Charles Murphy – EVP and CFO Andres Reiner – President and CEO.

Scott Berg – Northland Capital Markets Bhavan Suri – William Blair & Company Chad Bennett – Craig-Hallum Capital Group Greg McDowell – JMP Securities.

Good day. And welcome to the PROS Holdings Incorporated Second Quarter 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Charlie Murphy, Executive Vice President and CFO. Please go ahead, sir..

Thank you, operator. Good afternoon, everyone and thank you for joining us today for the PROS Holdings' financial results conference call for the second quarter of 2014. This is Charlie Murphy, Executive Vice President and Chief Financial Officer of PROS. Joining me on today's call is Andres Reiner, President and Chief Executive Officer.

In today's conference call, Andres will provide a commentary on the second quarter 2014 and then I will review the financial results and our outlook before we open up the call to questions.

Before we begin, we must caution you that some of today's remarks, including our guidance for the year, our competitive position, future business prospects, revenue growth, market opportunities, as well as statements made during the question-and-answer session contain forward-looking statements.

These statements are subject to numerous and important factors, risks and uncertainties, which could cause actual results to differ from the results implied by these or other forward-looking statements.

Also, these statements are based solely on present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements.

Additional information concerning risk and other factors that may cause actual results to differ can be found in the Company's filings with the SEC. Also, please note that a replay of today's webcast will be available in the Investor Relations section of our website at pros.com.

Finally, PROS has provided in its earnings release and will provide in this conference call forward-looking guidance on a non-GAAP basis. We will not provide any further guidance or updates on our performance during the year, unless we do so at a public forum.

PROS does not assume any obligation to update the forward-looking statements provided to reflect events that occur, or circumstances that exist, after the date on which they are made.

I would also like to point out that in addition to reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP, PROS reports certain non-GAAP financial results.

Investors are encouraged to review the reconciliation of each non-GAAP measure to the most directly comparable GAAP measure in the tables accompanying the press release distributed earlier today, which can also be found on our website in the Investor Relations section. With that, I'd like to turn the call over to Andres..

Thank you, Charlie and thanks to all who are joining us on today's call. I'm pleased to report that we had a strong second quarter, with non-GAAP revenue exceeding the high end of guidance at $46.5 million. The 31% year-over-year increase, non-GAAP operating income was $3.5 million and non-GAAP EPS was $0.06 per share.

I'm proud of our entire team of PROS for delivering these results; tapping off a strong first half. I'm pleased to share that our bookings growth in the first half outpaced revenue growth, both in an organic basis and at total basis. This growth was driven by record number of deals in the first half, of which approximately 70% were new customer wins.

We believe this indicates increasing momentum in the market and is further substantiated by continued increase in demand and a strong pipeline. I would now like to share, a few business highlights from the second quarter.

In terms of new customer growth or big data applications were selected a number of new customers in the quarter including Anixter International, Perstorp, Stahl, Qantas Airways, and YRC Worldwide, among others. I would like to highlight Perstorp as a particular example of how PROS can help company's outperformed in the market.

Perstorp is specialty chemical company in Sweden is in a highly competitive environment and has made a commitment to winning by better accommodating the needs of their customers; to do this they turned to PROS to help them better understand and anticipate their customers' needs and preferences.

Our big data applications integrated with Perstorp's SAP ERP solution will recommend products and prices best suited for each customer. All in real time to ensure a smoother and faster customer experience. We look forward to helping Perstorp achieve and exceed their objectives.

In the second quarter, we also continue to strengthen and extend our partnerships with existing customers such as Etihad Airways, Mopar and Swiss among others. We are pleased that our customers are capitalizing on our continuous innovation to help them outperform in their markets.

I would like share an example, PROS was selected by Hewlett Packard to help them increase wins reduce turnaround times and increase margins. HP was facing stiff competition that continually undercut [ph] HP's prices and provided fast turnaround on quotes.

The HP team, non-believers in the power of big data to inform faster and smarter business decisions turned to PROS to provide real time targeted price quotes on a deal by deal basis based on our patented data science technology.

The results are impressive, by empowering there seems with real time and fact these quotes, HP reduce their quote response time by more than 25%, up in from hours to minutes. The results was more wins for HP and their partners and a better buying experience for customers. The financial impact is even more impressive.

On deals, where PROS was leveraged, HP realized a relative margin expansion in excess of 200 basis points. this is what happens when companies leverage big data to better understand their customer's unique buying preferences and to provide a better buying experience. We are pleased that PROS Solutions are contributing to HP's turnaround strategy.

We focus on creating a more nimble and more customer and partner-centric company that can successfully compete across a rapidly changing IT landscape. We have numerous examples as well. With our travel customers outperforming in their market.

For example, Eric Transport world recently reported their rankings of the largest and most profitable airlines in the world and we are proud that 18 of the 25 largest airlines by revenue and 16 of the 25 most profitable airlines are PROS customers. Similarly, SkyTracks recently announced top 10 best airlines in the world is voted on by customers.

Each of the top 10 is a PROS customer including Cathay Pacific at number one. We are honored to have so many world class customers in the travel industry. We will continue investing in this market to help our customers outperform and achieve a long-term growth objectives. From the people standpoint in the second quarter.

We continue to add breadth, depth and focus to our leadership team with the addition of Jake Cleveland as our Senior Vice President of Worldwide Sales. Jake joins PROS following 25-year career with EMC Corporation, where he most recently served as Senior Vice President of Global Sales Strategy for the office of the Vice Chairman.

At the same time, we also announce that Chris Jones, who previously Lead Sales has taken on a new strategic role as Senior Vice President of Alliances and Partners.

Our Partner ecosystem is an important part of our growth strategy and we are pleased that we are seeing the number of opportunities coming in from SI Partners increase in each of the last four quarters.

Chris success in driving sales over the past four years and his institutional knowledge of PROS give him a unique and powerful perspective to continue to accelerate our partnership opportunities. Chris has rescaling our leadership team. We continue to scale our direct sales team.

We finish the second quarter with 55 quarter carrying personnel up 31% over the same period last year. Our sales execution is improving; we are pleased that Europe met our expectations in the second quarter. We expect the same for the second half of the year, as we continue to invest in hiring, on boarding and training programs.

Our acquisition integration are progressing as planned with our team operating under a unified go-to-market strategy. Demand for CPQ solutions is up, driven by our strong footprint in the US as well as our investments to accelerate awareness and adoption in the salesforce.com community.

In the second quarter, we were leading sponsor at seven Salesforce1 World Tour events in the US and Europe. During the key note session at the Paris event, we demonstrated how our CPQ solution on the Saleforce1 platform help our customers; sales reps optimize the opportunity to revenue process.

Enabling them to deliver faster quotes and improved sales effectiveness directly from mobile devices. We will continue to invest in driving awareness and adoption in the CPQ market to deliver what we believe is a unique and powerful value proposition. I would now like to comment on two factors that are impacting our near term growth.

The variability in the timing of implementation and the mix of recurring business. In the second quarter, we experience higher than normal variability on the timing of some implementation due primarily to changes in customers internal operations. Shifting revenue from those projects out of 2014 into 2015.

Part of our partnership approach with customers to work through any unexpected challenges they face. And sometimes, that means with subject to time line changes. Unfortunately, we had more this occurred in the second quarter than normal. We believe this was an anomaly and this reflect the positive momentum we are seeing in other parts of the business.

We expect third and fourth quarter implementation timings to return to historic norms. The other factor impacting our near term growth is the mix of recurring business, which exceeded our expectations in the second quarter.

while this modestly dampens near term revenue, growth in recurring revenues and pouring long-term objective and we remain focus on the fact that PROS continues to be selected by world class companies. Even with the impact of these events on near term.

We remained confident in our full year, given the tailwinds created by our strong first half bookings. The performance of our acquisitions and our strong pipeline.

We recognized that our business is changing and we believe it's changing for the better, as we expand or reach into new markets innovate with new products, we expect to add more recurring revenue. In fact, we expected to increase recurring revenue as a percentage of annual revenue from 38% in 2013 to mid-40% in 2014.

Mid-way through the year, we are already at 43%. This is good for long-term visibility and for their overall health of the business. Coming out of the first half, the fundamentals of our business are strong and we remain confident, we will grow 20% plus full year over the long-term.

Our team is deeper and broader; our portfolio of world class customer is growing. Our pace of product innovation continues. Our partner ecosystem is strengthening and our acquisitions are performing well.

We will continue to invest in accelerating awareness in adoption, extending our product leadership position and expanding, our global reaching scale to capitalize on the large market opportunity.

I will now turn the call over to Charlie, so he can provide you with a review of our financial results and our outlook for the third quarter and full year 2014. .

Thanks, Andres. I will be discussing our financial results on a non-GAAP basis. Our full GAAP to non-GAAP reconciliation is included in our earnings release which can be found on our website in the Investor Relations section.

I want to point out, that we have revised the presentation of revenue and cost of goods sold in our income statement to report license, services, subscription and maintenance revenue as separate line items. With the change in our business over the last several quarter. we believe, this is a more meaningful information and helpful to investors.

We are pleased with our performance in the second quarter, with total non-GAAP revenue of $46.5 million exceeding the high end of our guidance and an increase of 31% from a year ago.

As Andres noted, our bookings for the first half of the year have been strong going faster than revenue on both on organic and a total basis versus the prior year period, which gives us confidence in our business overall.

The $46.5 million of non-GAAP revenue was made up of $8.3 million from acquisitions and $38.2 million from our organic business and 8% organic growth over the same period in the prior year, consistent with our expectations.

We are pleased with the revenue contribution from our acquisitions, as a reminder we are now operating the business as one PROS with a single sales force and our operating Cameleon, CPQ products in place of our legacy PROS quoting solutions.

In addition, as expected our organic revenue growth rates continue to be impacted by the relative increase and recurring revenue bookings in the fourth quarter of 2013 and the first half of 2014, which are expected to be recognized over multiple years.

While the first half of the year approximately 25% of our bookings excluding maintenance from recurring business, which was significantly higher and during the same period in the prior year. We are pleased with this ongoing trend, which does have a negative short term impact on our organic revenue growth, but adds to longer term visibility.

License revenue was $12.3 million, an increase of $2.6 million up 27% from a year ago. License revenue recognized when contract execution is in line with our expectations and was approximately 12% of revenue for the quarter. as a reminder, this revenue does not go into our backlog, our backlog revenue metrics disclosed to year end.

Services revenues was $14.2 million, an increase of $1.7 million up 13% from a year ago. Our services growth was impacted by the timing of implementations as Andres previously commented on. In addition, our partners are taking on a greater portion of implementation services.

For the second quarter, subscription revenue is comprised of cloud services, SaaS and term license contracts was $6.6 million, an increase of $4.6 million or 239% increase over the prior year. Our acquisitions for the primary contributed to our subscription revenue growth.

Maintenance revenue was $13.4 million and increased 18% over a year ago and represented the largest component of revenue from recurring sources. Total recurring revenue represented 43% of total revenue driven by both organic and inorganic sources. This compares to 37% of total revenue in the prior year.

As I mentioned, a few moments ago our bookings growth for the first half of the year has been strong and our current organic revenue growth rates are not reflective of this positive trends.

If you were to normalize the bookings from the last several quarters, which have been more recurring in nature, normalized for the increase in services going to our partners and factor out the increase in license and contract revenue, our organic revenue growth rates would be approximately 16% significantly higher than our reported revenue growth.

Non-GAAP gross margins in the second quarter were approximately 70% as compared to 71% in the second quarter, 2013. Total gross margin vary from period-to-period primarily due to the level of implementation services required relative to the total contract value and the timing of license revenue recognition.

Total non-GAAP operating expenses for the quarter were $29 million compared to a $20.4 million a year ago, an increase of 43%. Non-GAAP operating income in the second quarter $3.5 million compared to a $4.9 million a year ago. Non-GAAP operating margins for the quarter were approximately 8%.

Our non-GAAP operating income exceeded guidance primarily as a result of revenue outperformance. I would also like to note, in addition to our non-cash stock-based compensation expense of $5.9 million that has been excluded from our non-GAAP results.

We now of amortization of intangibles, the impairment charge and acquisition and integration related expenses which are also excluded from our non-GAAP results, which total $5.5 million.

The non-GAAP effective tax rate for the second quarter was approximately 40% comparable 27% last year resulting a non-GAAP net income of $1.8 million for the quarter, a decrease from $3.5 million in the prior year. The increase in the effective tax rate is primarily because this year, there is no research and experimentation tax credit.

Non-GAAP earnings per share exceeded guidance and were $0.06 per share compared to $0.12 per share a year ago.

Before turning to our GAAP earnings, I want to discuss an impairment which is impacting our GAAP loss per share in the second quarter by $0.05 as result of integration Cameleon in our operations and product line, we have determined that the carrying value of certain internally developed software on our balance sheet should be reduced and expense is reflected in our second quarter financial statements.

GAAP earnings per share for the quarter were a loss of $0.24 compared to a profit of $0.02 per share a year ago. The decrease is primarily from the south [ph] of the impairment, I just mentioned.

The acquisition related expenses including amortization of intangible, acquisitions and integration related cost and increase in non-cash stock-based compensation expense.

Now moving to the balance sheet, we ended the second quarter with unrestricted cash and cash equivalence of $30 million, a decrease of $16.8 million from the end of the first quarter. at quarter end, there was restricted cash in our balance sheet of $2.5 million related to the Cameleon software tender offer. We now own approximately 93% of Cameleon.

Capital spending to the second quarter which includes infrastructure and facility improvements was $3 million. We expect capital spending in 2014 will approximate $9 million. Cash used on operations was $9.1 million for the six months and was impacted by one-time items related to our acquisitions and first half seasonal items.

Excluding these items, cash flow from operations would have been positive for the first half of the year. In addition, the increase in recurring revenue business over the last three quarters with cash collections spread out over the multiyear contract term has impacted cash flow for the first six months compared to prior periods.

We also believe, our second quarter collection efforts could have been better and we have taken steps to improve these efforts. With the impact of these behind us, we expect strong cash flow from operations in the third quarter and expect our full year cash flow from operations to be positive.

Gross accounts receivables at the end of the quarter was $62 million. Day sales outstanding were 110 days, above the range, we have experienced in previous quarters. Finally, at the end of the quarter headcount including outsourcing was 970, which increased approximately 25% from last year.

This reflects the addition of SignalDemand in Cameleon and our increased investments in sales, marketing, professional services, engineering and administrative personnel to drive growth. Before providing guidance for the third quarter in the year. I would like to provide some additional geographic information related to our business.

Revenue from the United States increased $5.2 million up 13% over the prior year and represented 48% of total second quarter revenue in both 2014 and 2013. We are pleased with the increase in revenue from United States and that our acquisitions are contributing to the performance in the region.

Revenue from Europe represented 26% of total revenue in the second quarter as compared to 22% in the prior year. This increase is driven primarily by the Cameleon acquisition. Well there has been improvement across our European sales in service organization.

We continue to focus on better performance and expect this region to meet our expectations for the last half of the year. Revenue from the rest of the world represented 26% of total revenue as compared to 30% last year an increase by 13% as compared to the prior year.

Rest of the world revenue is primarily travel and we can have some quality variability in our travel business. Overall, our business continues to have positive tailwinds driven by the large growing and significantly under penetrated B2B markets we serve and continue positive performance by our B2C markets.

Inter levels on our big data solutions remains very high and we continue to benefit from our diversification across products, industries and geographies.

We are also pleased with our strong bookings, the higher mix of new customer acquisition and the increase in recurring revenue, during the first six months as compared to the first six months of last year. Now turning to our outlook for the third quarter.

we anticipate non-GAAP revenue in the range of $47 million to $48.5 million, approximately 30% growth at the mid-point from the third quarter of 2013. We expect our acquisitions to attribute approximately $8 million in our organic growth to be approximately 8% at the mid-point.

We expect total non-GAAP expenses to be approximately $44 million up from $30.5 million in the third quarter of 2013, as we continue to make strategic investments in our business as well as incurring increased expenses coming from our two acquisitions.

We expect non-GAAP operating income margins of approximately 8% at the midpoint of revenue guidance, with a tax rate of approximately 40% in the third quarter. we anticipate non-GAAP earnings per share of $0.05 to $0.08 based on estimated $30.4 million shares outstanding.

Regarding cash flow from operations, we expect the strong performance in the third quarter with a significant improvement over the first half, as the seasonal and one-time items mentioned previously, substantially behind us and we are experiencing better collection performance.

For the full year, we expect revenue growth of approximately 33% at the midpoint of our revenue range of $190 million to $194 million, given the strength from our recent acquisitions; we now expect them to contribute approximately $29 million in revenue for the full year.

We continue to expect organic revenue growth to accelerate in the second half of the year to approximately 15% at the midpoint resulting a full year organic growth of approximately 12%. Our confidence in this back half acceleration is due to several factors.

First, we had strong first half bookings and we have a strong pipeline with good visibility at the second half booking opportunities. Second, historically from a seasonality perspective our business is stronger in the last half of the year and especially in the fourth quarter which remains our expectation.

Third, our license revenue recognized at contract signature from our B2B deals was in line with our expectations for the first six months and we expect to see an increased contribution from these deals in the second half.

And finally, we believe the sales improvements we have made together with the expanded leadership focus on sales and partners will have a positive impact over the next few quarters that will benefit our results going forward. As previously discussed, these factors are being offset by the timing of some implementation that extended into 2015.

This has an impact on recognized revenue 2014, the bills visibility in 2015. Our non-GAAP operating margin guidance for the year continues to call for approximately 10%. In summary, we are confident that our growth strategies and investments across the business have been working.

We are pleased with our performance in the first half and our outlook for the year. We expect our opportunity for growth to continue in the future as we capitalize on expanded market opportunity and improvements in our go-to-market initiatives. Contributing to our outlook of 20% plus revenue growth long term.

With that, let me turn the call back to the operator for questions.

Operator?.

Thank you. (Operator Instructions) and we will go to Scott Berg from Northland Capital Markets. .

Couple of questions, Charlie let me start with you on the, you just talked about revenue from the acquisitions coming in at roughly $29 million for the year.

I know when you guided at the beginning of the year, that range was I believe $17 million to $19 million, should we view the delta between that as stuff that's been signed on your paper, so it's more of an organic sale or is that just a reflection of maybe, how conservative you were on the initial impact of the deals that were brought over during the acquisitions period?.

Yes and Scott I think there's a couple of factors here.

One initially we are thinking around $19 million to $20 million and clearly at that stage, a lot of that was conservatism on our part because as you know, we had just completed, I mean just completed the Cameleon acquisition and just 45 days prior to that, we completed the SignalDemand acquisition.

So we want to be prudent about the prospects of both of those acquisitions, as we went through the year. I think what the momentum we've seen as far as bringing the sales organization together particularly on the Cameleon side, which is the bigger opportunity because of the configuration price quoting market price.

We are seeing opportunities for improvement there. We've obviously, we've combined the sales organization, we are there now.

We are now selling their product, in fact as a substitute in many cases for our products and with the salesforce that we have behind it, which obviously is much more substantial than their salesforce, which I believe was maybe just five to seven people. We see opportunities to improve the performance of that company, as we go through the year.

So it's a bit about mainly we were conservative again we were just have completed the acquisition, but now we are seeing the opportunity that combined companies can bring, we are also particularly pleased with just some of the services of revenue that Cameleon was able to drive in the first half of the year.

We started a little bit in that in the first quarter, we started move it in the second. So things trends in the right direction related to the acquisitions. .

Yes, one other comment that I will add is, we've talked about on ERP front; we have seen a significant uptick on the demand for the CPQ solutions. We have seen our customers and target customers looking at buying, also they complete offering like Charlie talked about or a scientific analytics prize optimizer and CPQ solution.

So we are seeing that resonate and again having the overall unified salesforce focused on this market and all of the demand gen activities from the Salesforce1 World Tour we have seen definitely a strong uptick in demand year-over-year..

Okay, great and then getting to your comments Andre on the sales momentum in the first half record deal fall in the first half, can you kind of, I guess comment on the linearity of that strength between Q1 and Q2 better reflection of a better Q1, Q2 both of them just trying to understand how that has fallen during the six month period?.

I would say that Q1 was a strong quarter and Q2 was even stronger and I would say that is a reflection of continued momentum that we see on all fronts, both on the RFP front, we are continued to see strength, so at the top end of the funneling demand as well as active deals closing throughout.

So in terms of number of deals as well as total booking amount were records for us, for the first half and they are outpacing the revenue growth for the full business..

Okay, great. Last question from me because I let someone else can jump in here, is can you guys talk a little bit about maybe directionally or comment a little bit more on the amount of revenues that's going to move from fiscal 2014 to fiscal 2015 based on customers that are pushing out some of these services.

Just trying to get an understanding, if call it out, so my guess is more than $10, for instance, just trying to get an understanding of what this does, in terms of impacting the organic growth for the year..

Yes, Scott, you're right. It's significant otherwise we wouldn't have called it out because every quarter, every period there is some variability some projects move in a little faster, some move out a little bit. Unfortunately for us in Q2, we saw a change that clearly anomalous for us and insignificant.

At this stage, it could be approximately 4% to 5% of the backlog revenue coming into the year and that's a big number.

We are backing that obviously our organic revenue growth expectations issued much better than they are, the only, the positive about this of course it's going to come back in 2015, but and we obviously have some strength in our acquisition and the overall strength of the business in the first half to help make up for it.

Now it is significant, it's anomalous. I have been here 15 years and this is the first experience that I have had with this kind of a shift. Maybe I should just give a little color and some examples here, maybe just to show how anomalous this is.

We had a customer, that actually paid in full for the license and their implementation services, that's – they really want to proceed with this and then they face a challenge internally that needed – necessity of moving the project off to 2015. We have another customer that paid all the license and still have to move the project to 2015.

So another customer actually experienced some significant events that it was on the newspaper recently and that pushed not services off, but possibly maintenance revenue off until 2015. So these are to us truly anomalous examples.

In general, it's just that the customer sometimes the third party dependencies we had a little bit more of that, certainly in the second quarter, that's pushing off their expectations to be able to proceed with the implementations.

So it's a confluence of few events, but we do large deals and all it takes is a few, a handful, a little more than handful of deals that aren't customer to have an impact on our revenue.

Now we've obviously doubled down, we booked at every implementation we have ongoing, we just don't see this having an impact on Q3 and Q4, but nonetheless for the full year with what we've seen here in the second quarter, there is a significant impact on the year..

Yes, now let's say and our focus continues to help these particular customers work through their challenges and making sure they come out strong from them and I think that's what's helped us build very strong relationships that span decades and I think this is our time to help them through their challenging times and we know, when they come out of it, they will come out stronger..

Thanks for answering my questions. I'll jump back in the queue..

And we will go next to Bhavan Suri with William Blair.

Hi, guys can you hear me okay?.

We can hear you well, Bhavan..

Hi, Andres. So let me jump right in. I guess, the first question I have is, you know where the shift into more recurring revenue, which is graded the term and subscriptions.

Can you just talk a little bit about how the salesforce is compensated to sort of push the transitions or are they not and it's kind of left up to the customer?.

Yes, that's a great question. Right now it's neutral for the salesforce and our focus is really around the customer preference.

Where we have customers that prefer, a private cloud or SaaS delivery model, we want to be able to accommodate their preferences, what we are seeing in certain scenarios customers wanted faster start and with the cloud offering, they feel they can achieve that and we can see, that they can achieve faster time to value, then relying on their particular IT staff to provide this service, but overall we are very pleased that we are pretty close to what our goal was for the year of 44% and that overall we are capturing good long-term business for us..

And that's great and then could you talk a little bit about salesforce.com relationship and sort of the traction you're seeing on the force.com platform for the offerings and I guess, is there a time in which we could imagine the data science possibly run on the force.com platform?.

Yes, that's a great question. So Salesforce is one of our key partners on the CPQ and even extending other capabilities to bring data clients and intelligence into their sales platform. So overall, we have been very focused as I talked about on the Salesforce 1 World Tour. We are going to play big role in the Dreamforce.

We are platinum sponsor and we are working very close with them on those opportunities long term.

We see the data science at this point, will live in our own cloud and will not be embedded within the force.com cloud and predominantly the reason is for scale in performance, that amount of data that we process and the real-time nature, where we are doing in millisecond response time is something that, would be hard to accomplish in the force platform today.

For the customers, it's the same benefit. It's seamless experience from a lead opportunity to quote. The whole user experience is native on the force.com platform, but the intelligence that's injected into it via a real time call that happens in our engine.

This also gives us obviously the flexibility to power other CRM platforms like Microsoft Dynamics and SAP CRM which are still important for many of our customers.

So at the end of the day, what we want to focus is some providing the best user experience with the most innovative data science capabilities to help that rep, be more successful when they're quoting..

That's helpful, Andres.

Thanks and then one last one from me, as you look at the partner channel obviously sort of some of the organization you've done is driving a bigger focus on that, when you think of the ideal partner, is it someone like Accenture or is it some who is a little smaller, a little more boutiquey [ph] around sort of the price optimization, revenue optimization kind of space.

And sort of how are you tracking in terms of, you give some color, but little more be great in terms of sort of getting these guys start to implementing the projects?.

Obviously SI wise Accenture are perfect partners for us and Accenture is one of our strongest partners specially since the preempted install, the union of CRM and CPQ and price optimization coming together in driving it's significant value to their customer.

So we are very aligned with their own partner strategies around helping their customers with our offering.

So they play a very good partner for us to have a lot of certified consultants in implementing for their CPQ solution and or price optimization offering, but obviously we do see some boutique partners that could be very good partners, whether be a region or because of certain capabilities they have whether be experiencing, price optimization or other areas.

But overall, our real focus is been on our strategic partners like Accenture and the Deloitte, Capgemini of the world and they provide us the large scale for global enterprise customers..

Great. Thanks, guys..

And we will go next to Chad Bennett with Craig-Hallum.

So I guess, just kind of rattle through a few here.

Charlie, on Cameleon specifically, can you mention – did that contribute anything material to the license line this quarter or was it primarily subscription?.

That business is primarily a subscription business, so it's more of the subscription side that they do, they and I think as we mentioned before, they still do deals on a perpetual side, but predominantly as we wanted. So it's one of the subscription side. As I commented, we are also being particularly strong on services.

They've been able to really drive so just the value added services into the customer base..

Okay and I'm trying to kind of understand a little bit more on the booking side, so if we go back to the December quarter.

I think you mentioned a fair amount of the December quarter bookings were recurring revenue bookings and the issue with kind of the first half growth of this year was, a fair amount or sizeable amount of those recurring bookings wouldn't be recognizing until the second half of this year.

Are nay of the delays, you're talking about relating to bookings going back that far and kind of, can you help me in kind of understand, kind of the ins and outs of how those bookings aren't benefiting as much anymore, is it just kind of the overall shift?.

Yes, the bookings. Let's talk about – as far as the shift. The shift really impacts it, we have a portfolio of customers. Some of the deals could have been signed in the second quarter of last year and some of the deals have been signed in the third and fourth quarter of last year.

Many of these were, the projects were preceding phases have been completed, but then they ran into the situations, where they had to make a change and shift it to 2015 and to give you the example on the travel side. There is lots of dependencies on the travel side with third parties.

And it is a very, very large application to have to use third parties, [indiscernible] system etc. If they just get a little bit of delay from the third party provider, well they need to help us complete our phase of the implementation, the project will get delayed. We clearly had more of that.

And then I gave some other examples, where customers signed as method, one was in the third quarter of last year, one was in the fourth quarter. Paid with cash, everything but then for their own internal reasons, had to move far till 2015. So it's really spread across a number of examples and across our portfolios, some is in trial, in B2B.

I will say, with absolute certainty, very anomalous. Our record of estimating backlog probably at the beginning of the year is been incredibly good..

You're right, now I understand and then I'm trying to understand better, you guys are thinking on the fourth quarter implied guidance obviously, since you just guided for the September quarter, by my math you need a sequential revenue growth of high teens versus historically.

It's kind of been high single digits to 10% sequentially and then to hit your op margin goal, you need to go from, I think you said 8% in the third quarter midpoint in the high teens.

I guess, are we expecting more based on your pipeline and how you say things close and today, are we expecting more an upfront deals to hit in the fourth quarter to get us there.

How do we kind of get there?.

I think the first way to get there, Chad is we like I'm sure many software products companies, the strongest quarter for us and historically this is absolutely been the case, has been the fourth quarter from a booking standpoint. When we are talking, I remember year ago, when I off the site, [indiscernible] it was hard to discern that.

But now, of course with us, moving more towards the true products company license model of recognizing license of contract, we like many other products companies well have the stronger fourth quarter than perhaps any other quarter in the year. So it's just the seasonality of the business, historically we've always been stronger in Q4.

Usually, it's Q4 then it sometimes it Q2. The sequence is, Q4 is always the strongest and maybe Q2 and maybe Q3 and the quarter historically weakest is Q1, that's been our historical patterns. It's probably tracks very close to other companies as well.

So first you have to, do you accept that the seasonality here in the business and we will have a good strong fourth quarter, as we've always had. That's the first piece, the second piece. We've had, we've obviously had very good bookings for the first half of this year. We are very pleased with the bookings that exceeded our revenue growth.

We have momentum there, but please with the momentum behind our new customers in the second quarter and looking up the sales pipe, not worried about the sales team, we've got a good sales pipe. We've got a stronger sales team. So we really feel, that we are progressing very well. The question was, is it going to be more upfront.

We expect, yes to be more upfront revenue recognized in the last half of the year, than the first, but that really is because of the seasonality. The quarter that's the strongest are always the fourth, sometimes the third, sometimes the second, never the first. So yes, we expect to have more revenue recognized at contract on the last half of the year.

In fact as well, as we did for the first six months. Let me just one more thing, Andres. I'm sorry. We talked about this in the third quarter last year, as far as model shifting with license and contract, we were pleased then, we are pleased with the fourth quarter, with the front in first quarter, the second quarter.

So I think we've established a record here, where yes you will get license and contract and it very much is going to be seasonally driven with the fourth quarter being the strongest quarter..

Yes, the only thing that I would add is, it was in our model that Q4 would be stronger. So we are not changing our model. The last thing thinking, giving us confidence.

We spoke about the RFP's significantly up year-over-year, but another important factor is that, approximately 70% of the business in the first half were new customers and that's what driving the confidence in the strength on new as well..

Okay, one last one from me.

If I may, so I think you talked about Charlie going into this year, license on contract, can upfront revenue wreck [ph] of roughly $10 million number, if I remember correctly, does that changed at all?.

Actually, the number Chad was approximately 10% of revenue. .

Oh! sorry..

Yes, obviously last year we did less than 5% of revenue and that was predominantly in the third and fourth quarter. this year, we said it will be approximately 10% looking at it today, what the progress we've made, it's very likely going to be 12% to maybe 13%, 14% of revenue..

Perfect. That's all I needed. Thanks guys for taking my questions..

And we will go next to Greg McDowell with JMP Securities.

I do like the new presentation of revenue. I think that's going to be helpful. Along those lines, given the discussion on the variability of the timing of implementations.

As I relates to your Q3 guidance, can you just help us in terms of the impact of that variability on how we should model, maybe the individual components of revenue?.

Okay on the individual because the study here is going to be maintenance that's easiest, of course you should, as you just look at historical trends on maintenance. I think that's a good performance where the company's business is likely to go.

The subscription, the subscription of course should grow, it's a nice rate because that's and now just to maintenance. You should just logically expect to see some nice growth in subscription.

I don't think, I know when you get the license in the services, but license would have more variability because we have the opportunity and now, we can follow the contract terms to collect on our B2B business, we have the opportunity to recognize the license. The license is going to have more variability.

The service is, I would expect it should progress. It will progress, one quarter the next because we still have substantial portion of our business, that's 1% to completion. So all the travel business is recognized, the services are recognized over time. And really in the B2B side, the services are recognized all the time as well.

So if there is any line that's going to have more variability. It's going to be the license line. I think we've addressed that by talking about the momentum we are seeing in the market place, the fourth quarter historically being the strongest quarter and so it's so.

Does that help?.

Yes, that is helpful.

Thank you and then the 70% new customer wins, one thing I didn't entirely understand is where are those new customer wins coming from, are those from the B2B business, the travel business, the Cameleon business, the SignalDemand business like what drove most of those new customer wins?.

The customer wins are driven by both by the combined business, both B2B, travel as well. I would say, B2B is growing faster from a booking standpoint than travel and the organic part of the B2B was very strong and organic part of B2B grew faster than they combined, then the full revenue of the business. So it grew more than 30%..

Great, thank you and then I'll squeeze one more in here. The normalized bookings and I understand, why you guys are pointing out that in the quarter. it was growing faster than revenue and organic 15% on normalized bookings basis, but could you tell us is that an acceleration from Q1, is it a deceleration from Q1.

What's sort of that normalized bookings guidance or what does it imply for the second half of the year?.

Yes, sure. We always love to talk about bookings mainly in one quarter because there is variability quarter-to-quarter, but I think it will say, that the Q2 was stronger than Q1, but again I do want to go back to historical norms too.

So the Q1 is generally not the strongest quarter for the company, but Q2 was stronger than Q1 and so we feel good about that and we feel good, that's all succeeded our revenue growth. You mentioned the normalization.

I'm not quite sure, I got the comment, but usually we did the normalization from a revenue standpoint is, we are actually asked about this, by a number of investors after our first quarter earning call.

And actually asked by this, about this by couple of analyst as well and we thought actually we should address it, we should address the normalization. So we've done that. hopefully, it's helpful. It's going to be this year only. Obviously because we get to next year. This is the year of the transition.

This is the year of the change from one model last year to new model this year. So next it will be, everything will be normal.

Is that helpful, Greg?.

Yes, it is and I don't want to ask too many questions here, but what is mechanically, how are you normalizing it? What's sort of the basic math behind it?.

Yes, the math really is, it's really start forward. What we are doing, is we're taking there are like three components for this, that impact what's different this year, than it was from the prior year and certainly, the year before that. one is, we have more recurring revenue business, with the uptick with substantial in the fourth quarter last year.

We have more upfront license business this year, than we had last year. It's started in Q3 of last year and we've got more deals, where we actually have the SI taken the lead on the full implementation. Previously SI's participated implementation, we were the prime.

Now the SI's have taken the lead and they're taking the implementation, not suggesting it's a lot, but it's started. You think about our, when we talk about the SI's for a moment. You think about the size for our average ASP being approximately $2 million, half of that services.

So if it's an SI led deal, then SI is getting substantially all of that $1 million of services from the deal value. So when you take those three items, more recurring revenue, more upfront license in the SI deals.

You factor all three of those in and the way we did it is, we took out the license and contract, take that out of revenue, treat that as if it were a percentage to completion contract, which is the predominant model last year. So normalize that, now the recurring revenue increased over the previous year.

If that had been more normal, perpetual deals that's 100% completion basis, normalized to that and then add in the services revenue. We lost because of turning the services over to SI's that was the basis with calculating the normalized organic revenue growth which 16% versus the 8% that we reported..

Yes, that's super helpful. Thank you so much guys..

And we will go next to Darren [indiscernible] with JP Morgan..

Hi, I'm [indiscernible] thanks for taking my question.

I just wanted to drew in a little bit on the metric about the 70% of your deals coming from new customers in the first half and you've spoken about the B2B and travel segments, but I'm just wondering if part of that strength could have come from success that you're having moving into the S&B segment, can you comment on that?.

No, I would say that the strength of this is coming predominantly on the enterprise market and S&B still early and I would say that, this is predominantly all the enterprise market. .

Okay, thanks..

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