PROS Holdings' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb.12.13 | About: PROS Holdings, (PRO)

PROS Holdings, Inc. (NYSE:PRO)

Q4 2012 Earnings Call

February 12, 2013 4:30 PM ET

Executives

Charles Murphy - Executive Vice President and Chief Financial Officer

Andres Reiner - President, Chief Executive Officer and Director

Analysts

Chad Bennett - Craig-Hallum

Nandan Amladi - Deutsche Bank

John DiFucci - JPMorgan

Chris Growe - Stifel Nicolaus

Jesse Hulsing - Pacific Crest

Ross MacMillan - Jefferies

Greg McDowell - JMP Securities

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2012 PROS Holdings, Incorporated earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Charlie Murphy, Chief Financial Officer, and you have the floor sir.

Charles Murphy

Good afternoon, everyone, and thank you for joining us today for the PROS Holdings financial results conference call for the fourth quarter and yearend of 2012. This is Charlie Murphy, Executive Vice President and Chief Financial Officer of PROS. Joining me today's call is Andres Reiner, President and Chief Executive Officer.

In today's conference call, Andres will provide a commentary on the fourth quarter and full year of 2012, and then I will provide the review of our financial results and our outlook, before we open up the call to questions.

Before we begin, we must caution you that some of today's remarks including our guidance for the year, our competitive position, future business prospects, revenue growth, market opportunities, as well as statements made during the question-and-answer session contain forward-looking statements. These statements are subject to numerous and important factors, risks and uncertainties, which could cause actual results to differ from results implied by these or other forward-looking statements.

Also these statements are based solely on the present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements. Additional information concerning risks and other factors that may cause actual results to differ can be found on the company's filings with the SEC. Also, please note that a replay of today's webcast will be available in the Investor Relations section of our website at www.pros.com.

Finally, PROS has provided in its earnings release and we'll provide in this conference call, forward-looking guidance. We will not provide any further guidance or updates on our performance during the year, unless we do so in a public form. PROS does not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they are made.

I would also like to point out that in addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, PROS' report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of each non-GAAP measure to the most directly comparable GAAP measure in the tables accompanying the press release distributed earlier today and can also be found on our web site, in the Investor Relation section.

With that, I'd like to turn the call over to Anders.

Andres Reiner

Thank you, Charlie, and thanks to all, who are joining us on today's call. PROS delivered great results in 2012. We saw an increase in momentum throughout the year and we believe we enter 2013 in a stronger position that at any time in our history.

Our business is more diverse, our markets are expanding and our customers in more than 30 sub-industries increasingly rely on PROS to monetize their big data. The investments we're making in our people, solutions and go-to-market strategies are working, and we expect to continue down this path to capitalize on the significant market opportunity ahead.

Turning to the high level financial details, fourth quarter revenue exceeded the high-end of guidance at $32.7 million, a 25% year-over-year increase. Non-GAAP operating income was $4.9 million for the fourth quarter and non-GAAP EPS was $0.11 per share. For the full year 2012, we also exceeded the high-end of guidance for revenue. We finished the year with $117.8 million in revenue, a 22% increase over 2011.

Underpinning this growth was a 40% increase in revenue from our B2B industries of manufacturing, distribution and services. Non-GAAP operating income for the full year was $17.8 million, resulting in non-GAAP operating margins of 15%. In full year, non-GAAP earnings per share were $0.42.

Our strong performance drove end of year backlog to a record $146.5 million, up 18% year-over-year. And backlog revenue expected to be recognized in 2013 is $108 million, up 26% over the prior year. This represents approximately 75% of our expected 2013 total revenue, giving us a very high level of predictability and visibility similar to subscription-based recurring revenue models.

I am very proud of the PROS team for delivering such outstanding results in the fourth quarter and for the full year. We continue to invest in our people to meet the thriving demand for big data applications that optimize sales, pricing, quoting, rebates and revenue management.

Our strong performance in 2012 was driven by notable uptick in new customer accounts in B2B industries. In the fourth quarter, PROS was selected by such great companies as American Standard, Guardian Analytics, O'Reilly Automotive, Panduit, Sichuan Airlines, Stramit Building Products, and Volvo Group Trucks, among others.

These companies joined those who selected PROS earlier in the year, including ARUP Laboratories, Ecolab, Hewlett Packard, Kimberly-Clark Professional, Nexidia, Oman Air, TE Connectivity, and Zimmer among others. We believe this is further validation, not only of PROS attractive value proposition, but also that more and more companies are investing in big data applications to drive sales growth and create a competitive advantage in their markets.

Entering 2012, we made the strategic decision to accelerate investments in support of our three stated growth strategies, to accelerate awareness and adoption, extend our product leadership position, and increase our global reach and scale. These investments were very successful as evidenced by our new customer signings, expanded customer relationships and strong yearend backlog. We believe these investments improve our ability to drive meaningful growth over the next few years.

Let me share a few highlights from each of our growth strategies. In 2012, we invested in numerous sales and marketing initiatives to accelerate awareness and adoption of PROS big data applications for pricing and sales effectiveness. These investments are paying off with our exceptional revenue growth in our B2B industries, strong uptick and new customer wins, and increased media coverage. We made great progress in distinguishing PROS in the market, as our value proposition aligned with the needs of a growing and maturing market for big data applications that utilize data science.

In 2012, PROS was featured in more than twice as many media stories than it made in prior years, including several big data stories in leading publications like CNBC Online, Financial Times, and forbes.com to name a few. This media coverage is helping to propel our B2B growth from companies who are looking to extend their leadership position as well as those facing economic pressures.

Underscoring this interest is the PROS stories recognition that predictive and prescriptive solutions that guide real-time decisions in B2B industries are fast becoming a source of competitive advantage. A recent article in Harvard Business Review stated that performance improvements and competitive advantage arise from analytics models that allow managers to predict and optimize outcomes.

PROS has been predicting and optimizing sales outcomes for more than two decades, with applications that connect data to key business actions all in real-time. Innovations like this are the foundation of our strategy to extend our product leadership position in the market.

In 2012, we continue to make incredible progress in innovations that help our customers outperform. We filed six new patents; introduced a new product, Rebate Optimizer; and release new innovations across all of our big data applications. We also continue to lay the foundation for long-term success with our quote-to-win product in 2012 by signing new customers, creating a dedicated mid-market sales team, an increasing awareness and interest in the market.

We also continue to invest in big data technologies that incorporate real-time prescriptive capabilities powered by data science. For example, our solutions leverage parallelization in machine learning technology for analyzing data in real-time. By connecting data, PROS can apply data science to identify patterns and correlations to guide key business actions. For example, our intelligent quoting capability give sales reps far more confidence, when negotiating deals, by providing data-driven insights into their customer's spying preferences, allowing them to tailor offers and quotes that are more likely to win.

The third pillar of our growth strategy is to expand our global reach and scale through direct sales coverage in our partner ecosystem. We finished year with 38 quota-carrying personnel, a 36% increase over 2011. We now have a stronger sales force than any time in our history, and believe we're in a strong position to capture or share what we believe is a large underpenetrated market.

Our partner ecosystem also continues to contribute to our global reach and scale. Our system integration partners actively participated in over 40% of our B2B implementations in 2012 compared to 30% in 2011. We believe it is important to have experienced partners that can help us scale our services as we accelerate growth with new and existing customers.

From a technology partner standpoint, we made great progress in 2012. Microsoft played a key role in driving awareness in differentiation for PROS in the market. Microsoft selected processes and launch partner for SQL Server 2012, with in-memory database technology to support real-time big data applications.

PROS was also spotlighted at numerous Microsoft enterprise customer events, welcomed into Microsoft chemical and discrete manufacturing reference architecture programs, and selected for the Microsoft Dynamics ISV program. Microsoft will continue to be an important partner going forward.

We also continued to invest in our SAP partnership, as we have done for the past seven years. In 2012, we achieved new SAP product certifications and set the standard for the most complete and seamless integration experience with SAP. We believe our depth of integration with SAP, ERP and SAP CRM is a key reason why SAP customers choose PROS.

In fact, approximately two-thirds of our new B2B customer signed in 2012, run SAP. We believe this indicate strong preference for PROS big data applications for pricing and sales effectiveness in the SAP community. Our SAP partnership continues to be an important part of our strategy.

Overall, 2012 was an outstanding year for PROS. We are privileged to have such incredible people, customers, and partners, who recognize the outstanding value we deliver. I am very proud of how the PROS team outperformed once again. This is a testament, not only to our people, but also the high value and strategic nature of our big data solutions.

Looking ahead to 2013, we are targeting another year of strong revenue growth. A revenue growth of approximately 60%, since the end of 2010, validates that our growth investments are working. This puts us in an excellent position to accelerate investments in our growth initiatives in 2013, in order to capitalize on this market opportunity. We're doing this from a position of strength, and we believe our accelerated investments will enable sustainable topline growth of more than 20% for the few years ahead.

We remain confident in our business, because demand for solutions has never been stronger. Our customers are realizing high value, our partner ecosystem is strengthening, and we continue to set the pace of innovation in the market. Our real-time big data applications are more relevant than ever before, as companies across diverse industries look to outperforming their markets, with big data science and solutions as their advantage. We are excited about the outlook for 2013 and look forward to another strong year.

Now, let me turn the call over to Charlie, so he can provide you with a review of our financial results and our outlook for the first quarter and full year of 2013.

Charles Murphy

Thanks, Andres. I will be discussing our financial results on a non-GAAP basis. A full GAAP to non-GAAP reconciliation is included in our earnings release, which can be found on our website in the Investor Relations section.

We are pleased with our performance in the fourth quarter with total revenue of $32.7 million, exceeding the high-end of our guidance and up 25% from a year ago. License and implementation revenue was $22.2 million, up 27% from a year ago. Maintenance and support revenue of $10.5 million was up 21% year-over-year and represents the largest component of revenue from recurring sources.

Non-GAAP gross margins were approximately 72% for the fourth quarter as compared to 74% for the fourth quarter of 2011. Margins can vary from period-to-period, primarily due to the level of implementation services required relative to the total contract value. Margins also have been impacted by increases in personnel, particularly across our professional services teams and anticipation of future revenue growth.

Total non-GAAP operating expenses for the quarter were $18.6 million compared with $14.8 million a year ago, an increase of 26%. Non-GAAP operating income in the fourth quarter increased 7% to $4.9 million or a non-GAAP operating margin of 15.1%. Our non-GAAP operating income reflects investments across our business in support of our growth.

The non-GAAP effective tax rate was 33.7% and non-GAAP net income was $3.2 million for the quarter, unchanged from the prior year. Non-GAAP earnings per share were $0.11, higher than our guidance. This compares to $0.11 per share a year ago.

GAAP earnings per share for the quarter were $0.05 compared to $0.08 last year, reflecting an increase in non-cash stock-based compensation expense in 2012. A reconciliation of GAAP to non-GAAP is provided in our press release.

Turning to our full year results, revenue was $117.8 million compared to $96.6 million in 2011, an increase of 22%. License and implementation revenue increased $14.7 million or 23% over last year. And maintenance revenue increased $6.5 million or 19% over last year. These are very strong results and we are pleased with our execution during the year.

Our maintenance renewal rates continue to be best-in-class at approximately 95%, adding to our good revenue visibility. Total recurring revenue, which includes maintenance and support revenue, and number of term license and cloud service contracts was approximately 42% of total revenue for the year.

Non-GAAP gross profit was $85.4 million for the year, yielding gross margins of approximately 73% compared to gross margins of 74% for the year ended 2011. Our non-GAAP research and development expenses increased $1.6 million to $25.7 million or 22% of revenue. Non-GAAP selling, general and administrative expenses for the full year were $41.9 million or 36% of revenue, an increase of approximately $10.1 million over 2011.

During 2012, we increased our investments relative to 2011, to support the growing demand for our big data solutions and to drive long-term revenue growth. We believe these investments were very effective and are reflected in our strong yearend backlog in 2013 revenue guidance. We'll spend more time on both of these in a moment.

Non-GAAP operating income was $17.8 million for the year, up 14% as compared to 2011, resulting in non-GAAP operating margins of 15.1%. This compares to operating income of $15.6 million and operating margins of 16.2% in 2011.

Our non-GAAP effective tax rate was 32.5% for the year as compared to 30.5% in 2011. Non-GAAP earnings per share for the year was $0.42 compared to $0.39 in 2011. In 2011, the research and experimental credit contributed $0.03 to earnings per share. On a GAAP basis, net income was $0.17 per share.

Now, moving to the balance sheet. We ended the year with cash and cash equivalents of $83.6 million, an increase of $15.1 million from last year. Capital spending for the year and facility expansion costs, and improvements, and IT infrastructure, was $8.1 million. We expect spending in 2013 will also approximate $8 million.

Gross trade accounts receivable at the end of the year were $39.3 million. Day sales outstanding were approximately 119 days, an 8 day improvement from the prior quarter. We generated operating cash flow of $13.8 million in the fourth quarter, yielding a cash flow margin of 42%.

For the full year, operating cash flow was $24.7 million, yielding cash flow margins of 20.9%. In 2012, cash flow benefited from a tax refund of $5.1 million in the second quarter. On a normalized basis, cash flow margins were 16.6%.

Before providing guidance for the first quarter and full year, I would like to provide some additional insights into our 2012 performance across geographies, our B2B and B2C industries, and our revenue visibility going into 2013.

As we have been discussing with you, we're investing in our quota-carrying sales people, primarily in United States and an awareness initiatives to drive our B2B business, which is the key growth driver for our company. As a result of our investments, our full year B2B revenue increased 40% to $66.2 million. The success of our investments is also evident in our results this year with United States revenue increasing 49% and making up 44% of revenue for the year compared to 36% last year.

Our legacy travel B2C business, which is predominantly outside of the U.S., continues to perform well, with full year 2012 revenue of $51.6 million, an increase of 4% year-over-year, and in line with our expectations of single-digit growth. We continue to realize healthy demand across Europe in both our B2B and B2C industries.

Revenue from Europe was 27% of total revenue in 2012 as compared to 28% of total revenue last year, and showed 19% growth over last year. The rest of the world made up 29% of revenue and decreased slightly by two points. We are particularly pleased with our backlog at the end of 2012 of $146.5 million compared to $124.1 million at the end of 2011, an increase of 18%.

The portion of our 2012 ending backlog estimated to be recognized as revenue in 2013 is $108 million, an increase of 26% over 2011. At the end of 2012, headcount including outsourcing was approximately 700, which increased 31% from the end of 2011. This reflects our increased investments in sales, marketing, professional services, engineering and administrative personnel to drive growth.

The B2B markets we serve are large, growing and remain significantly underpenetrated. Interest levels and our big data solutions remain very high and we continue to benefit from our diversification across many industries and geographies. Because of all these positive tailwinds and our position of strength, we continue to believe making strategic investments to drive our future growth is the right thing to do.

As you know, based on our percentage of completion revenue-recognition model, we believe investments we make today will positively impact revenue down the road and will be evident in our backlog. With our strong yearend backlog, we are seeing tangible evidence that our 2012 investments paid off.

We believe accelerating our spending across the company in sales and marketing, development, implementation services, and G&A in 2013 will further increase our leadership position and enable us to become a much larger company for years to come. More specifically, we think these investments will enable us to capture 20%-plus topline revenue growth over the next few years.

At the same time, our long-term growth could also be enhanced by acquisitions considering our strong balance sheet. While we have no specific activity to announce at this time, we will consider acquisitions that support our strategic long-term objectives.

Our focus on running a profitable and positive cash flow company remains a key underpinning of our financial strategy. While in 2013, we are accelerating investments, which will impact margins year-over-year by approximately 150 to 200 basis points. Our expectation is that we will deliver a modest operating income increase in 2013 and modest operating margin improvements in 2014 of approximately 50 basis points. This will still enable us to significantly invest to drive a stronger business, while further realizing the long-term potential of the operating model.

I would also like to make one comment on the research and experimental tax credit, which was renewed for both 2012 and 2013, in January of 2013. The total 2012 credit will be reflected in the quarter and year it was reinstated as required by GAAP, which is the first quarter of 2013. Therefore, the entire estimated 2012 research and experimental tax credit will be reflected in our first quarter and full year of 2013 tax rates.

Now, turning to outlook. We continue to be optimistic, while mindful of the global economic environment. We entered 2013 with a record revenue performance in 2012 and very strong backlog. For the first quarter, we anticipate revenue in the range of $32.7 million to $33.3 million, approximately 22% growth year-over-year at the midpoint.

We expect total expenses to be approximately $29.3 million. This includes higher overall personnel levels, based on our prior quarter hiring and support of our strong backlog, expected first quarter employee additions, and plan strategic investments in sales and marketing in support of our business.

In addition, it also includes a seasonal expense for employment taxes in the first quarter, which is up approximately $1 million over the fourth quarter. We expect non-GAAP operating income margins of approximately 11% at the midpoint of our revenue guidance.

With the full year impact of the 2012 research and experimental credit recorded in the quarter, on a non-GAAP basis, there was essentially no tax provision in the quarter. Including the 2012 research and experimental tax credit in the first quarter of an estimated $0.04, non-GAAP earnings per share is expected to be $0.12 to $0.14 based on estimated 29 million shares outstanding.

On a GAAP basis, we expect operating income margins of approximately 2% at the midpoint of our guidance. Including the 2012 R&E credit in the quarter, there is a tax benefit of approximately $1.1 million. GAAP earnings per share is expected to be in the range of $0.05 to $0.06, including stock-based compensation expense of approximately $3.1 million.

For the full year, we expect revenue growth of approximately 22% to 23%. Our estimated backlog revenue at December 31, 2012, to be recognized in 2013, represents approximately 75% of 2013 annual revenue guidance. This is good visibility going into the year.

Including the investment we will be making this year, that Andres and I addressed, we expect non-GAAP operating income margins of approximately 13% to 13.5%. For gross margins, we expect to maintain our solid gross margins attained this year and expect gross margins of approximately 71% to 72%.

With the research and experimentation tax credit for 2012 and 2013, both recorded in 2013, we expect the full year non-GAAP tax rate to be approximately 21%, and for the second through four quarters, we are modeling non-GAAP tax rates of 27%. Excluding the 2012, R&E credit, we expect the tax rate to be approximately 27% for the full year 2013.

The GAAP, we are modeling the full year tax benefit of approximately 10%, and we are modeling the GAAP tax rates for the second through four quarters of 18%. Excluding the 2012 research and experimental credit, we expect the 2013 GAAP tax rate to be approximately 18%.

In summary, we are pleased with our performance in the fourth quarter and the full year, and believe we are very well positioned for a strong performance in 2013. We are confident that our growth strategies are working and that we are well positioned to capture the growing opportunity for real-time big data solutions.

With that, let me turn the call back to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Chad Bennett with Craig-Hallum.

Chad Bennett - Craig-Hallum

I just wanted to dig a little deeper in the backlog, since it's that time we hear that you talked about it and reported. I guess, if we look at the short-term backlog and the year-over-year growth that you ended up at for the year. If we look at that year-over-year growth throughout the year, did backlog pretty much grow at that year-over-year rate throughout the year or did it grow at a faster rate ending the year in the second half or is there anyway to kind of look at it linearly from a year basis?

Charles Murphy

I'd say that gross earning we gave, I think good indications. We had a good Q2, good Q3 and a good Q4. So it grew very nicely in each of those quarters and Q4 was actually a little better quarter than we had expected from the backlog standpoint. So we're very pleased with results for the year.

Chad Bennett - Craig-Hallum

And also was SaaS anything meaningful in the backlog number to speak of?

Charles Murphy

No, not really. We booked about the same amount of business this year as we did last year.

Chad Bennett - Craig-Hallum

And then in the second half, you really kind of push the big data pitch around the products more. And I know it's probably tough to quantify. But I mean, do you think really the backlog reflects your efforts in big data at this point or do you think it's too early?

Andres Reiner

I think it's still early. But we definitely are seeing that companies really are looking for solutions that help them drive their business decision and help them monetize big data. So we definitely see that we're aligning better to company's challenges and we help them solve them. So we definitely see organizations in sales and pricing really be interesting, technology whether the company is performing well or going through challenging times.

Chad Bennett - Craig-Hallum

Is it fair to say, obviously, your MDS business grew substantially this year and it's great that you've kind of sliced that out and gave us some transparency there? I'm assuming that that business is even a bigger portion of backlog than it was as a percentage of revenue ending the year, is that fair to say?

Charles Murphy

That's fair to say. We've been saying that travel is a very good business for us, but it's more of a single-digit growth story. So we think that the backlog translates for B2B more than it does for B2C business. That's correct.

Chad Bennett - Craig-Hallum

And then last one for me Charlie. And I was kind of on and off the call I'm at the airport right now. But regarding investments heading into '13 remind me again what did you say an operating margin expansion or did you say 50 bps?

Charles Murphy

For 2014, we're talking about 50 bps in the margin. 2013 we're talking about the margins coming down from 15% non-GAAP to approximately 13% to 13.5% non-GAAP, coming down to 13% and 13.5%.

Chad Bennett - Craig-Hallum

And that reflects what type of investment in quota-carrying sales people, did you explain that?

Charles Murphy

No, we haven't. But we are planning on expanding our quota-carrying sales people just as we did last year and the year before and we expect that headcount to be up approximately 30%.

Operator

Our next question comes from the line of Tom Ernst with Deutsche Bank.

Nandan Amladi - Deutsche Bank

Nandan Amladi on behalf of Tom. Question on your system integration ecosystem, how big is that community now relative through this time last year? And what are your plans this year in terms of balancing between hiring people internally and growing the system integration community?

Andres Reiner

As we talked about the system integration program and system integrators are our key strategy around scaling the business. And we are very pleased that we reported that over 40% or approximately 40% of our projects. This year we had a system integrator partner involved. We still focus on our key system integrator partners and we want to continue to expand those programs moving forward. We're pleased with the progress and continuing to invest in that area as we continue to scale the business.

Charles Murphy

And the other half of that is that we are planning on continuing to grow our own professional services organization, support of our implementations. And we actually accelerated some of that growth late in the fourth quarter and early in Q1, based upon the uptick in demand that we saw going into 2013. So as Andres, mentioned, it's going to be a balance of additional activities with our systems integrators but also we're expanding our internal capabilities as well to keep up with the growth.

Operator

Our next question comes from the line of John DiFucci with JPMorgan.

John DiFucci - JPMorgan

Charlie, first question is on CapEx. I noticed on the cash flow statement there was a change in the label for the CapEx line to include capitalized internal used software development cost.

Charles Murphy

Yes, that's correct.

John DiFucci - JPMorgan

And I also noticed that that line was $9.5 million, which was $1.5 million greater than the $8 million you guided too for the year. What's going on there? And with that $1.5 million in the past, was that just automatically going right to the income statement or are you looking at things little differently now?

Charles Murphy

Yes, I think there's several pieces in that John. And that is that the GAAP cash flow statement is actually paid in cash for CapEx spending, whereas the numbers that, if you reconcile capital assets to begin the year to the end, just the number I refer to. So part of it's just how the cash flow reflects, capital ex, which is on a cash basis, whereas as you know, capital spending is really on accrual basis.

The other part, I'm glad you brought this up, because we disclosed this as well, is we did have approximately $2 million of capitalized development cost in support of internally developed software. That's the piece you just mentioned. So that's included in GAAP spending on the balance sheet, but also if you take that out, it would be indication of how much development grew on a comparable basis from '12 to '13, you'd have to add that back to the R&D spend that we're reflecting on the income statement. Does that make sense?

John DiFucci - JPMorgan

Yes, I know it does. And I'm just curious, why you started to do it this way? That why would you put it into R&D? I know in some cases you have a choice to do it this way, but you had done it before like this?

Charles Murphy

Yes, this really gets to internally developed software as opposed, which is the SaaS model. And under the SaaS model, you do capitalize the development cost. So as we mentioned, we have a SaaS initiative and we talked about quote-to-win is one of our SaaS initiatives that we have.

So for the development of those types of products, customary with GAAP and customary with other companies, so you capitalize those development costs, whereas other development cost that are not in association with internally developed software, just general R&D continues to get expensed. So we're frankly just following GAAP. We're not leading this in any direction, this is GAAP.

John DiFucci - JPMorgan

But you don't have to do that. You could have expensed that, couldn't you?

Charles Murphy

No, my understanding is no. This is GAAP.

John DiFucci - JPMorgan

And a question I guess for Charlie and Andres, either. Given your backlog at the end of 2012 and the amount to be recognized in 2013, it implies you have to grow your sort of new revenue by about 13% in 2013. That was down from about 30% last year. I guess just general question is this a reflection of just sort of simple prudent conservatism on your part, because it sounds like there's a lot of momentum in the business. Or I guess have to ask the question, or is it a slowdown in that new business momentum?

Charles Murphy

We don't expect to slowdown in the new business, but we are being prudent here, John. There is still lot of global uncertainty. We don't want to get ahead of ourselves. And we're obviously very pleased with the position we're in going into the year. But we still have a whole year ahead of us. There is economic uncertainty. We feel it's best to be a bit prudent. But also if we look at it in another way, if you look at the relative proportion of backlog revenue to total revenue last year and what's expected this year, they're not that different.

Last year, meaning going into 2012 we had about 73% of our actual 2012 revenue booked going into the year. This year we're saying it's about 75%. So relatively about the same, 73% to 75%, obviously 75% is better than 73%. So it's just we're pleased. But we just feel like this is the right guidance to be providing. We think 22% to 23% revenue growth in 2013 is very good growth in this economic environment. But it's not reflective of our confidence. We feel positive about the business.

Operator

Our next question comes from the line of Tom Roderick with Stifel Nicolaus.

Chris Growe - Stifel Nicolaus

This is Chris Growe for Tom. Just a quick question regarding the investments. I know you have talked quite a bit about that, but maybe get a better handle on what you expect to ultimately get out of that. Because I think we could certainly understand investing even 200 bps in 2013 to generate the 22% plus revenue growth, but it sounds like you may even be expanding that into 2014 if you are only targeting 50 bps worth of margin growth. So is this something where you fell like maybe your long-term margin profile maybe should be a little bit lower than you previously have been viewing it, or is this purely, we see such a huge opportunity that we're going to go after it aggressively?

Charles Murphy

It's really that we see a huge opportunity. And that's I think been validated by the increase in awareness and our strong backlog position going into 2013. It's not that the fundamental model has changed. We believe we can drive operating margin growth but we think the growth opportunities at topline is really terrific and we want to invest to achieve that.

So I think it's a positive statement for the company. I know it maybe viewed a bit differently by perhaps certain investors but this is a very positive statement. We could achieve operating income at 15% if we chose to. It's not the right decision for our investors. It really isn't. The topline growth is there. We've demonstrated that in '11 and '12, and now we're going into '13 in a strong very strong position.

So we want to take advantage of the market opportunity ahead of us. And we have the balance sheet to do it by the as well. And we did generate good positive cash flow last year. We've got lots of assets we can bring to spare here. And whether we have another $3 million or $4 million of cash on the balance sheet at the end of 2013 is not going to help our shareholders, but if we can take that investment and put that into initiatives, we'll do fabulous.

One other point that I'd like to bring is we talked about our B2B industries manufacturing distribution services growing at 40%, we believe we want to maintain that same growth as we move forward. And a lot of the initiatives that we put in place around sales and marketing are specific around those new industries. And we've been talking about the start-up within a more mature business and we're continuing to develop those areas. As we're seeing momentum, we want to make sure we're taking advantage of that momentum.

Chris Growe - Stifel Nicolaus

Andres. No one will blame you for playing offense if you see an opportunity, I think. So that is good to hear that you see that opportunity. So just to maybe frame our expectations is this something where you fell like there is enough opportunity where this could go even from a 20% grow to maybe more in the 25% range? I don't want to put you guys in a corner obviously, but I think that it would be important to maybe measure the results as they come.

Andres Reiner

I think for right now, we think the guidance of 22% to 23% is the right guidance, for the reasons we've mentioned. But we are optimistic about the business. We just feel like we've given the right level of guidance. And we also have said that and we've said that we believe that it's a 20% plus growth opportunity for the next few years.

So it's not like we're looking at this as a 2013 year. We are looking at this as a '13, '14 and '15, we just can't get too far ahead of our ourselves as far as getting too far into the future. But if you go back and you think about the fundamentals, a large underpenetrated market, which is our B2B market space, and we've got the opportunity to get more than our fair share with that. We want to go out and take it. And it's a very good position to be in, it's not without risks, certainly, but it's a very good position to be in.

Operator

Our next question comes from the line of Jesse Hulsing with Pacific Crest.

Jesse Hulsing - Pacific Crest

First on the sale side, how are your sales new hires ramping on a productivity basis versus your expectations?

Andres Reiner

The ramp up has been according to our expectations. We've invest there quite a bit on our on-boarding program within the last two years. And we're seeing good results. We still see the average ramp-up time in the nine-month range. But we're pleased with the maturing of organization. We're also pleased that we're improving our quota payments year-over-year. So all of our metrics internally, definitely improved year-over-year.

Jesse Hulsing - Pacific Crest

And, Charlie, Last quarter you mentioned that your growth in new customers was actually stronger than existing customers, I believe. Did that trend continue in Q4 and do you expect that trend to continue into Q1 as well, based on your pipeline?

Charles Murphy

It did continue in Q4. We're obviously very pleased with that. As you know, under our model we generally do not do an enterprise license. We license a segment of the business, we may license its certain products, we may license by geography. So every new customer acquisition that we get, it gives us an opportunity to go back and sell in, and we've had a very successful track record of doing that.

But just to be more specific on your question. Yes, new customer acquisition is up, we're very pleased. We believe that the awareness in the marketplace that's taken a place during 2012 and going into 2013, we expect to see a continuation of that. We expect 2013 growth will come primarily from new customer acquisition. And then of course, we'll continue to sell back in.

Jesse Hulsing - Pacific Crest

And based on your year and the calls that we have had through the year, it sounds like bookings may be accelerated in the second half. Would you say that's the case versus the first half? And based on the sales aperture you are bringing in and the ramp time do you expect that pace to continue?

Andres Reiner

We did see bookings accelerate in the second half. We did see a strong second quarter as well. So we were very pleased that we saw a very strong Q2, Q3 and Q4 in our business and that's what also driving confidence as we look forward into 2013.

Operator

Our next question comes from the line of Ross MacMillan with Jefferies.

Ross MacMillan - Jefferies

Just one question that hasn't been asked on the backlog number, I'm just curious about the flat non-current. What does that reflect? Is it that your implementation timeframes are shortening or is there anything else I should read into the flat to non-current backlog?

Charles Murphy

I really wouldn't read anything into it, Ross. And we're actually pleased that the deferred revenue each quarter in 2012 actually increased. It increased perhaps more modestly in the fourth quarter compared to three. But it's unusual for us. If you go back and look at history, that every quarter actually go up. And that gets back to the timing of milestone billings and the closed contracts, the timing of the contracts closed. But I wouldn't read anything into that kind of shift that you're referring to.

Ross MacMillan - Jefferies

Second question I had was just on cash flow. You obviously had a really strong Q4 cash flow. Just as we think about framing cash flow from operations growth in 2013, is that approximation to the growth in non-GAAP operating income still a good sort of benchmark to think about cash flow from operations growth?

Charles Murphy

It is. I think that's a good benchmark for us. So to be specific, so everyone understands we're talking about the non-GAAP operating income, and we think cash flow will approximate that perhaps modestly better than that, which was certainly in 2012 it was. It was 16.5% on an adjusted basis compared to 15.1% of operating income. So 2013, if we're talking 13% to 13.5% in non-GAAP operating income, we would expect the cash flow to be modestly better than that.

Ross MacMillan - Jefferies

A couple of, if I could to Andres. Number one, I'm just curious about your product mix and in particular, I think what you've done in last year or year-and-a-half has expanded into quoting. You've moved into rebate management. It seems like there are more product SKUs building in the portfolio, probably something you haven't talked to us about yet. Can you just talk about that as a way to drive incremental growth adding products to the portfolio?

Andres Reiner

Yes, definitely. We've talked a lot about focusing on how do we drive sales growth for our customers. And that's why the vision has been to continue on driving pricing effectiveness, driving sales effectiveness and in those areas like quoting, rebate, pricing and we see other opportunities.

It's really tight to bring in the connected data together with predictive and prescriptive analytics in helping while the sales organization, marketing and pricing drive their sales growth and their profitability improvement. And we're always innovating in our core products and we're continuing those innovations.

Ross MacMillan - Jefferies

Should we expect to see more products SKUs emerge this year?

Andres Reiner

I would say we're always innovating and obviously those are areas that we're looking into expanding whether it'd be through a build or buy. We've talked about our vision of driving sales growth and that to complete this vision we see other areas of opportunity.

Ross MacMillan - Jefferies

It sounded like you were leaning more towards the potential inorganic path for something here. I'm just curious competitively I think we know who you've competed with historically but as you start to think about the potential opportunities from an M&A standpoint, might there be different product areas I guess that can leverage the data that you already are leveraging for pricing or maybe the bigger question is just how are you thinking about your M&A strategy, is it geographic? Is it product? Is it customers? Anything there would be helpful.

Andres Reiner

We've said that our M&A strategy surrounds adjacencies that helps complete our vision around brining the connected data with predictive and prescriptive guidance to organization. So it's really around real-time, big data powered by data science capabilities to drive sales growth and Rebate Optimizer is a good example of the great adjacency that makes the full solution much more powerful.

And it allows our customers to start first with analytics and price optimization but then expanding to rebate optimization and quoting or start with rebate then move to price optimization. It gives us more paths to start in accounts and bigger differentiation because all of these components are connected together and they are leverage on the same data model, the same real-time architecture.

Ross MacMillan - Jefferies

Maybe one very last one, your quota-carrying heads up 36%, I think was about in line with your target. I was just curious within that number. Has that been a pretty stable gross number to get to that net? In other words has there been much turnover in the quota-carryings heads?

Andres Reiner

We've had some turn over but it's within normal ranges.

Operator

Our next question comes from the line of Greg McDowell with JMP Securities.

Greg McDowell - JMP Securities

I understand you guys are offering a discovery inside service to your select prospects. Could you provide some color to us today how this program has improved your run rate? And have you seen this increase your overall cost of sale?

Andres Reiner

So this program helps us identify the opportunities that customers have within their environment and helps them layout the best path to move forward with implementing our technologies, really understanding their business processes in areas that we can provide specific, very prescriptive guidance as which steps will drive the highest value for that given customer.

And be able to generate a good business case with strong ROI case around the value within a fast-time to value to implement the solution. We've seen this differentiate us in the market and that's part of our strategy to really partner with customers to help them outperform and help them drive their growth strategies. I think our experience of having strategic consultants, in addition to our technology specialists, differentiate us in the market and it is an industry-best practice.

Charles Murphy

It really doesn't impact our gross margins because this is handled by our solutions consulting teams, which are probably sales organization primarily. They do get some support from other disciplines but it's not significant. It really is a sales expense.

Greg McDowell - JMP Securities

Andres, you mentioned earlier you guys launched a mid market approach in 2012. Can you share with us some of the results? Are you satisfied with the approach? What are you looking to improve on? What do you see as the things you might want to continue with this fall?

Andres Reiner

So over the last two years, we've really focused on driving awareness and adoption of our technologies and we started programs around marketing, demand generation, improving our sales organization, growing our sales organization. This area as you can see the results by the overall growth that we've experienced, specifically around the B2B industries and overall as a business, but a lot of these initiatives have been aligned around this new market opportunities that we've talked about growing at a much faster pace than our legacy or more mature part of our business within travel.

So you can see in the number of net new customers as well as the 40% growth that we've talked about in the B2B industries this year which we believe, we can maintain that level of growth going into this year.

Greg McDowell - JMP Securities

And did you mention how are you guys defining the market, a certain type of revenue? Are you up to like $2 billion in revenue or a certain vertical you're going after? How are you defining that approach?

Andres Reiner

So the mid-market we're defining between $100 million and $500 million in revenue. It's our current definition of the mid-market.

Greg McDowell - JMP Securities

Any certain verticals that you want to specialize in and continue to go forward? Are you approaching new verticals that you're trying to attack?

Andres Reiner

It's the same verticals we're focusing, the enterprise. I would say that manufacturing and distribution is where we're seeing more of the adoption industries like high-tech, it is one of the areas that we've seen good adoption.

Greg McDowell - JMP Securities

And final question as I have to jump off real quick, of your revenue can you, Charlie, maybe that's a good question for you, how much is B2C versus B2B?

Charles Murphy

We actually gave I think some pretty good disclosures in the financial statement. We said about $66.6 million is the B2B, the balance, which is over $50 million is the B2C, the travel business. And what's important about that is that's a nice shift over the last several years, it's been increasing.

We've set our growth opportunities then in the B2B business, the manufacturing, distribution, and services. So it's trending exactly as we had expected it would trend. And we're obviously very pleased with the growth in the B2B side of our business in 2012 and we expect that to continue.

And I think it's the validation of the investments we've have made. It's the validation of the awareness that's increasing throughout 2011, '12 and going into '13, which was obviously invested very heavily through our marketing programs. But also just in general, there is just so much noise out there, particularly in 2012 about big data, sales effectiveness, the ability to use analytics to help improve sales. We fit right into that. We've been doing that for 25 years.

So I think we're very nicely positioned as far as being able to drive revenue. And we've said, we love our travel business, very pleased with that. We've said for a long time that's a single-digit revenue growth business for us. So when you look at the growth of 22% last year and one piece of single-digit, it's why the B2B growth is 40%. And that's the start-up within the mature organization that we've been talking about on our previous calls. So we're pleased with the trend and we hope and expect that that trend will continue.

Greg McDowell - JMP Securities

Last thing, Andres, if you could tell everyone on the call today what's your number one goal, as CEO of PROS, that you want to accomplish for 2013 and how do you plan to go about accomplishing that?

Andres Reiner

My number one goal is to continue to drive the passion around driving customer success within our business. This is something that really has created PROS to where it is today. Our passion in helping, our customers outperform and continue to drive that growth into business.

For us, it's very important to maintain this momentum. And as we scale and as we increase our headcount to keep the culture that customers are the center of our success and if we make them successful, we're going to continue to prosper and drive our growth. And a lot of focus from the executive team, I'm very proud of how close we work together to maintain the culture and the passion for the success.

And how we've driven the business and not looking at the economic environment as an excuse for driving our strategies that we've proven over the last few years, and continuing to expand on those strategies and accelerate those strategies, in the way that we're going to measure it by looking at the results in our growth and in our success in driving the business.

Greg McDowell - JMP Securities

How do you define that customer success? What are you putting in place to define that?

Andres Reiner

We track in that a net promoter score around our customers, but more importantly from a financial perspective we talk about, the maintenance renewal rate, which we believe is best-in-class over 95%. But we also have a very high level of reference ability. In fact, we usually tell our prospects, we show our customer list and we ask them to call any customer that they're shown and do their own reference check on their own. And that's our standard.

We want any customers to be able to call our prospects, to be able to call any customer and achieve a good reference. And that's a very high standard that we've set for ourselves. But we obviously have a customer success organization that measures net promoter score, and measures improvement which we have seen improvement year-over-year. And those are areas that through surveys we can measure how well we're doing. How many are promoters and how we're improving our programs.

Charles Murphy

I would say one thing is that we look at reference ability as a clear differentiator between us and our competitors. And as Andres mentioned, we are very open about references and we have customers that are very passionate about PROS, which we're very proud of. But that gets back to Andres number one goal, which is passionate for customer success. So it comes back. When you show that passion, it comes back in references and long-term relationship. And it's always been that way at PROS.

Operator

Ladies and gentlemen, that concludes the time we have for questions. I would now like to turn the presentation back over to Mr. Andres Reiner, for concluding remarks.

Andres Reiner

Thank you for your participation in today's call and for your support at PROS. We are confident that our growth strategies are working, as more and more companies look to PROS to monetize your big data. We continue to invest in innovations and our go-to-market strategies in order to drive long-term sustainable growth.

I would like to thank our PROS team worldwide for an incredible 2012. I am proud of their relentless passion and commitment to innovation and customer success. Thank you also to our customers, partners and shareholders for your support at PROS. We look forward to a strong 2013 and to speaking with you on our next call. Thank you and good bye.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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