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

Scott Berg - Needham & Company Matthew Van Vliet - Stifel, Nicolaus & Co., Inc. Jackson Ader - JPMorgan Chase & Co. Chad Bennett - Craig-Hallum Capital Group LLC.

Greetings and welcome to PROS Holdings’ First Quarter 2018 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 your host, 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, 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, and good afternoon, everyone, and thank you for joining us on today's call. I’m pleased to report that we delivered another outstanding quarter, exceeding the high end of guidance on our growth metrics. We started out with strong momentum in 2018 and I’m really excited by what we are seeing in our market.

I am hearing more and more customers and prospects talk about digital transformation and what it means for their go-to-market strategy. Industry analysts are also recognizing the shift as far as their estimates and more than 10% of B2B sales took place online last year.

And they're predicting that B2B e-commerce will reach 1.2 trillion in the next four years. This creates a huge opportunity for those companies that embrace digital transformation. It also creates an incredible growth opportunity for us as we leverage a real time platform in AI solutions to help companies reimagine how they sell, grow and outperform.

On our last call, I discuss how we're committed to driving growth and scaling our business by focusing on four strategic pillars; innovation, market adoption, operational efficiency, and migrations. I would like to share a few highlights from these areas.

First, we're delivering innovations that empower our customers with unmatched real-time and high availability capabilities. Greyhound is an excellent example of a customer that’s embracing our newly released real-time dynamic pricing platform to power its digital shift.

Greyhound is an iconic brand in a 100-year old company with a vision to transform its digital platforms to outperform low cost competition entering the market. Greyhound is committed to competing on customer experience and recognize that they need to meet customers where they want to buy online and from their mobile devices.

PROS is helping Greyhound realize this vision by enabling them to respond to millions of price quotes daily in real-time with sub-second response times across all channels. We're delivering the same kind of high availability and real-time capabilities with our travel solution platform to help our airline customers to outperform their market.

Today travelers had more options than ever for booking travel and are conducting dozens of searches across several sites before making a purchase. This has created an exponential increase in the number of prices and availability request that airlines must process to be competitive.

A real-time dynamic pricing solution for airlines enables carries to manage extraordinary transaction data volumes across all of their channels. For example, in March alone we processed 88 billion transactions in this cloud solution.

To put this in perspective, this transaction volume annualizes to nine times more transactions than visa process in all of 2017. Our teams are continuously innovating to ensure solutions delivering industry-leading performance, while processing these massive data volumes.

In our latest release of real-time dynamic pricing for airlines is delivering [indiscernible] availability and response times faster than a blink of an eye. Second, we're combining the power for cloud platform, next generation solutions, and industry expertise to both accelerate market adoption and drive sales efficiency.

Our latest B2B multi-tenant solutions were born in the cloud and assigned to deliver an intuitive user experience that enables customers to both sell, serve as well as leverage AI personal assistant [indiscernible].

As we continue to increase our focus on selling faster and smarter, we see this solution is exceptionally well suited for a lighter touch sales process. We are already beginning to see customers recognize the value of these solutions quickly.

For example, last quarter entire distributor selected our next generation guidance just two months after seeing more solutions showcase as a leading technology for companies looking to fast track their digital transformation in one of Microsoft technology centers. We began our partnership with this customer just two weeks after first meeting.

Another example of a customer recognizing the benefits of bringing together industry knowledge in next generation guidance solution is Compass Health. Last quarter, Compass Health partnered with us to counteract margin erosion they're seeing in their medical equipment and suppliers market.

We're excited to leverage our AI capabilities to deliver personalized market driven customer quotes that will enable them to compete and win on customer experience. And lastly, our cloud innovations and modern e-commerce vision continue to inspire our customers to move to the cloud. Today, nearly 50% of our customers are on the cloud.

The migration program that we rolled out at the beginning of the year is further growing our cloud business. Close to 30 customers have already moved to the cloud with strong representation from both B2B and B2C.

Among our airline customers, we’re seeing strong momentum as customers are seeking out or latest shopping and merchandizing solutions to regain control of their distribution channels drive more business through their airline.com in ultimately get closer to their customers.

Since we introduce this solution as part of PROS less than eight months ago, we've had more than a dozen travel customers adopt them including founding members of both Oneworld and Star Alliance.

I'm incredibly excited by the way customers are using our solutions to power their digital transformation and I look forward to what our team will accomplish this year, we helped customers make this shift to modern commerce.

We have an incredible market opportunity in front of us and I like to thank our employees, customers, partners and shareholders for their continued support as we deliver on our mission of helping people in companies outperform. Now I’d like to turn the call over to Stefan to comment on our financial performance..

Thank you, Andres. Before covering our first quarter results, I'd like to start by sharing a few more highlights from our strategic pillar of operational excellence. As we drive more growth in our business, we continue to lay the foundation to further scale our operations.

In customer success, we are leveraging our global footprint to better serve our customers around the world. For example we are expanding our Sofia, Bulgaria office to take advantage of the local technical expertise and to provide a closer source of support and service to our international customers.

Also as Andres mentioned, we continue to improve our sales efficiency by selling faster and more virtually. In some instances, we're selling our next-generation solutions after just one or two in person sales meetings.

Finally, our accounts receivable team continues to improve cash collections, which helped us achieve record lows in our days billing outstanding in the first quarter.

As we progress throughout the year, we plan to build on these accomplishments across our business to improve our performance and help drivers towards our goal of improving free cash flow by $26 million this year. Now move on to our first quarter results and then we'll discuss our guidance for the second quarter in the full-year.

Total revenue for the first quarter was $47.9 million up 19% and exceeded consensus estimates by $1.8 million. Subscription revenue was the primary driver of this better than expected performance and was up 72% year-over-year, which exceeded consensus estimates by $1.5 million.

As a reminder this is the first quarter where we are reporting the results of our business under the new revenue recognition rule ASC Topic 606.

While we are seeing some impact from the new standard through a reclassification of subscription revenue to maintenance and license revenue, as well as longer amortization periods of capitalized incentive compensation, the overall impact of 606 on both our total revenue and overall business is minimal.

Subscription and maintenance revenue combined make up our recurring revenue. First quarter recurring revenue was 78% of total revenue, which is flat quarter-over-quarter this is the first time that we saw a meaningful decline in our maintenance revenue, which was $16.6 million for the quarter and down 8% year-over-year.

This decline and maintenance was expected and primarily driven by migrations, which also helped our subscription revenues in the quarter. The recurring portion of our deferred revenue was $87.7 million in the trailing 12-month calculated Billings were up 24% year-over-year.

Moving on the margins, our Q 1 margins were 63%, which is up from 61% in the first quarter last year. This improvement was primarily driven by improved margins and subscription and services. Our first quarter adjusted EBITDA loss was $6.7 million, an improvement of $3.3 million from last year and was in line with our guidance.

Now turning to free cash flow, in Q1 we burned $6.8 million in cash, which was a $6.4 million improvement from last year and keeps us on track to deliver our free cash flow estimate for the full-year.

This strong year-over-year improvement was driven by a combination of our overall operating results higher deferred revenue and strong cash collections in the quarter. And turning to guidance, I'll start with the second quarter guidance and then discuss full-year.

For the second quarter, we expect subscription revenue to be in the range of $21.25 million to $21.75 million, up 60% over the second quarter of 2017 at the midpoint. We expect Q2 total revenue to be in the range of $46 million to $46.5 million, a 14% year-over-year increase at the midpoint driven by our strong improvement in subscription revenue.

We expect our second quarter adjusted EBITDA loss to be in the range of $6.7 million to $7.7 million and with an estimated non-GAAP tax rate of 22% in the second quarter we anticipate a non-GAAP loss per share between $0.21and $0.19 in the second quarter based on an estimated $32.6 million basic shares outstanding.

Now turning to the full-year, we are increasing our guidance for total revenue by $1 million to $188 million to $191 million. We are also increasing our full-year guidance on subscription revenue by $500,000 to a range of $90.5 billion to $91.5 million which is now up 50% at the midpoint.

We are reiterating our full-year guidance for ARR adjusted EBITDA in free cash flow. Overall, we are pleased with our first quarter financial performance and see this is a strong start to 2018. Thank you for your support of PROS and we look forward to speaking with you at our upcoming events.

So with that, let me turn the call back over to the operator for questions.

Operator?.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Scott Berg from Needham & Company. Please proceed with your question..

Hi, everyone. Congrats on a good quarter. I guess I’ve got two. Well, I’ll start with one and then a follow-up. I guess, Andres in terms of sales productivity, your comments in the quarter, I mean with Stefan’s and highlighted some faster selling activities.

I guess the question is, is this something that sustainable with some of these quick turnarounds for deals, you had mentioned a couple times, the answer probably is yes. But then also where are we on the lifecycle sales productivity because I know you’ve went through a lot of changes with the cloud migration.

Historically, you said you are probably not quite where you want to be at, but I probably figure you got to be getting close to that kind of peak optimization or peak productivity levels?.

Yes. That's a great question. What I would tell you is that we're continuing to improve.

As I talked in my prepared remarks, we were excited to see some of the deals that closed in the quarter having shorter sales cycle time, including the deal that we actually referred from the Microsoft technology center and we were able to close in a very short amount of time within the quarter.

I would say that's part of our strategy and going to this commercial solutions selling model and focusing a team on this initial land and we're seeing good progress. So that I would say early stages, I wouldn’t say we're doing a lot of deals yet under this model.

But this is a new growth area we're investing in that we think long-term is going to really payoff in this virtual mode where we're doing one to two visits max if any. And I think it's going to take a while to perfect, but I like how we started and I think we have a good potential there.

And I think our solutions are in a great fit to drive this sales motion. So overall, really pleased with sales productivity, but I would tell you and I said this always there's always room to improve. And I still think there's room to even drive better sales productivity as we move forward..

Great. And a follow-up to that one would be around ASP trend now as you're kind of getting though it I consider to be the trough phases of this migration, you're fully selling cloud, you are into the kind of the third full-year where most of your pipeline or all your pipeline is cloud.

Are you seeing any changes around ASP trend is relative to that productivity?.

Yes. I would tell you ASP hasn’t changed dramatically maybe slightly down, but very slightly. I would tell you in general ASP’s have maintained fairly constant. And as I said, it's a mix here because we do have the land motions and the smaller deals, but we also have large enterprise deals as well.

So I would say, overall, we have a more healthy mix in between, and maybe a slightly lower ASP, but not significant..

Fantastic. More quick one in for Stefan. You had a pretty big beat in the quarter and most of those on the subscription it looks like.

Where did that all come from because on a percentage basis that's a pretty big beat on the prior guidance number?.

Yes, Scott it was. We also had a large services number in the quarter as well and it really had to do with the timing of the lives of some of our subscription solutions that went live, sorry I couldn't get that out.

But what happened was we saw a similar trend happening in Q4, we had a similar occurrence in the first quarter as well, and we were able to recognize more services revenue, but then it is also more subscription revenue, and that was the primary driver behind it..

Very helpful. Thanks for taking the questions guys..

Thank you..

Our next question comes from the line of Tom Roderick from Stifel. Please proceed with your question..

Yes. Matt Van Vliet on for Tom. Thanks for taking my question.

Wanted to look at some of the geographic performance in the quarter and maybe you could just help us a little bit with reconcile and how some of the spending has been and maybe where that might shift throughout the year just depending on timing of certain projects?.

Yes. So Matt – this is Stefan. I'll take that one. So when you look at our business first of all from a revenue perspective, we have been about a third U.S., third Europe, and third rest of the world. And that tweaks a little bit here and there, but the first quarter was very similar.

As for investments, one of the things that I commented on in my prepared remarks is that we are taking advantage of our Sofia, Bulgaria location and we are expanding that location for a lot of technical talent both on the development side and also on the customer success side.

So you're going to see us over time building a bigger presence there, primarily to help service and support our international customers not just those mainly in Europe, but also in the Middle East. Sofia, Bulgaria is very strategically located to help support both areas which are very strong geographical regions for us.

But you know you're going to see us continue to invest in our sales teams. In the different parts of the world, we're going to do with some of our investments in Asia as well. We'll continue to invest in our primary markets like Europe and North America, and we're going to continue to invest where we see the opportunities.

And quite honestly right as we speak now, we see strength in all of the geographies in Americas, Europe and in Asia..

Great.

And then thinking about the migrations, I think you had mentioned you done over 30 of them now, and then Andres I think you said 50% of your customers are using the card and some sort – what’s the breakdown of those 30 customers relative to how much they move the cloud or those 30 that have moved entirely to cloud? And then as you look out into the rest of 2018 and even into 2019, how many more you already sort of scheduled and are working towards versus still having just sort of upsell the idea of moving to the cloud and wanting to provide that extra value that you’ve talked about in the past so you can get them to move?.

Yes. So what I would tell you – approximately 30 that we've moved so far. I would tell you that it’s interesting that about 50% are coming from our travel, 50% from our B2B related industries. I would say not all of them have migrated every solution they have to the cloud, but some have migrated fully to the cloud.

Also in terms of sizes some have been some of our largest customers, they've deployed quite extensively global and some have been smaller.

So on purpose what I would tell you that a lot of our strategy with migrations has been to cover the spectrum in terms of industries as well as size of customer to really fine tune or process and I would say our team has done a really, really good job.

But I would tell you what's really driving a lot if the migration is the new innovations or next generation guidance technology or next generation real-time dynamic pricing engine on the travel side. These types of solutions are really driving a lot of interests in the market and in our customers wanted to adopt the latest and greatest science.

So we continue to see as we push through the year. What I would tell you is we're pretty confident in the number we gave at the beginning of the year, which we said about $5 million in migrations. We're very confident of that number and continue to see very positive interest from our customers in the new technology..

Great, thank you..

Our next question comes from the line of Jackson Ader from JPMorgan. Please proceed with your question..

Great, thanks. Good evening, guys. Question from us, if I can just follow-up on the migration on the B2B side with I think some of your customers there being maybe less - not less mature, but have been PROS customers or a less amount of time into your travel customers.

I mean how much of an improvement in the product is there in the cloud versus may be some B2B customers that have just signed on in the last five years or so?.

That's a great question Jackson. So I would tell you the next-generation guidance product in our cloud editions are totally new science technology, it's a pretty different product from a user experience and science underneath, much more advanced science algorithms around auto segmentation and auto calibration of the price guidance.

So I would tell you to pretty significant improvement, also the time to adopt because these new solutions were born in the cloud, native cloud solutions, so it's not taking the on-premise model and now hosting it. It's truly a native cloud solution.

They can adopt it quite quickly, but be able to leverage a lot of their configuration capabilities that they had prior. So I would tell you – the everything that I would tell you is, we have quite a bit of customers seem to B2B side, also they've been with us a decade. So I wouldn't say they're all fairly recent.

We have quite a few they’ve been with us a long time and have upgraded previously on in on-premise model quite frequently to adopt the latest innovation and I would tell you a hallmark of PROS’ innovation.

I mean I think that we have an amazing R&D and science team that are always pushing the limits on the volumes of data and if we can process and or AI machine learning algorithms in our customers because your innovators they want to adopt these latest innovations..

Okay, all right. That’s fair.

And then just a follow-up, can you remind us, if I'm a salesperson at PROS, is there any migration up fell that’s factored into my compensation and my incentives to migrate existing customers?.

Yes, so there is an incentive program tied to migrations and there's goals that we measure tied to that absolutely..

Okay, all right. Thank you..

Thanks..

Our next question comes from the line of Chad Bennett from Craig-Hallum. Please proceed with your question..

Great, thanks for taking my questions. Steven – Stefan I think you pointed out maintenance this was kind of the first if you said kind of meaningful decline year-over-year, which net-net is a positive I think.

And I think you effectively kind of Andres talked about a %5 million contribution from migrations this year that you're comfortable with that so.

Have expectations for maintenance declined this year changed in your mind and am I correct that that $5 million of your subscription kind of guide for this year is conversion based?.

Yes so, Chad you're exactly right. I would tell you that we're not changing our view on the amount of maintenance that we're ultimately going to recognize for the year. We talked about upper single-digit percentage decline.

We're still comfortable with that type of an estimate for the year and so I think what you're hearing us talk about is that we had some early migrations that that give us even more confidence in some of the things that we talked about at the beginning of the year.

But at this point in time, we're not estimating a different ending number beyond what we had guided to a quarter ago..

Perfect. And so if I – we think about that upper kind of mid - upper single-digits year-over-year decline in maintenance. And you know that's call it round numbers I don't know $6 million roughly let's say $5, $6 million. And then $5 million I mean the conversion ratio and maybe it's just pure timing of when you can recognize revenue.

I would think that that would convert at a much higher multiple than $5 million in SaaS revenue is it just purely timing?.

Well, there is some timing in there for sure, but it's the decline in maintenance is not just from migrations. We do have churn that it's occurring in our base and if you think about it we're really not adding anything to the maintenance base that we started with at the beginning of the year.

So any amount of churn we have is going to be felt in that total number. So when you break it down you're looking at about half of the decline in maintenance is going to result in subscription migrations and the other half is going to roughly be from churn..

Got it. Make sense. Okay and then maybe one more for me again probably for Stefan.

Subscription gross margins ticked up again sequentially which is nice to see kind of expectations there exiting the year change dollar or any kind of update there and where you hope to end the year at or exit the year at?.

No, nothing really change there Chad, it's an area that we obviously focus on quite a bit. And we feel like there's been a good progress made in the last year.

Our cloud team and our R&D team have done a tremendous job and I think Andres commented earlier on a question that was asked about potential improvements and we do see that, but I would tell you that that's probably not going to manifest itself all in 2018.

So how we're seeing our subscription margin know where we're expecting that to be relatively flat maybe slightly up as we go throughout the year but think about it being relatively flat..

Got it. Okay. Thank you. And then maybe one more I guess….

Okay..

So the other thing just kind of through our checks, we've heard that that maybe there's been a little bit of kind of restructuring shuffling on the sales side in the New Year.

Is that just kind of normal course - just normal course of a New Year or is anything change on the sales side go-to-market wise heading into this year versus last year?.

Yes, I would tell you like every year we make changes within our or sales organization aligned to our strategies and we've talked about moving from it pure enterprise sales focus to bringing a couple of growth driver opportunities within sales one a bit more focus on our large strategic global accounts and we've outlined some leadership around that in another area this solution selling or think of commercial inside sales organization around the land motion.

So if you think about if we’ve learned from a fairly singular enterprise model which we are very, very good at I would tell you that’s the hallmark of PROS into incorporating a large strategic account programs in an inside sales.

But I would tell you is mainly the change is continuing to drive improvement in focus on where we're going three to five years. So we're really happy with the quality of talent we're able to attract and I would tell you that we gradable churn in sales is down.

So I think where we're keeping the great sales team that we have and really we're excited about the amazing team that we have in the potential going forward..

Perfect. Thanks guys..

Thank you..

Thank you..

[Operator Instructions] Our next question comes from the line of [indiscernible] from D.A. Davidson. Please proceed with your question..

Hi, guys. Thanks for taking my questions. First, let me start with Stefan, just going back to the guidance. Help me understand, I mean if I back into the full-year subscription guidance and look at Q1 and Q2, it’s implying a pretty steep decel on the back half of the year, recognize or some impact from lapping the Vayant acquisition.

And Stefan you talked little bit earlier about some earlier than expected recognition of some subscription revenue.

But can you maybe help us understand some of the moving pieces for why we should be modeling pretty steep decel in subscription?.

Well, yes so you're right. We had the Q1 acceleration, but that is going to stick with us throughout the year. So it wasn't a one-time event on the subscription side.

So I think part of it when you think about the decel – you're talking about the decel and growth rate not a deceleration in the total revenue because it's actually subscription revenue we do see accelerating throughout the year.

But to your point because we had the acceleration of revenue that was recognized in Q1 and Q4 a lot of that is being played out and it does have an impact of showing a quote lower growth rate throughout the balance of the year and you're right Vayant had an impact on that as well.

But when we step back and look at the trajectory of the business and we look at the growth rate from last year going into this year. We're actually very happy with the trend there and you know raising our actual number from up 40% to 50% growth.

We feel pretty good about that and we feel very good about how will exit this year they still not guidance as we go into next year..

Okay, Got it. That's helpful. And Andres can you maybe give us a little bit of an update in terms of the progress so far with the Vayant acquisition and how it's turning relative to your initial expectations for acknowledging that it's still relatively early in the process..

Yes, what I would tell you in terms of Vayant is that their flight search and merchandising capabilities have been accepted very well within the market.

I would tell you it's probably sitting some of our initial expectations, but overall we've seen a very positive reception within our customer base and I would tell you that in general across all areas both from an integration, innovation and from a customer success I think across all areas where we're very, very positive and we've had over 12 deals close since the acquisition and if fairly short amount of time our customer base, so very excited about the potential..

All right, great, that’s helpful. Thanks guys..

Thanks. End of Q&A.

Ladies and gentlemen we have reached the end of a question-and-answer session. And I would like to turn the call back to Andres Reiner for closing remarks..

Thank you for your participation in today's call. We started out 2018 with strong momentum and we believe we're in a strong position to continue to drive growth in scale in our business.

Like to thank our incredible PROS scene for their commitment to helping our customers outperform in our customers, partners and shareholders for your continued support. I’d also like to invite you to our annual outperform conference on May 15 through the 17 in Houston, Texas where we will unveil related solutions to power modern commerce.

We will also hold an investor luncheon in fireside chat as part of the conference on Wednesday, May 16. Thank you and goodbye..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..