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Edited Transcript of PRO earnings conference call or presentation 25-Oct-18 8:45pm GMT

Q3 2018 Pros Holdings Inc Earnings Call

HOUSTON Oct 27, 2018 (Thomson StreetEvents) -- Edited Transcript of PROS Holdings Inc earnings conference call or presentation Thursday, October 25, 2018 at 8:45:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andres D. Reiner

PROS Holdings, Inc. - CEO, President & Director

* Shannon Tatz

PROS Holdings, Inc. - Senior Director of IR

* Stefan B. Schulz

PROS Holdings, Inc. - Executive VP & CFO

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Conference Call Participants

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* Chad Michael Bennett

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Jackson Edmund Ader

JP Morgan Chase & Co, Research Division - Analyst

* Jason Vincent Celino

KeyBanc Capital Markets Inc., Research Division - Associate

* Matthew David Van Vliet

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Rishi Nitya Jaluria

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Scott Randolph Berg

Needham & Company, LLC, Research Division - Senior Analyst

* Yaoxian Chew

RBC Capital Markets, LLC, Research Division - Associate VP

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Presentation

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Operator [1]

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Ladies and gentlemen, greetings and welcome to the PROS Holding Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Shannon Tatz, Senior Director of Investor Relations. Thank you. You may begin.

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Shannon Tatz, PROS Holdings, Inc. - Senior Director of IR [2]

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Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me on today's call is Andres Reiner, President and Chief Executive Officer; and Stefan Schulz, Chief Financial Officer.

Before we begin, note that some of the information we will discuss during this call will consist of forward-looking statements, including without limitation our guidance, our strategy, future business prospects, revenue, margin and market opportunities. Actual results could differ materially from our current forecast. Please refer to the risks and uncertainties as well as other factors described in our filings with the SEC for more information. PROS assumes no obligation to update any forward-looking statements to reflect future events or circumstances. Also during the call, we will discuss financial results in accordance with generally accepted accounting principles or GAAP, as well as certain financial results and forward-looking guidance on a non-GAAP basis. A reconciliation of each non-GAAP measure to the most directly comparable GAAP measure to the extent available without unreasonable effort is available on the press release distributed earlier today and in the Investor Relations section of our website at pros.com.

A replay of today's call will also be available on the website and we encourage everyone to review this additional information.

So with that, I will turn the call over to Andres.

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Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [3]

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Thank you, Shannon. Good afternoon, everyone, and thank you for joining us on today's call. I'm pleased to report that we delivered another outstanding quarter, exceeding the high end of guidance on all metrics. I'm also excited to share that we continue to build more momentum in our business. Our deal volume was up 34% in the first 9 months of 2018, which gives us the confidence to raise our growth outlook once again. Our mission is to help companies outperform by enabling smarter selling. And we are seeing companies embrace our dynamic AI platform to help solve some of their biggest go-to-market challenges. Today, virtually all companies are privatizing digital transformation. And the majority of companies are putting the buying experience at the heart of their initiatives.

I'd like to share just a few examples of how our latest AI innovations are helping companies around the globe sell smarter in the digital economy. Here in the U.S., one of our distribution customers, Anixter, made the decision to migrate to the cloud last quarter to leverage our next-generation dynamic pricing solution. When we first partnered with Anixter 3 years ago, we set out to help them drive growth by delivering pricing guidance to their sales teams. Today, I'm proud to see our relationship continue to flourish as we partner with them to power their growing e-commerce channels with our newest cloud innovations. We plan to help Anixter deliver market-winning pricing to their online customers in subsecond response times, ultimately helping them win in the digital economy. This is a great example of what truly sets PROS apart. We haven't seen anyone else in the market who can deliver prices with this kind of speed and precision.

The next example I'll share is from Europe. Last quarter, we welcomed a new insurance customer who purchased our Smart CPQ solution to grow in scale their partner channel. With our solution, this customer plans to enable partners to self-serve as they personalize B2B and B2C offers for more than 1.5 million end-users that they serve globally. I'd love to see examples like this because it shows our companies can leverage our solutions to deliver a winning buying experience across all channels to accelerate growth.

And the last example I'll share is from Asia. Jeju Air, South Korea's first low-cost carrier joined us as a new airline customer last quarter to leverage our next-generation revenue management cloud solution. They selected our new RM essential solution, which uses advanced algorithms and forecasts to predict the unique buying behaviors of price-sensitive passengers. We see this new solution is having an incredible potential to drive value for them in the broader low-cost carrier segment, which is the fastest-growing segment in the airline industry. Our dynamic AI platform is helping companies like these transform how they sell. And we believe that our large underpenetrated TAM creates an incredible opportunity for us to continue to accelerate our growth. We are laser-focus on penetrating this TAM.

Now I'd like to discuss a few key initiatives that we're pursuing to make this happen. First, we are broadening and strengthening our technology and go-to-market partnerships. In the past month, we integrated our Smart CPQ solution with Adobe Sign, and co-sponsored an event with Adobe at DreamForce, where we showcased our joint capabilities. We also kicked off a roadshow series with Microsoft and Adobe where we are educating regional industry leaders on how AI can transform their digital selling.

Really excited about this initiative because it gives us the opportunity to show market leaders exactly how they can use our solution together to drive their digital transformation. So it also allows us to share how we work with our partners to drive customer success.

Second, we're focused on delivering even more value to the travel space with our full airline offer optimization. We're already seeing great success as we accelerate the adoption of our shopping and merchandising solutions. Since we acquired these capabilities through Vayant just over a year ago, we've increased the number of customers using these products by more than 50%. This past quarter alone, we had 5 customers select these solutions. And of these airlines three are new PROS customers. We are realizing our vision of being the first company to bring AI-driven offer optimization to market. And we are actively partnering with our airline customers to help them drive an amazing customer experience while increasing their revenue growth. And finally, we are continuing to strengthen our sales and marketing initiatives under Tom and Celia's leadership. Shortly, we plan to go live with a full refresh of our pros.com website. We see this as a huge step forward in helping our customers in the broader market self-serve as they learn more about our solutions and the value they drive.

We also completed some of our plan sales hiring ahead of schedule. And our number of quota-carrying personnel at the end of Q3 was 110, which is a 25% increase year-over-year. This puts us in a strong position to drive growth and scale in our business next year.

We believe we have an incredible opportunity in front of us as we bring our AI solutions powering commerce in the digital economy to market. I'd like to congratulate our team worldwide on another great quarter. I'd also like to thank our customers, partners and shareholders for their continued support as we deliver on our mission of helping people and companies outperform.

Now with that, I'd like to turn the call over to Stefan to comment on our financial performance.

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [4]

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Thank you, Andres. I, too, would like to congratulate our teams across the organization on another strong quarter. Through the first 9 months of this year, our calculated billings grew 23% over the same period last year. And as Andres mentioned, our deal volume increased by 34% over the same period. We are seeing strength in many areas across our business, and here are a few examples. First, we've accelerated the growth of our B2B business this year led by our logistics business. In this area, we've more than doubled our total ARR year-over-year, and most recently, welcomed Trimac Transportation, one of the largest bulk carriers in North America as a new B2B logistics customer. Second, we are seeing customers expanding more frequently than ever before. We have one customer who has purchased from us 7 out of the last 8 quarters. Strong expansion activity is helping us continue to drive a roughly 50-50 split in new versus existing customer bookings, which we think is the right balance to help fuel our revenue growth. And finally, as Andres mentioned, we are seeing strong market adoption of our shopping and merchandising solutions that came to us through the Vayant acquisition. In the first year since the acquisition, we've grown ARR from these solutions by about 80%, which is well beyond the goal we had set for this acquisition.

Our strong market momentum and solid execution is improving our outlook for growth, which I'll cover in more detail later.

Now turning to our third quarter results. In the third quarter, total revenue was up 17%, primarily driven by subscription revenue growth of 51%. Recurring revenue was 82% of total revenue for the quarter, which is up 1 percentage point over Q2 and slightly ahead of plan. We are pleased with the overall trajectory of this metric. But the recurring revenue composition may move slightly up or slightly down quarter-to-quarter due to revenue recognition patterns in our services business. The recurring portion of our deferred revenue was $100 million. And as I mentioned earlier, our calculated billings were up 23% year-over-year, providing us with added confidence in our future revenue growth potential.

Now moving on to profitability. We made solid progress on the 3 primary profitability measures. First, our subscription gross margins were 66% in the quarter, up 10 percentage points over last year as we continue to layer in more cloud customers and scale our cloud infrastructure and support. Second, on EBITDA. Our adjusted EBITDA loss was $4.9 million, which is more than a $4 million improvement year-over-year. This is a credit to our continued improvement in driving efficient revenue growth as our operating expenses have only increased by 2% over the first 9 months of last year.

And our operating margins have improved by 13 percentage points over that same period. And third on free cash flow. We reported a free cash flow burn of $2.6 million in the third quarter, which is a $7.2 million improvement year-over-year and consistent with the improvements made in the first 2 quarters. On a year-to-date basis, our free cash flow has improved by $18.6 million from last year, which puts us on pace to deliver a $25 million or better improvement in free cash flow for the full year and consistent with our initial goal.

From an overall cash and investments perspective, we ended Q3 with total cash and investments of $282 million, which includes the proceeds from our secondary offering. We believe we are in excellent position to continue to fund our growth and execute on our strategic vision, as well as settle our convertible notes due in the back half of next year. So the combination of our strong third quarter performance as well as our market momentum is leading us to improve our outlook for the end of 2018.

Accordingly, we are increasing our full year guidance for total revenue by $1.9 million to a range of $194.4 million to $195.4 million. By achieving this total revenue range, we would set a new record for revenues as a company. And we would accomplish this record in less than 4 years after beginning our transition to a SaaS business. We are also increasing our full year guidance on subscription revenue by $1.4 million to a range of $93.1 million to $93.6 million, which is a 54% growth rate year-over-year at the midpoint. We are improving our full year outlook on adjusted EBITDA by $3.5 million to a loss of $21 million to $22 million, which is a $12.2 million improvement over 2017 at the midpoint.

And finally, we are reiterating our ARR and free cash flow guidance for 2018. Now moving on to the fourth quarter. We expect subscription revenue to be in the range of $26.25 million to $26.75 million, up 39% at the midpoint. And this would bring us to another significant milestone. By achieving this guidance, our subscription revenue would represent more than 50% of our total revenue in the fourth quarter. At the end of just last year, subscription revenue accounted for only 36% of total revenue.

We expect Q4 total revenue to be in the range of $50 million to $51 million, driven by our strong improvement in subscription revenue. We expect our fourth quarter adjusted EBITDA loss to be in the range of $4 million to $5 million. And with an estimated non-GAAP tax rate of 22% in the fourth quarter, we anticipate a non-GAAP loss per share between $0.12 and $0.14, based on an estimated $37.2 million basic shares outstanding.

Finally, as we approach our next fiscal year, I wanted to provide preliminary color on 2019. As we continue to layer more SaaS customers into our model, we expect to grow our 2019 total revenue to the mid-to high $220 million range. We expect this growth will be driven once again by our subscription revenue, which we anticipate will grow at a similar rate to our growth guidance for Q4 subscription revenue this year. And finally, as we mentioned previously, we expect to generate free cash flow from recurring operations for the full year 2019. We will provide guidance in more detail related to our 2019 estimates during our fourth quarter earnings call. Overall, we are very pleased with our third quarter financial performance and our outlook for accelerated growth in 2019. Thank you for your support of PROS.

And we look forward to speaking with you at our upcoming events.

So with that, let me turn the call back over to the operator for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Jackson Ader from JP Morgan.

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Jackson Edmund Ader, JP Morgan Chase & Co, Research Division - Analyst [2]

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If we could just follow up, Stefan, on the comments that you just ended on the expected revenue numbers for 2019. Just given some of the kind of macro headlines over the last few weeks. What sort of economic environment or sensitivity analysis is baked into that mid-to high 220s range for next year?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [3]

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Yes, Jackson. That's a good question. What we've done is, we've evaluated the environment that we see today, which -- by the way, the environment we see today is not too different from what we've seen in the past, despite what's been going on in the stock market. What we're seeing in terms of our customer set, our prospects, is a continued focus in this digital transformation that Andres talked about in his prepared remarks. So we basically factored in that type of a market into our guidance, or into the color that we are just looking at for 2019.

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Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [4]

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This is Andres. Also, I would say that we look at our forecast moving out a year plus, and how we've seen our forecast or our overall demand gen funnel. And so far we see a pretty strong demand gen funnel at all levels, stage 1 through high pipe.

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Jackson Edmund Ader, JP Morgan Chase & Co, Research Division - Analyst [5]

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Okay. All right. And then just a quick follow-up. Of the -- it was interesting to hear that some Vayant airline win, I think, of the 5, 3 of them were new to PROS. So I mean, the 3 new airlines, is it possible that Vayant could actually be some sort of cross-sell opportunity to go and sell Vayant and then eventually get new airlines to buy revenue management? Or is that really not how the sales cadence looked in that business?

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Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [6]

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Yes. So I think there are opportunities. Some of these, there are opportunities to start with shopping and merchandise, and then later, obviously, our goal is to be able to cross-sell them with our RM solutions. But it was great to see some new logo wins that came in, in the low-cost carrier smaller airlines that now we can also cross-sell with other solutions as well. I would say one thing that clear from that is there is a -- I talked about offer optimization. The concept of offer optimization in the airline industry is a top-of-mind topic. And it's something that's driving a lot of interest in the market.

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Operator [7]

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Our next question comes from the line of Scott Berg from Needham & Company.

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Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [8]

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I guess, I got a couple here. Why don't we start off with pricing software relative to tariffs and trades that are in the news today. Do you think your software, are you hearing it from your customers is the software, obviously, more on the B2B side, does that help your customers mitigate any potential risk to their businesses at all, if they were to adopt or bring this in relative to some of those headlines that are out there today?

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Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [9]

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Yes. Scott, this is Andres. That's a great question. I would say, definitely, in the type of market we're in today, I think, both the tariff. And also as we move to the digital economy and companies are powering e-commerce, it requires one speed of change and real-time capabilities. And I think if I could see across our business, that is the trend that a lot of companies are moving to embrace, is kind of that speed and precision of pricing. And I think that's what's definitely helping us with our growth.

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Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [10]

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Got it, helpful. And then my follow-up question is, Stefan, you made the comments that operating expenses are only up about 2% year-over-year. And obviously, that number's aided a little bit by the positive impact of 606 on the commission side. But even excluding that, the difference isn't that much. But do you all feel that the business is constrained at all going after some growth opportunities by not maybe investing more than sales and marketing? Or do you think this is the right level to maintain or kind of measure the growth gains that the business is seeking?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [11]

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Yes. So Scott, we -- I think up to 2018, we'd really don't feel like the business has been constrained. Because we've been saying that we felt like there were efficiencies and productivity improvements that we could make in the organization. And we're actually very pleased with the progress we've made. We're pleased with the level of EBITDA improvement that we've had. We're also very pleased with the progress we're making on free cash flow. But I think as we look towards 2019, to your point, I think, you're going to see us increase our operating expenses to a little bit greater degree, probably instead of the low single digit, probably more in the higher single-digit growth rates from an OpEx perspective, because a lot of the efficiency and productivity enhancements that we were looking to make, we've been able to make, and to your point, we also want to make sure that we're achieving the growth potential that we know is inherent in the business.

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Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [12]

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Then Scott, one other thing that I will add is that we did accelerate, and I talked in my prepared remarks, hiring quota, carrying personnel, a little bit ahead of what we expect it. So we're already at 110. And that was really where we initially expected, to close to where we expected to end at the year-end. So we've pre-hired ahead to really prepare us for growth into next year.

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Operator [13]

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Our next question comes from the line of Jason Celino from KeyBanc.

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Jason Vincent Celino, KeyBanc Capital Markets Inc., Research Division - Associate [14]

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Just had a couple. As you just reported kind of 23% growth in ARR, which is consistent with type of growth we've seen over the last quarters. But you're still modeling or guiding to roughly 17% for the full year. I mean why such deceleration in Q4? And I mean, can you talk about your confidence kind of going into maybe next year?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [15]

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Yes. So Jason, this is Stefan. We -- the 23% is on calculated billings. And the ARR guidance is, to your point, the midpoint is in the upper teens. Those are similar but little different metrics. And the reason why we're not really providing color on the fourth quarter is primarily -- or updating that number, if you will, is because of we gave a number for a year metric on ARR. And when we step back and look at that over the course of the year, the fourth quarter is typically the largest quarter that makes up that number. And we still have a long part of the quarter to go still. And we really don't want to get too far ahead of where we set that guidance. But I think what you're going to see is, when we report ARR at the end of this year and compare that to calculated billings, you're going to see that, that number is a little separated from what -- which you may have seen in the past. And I think that accounts for some of that reconciliation difference. We're pleased with the booking progress we're making here so far year-to-date. And we feel very comfortable that our plans are proceeding appropriately.

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Jason Vincent Celino, KeyBanc Capital Markets Inc., Research Division - Associate [16]

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Okay. My next question, so maintenance revenue was flat quarter-over-quarter on an absolute basis. That's a little stronger than kind of what I had expected. And I'm a little surprised this is holding up so well, given kind of the migration focus, even though those are still pretty initial. I mean, are you still kind of expecting 5% migrations this year? And I mean, can you kind of talk about why maybe maintenance is holding up so well?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [17]

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Yes. So we had said at the beginning of the year, we felt like maintenance was going to decline in the upper single digit maybe as much as 10%. We're right on pace with that. And so we are -- it's trucking along just like we thought it would. I will say this, we have been surprised at how strong our renewal rates have maintained. They're actually stronger than what we had modeled at the beginning of the year. So one of the reasons for a better maintenance number than what you may have been thinking has to do primarily with the strength in our renewals. We feel very good about the progress we're making on our migrations. Andres talked about one example in his prepared remarks. And we continue to track pretty much along the lines that we thought we would. Now one other point I'll make on that, even though we're having progress in our migrations, they don't always show up and manifest themselves on the income statement, because once we sign the contract, there might be the period of a few weeks where the migration actually occurs. And during that time period, you're going to see us continue to recognize maintenance revenue. And we only turn on the subscription once the customer has actually switched over. And so there is a bit of a lag, if you will, from when you actually see it on the income statement versus when it was contracted.

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Operator [18]

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Our next question comes from the line of Yao Chew from RBC Capital Markets.

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Yaoxian Chew, RBC Capital Markets, LLC, Research Division - Associate VP [19]

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Yes, it's great to see the continued strength in the subscription revenue and billings, in particular. I wanted to dive in a bit more in deal volume that you mentioned was up north of 30%. Can you speak to what's going right in any particular verticals or market acceptance that's allowing for this, is it driven by competitive wins or -- on that front? And I guess towards that can you speak to how win rates are evolving and what's driving that as you build out your portfolio?

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Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [20]

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Now that's a great question. So first of all, I would say, overall, we're very pleased with our performance across the business. Some areas that are performing stronger than probably where we expected, especially on the B2B side, is definitely performing ahead of our expectations. And North America has been very strong. We've also seen slightly shorter sales cycles, I still -- that's one area that historically our sales cycles have been 11-month sale cycles. We've seen a good improvement, still have ways to go, but now are trending closer to the 8-month average sale cycle time.

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Yaoxian Chew, RBC Capital Markets, LLC, Research Division - Associate VP [21]

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Got it. Great. That's sort of segue into my next question as well around QCH and sales cycles. And, I guess, the way of asking it is, your QCH hiring has been accelerated, and how much of the -- how much of it relative to next year's guidance are you factoring in for quota attainment success. I'm just trying to understand the potential puts and takes of that back in the model relative to the resources that you currently have.

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Operator [22]

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Please standby, the conference will begin momentarily. Ladies and gentlemen, you're now connected once again. We still have Yao Chew on the line.

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Yaoxian Chew, RBC Capital Markets, LLC, Research Division - Associate VP [23]

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Sorry, I think we dropped around 11-month sales cycle closer to 8. And then I get -- we get disconnected at that point.

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Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [24]

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Okay. Yes, so we've seen a pretty, lot stronger on the B2B side, especially North America, a little bit of shortening of the average sales cycle time from 11 to 8 months. In the trends that we're seeing in terms of the market, lot more companies that are powering e-commerce and are bringing our capabilities to drive higher precision in omni-channel, either powering partner or e-commerce and to drive full price guidance and CPQ capabilities. So these are -- particular areas that we are seeing quite a bit of strength in the market.

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Yaoxian Chew, RBC Capital Markets, LLC, Research Division - Associate VP [25]

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Got it. Great. And just a quick segue into the next question, I guess. You mentioned sales cycles in particular. And I wanted to tie that to the increased pace of QCH hiring. I guess, what I'm trying to understand relative to next year is, initial look in guidance is just quota attainment, how much slight there is in sort of the model, the puts and takes relative to potential revenue growth, QCH hiring and quota attainment amongst that?

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Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [26]

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Yes. So what I will tell you is, look, we still believe we can drive higher productivity next year. The additional hires that we're hiring this year are going to help to drive production into next year. I would expect less of an impact in the fourth quarter, more of an impact into Q1 and Q2 next year. In terms of quotas assigned and all that, we're still too early. We haven't finalized our plan into next year. But what I would tell you is, overall, we -- what we see is strong demand in the market, we feel that our sales organizations continue to strengthen our overall sales and marketing. And we're pretty excited about our outlook into next year.

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Operator [27]

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Our next question comes from the line of Matt Van Vliet from Stifel.

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Matthew David Van Vliet, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [28]

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On for Tom. I guess, first off, looking at sort of maintain the free cash flow expectation for the full year, but looks like third quarter results were, again, a little bit weaker than a lot of us were expecting. Just curious what's going to be the biggest driver to bring that back to a pretty substantial positive operating cash flow, and the fourth quarter getting you to almost breakeven free cash flow like you've guided?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [29]

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Yes. So Matt, our -- kind of our trajectory throughout the whole year so far has been about a $5 million to $7 million improvement year-over-year. So when you go back and look at the free cash flow for Q1, Q2 and Q3, it's been somewhere in that $5 million to $7 million range, and in Q3, it was $7 million improvement. And right now, due to achieve the midpoint of our guidance for Q4, we would need about a $7 million improvement yet again to achieve that. And we feel like we're on track to deliver that. Obviously, Q4 is a big quarter for us from a cash collection perspective. So there's a lot of work, there's a lot of energy being put into like every year, making sure that we're timely with our cash collections to hit our objectives. But we actually feel very good with our progress. We've improved it by almost $19 million year-over-year. So -- and by the end of the year, we're hoping to be in the $26 million range. So we feel pretty good about that.

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Matthew David Van Vliet, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [30]

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Great. And then I guess more specifically on sort of the preliminary outlook that you provided for 2019. Where are you from a current coverage ratio and in terms of deals that are either already booked or are scheduled to close in the fourth quarter entering 2019 versus new business that -- how much new businesses is in sort of that new -- that total number that you expect to book next year?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [31]

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Yes. So we haven't really gotten into disclosing that. We'll provide more color on just how we see 2019 laying out when we do our Q4 call. But I can tell you this, the amount of visibility we have going into a year, such as in this case, 2019 is getting better and better. As we get farther and farther into our SaaS transition, we'll be at 4 years when we get back to you in 90 days. And because of the higher degree of recurring revenue, a higher percentage of our revenue is kind of contracted, if you will, if you want to even call it, I guess, backlog as some of the rule makers have in the accounting rules. So I will tell you that we're getting more and more of our business is visible to us just simply because of the model we are in.

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Operator [32]

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Our next question comes from the line of Tim Klasell from Northland Securities.

Tim, your line is now live. You might be on mute. Tim, once again, if you can unmute your line?

Ladies and gentlemen, our next question comes from the line of Rishi Jaluria from D.A. Davidson.

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [33]

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I just wanted to start with one of the comments you made in the prepared remarks. You talked about your roadshow with Microsoft and Adobe earlier. I mean, you obviously talk a lot about the Microsoft partnership and it's been, obviously, an important one for PROS. Can you talk a little bit about Adobe and maybe the potential for a partnership there, and where that can go? And then I have a follow-up.

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Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [34]

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Yes, no. That's a great question. So we've had a pretty strong partnership with Microsoft for a long time. And now we tell you that with Adobe, it's a more recent partnership that we formed. We had already formed a partnership with Magento, which they acquired and had integration with Magento and our solution. And it's -- and we see a lot of opportunities of continuing to partner between Microsoft, Adobe and PROS around digital transformations, especially around this area of e-commerce. So we're pretty excited. And I would say, we completed already 2 of the NCC Roadshows with Microsoft and Adobe in Chicago and Houston, and have a couple more before the end of the year. And plan to do a whole new series into next year.

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [35]

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Okay, great. That's good to hear. And then Stefan, just as we look at the ARR guidance, I want to go back to that. You've obviously overachieved on the subscription front so far year-to-date, and Q4 guidance would suggest the same patterns going to continue. You're maintaining ARR guidance, I get there's obviously a lot of moving parts there. But is this just a mix shift between ARR balance coming from subscription and maintenance? Or is there something else at play that I'm missing?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [36]

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No, it is due to the mix and also due to time to delivery. One of the things that we have been focusing on is, as a team, is increasing the amount of time it takes from contracting to go live and customer recognition, especially on our travel side. And so as you can tell, we are starting to see more and more of that revenue coming in it. Also, Andres commented on the fact that our B2B business has had a very strong year. And that's one of the segments or areas of our business where we get the recognition fairly quick. And so that's another part of what you're seeing. So that's why you're seeing a very strong or a stronger subscription revenue. And also a good strong year in our bookings as well.

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Operator [37]

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

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [38]

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So Stefan, in the quarter, I guess, relative to my expectations, the surprise was actually on the license line. So I guess what are the expectations going into the fourth quarter here for that line item? And once we exit this year, should we have any expectations for that line item in the '19?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [39]

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Yes. Chad, that's a good point. I think if we were still under 605 from a revenue recognition standard, your expectations would be spot on. With the advent of 606 and how 606 treats our term license customers. When those renew we get an infusion of license revenue and maintenance that we'll recognize over the 12 remaining months. And so that's what really caused the increase in Q3 on our license revenue side. And you're going to continue to see a quarter or 2 of that happening each year because of that shift in revenue recognition for term licenses. So that's what happened in the third quarter.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [40]

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Okay. And do you see that recurring in the current quarter?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [41]

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No. We don't see it recurring in the current quarter. But we do expect to see it in future quarters.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [42]

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Okay. Then maybe one follow-up for Andres. Andres, can you give us an idea of how many B2B customers are actually using you today as their e-commerce pricing engine? Hands-off, not rules-based stuff that helps inside sales or sales people kind of price. But a true real-time e-commerce B2B engine.

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Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [43]

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Yes. What I would tell you, Chad, is I would say, of our current customer base is still not a large number of the customers that have moved especially in the last, say, 12 months, and lot are powering e-commerce. So what I would tell you is that, when you'll start to see some of the customer base, especially that moves to the cloud, the part of the reason for moving to the cloud like I talked about Anixter was a perfect example, they've been a customer 3 years. They were not -- they were starting to use us to power e-commerce but they're in that move at this point. And part of their movement to the cloud is to power e-commerce.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [44]

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Okay. Good to hear. Sorry, maybe one last one...

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Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [45]

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So that's what is so excited about migrations and the opportunity ahead. Because what I would tell you is that, we've seen on the B2C obviously all of our customers are powering e-commerce with AI-based algorithms. We see B2B now waking up and needing that to compete and win. And that's what gets us excited about the market opportunities that now they're realizing they need the latest cloud offerings to be able to move that.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [46]

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I agree. For sure. Maybe one last quick one. From a regional standpoint or geographic standpoint, rest of world was really strong, at least on a year-over-year basis this quarter, if I'm reading it right. I assume that's all cloud-based strength and growth; any more color on kind of what's going on there?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [47]

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Yes, so you're right. I mean, just about any driver of growth, you're going to see us is based on our cloud progress. So in terms of what's happening, it's a tale of timing. And what I mean by that is we had some good wins a few quarters back in the rest of world regions. And we're now seeing that from a revenue perspective manifest itself. Andres commented in his prepared remarks that we've seen some strength in the U.S. market. And I think you're going to see that start to manifest itself in this geographical split in the upcoming quarters as well. So there's a little bit of a delay from when we are seeing the relative strength and when it shows up in this table. But that's what's going on there.

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Operator [48]

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Ladies and gentlemen, we have reached the end of our Q&A session. I would now like to turn the call back over to Shannon Tatz for closing comments.

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Shannon Tatz, PROS Holdings, Inc. - Senior Director of IR [49]

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Thank you for your participation in today's call. We look forward to speaking with you at conferences and events this quarter. We will be attending the RBC Capital Markets, Technology, Internet, Media and Telecommunications Conference on November 13 in New York City. And the Needham SaaS one-on-one Day on November 15 in San Francisco. If you have any questions following today's call, please contact us at IR at pros.com. Thank you, and goodbye.