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

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

Greetings and welcome to PROS Holdings Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr.

Stefan Schulz, Chief Financial Officer for PROS Holdings. Thank you, Mr. Schulz. You may now begin..

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 and 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. We would like to start by acknowledging and thanking our PROS team worldwide for a breakthrough year in 2016.

Less than two years ago, we embarked on our journey to become a cloud company to help more companies outperform with modern commerce solutions that are easy to buy, implement, and expand. We started the journey by driving foundational changes in organization, products, and infrastructure.

We accomplished that and set ourselves up to drive towards our vision. In 2016, we executed exceptionally well, and I could not be more proud of the results we achieved across our business. Now, we are operating as a cloud company. In sales, every new company we added was a cloud customer.

In professional services, we are getting customers to value faster with some customers going live in under 90 days. In R&D, we doubled the number of product releases from the year before and we’re leveraging our adaptive cloud platform to deliver rich, real-time data science capabilities to customers across the globe.

These milestone achievements drove strong financial results in 2016, and contributed to a succeeding on our key goals. From a growth standpoint, we exceeded our fourth quarter and full-year guidance metrics on total revenue, subscription revenue, ARR and ACV.

On a full-year basis, subscription revenue was up 31%, ARR was up 24%, ACV was up 38% compared to 2015. We’re particularly pleased that we exceeded the ARR guidance that we set at the beginning of the year by $4.2 million, driven by outperformance on bookings and renewals.

We attribute these strong results to our simplified cloud offerings, as well as our improvements in execution. As we enter 2017, we believe we have the right people, the right solutions, and the right strategy to achieve our long-term growth objectives.

Our culture, innovation and industry approach are key components to driving growth and creating value for our customers and shareholders. I’d like to share a few highlights of how we’re advancing in these areas. First, on culture what makes us special sort of people. We take a great pride in what we’re building together.

Our people are innovators, owners, and they care deeply about our customers, the community, and each other. One example of our culture in practice is our PROS women’s network BLAZE.

Last year, BLAZE members fostered thought leadership and outreach at the Grace Hopper Conference by leading sessions on data science and career development for women in technology. This is one example of numerous employee-led efforts to help people achieve their full potential.

Our passionate, smart and caring people enable us to drive innovations and ultimately achieve our mission of helping companies outperform. Second, on innovation. We believe we’re at the forefront of developing innovations that enable companies to make the shift to modern commerce.

In the digital era, B2B buyers have come to expect the same personalized, frictionless customer experience demanded by B2C buyers. As companies seek out new ways to compete in this changing environment, we’re well-positioned to help.

For example, last year we helped the home improvement products provider respond to increase demand for online purchasing. With PROS solution, this company put the power of PROS product configuration in order personalization directly into the hands of buyers.

This is just one example how our modern commerce innovations help our customers differentiate and grow. At the heart of our innovation strategy is data science that powers modern commerce. We’re delivering new ways for companies to provide frictionless customer experience in real-time.

For example, we recently released a new capability that allows airlines to dynamically adjust their cabin class configuration, as demand fluctuates right up to the moment of departure. This enables airlines to deliver the level of service customers come to expect based on their loyalty status.

Innovations like these are driving continued growth for PROS in the airline space, as customers expand their use of our solutions. The final pillar of our growth strategy for 2017 is our industry go-to-market approach. Our team’s industry expertise paired with more tailored industry solution templates is driving land and expand business.

The great illustration of this is the food vertical. So an example, last quarter, we welcomed J.R. Simplot, Land O’ Lakes Dairy, and Purina Animal Nutrition as new customers, and expanded our customer partnership with Cargill.

Food companies like these recognize our unique ability to combined real-time commodity pricing and forecasting with cloud quoting solutions for CRN. This underscore our industry and innovation strategies together amplify the value that we create.

We entered 2017 confident that continued execution of our industry and innovation strategies will drive consistency, productivity, and scaling our business. We already see more linear bookings and better overall sales productivity.

In fact, last year a team responsible for driving new business remained relatively constant in size, while growing bookings by 38%. Looking ahead, we see an opportunity to drive even higher levels of productivity. In the fourth quarter, we further aligned our teams with the customer lifecycle in a SaaS model.

We increased our overall quota-carrying personnel to 77, shifting more people to manage customer relationships and renewals. We believe, we’re entering the year with the right mix and number of quota carrying personnel to meet the needs of our revolving cloud business. We expect to invest modestly in this area for the remainder of 2017.

The team and I are energized and motivated by where we’ve accomplished in transforming PROS into a cloud company. We executed on our strategy and I cannot be more proud of the results that we’ve achieved in 2016. We entered 2017 committed to building on this momentum and driving this shift to modern commerce in the market.

I’d like to thank our employees, customers and shareholders for joining us on this transformational journey, and look forward to another strong year in 2017. With that, I’d like to turn the call over to Stefan to comment on our financials..

Thank you, Andres. I too would like to begin by thanking our team for a strong fourth quarter and full-year. As Andres mentioned, we saw impressive growth in our revenue and bookings for the year. But I’m especially pleased with how we went about accomplishing these results. We grew the business and at the same time improved productivity and efficiency.

Here are a couple of examples. First, our sales reps are selling more, which enabled us to improve our CAC ratio by about 30% year-over-year. And second, our accounts receivable team significantly improved cash collections, reducing our average days billing outstanding by about 30% year-over-year as well.

These are just a couple of examples, where our team improved how we operate. We are emerging from the cloud transition as a better operating company, and these accomplishments underscore our commitment to creating more value for our customers and our shareholders as we drive towards our long-term goal.

Now, I’d like to provide an update on the goals related to our cloud strategy that we introduced at the beginning of 2016. Our first goal was related to accelerating growth rates in our subscription revenue. We set a target of 20% subscription revenue growth in 2016, growing to approximately 40% in 2017, and accelerating again in 2018.

With 2016 subscription revenue growth of 31% and this year’s guidance in excess of the 40% growth goal, we are executing well ahead of plan. Our second goal was to crossover into sustainable positive free cash flow in late 2017 setting us up for full-year free cash flow in 2018.

We are well ahead of the pace we targeted at the outset of our cloud-first transition from a free cash flow perspective. And we remain confident in achieving our 2017 and 2018 goals, as well as our long-term goal of 20% free cash flow margins. Now moving on to our fourth quarter and full-year results.

Starting with our cloud metrics, we finished the fourth quarter with $122.2 million of ARR, up 24% year-over-year. When viewed on a constant currency basis, year-end ARR was slightly higher at $122.7 million. Subscription-related ARR continues to be the primary driver of overall ARR growth.

From a bookings standpoint, we finished the fourth quarter with $9.3 million in ACV, up 45% year-over-year and $1.2 million above the high-end of guidance. As we’ve discussed previously, ACV has historically been lumpy on a quarterly basis, and the fourth quarter is a perfect example of this variability.

On a full-year basis, ACV was $29.7 million, up 38% year-over-year. This growth reflects healthy contributions from all part of our business with growth in B2B slightly outpacing our overall growth rate. Our strong bookings were also characterized by a good balance of new customer additions and existing customer expansions.

We’re seeing that many of our customers are motivated to increase their PROS footprint due to the ease of expansion that comes with cloud solutions. Before I turn to the P&L, I would like to make a few comments on our go-forward plan for cloud metric reporting.

After seven quarters of layering ACV into ARR, our underlying business growth is now more visible in our financial statements. As we shared at our Analyst Day in November, we will not report ACV bookings going forward and we will report ARR on an annual basis.

At the same time, we’re now disclosing the deferred portion of our recurring revenue on a quarterly basis. This can be used to determine our trailing 12 months calculated billings. Now, turning to our P&L. Total revenue for the fourth quarter was up sequentially and came in above guidance at $39.9 million.

For the full-year, total revenue was $153.3 million, which was also ahead of our expectations. In both cases, the outperformance came from stronger subscription revenue and license expansions with a few existing customers. Subscription revenue was up 37% year-over-year in the fourth quarter and 31% for the full-year.

Subscription and maintenance revenue combined make up our recurring revenue. In the fourth quarter, our recurring revenue was $28.4 million, up 13% year-over-year. For the full-year, recurring revenue was $106.7 million, up 15% over 2015. Our recurring revenue made up 70% of our total revenue, as compared to 54% last year.

This is on track with our long-term target of better than 85% recurring revenue mix. As I mentioned earlier, we are now breaking out the recurring portion of our deferred revenue, which was $61.7 million at the end of the fourth quarter.

From a gross margin standpoint, we achieved 63% in the fourth quarter and we remain focused on achieving our long-term gross margin target range of between 69% and 72%. Due to our cloud transition, 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. Now, turning to free cash flow.

In 2016, our free cash flow burn was $24.3 million, which was approximately $14 million better than originally anticipated due to our disciplined approach towards cash expenditures and strong cash collections that I referenced earlier. We exited 2016 with a total cash and investments balance of $134 million.

In addition and subsequent to year-end, we renewed our existing $50 million credit facility for five more years and the facility now expires in July of 2022. Overall, we are pleased with our financial position entering 2017. Now, turning to guidance. I will start with the first quarter and then move to the full-year.

For the first quarter, we expect total revenue in the range of $38 million to $39 million, a 2% year-over-year increase at the midpoint. Returning to total revenue, year-over-year growth represents another important milestone in our cloud transformation and keeps us on pace with our plans to achieve 20%-plus revenue CAGR over the next five years.

We expect subscription revenue for Q1 to be in the range of $11.5 million to $11.8 million, up 42% over the first quarter of 2016 at the midpoint. We expect our adjusted EBITDA loss for the first quarter to be in the $13 million to $12 million range.

And with an estimated non-GAAP tax rate of 36% in the first quarter, we anticipate a non-GAAP loss per share between $0.30 and $0.29 based on an estimated 31 million basic shares outstanding. And now for the full-year guidance. We expect total revenue for 2017 to be between $162.5 million and $165.5 million, a 7% increase over 2016 at the midpoint.

We anticipate subscription revenue for the full-year will be between $54 million and $55 million, which is an increase of 43% over 2016 at the midpoint.

We estimate our free cash flow burn will be between $21 million and $19 million for the full-year, a $4.3 million improvement over 2016 at the midpoint.And we estimate that our full-year adjusted EBITDA will be a loss between $35 million and $34 million, which is relatively flat compared to 2016.

We intend to make investments in our business to support our growth for 2017 and beyond. Our non-GAAP loss per share is expected to be between $0.87 and $0.84 per share for the full-year of 2017. And from a cloud metrics standpoint, we expect ARR for 2017 to be between $147 million and $149 million, a 21% increase over 2016 at the midpoint.

Overall, we are very pleased with our fourth quarter and full-year performance. While achieving these strong results, we laid a foundation that positions us for better long-term results through more disciplined, productivity, innovation and scale.

We now move into this year with greater confidence in achieving our longer-term growth and profitability goals. We believe that we have the right team, the right innovation strategy, and the right industry focus in place to capitalize on our large market opportunity and ultimately to create value for our customers and shareholders.

We are grateful for your support of PROS and we look forward to 2017. With that, let me turn the call back to the operator for questions.

Operator?.

Thank you. We will now be conducting a question-and-answer section. [Operator Instructions] Our first question is from Bhavan Suri of William Blair. Please go ahead..

Hey, guys, can you hear me, okay?.

We can hear you perfect, Bhavan..

Okay, Andres, congratulations. Nice job there, guys, across the board. I’ll just dive in with the first question here. Obviously, you’ve shifted sort of the land and expand strategy and you’ve got the sort of smaller deal size that the cloud allows you and small implementations.

Just give us an update on how that’s trended versus expectations? And then you referred to sort of the CAC coming down since the sales guys are selling more.

Is that generally more to the same customer, or is it a sort of – that sort of logo count also increasing, just some sense of how those two split up?.

Yes, so good question. In general, we’re seeing all areas of the business performing really well and both selling to new business, as well as expanding with existing customers. So in all areas, we’re seeing an improvement.

I think as we’ve gone through the year, our sales team is definitely executing much better in selling or packages, especially around our industry templates and/or SaaS solutions. And we’ve seen that drive an improvement in sales cycle time and productivity.

On average, for example, in the B2B business, we’ve seen a 10% improvement to sales cycle time, which is in direct correlation to make it easier to sell our solutions and to drive value faster..

Yes, Bhavan, this is Stefan. And on your question around the CAC ratio to Andres point, the benefits that we’ve seen that Chris laid out at our November Analyst Day have really come to fruition. We’re starting to see a lot of those benefits occur.

We really saw that in the latter half of the year and especially Q4, but those benefits are standing across both existing and new. As a matter of fact, last quarter, we highlighted one particular account, where we went to halo to the deal that was actually sold and implemented inside of the quarter. So we’re seeing more examples like that as well.

So we’re very pleased with the progress we’ve been making there..

Great. And then we’ve been talking now for maybe over a year now about the vertical strategy. And you called out food, and you guys have called out food and agra multiple times, the Land O’ Lakes is a good example.

But you’ve also got a number of other verticals outside of the airline space that you play and how are those going? And sort of are those also growth drivers? Is it large? Are you still food and agra?.

Yes. No, we’ve seen across all of our strategic industries we’ve seen a good adoption, obviously, chemical and energies and other area. In automotive and industrial, we’ve seen good opportunities in high-tech as well.

So we think that customers now they expected the solutions aren’t just vertical or not horizontal platforms, but they have verticals facilitation. And I think with our industry templates and our industry experience, they see significant value and acceleration to that value..

Got it. And then one last one from me. As companies go through this transition, on-prem maintenance and license to SaaS, the switch of existing customers from an annual maintenance to a subscription or SaaS model drives this pretty big inflection.

Typically you get pick a number 3X to 4X annual recurring revenue from the SaaS model versus the maintenance. You obviously have a big base there.

Have you thought, or are you thinking about strategic programs to start getting some of those customers to transition from the existing maintenance streams to SaaS? Is that something that’s in the plan? Is that something that’s further out? How are you guys thinking about that move?.

Yes. So we – we’ve said all along that our strategy is kind of the old baseball analogy of build it and they will come,and our strategy still has a – still involves that that concept.

But we have started seeing some customers that actually want to start to migrate, because they are seeing the benefits of being on the cloud, because they are starting to see the benefits that have been built into the product that our engineering team has developed over the last couple of years. So we are seeing that happen at a greater scale.

But I would tell you, it’s still not a major component of our overall business, both in 2016 and still in 2017. I think you’ll start to see that happening more in 2018. We’re going to start looking at more formal programs on how we would roll that out. But the details has yet to be completely ironed out and we haven’t really disclosed what that is.

But I would look for us to talk more about that probably at our outperform event, which would be actually a new neck of the woods, Bhavan, in May..

That’s awesome, if I’m actually in town, but that’s it. Thanks, guys. Thanks for taking my questions and congrats..

Thank you..

Thank you..

Thank you. The next question is from Scott Berg of Needham. Please go ahead..

Yes, boys, congrats on a good quarter. I have a couple of quick ones, I think.

First of all, as a follow-up to Bhavan’s question, Stefan, your maintenance revenues were actually down sequentially from the third quarter, I think, for the first time ever, is that related to any customer conversions, or are you just trying to understand that dynamic?.

No, good question, Scott. It’s a – for the most part our bank and its revenue is accounted for, as you might expect, where we’ve recognized maintenance on a ratable basis as customers utilize the service.

But we also have some accounts that are on a cash basis because of where the accounts are located in the track record and the trends that we have we have, we have a few of those. And when those customers pay, we actually may see a boost in maintenance revenue and we did see that in the third quarter.

And as a result that actually boosted our maintenance a bit in the third quarter, and we didn’t get quite as much of a boost on those types of accounts in the fourth quarter. It really has nothing to do with any sort of accelerated migration program, or any sort of degradation in our maintenance space.

It was really more about anomaly that that existed where as it relates to cash counts..

Thank you. That’s helpful. And then, Andres, one of the things you had in your press release that I found interesting is you talked about getting an airline customer up on the Azure cloud for the first time. Wanted to try to understand how that can impact your travel segment business going forward.

I assume that’s the platform you’re going to leverage for other types of cloud customers to try to leverage going forward.

But does that accelerate those types of customers just in general moving to the cloud, or I’m just trying to understand what’s the right way to think about that first milestone?.

Yes. So what Azure gives us is ways to drive a lot more elastic expansion. As you can see in the travel industry, we’re doing the real-time requests. As you book a flight, it’s hitting our engine in real-time. And it allows us to place multiple nodes across the world and be able to throttle them dynamically depending on demand pattern changes.

So it gives us a lot more flexibility in expanding quickly and readjusting to size of seasonality demand pattern changes. It also gives us a way to get solutions up and running faster. So we think this is a real breakthrough for us and our customers and it’s going to drive significant value to the airline industry..

Great. And then the last question for me is, we were at a retail and e-commerce trade show in the month of January, and one of the things that came up several times was B2B e-commerce. Now, obviously, your SaaS solutions both on, we’ll call it, the generic pricing and the CPQ side have some impact there.

Just wanted to see if you could comment on any trends that you’re seeing in that space directly that you think you can benefit from over the next two to three years?.

Yes, I can tell you, we’ve definitely seen a big trend of companies thinking about, especially digital commerce and e-commerce, but not at the silo in a separate channel, but more as an omni-channel and how they’re driving direct sales, their partner in e-commerce in a consistent way.

So that customers can begin maybe through e-commerce complete through a direct sales rep, or vice versa, or start through direct sales, but buy more through e-commerce.

And we’re seeing that to be really more important in the market in an area that that we believe we’re driving huge differentiation with our pricing science, because at that point you have to drive dynamic pricing recommendations in real-time to be able to capture that win and you need to be able to have ensure that you’re driving similar pricing across all of your channels.

So we definitely see that as a major trend in the market and something that many of our customers are thinking about..

Great. That’s all I have. I’ll jump back in the queue. Thank you..

Great, thanks..

Thanks, Scott..

Thank you. The next questions is from Ben McFadden Pacific Crest. Please go ahead..

Hey, guys, thanks for taking my questions. I want to start with this ACV number, which was particularly strong in the quarter. Stefan, I think you said back at the Analysts Day that in this cloud-based model, you weren’t sure whether we would see the same type of seasonality that we previously saw with the license model. This is clearly a big number.

So I’m just hoping you could kind of help us parse through how much of this is due to seasonality and the fact that you have historically had a very strong Q4 versus this – the other aspects that you’re talking about around sort of the maturation of this cloud-based model and this new go-to-market method around vertical specific sort of implementations.

Just any help there would be great?.

Yes. No, that’s a great question, Ben. And you remember that comment, obviously. And I would tell you that it’s more the latter. It’s more on our execution in the field than it was anything related to seasonality. Now, I do think there was a little more seasonality than what we were planning and modeling.

But when you look at the level of outperformance that we saw in Q4 and I look at the deals that that made that up, I would tell you that, the fields execution in actually, putting forth the industry value proposition and all the things that Chris talked about about the rigor that we’re going through in the field organization drove a lot of those results.

So a lot of credit goes to the work that that our field leadership has done..

Yes, I would add to that. I think definitely had to do a lot with execution. As we look at the numbers also, we saw that whether we look at them in North America, Europe, or rest of world. We see strong performance across the business and for the full-year not just for the quarter.

The other thing that I would say is, we continue to see linearity of bookings rather than in driving a rhythm in our business.

I think, there’s a lot of rigor that’s been placed by the sales organization in execution and they deserve a lot of the credit for really executing well through the quarter and not being way back-ended as is typical in software.

So we’re continuing to see and I would say that this is probably our fourth quarter of continuing to see this linearity of bookings, which to me starts to be more of a trend than a one-time event..

Great. And then maybe just to continue to pick on Stefan here, just I feel like, I ask this question every call, but I know it’s a question that people care about. Just on the free cash flow here, you continue to exceed your guidance. There seems to be a slight uptick projected for 2017. I’m just kind of curious your thoughts on how much.

conservatism there is to potentially be ahead of schedule on free cash flow. I do see that the quota-carrying personnel went up quite a bit in the quarter.

So I wasn’t sure if this is a situation, where your investments have picked up to the point of, the free cash flow should continue to operate at a burn versus how much kind of leeway you have in there going forward?.

Yes, that’s a good point. I must say, I’m very, very pleased with how free cash flow has – as we’ve been reported this year, because we did have a much higher burn rate that we were planning and anticipating. But a lot of the efficiencies that we’ve been able to identify and realize to the organization were actually realized.

And that had a big contributor to – was a big contributor to the outperformance there, but then also, our collection efforts continued to improve.

So as a whole company, we really focused on how we could reduce our days build outstanding and we did a really nice job in actually driving that number down quite a bit much more so than what we had originally thought. So I don’t think we have that much upside in terms of how much more we can do on days bills outstanding for next year.

But I think there is going to be a slight improvement in cash flow from what you saw this year. And to your point, we will be making investments in our field organization, not so much to drive 2017 results, but really in anticipation of driving 2018 results.

And that’s something we’ve been looking forward to now for the last six months or so, and we are modeling and planning for that. So that’s why you’re seeing the EBITDA and free cash flow results for 2017, the way they are, because we are making sure we are not caught short handed as we get into 2018 and miss that on the opportunity..

Great. Thank you very much..

Thank you..

Thank you. The next question is from Jackson Ader of JPMorgan. Please go ahead..

Thanks. Hi, guys..

Hi, Jackson..

Andres, I’ll start with you. I think, to piggyback on the last question about the sales heads that quota-carrying reps jumping up pretty significantly quarter-over-quarter. I mean, the last time I think that we – that we heard from you guys, it was all about rep productivity rather than really growing the actual headcount.

So what has changed since then on the…?.

Yes. So nothing has changed as we looked at Q1 and the full-year one area that we wanted to put more focus and emphasis was around managing customer relationships and driving renewable. In – during Q4, we made some realignment to add more individuals focus on this area.

And we wanted to make sure, we look the full ARR that we have and we have the right focus within the organization to able – to be able to manage that ARR growth and to be able to manage a better customer experience and and opportunities to continue to land and expand..

Okay. So, I mean, if I look at it, I think it was 14 heads or so quarter-over-quarter.

Are – is – that’s not 14 total your brand new – net new headcount, correct?.

That’s correct..

Okay. Okay, sorry go ahead..

Think of it as a reorganization. We – as Andres was just saying, we aligned some of our personnel that were not necessarily the quota-based into a quota function basically to help us expand and also help our customers realize the full value of our products and solutions.

So as we get our ARR larger and larger and larger, I mean, we grew our ARR about $24 million last year. We’re starting to realize, we need to expand that that quota-carrying base to make sure that the value is being realized by our customers and the opportunities for them to expand with us is realized..

Gotcha. All right.

And then maybe just, as you look at the verticals – the strategic verticals that you’re trying to move into, if you move into new verticals, how do you get a sense of what those new industries are looking for as far as tailoring your products to the brand new industries?.

Yes. I would tell you that right now we’ve seen the industries that we’re in, we see a huge market opportunity. So right now, I would tell you, we’re not looking at expanding another verticals.

But the way that we’ve analyzed other verticals is, where we see a combination of typically a high number of products, high number of transactions, a high number of customers, and we see we can drive value.

We will expand within that vertical and we’ll typically take one or two customers within that space to help define a template around that industry. So, for example, when we looked at food, we look at commodity price and being able to bring commodity price data and forecast commodity price moves.

So we start to analyze the specifics about that industry, where we can drive through the same science and same platform capabilities even more impact by consuming internal or external data to be able to optimize price recommendations, et cetera. So right now, I would say, really our focus is going deep within the industries that we’re in.

And I think it’s continuing to execute to our industry strategy as is. The beauty of our technology is really the same solution can apply to many, but focus is what’s driving our growth and we want to continue to focus on the industries we’re in and going deep and continuing to penetrate deep..

All right. Thanks, guys..

Thank you..

Thank you. The next question is from Nandan Amladi of Deutsche Bank. Please go ahead..

Hi, good afternoon. Thanks for taking my question. So, Stefan, and I guess, Andres too, you guys had a pretty strong finish to the year. You talked about how execution has improved and so on, you’re feeling pretty comfortable heading into 2017.

Why then adjusted EBITDA, so that – and your free cash flow and EPS guidance so much lower than where consensus was, the street get it wrong, or are there other areas of investment that you would like to make?.

So, yes. So, Nandan, one of the things that we wanted to make sure that we did is invest, so that we’re ready for 2018. And I don’t want to go out and say that that the street necessarily got it wrong. I don’t know that we’ve really covered, what our expense plans are for 2017 until just now.

And we’re on track with where we wanted to be at the end of 2017.

And as I think back to that kind of that long-term model that I’ve shared, both from a revenue perspective and from a profitability perspective, we’re on track actually a little ahead of where we thought we would be at this point and for the next, where we guided to for 2017, as we move forward towards our long-term goals and strategies.

So does that makes sense?.

Yes. So, I’ll interpret that to be just initial guidance for the year, or you’re leaving yourselves some headroom, obviously, there’s areas we want to invest in. But this is your first guidance, obviously, for 2017 and perhaps that’s what expands it.

Another question on the visibility, as your sales cycles have gotten shorter, and I think, Andres made reference to this earlier.

How is your visibility into the pipeline actually helping? Are you able to extend your time horizon out a little bit, given the visibility from the near-term stuff has improved significantly, how you’re thinking about…?.

Yes. So I believe that – that’s a great question. I believe the quality of the pipeline has greatly improved, not just in quantity, but the quality of it. And I just say with a rigor in brining linearity in bookings, where everything’s not back-ended, it gives us a little bit definitely better visibility.

And overall, obviously, that SaaS model gives us about more visibility going into the quarter and into the year. So overall, we feel very comfortable with the pipeline that we have to drive the 20%-plus ARR growth..

Okay. Thank you. That’s all for me..

Thank you..

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

Yes, Matt VanVliet on for Tom this afternoon. Thanks for taking my question.

I guess, first off looking at the partner network, and I guess a question around how much involvement are they having? How many maybe partner sourced deals are out there, or early sponsor where you’ve worked concurrently with a partner in the customer? And maybe how that strategy has changed a little bit as cloud is becoming a bigger piece and maybe the initial services engagements have been minimized to a certain extent?.

Yes, I would say the partner continues to be about the same range as it’s been historical, not much change. We’ve usually talked about 30% of our deals are – we have a partner involved, that hasn’t changed much 20% of the implementations.

What we’re seeing is, in some of the cases where companies are starting small and we’re doing a very short implementation 90 days, we may start a partner may continue the global roll out. But our team may starting some scenarios will have where a partner actually starts the implementation in plans with global roll out. So that that’s varied.

But overall, we’re seeing good partner momentum across the globe..

And then, obviously, you talked about the CAC ratio improving some of the sales cycle shortening. Are you expecting much impact from the pretty big jump in quota-carrying heads. Obviously, we talked about maybe that number being inflated slightly by some of the realignment.

But in terms of net new more traditional quota-carrying outside reps, I guess, maybe what did – what was the growth like in the fourth quarter? And should we expect any impact maybe early in the year to sales efficiency rates?.

So we still believe there is room to drive efficiency within the sales organization and our focus is not just to add quota-carrying personnel, but to continue to drive our improvements in execution. And as incredible job that the sales team did last year, we believe there’s still room to continue to improve.

On top of that in terms of the breakout, it’s about 60% of our reps are focused on new business and 40% are focused on the renewals and customer satisfaction, so that’s kind of the breakdown.

We believe we have the reps needed to drive the growth for the full-year, so the reps that we’ll be adding which I talked to be modest is predominantly for 2018 growth. But we believe we have the team to drive the 20%-plus ARR growth that we’re guiding to..

And then lastly, I would say, in the fourth quarter, the results that you guys showed were quite strong. There’s a lot going on the geopolitical stage in the fourth quarter.

I was curious if you guys saw much change either before or after the election and maybe what impact you thought that that might have had if there is any pause in deal flow, or maybe an acceleration end of the year and how that’s continued so far in the first quarter?.

We haven’t seen any impact either pre-election or post-election in any geography, or any business sector. I would say at all, so far we haven’t seen any..

Yes, Andres, you commented earlier that we saw growth across the board that was true for whatever product line we happened to be selling or which industry it was in, or geographically. We saw strength in growth in Americas and Europe and rest of world. So we really haven’t seen any impact as of yet from any geopolitical issues..

All right. Great. Thank you for taking my questions..

Thank you..

Thank you. The next question is from Tim Klasell of Northland Securities. Please go ahead..

Yes, thank you for taking my question. I’m sorry, got on just a little bit late. So this have already been answered. Your CAC is coming in nicely and that was one of your – from your Analyst Day a great leverage point, I think you brought out. Yet, as mentioned earlier, your EBITDA margins and what have you are not improving.

If we look out into 2018, when could we start to see that effect begin to hit the EBITDA margins? Is that a 2018 event? Could that be out to 2019? When do you think you would start to let that leverage flow through to the bottom line?.

Yes, that’s definitely we’ll start to see in 2018. And actually, Tim, you’ll probably start to see that trending in – even in the late quarters of 2017. But what we couldn’t afford to do was take the turn that we now have in revenue, where revenue is now going to start to increase.

And by the way, I want to just, in a second, I’ll give you a little color on the revenue for the year since we’re talking about it. But as we saw the growth, we realized that that we also need to plan for further growth in the opportunities that we have.

And we just – we haven’t turned the corner on revenue, such that we can not, let’s put it this way, bring more to the bottom line, because we also need to invest in the business to drive the growth that we want to see in the future. For example, we’re still making investments in our cloud infrastructure.

We just bought on a Data Center in Germany, which is a significant asset for us not a lot of companies have that based on the new euro in German rules around data privacy and security. And so, we’re making investments like that, they’re going to be leverageable in the future. We’re still making investments in some of our product capabilities.

And then also like we said earlier, we’re going to be making more investments in our sales to drive the growth in the future that we need to have. We think it’s the best use of resources right now to do that. Then real quickly, as I mentioned earlier, as now we’re talking about 2017.

One of the things that I also wanted to provide color on for you is, I talked about the overall growth rate that have in total revenue, and I also talked about the 43% that we’re targeting for a subscription in 2017.

But as you look at the other line items and you think about how those lines will behave on our results for the year, I would say that, license will again be down by about half, which is very similar to what we told you last year. It would come down about half this year. It’s going to come down about half again in 2017.

Maintenance should be down just a few percentage points up where it was this year, as we lessen our focus on selling licenses and fewer and fewer customers are buying in that capacity. And then services, we do expect to start seeing that how a slight growth. And so we’re thinking somewhere in the mid single digits for services to grow.

And so that’s how we’re thinking about the revenue line item shaping up for 2017..

Okay, great. That’s very helpful. And then just one final follow-up on that, the CAC improvement.

How much of that was driven by just quickening sales cycles versus, I don’t know, maybe larger deals or something else? But how much of that was driven by the quicker sales cycle?.

Well, I would say most of it was driven by the sales cycle and then also efficiency. As you can look at that our sales and marketing expenses, we’re not spending as much on sales and marketing this year as we did last year. So we’re actually getting more productivity from fewer resources.

And that’s a credit to our sales leadership and what they’ve been able to do. But absolutely getting deals through the goal line faster are a big component to driving a better CAC ratio, because the same reps were able to do – actually perform more closures during the year..

Okay, great. That’s very helpful. Thank you..

Thank you..

Thank you. The next question is from Joe Fadgen of Craig-Hallum. Please go ahead..

Yes. Hey, guys, on here for Chad today. Thanks for taking the questions. I want to delve a little bit into the OpEx outlook, kind of what – it’s been asked a bunch of times on the sales heads and the sales and marketing.

But if we’re looking through 2017, so you’ve made a bunch of it – a bunch of those adds, I mean is it a fair assumption that your sales and marketing expense for next year will probably grow at a higher rate than your overall revs, but maybe not at a higher percentage than the headcount adds? Is that kind of the right way – am I kind of bracketing it right there?.

I would say that the sales and marketing, it’s probably anymore in line with total revenue than slightly higher.

It will probably grow in line with it, but we’re also making – it’s not just sales and marketing, we’re making investments and we’re, as I said earlier, we’re also making investments in our cloud infrastructure that’s also having an impact on that.

And then and we continue and one of our hallmarks and one of the things that PROS has always been about is making sure we innovative and we don’t ever lose sight of adding the performance and capabilities for our customers. And so we will continue to make investments in our R&D platform as well..

Yes, that was going to be the next one. So R&D, then it sounds like you would say kind of grows in line with revs again next year, which….

Correct..

Okay. Yes, so that’s a little higher than we had.

And then last one, one more on the sales adds, was there any like kind of outlier geography wise on those adds, or was it pretty evenly distributed?.

That’s pretty consistent to where we’re at, so no new areas. It’s really in the same focus areas that we’ve been..

Okay. That will be all for me for now. Thanks, guys..

Great. Thank you..

Thank you. We have no further questions at this time. I would now like to turn the conference back over to Mr. Reiner for closing remarks..

Thank you for your participation in today’s call. We come into 2017 with great momentum, and we’re confident that we will continue to drive growth and adoption through innovations and industry strategies. We’d like to thank our PROS team for their incredible commitment and passion to helping our customers outperform.

And I would also like to thank our customers, partners, and shareholders for your continued support. Thank you and goodbye..

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time, and thank you for your participation..