PROS Holdings, Inc.

Greetings. Welcome to the PROS Holdings First Quarter 2025 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 the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference call over to Melinda Overdaput, Senior Director of Investing Relations.

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 are also available on our website and will be replaced by the official transcript, which includes participant questions once available. With me on today's call is Andrus 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 and guidance. Actual results could differ materially from such statements in 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. Reconciliation between each non-GAAP measure and the most directly comparable GAAP measure, to the extent available without unreasonable effort, are available in our earnings press release. With that, I'll turn the call over to you, Andrus.

Thank you, Belinda. Good afternoon, everyone, and thank you for joining us on today's call. I'm proud to share that our team delivered a strong start to 2025. The broader macroeconomic uncertainty has contributed to a complex selling environment, and our team has executed well through this. We exceeded the high end of our guidance ranges across all metrics, with sales performing ahead of our expectations across B2B and travel. Our trailing 12-month recurring calculated billings grew 14% -over-year. Our strongest performance on this metric in 10 quarters. At the same time, our team continued to focus on driving greater efficiency, resulting in an impressive 123% improvement in free cash flow -over-year. Three key factors are fueling our momentum. First, the ongoing recognition of PROS as a market leader. Second, the proven value of PROS solutions made even more critical by the need for disability and adaptability in volatile markets. And third, accelerating adoption of AI-powered pricing and selling solutions. First, ongoing industry recognition continues to reinforce PROS leadership position in the market. In Q1, we were named the leader in the Forester wave for configured price quote solutions, earning the highest possible scores across most of the evaluations criteria. This designation came on the heels of PROS receiving leader rankings in the Gartner Magic Quadrant in the IDC MarketScape for CPQ. Recognition from all three major analyst firms underscores a relentless passion for innovation that drives profitable growth for our customers. This continued industry recognition is reflected in the trust global enterprises are placing in PROS. I highlight three examples of new customer wins from Q1, among many others. A Fortune 500 chemicals company selected PROS Smart CPQ to fuel AI-driven sales transformation, streamlining pricing and sales across global operations to enhance the omni-channel customer experience. Softcat, a leading IT services provider, selected PROS Smart CPQ with agreements to increase sales efficiency and support their growth strategy. And GreenFox selected PROS Smart price optimization and management to transform global pricing and future proof their commercial strategy. The second driver of our momentum is continued market volatility. Volatility has been amplified by tariff announcements in evolving trade policies, which are on top of supply chain disruptions, changing customer demand patterns, and currency fluctuation. More and more businesses are realizing market volatility is here to stay and that PROS AI-powered pricing and selling solutions are mission critical to mitigate risk and outperform the market. Our expansions in Q1 with Digi-Key and ADI global distribution are great examples of how companies are taking action. Digi-Key is expanding their use of PROS by adopting smart price optimization. Digi-Key's VP of strategic pricing, Stefan Bratu, said, and I quote, PROS has been a strategic partner to us for many years. Now as we adopt PROS AI-powered price optimization, it's clear that real-time data-driven decisions are no longer nice to have. They're business critical. In a market defined by volatility, PROS helps us move faster, adapt with confidence, and lead with precision, end quote. ADI global distribution is enhancing its omnichannel pricing strategy by leveraging advanced capabilities, including our Gen 4 price optimization, to deliver accurate real-time pricing as well as increased self-service conversion. In the airline industry, PROS empowers carriers to move from reactive to predictive. By identifying demand pattern changes a year in advance, PROS enables airlines to respond proactively and capture new revenue opportunities, which is critical in today's volatile market. As airlines prioritize offer optimization and customer experience, the PROS platform delivers the comprehensive capabilities needed to create tailored offers and win in ever-changing market dynamics. We saw strong demand in Q1 in travel, including wins at two of the top seven U.S. carriers by domestic market share, among many others. Southwest Airlines selected PROS offer marketing to amplify brand visibility and capture more demand through enriched web experiences. Another domestic carrier expanded its partnership with PROS by selecting PROS Revenue Management Advantage powered by our market-leading AI. PROS will enable this airline to improve demand forecast accuracy and drive a dynamic commercial strategy, positioning them to outperform in this market. The final key momentum driver I'll discuss is the market-accelerating adoption of AI-powered solutions. As a pioneer and leader in AI, we're not just keeping pace with the market. We're extending our leadership position by advancing autonomous AI to help organizations execute faster, smarter, and with greater precision. True to our longstanding principles, PROS takes a responsible approach to AI innovation, prioritizing transparency, ethics, compliance, and trust. By combining agentic AI with our predictive and prescriptive capabilities, we're enabling intelligent, self-directed systems that augment employee productivity and improve customer experience. This unified approach positions PROS at the forefront of a market rapidly shifting towards AI-driven outcomes and towards a future where AI and people work in seamless synergy. We'll be bringing our vision to life at our upcoming Outperform Conference, where we'll showcase our latest AI innovations and demonstrate how the combination of agentic, predictive, and prescriptive AI can drive measurable business outcomes. Two of many examples of PROS sales agent and PROS rebate agent. The PROS sales agent assists sales reps in finding the right products for the right customers by serving up tailored product recommendations based on conversational input, while also keeping deals moving forward with real-time actions to overcome stalled moments in the sales process. PROS rebate agent uses AI to autonomously create powerful incentives that drive optimized product mix and volumes while improving customer experience. Before I close, I'd like to share an update on my planned retirement. On behalf of the board, I'm excited to announce that Jeff Cotton will join PROS on June 2nd as our next president and CEO. Jeff is a high-impact leader with a proven track record of driving growth and operational excellence at scale in fostering strong customer-centric cultures. His people-first mindset, passion for innovation, and deep commitment to customer value align seamlessly with our strategy and the culture we built at PROS. I've enjoyed getting to know Jeff, and I'm confident the future of PROS under his leadership. We have an amazing experienced leadership team, the best people in technology, and our value proposition has never been more relevant. We're well positioned to capitalize on our large market opportunity, and I look forward to supporting Jeff on a successful transition. Finally, I would like to thank our global team for their passion and dedication to PROS, our customers, and our communities. I'd also like to thank our customers, partners, and shareholders for their continued support of PROS. With that, I will now turn the call over to Stefan to cover our financial performance and outlook.

Thank you, Andres, and good afternoon, everyone. I'm also very proud of how well our team is executing, and this is reflected in our first quarter results. We saw continued momentum in our -to-market functions, including improved bookings linearity for the third consecutive quarter and a -over-year reduction in sales cycle times of over 10%. Also, as Andres mentioned, our product teams continue to deliver new innovations while also improving our overall efficiency. We delivered positive free cash flow of $1.1 million in the quarter, a $6 million improvement, despite Q1 typically being our seasonally high cash use quarter. So we are continuing to make progress towards our long-term goals. And with that, I will provide more detail on our results for the first quarter. Subscription revenue was $70.8 million, up 10% -over-year, and total revenue was $86.3 million, up 7% -over-year, both exceeding the guidance ranges. Our first quarter recurring revenue was 85% of total revenue, an increase from 84% reported in Q1 of last year. Our trailing 12-month gross revenue retention continues to be better than 93%. Recurring calculated billings in the first quarter increased 17% -over-year and 14% for the trailing 12 months, exceeding our expectations. We focused primarily on our trailing 12-month quarterly calculated billings metric, as the quarterly metric can vary due to the timing of billings. For the year, we expect Q1 and Q3 to be our stronger billings quarters. Our non-GAAP subscription gross margin was 81% in the first quarter, an improvement of over 160 basis points -over-year. We also delivered 13% non-GAAP services gross margin in the first quarter, an improvement of over 460 basis points -over-year. With these improvements, our overall non-GAAP gross margin increased to 70%, an improvement of over 270 basis points. Our teams continue to find ways to optimize our costs, and this increased efficiency is reflected in the progress we have made to our gross margins over the last several quarters. Our adjusted EBITDA was $8.7 million in the first quarter, exceeding guidance and a 90% improvement over last year. Our free cash flow was $1.1 million, an improvement of $6 million over last year. And from a balance sheet perspective, we exited the first quarter with $170 million of cash and investments. Our first quarter non-GAAP earnings per share was $0.13 per share, also exceeding guidance. Now turning to our forward-looking guidance, for the second quarter, we expect subscription revenue to be in the range of $72 to $72.5 million, representing 10% growth -over-year at the midpoint. We expect total revenue to be in the range of $87 to $88 million, representing 7% growth -over-year at the midpoint. We expect adjusted EBITDA of between $4 and $5 million, and as planned, we are increasing investments in selling and marketing in the second quarter, including our upcoming Outperform Conference. Using our non-GAAP estimated tax rate of 22%, we anticipate non-GAAP earnings per share to be in the range of $0.04 to $0.06 per share, based on an estimated $48.2 million diluted weighted average shares outstanding. For the full year, we are maintaining all of our existing guidance ranges. We expect subscription ARR of between $308 to $311 million, representing 10% growth -over-year. We anticipate subscription revenue to be in the range of $294 to $296 million, representing 11% growth -over-year. And we expect total revenue to be in the range of $360 to $362 million, representing 9% growth -over-year. We expect adjusted EBITDA to be in the range of $42 and $44 million, representing an improvement of $13 million -over-year, and free cash flow in the range of $40 to $44 million, an improvement of $15.8 million -over-year. As I noted last quarter, we continue to see accelerating growth in subscription revenue for the rest of the year from deals that were previously booked. In addition, we see a similar trend for services revenue in the second half of 2025. So in closing, I would like to thank our global team and our customers for their continued support of PROS. We also thank you, our shareholders, for your support, 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?

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please 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 keys. One moment please while we poll for questions. Our first question comes from the line of Scott Berg with Needham & Company. Please proceed with your questions.

Hi everyone. Nice quarter. And Andres, congrats on, I guess, what's your last full quarter as a public company CEO of PROS? Nice results here. Thank you, Scott. Yeah, both yourself and Stefan certainly kind of spoke and alluded to a better bookings environment here the last couple quarters. It seems like it's been increasing or at least improving on a couple of different levels. I guess if you break that down, B2B has been reasonably strong anyways over the last couple of years. But what do you all see in the travel side here? You kind of proclaimed it was back last quarter. Help us understand where that momentum is and how far away are you from a kind of normal bookings environment in that segment?

Yeah, Scott, great question. I would say, look, we've continued to see improvements in travel, you know, Q3, Q4 and Q1 again. We're seeing that the areas that we've been innovating around the future of offer optimization is truly resonating. I think airlines, as you know, are moving more to ensuring they're marketing the right offers and driving demand through their digital channels and improving those digital experiences. And we've been very laser focused on those innovations and we're seeing them resonate. I would say Q1 was very strong performance on the travel side. I mentioned that we won two of the top seven U.S. carriers. You know, and we're seeing overall continued momentum. So we feel travel will definitely contribute this year. And it was good to see increasingly improvement, you know, Q3 to Q4 now to Q1. And overall, B2B continues to perform very well. I would say from sales execution, we're executing very, very well. You know, and how we're driving better productivity and continued improvements or sales cycle times. I'm very excited to see how we're doing.

Understood helpful. And then, you know, as you think of the macro today, it's changed a lot since last time. I think you and I spoke, Andreas, in late February. How is the current macro helping or hindering your business? Historically, dynamic changes have been helpful, especially at least on your B2B side. Are you seeing similar traction or are customers actually kind of maybe stopping and reevaluating in this environment?

Yes. So that's a great question. I would tell you, look, there is no doubt this is a complex selling environment. I will say that our solutions are really mission critical for these types of environment. And what we're seeing is a lot of companies really accelerating initiatives, both on the B2B and on the travel. And a lot is the dynamics of the market. As I talked about in my prepared remarks, you know, the level of volatility has increased probably to the highest level. We've seen it. And I've talked about this a lot that in my view, volatility is here to stay. And a lot of companies are realizing that in the nature of having a real time AI power platform to better understand how demand patterns are changing and how you're driving a more self-serve, you know, buying motion and selling motion is really critical. So I would say overall, we're very pleased with the demand. So far, we haven't seen any impact. I would say I spoke in the call, you know, we felt Q1, we exceeded our expectation both in travel and B2B, but are cognizant, you know, of the environment and making sure that customers understand the value and why now the risk that we help support and how we help them drive better efficiency and better precision in execution. I will tell you that from a demand perspective, we saw an increase in inbound demand and definitely a significant increase in SDR-based meeting spoke, which actually yielded to some of our results in Q1.

Excellent. Congrats on the quarter and looking forward to seeing you at the conference in a couple of

weeks. Look forward to it, Scott. Thank you.

Thank you. Our next question comes from the line of Zane Mehan with KeyBank Capital Markets. Please proceed with your question.

Great. Thank you for taking my question. I'm on for Jason Salino today. Stefan, you talked about the improvement that you've seen in gross margins and pointed to, you know, efficiencies that you all have been able to obtain. Maybe you can talk about what those efficiencies are and, you know, how that's driving the better gross margin.

Yeah, sure. So, Zane, I think I'll start with subscription because that's obviously the biggest driver. You know, our our cloud team and our engineering teams have really worked over the last couple of three years, actually, on how our solutions can be more efficient at providing the outcomes that our customers are looking for. And they've been very successful at doing that. And, you know, one of the things that that we offer is real time results. And historically, that has been a big consumer of compute. And they've been able to work on ways to deliver that real time nature of a response by using less compute. And so historically, we would have, you know, redundancies that we've now been able to eliminate and therefore save the cost. And that's what's helped a significant amount among a number of other initiatives that the cloud team has undertaken. And then similarly on the services side, you know, one of the areas that we've been focusing on is, you know, a lot of automation. You know, Andres talks a lot about AI and how AI is one of our three strategic pillars. And our services team has really been on the forefront of using AI to help with the implementation, to help with data gathering and data sorting. And that's been a big driver for, you know, our efficiency and our benefits on the services side.

OK, awesome. Makes sense. And then following up on Scott's question on macro, you know, I mean, we're obviously seeing that volatility in real time and just curious if, you know, you're seeing, you're seeing any customers that are maybe delaying implementations as a result or maybe, you know, not landing as big as you would have expected. Just kind of anything you can speak to on demand and customer behavior and if you could break out between B2B and travel.

Yeah, so great question. I would say in general, we haven't seen any demand pattern changes, you know, whether it be on the ASP. We haven't seen any change to our ASP that's been fairly consistent. And overall, I would say, look, if anything, we're seeing companies that want to drive acceleration of implementations. We have seen very strong demand on the CPQ side as well. I think a lot of companies are leaning in to automating and self-serve of commerce and having real precision to market changes in real time where before they didn't have that visibility. So, so far, I would tell you, having seen any changes, we're continuing to see, you know, strong

market demand. Great. Thanks for taking my question and, Andreas, congrats on retirement. Thank you.

Thank you. Our next question comes from the line of Parker Lane with Stiefel. Please proceed with your question.

Hi, this is Matthew Kickert for Parker. Thank you for taking my questions and congrats again, Andreas, on the retirement and the new successor. Thank you,

Matthew.

You're welcome. I want to talk a little bit about the revenue guidance. And if you could break down the split between the net new customers and expansion between current customers for the 25 guidance and then also more broadly what that looks like on your path to the rule of 40.

Yeah, so I'll take that, Matthew. So, you know, if you look at the last call it 12 months or so, we're, we're averaging about a 40 60 split of 40 new to 60 existing. And we really don't feel like that's going to change materially going forward. So we feel like that's going to be a fairly consistent mix of somewhere between 50 50 40 60 or lately has been more 40 60. And we expect that to continue. I think having a healthy balance is very important. Being able to go out and earn new customers is an important muscle to keep and retain, as is learning how to in doing a good job of staying with your customers and expanding that relationship is also very important. So we really work hard to make sure we're able to do both. I think where you're seeing it to a little bit of a degree of having, you know, a little bit of an impact is, you know, our services, you know, at least in the first half of this year has been a little lower than, you know, what we would have seen in the past. We think that's a good thing because that's, you know, that's indicative of the efficiencies that our services team have driven, as I mentioned on the previous question. And secondly, it's a big driver for time to value for our customers. So that's kind of how we're seeing the rest of the year play out as we look forward to 2025.

Okay, thank you. And then secondly, the bookings number continues to trend in the right direction. This comes on the heels of making go to market changes over the past 12 months. Are there any specific changes to go to market do you think or maybe contribute to that or what have you learned so far after making those go to market changes?

Yeah, so overall, we've continued to see, as I talked about, a real focus is on sales execution and ensuring that we have more reps, you know, executing every quarter. And I would say every metric that you look at, whether it's sales cycle time has improved. If you look at number of reps driving productivity in a quarter, it's improved. If you look at linearity, monthly linearity within a quarter, those areas have improved. I'll also say there's been a lot of focus on driving improvements in our marketing function and demand gen, and we're also seeing improvements in those areas. So I think all of the programs that have been put in place, they're continuing to drive improvement. We're also driving our tenure within our sales team, which we expect that will continue to drive improvement. So really proud of the team, how they're executing. And we expect the programs that we put in place, you know, mid last year, they're definitely paying dividends and we expect those to continue to drive success this year.

Terrific. Thank you.

Great.

Thank you. Our next question comes from the line of Nehal Chokshi with Northland Capital Markets. Please proceed with your question.

Thank you. Congratulations on your planned retirement. Thank you. As well as a, you're welcome, as well as a, sounds like a good quarter here. Relative to the situation, so that's great as well. So, a couple of questions here to try to bridge between the positive commentary regarding demand and guidance, one on a quarterly basis and one on a full year basis. So, let's start with the full year basis. Given the highlighted demand drivers of industry recognition and market volatility being positive drivers for pro, why is, you know, and what sounds like, you know, third quarter in a row improved linearity, improved sales cycle times, all these are positive vectors, but it's just leading to a reiteration of full year guidance. Can you help bridge why that is here?

Yeah. Go ahead. Yeah, just in general, we tell you, look, we have to, the way that we approach guidance hasn't changed, but we have to understand what everyone else is seeing in the market and we don't want to get ahead of ourselves. What I would tell you is we have more confidence in the full year guidance through Q1, and we have confidence how we're executing, but given the overall, you know, macro risk, we have to take that into consideration with our guidance. So, we feel very good about the guidance that we provided and the confidence that we have in executing to it. But we felt it was prudent to

drive guidance the way we approached it.

Okay, great. And then zooming in on the quarter here, Stefan, why are you guiding to a 4 million QVQ adjusted a bit to decline on a

2.5

million QVQ revenue increase? And typically, adjusted a bit to improve QVQ going into June quarter. So, your insight here would be helpful.

Yeah, sure. So, you know, first of all, the second quarter is a typically high spend quarter for us. We do have our outperform conference, and so that does represent a bit of a drag on the second quarter. We don't see those types of expenses as we go throughout the rest of the year, so we do see a bit of relief on expenses in Q3 and Q4. Now, we did see a sequential improvement a year ago, to your point, from Q1 to Q2 from an EBITDA perspective, but we had some benefits from incentive comp that actually drove some of that a year ago. You may recall, you know, our first half of last year wasn't as strong because of some of the challenges in travel that Andres talked about earlier. And, you know, we're seeing the exact opposite of that now, so, you know, we're not seeing some of the relief in our expense structure this year that we did last year, but I would say that's a very good thing. And that's a bit unique to what happened last year. This year is more reflective of what we would typically see from an EBITDA perspective, and then as the high spend from the second quarter, you know, dissipates and we get into the second half of the year, you'll see that EBITDA expand again, you know, like you did last year.

It's great. Thank you very much, Stefan. Congrats, everybody.

Thank you.

Thank you. And ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the call back to Belinda Overtheputh for closing remarks.

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 virtual Needham Technology Media and Consumer Conference on May 8th, the Craig Hallam Institutional Investor Conference on May 28th in Minneapolis, the Stiefel Cross Sector 101 Conference on June 3rd in Boston, and the Baird Consumer Tech and Services Conference on June 4th in New York City. I'd also like to remind investors that we are hosting an investor Q&A session on May 14th at our upcoming Outperform with Pros 2025 conference at the Cosmopolitan in Las Vegas. In-person registration for the entire conference is available at pros.com slash Outperform. A live webcast of the investor session will be available for virtual attendees via the investor relations section of our website at pros.com. If you have any questions following today's call, please contact us at IR at pros.com. Thank you and goodbye.

Ladies and gentlemen, this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.