Andres Reiner - President and Chief Executive Officer Stefan Schulz - Chief Financial Officer.

Nandan Amladi - Deutsche Bank Bhavan Suri - William Blair & Co Benjamin McFadden - Pacific Crest Securities Scott Berg - Needham & Company Matt VanVliet - Stifel, Nicolaus & Co., Inc. Jackson Ader - JPMorgan Chase & Co. Timothy Klasell - Northland Securities, Inc. Joseph Fadgen - Craig-Hallum Capital Group LLC.

Greetings and welcome to the PROS Holdings Inc Third Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] It is now my please to introduce your host Stefan Schulz, Chief Financial Officer. Please go ahead sir.

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

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

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

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. 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 pros.com. We encourage everyone to review this additional information.

Finally, I would like to point out that in addition to reporting financial results in accordance with Generally Accepted Accounting Principles, or GAAP, PROS reports certain financial results, as well as forward-looking guidance, on a non-GAAP basis.

A reconciliation of each non-GAAP measure to the most directly comparable GAAP measure, to the extent available without unreasonable efforts is available on the press release distributed earlier today, and in the Investor Relations section of our website. So with that, I'll turn the call over to Andres..

Thank you, Stefan. Good afternoon, everyone and thank you for joining us on today’s call. 2016 has been a breakthrough year for PROS, we have fundamentally changed how we run our business and we are now clearly seen the benefit of our clouds strategy. Putting us in a much stronger position to capitalize on our large in going market opportunity.

We are also excited there are positive moment is becoming clear in our reported financials. As we now have also passed several milestones in our cloud transformation. Like to share a strategic view of where we are as a business and why we are so excited about our outlook.

Our innovation strategy is well aligned with rising trend around data-science driven solutions. As more company shift to modern commerce and realize that automation isn’t enough or decades of market leadership and experience has positioned to help companies out perform in the digital era.

The growing excitement around algorithms, artificial intelligence and machine learning highlights the power for data-science to drive modern commerce. Real-time dynamic pricing, quoting and offers are essential to creating personalized and friction as customer experiences expected in modern commerce and data-science is the key to unlocking it.

We are thrilled because data-science is our core strength in a category we pioneered and continue to lead. Today our unique technology and innovation strategy is fueling our momentum. In the third quarter, total revenue came in above guidance and we are sequentially one quarter ahead of expectations.

Subscription revenue also came in above guidance and was up 43% compare to last year. ARR grew 22%, which was above our expectations. And ACV booking came within guidance up 25% in the third quarter in 35% year-to-date. I couldn’t be more proud of our teams for delivering these results.

I would now like to share a few highlights from the third quarter that illustrate our innovation in cloud strategy are driving growth in adoption. First, investments we are making in technology and data-science are paying off with customers getting real tangible value.

Brasil Foods is a great example of how this helps distinguish PROS and our customers in the market. In the third quarter Brasil Foods won an award from Computer World for their outstanding value they got from using our pricing solutions.

The company leverage our technology to improve accuracy on more than 20,000 price requests each day by using data-science to drive better agility, accuracy and customer responsiveness. Brasil Foods is a prime example of how we help company shift to modern commerce. Second, our renovation engine is vibrant and strong.

We are relentlessly focus on innovation to enable modern commerce. In the third quarter, we released a new innovation that uses data-science to detect B2B cross-sell opportunities based on patterns found in data. This can lead to a better customer experience with offers and products online with a customer preference across all channels.

In the third quarter, we also introduced new cloud analytics that leverages in Microsoft Cortana Analytics Suite to help airlines improve their group booking performance and experience. Airlines can quickly calibrate and tailor their group pricing strategies for customers and travel agents reducing friction in the buying process.

Third, we continued to strengthen our position in the CRM ecosystem, as [intrinsic] (Ph) machine learning, artificial intelligence and data-science growth. In the Microsoft market, we were once again showcased as a Data-Science Innovator in a keynote presentation on Cognitive computing.

And our Smart CPQ solution was added to the Microsoft marketplace Azure Solution. At Reinforce a few weeks ago I met with many customers who are striving to create better omni-channel commerce experiences. As companies build up their digital business, they want customers to have a consistent experience across direct partner in eCommerce channels.

This is where innovation sets us apart, using algorithms they have been trained over decades where real-time Dynamic Pricing ensures rational consistent in personalized pricing across all channels.

We believe our Smart CPQ with integrated pricing science is redefining what Microsoft Dynamics and Salesforce.com customers should expect from a pricing and quoting solution. This combined with our industry focus is a key reason why CRM customers such as Bostik, Honeywell, Lamb Weston and Waste Management selected PRO Smart CPQ in the third quarter.

Companies like these and many more are taking notice that PROS’ market leading innovations are even more accessible and more valuable in the cloud. This is one of the reasons we have made great progress in our cloud strategy. In the third, quarter every new customer was a cloud and more than 90% of our bookings were cloud.

We continue to see strong Land and Expand business as the cloud makes it easier for customers to start fast, get value and then grow. We had a great example of faster adoption in the third quarter with an industrial distribution company that sells 30,000 SKUs to more than 10,000 customers.

To simplify their customer experience, the company waned pricing that we both personalized for customer and prescriptive for their sales reps. With our deep industry experience, improving data-science made our cloud based price guidance edition a right fit.

In fact the company went from discovery to purchase to the start of the implementation in less than 45 days. This is a great example of what can happen with simplified cloud offerings in our industry focused approach. We also have a good example how the cloud enables us to extend our reach within existing customers.

In the third quarter, one of our medical device customers expanded the use of our pricing and quoting solutions from three divisions to five divisions on PROS clock. The cloud was the most effective way for them to standardize on PROS and now they are evaluating additional opportunities to expand our solution to even more business units.

Success with our cloud strategy was the key factor behind our solid third quarter performance. We are going to fourth quarter confident we will continue to execute on our growth strategy. Demand is strong, our solutions are at the heart of modern commerce and more important our people are all in.

We spend a lot of time with our teams across the world and the energy and passion I’m seeing is truly incredible. Each new customer success, each new innovation, and each new win further galvanizes our people around our strategy. We have seen the benefits of delivering on our mission and our culture is thriving.

Ultimately, this is why we are so enthusiastic about our future and why we can create value for customers and shareholders. With that, I will now turn the call over to Stefan to review our financial results and our outlook for the fourth quarter and full-year 2016..

Thank you, Andres. Before I discuss our performance, I would like to remind you that we will be holding our Analyst Day, next Thursday, November the 10th, in New York City. This event will also be available via webcast. You will have a chance to hear from several members of our leadership team as well as several customers.

We are looking forward to next Thursday and hope you can join us. Now for the business update. I will start with an update on our cloud strategy and then move to details on the third quarter and outlook for the fourth quarter and full-year.

Our execution continues to improve and our cloud transformation continues to progress faster than we had planned at the beginning of the year. As a result, we believe our revenues have now passed the low point that the company’s transitioned from an on-premise software company to a SaaS company.

We achieved sequential revenue growth in the third quarter and we now have line of sight to year-over-year revenue growth within the next few quarters. While there may be modest variability from quarter-to-quarter, we believe we are now on an upward trajectory. A few quarters ago, we laid out two additional goals related to our cloud strategy.

The first goal was to accelerate subscription revenue growth from approximately 20% in 2016 to approximately 40% in 2017 and then accelerate again in 2018. With another strong quarter of subscription revenue growth in the third quarter of 43%, we are ahead of schedule towards reaching that goal.

The second goal was to cross over into sustainable positive free cash flow in late 2017 setting us up for full-year free cash flow in 2018. We are still tracking that goal with another better than expected and positive free cash flow performance in the third quarter.

Our free cash flow results have exceeded our expectations over the past five quarters and that has only increased our confidence towards achieving our long-term goal of 20% free cash flow margins.

Our initiatives around working capital improvement, sales productivity, and operational excellence are making a difference and will continue to drive our cash flow margins going forward. We are pleased with the progress we are making to drive long term sustainable value to our shareholders.

I will now provide color on our third quarter results, focusing primarily on our cloud metrics and a few P&L highlights. ARR came in at $114.8 million in the third quarter, up 22% over the same period last year. Growth in subscription ARR continues to be the primary driver of overall ARR growth, both sequentially and year-over-year.

Our ACV bookings in the third quarter were in line with our guidance range at $5.6 million, up 25% from the third quarter of last year; ACV bookings with B2B customers, was the primary driver of this growth. Turning to our P&L.

Revenue for the third quarter was $38.4 million, which was above the high-end of our guidance range and a sequential increase but an 8% decrease from last year. With our substantial outperformance on revenue for the third quarter we achieved sequential growth a quarter sooner than expected.

Because the Q3 growth was primarily due to revenue coming in sooner than planned, we expect our fourth quarter total revenue to be modestly impacted by this timing, though nothing has changed in our full-year outlook on revenue.

Subscription revenue was $9.9 million for the quarter, above our guidance range of $9.3 million to $9.5 million and an increase of 43% over last year. Now for two quarters in a row, we have seen significant growth in subscription revenue.

One of the factors driving this growth is better linearity of booking within each quarter, as we continue to focus on sales execution. Maintenance revenue was $17.7 million, up 12% over last year. This was better than our expectations and primarily due to the timing of cash collections.

As we have mentioned before, some of our maintenance contracts are recognized on a cash basis, which is why we continue to expect some variability in our maintenance revenue.

Combined, subscription and maintenance revenue make up our recurring revenue, which represented 72% of total revenue in the third quarter and is a much larger component of our total revenue than last year, when recurring revenue was made up only 54% of total revenue. Recurring revenue was up 21% year-over-year.

From a margin standpoint, we remain focused on achieving our long-term gross margin target range of 69% to 72%. In the early stages of our cloud transitions, margins have been impacted by lower services gross margins and lower subscription gross margins.

We believe both of these are short-term issues that will lessen as we build scale in our cloud business and as we continue to shorten our implementation services. Subscription gross margins were in the mid-50s in the third quarter due to continued investments in our cloud infrastructure. We expect to take that up to low-60’s in 2017.

We also continue to emphasize operating expense discipline during our cloud transition. Total operating expenses were actually down from last year by $1.9 million or 6%.

The decline was mostly within sales and marketing expenses and related to a small shift in spinning our marketing programs and an increase in the deferral of sales commissions, resulting from increased subscription bookings. Now turning to free cash flow, we are very pleased with the positive free cash flow of $531,000 in the third quarter.

This was obviously better than we expected and was driven primarily by strong execution on collections, as well as continued focused on expense management.

Year-to-date, our free cash flow burn was $14.3 million, we are on track with our expectations that 2016 will be the low point of our free cash flow and are transitioned and that we will crossover into positive free cash flow on a full-year basis in the year 2018.

Before I get into our outlook, I would like to step back and note that after six quarters of ACV layering into ARR, we are starting to see both ARR and subscription revenue more closely reflect our growth activity.

We are excited to reach this point and look forward to getting pass the translation difference between on-prem and cloud growth activity as well as reported revenue. We believe this will give us the opportunity, to reach one of our previously stated objectives of simplifying our reported matrix.

We will discuss this topic in more detail in our Analyst Day next week. Now, for an update on our guidance. For the fourth quarter, we expect ACV bookings to be in the range of $6.1 million to $8.1 million.

We understand that our range for ACV bookings is relatively wide, but as we discussed in the past the exact amount and timing of ACV bookings is difficult to predict, especially when we are focused on insuring our contracts generates sufficient value to us, based on the proven value our products provide to our customers.

With this Q4 range of $6.1 million to $8.1 million, we are reiterating our full-year guidance on ACV. For ARR we expect to be in the range of $119 million to $121million a 22% growth over last year at the midpoint. This is a $500,000 increase from our prior guidance due to strong customer renewals.

We expect subscription revenue in the fourth quarter of between $10.3 million and $10.5 million. We are also raising our guidance on subscription revenue for the full-year to $37.5 million to $37.7 million, a 29% increase over 2015 at the midpoint.

As you can see, we are beginning to see the growth in subscription revenue that reflects momentum in our cloud strategy. Total revenue for the fourth quarter is expected to be between $37 million and $38.5 million and for the full-year, we expect total revenue to be between $150.3 million and $151.8 million.

We are improving our free cash flow and EBITDA guidance for the year. We are now estimating our free cash flow burn to be between $30.5 million and $32.5 million for the full-year, an improvement of $3.5 million from prior guidance and $6.5 million from our guidance at the beginning of the year.

Lastly, we are estimating that our Q4 adjusted EBITDA to be a loss of between $9.5 million and $11 million. For the full-year, we expect adjusted EBITDA will be a loss between $36.3 million and $37.8 million, a $7 million improvement from the guidance given last quarter.

Our non-GAAP loss per share loss is expected to be in the range of $0.24 to $0.27 per share in the fourth quarter. And finally, we will provide initial thoughts on several 2017 metrics at our Analyst Day next week. Overall, we are pleased with the third quarter and the progress we are making and helping our customers to outperform.

Our cloud strategy is helping new customers access our solutions and existing customers expand their PROS footprint. We know the happy customers who get value from our solutions are the key to recurring revenue growth, positive free cash flow and strong customer lifetime value.

We are making solid progress in each of these areas, which we will believe will create long-term value for our shareholders. As we look ahead, I am confident in our outlook based on the health of our pipeline and the improvements we are seeing in execution.

We believe we are making the right investments and innovations in our industry strategy to drive both sustainable growth over time and to capture our share of a large market opportunity. We are grateful for your support and we look forward to seeing you at our Analyst Day next week. With that, let me turn the call back to the operator for questions.

Operator..

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today comes from Nandan Amladi of Deutsche Bank. Please go ahead..

Hi, good afternoon. Thanks for taking my question.

Just Stefan question on the financials, the ACV growth came in line, but some of your other metrics are a lot stronger than [Indiscernible].ad you guided, so what were your one-time things that might have impacted the because you have not taken up the full-your guidance?.

Yes, so Nandan thanks for the call. A couple of things, first of all you are right we did take up our ARR guidance and that was impart because of an ACV result that we saw in Q3 and what we guided to in Q4.

But also because we continue to see better renewals than what we had originally modeled and so that play a part in our increase in our guidance for ARR. On the P&L, we actually had a couple of things that we were really pleased with.

One on the subscription side, as you noted we actually beat our guidance range by several hundred thousand range and the biggest reason for that is the timing at which we are able to start our subscription services.

So we are doing much better at having linearity of bookings within a quarter and then we are also doing a better job of once we sign our customer, getting them up and running faster and getting their environments up in running, so we can start recognizing that revenue. So those are few things that are actually helping us on the subscription side.

And then finally on maintenance, we also had some one-time benefits associated with cash collections and we have mentioned in the past that we have a handful of accounts were on a cash basis, because of regions or collectability trends that we have seen.

And we actually have a nice inflow of cash from those types of customers in the third quarter and that actually benefitted our maintenance revenue line item to some degree.

Does that address what you were looking for Nandan?.

Yes, that's helpful. And if I may, a quick follow-up for Andres. You talked about Brasil Foods as a customer, is your B2C and B2B mix shifting a little bit Brasil Foods I'm assuming is a base turner.

So I don't know if you were in the B2B side of that business or on the B2C side, but can you talk about your log offerings and how the mix might be changing if at all?.

Yes, so we continued to see a lot of strength in our B2B business, we have customers that are in our B2B segment that also have a B2C component in Brasil Foods as an example of one of those.

But we continue to see a lot of strength across all segments including B2B and I would say both in North America, Europe and rest of world, as well as our travel segment is performing well..

Okay. Thank you..

Your next question comes from Bhavan Suri of William Blair & Co. Please go ahead..

When I look at the pipeline, you gave some great color sort of about the cloud bookings and the mix there.

When you look at existing customers and you look at the transition they are going through, maybe a little color of how you guys are working with them through the transition, have you guys seen the programs of acronyms to start making the transition to cloud. Obviously on the airlines have you seen a nice uptick of cloud.

But just some color sort of how is that trending for existing customers and have you thought about putting a program placed to have the existing customers maybe accelerate their transition to cloud?.

Yes. So, I would say still our focus continues to be predominantly on that new acquisition and it's been for now.

On existing customers the areas that we are seeing great opportunity for expansion, it's where they are either adding on new divisions or adopting new solutions within their existing environment and we see those as straight opportunities to move them to the cloud and I would say that's why it's still few so far.

But we see a lot of opportunities predominantly around expansions where they are really getting a lot of value out of more solution, they are looking to expand and they may be expanding across divisions or across geographies for adopting new solutions and they want to standardized on the cloud as a platform for those expansions.

And you can expect that we will continue to execute more programs around our customer migration going into 2017..

And then one other one maybe just on the strategic perspective, the B2C eCommerce place is pretty well understood and B2B eCommerce sort of starting to pickup and now B2B eCommerce where you have got a large commoditized guy take one of your customers there, who maybe trying to transact online.

Dynamic Pricing plays a part into it, just give us some sense of where you guys are and where do you fit in terms of Dynamic Pricing on the B2B eCommerce place.

And sort of what does that look like not today but in five years, but we still feel it’s pretty early today, but sort of how you guys are tracking it and what does that opportunity look like in five years?.

Now that’s a great question Bhavan. That to us is one of the exciting areas, we have seen how company are thinking about modern commerce and thinking holistically. What we have seen is a change historically, they would see B2B as a separate channel.

And in the way we are helping our customers think about, is you are going to have direct sales, you are going to have your partner channel and you are going to have eCommerce. And customers can begin their journey in many different ways and therefore eCommerce can be a warn of.

You have to have programs in place that are rational across all of your channels and you have to drive Dynamic Pricing as a way to provide real-time experience through eCommerce.

So the customer may begin through an eCommerce channel gets support from a sales rep to complete a deal in an omni-channel experience and then continue to expand their purchasing through eCommerce or through direct.

And that’s the power of our platform and the capabilities that we build to bring tools for sales for your channel as well s powering eCommerce.

And as you mentioned to us, one of the secrete sauces is in an area we have been innovating for decades is around Dynamic Pricing cross-sell up-sell recommendations based on data-science and I think that message is resonating well.

And I think the companies has started in eCommerce in a small way to pass or seeing good results and seeing they can expand beyond that..

Maybe one for Stefan, so is that a big part of the business today, and sort of I guess, the question I was asking just as a follow-up is sort of three to five years out what does that look like, what do you guys think that looks like as a sort of component of the business?.

I would tell you Bhavan it’s not a huge part of the business today, but that is clearly where we see our growth going and where our business going. So I would say in the next two to three years as we look out especially - actually it’s not just even in B2B, it’s also in B2C as well.

We see this as becoming the driver if you will for a lot of the growth that we are planning for the next several years..

Okay, great. Nice job guys and thank you for taking my question. I appreciate it..

The next question comes from Ben McFadden of Pacific Crest Securities. Please go ahead..

Andres I want to start with you, you mentioned Dreamforce, in your prepared remarks. Dreamforce there is a lot of difference in CPQ vendors and of course, now we have Salesforce selling their own CPQ solution to the Steelbrick acquisition.

So I wonder, if you could just talk about what you are seeing from a demand prospective with CPQ and any changes in the competitive landscape there?.

Yes what I would say is Dreamforce is a great event for us, and I would say the Salesforce ecosystem continues to be a very vibrating environment in a vibrant ecosystems for us. I talked about in my prepared remarks around some of our wins like Bostik and Honeywell and Waste Management and Lamb Weston as examples of those buying our Smart CPQ.

I would say that the message around modern Commerce and Dynamic Pricing is resonating well and companies thinking beyond a tools for sales and I would say in our presence at event that was a very predominant topic and seeing the differentiation of our capability especially for the large enterprise market.

What I would say from our perspective you probably notice, we didn’t have a booth at event and I would say our ROI measures really don’t justify the big spend for the booth, but we felt overall I would a say very successful event for us..

Okay. Great. And then Stefan I wanted to talk a little bit about the ACV guidance. I think in the past you have seen pretty strong seasonality at times in Q4, especially when you are back on the license model and as we looked at the license being booked on upfront at contracts.

So as we think about this guide, the ACV bookings, I think at the high end it’s about 28% of your year’s guidance is going into your Q4 ACV at the high-end.

So I was just curious how we should be thinking about seasonality in this cloud or subscription model in Q4 as it relates to ACV and how confident you are as far as those potentially being conservative as we head into the end of the year?.

Yes, so it’s a good question. Last year, our first year in the cloud first transition, we did not see the seasonality that we had historically seeing in the on-prem model.

And one of the things that we noted at that point in time was we acknowledge that we had some execution issues that we needed to work through and we have worked through a lot of those in the first part of 2016.

But we also commented on the fact that the CapEx and budget issue for most companies is a driver and we feel like we certainly benefited from that and that’s what accentuated the seasonality that we saw when we are in on-prem environment. We don’t think we are going to have the same level of seasonality that we used to see when we are an on-prem.

So we have flattened that out a bit, based on one year’s data point that we saw last year. So when we gave guidance this year, our guidance was more of a flattish type of guide from the first half to the second half and our guidance today reflects that as well as you can see.

So we will be looking forward to seeing exactly how that the quarter ends, we are very encouraged by the pipeline we had, we are very encouraged by the opportunities we have relative to our fourth quarter, but we remain to be seeing exactly how those come down.

So we feel good about the position we are in, but we learn a quite bit more as we get to our second data point here in terms of seasonality..

Great. Thank you..

The next question comes from Scott Berg of Needham & Company. Please go ahead..

Hi Stef and Andreas, thanks for taking my questions. I have two quick ones. Andreas, now that you have been in this transition for 18 months and you are starting to look at pipelines on a year-over-year basis that are a little bit more consistent year-over-year. A lot more subscription right now obviously then 12 months ago.

how can you quantify or maybe can you give us some color on what pipeline growth looks like on an apples-to-apples basis, year-over-year?.

I would say that our pipeline growth continues to be very strong and it’s reflective of 20% plus numbers that we have stoked historically of supporting in our business. So the pipeline that we need to grow to continue to drive that level of growth. So I would say we feel very good about the pipeline.

In addition, I feel that the sales execution has greatly improved, the quality of pipeline is much greater, our execution around deals in time to closure has improved and that was one metric.

Frankly that historically or time to close the deal had not improved we have seen in the first three quarters of this year some slight improvement and I talked about an example of a deal entering the pipeline from start to actually begin of the implementation in under 45 days, which historically we never experienced that.

So overall what I would say is, we are pretty bullish about the pipeline, the activity that we have and the quality and execution of that pipeline which to me is as important as pipeline growth..

And then my follow-up Stefan is your subscription revenues in the third quarter are much higher than initially guided to based on the factors that you talked about.

Obviously fourth quarter is going to be up there, but as we start looking at 2017 do we still get 40% subscription revenue growth for the year as a whole over those raised numbers, just trying to understand if that's the right way to still think about next year?.

Scott, I'll provide a bit more color next week when we get together in Analyst Day.

But yes, I think based on the momentum we are seeing in the second half of this year, as we go into next year I think there is a good chance that we will be slightly above the 40% number that we had talked about in the past and again I'll provide more color on that next week..

One real quick last one here, with the raise in subscription revenues in Q3 and Q4, you have essentially maintained your guidance range for the full-year on total revenue - just a little bit.

What is giving in that model, those subscription revenues are up but total is flat, what other line items are coming in to essentially maintain the total revenues?.

It's mostly license. So, one of the things that we have been very, very happy with is the mix of bookings and how much of it has been subscription and while we do still see some existing customers that will do an expansion that may want to buy a license from time-to-time, and we do see that.

The mix has exceeded our expectations on the subscription side. And so, that's what driving the pluses on the subscription side and then the minuses on the license.

So, I would also say a little bit on the services, and only reason for that is as I mentioned earlier, our implementation times are actually coming down a bit and the attach rates that we are seeing with a lot of bookings that we are doing today are actually a little lower than what we saw in the past.

And we think those are all really good trends, but to your point it is having a neutralizing effect on total revenue here in the short-term..

Great. That’s all I have. Thanks for taking my questions..

The next question is from Tom Roderick of Stifel. Please go ahead..

Hi, guys, its Matt VanVliet on for Tom. Thanks for taking the question. You talked a quite a bit about sales execution improving.

I was wondering if you could dig into that a little more in just maybe what do you think are the biggest driving factors, obviously there has been some management changes and we have talked about greater sort of sales trending around the cloud process.

But you could give a few more details on maybe what metrics you are tracking to be confident that its execution?.

So I would say the several metrics around the time to close deals, we talked about seeing an improvement there on average from, if you remember 11 to 12 months to now getting closer to the nine-months, which is a pretty significant improvement in execution. When we look at attainment across our reps and the performance of our reps.

If you have soon our quota carrying personnel has been slightly down versus last year, while we are actually driving 35% booking growth. So that’s a clear indicator that we are driving much better productivity as a quota carrying personnel level.

Just in general overall execution, I would say some of it has to do with the sales team is much more maturing, selling our cloud solutions and they have been through multiple sales cycles end-to-end and that naturally them broad better execution.

But I feel that we have a great team and they are continuing to improve and drive improvement in our execution. I still believe, we can continue to drive better improvement heading even into next year..

And then following up on the sales hiring trend and may be what your outlook is for the reminder of the year.

Do you expect sort of continue to have a very low new hiring and instead focus on that productivity of the current sales reps?.

As we said, we are expected to really focus on productivity and execution. And what I would say is that you should expecting in the fourth quarter in Q1 of us starting to add new raps into the business.

But I would say, we are pleased with the results and our real focus on the execution I believe we have the team not only hit the numbers this year, but also to hit the numbers next year with our expected growth. You can expect, in the first half of next year to continue to layer on more sales reps..

And then lastly on the productivity side, you have obviously made great a rapid improvement there. Is there still another big leg up that you can capture or is it more going to be sort of organic in line with growth.

And from there the factors, really just continuing to add some headcount and seizing on some opportunities?.

I still believe we have room to drive even further productivity, as much progress as we have made as a team, I think as we become effective in selling, I think our sales cycle times can decrease from the average of nine-months. I still believe we should be able to drive another significant improvement to that.

And as we are driving that we are hopeful and drive better productivity side. So I still believe we have quite a bit of opportunities to drive more productivity..

All right, great. Thank you..

Our next question is from Sterling Auty of J.P Morgan. Please go ahead..

Hey guys this is Jackson Ader on Sterling tonight. Thanks for taking our questions. The first can we start with just a little bit of commentary around what you are seeing in geography that looks like Europe was a little soft year-over-year and United States the rest of world is growing pretty nicely.

And any commentary on the geographic mix and the demand you are seeing?.

We continue to see strong activity in just about all the geographies. I think last time we had a chance to talk to you guys.

Brexit has just been announced and there was some question about what the impact was going to be and I would tell you we have been very happy with that we have seen there both in Q3 and as we look forward into Q4 in the next quarter. and I would tell you the same is true for the Americas and rest of world.

We really haven’t seen honestly any negative trends in any one geography versus the other. The opportunities that are built in our pipeline are actually good across the board..

Okay. Great. And following up on, I think it was Matt’s question about sales productivity and sales hiring with deals cycles coming in and all of the new initiatives on training and getting people up to speed. Do you expect now that when you do ultimately start to hire people.

How long they can take them to ramp to completely up to speed with the rest of the Salesforce?.

Yes, so historically we see six to nine months timeframe to ramp in new sales rep to productivity. I think with the programs we have in place and with the simpler solutions that we now having the party should be better than that and I would say our goal would under six months.

But we want to really look at as we are layering new reps, seeing improvements on productivity on the on boarding process.

But there has been a lot of focus around our solutions our industry focus that allows reps to drive productivity faster and we have seen examples of that of sales reps joining and being able to drive productive in a shorter amount of time than our historical norms. But we want to get that experience within before we comment on any lower timeframes..

I got you. And then, one more if I can just squeeze in quickly for Stefan. The ARR renewal rates that you said came in a little bit better than expected. So what are the historical ARR renewal rates either I guess on a customer or a dollar based and how benefit was it this quarter..

Yes, so you know historically we have always talked about maintenance renewal rates being over 95% and we did not go so far as to stretch that when we did our initial modeling so could apply that same ratio to what we were seeing on subscription.

And part of that had to do with early experiences from some of that the SaaS transactions we have inherited from some of the acquisitions we did, where we weren’t focusing on a certain aspects of their business and we saw a little more churn there.

So the question was how much of that was because there was an orphaned customer on an acquisition we bid versus that’s really what we should be expecting from SaaS contracts. And the reality is to get to your question.

The ARR in terms of the renewal rates and as it relates to subscription is actually quite similar what we are experienced on the maintenance side, it's better than 95%.

So, that's why we are actually able to blaze our guidance on it, because we were assuming slightly less than 95% overall as we got into the year and we are actually achieving better than 95% now..

Okay. Thanks guys. That’s all for me..

Once again, we have question from Tim Klasell of Northland Securities. Please go ahead..

First question on the sales and marketing expenses coming down, obviously you mentioned that you have seen the deferring subscription and then you had the marketing spend.

Can you give us a little bit color of the magnitude on each?.

So, they are both about the same amount of money and they were clearly the items that drew us from a growth side to a negative side without going into all the boring details, Tim.

As we have grown subscription and as we continue to grow all the mix, our subscription versus license, we are deferring more of those commissions, and that is having an impact in terms of the dollars for our cost. And then on the marketing side, now that was merely just timing.

So it's just a matter of actually seeing when programs and events occurred last year, versus when they occur in this year. One example for everyone's benefit is, last year Dreamforce was in the third quarter, this year it's in the fourth quarter.

So there is just a number of things like that that are actually shifting and so I wouldn't read anything into us necessarily decreasing our overall marketing spend, we are actually still promoting and looking for ways in which we can push our marketing dollars to drive business.

And it just happens to be in this case there was a difference in timing..

And then sort of a follow-up on the improving sales cycle.

How much do you attribute to just greater experience in your Salesforce versus what seems to be an accelerating acceptance of the customer base for subscriptions deals?.

I would say that selling subscription from what we have experienced so far definitely it features itself in a on-premise solution, because you can start small and grow and that definitely help.

But I would give the sales leadership a lot of credit and their programs they have put in their training around the organization has also driven improved performance. But clearly as we went through our pipeline last year, we were migrating a lot of deals, we still had a lot of deals that would make on-premise somewhere cloud.

As we are working this year, a lot of deals enter the pipeline as clouding or being closer to cloud. So that becomes easier, and it's the third quarter in a row that a 100% of the new deals have been cloud and just more than 90% of all deals were cloud. So I think that also helps drive better execution..

OKAY, great. Thank you..

[Operator Instructions] Our next question comes from Joe Fadgen of Craig-Hallum. Please go ahead..

Hey, guys, thanks, on here for Chad today. Just want to dig a little bit into the subscription line and the gross profit there.

It looks like it was a little bit lower than we had expected this quarter and you spoke to that in your prepared remarks, but if we look at that line going forward and we expect a subscription revenue is going to grow sequentially throughout 2017.

Should we also expect in that the gross margin would expand sequentially along with it or should we certainly be a little bit more volatility or lumpiness in the margin profile going forward. And then quick clarification, I think you said you expected low 60% margin in that line in 2017.

Is that an average for the year, or do you expect to exit the year at that low 60% range?.

So Joe, this is Stefan good question. I would tell you, first of all, your question about will we see it expand throughout the year or next year? the answer is yes. I would also tell you that it will not be a liner progression, there will be lumpiness to it.

One of things that we are actually going through as we expand and rescale within our subscription business, is we are making investments in areas that are different from where we may have been investing last quarter or last year.

So for example, one question that came in earlier was, what are we seeing geographically? Are we seeing good momentum in Europe or in Australia or in the far East? and the answer is yes.

As you know there are number of requirements that are actually coming out almost every day, about what kind of security, what kind of data center and support that you need to have overseas. We are making those investments as we expand our opportunities in those regions as well.

And so as we make those investments that will drive some of the lumpiness that I’m talking about, but to answer your final question is, as we go through next year and we come out of the mid-50’s and we get into the low-60’s. I would say low-60’s is going to be an average.

When we expect to report 2017 results, we expect to talk about 2017 and be in low-60’s..

Okay. All right. That will be all for me. Thank you. A - Stefan Schulz Thank you. A - Andres Reiner Thank you..

There are no further question at this time. I would now like to turn the floor back over to Andres Reiner for closing remarks..

Thank you for your participation in today’s call. We are pleased with our results for the third quarter and we are confident in our outlook for the year, based on our momentum. I would like to thank our incredible people approach for their passion and commitment to helping customer outperform.

I would also like to thank our customers, partners and shareholders for your continued support. We look forward to providing more details about our strategy and model updates at our Analyst Day next week and thank you and good-bye..

This concludes today's teleconference. You may disconnect your lines. Thank you for your participation..