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PROS Holdings, Inc. (NYSE:PRO)

Q2 2013 Earnings Call

August 1, 2013 4:30 PM ET

Executives

Charlie Murphy – EVP and CFO

Andres Reiner – President and CEO

Analysts

Jesse Hulsing – Pacific Crest

Joe Fadgen – Craig Hallum

Sterling Auty – J.P. Morgan

Scott Berg – Northland Capital Markets

Greg McDowell – JMP Securities

Ross MacMillan – Jefferies

Operator

Good day ladies and gentlemen and welcome to the second quarter 2013 PRO Holdings Inc. earnings conference call. My name is Jacky and I will be your coordinator today.

(Operator Instructions)

I will now like to turn the conference over to Mr. Charlie Murphy, Executive Vice President and Chief Financial Officer. Please Proceed.

Charlie Murphy

Thank you, operator. Good afternoon everyone and thank you for joining us today for the PROS Holdings financial results conference call for the second quarter of 2013.

This is Charlie Murphy, Executive Vice President and Chief Financial Officer of PROS. Joining me on today’s call is Andres Reiner, President and Chief Executive Officer.

In today’s conference call, Andres will provide a commentary on the second quarter of 2013 and then I will provide a review of the 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 and 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 would 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 in the company’s filings with the SEC. Also, please note that a replay of today’s webcast will be available in the investor relations section of our website at pros.com.

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 at a public forum. PROS does not assume any obligation to update the forward-looking statements provide to reflect events that occur or circumstances that exist after the dates 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 reports 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, which can also be found on our website in the investor relations section.

With that, I’d like to turn the call over to Andres.

Andres Reiner

Thank you, Charlie, and thanks to all who are joining us on today’s call. PROS delivered another quarter of solid performance with revenue exceeding the high end of guidance at $35.5 million, a 26% year-over-year increase. Non-GAAP operating income also exceeded the high end of guidance at $4.9 million, a non-GAAP EPS was $0.12 per share.

This result reflects to continue demand for PROS solutions as more companies recognize that their Big Data can be a powerful source for sales growth. According to a study by PWC, a majority of CEOs believe their greatest growth opportunities will come from expanding their customer base and they’re increasingly looking to predictive and prescriptive Big Data technology, like PROS, to cover high-yielding growth opportunities based on a deeper understanding of customer behaviors.

We believe PROS Big Data science and technology help get companies a competitive selling advantage, which can result in higher win rate and increased sales. For example, in article in CRN Magazine spotlighted HP, a PROS customer, in how they’ve recently experienced increased win rates in the sales channel through the use of new pricing tools.

Even in an uncertain microeconomic environment, companies are looking for strategic technology partners that provide meaningful impact on sales growth. We believe our market leading Big Data solutions were strong history of delivering substantial and tangible results in our unmatched customer reference ability continue to create differentiation and preference for PROS in the market.

Our ongoing investment in our stated growth strategy continues to drive our moment in the market. We remain on accelerating awareness and adoption of our solutions, extending our product leadership position and increasing our global reach and scale.

I will share a few highlights from each of these areas. Our investments in accelerating awareness and adoption are working resulting in a stronger pipeline and increased demand. We experience strong response to a recently held PROS outperformed Big Data event in Europe. Like our North America outperformed event, we saw record attendance and increased willingness from our customers the success they’ve had with our solutions.

Guest heard presentations from PROS customers including 3663, HP, Johnson and Johnson Depuy, Novozymes, Volvo Trucks. One customer in the distribution industry described how they’ve increased growth margin 260 basis points, five times higher than their goal. Another reported that they’ve increased their average selling price by 6% during the same time one of their competitors saw their average selling price fall by 11%.

Results like these are fueling increased recognition in the marketplace of PROS as a leader in Big Data applications for sales growth. For Example, PROS was recently spotlighted in a story in the Wall Street Journal about technology that can help companies achieve a competitive advantage.

We believe PROS value proposition is unique and relevant at a time where more and more camping is recognized that Big Data can be a top source of sales growth. To capitalize some of this opportunity, we will continue to invest in sales and margining strategies that increase awareness and adoption of PROS.

Innovation remains a key differentiator for PROS, and we continue to invest in extending our product leadership position in the market. We recently expanded our mid-market sales offerings with the introduction of PROS Step, complementing our work-to-win product for ideal quoting.

Step brings the power of PROS data science and prescriptive analytics to the cloud providing pricing and selling recommendations through a sell serve model that’s easy to setup and use in a matter of minutes.

Step uses data science to reveal new high yielding revenue opportunities based on customer’s buying patterns and preferences arming sales reps with greater focus, confidence and agility. Lines Laundry System selected Step to provide science driven pricing and selling guidance to help their sales teams capture greater value for their 20,000 parts and improved responsiveness to customers.

Innovations like Step strengthen our mid-market offerings and extend our overall product leadership position. We expect recurrent subscription revenue from Step to provide another source of sustainable long-term growth for PROS.

We also continue to innovating the travel industry with our new group pricing solution that allows airlines to automate large group bookings on their website in real time powered by data science.

These helps airlines, like Switch for example, improve their customer experience and increased business agility. This is just another example of our ongoing commitment to innovation that helps customers outperform in their market.

The third pillar of our growth strategy to expand our global reach and scale through direct sales coverage and our partner ecosystem. We ended the second quarter with 42 product caring personnel, up 35% year-over-year. We expect to achieve miracle of approximately 30% increase in product caring personnel in 2013 to meet the demand force solutions.

Our strategic partnership with Microsoft continues to play an important role in driving awareness in differentiation for growth in the market. In the second quarter, PROS won the 2013 Microsoft application development partner of the year award.

These results of our shared vision in collaboration in helping companies turn Big Data into a competitive advantage through innovative technologies. We’re honored to be recognized for demonstrating excellence innovation and implementation of customer solutions based on Microsoft technology.

We appreciate the support and confidence of Microsoft and look forward to a continued strong relationship. Our partnership with SAP provides visibility and differentiation for PROS and Big Data solutions at SAP Sapphire Now Conference, we prominently showcase our SAP HANA OEM partnership in our market leading integration with SAP ERP and SAP CRM.

We believe SAP customers choose PROS because we provide the most complete and seamless integration experience in the SAP market. In fact, more than half of our B2B customers run SAP. We believe this indicates strong preference for PROS Big Data applications for pricing and sales effectiveness in the SAP community.

Q2 was a solid quarter for PROS. We’re pleased with our execution and gains our three-stated growth strategies. Looking ahead, we remain confident in our business for the rest of the year and we’re maintaining our full year guidance.

Demand for a solution continues to grow. Our partner ecosystem is strengthening and we continue to set the phase of innovation in the market. Our real time Big Data applications are more relevant than ever before. We believe PROS is in a strong position to capitalize on this sizeable market opportunity.

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

Charlie 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 second quarter with total revenue of $35.5 million exceeding the high end of guidance and increase to 26% from a year ago. License and implementation revenue was $24.2 million, up 33% from a year ago. Maintenance and support revenue was $11.4 million up 14% from a year ago and represents the largest component of revenue from recurring sources.

Total recurring revenue which includes maintenance and support revenue and a number of term license contracts was 37% of total revenue in the second quarter. Non-GAAP gross margins in the second quarter were approximately 71% as compared to 74% for the second quarter of 2012.

Gross margins can and do vary from period-to-period primarily due to the level of implementation services required relative to the total contract value. In addition, gross margins have been impacted by investments in personnel particularly across our professional services teams in anticipation of future revenue growth.

Total non-GAAP operating expenses for the quarter were $24.4 million compared with $16.5 million a year ago, an increase of 23%. Non-GAAP operating income in the second quarter was $4.9 million compared with $4.4 million a year ago, an increase of 11%. Non-GAAP operating margins for the quarter were 13.8% which reflect continued investments across our business in support of our growth.

We will continue to adopt and capitalize on what we believe is a very large market opportunity. Non-GAAP effective tax rate of the second quarter was approximately 27% resulting a non-GAAP net income of $3.5 million for the quarter, an increase of 26% over the prior year.

Non-GAAP earnings per share exceeded guidance and were $0.12 per share compared to $01.10 per share a year ago. GAAP earnings per share for the quarter were $0.02 per share compared to $0.04 per share a year ago, a reconciliation of GAAP to non-GAAP is provided in our press release.

Now moving to the balance sheet, we ended the second quarter with cash and cash equivalents of $88.2 million, an increase of $5.8 million from the end of the first quarter. Capital spending for the second quarter was $800,000. We expect capital spending for the year, which includes infrastructure and facility improvements to be approximately $8 million.

Gross accounts receivable at the end of the quarter was $37.6 million. Day sales outstanding were approximately 103 days, a seven day improvement from the first quarter.

We generated operating cash flow of $6.7 million in the quarter yielding a cash flow margin of 18.8%. Year-to-date operating cash flow is $7.9 million, a 14% increase over last year. This yields a cash margin of 11.5% year-to-date. For the year, we expect our annual operating cash flow to approximate our annual non-GAAP operating income of approximately 13% to 13.5%.

Finally, headcount including outsourcing at the end of the quarter was 770 up from 620 on June 30th, 2012, an increase of 150 or 24%. We continue to increase our sales, marketing, engineering, professional services and administrative resources, which reflect continued confidence in our long term opportunity.

Before I turn to our guidance for the third quarter and the full year, let me provide you with some additional information related to our business. We continue to invest an awareness initiative to drive our B2B business, which is the key growth driver for our company.

As a result of our investments, we continue to see solid growth in the United States primarily from our B2B business which represented 48% of total revenue for the quarter, an increase of 54% over the same period of last year as compared to 39% of total revenue in the second quarter of 2012.

Revenue from rest of the world continues to perform well and it’s up 19% compared to last year. It made up 30% of total second quarter revenue. Revenue from Europe was 22% of total revenue in the second quarter as compared to 28% of total revenue in the second quarter of 2012.

We face some sales execution challenges which impacted our growth in Europe. We continue to make improvements in our go-to-market initiatives in this region. We are confident about the enhanced team we now have in place and we feel good about the opportunity in Europe going forward.

Overall, our business continues to have positive tailwinds driven by the large growing and significantly under penetrated B2B markets we serve. Interest levels in our big data solutions remain high and we continue to benefit from our diversification across many industries and geographies.

Our plan remains to continue to make strategic investments to drive our future growth particularly in sales and marketing, product development, professional services and administration in 2013. We have seen the benefits of these initiatives and we believe these investments will further increase our leadership position enable us to capture 20% plus top line revenue growth over the next few years.

Now, turning to our outlook, we continue to be optimistic while mindful of the global economic environment. For the third quarter, we anticipate revenue in the range of $36.2 to $36.8 million, approximately 22% growth at the mid-point from the third quarter of 2012. We expect total expenses to be approximately $32 million up from $28.1 million in the third quarter of 2012 as we continue to make strategic investments in our business.

We expect non-GAAP operating income margins of approximately 12.3% after mid-point of revenue guidance. With a tax rate of approximately 27% in the third quarter, we anticipate non-GAAP earnings per share of $0.10 to $0.11 based on estimated 30.3 million shares outstanding.

On a GAAP basis, we expect operating income margins of approximately 1.4% and GAAP earnings per share of $0.01 per share. With the research and experimentation tax credit for 2012 and 2013, all three quarters of 2013, we expect the 2013 full year non-GAAP tax rate to be approximately 20%. And for the third and fourth quarters, we are modeling non-GAAP tax rates of 27%. The GAAP, we are modeling the 2013 full year tax benefit of approximately 32% and we are modeling GAAP tax rates for the third and fourth quarters of 27%.

For the full year, we continue to expect revenue growth of approximately 23%. Our non-GAAP operating margin guidance continues to call for approximately 13% to 13.5% as we invest on significant opportunity we see ahead. We continue to believe that long-term, we will be increasing our operating margin leverage as our business scales and we realize the benefits of our investments.

In summary, our performance of the first half of the year reflects that our gross strategies are working, our products deliver tangible results for our customers and we are capturing the opportunity for real time Big Data solutions.

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Jesse Hulsing with Pacific Crest. Please proceed.

Jesse Hulsing – Pacific Crest

Charlie, you touched upon some execution issues in Europe and just looking at your guidance, it looks like Q3 would be somewhat seasonally soft on the sequential growth basis relative to prior Q3s. Did you see any disruption to your bookings trends which have been taking up for the last three quarter? And maybe you could give us a little bit of some insights into how your bookings are trending on a year-over-year basis and how confident you are there.

Charlie Murphy

Sure, absolutely.

Andres Reiner

Hi, Jesse, this is Andres. I’ll start with Europe, so Europe did not meet our expectations for the second quarter. We did see sales execution challenges which we have addressed. We’ve actually assigned Wagner Williams to the interim GM role within Europe. He started our European operations in 2007 and led that region through Q1 2012.

We are confident for the remainder of the year because we feel we have a great team in place and we see very strong leading indicators clothing [ph] the pipeline any demand.

Jesse Hulsing – Pacific Crest

Thanks.

Charlie Murphy

What I’d like to say, Jesse, is that really, with the exception of Europe that Andres has commented on, we’re really pleased with the performance of the company during the first half of the year and quite frankly, we’re pleased with the guidance that we’re continuing to provide. At the beginning of the year, we started with 22% or approximately 23% and we’re holding at approximately 23% as we’re going into the third quarter. We believe that’s going to be good calls for the company this year and we don’t think that – and we still believe we will position that 20% revenue growth in next year and in light of the year beyond that as well.

So, fundamentally, we don’t see anything that’s really changed the business and our confidence remains the same.

Andres Reiner

Yes. One last thing I will add is we had solid bookings this quarter and we continue to see our pipelines being strong and a lot of deal activity lined up for the second half. So which traditionally has been our strongest seasonality is the second half is the strongest for us. So overall, really, nothing has changed. We believe [ph] very strong about our 23% growth for the full year and 20% beyond that.

Jesse Hulsing – Pacific Crest

Thanks. And you mentioned, Andres, a new solution for the airline industry. Do you see any indication that back drive something of a product cycle on that segment which has traditionally been slower growing?

Andres Reiner

Yes. So we’ve communicated in the past and we’ve been investing our growth strategies around the travel industry and one of those areas is around product innovation. We believe we can expect to achieve a low double-digit growth in that industry in that sector through this new innovations that are very competitive and very innovative in the market.

Jesse Hulsing – Pacific Crest

Got it. So it sounded like you do expect something of a product cycle from your new solution, is that fair [ph]?

Andres Reiner

Yes. I mean, we definitely expect these new solutions to drive increase demand in that particular sector.

Jesse Hulsing – Pacific Crest

Great.

Andres Reiner

And we’re always investing in innovation, that’s part of our DNA.

Jesse Hulsing – Pacific Crest

Got it. Thanks, Andres.

Andres Reiner

Thank you.

Operator

Your next question comes from the line of Tom Roderick with Stifel Nicolaus. Please proceed.

Unidentified Analyst

Yes. Hi, this is Matt [inaudible] for Tom. I just had a quick question on the progress of some of the new developments or maybe even some of the technical aspects of the new Big Data products that you think further differentiate the business in your offering to your client.

Andres Reiner

Yes. So we’re continuing to make investments. So if you’re referring to our new Step product in the mid-market, a lot of the innovation went in that solution in being a true multi-tenant SaaS solution with machine learning technology. And a lot of our innovations in this space is making it very easy for mid-market companies, companies between $100 million and $500 million in revenue to be able to adopt this technology very fast to drive their sales growth and confidence in selling.

In our enterprise platform product, we’re continuing to invest both in our sales oriented quality technology and other technology like customer attrition algorithms that allow customers to be able to predict when they have risk of customer attrition. So in many of the areas around our Big Data platform, we continue to invest and allowing us to drive prescripted capabilities to help companies achieve their sale growth and drive their sales growth and profitability improvement.

Unidentified Analyst

Okay. And then a follow up to that, you mentioned the travel industry, were there any other specific industries where you saw some strong development or have new products in the pipeline that might make an equally big splash in the market?

Andres Reiner

I would say we’re continuing to invest in innovation across all of our industries and these are just samples of the innovations that we’ve made. Step is an example in the B2B mid-market but we’re continuing to make innovation across all of the markets that we served.

Unidentified Analyst

Okay. Thank you.

Andres Reiner

Thank you.

Operator

And you next question comes from the line of Joe Fadgen with Craig Hallum. Please proceed.

Joe Fadgen – Craig Hallum

Hey, guys, thanks for taking the question on your [inaudible] today. So looking at that Step solution, cloud Big Data solution, can you let me know, I guess, how significant is our cloud solutions or SaaS offerings as a part of your business right now? And also, I guess, kind of driving this, when you go touch your customers, do you have customers really asking you for more SaaS solutions, cloud solutions or is this something that you’re kind of doing on your own thing [ph] to the market and hoping it will work?

Andres Reiner

Yes. So in the enterprise side, we also offer a private cloud solution and we have for some time and we see some particular industries like High-Tech [ph] had interest in our cloud solution. But as a whole at the enterprise level, having seen any meaningful shift where customers prefer cloud versus on-premise, we’re definitely have a very robust enterprise private cloud solution for that market and it’s something that we offer.

In the mid-market, we’re only going to offer our products in a cloud multi-tenant and we see that as a way to more easily penetrate that market.

Joe Fadgen – Craig Hallum

Okay. And then going back, in the last quarter, you had the kind of the HANA integration and running on SAP and OEM [ph] in that [ph]. I guess, a quarter later or so come, what’s been the reaction from your customers from the market as far as positive, good, bad and especially kind of around the functionality that provides mainly the real time capabilities?

Andres Reiner

Yes. So we’ve seen positive reaction from the market both from our customer-based and prospects. I would say that a lot of them are still trying to learn about HANA and I would say are interested in leveraging the technology but want to see it continued to mature. And we definitely see a lot of customers wanted to adopt technology like HANA. But at this point, we’ve seen not in large use in production of the technology thus far.

Joe Fadgen – Craig Hallum

Okay. And then one last one real quick, kind of following up on the issue with Europe and some of the sales execution issues there. So, you [ph] have been pretty aggressive on your hiring the last year, year and a half and obviously are continuing that. I guess, just general rule, how much churn do you see in a given quarter, year or whatever of your sales teams like when you add three in the quarter that you add – or hire five and two leaves [ph], so isn’t that three years pretty much is everyone kind of hanging around, what’s that look like?

Charlie Murphy

Yes. This is Charlie. Overall, the company’s turnover experiences are very, very good. I think probably typically of separate [ph] companies, out turnover in the sales organizations typically is higher than the rest of the company and that continues. That was true for the first six months of this year. And we anticipate some of that as we close [ph] to our planning for the year. So, still, we believe on track to get our number of sales hires in full positions still between now and the end of the year. But your point is well taken, there’s higher churn on the sales organization than there are in the other part of the organizations.

Andres Reiner

Yes, and I would say we are continuing focus on calibrating the sales organization and continuing to improve our overall sales organization and that’s something that, as you mentioned, we’ve grown in the sales organization significantly over the last three years and we believe strongly in top grading and continuing to calibrate our overall sales organization. So I would say some of that is part of our strategic direction.

Joe Fadgen – Craig Hallum

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

Andres Reiner

Great. Thank you.

Charlie Murphy

Thank you.

Operator

Your next question comes from the line of Sterling Auty with J.P. Morgan. Please proceed.

Sterling Auty – J.P. Morgan

Yes, thanks. Hi, guys.

Andres Reiner

Hi.

Sterling Auty – J.P. Morgan

So I want to revisit Europe as well. You mentioned that you implemented a person as interim general manager. What’s the process that you’re looking at for a permanent placement? And is there additional turnover that you’re expecting at that next layer down?

Andres Reiner

Yes. So, we don’t expect any additional turnover at the next layer down. We feel we really have a very special team there that’s very strong. We are actively recruiting for the GM position, but I would say that Wagner Williams will remain leading at least for the next six months after we hire the new GM in helping through the transition. So we’re pretty active in the recruiting. I expect to feel deposition probably within the next quarter, but definitely, Wagner will continue and help support the new leader to achieve success.

Sterling Auty – J.P. Morgan

Okay. So, if there’s no additional turnover layer down from the sales execution, do you have a finger on was it the way that the pipeline was being scrubbed or was it close process? What are the things that you think you should [ph] see improvement on under Wagner?

Andres Reiner

Yes. I would say it’s definitely around the management and leadership process. In the expertise, I would say that that was in newer organization. With that said, a lot in growing North American and I would say the Europe sales organization was less mature. And bringing more experience to help them be successful is going to be a key to our long-term success. But overall, I would say, in terms of demand, when we look at our pipeline in the activity remains strong and that’s what makes us confident about the second half.

Sterling Auty – J.P. Morgan

Okay. That make sense. My last question would be in terms of the investments that you’re making, can you give us, what was the headcount at the end of the quarter and how should we take about [ph] hiring for the remainder of the year?

Charlie Murphy

Yes. Headcount at the end of the quarter was 770 [ph] personnel. I think as we mentioned, that was up 150 people from this time last year as well. And we’re still looking at growing the organization somewhere in the mid-20s, 24% to 25% headcount growth between now and the end of the year and that’s obviously impacted into our guidance and to our expense run rate.

Sterling Auty – J.P. Morgan

Okay. Thank you.

Andres Reiner

Thank you.

Operator

Your next question comes from the line of Scott Berg with Northland Capital Markets. Please proceed.

Scott Berg – Northland Capital Markets

Hi, Andres and Charlie. Congratulations on what appears to be a good quarter.

Andres Reiner

Hi. Thank you.

Charlie Murphy

Thank you.

Scott Berg – Northland Capital Markets

Yes. Just a point of clarification really quick is Europe was a little bit of a disappointment but you seemed overly happy with US and the rest of the geographies. On a net basis was total deal flow in the quarter below in line or above your expectations going into the quarter once you have kind of account for all those different areas.

Charlie Murphy

Was the question deal flow itself? I would say that –

Scott Berg – Northland Capital Markets

Yes – [multiple speakers]

Charlie Murphy

Yes, I would say taking out obviously [ph], we did feel like we execute as well in Europe as we should have, taking that out, we are pleased with [inaudible] in the second quarter.

Scott Berg – Northland Capital Markets

Okay. So a net basis so even including that, was it still kind of in line or above your expectations going into the quarter?

Andres Reiner

I would say it was in line.

Scott Berg – Northland Capital Markets

Great. And then can you talk a little bit about upsell versus new [inaudible] wins in the quarter? You have this interesting trend last year where 75% of your deals roughly were new business. Is that a trend that continued in the quarter or upsells kind of better or weaker than expected?

Andres Reiner

Yes. So overall, we did see good new business in the quarter but we also saw a very strong existing business and it’s something that, to us, it’s a true testament to – they all arrived [ph] in our solutions providing our customers continuing to want to leverage our technology across other geographies or be able to adopt other modules.

I would say overall, for the first half, the mix is striking similar to last year in terms of new business and we expect for the full year, new business will outpace existing business as we stated in the past. So I don’t see that trend changing. But definitely, we are very pleased with the existing business as well.

Scott Berg – Northland Capital Markets

All right. Great. Then the last question I guess I have is on the newly announced Step product. It sounds like initial indications of the product are strong especially with the customer that you quoted. Should we be thinking about this as more of an impact to revenues in maybe the back half of ‘14 or ‘15 or do you see some more opportunities before that to kind of help accelerate the gross or even [ph] further?

Andres Reiner

Yes. I would say that’s a good way of looking at it at the back half of ‘14 and ‘15. As we said, a lot of these investments in the mid-market is to drive long-term growth. So this has been part of our strategy of ensuring that we’re investing in solutions to help us drive growth three to five years out. This is a SaaS recurring revenue model, so as you can imagine, it takes time for the revenue to build up, but definitely looking at the back half of ‘14 and ‘15 is a good way of looking at it.

Scott Berg – Northland Capital Markets

Great. That’s all I have in the moment. And I want to jump back –

Andres Reiner

Great.

Scott Berg – Northland Capital Markets

Thank you.

Andres Reiner

Thank you.

Operator

Your next question comes from the line of Greg McDowell with JMP Securities. Please proceed.

Greg McDowell – JMP Securities

Great. Thank you very much. I have question for you, Charlie, and one question for you, Andres. Maybe you first, Charlie, when I looked at the balance sheet, the deferred revenue declines maybe a little bit more than usual. So I was hoping you could just help us reckon the file, the commentary on solid bookings in most geographies with sort of the steep sequential decline and differed?

Charlie Murphy

Yes, sure. I’d be happy to talk about that. We’ve actually commented in the past, Greg, that differed revenue in of itself is really not a good indicator of revenue growth for the company and we go back to example in 2011 where differed revenue was relatively flat the whole year and revenue growth was over 25%.

But nonetheless, there are some variability here with respect to the business from period to period that does influence the amount of differed revenue and receivables in particular quarter.

Let me give you an example. For the second quarter of this year, the maintenance billings that renewed were much lower in the second quarter than they were in the first quarter of the year. So the first quarter got the benefit of much higher maintenance billings in the first quarter than we got in the second quarter.

That no way changes maintenance revenue. It’s all about what goes on the balance sheet. Another example is we have more term deals in the second quarter issued in the first. And historically as you would expect, we actually get better billings or perpetual deal than you would offer in term deal. So the mix, really, on the timing of when milestone billings occur is the major explanation as to what happens in differed revenue from one period to the next.

Now, with that on the margin that we have commented and we’ve discussed in the call that they were some challenges in Europe. But with that said, we’re confident in the changes we made in Europe and we expect to be stronger in the second half in Europe as well.

So we still feel good about our 23% guidance for the year and hopefully that gives the kind of call you’re looking for.

Unidentified Analyst

That’s very helpful. I know you guys do talk about backlog once a year. So thank you. Thank you for that explanation.

And then Andres, maybe a question for you, I would love to hear your thoughts on the competitive environment and whether there have been any changes especially as you move more and more and do SaaS pricing optimization type solutions. Thanks.

Andres Reiner

Yes. No, we have not seen any real changes in the competitive environment. It continues to be the same, or I would say we have to give it some time with our Step offering to see if we see any changes. But we really are not expecting any meaningful changes in the competitive landscape.

I do believe that this Step product is very differentiated to what’s being offered in the market. So I think it maybe a case that there is any clear one-to-one competitive position on that product.

Unidentified Analyst

Great. Thank you gentlemen.

Andres Reiner

Thank you.

Charlie Murphy

You’re welcome.

Operator

Your next question comes from the line of Ross MacMillan with Jefferies. Please proceed.

Ross MacMillan – Jefferies

Thanks. Hi Andres. Hi Charlie. I had a question on maintenance actually. I heard your comments on maintenance billings. But maintenance revenue growth is a little slower than I expected and I just wondered is there any factors on that? And forward exchange hasn’t been talked about at all today, and I know you don’t have a lot of foreign exchange exposure, but I just wondered given the airline base that you have. I wondered if there was anything from a currency standpoint that could be impacting that.

Andres Reiner

From a currency standpoint, there’s actually a loss. It was less than $100,000 in the quarter. So currency, I don’t think it’s a major element here, Ross, in our revenue whether it’s maintenance or license and implementation revenue. If you’re looking at the maintenance change from this year to last year, last year we have a one-time item that benefited the maintenance in Q2 of 2012. And that is that we have to catch up from a customer that we put on hold because of slow payments and then they paid.

That was approximately $400,000 last year. And under our record of course, if you don’t expect to collect, you don’t recognize the revenue and we’ve got good disciplines around that and then ultimately, this customer pays. We have actually a little bit of a pick-up in Q2 of last year. If you take that up year-over-year, it’s about 19%. So the year-over-year is fine, if that helps on the explanation. I don’t know what you think –

Ross MacMillan – Jefferies

Yes, I was going to say I didn’t recall that, so that explains it I think pretty much in entirety [ph].

Charlie Murphy

Yes. Well, I don’t want anyone to think that has anything to do with our maintenance renewal rates. The maintenance renewal rates continue to be best in class in over mid-90%.

Ross MacMillan – Jefferies

That’s great. And then just on two data points, I guess, you gave us the breakout between airlines and the manufacturing distribution and service upsetting [ph] your revenues. My math suggests the manufacturing distribution and service piece was growing in the mid-50s year-over-year? Is that math right? Does that definitely seems to be a further acceleration relative to last year?

Charlie Murphy

No. Ross, actually, the percentages that we gave were percentages by geography. We were talking about the United States and, of course, United States is experiencing very big growth year-over-year and that’s obviously predominantly because of our B2B business because we have very little travel business here in the US. Then we talked about the rest of the world and we talked about Europe. Those were revenue numbers by geography that we’re discussing.

Ross MacMillan – Jefferies

Okay, all right. So, I guess the answer then is that the domestic business, the North American business, I mean, that is growing in the 50% range and that’s all NST, so one could sort of confer from that estimates [ph], sort of pace of growth you might be having in that business at least here in the US.

Charlie Murphy

Yes, except for it’s not all, it’s not all B2B, it’s predominantly B2B. But you could infer that B2B from that [inaudible]. Well, it’s saying B2B is doing well and B2B is the growth engine. We do have some business in travel in the United States. I just want to be clear here that within the US, there is some travel but it’s predominantly B2B. And as we’ve said, B2B is expected to be the growth driver for the company and we absolutely – it is the growth driver for the company.

Having said that, I want you to know that travel is doing well and we have said last year, we helped to get travel up into the high single-digits, maybe a little double-digit and we actually have an opportunity to get there this year.

Ross MacMillan – Jefferies

Great. Thank you.

Charlie Murphy

You’re welcome.

Operator

Ladies and gentlemen, that concludes our question-and-answer session. I will now like to turn the presentation back to Mr. Andres Reiner for closing remarks. Mr. Reiner, you may proceed.

Andres Reiner

Thank you for your participation in today’s call. We feel good about the second quarter. We’re confident going forward because our growth strategies are working and more companies are recognizing that their Big Data can be a powerful source for sales growth. With our legacy of innovation, market leading solutions and unmatched customer reference ability PROS is in a strong position to capitalize on the growing market opportunity.

I would like to thank our PROS team worldwide for their relentless passion and commitment to customer success. Thank you also to our customers, partners and shareholders for your support of PROS. We look forward to speaking with you on our next call.

Thank you and goodbye.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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