participation in today's call. We started out 2018 with strong momentum. And we believe we're in a strong position to continue to drive growth and scale in our business. I'd like to thank our incredible PROS team for their commitment to helping our customers outperform, and our customers, partners and shareholders for your continued support.

I'd also like to invite you to our annual Outperform Conference on May 15th through the 17th in Houston, Texas, where we will unveil our latest solutions to power modern commerce. We will also hold an investor luncheon and fireside chat as part of the conference on Wednesday, May 16th. Thank you, and goodbye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.