PROS Holdings, Inc. (NYSE:PRO) Q4 2022 Earnings Call Transcript

PROS Holdings, Inc. (NYSE:PRO) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Greetings and welcome to the PROS Holdings Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this call is being recorded. I would now like to turn the conference over to Belinda Overdeput, Director of Investor Relations. You may now begin.

Belinda Overdeput: Thank you, operator. Good afternoon, everyone, and thank you for joining us. Our earnings press release, SEC filings, and a replay of today’s call can be found on the Investor Relations section of our website at pros.com. Our prepared remarks will also be available on our website immediately following the call and will be replaced by the official transcript, which includes participant questions, once available. With me on today’s call is Andres Reiner, President and Chief Executive Officer; and Stefan Schulz, Chief Financial Officer. Please note that some of the commentary today will include forward-looking statements including, without limitation, those about our strategy, future business prospects and market opportunities, and our financial projections and guidance.

Actual results could differ materially from such statements and our forecast. For more information, please refer to the risk factors described in our SEC filings. PROS assumes no obligation to update any forward-looking statements to reflect future events or circumstances. As a reminder, during the call we will discuss non-GAAP metrics. Reconciliations between each non-GAAP measure and the most directly comparable GAAP measure, to the extent to which available without unreasonable effort, are available in our earnings press release. Before I hand the call over, I’d like to notify our investors and analysts about our upcoming Analyst Day which will take place the afternoon of Tuesday, May 23rd during the 2023 PROS Outperform user conference at the Hyatt Regency in Denver, Colorado.

The event will be webcasted live for those unable to attend in person. Investors and analysts who wish to attend the full conference will receive a discount on the conference registration. For more details on Outperform 2023 or to register, visit pros.com/outperform. With that, I’ll turn the call over to you, Andres.

Andres Reiner: Thank you, Belinda. Good afternoon, everyone, and thank you for joining us on today’s call. As I reflect on 2022, I’m proud of how our team executed to deliver a strong year. We grew subscription revenue by 15% and total revenue by 10% year-over-year. The increased momentum we saw in 2022 is supported by the fact that we more than doubled our deal count for the full year compared to 2021. Our value proposition has never been more relevant, which is fueling demand for our platform. Businesses today are leaning into automation and AI to drive greater efficiency and fuel profitable revenue growth. In times of economic uncertainty, the question management teams are trying to answer is simple: how can we drive organic growth, efficiently?

The PROS Platform helps answer that question. In today’s rapidly evolving markets, speed is a competitive advantage. Businesses that get quotes out faster win. However, operating at speed is becoming increasingly challenging because of the number of product configurations, distinct sales channels, and negotiated customer prices. For businesses today, the only solution is to digitize sales and support an omnichannel sales model. Industry analysts predict that by 2026, 85% of B2B sales interactions between suppliers and buyers will occur in digital channels, up from 55% in 2021. The PROS Platform is uniquely able to automate and digitally connect omnichannel sales experiences, driving higher productivity in sales and a better customer experience.

We continue to be recognized for innovation leadership with 15 awards and accolades received in 2022. In Q4, PROS was recognized again as a leader in Gartner’s 2022 Magic Quadrant for CPQ solutions, with Gartner citing that PROS Smart CPQ is ranked number one overall for our ability to support channel sales. Additionally, it was noted that PROS delivers more AI-driven guided selling capabilities than any other product evaluated. Together with our leadership position in the IDC MarketScape, PROS continues to be the only platform with a leadership position in both Price Optimization and Management and CPQ. Our leadership in the market continues to drive new customers to PROS. In Q4, we welcomed Unlimited Technology and Vector Security, both leading providers of security solutions.

With PROS, Unlimited Technology and Vector Security can accelerate sales productivity with guided selling workflows and reduce quote turn-around time, fueling profitable growth. Industry analysts predict that by 2028, 85% of all companies with B2B go-to-market will employ AI to augment at least one of their primary sales processes, up from nearly 40% in 2021. AI is going to be core to the way companies execute, and they will be looking for technology that drives the best outcomes. In Q4, we announced the availability of our next generation of Price Optimization powered by PROS Gen IV AI, the first pricing solution in the market to use neural network technology. Neural network algorithms adapt in real-time to ever-changing market factors and drive robust results even with imperfect data, which drives higher ROI results for our customers.

Signature Aviation, a B2B aviation services company, selected PROS in Q4 to take advantage of our latest Gen IV AI advancements to fuel their profitable growth strategy. In travel, the disruption airlines have experienced over the last couple of years has increased their focus on extreme automation and full digitization of the customer experience. Our digital offer marketing and dynamic offers solutions are helping airlines entice customers with relevant offers and pull them into direct and digital channels, driving higher conversion rates through channels with lower cost of sales. Aegean Airlines, Greece’s largest carrier, selected PROS in Q4 and will use our dynamic offers solution to distribute offers to online channels. Philippine Airlines and Oman Air, among others, expanded their partnerships with PROS with the adoption of our digital offer marketing solutions.

We are focused, as always, on value creation for our customers and you, our shareholders. We made organizational changes in early 2023 and are now projecting to generate free cash flow and positive adjusted EBITDA this year. We’re also accelerating our timeline for our long-term growth and profitability targets. Further fueling our profitable growth will be our focus on three key pillars of our strategy. The first is driving market adoption of the PROS Platform with our land and expand sales motion. We are laser focused on landing customers with solutions that drive immediate value, and then expanding quickly to drive more value over time. A great example of this is our expansion within the General Electric family in Q4. In Q3, we announced our win with GE Healthcare and in Q4 we expanded into GE Power.

The second pillar of our strategy is to establish a new software category of profit and revenue optimization software. Our innovation leadership is recognized by industry analysts across the software categories that we exist in today, whether it be revenue management, price optimization and management, or configure-price-quote. However, we bring so much more value to the market with the extensive capabilities in our platform and our AI. We believe the value we deliver is reflected in a new category of software, profit and revenue optimization. This year, we’re focused on elevating our messaging and leading the market in innovation that drives profitable growth for businesses. The third pillar of our strategy is to focus on customer experience and rapid time-to-value.

I’m confident that no one else in our market can deliver the measurable ROI we deliver to our customers, as fast as we deliver it. We’ll continue to build implementation assets and drive platform innovation that allows our customers to activate even more use cases with rapid time-to-value. We enter this year well positioned to fuel our profitable growth. We have the right people, strategy, and platform to capture the market opportunity in front of us. Before I close, I’d like to talk a little bit about our incredible team and culture. Our people-first culture is what makes PROS such a special place, and I’m so proud of the environment we’ve built that prioritizes personal growth and ensures every employee can reach their full potential. We continue to receive recognition of our culture, including recently by PEOPLE magazine in the 2022 Companies that Care, a list of the top 100 U.S. companies that demonstrate outstanding care, respect, and concern for their employees.

While we’ve had to make difficult decisions over the past several months, we know that the culture that we built is one that encourages current and past employees to care for and lean on each other. I am thankful to all our team members over the years for their contributions to PROS, and we’re committed to supporting both current and former employees of PROS throughout their careers. I’d also like to thank our shareholders, partners, and customers for their ongoing support of PROS. With that, I’d like to turn the call over to Stefan to cover our financial performance and outlook.

Stefan Schulz: Thank you, Andres and good afternoon, everyone. Our team delivered a strong fourth quarter and full year. Despite a challenging economic environment, our solutions have proven to be mission critical to businesses as they look to drive profitable revenue growth. Our platform and our package offerings launched in the second half of 2021, really set us up to drive a strong 2022, where we consistently outperformed our revenue guidance. With our platform launch, we were also able to drive our revenue performance with greater efficiency. This resulted in improved subscription gross margins. We even generated positive services gross margins as well as positive adjusted EBITDA in the second half of 2022. Now, I’ll cover our results in a little more detail.

Subscription revenue in the fourth quarter was $53.1 million, increasing 13% year-over-year and exceeding guidance. For the full year, subscription revenue was $204 million, increasing 15% year-over-year. Our strong subscription revenue performance along with a stronger-than-expected services revenue result led to total revenue in the fourth quarter of $70.9 million, increasing 9% year-over-year, and $276.1 million for the full year, increasing 10% year-over-year. Recurring revenue for the fourth quarter and the full year was 84% of total revenue, and our trailing twelve-month gross revenue retention rate continued to be better than 93%. Our Subscription ARR was $229 million, increasing 17% year-over-year on a constant currency basis, and exceeding guidance.

Total ARR was $247.5 million, increasing 9% year-over-year on a constant currency basis and was within our guidance range. Going forward, we will focus on subscription ARR because ARR from maintenance customers now represents well under 10% of our total ARR, and will continue to decline during 2023 as we approach the end of life of our perpetual license agreements. This is a significant milestone for us as it marks the end of our transition to SaaS. Our fourth quarter recurring calculated billings increased 6% year-over-year and 13% for the trailing twelve months. Our non-GAAP subscription gross margins were 77% for the fourth quarter and the full year, which increased over 500 basis points from 71% in 2021. Additionally, we delivered another quarter of a positive 4% services gross margin, getting us to a year-end services gross margin that was just short of breakeven.

Our professional services team drove significant improvement from a loss of 6% in 2021. As I mentioned in last quarter, we expect services margins to be slightly positive on an annual basis in 2023 and beyond, with some quarterly fluctuations due to seasonality. Total gross margins were 65% in the fourth quarter and 64% for the year, which is more than a 350 basis point improvement over 2021. The path to profitability starts with improving gross margins and our team delivered in 2022 reflecting continued focus on driving efficiencies in how we provide and deliver our solutions. We generated an adjusted EBITDA profit of $2.4 million in the fourth quarter, significantly outperforming our guidance. Our adjusted EBITDA loss for the full year was $14.9 million, a 40% improvement year-over-year.

Our adjusted EBITDA outperformance was driven by the better than expected revenue and cost savings in the fourth quarter. Our fourth quarter earnings per share was $0.02 per share beating guidance and we generated just over $1 million in free cash flow in the fourth quarter. And our free cash flow burn for the year was $21.7 million and in line with our expectations. We exited the year with $203.6 million of cash and investments. We ended the year with 71 quota-carrying personnel, which was slightly better than our expectations. Starting in 2023 we are adding quota-carrying personnel to drive expansions. The quota for these reps will be lower than the quotas for our new business reps and will create a larger pool of quota-carrying personnel with varying levels of quota.

Because of this change, we will not be providing quarterly updates on quarterly carrying personnel as the comparisons to past quarters will be inconsistent. Now we are comfortable with our sales coverage at this time and we’ll continue to manage this coverage to achieve our growth goals going forward. We will also continue to focus on driving higher sales rep productivity, building on the success we had in 2022, where we doubled our deal count every quarter of 2022 with only a few more sales reps than we had in 2021. And, before I cover guidance, I want to mention a couple of things. First, we are confident in our ability to capture the incredible market opportunity in front of us, but we are considering the current economic environment as we set expectations for the year.

Second, and to echo Andres’ comments, we continue to scale our business and have recently made changes to our cost structure, allowing us to accelerate our near-term and long-term profitability goals. We expect to report positive adjusted EBITDA and generate free cash flow in 2023. I’ll provide more insights into our long-term model at our upcoming Analyst Day during the Outperform Conference in May. With that, here is our guidance for the full year of 2023 with the stated growth rates reflecting the midpoint of the ranges. We expect subscription ARR of $250 million to $253 million, representing 11% growth year-over-year. We expect full year subscription revenue to be in the range of $230.7 million to $232.7 million, representing 14% growth year-over-year and total revenue to be in the range of $293 million to $296 million, representing 7% growth year-over-year.

We are expecting full year adjusted EBITDA profit of between $3 million and $6 million, representing an improvement of over $19 million year-over-year. We expect to generate free cash flow in the range of $2 million to $6 million an improvement of over $25 million year-over-year. Turning now to guidance for the first quarter of 2023, we expect subscription revenue to be in the range of $54 million to $54.5 million, representing an 11% increase year-over-year. And total revenue to be in the range of $70.4 million to $71.4 million, representing a 7% increase year-over-year. We expect first quarter adjusted EBITDA loss of between $3 million and $4 million, which is a $5.6 million improvement over the first quarter last year. And as a reminder, it is typical for our business to have higher expenses in the first quarter.

Using an estimated non-GAAP tax rate of 22%, we anticipate Q1 non-GAAP loss per share of between $0.09 and $0.12 per share based on an estimated 46 million shares outstanding. Now related to the cost structure changes, I mentioned earlier, we expect to incur severance charges in the first quarter of approximately $2.8 million to $3.2 million, which we will exclude from our non-GAAP results. In closing, I would like to thank all of our employees around the world for their continued hard work and dedication to PROS. I would also like to thank you, our shareholders, for your continued support of PROS and we look forward to speaking with you at our upcoming events. I will now turn the call back over to the operator for questions. Operator?

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Q&A Session

Operator: Thank you. Ladies and gentlemen at this time we will be conducting a question-and-answer session. Our first question comes from the line of Scott Berg with Needham. Please proceed with your question.

Scott Berg : Hi everyone. Congrats on the nice bookings this quarter and thanks for taking my questions here. I’ve got a couple Andres. So I wanted to start off with the reopening of China and the impact of your business. I know on the travel side it’s heavily dependent on international travel and when we think of Asia PAC, China is a large chunk of that. One of the data points we recently heard is air travel, or at least bookings for Asia PAC-based air travel in January, it was looking very close to 2019 levels. I guess two questions in there. One, have you seen that as well? And then two, if that area or region is trending towards kind of more normal levels all of a sudden, how does that impact your business or potentially impact your business this year? Thanks.

Andres Reiner: Yes, Scott, great question. Yes, we are seeing that region continue to improve and are really pleased that it’s opening up because that impacts frankly not just that region but all regions. We think that this year definitely that will help us and it’s something that, I think, is still early, but throughout the year, I think, that’s going to be an area where we’ll continue to see investment. So, overall, we’re pleased with that recovery.

Scott Berg: Got it helpful. And if we look at the B2B side of the business, which I believe in yours and I’s, prior conversations was trending towards pre-pandemic levels. Should we think of the bookings in 2022 as it’s kind of maybe in line with what you saw in 2019, or is that business dropped a little bit to go before it’s deemed to be completely healthy again?

Andres Reiner: Yes, I would say look, B2B has continued to improve and performed very well last year and we continue to see that business continue to improve as we get into 2023. Overall, I would say last year we set pretty aggressive goals from a sales perspective to get back to 2019 and I’m very pleased of how we executed throughout the year. And overall, I would say look, travel performed well last year as well. It’s still not back, but definitely travel contributed as well in 2022.

Scott Berg: Got it. And I’m sorry, I’m going to slide one more in here really quick.

Andres Reiner: Yes.

Scott Berg: You are carrying a bunch of additional reps for expand motions this year and I get why you are not going to give that metric going forward because it’s a different metric at least. But how do we think about your expand cadence in 2022 with regards to your bookings and expectations there? Are you seeing customers expand like they did also pre-pandemic or is this really just a chance to maybe fuel those plans going forward?

Andres Reiner: No. So, that’s a great question. So overall, we saw about a fifty-fifty split between new and existing, which is a very healthy level. In last year we really focused on deal velocity and continuing to start small and drive expansions. We see a lot more opportunities with our platform to drive even more expansions within our customer base of more capability that we can sell to our customer base. And we’re setting up a sales organization that can help drive faster expansions within the customer base. And we see that as an opportunity long-term, smaller quotas a different approach. We’re trying in some segments of our business first, but it’s a model that we see a lot of opportunity in the future. But overall, very pleased with both the new and the existing and the approximate fifty-fifty split between both.

Scott Berg: Great. That’s all I have. Thanks for taking my questions and congrats again.

Andres Reiner: Thank you.

Operator: Our next question comes from the line of Chad Bennett with Craig-Hallum. Please proceed with your question.