Andres Reiner - President and CEO Stefan Schulz - EVP and CFO.

Scott Berg - Needham & Company Ben McFadden - Pacific Crest Jack Schneider - JPMorgan Sameer Kalucha - Deutsche Bank.

Greetings and welcome to the PROS Holdings Second Quarter 2017 Results 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 your host Mr.

Stefan Schulz. Thank you. Please go ahead..

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, note that some of the information we will discuss during this call will consist of forward-looking statements, including without limitation, our guidance, our strategy, future business prospects, revenue, margin and market opportunities. Actual results could differ materially from our current forecast.

Please refer to the risks and uncertainties, as well as other factors described in our filings with the SEC for more information. PROS assumes' no obligation to update any forward-looking statements to reflect future events or circumstances.

Also during the call, we will discuss financial results in accordance with Generally Accepted Accounting Principles or GAAP, as well as certain financial results and 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 effort is available on the press release distributed earlier today and in the Investor Relations section of our website at pros.com.

A replay of today's call is also available there and we encourage everyone to review this additional information. So with that, I will turn the call over to Andres..

Thank you, Stefan. Good afternoon, everyone, and thank you for joining us on today's call. I'd like to start today by welcoming the people, customers and partners of Vayant. Earlier, we announce our acquisition of Vayant to extend our modern commerce solution for the travel industry, Stefan and I will share more details on this in a few minutes.

I would like to thank our PROS team across the world for continuing to execute on our vision and strategy. We're leading our customers into their own modern commerce with powerful new innovations in machine learning and AI.

We're driving our land and expand business with an industry focus approach and we continue to accelerate a rapid transition to the cloud. In fact, in the first half of this year, 95% of our deals were cloud, up from 82% last year and ahead of our expectations.

Our customers are clearly embracing our solutions that are easy to adopt, implement and expand into clout. We had another solid performance in the second quarter. We grew subscription revenue 47% year-over-year, helping us exceed the high-end of guidance on both subscription revenue and total revenue.

We are pleased to continue building on our base of recurring revenue to drive sustainable long-term growth. I'd now like to share a few highlights from the quarter that illustrate how we're executing on our growth strategies. First, we had an incredible Outperform conference in May. We hosted a record number of guests from more than 35 countries.

Customers like Cargill, Honeywell, HP, Southwest Airlines and many more gave presentations on how they're making the shift to modern commerce. One manufacturer described how they're adapting to their buyers' new expectations in a digital world.

Powered by our dynamic pricing and smart CPQ solutions, this customer increased responsiveness and customer satisfaction by reducing turnaround time from eight days to real time. They're now delivering the personalized and frictionless buying experience that their customers expect.

With attendance at Outperform up 30% over last year, we unveiled our latest modern commerce innovations and the excitement from customers was tangible. We introduced opportunity detection, a machine learning solution that uncovers trends in buying behavior and identifies new sales opportunities.

We showcase how cognitive computing provides richer personalization for B2B buyers and stronger demand forecasting for airlines using real time data. We demonstrated our new product configuration experience in augmented reality using Microsoft HoloLens and we introduced our new user led trial of PROS Smart CPQ in the Microsoft app source.

We believe these exciting innovations will deliver great value to customers and further extend our leadership position in the market. In fact, our new opportunity detection solution was one of the reasons why Smith Drug selected PROS in the second quarter.

The pharmaceutical distributor competes in a high pressure market where having the right price is critical to winning. Our machine learning price guidance aligns pricing with buyers' expectation in opportunity detection direct sales reps to where to expand.

We believe this powerful combination will help Smith Drug shift to modern commerce and outperform in their market. Another great highlight from the quarter came from our partnership with Microsoft.

In June, Microsoft named us Alliance Global Commercial ISV Partner of the Year and then just a few weeks ago, we also won EPG, ISV Business Application Partner of the Year for the US.

Together, we're delivering value to Microsoft customers on six continents through deep integration of our solutions with Microsoft, including Dynamics 365 Cortana SQL Server, Power BI, Azure and more. We're excited about our partnership with Microsoft that spans more than a decade and benefits many of PROS' customers.

The final highlight that I'd like to share is about our land and expand strategy. As our solutions have become more accessible in the cloud, we continue to see customers start small and then expand quickly. In the second quarter, a customer who went live on smart CPQ less than a year ago purchased additional seats for the fifth time this year alone.

And for the third consecutive quarter in a row, we're thrilled to see this. It's one of the many examples where land and expand strategy is driving value for our customers and for PROS. Looking at the first half of the year overall, we made solid progress on innovation, cloud and land and expand strategies.

We now go into the remainder of the year confident with our outlook as we continue to drive execution and productivity improvements in the business. Over the next two quarters, we'll continue to add quota carrying personnel at a modestly higher pace than we originally plan to capitalize on the large market opportunity.

Now before I turn the call over to Stefan, I'd like to discuss our acquisition of Vayant and how it advances our modern commerce strategy. Vayant is a SaaS provider of shopping, pricing and merchandising technology for the travel industry.

Their software ties together seat availability, pricing and ancillary services to create accurate offers for airline passengers. Our vision is to combine this with our dynamic pricing and revenue management technology to provide the most robust optimization solution in the market.

This is increasingly important as companies in the travel industry modernize their customer experience into digital era. Powered by PROS machine learning and cognitive based AI. Airlines will be able to deliver personalized softwares and expand choices that drive loyalty and growth.

We're excited about this strategy and look forward to working with Vayant team to create even more value for our customers. With that I'd like to turn the call over Stefan to comment on our financials..

Thank you Andres, I'll start today with an update on our cloud transition goals, then I will provide details of our second quarter performance, our acquisition of Vayant and our outlook for the remainder of the year. Early in our cloud transition, we set goals for subscription revenue growth and free cash flow as key indicators of our success.

I'm pleased to report that we're making progress on both. Our initial goal for subscription growth for 2017 was 40% and with 47% subscription revenue growth in Q2 we are ahead of pace on that metric. On cash flow, our goal has been to break into positive free cash flow late in 2017 setting us up for full-year positive free cash flow in 2018.

For the second quarter, we had a cash burn of $10.1 million which was in line with our expectations. We're seeing a positive trend in the burn rate of our free cash flow and we are on track to generate free cash flow in the fourth quarter.

But we will be adjusting free cash flow guidance for the full-year due to a couple of investments we will be making in the second half of 2017. I will discuss these investments in more detail when I cover guidance. Now for more details on our P&L results.

Total revenue for the second quarter came in at $40.4 million, up 9% year over year and driven by strong subscription revenue of $13.4 million. Subscription and maintenance revenue together make up our recurring revenue. In the second quarter, our recurring revenue was $30.6 million, up 18% year over year.

For the first half, recurring revenue grew 20% compared to last year, primarily due to our subscription revenue growth, which was ahead of our expectations. Our recurring revenue in the second quarter made up 76% of total revenue as compared to 70% last year, keeping us on track with our long-term target of better than an 85% recurring revenue mix.

The recurring portion of our deferred revenue was $71.2 million at the end of the second quarter, up 23% over the same period last year. Non-GAAP gross margins were 63% in the second quarter compared to 60% last year. Non-GAAP subscription margins came in at 60%, up sequentially as we're starting to gain leverage from our global infrastructure.

This is in line with our expectations as we continue to drive towards our long-term gross margin target range of 69% to 72%. Our adjusted EBITDA loss for the second quarter was $9.5 million, which was better than guidance due to slightly higher than expected revenue and continued focus on managing the operating expenses.

Now turning to free cash flow, as I mentioned earlier, our free cash flow burn in the second quarter was $10.1 million.

Also even though we experienced seasonality in our operating cash inflows and outflows, we are seeing a positive trend in our free cash flow burn rate as we continue to manage our spend and layer our new subscription billings on top of existing recurring billings.

Our cash balance and short-term investments at the end of second quarter total $204 million, $93.5 million of this came from successfully completing a private offering of convertible senior notes in June. This provided additional support to execute on our long-term strategy.

When we issued the convertible notes, we stated that we intended to use the proceeds for general corporate purposes including acquisitions or other strategic transactions, working capital and capital expenditures and debt repayment from time to time based on market conditions.

We have already put some of these proceeds to work including our acquisition of Vayant which we announced earlier today. Continuing on that topic, I would like to welcome the team at Vayant to the PROS family.

As Andres mentioned, we believe the combined solutions from our two companies will further strengthen our leadership position in the travel industry and put us in an even stronger position to help customers shift to modern commerce.

Vayant is a $7.5 million SaaS company headquartered in Bulgaria with approximately 90 people and attractive roster of global customers and an impressive suite of solutions. From a financial standpoint, Vayant is an attractive fit for PROS with recurring revenue making up greater than 90% of their total revenue.

We expect Vayant to continue to grow as a part of PROS and we expect this growth rate to be in the mid 20s.

From a free cash flow and profitability standpoint, we expect the acquisition to slightly increase our loss and free cash flow burn in the first twelve months as we integrate their business into PROS in order to quickly take advantage of our unique and combined offering in the market.

For the remainder of 2017, we anticipate the Vayant acquisition will contribute total revenue of approximately $3 million on a GAAP basis, subscription revenue of approximately $2.7 million on a GAAP basis, ARR of approximately $7.5 million and free cash flow burn between $1.5 million and $2.0 million which includes expenses we will incur to integrate the two companies.

Please keep in mind that both subscription and total run rate revenue will be impacted by a deferred revenue write down as a part of purchase accounting. With that I will now provide guidance for the third quarter and full year, which includes Vayant. For the third quarter, we expect total revenue to be in the range of $40.5 million to $41 million.

We expect subscription revenue for Q3 to be in the range of $14.8 million to $15.0 million. We expect our adjudged EBITDA loss for the third quarter to be in the range of $9.5 million to $10 million.

And with an estimated non-GAAP tax rate of 36% in the third quarter, we anticipate a non-GAAP loss per share between $0.23 and $0.24 per share based on an estimated 31.9 million basic shares outstanding. Now for full-year guidance, for 2017, we now anticipate total revenue in the range of $165.5 million to $168.5 million.

We expect subscription revenue for the full year in the range of $57.5 million and $58 million. And with this revenue guidance for Q3 and the full year, you will see that we are expecting a noticeable increase in total revenue and subscription revenue in the fourth quarter.

This increase is attributable to several customers beginning their subscription services with us in late Q3 and early Q4, these customers are mostly in our travel vertical where it is more common to book deals in earlier quarters and begin to recognize those deals at a later time.

Also note that this is not a one-time revenue benefit as the dollar impact in the fourth quarter will carry forward into future quarters. Now moving onto ARR, we expect ARR for the full year to fall between $154.5 million to $156.5 million.

We anticipate a full-year free cash flow burn of between $28 million and $29.5 million and an adjusted EBITDA loss of between $34.5 million and $35.5 million.

As I mentioned earlier, while we expect to generate positive free cash flow in the fourth quarter, we decided to make two investments during the third quarter that negatively impacted our forecasted free cash flow, but we expect will generate additional free cash flow in profitability in 2018 and beyond for.

First, as I mentioned earlier, we will invest additional cash in the next few months as we integrate Vayant with PROS. Second, we restructured our primary cloud provider agreement for another three years which will provide us with additional economies as we continue to grow our cloud business in the future.

This new agreement required a significant cash payment in the third quarter, which will negatively impact free cash flow in the third quarter. Overall, we are pleased with our second quarter and first half financial results for 2017. We are on track to deliver against the key financial metrics we outlined in our Investor Day conference last November.

As we go into the back half of the year, where we typically see stronger results we are focused on continuing to drive growth, profitability and free cash flow. We are excited about our new cloud innovations and the addition of Vayant to the company.

Both of which put us in a stronger position to capitalize on our large market opportunity and help our customers outperform. So with that let me turn the call back to the operator for questions.

Operator?.

[Operator Instructions] Our first question comes from Scott Berg of Needham & Company. Please proceed with your question..

Two questions from me and congrats on a good quarter and interesting acquisition. I guess on the acquisition side, Andres, is the product seems like a natural up sell as your customers are using your solutions more appropriately priced seeds in their travel business, pricing add on services of products that seem to be a natural fit.

But can you tell us about maybe about the sales processes of this product are like and how much Greenfield is this end market.

Do these customers have solutions already? Trying to understand, I guess how [indiscernible] from the get-go?.

Yeah. Great question. What we see with Vayant is a natural extension of our real time dynamic processing capabilities all the way to offer optimization.

You've seen in the travel industry, there's been a move to really unbundle fares and create different products and what Vayant capability will allow you through their merchandising and shopping technology is to unbundle all those different offers and allowing the airline to define very different strategies to go to market in this real modern commerce experience.

What I would tell you, sorry, areas that are starting in the airline industry, there's still not a lot of adoption. So we see a lot of greenfield opportunity within our customer base.

We talked about in our prepared remarks that we have a couple of customers live on the technology, but more and more airlines are looking at ways beyond seat pricing and really to provide a modern commerce experience.

They also have capabilities that allow you to search in very different ways we're all very used to searching of where we know the origin and destination, but what they call inspirational search, where I may decide what type of vacation I'm thinking about and parameters around budget, distance and being able to have a very different type of search.

So we see a lot of ways that we can actually drive better customer experience to the end customers in this industry and capitalize on a very large market opportunity..

And then the second question for me is on the comment of increasing your quota carrying sales reps here over the next couple of quarters.

Wanted to see if you can provide some color in terms of what that incremental increase would look like, maybe the areas of investment, is this more on the travel side, is this more on your other modern commerce solutions, just trying to get a feel of what that magnitude and what the opportunity looks like in the near term for you..

Yes. So what I would tell you is that we're at 82 right now.

We see adding a little bit over 12 additional quota carrying personnel in the back half of the year, so probably ending up 20% for the year and predominately, I would say still a lot of the quota carrying personnel that will be added will be focused on our B2B industries, but some will also be focused on travel as well, but still predominately on the B2B market and it's really set up '18 and beyond..

Our next question comes from Ben McFadden of Pacific Crest. Please proceed with your question..

Hey, guys. Thanks for taking my questions. I wanted to start with just kind of a momentum question.

I mean, you posted I think 23% recurring revenue billings growth in the quarter, but if we were to unpack that, is there any metrics kind of or color that you can help us with around how is the velocity or cadence of deals trending versus kind of what you've seen in the past, both with new customer adoption and upsells, any additional color would be great? Thanks..

Yeah. What I would tell you is that we're on track with our expectations for the full year and we're happy to see that we're raising subscription revenue.

I would tell you that in terms of business, we're seeing about 50% come from new, 50% from existing and also we're seeing about a little bit of better than 95% of the bookings coming at subscription. So if anything, we're seeing more subscription than we expected.

And in terms of deal volume, it's been up more than 25% year-over-year for the first half. So we're seeing that our land and expand strategy, which has been a real focus of us, we're starting to see better momentum in that land and expand strategy..

Yeah. And there's more we can do..

Yeah..

And then Stefan, I just wanted to get a clarifying question here on the free cash flow, a downtick, I mean you have the acquisition and you also have this Q3 payment from a cloud architecture perspective, but just curious kind of what that free cash flow guidance could have looked like as we strip out those two components, would it - any color as far as kind of would it be flat, would it have improved relative to our current expectations? Thanks..

Yeah. So Ben, I would tell you that we would've been right in our range, the initial range that we have provided. Keep in mind when we first gave up the guidance range it was a burn of $19 million to $21 million.

We adjusted that in the middle of Q2 when we issued the convert because there was an interest charge that was going to be on top of that so we did move it to 20 to 22.

And what I would tell you is, absent the integration cost that we're talking about with Vayant and the upfront payment that we made for our cloud provider, we feel like the range that we have had of 20 to 22 was definitely achievable..

Our next question comes from Jack Schneider of JPMorgan. Please proceed with your question..

First question is geographically speaking it looks like Europe has, last couple of quarters has sequentially decreased.

Is that due to the bookings being more heavily toward subscription and so you're not really back filling the previous revenue or is there something else going on in that geography?.

A lot of that - that's not necessarily indicative of current bookings. What you're looking at there is more of a revenue mix. And a lot of that has to do with implementation services that are occurring from time to time and where we are in the implementation cycle. But I would actually tell you quite the opposite.

One of the things that we always had an eye on was how the impact of Brexit on our bookings business. And to be honest with you we really haven't seen an impact on that business at all. Actually from a booking standpoint, our European business is doing quite well.

So it really is more of a timing, revenue point than it is an indication of strength in terms of the current market..

And then one more quick follow up on the metrics. At the Analyst Day, I guess last year, the trailing 12 months recurring billings metric which is a mouthful. But is there any reason why you know that kind of always track towards ARR in the quarters. Should we you know it ended this quarter at 129.9.

With the increase in the ARR guidance, it looks like there's going to be a healthy uptick or is there something - is there some reason why trailing 12-month recurring billings shouldn't reach that ARR level?.

So good question, I would tell you that they are still good proxies for one another. We do look at that every quarter because to your point we did make a commitment that if those two numbers separate too far we would give you the color of what ARR isn't and the relationship has stayed fairly static.

I will tell you though that we are going to provide that number at the end of the year as a metric to show you just how that number is tracking.

But keep in mind that the ARR number is typically a little larger than the calculated billings number on a trialing 12-month basis because of the fact that there is a - there's a slight difference in timing of when invoices go out and some of those invoices are not captured in the calculated billings number and they are captured in the ARR number because of the fact that we calculate contracting in ARR and invoicing in calculated billing.

So that's the biggest reason why there's a delta..

[Operator Instructions] Our next question comes from Sameer Kalucha of Deutsche Bank. Please proceed with your question..

Hi. This is Sameer calling in for Nandan, thanks for taking my question. I was wondering in reference to your long-term revenue target that you outlined at your analyst day exiting '21, '22 timeframe with 500 million in revenue.

I was wondering how much of acquisitions does that contemplate in the target or these acquisitions you are making or will likely make in the future, do they add to that particular target going forward?.

They actually will add. So the number we had given which was a, you know, being on a run rate of $500 million revenue figure was an organic number..

So all the revenue and margin impact is going to be in addition to those things?.

That is correct, that is correct..

Ladies and gentlemen we have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Andres Reiner for closing comments..

Thank you for your participation in today's call. We entered the back half of the year confident with their outlook and excited about our opportunity to lead the market with our modern commerce solutions. We like to thank our incredible people at PROS for their passion and commitment to helping customers outperform.

We'd also like to thank our customers, partners, and shareholders for your continued support. We look forward to speaking with you on our next call. Thank you and goodbye..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..