PROS Holdings, Inc. (NYSE:PRO) Q3 2023 Earnings Call Transcript

PROS Holdings, Inc. (NYSE:PRO) Q3 2023 Earnings Call Transcript October 31, 2023

PROS Holdings, Inc. misses on earnings expectations. Reported EPS is $-0.30001 EPS, expectations were $0.03.

Operator: Greetings. Welcome to the PROS Holdings Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference call over to Belinda Overdeput, Director of Investor Relations.

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 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. 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. I am proud to share we delivered a strong third quarter, exceeding our guidance ranges across all metrics. We grew subscription revenue by 16% year-over-year, total revenue by 10% year-over-year and delivered $5.6 million in positive adjusted EBITDA, an improvement of $7.8 million year-over-year. Our results are a testament to our team’s relentless focus on driving profitable growth to achieve our goal of being a Rule of 40 company by 2026. As the market increasingly embraces AI, PROS long-term trajectory continues to strengthen. C-suite leaders across industries are encouraging their teams to infuse AI into their operations, and PROS is a clear choice given our enterprise AI is proven to fuel profitable revenue growth.

When it comes to enterprise AI, accuracy, trust, and speed are critical, and this is what sets PROS apart. We ensure accuracy and trust by using an ensemble approach to combine multiple AI algorithms together. For example, we ensemble our price prediction algorithms with outlier detection and explainable AI algorithms to deliver the most optimal and transparent results possible. Our models are adaptive, they self-learn and recalibrate based on user interaction and real-time data signals to provide the most up-to-date predictions. We offer unparalleled solution performance with response times that are guaranteed within milliseconds for our real-time solutions. Through greater accuracy, trust, and speed, PROS delivers the promise of AI today.

Our mission is to help people and companies outperform. Our enterprise AI generates significant revenue, margin, and efficiency improvements for our customers, as shown in our published ROI study. Recently, we ran an analysis to see how these business outcomes translate into shareholder returns for our customers. We found that PROS publicly traded customers outperformed the Dow and S&P 500 by more than 15 percentage points between the beginning of 2022 and the end of Q3 2023. I’m proud that we are helping such amazing customers drive these incredible returns. I encourage you to check out this chart in our Q3 Investor Presentation. Our land-and-expand strategy is working, demonstrated by our accelerating subscription revenue growth, significant improvements to profitability, and the pace at which we are continuing to land new customers and expand their use of our platform.

In Q3 we continued to welcome new logos across our target industries, and now I’ll share a few examples. Genesis Energy, a New Zealand-based electricity and gas supplier, selected the PROS Platform to provide a seamless customer experience with a harmonized omnichannel strategy. Trivium Packaging, a leading global manufacturer of metal packaging, selected the PROS Platform in Q3 to fuel profitable growth. Trivium will improve their responsiveness to shifting raw material costs with dynamic pricing and drive accelerated time-to-quote with CPQ. JetSMART and GOL Airlines selected the PROS Platform to use our digital offer marketing solutions to increase online traffic and drive higher conversion of sales through digital channels. SKS Airways, a new Malaysian carrier planning to launch at the beginning of 2024, selected PROS as a strategic partner in driving their growth strategy.

SKS Airways will use PROS Revenue Management platform to help them predict demand, scale their operations, and maximize revenue. Now, I’m excited to share a few of the incredible expansions we saw with our customers in Q3. Ingredion, a leading global ingredient solutions provider, began their journey with PROS to drive a digitally connected sales motion and optimized pricing. Since implementing our platform, Ingredion is driving more accurate pricing by leveraging real-time cost changes resulting in faster time-to-quote and an improved customer experience. Ingredion has expanded margins using PROS AI-powered pricing to optimize product and customer mix, and even highlighted this on their recent earnings call. Ingredion’s CEO, James Zallie, said on the call “our results demonstrate our ability to be responsive to shifting market dynamics and deliver continued profit growth.” We are proud of Ingredion’s success and pleased to share they expanded their use of the PROS Platform to a new region each of the last two quarters.

Air New Zealand expanded their use of the PROS Platform with the adoption of our Dynamic Offers solution. With PROS Dynamic Offers, Air New Zealand will modernize their retailing strategy with our leading capabilities in airfare shopping and pricing, enabling them to design, distribute and manage priced fares across direct, indirect, and digital sales channels. Turkish Airlines expanded their use of our platform with their adoption of our digital offer marketing solution and their recent go live of our latest generation of solutions for revenue management, real-time dynamic pricing, and group sales. Turkish Airlines has been a PROS customer since 2009, and it’s been amazing to be part of their stunning break through during this time. Turkish Airlines has more than doubled the number of destinations it flies to since the beginning of our partnership, and today flies to more countries than any other airline in the world.

Our platform innovations enable the next-generation of modern retailing for Turkish Airlines on a massive global scale. Real-time dynamic pricing is the key to fueling revenue growth, managing availability, and intelligently controlling each offer. With the PROS Platform, Turkish Airlines can increase online traffic and drive higher conversion rates of optimized offers across their global passenger and group businesses, driving their growth strategy. In closing, I would like to thank our global team for making PROS an incredible company and delivering on our mission of helping people and companies outperform. Also, I would like to thank our customers, partners, and shareholders for their ongoing support of PROS. With that, I would like to turn the call over to Stefan to cover our financial performance and outlook.

Stefan Schulz: Thank you, Andres, and good afternoon, everyone. We delivered another strong quarter which puts us in a position to raise our outlook once again for the year. Year-to-date we have grown our subscription revenue by 15% and total revenue by 10% while delivering over $20 million in improvements to both adjusted EBITDA and free cash flow. We have now generated positive adjusted EBITDA on a year-to-date basis and expect positive free cash flow for the full-year, after an expected seasonally strong fourth quarter. These profitability improvements have been made while also executing to our revenue growth plan. We are off to a good start towards reaching our goal of achieving Rule of 40 by 2026, and I am pleased with our progress towards these objectives.

Now, for our third quarter results. Subscription revenue in the third quarter was $60 million, up 16% year-over-year and total revenue was $77.3 million, up 10% year-over-year, both exceeding the high-end of our guidance ranges. Our third quarter recurring revenue was 84% of total revenue. As expected, our third quarter calculated billings were relatively flat year-over-year and increased 5% for the trailing 12-months. As a reminder, the size and timing of our billings have an impact on our quarterly growth rate. Our trailing 12-month gross revenue retention rate in the third quarter remained above 93%. Non-GAAP subscription gross margin was 78% for the quarter, improving from 77% a year ago. Our non-GAAP services margin was 9% in the third quarter, improving from 4% a year ago.

Our overall profitability improvements start with gross margins, and year-to-date we have delivered over 145 basis points of improvement to subscription gross margins and over 800 basis points of improvement to services gross margins compared to last year. Driving greater efficiencies in how we deliver our solutions has been an area of focus for our professional services and product teams, and I want to congratulate them for their achievements in this area. Adjusted EBITDA was $5.6 million in the third quarter, exceeding guidance. We also generated $8.5 million of free cash flow in the third quarter, a $17.6 million improvement compared to last year. From a balance sheet perspective, we exited the third quarter with $169.1 million of cash and cash equivalents and have access to our $50 million revolving line of credit.

Additionally, we exchanged approximately $122 million of our convertible notes due in May 2024 for approximately $117 million in additional notes under our 2027 indenture. The new notes under the 2027 indenture are recorded on our balance sheet at fair value because our 2027 notes were trading at a premium to par, so even though the exchange resulted in a lower level of debt at par value, our balance sheet will reflect a higher amount of debt. This non-cash premium will be amortized down to the debt’s par value over the next four years. As a result of this exchange, we have reduced our debt due in May 2024 to approximately $22 million. Our non-GAAP earnings per share was $0.09 per share. Now turning to guidance. For the full-year, we are raising our subscription and total revenue guidance.

We expect subscription revenue to be in the range of $233.3 million to $233.8 million and total revenue to be in the range of $302.2 million to $303.2 million. We are also raising the midpoint of our EBITDA and free cash flow guidance. We expect adjusted EBITDA profit for the full-year of between $6.5 million and $7.5 million and free cash flow of between $3.5 million and $6.5 million. We are maintaining our guidance for subscription ARR at $251 million to $254 million. And for the fourth quarter, we expect subscription revenue to be in the range of $60 million to $60.5 million and total revenue to be in the range of $76 million to $77 million. We are anticipating a sequential decline in services revenue due to the holidays. We expect fourth quarter adjusted EBITDA profit of between $3 million and $4 million.

And using an estimated non-GAAP tax rate of 22%, we anticipate fourth quarter non-GAAP earnings per share of between $0.03 and $0.05 per share, based on an estimated 47.5 million diluted weighted average shares outstanding. In closing, I would like to thank our employees and customers for their continued passion and support. We also thank our shareholders for their 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?

Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Chad Bennett with Craig-Hallum Capital Group. Please proceed with your question.

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Q&A Session

Chad Bennett: Great. Thanks. Nice job again on great execution in the quarter. It’s great seeing the reacceleration in subscription revenue growth to 16%, pretty material year-to-date and then also that flowing down to a very nice EBITDA and earnings beat. I guess question I have is I kind of marked down, Andres, all the logos you talk about in expansions every quarter. And I could be wrong, but I think there are a fair amount of travel-related transactions this quarter. Can you give us a sense of where we are in that recovery and maybe into the fourth quarter here and how we should think about the travel business and bookings there?

Andres Reiner: Yes, Chad, great question. Yes. I would say travel had a good quarter; a very strong quarter and we’re very pleased both on the lands with GOL Airlines, JetSMART and SKS Airways as examples and also on the expansion side, as well. You know Air New Zealand expanding to dynamic offers, huge win for us and continuing to broaden our reach within Air New Zealand and also Turkish Airlines continuing to expand now with our digital offer marketing. What I would tell you is that where we innovated during the pandemic is areas that airlines we knew when they started investing. They would want to adopt these solutions and definitely they’re resonating. And the market is improving as we expected into Q3 and Q4.

Chad Bennett: Okay. So we are seeing demand recovery into the second half here.

Andres Reiner: Yes. Yes. I would tell you it’s pretty consistent with what we expected in a good way. We said we expected in the back half of the year for demand to pick up and we’re seeing it.

Chad Bennett: Okay. And then maybe just on the other side of the — B2B side of the business, just in terms of how to characterize, I think you talked about last quarter a pretty significant reduction in sales cycles, I think you said 30% and an improvement in new logo activity that you saw last quarter. Is that business — I assume it’s driving the reacceleration or a decent amount of it, but is there any characterization of how much that business has accelerated year-to-date and how to think about that going forward? Thanks.

Andres Reiner: Yes, Chad, great question. We’re seeing the same improvement in the B2B new logo velocity that we talked about last quarter. We’re seeing about a 30% improvement in those sales cycle times and we’re continuing to drive deal growth there. We’re always proud to talk about the lands like Genesis Energy and Trivium Packaging as well. As I would tell you, the land realize and expand strategy that we started at the beginning of the year, we’re seeing it working Ingredion is a perfect example. They’re seeing significant value in each of the last two quarters. Q2 and Q3 they expanded into new regions and I believe that motion, while we’re not fully to our potential, we’re executing very well.

Chad Bennett: Got it. Thanks for the color. Nice job.

Andres Reiner: Thank you.

Operator: Our next question comes from the line of Rob Oliver with Baird. Please proceed with your question.

Rob Oliver: Great. Hi guys, thank you very much for taking my question. Good afternoon. I had two. My first, Andres, was just around and I recognize that it’s still early, but a question around the Microsoft partnership obviously some excitement around Azure with the recent report and seeing some interest in AI solutions. And I know it’s early for you guys, but would be curious to hear how you characterize the sort of progress and what constitutes early success for the Microsoft partnership. And then I had a quick follow-up as well.

Andres Reiner: Yes. I would tell you, look, the Microsoft partnership continues to strengthen in all areas. I think from an innovation, we’re continuing to drive innovation on the front of OpenAI and some generative AI capabilities around their next-generation Viva Sales platform and PROS. But on a go-to-market, I would tell you there’s very strong collaboration across all of our geographies between Microsoft and PROS. We can now resell our solutions in their marketplace and we’re working very well. Still early phases, but I would tell you the partnership is as strong as it’s ever been.