Charlie Murphy - EVP & CFO Andres Reiner - President & CEO.

Scott Berg - Northland Capital Markets Tom Roderick - Stifel Ben McFadden - Pacific Crest Securities Chad Bennett - Craig-Hallum Darren Jue - JP Morgan Bhavan Suri - William Blair.

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

Thank you, operator. Good afternoon, everyone, and thank you for joining us today for the PROS Holdings' financial results conference call for the fourth quarter and full year 2014. This is Charlie Murphy, Executive Vice President and Chief Financial Officer at 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 fourth 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 risks 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 www.pros.com.

Finally, PROS has provided in our 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. 2014 was another outstanding year for PROS. We entered 2015 with more confidence in our wining strategy than ever before. Our incredible team worldwide delivered great results in the fourth quarter on the strength of record bookings for the full year.

We exceeded revenue guidance in the fourth quarter with non-GAAP revenue of $55.6 million, a 43% increase over the same period last year. Non-GAAP operating income was $8.5 million for the fourth quarter and non-GAAP earnings per share was $0.21.

For the full year, we exceeded guidance with non-GAAP revenue of $193.6 million, a 34% increase over 2013 marking our fourth consecutive year of better than 20% revenue growth. Non-GAAP operating income for 2014 was $18.3 million, non-GAAP earnings per share was $0.39.

Our 2014 performance was the result of our ongoing investments in our diversified growth strategy. Initiatives to accelerate awareness and adoption paid off. We added a record number of new customers including twice as many new B2B customers than in the year before.

In 2014, we were selected by Anixter, Brasil Foods, Cargill, EOVI, Hub Group, Jet Airways, Qantas, YRC among others. We believe this indicates an ongoing preference for PROS by company's seeking a strategic partner to turn their data into better business performance. Several factors drove this growth in new business.

First, we invested in demand generation strategies to grow our pipeline resulting in a record number of RFPs and twice as many new opportunities than in the previous year. Second, we increased our reach in the market by growing our direct sales team. We ended the year with 64 quota-carrying personnel, up 39% from the previous year.

I'm proud of our world-class sales team for their outstanding performance in 2014. We will continue to invest in recruiting, training and on-boarding to further increase scale and productivity.

Finally, we made it easier to buy and implement our solutions with new package offerings that include prescriptive best practices resulting in faster sales cycles and 90 day implementations. We believe this approach will continue to accelerate sales cycles, time to value and market adoption.

As strong as our new customer growth was in 2014 our growth in existing customer business was just as impressive. We broadened and deepened our partnerships with a record number of existing customers such as Avis Budget, Cardinal Health, Etihad Airways, Hertz, McKesson, and Mopar, among others.

The driving force behind customer expansion is the high value our predictive and prescriptive solutions can deliver.

A recent study by PwC revealed that companies who are precision in analytics for sales and marketing outperformed during those street[ph] years in sales growth, marketing growth and profit growth by more than two times and showed an eight times better total shareholder return on capital. We have health companies outperform like this for many years.

For example, in 2014, we spoke about how health HP compete and win by reducing flow turnaround times by 25% and improving margins by more than 200 basis points. We also had a B2B customer in Europe achieve 6% incremental profitability with our solution.

These are just two of many examples where PROS health create a competitive advantage and drove hundreds of millions of revenue and margin increases. We're honored to be a key solution that executives depend on to drive better business performance. At the heart of our customer success is our heritage of innovation.

In 2014, we continued to set the standard of innovation by introducing two new data driven solutions that combined the power of analytics, automation and intelligence. We delivered a first of its kind CPQ solution with integrated price optimization.

This breakthrough solution helps customers to improve the ease, speed and effectiveness of the coding process to win more deals profitably.

We also introduced Group Sales Optimizer, a real time booking solution for travel customers that integrates dynamic pricing with powerful sales effectiveness, revenue management and contract management capabilities.

These solutions are two more examples of how PROS is redefining what customer should expect from an enterprise application and our efforts are being noticed.

PROS was recently named a winner of the prestigious CRM Watchlist Award, which recognizes those companies that are making a meaningful positive impact on customers with sales and marketing technology. Out of more than 140 companies reviewed PROS was joined only by Salesforce.com and Microsoft in achieving elite winner status.

According to the analysts who researched the companies for this award, to win elite status a company must not only have a strong impact in 2014 but also be built for the future too. We are proud to be recognized alongside two great partners for making a noticeable difference in the sales and marketing technology space.

I'm proud of our entire product organization for powering our innovation advantage in the market and we will continue to invest in this area to further extend our leadership position. Overall, 2014 was an outstanding year for PROS and we're confident in our long-term growth outlook for several reasons.

First, a large underpenetrated B2B market is emerging and gaining momentum as evidenced in the uptick of new customer wins, existing customer expansions and demand. We believe B2B will continue to be the biggest driver of our growth for PROS. Second, our partner ecosystem is getting stronger and it's contributing to growth.

Partners delivered an increasing number of new opportunities throughout the year and we closed deals sourced by partners. We're pleased with the early wins from the partners and look forward to continued success going forward. Finally, our solutions are more differentiated, more valuable, and more relevant than ever before.

And already going, PROS identified data-driven applications as an emerging category of software that combines data science expertise with a deep understanding of business problems. This has been our mission from the very beginning because we believe that smarter is better.

The age of data driven applications has arrived and few companies have PROS pedigree in turning these solutions into real customer value. We believe we have the key ingredients for sustainable long-term growth and we will continue investing in our diversified growth strategy to capitalize on the large market opportunity.

Before I close, I would like to acknowledge and thank Charlie Murphy for his 16 years of passion and dedication as our CFO. His contributions to PROS have been incredible and will be long lasting. We wish Charlie all the best in his retirement after he gets one last chance to discuss our detailed financial results with you.

We're pleased to announce Stefan Schulz who will join PROS as our next Chief Financial Officer on March 3. Stefan is a great leader whose extensive experience in driving global scale will be incremental to our long-term growth strategy. Stefan is a great addition to our team and I look forward to working closely with him.

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 first quarter and full year of 2015..

Thanks, Andres. I will be discussing our financial results on a non-GAAP basis. As I mentioned at the beginning of this call, a full GAAP to non-GAAP reconciliation is included in our earnings release which can also be found in our website in the Investor Relations section.

This was a significant year for PROS as we were able to expand our recurring revenue contribution while at the same time satisfying the needs of our customers and the resulting increase in license revenue recognized at contract.

Turning to our fourth quarter results, we are pleased with our performance with total non-GAAP revenue of $55.6 million exceeding the high end of our guidance and an increase of 43% from a year ago. The $55.6 million of non-GAAP revenue included organic revenue of $48.4 million or 25% organic growth over the same period in the prior year.

Non-GAAP revenue was negatively impacted by approximately $300,000 because of foreign currency changes in the period. We are pleased to see the improvement in our organic revenue which was positively impacted by the strength of our B2B bookings throughout the year as well as very strong license revenue recognized on contract.

As a note, beginning next quarter, both Cameleon and SignalDemand will have been part of PROS for year and their revenue will no longer be broken up separately. Licensed revenue increased $11.4 million to $22.5 million, an increase of 103% in the same period a year ago.

License revenue recognized on contract execution was approximately 29% of total revenue for the quarter compared to 8% in the year ago period. As expected, the fourth quarter was our strongest bookings quarter for the year and we expect the seasonal trend will continue similar to other enterprise software companies.

Services revenue were $11.3 million, a decrease of 9% a year ago due primarily to timing of the implementations. As communicated regarding services revenue, our strategy has been to introduce package offerings with faster sales cycle times and shorter implantation periods. This has the effect of reducing services revenue.

In addition, our strategy is to drive increasing license revenue by utilizing our partners for both lead generation and implementation services. As a result, we expect service revenue to have modest growth in 2015. Subscription revenue increased $3.7 million to $7 million, an increase of 109% of the same period a year ago.

Our acquisitions were the primary contributors to our subscription revenue growth. Maintenance revenue increased $2.8 million to $14.7 million for the quarter, a 23% increase over the same period a year ago and represent the largest component of revenue for recurring sources. Our fourth quarter recurring revenue increased 42% over the prior year.

Non-GAAP gross margins in the quarter were approximately 75% as compared to 74% in the fourth of 2013. Total gross margins varied from period-to-period primarily due to 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 $33.3 million compared with $22.1 million a year ago, an increase of 51%. Non-GAAP operating income in the fourth quarter was $8.5 million compared with $6.5 million a year ago, an increase of 30%. Non-GAAP operating margins for the quarter were approximately 15%.

Note that in addition to the $6.3 million of non-cash stock based compensation expense and an impairment charge of $1.9 million, also excluded from our non-GAAP results were amortization of intangibles and acquisition integration related expenses of $1.6 million.

The non-GAAP effective tax rate was approximately 22% in the fourth quarter and compares to approximately 21% in the prior year. The effective tax rate in the fourth quarter includes the renewal of the research and experimentation tax credit for 2014. The credit has not yet been renewed for 2015.

Non-GAAP net income was $6.4 million for the quarter compared to $5 million in the prior year, an increase of 28%. Non-GAAP earnings per share was $0.21 compared to $0.16 per share a year ago. The non-GAAP earnings per share $0.21 exceeded the high-end of our guidance by $0.04 per share.

Before turning to our GAAP earnings, I want to discuss a $1.9 million impairment charge that has impacted our GAAP loss per share in the fourth quarter by $0.07.

As a result of the integration of our product lines, we have determined that the carrying value of certain internally developed software on the balance sheet should be reduced and the expenses reflected in our fourth quarter financial statements. GAAP earnings per share for the quarter were a loss of $0.60 compared to a break-even a year ago.

The earnings per share decreased as primarily the result of establishing a $16.2 million valuation allowance against our deferred tax assets. Acquisition related expenses of $1.6 million which includes $1.2 million amortization of intangibles and an impairment charge of $1.9 million and a $2 million increase in non-cash stock-based compensation.

Turning to our strong full year results, total non-GAAP revenue increased $48.8 million to $193.6 million has compared to $144.8 million in 2013, an increase of 34%. Non-GAAP revenue was negatively impacted by approximately $800,000 because of foreign currency changes throughout the year.

License revenue was $58.6 million, an increase of 42% from the same period a year ago. Services revenue was $53.5 million, an increase of 11% in the same period a year ago. Subscription revenue was $25.9 million, an increase of 181% from the same period a year ago.

Our maintenance renewal rates continued to be best in class exceeding 95% and adding to our future revenue visibility. Maintenance revenue was $55.7 million, an increase of 21% over the prior year. Our annual recurring revenue was $81.5 million, a 47% growth over 2013 and represented 42% of total revenue in 2014 compared to 38% of 2013.

Non-GAAP gross profit was $138.4 million for the year yielding gross margins of approximately 71% compared to gross margins of 72% a year ago. The decrease was expected and driven principally by the revenue from the acquisitions. Non-GAAP operating income was $18.3 million for the year, a decrease of $3.6 million as compared to $21.9 million in 2013.

Operating margins were 9.4% of 2014 inclusive of absorbing two acquisitions as compared to 15.1% in 2013. During 2014, we also increased our investments relative to '13 in sales, marketing, product innovations to drive our long-term revenue growth.

We believe these investments were effective and are reflective in our strong results, growing pipelines, expanded product offerings and increased market awareness. Our non-GAAP effective tax rate was 29% for the year as compared to 19% in 2013.

It was two years of research and experimentation tax credit recorded in the 2013 because of the timing of the reinstatement and one year in 2014. Annual non-GAAP earnings per share for the year was $0.39 compared to $0.58 in 2013. On a GAAP basis loss per share was $1.27 compared to a profit of $0.11 per share last year.

Now moving to the balance sheet, we ended the year with cash and cash equivalents of $161 million compared with $44.7 million as of December 31, 2013. During the fourth quarter, we issued convertible senior notes which netted us $126 million after transaction cost.

Cash flow used from operations for the fourth quarter was $1.4 million and cash flow generated from operations was $1.8 million for the year.

As I previously discussed, cash flow during 2014 was principally impacted by one-time items related to our acquisitions and the significant increase in recurring revenue bookings last year which spread out cash collections over several years.

Finally, at the end of the quarter, headcount including outsourcing was approximately 1,010 which increased approximately 10% from last year. Before providing guidance for the first quarter in 2015, I would like to provide some additional metrics related to our business.

Revenue from the United States for the year was $85.6 million, an increase of 31% over prior year and represented 44% of total revenue in 2014. Revenue from Europe was $47.8 million, an increase of 42% over prior year and represented approximately 25% of revenue.

Revenue from the rest of the world was $60.2 million, an increase of 31% over the prior year and represented approximately 31% of total revenue. Overall, geographies performed well and represented above the same proportion of total revenue as in 2013.

Organic revenue growth was 14% for the year, with a significant improvement of the second half of the year particularly in the fourth quarter.

As we've previously discussed, organic revenue growth for the year was negatively impacted by the significant increase in recurring revenue bookings in 2013 which while contributing to long-term revenue had a negative impact on 2014 revenue.

Our non-GAAP backlog at the end of 2014 was $199 million compared to $203 million at the end of 2013, which was on a pro forma basis to include the backlog of Chameleon. Of this $199 million, we expect to recognize $136 million in 2015 with the remaining $63 million extending beyond 2015, continuing to give us good long-term revenue visibility.

As previously discussed, license revenue recognized at contract does not contribute to backlog or backlog growth. License revenue recognized at contract in 2014 increased and was $27 million which negatively impacted year-end backlog by approximately $16 million.

Also, the significant decline in the basket of European currencies in which we operate reduced year-end backlog by approximately $3 million. Have license revenue recognized at contract on 100% completion basis and exchange rates remain flat; the year-end backlog would have been approximately $218 million.

We are pleased to say that our B2B sales performance has continued to perform well and remains the major long-term growth driver for PROS. We are now starting to experience even more synergies between our B2B and B2C businesses with B2B products being sold to traditional B2C customers.

The lines are being blurred as we are covering even more ways for our customers to use our technology. Because of this, we do not believe it is that meaningful to break this out.

In an effort to continue to provide meaningful metrics for our investors, I would like to discuss bookings performance which speaks to the underlying momentum in our business.

We had very good sales performance in 2014 which drove total bookings growth faster than 30% and organic bookings growth of greater than 20%, which excludes the impact of Cameleon CPQ [indiscernible].

We feel very good about this performance and continue to be very optimistic about the current market potentials and long-term growth prospects for the company. Now turning to outlook for the first quarter and year, we anticipate non-GAAP revenue in the range of $47.9 million, approximately 12% growth at the midpoint from the first quarter of 2014.

We expect total non-GAAP expenses in the range of $49.5 million to $50 million, an increase of approximately $7.5 million from the first quarter of 2014 as we continue to make strategic investments in our business in support of our belief in the growth of opportunities ahead.

The first quarter also includes a significant seasonal expense for employment taxes which is up approximately $2 million over the fourth quarter. We expect a non-GAAP operating loss of approximately $1.75 million at the midpoint of revenue guidance.

As a result of our convertible debt issuance, we expect cash interest expense of approximately $750,000 in the first quarter and each subsequent quarter during the year.

With an estimated tax rate of approximately 36% from the first quarter, we anticipate a non-GAAP loss per share of $0.04 to $0.07 based on an estimated $29 million basic shares outstanding.

Non-GAAP operating income excludes approximately $6.5 million of stock based compensation expenses, amortization of debt discount and issuance cost of approximately $1.5 million and $1.2 million amortization of tangibles.

For the full year, we expect non-GAAP revenue in the range of $222.5 million to $228.5 million, which represents growth of approximately 16% at the midpoint including approximately $4 million of non-GAAP revenue. This is inclusive of approximately $3 million of negative impact from the strengthening of the U.S.

dollar against the basket of currencies that we conduct business in. But for this, our revenue growth would have been approximately 18% at the midpoint. Our non-GAAP operating margins for the full year are expected to be between 9.5% and 10%.

This guidance reflects approximately 50 basis points of improvement over our 2014 results in line with what we have previously communicated. We are pleased that the midpoint of guidance provides for a 21% growth in our operating profit over 2014.

Our non-GAAP operating income excludes approximately $29 million of stock based compensation expense, $6 million non-cash accretion of the discount from the convertible offering, and $4.7 million of amortization and tangibles. On a non-GAAP basis, we expect the tax rate to be approximately 36% for the full year compared to 29% for 2014.

Our non-GAAP tax rate is higher in 2015 than 2014 as a result of the R&D credit not being renewed for 2015. While we expect a good start for the year, our first quarter revenue will reflect seasonality as to many other enterprise software companies who recognize license at contract.

We have always talked to you about our bookings being lowest in Q1 and strongest in Q4. These expectations for 2015 remain the same, but with more license revenue recognized at contract our revenue is expected to reflect more of this seasonality as well.

Given the large market opportunity ahead for us, we are continuing with our pace of investment in order to drive meaningful growth and scale. Overall, our business continues to be strong driven by the increasing need for companies to better leverage their data to help grow revenue and improve profits.

In addition, we are benefiting from the investments we have made to drive awareness and adoption and expand our solutions to address a larger market opportunity. While we are also pleased with our ability to add new customers and expand our solutions across our existing base as well as increase our recurring revenue streams.

In summary, we are confident that our growth strategies and investments across the business are working. We are pleased with our performance in 2014 and outlook for 2015. With that, let me turn the call back to the operator for question.

Operator?.

Thank you. [Operator Instructions]. We'll go first to Mr. Scott Berg with Northland Capital Markets..

Hi, Andres and Charlie. Congratulations on a very good fourth quarter..

Thank you..

Scott, thank you..

First question, Andres, is on the guidance for the year.

So your organic bookings growth were greater than 20% in '14 and clearly the commentary around deal environment is positive, but how do you get back to a 20% revenue growth rate? What happens or what needs to happen in the business to kind of reaccelerate to get to that level that you guys saw for several years before '14?.

Yes, so definitely we talked about the momentum the key in both number of net new wins and sell back into our customer base that we're very pleased with the performance of last year and continuing on this year maintaining similar growth rates on an organic basis.

So from a momentum and scale, we feel we have what it takes to drive long-term 20% plus growth. We had, as we talked about, an effect of the foreign currency impact of approximately $3 million, which has a midpoint would have brought overall guidance around 18% at the midpoint.

So we feel -- if it wasn’t for that we'd be at the high end at 20%, but again we're very confident with the results, with the momentum, with the wins and with incredible team we have..

We'll hear next from Tom Roderick with Stifel..

Hi, gentlemen, do we still have you out there?.

We are here..

All right, excellent, I cut off at the end there. Okay, well, first of all, Charlie, let me start of by wishing you the best of luck in your next endeavor. It's been a pleasure working with you, so best of luck and get some sunshine for the rest of us..

Thanks, Tom..

The question I had is more on seasonality. I mean you guys had a great fourth quarter and you're guiding for a sharper seasonal downtick in Q1, and I think some of this probably has to do with you establishing VSOE last year and probably having some bigger deals that were booked on a more traditional perpetual basis here in Q4.

But can you take us through the dynamic of what you're seeing with that partner community and how that’s driving some of that seasonality? And can you just repeat also what the organic growth number was for revenue growth in the fourth quarter?.

Yes, I'll touch on the, the revenue growth for fourth quarter was 25%; that’s the organic revenue growth was 25%. So we're very pleased with that. We’ve said as we go through 2014 we expected to see that growth trend up.

And there we have the benefit in the fourth quarter of very strong seasonally high bookings and we executed well on that; our sales team did a great job. We really executed, perhaps even outperformed a bit and that drove the organic revenue growth up very nicely.

Before Andres talks about the partner component, I think we mentioned, Tom, it is the seasonality that’s giving us the lower Q1 compared to certainly Q4; it's still up of Q1 of last year, but with the seasonality and our bookings with Q1 traditionally being the lowest bookings quarter for the company and Q4 being the highest bookings quarter you are going to see more of a seasonality in our revenue which is very consistent with other enterprise software companies.

Andres?.

Yes. So on the partners as we discussed, we’ve continued to see each quarter improve this ability into number of opportunities being brought in from the partnered community. We also talked about wins with the partnering echo system and partner led implementation.

So we feel we made very good progress last year and we feel that the momentum will continue to accelerate in 2015..

Got it. When you talked about bookings for the year you said 30% growth overall and I think it is 20% organic bookings growth. If I think back to the mid-year update you provided on an apples-to-apples basis I think that you're talking about 30 greater than 30% organic growth for the first half of the year.

What do you attribute the slowdown to in bookings if that’s the proper way of looking at that or, first of all, maybe the first question is, is that an apples-to-apples to comparison that greater than 30 for the first half as compared to greater than 20 for the full year, and if that did drive or you did see a slowdown, what would you attribute that to a there in the marketplace?.

Yes, so we did not see a slowdown. So we said in the first half we said better than 30% booking growth and we said for the full year better than 30% booking growth on an overall basis. And then on an organic basis we commented better than 20% for the full year.

So overall, we did not see -- we had a very strong second half and we did not see a slowdown..

Yes, and just on the mechanics for that, Tom, what happens is when you have a large bookings quarter but a large portion of that booking is absorbed by revenue you get a bit of a distortion as to the relative relationship of revenue growth versus booking growth in a quarter.

So as Andres mentioned, really great strong bookings for farmers throughout the year; terrific last half from booking standpoint, but that seasonality in revenue recognition of license at contract shows somewhat the relationship between the first half and the second half between those two. And taking about the revenue -- yes, go ahead..

Got it. Okay, last quick question from me, Cameleon you've now got a year under your belt with that and you’ve got the opportunity now to bring that product team and into the U.S. where CPQ seems to be a relatively hot topic.

What do need to staff up Cameleon in the U.S., what have you done so far and how optimistic are into that business can continue to outpace the core growth of the company?.

Yes, so we’re very optimistic about our CPQ offering and all of our investments around our integration from the team integration to the technology innovations that we made last year.

So we feel last year we really built the platform for future growth, and definitely we believe to have a very differentiated product that not only incorporates the price optimization and data science but really can scale for large enterprises.

So we feel we have the best solution for large enterprise as well as our whole team available to help drive the growth both in North America and Europe..

Very good. Thank you I appreciate it..

Thank you..

We’ll hear next from Ben McFadden with Pacific Crest Securities..

Hi, guys, thanks for taking my call. I actually dropped off the call little bit in the middle due to a phone malfunction, but wondered if you mentioned anything on the call as far as how currency affected actually Q4. I heard the bookings guide for 2015 the $30 million, but I was wondering if you gave any color as far as what you saw in the quarter..

Yes, in the fourth quarter, the impact on revenue was approximately $300,000, negative impact on revenue; for the full year, it was $800,000, and we've taken the overall impact from the company’s EPS because we have significant cash balances sitting over there for the Cameleon center, the impact on the EPS overall for the full year it was about $0.04.

Now we don’t expect that next year because we’re not going have any assets concentrated in euros because of the acquisition as we did this year, but $300,000 impact on fourth quarter revenue negative, $800,000 for the year..

Okay.

And then as we look at the 2015 guide, how are viewing it from growth rates as far as segment goes, airlines versus the B2B segment, what do you expect to see in 2015? And then with that, does the airline segment need additional solutions to kind of maintain the growth rate that its achieving right now or can it maintain that growth rate based upon the solutions you have today?.

Yes, so we expect the B2B to be the main growth driver for 2015 and beyond that’s where the large market opportunity is and that’s growing significantly faster pace than our traditional travel business.

We've continued invest in tools like group sales, booking tools, and we're continuing to invest in new innovations around our real time pricing capabilities to help drive growth in that sector in travel, as well as bringing some of our B2B capabilities back into travel for say cargo business and logistics other areas of their business where we can incorporate our solution, as well as brining in the CPQ solution.

So what we're trying to do is leverage the incredible customer base that we have very loyal for decades and bring them more value through the use of our pricing technologies as well. So we feel it's not going to be growing at the same pace of B2B, but we have a lot of opportunities within the foreseeable future to drive growth in that market..

Okay.

And then lastly, I just want to know if you're going back to the seasonality question, I was just wondering if you can provide any color as far as how we should be thinking about license recognized upfront, either as a percentage of total revenue or license as that can pass the channel continues to become a larger portion of your business and you're recognizing, I guess, less and less on that percentage of completion basis?.

Yes, absolutely. We do expect to see an increase in license and contracting recognized in 2014. We had very good increases -- I'm sorry in 2015, had a very good increase in 2014 as you know, and overall license growth is 42% last year which is absolutely terrific.

That's been part of our strategy to drive license growth up and drive the services growth down. So as far as what do we expect? We expect to similar growth in license and contract in 2015, as we had in 2014, and have that growth to approximately 20% of total revenue the next year. That's license and contract.

We feel good about that, but based upon the execution we've experienced so far, and I think you've seen that with the performance of 2014. And I think may be a little more contracts too, just the strategy has increased license.

So you should expect as we look at our models going forward, the largest percentage growth we're going to have in 2015 will be in license, okay. Services are going to be a small growth contributor for us in 2015, for the reasons we've mentioned before, we've shortened up our implementation times. We've packaged soft drinks.

We've partners now that are getting more engaged with us. We expect we will take more implementations for 2015.

So our strategy, relative to services, is working very, very nice, and that is to lower services as a proportion to top companies overall growth, so you should expect us to go smaller and then revenue from recurring sources from at the way we're looking our models, looking at that growing about the same as our guidance.

And we're saying our guidance is midpoint 16% may be 18% at the high, we expect recurring revenue grow around that range. So license, good, good growth, but up to approximately may be 30%, services very, very modest growth, and then recurring revenue consistent with our overall guidance of revenue.

Is that helpful?.

[Operator Instructions]. We'll hear next from Chad Bennett with Craig-Hallum..

So I think guidance question has been asked 10 different ways but I'll try a 11th. So I've never so, should we expect, I've never really seen a company successfully manage growing subscription revenue and license revenue consistently.

Can you talk about how you're going to manage that growth between products and kind of billing terms and stuff like that?.

Yes, certainly that's a great question because that's exactly what we've been saying we want to do.

We've been saying this the last couple of years is that, we want to obviously continue, as we obviously having as a true products company get the model lined to the true products company model, which is getting the license revenue recognized on accelerated basis. While at the same time we do want to increase our recurring revenue source.

The acquisitions weren't done just because they're predominantly fast. But we consider that as one of the considerations that we want to and our acquisition strategy to try to drive more recurring revenue into the company's model. We're very fortunate that you can just about take maintenance and take it to the banks.

So we've got a very predictable stream on the maintenance, we're layering in some of our own subscription offerings; we're layering in acquisition subscription offering. So that's how we plan on building up the subscription side of the business i.e. the recurring side. On the license side, it's clearly the momentum in the market place.

We're looking at the momentum first in the market place that we're seeing, that we experience in 2014, looking ahead to see what the pipe looks like. So we've got great confidence based on the momentum that we see that we've got some very good kind of like --- no longer having headwind against us.

We kind of think we have tailwinds now helping us relative to our growth. But that's why it's not higher than 18%, it's a mix model. We've got a base of recurring revenue trying to build which doesn't build historically at those kind of rates where the kind of an ASP we have and we've got a nice perpetual model as well..

And internally, I'll add a little bit more color on it, go-to-market strategy.

So where we're seeing Chad, is from sales oriented tools think about our CPQ product, a pretty good acceptance of that being cloud first, and mostly SaaS and that sort of goal as we can drive 100%, it may not be 100%, there are areas in Europe where they have strong preference from a data privacy to go with on-premise and we're open to that model.

But at closer to 100% of the sales oriented tools, the cloud oriented, in the pricing supporting both models, both cloud and on-premise we still see mostly strong preference for all of the pricing and analytics engines to be on-premise closer to the RP Solution.

And then on the travel since that part continues to be percentage completion, driving both percentage completion and recurring revenue within the travel business. So we're managing its kind of on end-user persona with areas we see. And that's how we're confident of continuing to drive 20% or better long-term growth..

Okay. So I think you would, just kind of asking it another way. I think you would characterize or always have characterized the pricing business or industry as a 20% plus grower.

And I know the CPQ industry is 25% plus depends on some competitors growing faster than that, so I mean is it just explainable in the model shift and the kind of the way things are working in the financial model, why both segments industry wise are growing above 20% why you guys aren't?.

Yes, and what we said absolutely. And the other part that we did common is the B2B industries are growing better than 20%. So that's pretty obvious that the B2B industries are growing better than 20% in 2015..

Yes, one of the other piece, we've touched on this already is that the travel business for us is a good business. But we never said that the travel business is going to grow at the rate of B2B or CPQ and for us it's a great business, its Steady Eddie, some years it's better than other years.

Over time we think it's a nice 10% to low teens grower, some years it’s a little higher, some years its lower. So travel is -- travel is in this senses is waiving down a little bit, but I don't want to take away from the travel business. It's a fabulous business for us with the best of provided airlines; we're highly regarded, highly respected.

We believe it helps us open up opportunities, particularly as we get to the far Eastern side. So it's a true asset for the company, it's just the growth rates is not there, because of the maturity. So we have a segment of our business that's just not going to grow at the rates of B2B or B2C that's waiving us down a little bit, but a great business..

Okay. So have one last one. Sorry, one last one for me.

Did, Charlie -- did Cameleon contribute at all to the license revenue line this quarter?.

Well, not very much. So to me we've been saying we're trying to drive it to more of a recurring revenue model. So it's not a big driver to the license side that may change and had to see a couple of deals that’s what they actually want perpetual license. But by the time, we're trying to get it to be a SaaS.

So that the license growth in the fourth quarter was really driven by the company's poor business, our B2B business, and somewhat less by our travel business, but B2B is what drove it..

That’s what I figured. Thank you..

We'll hear next from Sterling Auty with JP Morgan..

Thank you, it's Darren Jue on for Sterling. I also had a question on the full-year guidance but wanted to ask you about the margin guide.

Just wondering if you could give us a bit more color on where the additional investments are going, just because we had been modeling more in a way of margin expansion for the year?.

Yes, actually we are providing some margin expansion. We're going from 9.4% to approximately 10% for the year. We, it would be easy for us to go higher if we chose to, because we still have -- we have very good gross margins.

So our flexibility really is Jue, we only continue to invest with large market opportunity, which really comes down to the sales and marketing spend and the product innovation spend. So our goal is to continue invest in those areas. So the market opportunity is huge, we're building out some additional crowd infrastructure.

So we're pleased we have a model that you think -- I think is very, very encouraging, good gross margins I mean really good gross margins for company of our size then we're investing. And we could choose not to but we don't think that's in the best interest of the shareholders.

So we think 10% operating margins on non-GAAP basis is a good level for us. We like that, we kind of targeted that as our target and it's going to still throw up some very nice operating, in terms of absolute dollars, operating growth in 2015 compared to 2014, just on the terms of percentage..

Okay. And then Charlie, you mentioned cash flow in 2014 was impacted by a couple of acquisition cost and one-off items. I wonder if you could talk about what your expectations are for 2015..

Yes, that's absolutely right. So I commented that we have the -- plus we also have the large percentage of recurring revenue bookings in 2013, which spreads cash out over a period of time. That's much more normalized now as we go into 2015.

So we do expect that cash flow operation is definitely going to improve and should represent may be approximately 8% of revenue in 2015 compared to being a very modest amount in 2014..

We'll hear next from Scott Berg with Northland Capital Markets..

Hey guys, had to jump back in because somehow I got cutoff there earlier..

Yes, we thought. We thought you had more than one question..

Funny I've got a laundry list but we'll start with one or two more here..

Okay..

And my question was on the operating margin guide, is Charlie, you talked about the mix of revenue growth next year was going to be stronger on the license side less on the services side.

The net revenue and mix shift can you suggest higher gross margin for 2015 in general why wouldn't that not more of that triple down to operating margin expansion?.

Yes, and that's sort of the gross margins just from our standpoint looking at gross margin above the same in 2015 as 2014, may be up a little bit, but not up a lot, and one of the reasons is we are investing more as we go into 2015 in our cloud operations.

We see that as big opportunity for us, its growing more customers are looking to, companies like PROS to take more responsibility relative to the IT side. We're not going to -- we want to compete in that space. So that piece of our business is going to incur some additional cost. That's one factor.

So the gross margins aren't going to improve a lot, they should improve somewhat but not a lot. And then again the operating income we want to continue to invest. And we can control that, if you wanted to, we could pull back on that if we wanted to, but we don't want to, we don't think it's good for long-term value..

Okay. Fair enough. And then the last question I had, Andres, is how do view growth in your sales team this year in 2015. The rest increased 39% year-over-year some of that I'm sure came from the acquired companies but how do you look at that in 2015, and then from a geographic perspective how do they get balanced in the U.S.

say versus EMEA?.

Yes. So we're focusing continuing to expand within the active markets that we are and as we communicated in the past North America and Europe are there the areas with more concentration.

So we're continuing to expand in both of those markets to approximately 75 quota-carrying personnel it's our goal for the year, so approximating similar to our revenue growth number for the year.

And a big focus on the quota-carrying personnel is continuing to focus on productivity, it's been a big focus last year and we're continuing on enablement, training on-boarding and productivity within the sales organization. So we are pleased with the growth numbers..

We'll hear next from Bhavan Suri with William Blair..

Hey guys thanks for taking my question..

Thank you..

Thank you..

Guys you hear me, okay. Yes, great, and it was good to see sort of the organic number come back that was nice. Just a couple from me, I think you addressed kind of the margin stuff which I was wondering about.

But you released on the product side, just a couple of questions, you released an update to Cameleon in the back half of ’14 that kind of embedded perspective price guidance into the automatic coding process, just a little bit color of how the initial market reaction has been and how is optic trending versus your expectation?.

Yes, it's been very positive. I think this brings really the only solution in the market that really can be served for the enterprise market with embedded data science capabilities and we know that’s really the capability that drives better performance for our customers in terms of revenue growth and profitability.

So, so far, the market reaction has been positive and we expect that to continue within 2015 just looking at our overall demand..

Okay, okay. And then you obviously had a good question in terms of number of customers but you also called out previously a record number of RFPs that happened over the first nine months of the year.

Sort of as I look at what you closed, is that pipeline still as healthy as it sounded last quarter, did you close some of them this quarter and so its sort we building the pipeline, how should we think about that?.

Our pipeline continues to get stronger and stronger, and as we talked about overall demand last year is doubled; our pipeline continues to be the strongest ever. And that’s what gives us confidence going into next year and we are very pleased with the guidance we’re providing and with the progress that we made.

That’s why we’re confident saying that the bookings will outpace revenue growth next year..

You mean '15?.

In ’15. Yes..

'15, yes..

Correct, correct. Okay, great. One last one from me sort of in the same vein, just you had seen some implementations pushing into 2015 due to kind of atypical customer specific circumstances.

Has anything changed with those customers? Do you expect those deals to now close this year?.

Yes, we do. Yes, so really other than what we talked about in the second quarter there is really no changes in our implementations which we had expected was somewhat anomalous and that was. We expect those implementations to proceed in 2015..

Okay, great. That’s it from me guys. Thanks again..

Thank you..

At this time, there are no further questions in the queue. I like to turn the conference back over to Andres Reiner for any additional or closing remarks..

Thank you for your participation in today’s call. 2014 was an excellent year for growth. Our growth strategies are working and we’re in a strong position to capitalize on the large market opportunity. I would like to thank our PROS team worldwide for their relentless passion and commitment to customer success.

Thank you to our customers, partners and shareholders for your support at PROS. We look forward to speaking with you our next call. Thank you and good bye..

That does conclude today’s conference. Thank you for your participation..