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spk03: greetings and welcome to the pros holding third quarter 2021 earnings conference call at this time all participants are in a listen-only mode a question and answer session will follow the formal presentation if anyone should require operator assistance during a conference please press star zero on your telephone keypad as a reminder this conference is being recorded i would now like to turn a conference call over to belinda over to put director of investor relations
spk00: 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 in 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 Schultz. 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. Actual results could differ materially from such statements in our forecast. In particular, there remains significant uncertainty around the duration and impact of COVID-19. This means that results could change at any time and the contemplated impact of COVID-19 on the company's business results and outlook is the best estimate based on the information available as of today. 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 remind our investors and analysts about our upcoming virtual investor fireside chat taking place on November 17th from 1.30 p.m. to 3 p.m. Central Time during the 2021 PROS Outperform Conference. With that, I'll turn the call over to you, Andres.
spk05: Thank you, Belinda. Good afternoon, everyone, and thank you for joining us. We ended the quarter with significant outperformance on our guidance ranges for profitability and cash flow and deliver revenue results in line with our expected ranges. We did see impact from the Delta variant in our Q3 results and our Q4 outlook. Stefan will expand on this later. Our strategies to accelerate market adoption of the PROS platform. deliver an incredible experience, and drive significant value for our customers. Despite the challenges we face because of COVID-19, our team continues to execute well against our strategy. We welcome new customers across industries and from new market segments to pros during the quarter. We continue to drive incredible value for our customers, evident by our expanding partnerships and best-in-class gross revenue retention rate. We received industry recognition of our leadership in both CPQ and price optimization and management. When I look at all of this and the progress of the recovery, I couldn't be more excited for what is to come. In travel, we're starting to see international restrictions ease, and some carriers are seeing significant increases in passenger demand as a result. For example, when the announcement was made that the Europe to U.S. travel ban would be lifted in November, carriers saw an immediate 140% increase in ticket sales in a single week for European travelers. This demonstrates the pent-up demand for travel, both leisure and business, and energizes us for the pace of recovery heading into 2022 as more borders open. In Q3, we welcomed two new low-cost carriers to the PROS family, AirTransact and Scoot. Historically, this market segment didn't have access to the best-of-breed AI-powered revenue management solutions. We designed our PROS RM Essentials Edition on the PROS platform to enable teams of any size to adopt their industry-leading AI and grow with PROS over time. With ProsRM Essentials, customers like CareTransact and Scoot can forecast demand and dynamically price to maximize revenue. Now moving to B2B. In the healthcare space, we're seeing demand for solutions as companies look to digitize their selling motions. We welcome Corian, a provider of long-term care services. and Radiometer Medical, a manufacturer of diagnostic devices to the PROS family as new customers. We're also seeing momentum in transportation and logistics, where companies are looking to PROS to enable them to deliver a frictionless sales experience as demand continues to rise. This year, air cargo demand is expected to increase approximately 20% year over year. In Q3, Emirates SkyCargo adopted our B2B platform to empower their customers with a self-service buying experience to drive a higher conversion of sales using our omni-channel quoting capabilities and capacity-aware price guidance. Similarly, Markham, a division of UPS Healthcare Logistics that is essential in the delivery of vaccines globally, also adopted our B2B platform to power digital selling across our enterprise. Our latest innovations are also inspiring existing customers to expand their partnerships with Pros. In Q3T, Connectivity, a Pros customer of eight years, chose to migrate to our cloud platform which allowed them to expand adoption across their business. TE Connectivity is a leading manufacturer of electronic connectors and sensors that powers vehicles, factories, and homes across the globe. With hundreds of billions of products manufactured annually, TE Connectivity is relying on the scale, speed, and precision of pros, price optimization, and management capabilities to drive winning offers. Honeywell also expanded adoption of our price optimization and management solution. Like many businesses today, Honeywell is experiencing the impact of rising commodity prices and the risk of inflation. To effectively manage volatility and continue to produce winning offers, Honeywell name-processed their global pricing solution vendor and is actively rolling out our solution to all their strategic business units. Sheila Jordan, Honeywell's Chief Digital Technology Officer, will be joining me in my keynote at Outperform to share more on their success with BROS. Now I'm excited to share that we've been named a leader in the 2021 Gartner Magic Quadrant for Configure Price and Quote application suites. When we acquired our CPQ technology, we acknowledged that we were coming from behind. We set a bold strategy to become the leader in this space. This acknowledgement from Gartner recognizes our passion for innovation to drive customer success. Our flexibility to support omnichannel selling, the combination of pricing and selling capabilities in a single platform, the performance, usability, and scalability of our platform were all cited as key strengths. We also have the honor of once again being named the leader in the 2021 IDC MarketScape assessment of worldwide B2B price optimization and management applications. IDC emphasized these views in transparency within our solutions as a key differentiator. The core part of our strategy has been making our AI algorithms accessible, explainable, and extensible. which allows companies of all sizes to adopt their market-leading AI-powered platform. As an engineer at heart, I'm incredibly proud of the market recognition we're receiving for our innovations. And I would like to express my deep gratitude to our amazing product and engineering teams. With these most current designations, we're the only platform with a leadership position in both the CPQ and price optimization and management markets. In addition to our product awards, I'm thrilled to share that PROS has been certified by Great Places to work for the second year in a row. This year's designation extends the company's original certification to all eligible countries. recognizing our inclusive people-first culture on a global scale. This award is based entirely on what current employees have to say about working at PROS, which is what makes this award so special to me. Finally, in September, we announced Rob Reiner's intention to retire from PROS. As Chief Technology Officer, Rob has been key in driving our culture of innovation forward. Rob joined PROS in 2016 to lead our pivotal transition to the cloud. With his leadership, we transform more travel and B2B solutions into the most comprehensive and innovative SaaS offerings in their markets. I'd like to thank Rob for all his contributions to PROS and wish him the best in his retirement. Succeeding Rob A.J. Damani has been promoted to the role of Executive Vice President of Engineering, and Sunil John has been promoted to the role of Chief Product Officer. A.J. and Sunil each have over 15 years of experience with PROS and have been a huge part of our success. I look forward to working closely with them in continuing to accelerate our innovation leadership. In closing, I'm proud of how our team is executing to drive adoption in the market, deliver industry-leading innovations through our platform, and create a culture that empowers every employee to reach their full potential. Thank you to our global team for making PROS an amazing company. Thank you to our customers, partners, and shareholders for your ongoing support of PROS. With that, I'd like to turn the call over to Stefan to cover financial performance in Outlook.
spk02: Thank you, Andres, and good afternoon, everyone. In the third quarter, we significantly outperformed our profitability and cash flow metrics and delivered revenue results that were in line with our expectations. Our team continues to look for ways to drive efficiencies as well as improve our customer satisfaction and collection processes. As a result of our strong operational execution, our outlook for the full year is now much better on profitability and cash flow. As Andres mentioned, the ongoing impact from COVID-19, and specifically the Delta variant, did affect some of our travel customers in the third quarter. Examples of the impact during the quarter include a travel customer declaring bankruptcy, a small number of contract restructurings, and some of our new opportunities and implementations being pushed by a few months. Individually, none of these items significantly impacted our revenues, but the combination of these items did impact our subscription and services revenues slightly in the third quarter. These items will also impact our fourth quarter revenues, and we expect total revenue for the year to be at the low end of our previous annual guidance range. All of these items impacting the second half of 2021 are temporary in nature. We expect to recover most, if not all of these amounts during 2022. Now moving on to our results. Subscription revenue in the third quarter was $44.1 million, up 5% year over year, and total revenue was $62.7 million, up 2% year over year. Our third quarter recurring revenue was 84% of total revenue. Our gross revenue retention rate for the trailing 12 months was approximately 91%. As a reminder, we disclose gross revenue retention rates, not net revenue retention rates. Gross revenue retention does not include bookings from existing customers, which can mask real customer churn. Our revenue retention rates have continued to improve throughout 2021, and we anticipate ending the year at approximately 93%. This returns us to world-class gross revenue retention rates and demonstrates the value our customers see in our solutions. Our non-GAAP total gross margins improved sequentially again to 61%, and our non-GAAP subscription gross margins were 72%, which are up sequentially from 71% and also up year over year. We expect subscription margins to remain relatively constant in the fourth quarter of 2021. We also continue to make steady progress on our services margins, and we're within $200,000 of break-even in the third quarter. As I mentioned before, we continue to make progress on adjusted EBITDA, and we're very pleased with our performance this quarter. Adjusted EBITDA loss was $4.4 million as compared to $6.2 million last year. Revenue growth and reduced operating expenses led to this improvement. total operating expenses declined by 5% in the quarter and 6% in the first nine months of the year. I am proud of our team's strong operational execution and how we continue to look for ways to drive more efficiency into our business. Our calculated billings decreased 5% for the quarter and for the trailing 12 months. And as previously mentioned, we anticipate calculated billings will grow in the fourth quarter, which would result in full-year growth of at least 10%. Our free cash flow burn was $8.5 million in Q3 and $18.9 million year-to-date, a significant improvement over last year driven by a combination of operating expense efficiencies, strong customer collections, and better gross revenue retention rates. We exited the third quarter with $308.6 million of cash and investments. We also made nice progress towards our year-end target of adding quota-carrying personnel, and we ended the quarter with 64. We were able to hire a head of plan, which allows our new team members to ramp up so that they can be productive earlier in 2022. We do not anticipate growing this metric further in the fourth quarter. And as previously discussed, we expect to exit the year with 60 or more quarter-carrying personnel. Now turning to guidance. We expect Q4 subscription revenue to be in the range of $45 to $45.5 million, and total revenue to be in the range of $63 to $64 million. We expect fourth quarter adjusted EBITDA loss to be between $9 and $10 million. Using an estimated non-GAAP tax rate of 22%, we anticipate fourth quarter non-GAAP loss per share of between 22 and 24 cents per share based on an estimated 44.4 million shares outstanding. For the full year, we expect subscription revenue to be in the range of 176 to $176.5 million and total revenue to be in the range of 249.5 to $250.5 million. We expect an adjusted EBITDA loss of between $27.3 and $28.3 million and a free cash flow burn between $22 and $25 million. We also expect our ending ARR on a constant currency basis to be between $214 and $217 million. In closing, I would like to thank our amazing employees and customers for their continued passion and support. We also thank you for your support of PROSE, 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?
spk03: Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Rob Oliver with Robert W. Baird. Please proceed with your question.
spk01: Great. Good afternoon, guys. Thank you for taking my question. A couple ones for me. So first, Just a question on the outlook relative to kind of previous expectations and some of what changed in the quarter. And, Stephan, you mentioned the, you know, some of the, or I think Andre's mentioned in his prepared remarks, some of the commentary around additional bankruptcies, or perhaps that was you. Can you talk a little bit about that, and was it all travel that was the swing factor, or is there anything on the B2B side to call out as well? We'd love to hear about some of the momentum there. And then I just had a quick follow-up question.
spk02: Yeah, hey, Rob, this is Stefan. Yes, it was all travel-related, and it had to do with, you know, the direct effect of certain airlines. And really, we're talking about certain regions around the world that were still feeling the effects of really not having much in the way of their operations taking place in the third quarter. So we did see an additional bankruptcy, as you pointed out. We also saw a couple of customers ask for some contract restructurings And as I pointed out, some of our opportunities and implementations got pushed out. Now, just to put it in context, the, you know, the restructurings that we're talking about here were much smaller than what we were talking about back in 2020. And like I said, there were just a couple of them. But when you take all these things in totality and you look at it, it did impact our total revenue by about a couple million dollars in the second half of the year when you look at Q3 and Q4.
spk01: Got it. Okay, that's helpful. And then, you know, just one follow-up, Stephan, just on the free cash flow and profitability profile, obviously strong, and, you know, you guys have been able to find a lot of – you've always had a lot of leverage to pull, and it sounds like you're pulling some of those on the operating expense side. So just, you know, curious, is this – represent a paradigm shift in terms of process for you guys that we can expect to focus on free cash flow and profitability going forward? And then of the operating expense improvements that you cited, should we assume that those are more sustainable even as we emerge from the COVID situation? Thanks a lot.
spk02: Yeah, so You know, there's been a lot of work that's taking place by the teams around the company, and I think the ones that really impact our free cash flow really have to do with the folks and teams that are working on the collections and building a much better process around how we work with our customers on timely collections, and we've made a lot of improvements there. That's one area. The other area is I commented on, our gross revenue retention rates so as those continue to get better um and you know as we got into the you know the 90s this quarter at 91 and then we move into deeper into the 90s going to 93 in q4 um that's also driving more more cash um so from a cash standpoint we're we're executing on the the cash opportunities better But then the third dimension to that is how we're doing on expense management and being more efficient, to your point. And that's also driving the EBITDA performance. And yeah, I think it's something that you see us working on as far up the income statement line is the cost of subscription. That's been an area that we've really focused on this year, and we've seen those margins improve throughout the year. But we're also looking at ways in which we can you know, operate our business in a more efficient way. So I think we want to continue to see progress on that. But I will stop and say we don't want to do anything that's going to hamper our growth opportunities. We still feel like there's a tremendous amount of growth ahead of us, and we will continue to make those investments. what we're doing with our quarter-carrying personnel and really going beyond where we were thinking we'd be at the end of the year and making the investments where we see there's an opportunity. So we'll continue to make those investments to fuel that top line, but always with an eye on making improvements on the bottom line as well.
spk01: Great. Thanks again, Stephan. Thanks, guys.
spk03: Thank you. Our next question comes from the line of Chad Bennett with Craig Hallam. Please proceed with your question.
spk06: Great. Thanks for taking my question. So, um, Stefan, maybe thanks for the color on the, um, the restructurings and, and, uh, the bankruptcy and so forth that impacted the quarter. Um, so that was 2 million for the second half. So if we, we just kind of, I guess, annualize that. And I'm just thinking in terms of like RPO and, and deferred revs would, would that kind of have a $4 million impact on that figure? Or how should we think about those secondary metrics?
spk02: Yeah, I think, Chad, it's a good point because I don't think we'll see a $4 million impact over a sequential four-quarter period. What we saw here was more timing related. So, for example, we had some implementations and some deals that were pushed out by a few months. And you're feeling that impact in the third and fourth quarters, but we do expect to see that revenue come back online for us in the first part, or I should say at some point in the first, second, third quarters of 2022. And the same thing with the contract restructuring. So the you know if you think about uh how we worked in the particular restructurings we're talking about it was a a bit of relief today for you know a future obligation in the future and in this in these cases not distant future but near-term future right got it okay and and so from a from a rpo deferred rev standpoint that impact was much less i take it correct That's correct. So from an RPO, calculated billings, deferred revenue, and from an ARR perspective, the impact was negligible from the contract restructuring standpoint. That's correct.
spk06: Got it. Okay. And then just curious, Andres, maybe for you, just on the travel side of the business, I mean, you talked about the Europe reopening from a travel standpoint. I saw something earlier in the week that business travel bookings are basically almost a pre-pandemic levels at this point, which I think is good from a margin standpoint for airlines. I mean, you know, September's obviously over, but just, you know, as you look at October and maybe even the end of September and November year, what are you seeing in terms of, you know, progress or pickup on the travel side of the business, if you are seeing that?
spk05: Yeah, I would tell you still early from a sales perspective, I'm pretty proud of the team. If you see, we focus a lot on new airlines that we've signed, including Air Transact and Scoot. This quarter is an example. So what I would tell you, certain regions are recovering faster. North America obviously recovered much faster, and we saw strength in that market. Europe is starting to recover. You commented even business travel is starting to pick up, especially after the U.S. lifted the ban of travel. That's definitely helping. We started to see bookings in October for November and beyond. Now what they will want to see is the materialization of those bookings to see, because remember that now you can cancel those bookings. So they're closely watching to see the conversion of those bookings to actually passengers traveling. So overall, I would tell you that from a booking perspective, 80% of our bookings have been B2B year to date. uh so that's really driving um you know the growth in the business i do expect travel to continue to improve and i would tell you that you're gonna see probably europe come next asia will probably bleed further out and i would say that's the region uh that that is still experiencing more of an impact compared to 2019 but the good news is that we're starting to see the wave continues to improve and and we do expect that to pick up in 22 and Beyond okay no that that's great color and and for a point on on the the kind of late cancellation and and wanting to see bookings actually
spk06: translate to revenue. And then maybe just one last question for me, if I may, just on the B2B side, you know, are you seeing just in terms of CPQ RFPs, you know, obviously there's, you know, CPQ has been around for a number of years now, a number of competitors and so forth. The stuff you're seeing today on the CPQ front, is there still a fair amount of greenfield out there um for you guys as you're looking at new logos or or are we are we i can't imagine we're doing rip and replace but but is it still largely a greenfield under penetrated market thanks
spk05: i i believe it's it's very much greenfield uh and i would tell you that uh you know i talked about several of the deals like emirates sky cargo that includes or or smart cpq markham as well as orient radiometer uh you know many of our deals include it's not the only solution uh obviously the areas of omni-channel commerce are resonating really well in the market in self-service commerce. I think what we're seeing is a lot of companies really change their view of CPQ of not looking at it purely from a sales lens and a direct sales lens, but looking at it from an omnichannel selling lens. And one of the powers and greatest differentiations of our solution is being able to power both the digital and the direct sales and channel all with the same platform, same configuration, same catalog, same quoting object. in a seamless way, and I think that's resonating. So we do see a lot of greenfield opportunities. We are seeing some replacements. I think that there's the level of sophistication in our solution to handle scale, the configuration capabilities, and obviously our AI-powered guidance, I think bring another level of value for the market that is resonating. So I'm very bullish. I'm also really proud of us getting to a leadership position in the Gardner market scope and being the third year in a row that we've advanced from visionary to challenger to now leader. And it's really kudos to our engineering team for their passion and innovation in the vision that we drove around this solution and getting to this point.
spk06: Makes sense. Thanks much for taking my questions.
spk03: Thank you. Our next question comes from the line of Scott Berg with Needham. Please receive your question.
spk04: Hey, guys. This is Josh on for Scott. Thanks for taking my questions. So starting off on the B2B side, if you look across the different ecosystems of opportunities for your business, are you seeing a pickup in activity around the SAP ecosystem? ERP ecosystem or maybe some other ecosystems like Microsoft Dynamics driving more net new business activity. Any color there would be helpful.
spk05: Yeah, that's a great question, Josh. I would tell you SAP ecosystem is usually a very important target for us in the large enterprise. So yes, we see a lot of our customers are in the SAP ecosystem, and I would say that that's probably an area. Salesforce ecosystem is another one. And we are seeing even in the Microsoft ecosystem in Dynamics as well.
spk04: So I would say those three are what's driving the growth. Okay, great. And then, you know, moving on with the cash flow question, how are you thinking about, and I know it's early, but how are you thinking about cash flow next year? as travel returns, you know, is there any chance for break-even free cash flow next year? Or maybe give us a sense of what are the puts and takes that could kind of get you into that kind of key break-even level next year?
spk02: Yeah, so Josh, I don't think we'll be getting quite to break even next year, but what we have signaled in the past is that we'll be, you know, we'll be approaching that by the time we end 2022 and looking for, you know, a free cash flow break even year in 2023. But, you know, our goal is to consistently improve, to show progress from last year to this year and then this year to next year. But I don't think we'll get all the way there in 2022.
spk04: Okay, great. Thanks, guys.
spk03: Thank you. Our next question comes from the line of Jackson Adder with J.P. Morgan. Please proceed with your question.
spk06: Great. Thanks for taking my questions, guys. I was curious to hear whether any of the monetary and commodity prices was driving any incremental demand on the B2B side.
spk05: Hey, Jackson, we can't hear you very well. Oh, sorry. Could you repeat it one more time? I heard about commodity and volatility, but I did not catch everything really well, so I want to...
spk06: Just curious whether the commodity price volatility that we've seen, whether it's lumber or oil, it doesn't matter, but whether that led to any impact and increased demand on the B2B side for price optimizations?
spk05: I would say that that's top of mind for pretty much every company we talk to. And I would say that overall, this notion that the world we're living, there's a lot of uncertainty and there's a lot of volatility in how you drive success with that. And the need from moving from an old manual static process to a more dynamic AI-powered model that can adjust much faster to trends and changes is resonating really well. I think that every company is facing with these changes. You know, think of the overall supply chain issues, you know, cost changes, raw material, inflation, and being able to drive precision and changes quickly. And the faster you can drive these changes, the better your business is going to be in terms of capturing revenue and profitability and winning deals. I think those are areas that are top of mind around all buyers.
spk06: Okay. Great. That makes sense. And then, Stephan, you know, in the past on kind of third quarter calls, you've given some directional or kind of preliminary expectations for the following year. I'm curious if you have any initial thoughts on 22 or if that's a little too far out at this point.
spk02: Yeah, Jackson, I have to tell you, I'd love to be, you know, in a market position where we could, you know, make a comment on 2022. I think there's some encouraging things that are happening in the marketplace that we've discussed on some previous questions. And so we're very optimistic about what could be the case as we look in 2022. At this point, just not ready to call what we see happening for our own business in 2022, but do expect to provide, you know, that type of color and guidance on our next call. Okay. All right. Great. Thank you.
spk03: Thank you. Ladies and gentlemen, we have reached the end of our question and answer session. I would like to turn the call back to Belinda Overdeput for closing remarks.
spk00: Thank you for listening to today's call. We look forward to speaking with you at conferences and events this quarter. We will be attending the Stiefel 2021 Virtual Midwest One-on-One Growth Conference on November 11th, the Baird Virtual Bus Tour on November 16th, and the Needham Virtual SAS One-on-One Conference on November 18th. If you have any questions following today's call, please contact us at iratprose.com. Thank you and goodbye.
spk03: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
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