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Edited Transcript of PRO.N earnings conference call or presentation 29-Oct-20 8:45pm GMT

·32 min read

Q3 2020 Pros Holdings Inc Earnings Call HOUSTON Nov 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Pros Holdings Inc earnings conference call or presentation Thursday, October 29, 2020 at 8:45:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Andres D. Reiner PROS Holdings, Inc. - CEO, President & Director * Shannon Tatz PROS Holdings, Inc. - VP of Strategy and IR * Stefan B. Schulz PROS Holdings, Inc. - Executive VP & CFO ================================================================================ Conference Call Participants ================================================================================ * Chad Michael Bennett Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst * Elizabeth Mary Elliott Morgan Stanley, Research Division - Research Associate * Jackson Edmund Ader JPMorgan Chase & Co, Research Division - Analyst * Jason Vincent Celino KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst * Joshua Christopher Reilly Needham & Company, LLC, Research Division - Associate * Robert Edward Simmons RBC Capital Markets, Research Division - Assistant VP * Thomas Michael Roderick Stifel, Nicolaus & Company, Incorporated, Research Division - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to the PROS Holdings Third Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Shannon Tatz, Vice President of Investor Relations. Please go ahead. -------------------------------------------------------------------------------- Shannon Tatz, PROS Holdings, Inc. - VP of Strategy and IR [2] -------------------------------------------------------------------------------- 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. Consistent with how our global teams are operating today, the 3 of us are hosting this call from our homes. Please note that some of the commentary today will include forward-looking statements, including, without limitation, those about our strategy, future business prospects and market opportunities and our financial projections. Actual results could differ materially from such statements in our forecast. In particular, there is significant uncertainty around the duration and impact of the COVID-19 pandemic. This means that results could change at any time and the contemplated impact of COVID-19 on the company's business results and outlook is the best estimate based on the information available as of today. For more information, please refer to the risk factors described in our SEC filings. PROS assumes no obligation to update any forward-looking statements to reflect future events or circumstances. As a reminder, during the call, we will discuss non-GAAP metrics. Reconciliations between each non-GAAP measure and the most directly comparable GAAP measure, to the extent to which available without unreasonable effort, are available in our earnings press release. With that, I'll turn the call over to you, Andres. -------------------------------------------------------------------------------- Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Thank you, Shannon. Good afternoon, everyone, and thank you for joining us on today's call. On behalf of PROS, we hope that you and your families continue to stay healthy and safe. The pandemic has impacted our customers and our business, but I'm incredibly proud of how our team is executing and supporting our customers. I'm pleased to report that even in this particularly challenging macroeconomic backdrop, we beat our revenue and profitability guidance last quarter. These results reflect our commitment to our mission of helping people and companies outperform and the incredible value our digital selling solutions provide. Our vision is to be the AI platform that powers digital selling, and companies across industries now recognize that selling digitally is essential to win in today's new reality. In the first few months of 2020, e-commerce penetration in the U.S. rose from 16% to 33%, according to industry analysts. There has been more growth in the past few months than the whole last decade. This rapid shift in buying behavior creates an incredible opportunity for companies that embrace self-service, and we're uniquely positioned to power omnichannel selling with our AI pricing and selling solutions. Our leading AI platform that powers digital commerce continues to set the pace of innovation, and we're laser-focused on helping our customers win in this digital era. At our Outperform Customer Conference earlier this month, we unveiled many new digital commerce innovations. Like most companies, we held our conference virtually this year. While I missed connecting with everyone in person, it was amazing to have more than 5,000 registrants from over 1,000 companies to hear about our latest innovations in digital selling thought leadership. This kind of reach simply wasn't possible before, and the strong turnout we had for Outperform is a testament to the importance of PROS in powering digital commerce today. During the event, we released our next-generation dynamic pricing capabilities for B2B commerce to accelerate companies' shift to digital commerce. Our innovative algorithms enable companies to quickly deliver dynamic, market-driven prices across online, low-touch and no-touch channels. This next-generation solution gives companies the ability to harmonize between negotiated and non-negotiated channels to win in their markets and deliver a great customer experience. We were also excited to announce the expansion of our relationship with Adobe. Adobe has been an incredible customer, and we look forward to expanding our partnership with them after releasing our Magento Accelerator, joining the Magento Marketplace. Now our joint customers can power their online channels with our market-leading digital commerce platform. For travel customers, we showcased dynamic, class-free pricing, which is a first in the industry. This innovation enables airlines to better identify passengers' willingness to pay by delivering dynamic pricing along a continuum and removing the limitations historically imposed by fare classes. Additionally, we released our latest innovation for group sales to help airlines address the challenges of today. Our latest innovations offer extended reservation windows with refund and change capabilities so airline customers can provide group travelers with increased flexibility and a great customer experience. Innovations like these are helping companies better serve their customers in adapting in an ever-changing market. Now I'd like to share a few customer examples from the third quarter. Last quarter, we welcome Diversey as a new customer. Diversey is a global leader in hygiene, infection prevention and cleaning solutions that is playing a critical role in helping businesses and facilities reopen safely. Diversey selected our Guidance and Opportunity Detection solutions to personalize their offers and prices based on their customers' unique needs. We're incredibly proud to partner with Diversey and help them adapt their business to capture growth opportunities. Last quarter, we also expanded with existing customers. For example, a leading international health diagnostics provider chose to migrate to our Smart CPQ and Guidance solutions. With our technology, the company plans to deliver a better customer experience to physicians, hospitals and clinics to ensure their patients across the world receive diagnostics such as COVID tests faster. Final example of our customers leaning into self-serve is Qatar Airways. Qatar Airways has been a customer for more than 2 decades and last quarter, chose to migrate to our next-generation Group Sales Optimizer and OneSearch solutions. With these solutions, Qatar Airways will be poised to deliver a frictionless self-serve booking experience for group travelers across the world in advance of the FIFA World Cup in 2022. These are just a few examples of how we're helping our customers reimagine how they sell to win in the digital era. Now I'll shift to comment on the pace of our business. While we continue to feel the effect of COVID, in B2B, our pipeline continues to grow, and the market demand is improving over the first half of the year. We're focused on helping customers start smaller and achieve faster time to value. In travel, our main focus continues to be supporting airlines on their way to recovery. Our logo retention with airline customers remains best-in-class, which is a testament to the significant value that our solutions provide. The ongoing impact of COVID is putting some pressure on the dollar-based retention associated with our travel customer renewals, which Stefan will cover in more detail. Overall, we're pleased with how we're continuing to deliver on our mission. We're excited about the new innovations we're bringing to market that will help us lead in the area of digital selling and capture our attractive market opportunity. I want to thank our amazing global team for your unwavering commitment to our customers, and thank our shareholders, partners and customers for your continued support of PROS. With that, I'll turn the call over to Stefan to cover our financial performance and business outlook. -------------------------------------------------------------------------------- Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [4] -------------------------------------------------------------------------------- Thank you, Andres. I, too, would like to extend my best wishes to everyone on today's call and to your families. Also, thanks to all of you who attended our virtual Outperform conference. If you weren't able to join, all of the sessions are available online, and several sessions feature more information on the new innovations Andres mentioned in his prepared remarks. I'd like to congratulate our marketing team for successfully executing our first-ever fully virtual customer conference and driving more than a 600% increase in event registrants year-over-year. Now turning to the third quarter. Our subscription revenue was $42 million, increasing 9% year-over-year. Total revenue was $61.5 million, representing a decline of $2.6 million year-over-year. Our recurring revenue as a percent of total revenue was 86%, which was our highest quarterly mark to date. The recurring portion of our deferred revenue was $105 million, up slightly sequentially, and our trailing 12-month calculated billings increased 3% year-over-year. Moving on to our profitability metrics. Non-GAAP subscription gross margins were 71%, down 2 percentage points sequentially, largely due to slightly lower sequential subscription revenues. Non-GAAP total gross margins were 62%, up 1 percentage point year-over-year, driven by improvements to our services gross margin. Our adjusted EBITDA loss was $6.2 million for the quarter, which was better than expected, largely due to higher total revenue than expected and additional cost savings we realized in the quarter. We continue to drive savings across our business from reduced hiring, lower variable compensation, reduced program spend as well as the continued benefit from lower travel expenses as a result of our virtual work environment. We have also taken additional steps to realize the benefit to our sales team of working in a virtual first world. As a result, the number of quota-carrying personnel is down slightly from the beginning of the year, and it's expected to be below 60 by the end of the year. As a result of these actions, we now expect to save a total of $22 million in 2020, which is $4 million above our previous forecast. Our free cash flow burn in the third quarter was $15.7 million, which was slightly below our expectations and was driven mainly from an increase in customer payment deferrals. As of the end of the third quarter, approximately $26 million was included within accounts receivable related to payment deferrals provided to our customers. From a balance sheet perspective, we ended the quarter with a cash balance of $322.4 million, up $102.2 million sequentially due to our successful completion of a convertible debt offering in early September. Net proceeds from this transaction were $120.9 million after the purchase of capped call transactions. Our strong cash balance provides us with great financial flexibility as we look to invest further in our vision of powering digital selling. Now before I cover guidance, I want to cover the continuing impact COVID is having on our business. Many of our customers, especially those in travel-related industries, continue to be significantly impacted by COVID. While we have seen signs of slight improvement in certain areas, it is clear the pandemic continues to impact the global economy, and the impact will last longer than we had originally hoped. The pandemic has impacted several aspects of our business. First, our subscription bookings for new and existing customers this year are anticipated to be down by approximately $25 million from last year. Second, we have responded to some of our hardest hit customers by granting extended payment terms. And as I mentioned earlier, this has had the impact of delaying a total of $26 million in cash collections out of the first 3 quarters of 2020 and into the fourth quarter and into 2021. And finally, in a smaller number of instances, we have agreed to amend previously signed contracts. For example, we agreed to delay some implementations, restructure certain customer agreements and, in one case, agreed to cancel a contract after a customer declared bankruptcy. We currently estimate the annualized revenue impact from these contractual changes could be up to $18 million. We do expect much of this impact to be recovered in future years as our customers rebound from COVID. With this information as added insights into our business, I will provide our guidance for Q4 and the full year 2020. We expect our annual recurring revenue, or ARR, to be between $207 million and $209 million at the end of 2020. Lower estimated in-year bookings, customer bankruptcies and customer contract restructurings are expected to negatively impact ending ARR. Our estimated gross revenue retention rate for the year is expected to be in the range of 88% to 89%. Now absent the impact of COVID, our gross revenue retention rate would be in the 92% to 93% range, which is consistent with our renewal rate from last year. We expect Q4 subscription revenue to be in the range of $41.1 million to $41.6 million, up 2% year-over-year at the midpoint. We expect our full year subscription revenue to be in the range of $168.7 million to $169.2 million, up 16% year-over-year at the midpoint. Again, lower in-year bookings, customer contract restructurings and customer bankruptcies, all resulting from the COVID pandemic, have significantly reduced the growth rate we expected for 2020. We expect total revenue to be between $58.9 million and $59.9 million in the fourth quarter and between $250.5 million and $251.5 million for the full year. We expect our adjusted EBITDA loss to be between $8.1 million and $9.1 million in the fourth quarter and between $31.5 million and $32.5 million for the full year. Our efforts to reduce cost by an estimated $22 million will allow us to minimize the reduction to our adjusted EBITDA loss for the full year. We expect our free cash flow burn to be between $60 million and $65 million for the full year. And this implies a roughly $10 million to $15 million free cash flow burn in the back half of 2020, which is a significant improvement from the first half of 2020, but higher than what we forecasted last quarter and largely driven by the impact of customer payment deferrals that I mentioned earlier. Lastly, with an estimated non-GAAP tax rate of 22% in the fourth quarter, we anticipate a non-GAAP loss per share of between $0.16 and $0.18 per share based on an estimated 43.4 million basic shares outstanding. We realize this pandemic will continue to impact our customers for at least several more quarters. And we are purposely approaching these challenges with a long-term view. We remain committed to delivering value and insights to our customers, and we are confident in our long-term market opportunity as we believe powering digital selling will be more important going forward. We 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? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Tom Roderick with Stifel. -------------------------------------------------------------------------------- Thomas Michael Roderick, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2] -------------------------------------------------------------------------------- Andres, I'll start with you, and I'll just kind of rip some data points from your Outperform user conference, from one of your Brazilian airline operators. But I think they're kind of indicative of what you're probably seeing from a lot of your airline customers around the world. I think the numbers are something like the operator was operating 950 departures a day, that fell to 70 in March and has since recovered to maybe 500 departures a day. But as we sort of look around the world, we're seeing similar modest recoveries, not all the way back to where we were. But they are recovering. So I guess in that context, I'd love to hear how your conversations are going. It looks to me the subscription revenue and the churn numbers that you've given, that you're hanging in there pretty well. I understand it's not an environment where they can necessarily buy net new software and think all that strategically, but what are the discussions like? And when do you think the spending patterns might return, if not to normalcy, at least to some level of growth off this low level? -------------------------------------------------------------------------------- Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Yes. Tom, great question. Yes. I would tell you, look, there's been slight recovery, and they're starting to see some, but it varies by area. We've seen some airlines that have been impacted more than other areas, depending on the region of the world they're in. But overall, I think, look, we've aligned very closely to support them and have very close collaboration with all of our customers. They still see a ton of value from our solutions and the new innovations especially around digital commerce. I talked about it in my prepared remarks, around Qatar expanding with GSO. I think airlines are leaning in much harder to self-serve. As you've seen, many airlines have taken out all senses, which means that you can cancel at any time. And those abilities now -- for them, it's really important that passengers, whether it's group or individual passengers, can be more self-serve. So a lot of our innovation has been focused on how we help them support that in a full, frictionless way to both improve customer experience and as well let them adapt quickly. So overall, let's say, look, the conversations are improving. I think airlines are very focused on building a recovery plan. And we're supporting them through that process as well as helping them think of what the future should be and how we innovate towards that future with our new -- we also launch our new dynamic pricing capabilities that aren't constrained by fare classes, which are going to be very high value to airlines as they bounce back and recover. -------------------------------------------------------------------------------- Thomas Michael Roderick, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [4] -------------------------------------------------------------------------------- Yes. Right. Really, really helpful. And then maybe I can just pivot to the B2B side. The flip side of the down -- the bad news on airlines is we're getting all this data that the GMV on e-commerce platforms like Demandware and Magento were up 90%, 100% this last quarter. That's not likely to maintain forever. But it has, to your point, sort of changed the nature of how people shop. Talk a little bit more about how your B2B customers are leaning in to ancillary complementary solutions on the dynamic pricing side. How much of that is tied to e-commerce purchasing? And how much of it can actually be tied to GMV and downstream behavior that results from just more transactional activity amongst your existing customers. -------------------------------------------------------------------------------- Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [5] -------------------------------------------------------------------------------- Yes. So on B2B, we're seeing strong logo wins. And what we're seeing, especially in this area of driving CPQ and our PROS Guidance solution, looking at use cases beyond powering your typical negotiated channels. And I talked a little bit about this in my prepared remarks, but we're seeing companies think about e-commerce and marketplaces, and that being a very strategic area. We launched both our Magento Connector, this last quarter, we also launched our PROS Guidance and Control solution with the SAP Commerce platform as well, both in their marketplaces, predominantly, due to what we see demand of a lot of companies in B2B thinking not just how they support B2B commerce but some of them, from a brand perspective, looking at direct-to-consumer models as well, where we brought a lot of experience historically. And frankly, we're one of the -- probably the only company that can help B2B companies as they think of the B2C model and the direct-to-consumer from a digital perspective. So those areas are areas that we see resonating in the market, in companies kind of looking at focusing more on those areas than just the direct sales model. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- The next question comes from Stan Zlotsky with Morgan Stanley. -------------------------------------------------------------------------------- Elizabeth Mary Elliott, Morgan Stanley, Research Division - Research Associate [7] -------------------------------------------------------------------------------- This is Elizabeth Elliott on for Stan. I was wondering if you could provide some color on the B2B selling cycles. Last quarter, you mentioned there was some lengthening of sales cycles. So curious kind of how that's changed this quarter and what your customer conversations are like and what you're expecting for trends next quarter. -------------------------------------------------------------------------------- Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [8] -------------------------------------------------------------------------------- Yes. That's a great question. So we've seen a slight improvement from what we saw in the first half. So still, I would say, not back to what it was pre-COVID, but definitely we saw a positive uptick in Q3. And we're seeing a lot of organizations, I think, were trying to understand how COVID was impacting them, also trying to understand what they needed to do internally to help support their customers and their go-to-market. And we're seeing more of them now wanting to take action and move forward. We also did quite a bit of innovation in areas where we allow them to land in much smaller scope, with much faster time to value, and we're seeing this resonate well in the market as well. -------------------------------------------------------------------------------- Elizabeth Mary Elliott, Morgan Stanley, Research Division - Research Associate [9] -------------------------------------------------------------------------------- Great. And then just as a follow-up, digging more onto the travel side. Curious, do you still expect to see 2021 as the year we could see bookings start to return here? -------------------------------------------------------------------------------- Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [10] -------------------------------------------------------------------------------- Look, I would say it's still premature. We would hope that going into 2021, the environment continues to improve and their load factors continue to increase. But I would say, at this point, it's still premature to call out and say that travel will be back to historical norms next year. We see things slightly improving, and we're continuing to monitor. But it's still, I would say, premature to call out 2021. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Next question comes from Aleksandr Zukin with RBC Capital Markets. -------------------------------------------------------------------------------- Robert Edward Simmons, RBC Capital Markets, Research Division - Assistant VP [12] -------------------------------------------------------------------------------- This is Robert Simmons on for Alex. I wonder if you could give us a little more color on your customer bankruptcy situation. Like how much of your base has actually filed for bankruptcy, either a 7 or 11? And then what have you seen so far in terms of them continuing to pay you through Chapter 11? -------------------------------------------------------------------------------- Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [13] -------------------------------------------------------------------------------- Yes. So Robert, this is Stefan. I'll take that. We really haven't seen any increases in bankruptcies in the last quarter. So the number we were looking at and the impact that we were thinking about at the end of last quarter is very similar to what we're seeing now. So that number remains to be the same. And in terms of as a percentage of the total, it's a very small percentage. So I think last time we talked about it was 8 bankruptcies, but we had -- unfortunately had missed one. So it's really 9. It was a small one, but it had been factored into the calculus. So right now, it's 9 customers that we've seen with an impact, which is consistent with where we were last quarter. -------------------------------------------------------------------------------- Robert Edward Simmons, RBC Capital Markets, Research Division - Assistant VP [14] -------------------------------------------------------------------------------- And have you been able to be designated as -- what was the term, mission critical or business critical? Anything you can give there. -------------------------------------------------------------------------------- Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [15] -------------------------------------------------------------------------------- Yes. So I think last quarter, we had talked about the fact that there was one of the bankruptcies where they had to leverage the rules on bankruptcy to cancel the contract. To date, that's the only time that's happened. And so all the other 8 in this case have continued to use us. And I think the term is -- critical vendor, I think, is the term you're looking for. And in many cases, we haven't been that, but not in all. But that doesn't necessarily determine whether or not they're going to continue to use us or not. It just really depends on how they're going to handle the pre-petition payments that are due. And -- but in all cases, other than that one, our customers are continuing to work with us and continuing to pay their bills, actually. -------------------------------------------------------------------------------- Robert Edward Simmons, RBC Capital Markets, Research Division - Assistant VP [16] -------------------------------------------------------------------------------- Okay. Great. And then can you just talk a little bit about what you've seen by geography? Like how is Asia performing, Europe, the Americas, where things are getting better or worse? -------------------------------------------------------------------------------- Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [17] -------------------------------------------------------------------------------- Yes. I'll handle that. What we've seen is -- Europe, we've seen perform well. It's been one of the areas that frankly we're pleased with how it's been performing. And we're continuing to see strong demand coming out of Europe. Areas that we have seen the impact have been most, rest of world and the Americas. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Next question comes from Jackson Ader with JPMorgan. -------------------------------------------------------------------------------- Jackson Edmund Ader, JPMorgan Chase & Co, Research Division - Analyst [19] -------------------------------------------------------------------------------- Great. First one on the sales reps and the expected decline here toward the end of the year. As you look at maybe the start of 2021, the remaining cohort of reps, any sense you can give us for the tenure of those reps compared to maybe the cohort that started out in 2020? And then just a quick follow-up, on those same sales reps, I assume the mix will be more heavily weighted toward B2B than they were at the beginning of the year. But any color you can give there as well would be great. -------------------------------------------------------------------------------- Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [20] -------------------------------------------------------------------------------- Yes. So a couple of points. So the changes that Stefan talked about in terms of reduction to quota-carrying personnel, all of that has happened early in the fourth quarter. And predominantly, it has been some positions that we eliminated on the travel side and some performance-oriented. And for us really was preparing for getting an advanced preparation for 2021. So in terms of average tenure, no major changes in that. We have a pretty strong sales team continuing to build it. We expect to continue to invest in the sales organization but start preparing for 2021. -------------------------------------------------------------------------------- Jackson Edmund Ader, JPMorgan Chase & Co, Research Division - Analyst [21] -------------------------------------------------------------------------------- Okay. Great. And then a follow-up on -- there was a press release, the ANA press release the other day or the other week about their kind of move to the cloud, was this something that was planned all along? Was it actually accelerated because of the need for digitalization because of the pandemic? Did it factor into their decision at all? -------------------------------------------------------------------------------- Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [22] -------------------------------------------------------------------------------- Yes. This was a very strategic initiative for them that started early and was very important for them to continue and go live during COVID. And I would tell you that this was a very strategic initiative for them. They wanted to be able to leverage our latest generation technology and our latest generation science. And we work hand-in-hand. This was one that I commented that we did fully virtual go live, jointly between organizations and was a very huge success amongst both of our teams, ANA and our team. But it was a very strategic initiative for them. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Next question comes from Jason Celino with KeyBanc. -------------------------------------------------------------------------------- Jason Vincent Celino, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [24] -------------------------------------------------------------------------------- One for Andres. You talked about companies leaning into online, low-touch and no-touch channels. Which of these modes do you think have more immediate opportunities or where you're seeing the most interest? And then maybe can you tie into which PROS solutions would be used for these? -------------------------------------------------------------------------------- Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [25] -------------------------------------------------------------------------------- Yes. So we're seeing -- both areas, we're seeing organizations leaning to how they're supporting more of a low-touch by leveraging our guidance and CPQ solutions, both for traditional negotiated channels as well as partner or e-commerce. And in terms of the solution mix, where we're seeing a lot and where we've seen an incremental is selling the CPQ and our Guidance solution combined. So really getting our integrated platform to help support both the negotiated and non-negotiated channels. -------------------------------------------------------------------------------- Jason Vincent Celino, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [26] -------------------------------------------------------------------------------- Okay. Great. And then one quick one for Stefan. When we think about visibility, I know things are still pretty cloudy. But what are some internal processes that you're implementing at your, like, your sales teams and your pipelines to kind of project future opportunities, and then your kind of confidence maybe today and visibility versus 3 months ago? -------------------------------------------------------------------------------- Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [27] -------------------------------------------------------------------------------- Yes. I think when Andres talked about the cycle times and some of the things we're doing around our -- kind of shifting our B2B focus from, say, larger transactions to more land opportunities, those are -- those typically are higher, predictable transactions because they're not -- they don't require as much of an approval process from the customer. And so that's giving us a better feel for how the future is going to look. It also derisks some of the transactions. Because as you might imagine, larger transactions typically are less predictable because there are, even in normal times, more of an approval process. So I think the land motion that we really started to develop in the third quarter and we're seeing moving forward into Q4 and beyond, I think that's just going to help us get a better feel of how that pipeline is going to convert. And so Q3 was the first one that we saw that, and to Andres' point, we did see some momentum coming from it. And ideally, we'll continue to see that as we go into the fourth quarter as well. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- Our next question comes from Chad Bennett with Craig-Hallum. -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [29] -------------------------------------------------------------------------------- So maybe for Stefan first. So a couple for me. Just on the $26 million and the kind of payment-related relief you gave customers that's reflected in account receivables and the $18 million in, I think, amendments you indicated to contract terms. I guess are those numbers -- I assume they're reflected in the billings or deferred revenue on the recurring side. But are they also reflected in your year-end ARR number? Or are they still in that number? -------------------------------------------------------------------------------- Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [30] -------------------------------------------------------------------------------- Yes. So good question, Chad. Just for clarity, the $26 million, if you will, deferral of payment terms, those would be in the ARR number, and they would be in the calculated billings number. So they're invoiced, and they would be counted. The other component, the $18 million number that you're referring to, in many cases, is not. In some cases, it may be. In many cases, it will not be included because we will not have billed it. -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [31] -------------------------------------------------------------------------------- And that wouldn't be in the ARR obviously. -------------------------------------------------------------------------------- Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [32] -------------------------------------------------------------------------------- That is correct. That is correct. -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [33] -------------------------------------------------------------------------------- And then do we -- I guess in terms of heading into year-end, do we anticipate kind of more of this kind of headwind or activity for the next quarter or 2? Or do you think the worst is behind you? -------------------------------------------------------------------------------- Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [34] -------------------------------------------------------------------------------- I'd love to say the worst is behind us. I can certainly tell you we have been -- we have a customer success team that has been really working hard to work with our customers and find ways not just structurally from a contract perspective, but how we can actually come beside them and work with them in the new reality that we're all working with. So there's been a tremendous amount of work put together to help our customers along during this time period. So I would tell you, we're pretty engaged with our customers in that regard. And so we certainly have had conversations with just about all of our customers at this point. I think the question really remains, how long is this going to continue to play itself out? I think one of the questions that came up earlier is, when do we see passenger boarding metrics start to get closer to where they were pre-pandemic. And it's just really hard to say. We're seeing some improvement, but we still have a ways to go before we get there. -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [35] -------------------------------------------------------------------------------- And then maybe one last one for me. Just in the $22 million in cost savings you cited, I think, thus far, but maybe for the full year. I mean OpEx was kind of flattish sequentially on a dollar basis. How much of that is reflected in the P&L? And how much is ahead of us? -------------------------------------------------------------------------------- Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [36] -------------------------------------------------------------------------------- So the $22 million number is actually from Q2 through Q4. So that's where the bulk of it is -- well, that's where all of it is going to be generated. And it is -- you should see quite a bit of it coming in the fourth quarter. So not quite -- a little bit more than 1/3, let's put it that way... -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [37] -------------------------------------------------------------------------------- Got it. -------------------------------------------------------------------------------- Stefan B. Schulz, PROS Holdings, Inc. - Executive VP & CFO [38] -------------------------------------------------------------------------------- Of those savings, you'll find them in Q4 -- and by the way, Chad, real quick. Just to clarify. This is versus what we were -- what we had guided to spend at the beginning of the year, not necessarily off of what we spent last quarter. So just to make sure we're -- the reference point is the same. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- Next question, Josh Reilly with Needham. -------------------------------------------------------------------------------- Joshua Christopher Reilly, Needham & Company, LLC, Research Division - Associate [40] -------------------------------------------------------------------------------- This is Josh on for Scott. What kind of interest are you seeing from clients in adopting the dynamic pricing for airlines following that product launch that outperformed? Do you think that COVID will accelerate the time line's move away from the fare class system? And then how do you think the big 3 will adjust their pricing strategy for the current market environment? -------------------------------------------------------------------------------- Andres D. Reiner, PROS Holdings, Inc. - CEO, President & Director [41] -------------------------------------------------------------------------------- Yes. So I would tell you that there's a lot of interest. I think airlines right now, the biggest challenge is that they're still on very light staff. And from an internal people standpoint, they don't have the resources to embark on a new initiative. But there's definitely -- there was a very positive reception to or new willingness to pay algorithms. And I believe that as they start coming back, bringing some of the employees back from furlough, we will see strong interest coming up. But right now, it's hard to predict when that will be. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- Ladies and gentlemen, we have reached the end of the Q&A session. I would like to turn the call back to Shannon Tatz for closing remarks. -------------------------------------------------------------------------------- Shannon Tatz, PROS Holdings, Inc. - VP of Strategy and IR [43] -------------------------------------------------------------------------------- Thank you for listening to today's call. We look forward to speaking with you at conferences and events this quarter. As Stefan mentioned, a playback of our content from our Outperform Customer Conference is available on our website. This quarter, we will be attending the Stifel Midwest growth conference on November 11, the RBC Capital Markets global TIMT conference on November 18 and the Needham SaaS conference on November 19. We will also be marketing virtually with Baird in December. If you have any questions following today's call, please contact us at ir@pros.com. Thank you and goodbye. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.