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Edited Transcript of PRO earnings conference call or presentation 24-Oct-19 8:45pm GMT

Q3 2019 Pros Holdings Inc Earnings Call

HOUSTON Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of PROS Holdings Inc earnings conference call or presentation Thursday, October 24, 2019 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

* Christopher George Eberle

Nomura Securities Co. Ltd., Research Division - Research Analyst

* Jackson Edmund Ader

JP Morgan Chase & Co, Research Division - Analyst

* Jason Vincent Celino

KeyBanc Capital Markets Inc., Research Division - Associate

* Patrick D. Walravens

JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst

* Scott Randolph Berg

Needham & Company, LLC, Research Division - Senior Analyst

* Thomas Michael Roderick

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

* Tyler Jacob Wood

Northland Capital Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Greetings. Welcome to the PROS Holding Third Quarter 2019 Earnings Conference Call. (Operator Instructions)

Please note this conference is being recorded.

I would now like to turn your -- conference over to your host, Shannon Tatz, Vice President of Strategy and Investor Relations.

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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.

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.

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, our guidance, our strategy, future business prospects, revenue, margin and market opportunities. Actual results could differ materially from our current 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 our non-GAAP measures and the most directly comparable GAAP measures, to the extent available without unreasonable effort, are available in our earnings press release.

With that, I'll turn the call over to you, Andres.

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

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Thank you, Shannon, and thank you, everyone, for joining us on today's call.

I'm pleased to share that we delivered another strong quarter as we realize our vision of powering selling in the digital economy. We grew total revenue by 31% and subscription revenue by 57% last quarter, exceeding the midpoint of our guidance by $1.2 million.

We're laser focused on innovating to help companies power digital selling, which is contributing to our success and helping us accelerate our growth. In a digital economy, companies can't survive unless their online channels serve customers with speed, personalization and precision. A real-time pricing solution empowers companies to deliver personalized prices to their customers in subsecond response times. We offer the only Real Time Dynamic Pricing solution on the market with proven scale and guaranteed response time SLAs, so our customers can trust us to power their digital selling. This kind of differentiation is helping us win in our markets and drive incredible growth.

Last quarter we launched a completely redesigned user experience for our Control solution, where customers can now deploy even more sophisticated and dynamic pricing strategies in a simple, self-serve manner. B2B companies are leveraging our Control solution with our real-time pricing capabilities to power their omnichannel selling strategies and transform their customer buying experience.

We also continue to innovate on our digital selling platform for travel. Last quarter, we launched PROS Travel Retail, which provides airlines with an end-to-end e-commerce solution that delivers an incredible customer buying experience powered by real-time personalized offers. Our acquisition of Travelaer last quarter helped us bring this solution to market. We're incredibly excited to have the Travelaer team join our global PROS family and help us realize our vision of powering digital selling.

With our combined solutions, we see strong potential to accelerate our growth in the travel industry and continue to extend our market leadership position. Stefan will provide more color on this acquisition later in the call.

We're seeing both new and existing customers embrace our latest innovations. I'd like to share a few examples of how companies are partnering with us to reimagine how they go to market in the digital economy. Last quarter, Henkel, a global chemicals and consumer goods manufacturer based in Germany, joined us as a new customer. Henkel adopted our Control, guidance and Smart CPQ solutions so that thousands of users can personalize prices across our product and customer segments. Henkel plans to leverage our AI-powered solutions so that they can respond to changing market dynamics in real time while also providing their customers with an exceptional digital sales experience.

Another great example of a new customer putting our AI at the center of their go-to-market strategy is Cargolux, the largest European dedicated air cargo company. Cargolux' strategy is to deliver a superior digital sales experience for customers, and they're accomplishing this by powering their newly released online booking engine with our AI-based guidance, Smart CPQ and revenue management solutions. We are proud to partner with Cargolux on their digital selling transformation as they look to deliver a best-in-class online customer buying experience.

Our latest innovations are also inspiring our existing customers to migrate to the cloud. For example, last quarter a global chemicals company began their journey to the cloud. This customer is leveraging our next-generation guidance and control solutions to deliver personalized prices and offers in real time to over 1 million customers globally. By leveraging our PROS cloud, this customer will be able to dynamically react to the changes in their raw material supply costs and execute on their go-to-market strategy at scale.

As we accelerate our global market adoption, we're committed to continuing to delivering an incredible experience at every stage of our customer's life cycle. We've created a culture of SaaS with delivering exceptional customer experience and value. To further support our customers from day 1, we're expanding our global partner ecosystem. As part of these efforts, I'm pleased to share that we signed a new alliance agreement with EY, and we're working together as they build out their global PROS practice. This alliance will help us deliver incredible value to our customers and will help us scale globally as we capitalize on our large market opportunity. Finally, I'm excited to welcome John Allessio to our PROS family as Chief Customer Officer. John will lead both our global delivery and customer success teams to help us further accelerate customer value and deliver a world-class customer experience at scale. We're excited to partner with John to continue to deliver on our mission of helping people and customers outperform. We're seeing strong momentum in our business, and we believe we're incredibly well positioned to continue to drive long-term growth.

Thank you to our amazing global team for driving our success in helping us realize our vision of powering selling in the digital economy.

With that, I'll turn the call over to Stefan to cover our financial performance and outlook.

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

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Thank you, Andres. We had another strong quarter, and at the same time we continued making progress in scaling our cloud business.

So before I discuss the financial results and guidance, I would like to add additional comments covering some of the successes we had as a team during the third quarter.

First, we're seeing strong performance globally across both new and existing customers, with a relatively equal booking split between new and existing customers. Also, in addition to the customers Andres mentioned earlier, we welcomed Copa Airlines, Shell and Wilbur-Ellis among many other new customers last quarter. We're also pleased to share that we're seeing increased momentum in our customer migrations and existing cloud customer expansions.

We had 1 customer expand in 10 out of the last 12 quarters and another expand for the fifth consecutive quarter. This is a testament to the strength of our land and expand strategy in driving our growth.

Finally, as Andres mentioned earlier, we acquired Travelaer last quarter to expand our digital selling platform for the travel business. We would also like to take this opportunity to welcome the Travelaer team to PROS. We look forward to working together as a combined team to further strengthen our leadership position in the travel industry.

Travelaer is an early-stage company that has not generated significant revenue or ARR to date. At the end of Q3, Travelaer accounted for less than 1% of our revenue and ARR. We see strong potential to grow this business moving forward by combining their online booking engine, mobile and web solutions with our shopping and merchandising offerings to provide airlines with comprehensive e-commerce capabilities.

Now I'll move on to our financials, starting with our third quarter results. Subscription revenue increased 57% year-over-year and was the primary driver of our 31% increase in total revenue, which was $64.2 million in Q3. As I mentioned earlier, the impact from Travelaer was very small, at well under 1% of subscription revenue in the quarter.

Services revenue was strong once again in the third quarter, up 42% year-over-year, but down sequentially as we expected. As a reminder, this level of services growth is in line with what we expect for the remainder of the year, which also resulted in a more typical recurring revenue to total revenue ratio of 81% in the third quarter.

The recurring portion of our deferred revenue was $109.9 million, up 10% year-over-year. And our trailing 12-month calculated billings increased to 15% year-over-year. And we continue to expect calculated billings for the full year to be up approximately 20%.

Now moving on to profitability metrics. Our non-GAAP subscription gross margins were 73% last quarter, up nearly 650 basis points year-over-year. We're pleased with our continued progress in this area as our team innovates on ways to deliver our solutions more efficiently.

Our third quarter services gross margins were negative 9%. And since this is a sizable sequential decline, I want to take a moment to provide more color. Due to the increase in number of active implementations, we invested heavily in third-party system integrators within the quarter to supplement our delivery organization so we could continue to provide our customers with a best-in-class customer experience. We expect services margins to remain negative in the fourth quarter as we continue using third-party integrators in current services projects. These resources have been a good supplement to our internal resources and these projects have allowed them to develop a deeper knowledge of our products.

We expect services margins to normalize as we progress through 2020 and see the benefits of the partner ecosystem manifest in our financials.

In the third quarter, our adjusted EBITDA loss was $2.2 million, which was -- which improved by $2.7 million year-over-year. We reported $3 million in positive free cash flow in the quarter, representing a $5.6 million improvement year-over-year driven by strong cash collections within the quarter.

During the quarter, we also exercised our option to call the $106 million par value convertible bonds that were issued in 2017 with common stock. As of September 30, approximately 77% of the outstanding bonds were converted into approximately 1.7 million shares of common stock pursuant to the call and conversion activities.

Now turning to guidance for the fourth quarter. We anticipate total revenue in the fourth quarter to be in the range of $63.9 million to $64.4 million, up 22% year-over-year at the midpoint. We expect the growth will primarily be driven by a combination of strong subscription and services revenue.

We expect subscription revenue to be in the range of $38.6 million to $39.1 million, up 37% at the midpoint. Our guidance for fourth quarter adjusted EBITDA loss is a range of $2 million to $3 million. And with an estimated non-GAAP tax rate of 22% in the fourth quarter, we anticipate a non-GAAP loss per share between $0is .08 and $0.10 based on an estimated 42.1 million basic shares outstanding.

Moving to the full year. We are reiterating our ARR guidance of $220 million to $222 million, up 17% year-over-year at the midpoint. We are increasing our total revenue guidance to $248 million to $248.5 million, up 26% year-over-year at the midpoint. And we're also increasing our subscription revenue guidance to a range of $139.5 million to $140 million, up 47% at the midpoint. And due to the incremental spend, largely driven by our Travelaer acquisition and the addition of third-party resources to our professional services projects, we are lowering our adjusted EBITDA loss guidance by approximately $2 million to a range of $10.5 million to $11.5 million. Similarly, we are slightly lowering our free cash flow guidance by $2 million to a cash flow burn of $2 million to breakeven.

Now turning to 2020. We expect to see continued strong market momentum next year as both new and existing customers adopt our cloud innovations. As a result, we expect subscription revenue growth just under 40% next year. As I mentioned earlier, we expect our partners to lead more implementations next year, so we expect a small headwind to our 2020 services revenue, but a benefit to our services gross margin and implementation capacity.

We anticipate our total revenue to be in the upper $280 million to low $290 million range.

Finally, we anticipate a very modest improvement to free cash flow over our 2019 guidance range. Overall, we're very pleased with our third quarter financial performance and our outlook for 2019 and 2020. We appreciate 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 is from Chris Eberle with Nomura Instinet.

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Christopher George Eberle, Nomura Securities Co. Ltd., Research Division - Research Analyst [2]

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Can you just give us, from a high level, an idea of how your conversations have changed with customers over the last, say, 6 or 9 months for those who have moved to the cloud? And kind of what they're seeing from an ROI perspective? Is that different than what they may have seen on-prem? And then just from a dollar net retention perspective, are we seeing PROS become more strategic to the customer base?

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

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It's a great question, Chris. I would say from a customer base what we're seeing is that customers are able to expand a lot faster. We've talked in the past of customers expanding, say, 10 out of the last 12 quarters. For example, we have a customer that has expanded. So what we're seeing is the time to value is much faster because implementations are lower. We're also seeing their ability to expand is much easier. So in both of those areas, we're driving significant more value in the cloud because of their ability on time to value is much shorter.

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Christopher George Eberle, Nomura Securities Co. Ltd., Research Division - Research Analyst [4]

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Got it. Great. And then as we may or may not see some macro weakness out there today or in the near future, would you guys think that, that would accelerate greater adoption of your services? Or does PROS seem more as a nice to have, not necessarily something that you can't live without? And are there any verticals within your customer base that you guys speak to regularly that you've seen any changes, even just from a conversational perspective?

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Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [5]

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Well, I would tell you that in the digital era, companies are going to have to have a solution for digital selling. I think companies can't ignore the digital era. And I think if you're seeing -- a lot of our growth and momentum, I think is beyond companies think as they're equipping sales to do quotes and price. But more importantly, how are they going to power their digital selling, e-commerce and other digital channels to power their business.

So I see that as very strategic. And I think that's also led -- for the example in -- I talked about Henkel, when in the quarter where they're adopting our control, CPQ and guidance solution and part of that is tied to their digital transformation around sales and e-commerce as well in the future. So I think that topic -- I think is top of mind in many organizations. And I think the strategic nature of being able to dynamically price at a market-oriented price is very strategic. We're also seeing in industries like chemicals and energy. We talked about Shell as a win as well, that having the right algorithms to price in this market and win are very important. So I would say, in an area where there's market pressure, having the right price guidance is even more critical to win.

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Operator [6]

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Our next question is from Todd -- Tom Roderick with Stifel.

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Thomas Michael Roderick, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [7]

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Stefan, you talking about offloading some more services to partners and the impact to EBITDA. Can you just talk a little bit more about what that means? Maybe if you could just repeat what the drawdown -- the EBITDA guidance from that? But more to the point, organizationally, what do you have to do to sort of pass some of those resources off, support some of these third-party services providers and you build up a practice around that so that you can kind of officially and effectively and accurately offload those resources for proper implementations?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [8]

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Yes. Tom, when we look at -- back at a course of the course of the year, we've had a very strong booking year. And that's led to a large number of active implementations. As a matter of fact, when we go back and look at where we were at the beginning of this year to the high point that we reached in the third quarter, we actually had a 40% increase in the amount of active implementations. So not only have we really worked hard to add resources to our own professional services team, we've also supplemented them with a lot of these third-party integrators that I referenced on the call. Now there's 2 points and 2 purposes behind these third-party integrators that are actually helping us on current projects. One, they're providing some experienced resources that are allowing us to keep to our customers' expectations and time lines. But second, they're also training and gaining more exposure to our products specifically that's going to enable them to actually build their own practice around a lot of what we're doing with our products. So as we go forward into next year, the idea is that they're going to spend less time working on projects that they -- we have. They're going to help us get caught up, if you will, but then actually build their own practice. And so as we look to next year, we see 2 things happening: one, we see the margins getting better because we're not going to be utilizing some of these high cost resources as much; and two, they'll be taking on some projects and actually increasing our overall capacity by actually helping identify opportunities, bringing their professional services team to combine with our software. So as we look forward to next year, we think this is a -- not only a good investment for the active implementations we have going on, but also for expanding our capabilities and our scope next year.

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Thomas Michael Roderick, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [9]

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Outstanding. That's helpful. And then Stefan, my next question will go back to you here. You've referred repeatedly this year to very strong bookings all year long. We've seen great subscription growth. And when I look at this ARR guide for the year still calling for 17%, you've held on to that all year long. I think maybe there are some of your investors out there that are just sort of assuming given the commentary on bookings, it'll come in well above that. To the extent that it comes in right exactly where you guys are saying it will, give us the reason why there's a little bit of a disconnect on the growth in ARR versus what we see on subscription? And then how does that ARR trend as subscription, of course, becomes a bigger component of the model as we look out to next year?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [10]

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Yes. So there's a couple of metrics that we're -- you're seeing that relates to our overall bookings. You're seeing ARR, the one you referenced, and then you're also seeing calculated billings. Those are 2 similar but different metrics. Let me start with ARR. ARR, to your point, includes both maintenance and subscription. And as we've commented -- as you pointed out throughout the course of the year, we've seen very strong bookings momentum in growth in our subscription business, which is obviously pretty much everything we do today. We do very, very little outside of subscription. And that by far and away is driving the activity and the growth much more so than the 17%. And then obviously, on the maintenance side that's actually declining because of what you're seeing in terms of migrations and then also some natural churn. But there's nothing going into that bucket. So that's been kind of a drag on it. And that's what's kind of offsetting what you're seeing from an overall ARR growth rate perspective and what you see from a subscription perspective. If you were just to look at subscription just by itself within ARR, it's way beyond the 17%. Well beyond that, probably more than double that. On the calculated billings side, it's a similar metric, and it's another way to look at the overall business. And that number has typically trended to be more consistent with what we see from an overall bookings perspective because it does track to billings. But we did see a bit of an anomaly this particular quarter because of some timing issues. And we've had that happen before, and we've talked about that. But when we look at our overall business and we look at the successes that we've seen year-to-date and what we see in our pipeline for Q4, we feel very good about the 20% number being a real -- and again, combined subscription and maintenance growth rate with subscription being well beyond that, being at 20%.

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Operator [11]

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Our next question is from Scott Berg with Needham & Company.

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Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [12]

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Congrats on a good quarter. I guess I have a lot -- have lots of them, but we'll just take a couple. Stefan, first, I just wanted you to clarify the reduction in free cash flow guidance for the year? If you look at the $2 million delta, how much of that is from the acquisition of Travelaer? And how much of that is maybe related to the services that were pushed to partners?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [13]

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Yes. I mean it's roughly 50-50. But honestly, it's probably a little bit more on the services side, a little less on the Travelaer side to be -- I guess to be more precise.

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Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [14]

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Got it. Very helpful. And then I guess, Andres, I just wanted to talk about the overall go-to-market strategy and how that's kind of morphed this year. There was a question earlier, I think it was Tom's question as well on the partner strategy, but can you help talk about what partners have meant to the business, maybe in terms of bookings contribution year-to-date or over the last year? And with the addition of a partner like EY, how does that kind of morph maybe over the next 12 to 36 months in terms of that composition, especially when that augments your other strong partnerships with [the work and] et cetera.

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Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [15]

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Yes. No. So I would tell you partners continue to be a strong contribution to our business both in co-selling opportunities as well as bringing us deals into the business. But also it's more -- as important as from a demand perspective they're strategic, it's also important from a delivery perspective, they're very strategic. And I think the EY relationship, the strategic nature, we've already had deals that they brought in that we've closed. So we've already had success with them, but also the ability that they will give us to scale. We have pretty ambitious growth aspirations. And frankly, we can't scale just on our professional services team, as amazing as they are. The global expansions and our strategic customers that are some of the global's biggest companies in the world require us to implement globally. And I think they're going to give us a lot more ability to scale over the next 3 years. So we see it 2-fold: helping them contribute obviously, to our pipeline, which our pipeline growth remains very strong; but more importantly, help us in the ability to deliver with the same quality that we've delivered at a much higher scale. And that's what's exciting for us. And in strategic also that we're not just looking at a pricing practice or a CPQ practice in the EY, it's really a practice that combines both pricing in CPQ, and it aligns with a lot of top of mind topics around digital transformation for sales. And us being a unique offering that can really power a more strategic initiative within an organization and having a company like EY, partner like EY supporting that I think is going to be very good for us long term.

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Operator [16]

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Our next question is from Jackson Adler (sic) [Ader] with JPMorgan.

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Jackson Edmund Ader, JP Morgan Chase & Co, Research Division - Analyst [17]

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If we could actually just follow up on the EY partnership that Andres here was just talking about. If part of the strategic partnership includes not just delivery, but demand generation, how should we then be thinking about the growth or ramping of your direct salespeople?

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Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [18]

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Yes. No. That's a great question. So I would tell you that we're continuing our recruiting to get to the 20% quota-carrying personnel hire increase for the year. We feel very good about that. As you know we were ahead in Q2 and are continuing to recruit. At this point, we feel that, that 20% quota-carrying growth is kind of the level that we feel -- it's the right level at this point. May decide to change that going into 2020, but I would stay still premature. We're still going through our budgeting for 2020. And I would say we'll give more color in our Q4 earnings call around that. But I would say, look, for now we're seeing good success. We expect that as we continue to drive success we're going to continue to ramp up our sales organization. And -- but at the same time, we're also driving productivity improvements. And I would tell you that our sales cycle times continued to improve a little bit this year. And a big focus for us is also trying to drive better sales productivity. And as our solutions become more standard, as companies are more mature in their buying, it drives the shorter selling cycle, which means that we don't have to grow quota-carrying personnel as high to still achieve a higher growth rate.

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Jackson Edmund Ader, JP Morgan Chase & Co, Research Division - Analyst [19]

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Okay. Great. And then a follow-up for you, Stefan. The disconnect maybe between calculated billings and revenue and ARR that you mentioned, the timing of some of those deals that impacted billings, was that simply just -- may be -- are those deals that have now already been billed? Meaning it's just something that was going to be billed in September that ends up being in October? Or any other color you can give us on that?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [20]

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Yes. No. That's exactly right. Some of those are exactly just that. There's -- maybe I'll take a second and go into this in a little more depth to address that question, Jackson. But yes, to your point, there were some invoices that didn't go out in September that have now gone out in October. But you asked this question about the relationship between ARR, for example, and calculated billings. And while they are similar, they're different in how they're calculated and how they're arrived -- or derived. One of the biggest differences has to do with calculated billings is a pure billings metric, and it only gets counted when the invoice is actually submitted to the customer. And so that has 2 impacts to us relative to ARR: one, when we're looking at a -- an invoice that goes out the door in a 3-year contract, many times, as Andres said in his prepared remarks, there are customers that are buying our full suite of products today, and they're rolling them out in increasing stages in increasing fashion. So what ends up happening is the ARR ends up being the average of that 3-year rollout, which means as they increase their contracts each year, we take an average of that from an ARR perspective. Then from a calculated billings perspective, we're only counting what we bill in the first year. So there's one disconnect that occurs. And so that's the -- that's probably the biggest difference that you're going to see. And that's probably why -- well, that is why you see calculated billings being impacted from time to time by timing versus what you would see in an ARR scenario. Does that help?

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Jackson Edmund Ader, JP Morgan Chase & Co, Research Division - Analyst [21]

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Yes. Yes. So basically, we should think about it as -- and in one of those ramped deals, billings gets impacted, ARR somewhere in the middle, eventual ramp to recurring revenue is going to be the highest of those 3?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [22]

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Correct. Correct.

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Operator [23]

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Our next question is from Jason Celino with KeyBanc Capital Markets.

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Jason Vincent Celino, KeyBanc Capital Markets Inc., Research Division - Associate [24]

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Just a couple for me. Stefan, you talked about some increased momentum on the migration side. Do you have any other anecdotal commentary you can share with that?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [25]

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Yes. We've talked at the beginning of the year, Jason, about the fact that we were going to change the comp plan, and we had a dedicated team that was going to start driving that. And we've been kind of looking towards the second half of the year as the point in time where we'd start to see that come to fruition, and we have. We saw several deals that were migrations occur in the third quarter. As we look at our fourth quarter forecast and pipeline, we actually see more, and even more as we go into the beginning of 2020. So we are starting to see that, that's starting to take effect. And yes, so we're pretty excited about that, that as we look out into 2020, we do expect to see a bit more of an impact on maintenance than what we've seen in the last couple of years as a result of that.

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Jason Vincent Celino, KeyBanc Capital Markets Inc., Research Division - Associate [26]

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Okay. Great. And your early comments on 2020, the subscription growth, I think you've said in the -- it's a tad under 40%. But if I kind of roughly go over where we're setting up for total revenue that would suggest that services revenue would be a little bit flatter. And when you talk about the change in services business, is that kind of the way you're thinking about it?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [27]

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Well, I would not say it's -- I wouldn't really use the term flat. I would say it's going to be a declining growth rate from what you saw this year for certain. But I think maybe the other piece of the puzzle is the piece I've just shared, which is that maintenance is going to be coming down a little bit more than what you've seen in the last couple of years, primarily because of the successes we're starting to see our migration plan. So think in terms of maintenance coming down in the mid- to upper teens from a percentage standpoint [next year].

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Operator [28]

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Our next question is from Chad Bennett with Craig-Hallum.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [29]

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Stefan, maybe I think everybody's tried to ask this a few different ways. Can you just speak to, I guess qualitatively, how subscription billings or bookings performed in the quarter relative to expectations?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [30]

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Well, they performed very well relative to expectations. So we are, I think -- well, let me put it this way. Bookings performed very well relative to expectations. Billings, on the other hand, mainly because of some timing challenges that we talked about earlier, not so much. And that is reflected in the 15% overall calculated billings growth rate that you saw in the trailing 12-month number for Q3. But Chad, we're actually very happy with the progress we're making in terms of our subscription business, which is when I say -- it's pretty much our business, right? Because that's what we're doing now. And we're very pleased. We're actually ahead of our -- of what we had set as an overall plan for ourselves from a bookings standpoint. And that's really how we truly run the business, to be quite honest. We're really running it from an overall bookings perspective because we want our sales team and we want our customers to be incentivized to get started with our implementations, get started with our products start getting value from them and then start ramping that up into more divisions, more geographies as they mature in our contracts. So it's very consistent with how we're wanting to manage the business, and we're very happy with it. Unfortunately, we do have the unfortunate side effect of -- from time to time that does mean that billings aren't consistent with the bookings, and we end up with a 15% calculated billings growth rate.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [31]

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Yes. No. I appreciate that and I understand that bookings are ultimately what matters. And so I -- and I think if I recall correctly last year, Stefan, you actually benefited billings-wise in the third quarter from things shifting from second quarter into Q3. Did you -- I don't recall. Did you guys ever quantify that? Or do you want to speak to that?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [32]

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We did. It was -- if I remember correctly, Chad, it was like 2 or 3 percentage points of growth. If -- I may be misquoting that, but if memory serves, it was around that area. So you're right. That was a -- that was something we saw last year as well. We try not to spend too much time talking about it because it's always going to have -- there's always going to be an impact one way or the other. We own the number, we own where we are. What we can tell you is that we feel very confident that over the long term, and including the fiscal year of 2019, we feel confident saying that number's going to be in the 20% range.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [33]

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And then as we stand today or as you can at least tell today, Stefan, just recurring deferred sequentially into the current quarter, do you think that -- and I understand you have offsets, right? Things go in different directions. But do you think recurring deferred is up sequentially in this current quarter?

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [34]

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It is.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [35]

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Okay.

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

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You meant in 20 -- in Q3 or Q4 or both?

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [37]

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In Q4 of this -- the quarter we're in today.

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [38]

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Oh, in quarter 4?

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [39]

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Yes.

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [40]

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Yes. It was in Q3 as well. I just wanted to make sure I was answering the right question.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [41]

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Yes, I'm just wondering if seasonally we should see a -- I don't know what you call decent, but a nice sequential uptick in that deferred rev number.

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Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [42]

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Yes. We are expecting that, yes.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [43]

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Okay. Good. That would be great. And then maybe one last one I -- if I could, and it's probably for Andres. When you think about next year and the little bit less than 40% subscription growth, and I know it's early in the planning process, but is there any way today to at least qualitatively talk about how much -- to achieve that target, how much of that would just come from natural productivity improvements of the sales force that you've added this year incrementally in terms of heads? But even sales force you've had for a while? And then how much of that would have to come from kind of net new hiring?

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Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [44]

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Yes. I would tell you that the majority of that's going to come from what we've already hired and what we will hire in Q4. So if you think about typical rep productivity, it's about 6 months. So you do get some benefit from the first 6 months of hiring. But the majority of your benefit is from the hiring that was done this year. So we feel in a good place. And as we talked in Q2, we accelerated some of the hiring into Q2, which is actually giving us more time to onboard and drive rep productivity this year, which should help us drive better execution into next year. So I would tell you look, as we look at our pipeline, the momentum, the sales team and the strength of the organization, we feel pretty good about next year.

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Operator [45]

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Our next question is from Tyler Wood with Northland Securities.

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Tyler Jacob Wood, Northland Capital Markets, Research Division - Analyst [46]

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Just one from us. When you look at the strength on the B2B side of the business, is there any particular verticals that you see standing out or it just generally has been stronger than you would have expected?

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Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [47]

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Yes. I would tell you, commodity-driven industry some of the B2B have been very strong, chemicals in energy, especially on the fuel side, has been -- fuels, lubes has been very strong, food. So I would say the commodity-oriented. We've seen some in the utility side, which is a new industry for us. But in a lot of the commodity-driven industries, we've seen very good strength. But overall, I would tell you across all of our strategic B2B industries, we're seeing good strength.

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Operator [48]

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Our next question is from Pat Walravens with JMP Securities.

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Patrick D. Walravens, JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst [49]

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So I'm going to go big picture. So what is the biggest challenge that customers have in getting value from your pricing solutions? Is it the data? Is it having the right people do the services? Is it understanding where to apply it? And Andres, how has that maybe changed over the last few year?

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Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [50]

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Yes. I would say look, historically it was getting access to the data and getting the base configuration of the solution in place. I would say today that's been massively improved through our cloud solutions. So really getting to value is not as complex as it ever was. Historically, with our guidance solution, the micro segmentation was done off-line and that required more effort from a services perspective. But now that's all based on machine learning algorithms that is instantaneous. Once they load data, they can auto-segment and drive guidance out. So I would say, look, the effort to drive value today has -- is much easier. I would say in everything, as large organizations look at driving pricing strategy changes because remember, a lot of the guidance is based on how you price historically and willingness to pay historically. But it brings a lot of opportunities now that you have segments and you have peer groups to compare, to drive pricing strategy changes. And I would say the change management of driving adoption within the sales organization, getting them to drive confidence in using the guidance, that's an area that we put a lot of effort and our partners do as well with our customers to ensure they drive the full value, but it's not the technical perspective, it's more the business change management.

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Operator [51]

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Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to Shannon Tatz for closing remarks.

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Shannon Tatz, PROS Holdings, Inc. - Senior Director of IR [52]

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Thank you for joining today's call. We look forward to speaking with you this quarter as we will be marketing in Baltimore, Los Angeles and San Francisco. We also plan to attend the Stifel One-On-One Growth Conference in Chicago; the Needham SaaS one-on-one day in San Francisco and the RBC Capital Markets Global TIMT Conference in New York City. Finally, please save the date for our 2020 Outperform customer conference, which will be held from October 6 through October 8 in Orlando. If you have questions, please contact us at ir@pros.com. Thank you, and goodbye.

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Operator [53]

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This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.