PROS Holdings' CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: PROS Holdings, (PRO)

PROS Holdings, Inc. (NYSE:PRO)

Q3 2013 Earnings Conference Call

November 4, 2013 4:30 PM ET

Executives

Charles Murphy - EVP and CFO

Andres Reiner - President and CEO

Analysts

Bhavan Suri - William Blair and Company

Chad Bennett - Craig-Hallum Capital Group

Jesse Hulsing - Pacific Crest Securities

Matt Van Vliet - Stifel Nicolaus

Scott Berg - Northland Capital Markets

Ross MacMillan - Jefferies

Greg McDowell - JMP Securities

Operator

Good day ladies and gentlemen and welcome to the Third Quarter 2013 PROS Holdings Inc. Earnings Conference Call. My name is Brianna, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Charlie Murphy, Executive Vice President and CFO. Please proceed.

Charles Murphy

Thank you, operator. Good afternoon everyone and thank you for joining us today for the PROS Holdings financial results conference call for the third 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 third 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 could cause actual results to differ from results implied by these or other forward-looking statements.

Also, these statements are based solely on 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 will 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 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 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 for joining us on today’s call. I would like to extend a warm welcome to the great welcome, customers and partners of Cameleon Software. On October 24, we announced our plans to acquire Cameleon, a market leading configure pricing quote software headquartered in Toulouse, France. We are excited to work with Cameleon’s team, to introduce what we believe will be a powerful and unique value proposition to the market. I will share details of this planned strategic acquisition, following my comments about the third quarter.

For the third quarter, PROS delivered solid revenue at the high end of guidance, coming in at $36.8 million, a 23% year-over-year increase. Non-GAAP operating income was also strong, exceeding the high end of the guidance at $6.3 million and non-GAAP earnings per share was $0.15. These results reflect the continued investment in our three stated growth strategies; accelerating awareness and adoption, extending our product leadership position and increasing global reach and scale.

Our investments in accelerating awareness and adoption are resulting in continued demand, the strong pipeline and new customers. In the third quarter, we added among others, new customers such as Air Berlin, B.W. Rogers, and Unify, formerly known as Siemens Enterprise Communications. We also extended our relationships with existing customers, such as Ecolab, Panduit, and [Penske] among others.

Awareness has been fueled by more customers and third party experts sharing their perspective about Big Data for pricing and sales effectiveness. For example, customers from Cardinal Health, Panduit, TE Connectivity and Volvo, shared their stories at recent events like the European Aftermarket Parts Conference in the Professional Pricing Society Fall Conference.

In another example, Gartner recently produced a report on analytics that identified customer churn, cross-sell guidance and price optimization as used cases for predictive and prescriptive analytics, to help companies unlock the value of their Big Data. PROS has been innovating in these areas for many years, and we believe our investments in awareness and adoption will continue to attract more companies to PROS, in our unmatched value proposition.

Innovation remains a key differentiator for PROS. In the third quarter, we introduced another next generation solution for travel customers. PROS Availability Server is designed to help airlines improve revenue and reduce costs by providing real-time dynamic pricing engine direct to the airlines distribution channels. Rather than these channels requesting availability from the airlines inventory system, which drives up costs of the airline, these channels can now directly access PROS Availability Server. The effect is the much faster and more accurate response, providing an improved customer buying experience.

We also filed two new data science patents centered on helping companies during their Big Data into a competitive advantage. For example, during a price change process, many B2B companies went to achieve the best price realization, and are unsure as to how much they should change their list prices, versus how much they should change discounts on a deal-by-deal basis.

One of our new patent guides companies to how they should change both discounts and list prices simultaneously, to achieve their desired objective. This gives sales reps even greater confidence than they can win the deal, while also meeting the company goals.

Our strength in product innovation drives our value proposition for customers, and we will continue to invest in extending our product leadership position in the market, to drive long term growth.

We also continue to execute our strategy for increasing our global reach and scale, through direct sales in our partner ecosystem. We ended the quarter with 43 quota-carrying reps. We also further strengthened our leadership team in go-to-market strategies in Europe, with the addition of Eric Allen, our new General Manager of EMEA. Eric brings a wealth of experience in leading EMEA teams. Most recent, he was head of EMEA for Emptoris, where he grew the region from the ground-up, to become a significant contributor to the overall business. Eric has been working on recent sales execution challenges in Europe, and we feel good about our opportunity in the region going forward.

Our partner ecosystem continues to strengthen. System integrators continue to certify their consultants to implement our solutions. As we had planned, we expect system integrators to play a more prominent role in our implementations going forward, allowing us to scale more quickly as the market grows.

From a technology partner standpoint, we recently achieved powered-by HANA status from SAP. PROS was the first Big Data application for pricing and sales effectiveness to join their safety OEM program for HANA, and now we have officially achieved powered-by HANA status. This is a part of our longstanding commitment to provide the most complete and seamless Big Data application for pricing and sales effectiveness in the SAP community.

We are pleased with the progress we are making against our stated growth strategies. We have also said in the past, that M&A will play a strategic role in achieving our vision. 10 days ago, we announced a tender offer agreement to acquire Cameleon. We believe Cameleon is a great complement to PROS, based on their people, their solutions, their geographic footprint and their industry focus.

Our plan acquisition of Cameleon represents another step in our mission to help customers outperform. CPQ solutions are a natural adjacency to PROS, and we believe the combination of Cameleon CPQ solutions with PROS speed data applications, will offer a powerful end-to-end sales effectiveness solution that helps customer drive sales growth. In fact, CPQ and price optimization were the only two technologies categorized as transformational in Gartner’s 2013 Hype Cycle for CRM Sales Report. Customers are seeking a single platform, that combines the efficiency of sales execution with Big Data science to optimize the lead to order process. We believe this acquisition will bring our vision of improving both sales efficiency and sales effectiveness to a powerful new reality, and will put PROS in a unique market position to provide a total solution for our customers.

Cameleon has a strong team of people. Their passion, energy and teamwork are what makes Cameleon and PROS a great fit, and we will make PROS even stronger. We plan to retain and grow this talented Cameleon team under the continued leadership of Cameleon’s Founder, President and CEO, Jacques Soumeillan, who will lead the Cameleon CPQ product line. Cameleon will add both geographic strength and industry strength to PROS. With headquarters in France, they increase our presence in Europe, while we provide a complementary reach to Cameleon in the US. They also serve a number of the same industries we already serve, such as manufacturing, high tech and telecommunications. Their strength in the insurance and financial services industries will allow us to expand our industry footprint and create cross-sell opportunities.

We are excited about the many opportunities to drive growth, differentiation and value in the market (inaudible). We will both exhibit a (inaudible) force later this month, giving us an opportunity to introduce the value proposition to the market. We are confident in our strategy, and look forward to when we can collaborate as a single team with a common vision and mission. We believe we are setting new standards of innovation and value in the market, and that the planned addition of the Cameleon team and their solutions will only make us stronger.

In closing, I want to thank our people at PROS for their passion, innovation and commitment to customer success, that has put us in a position of strength.

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 fourth 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 third quarter, with total revenue of $36.8 million, which is at the high end of our guidance, and an increase of 23% from a year ago.

License and implementation revenue was $25.1 million, up 29% from a year ago. Maintenance and support revenue was $11.7 million, up 13% 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 third quarter. Non-GAAP gross margins in the third quarter were approximately 71.5%, as compared to 72.1% in the third 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 $20 million, compared with $17.3 million a year ago, an increase of 16%. Non-GAAP operating income in the third quarter was $6.3 million compared with $4.3 million a year ago, an increase of 47%. Non-GAAP operating margins for the quarter were 17.2%. Non-GAAP operating income exceeded guidance, as a result of timing of new employee hiring and lower travel expenses, as we better leveraged our new travel management system. In addition, approximately $700,000 associated with the Cameleon Software acquisition is being excluded from our non-GAAP results.

The non-GAAP effective tax rate for the third quarter was approximately 28%, resulting in non-GAAP net income of $4.6 million for the quarter, an increase compared to $3.2 million in 2012. Non-GAAP earnings per share exceeded guidance, and was $0.15 per share, compared to $0.11 per share a year ago. GAAP earnings per share for the quarter was $0.03 per share, compared to $0.05 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 third quarter with cash and cash equivalents of $90.8 million, an increase of $2.5 million from the end of the second quarter. Capital spending for the third quarter was $1.1 million. We expect capital spending for the year, which includes infrastructure and facility improvements to be approximately $6 million. Gross accounts receivable at the end of the quarter was $44.6 million; days sales outstanding were approximately 102 days, in line with the second quarter.

We have generated operating cash flow of $3.2 million in the quarter, yielding a cash flow margin of 8.8%. The year-to-date operating cash flow is $11.2 million, a 3% increase over last year. This yields a cash flow margin of 10.5% year-to-date. For the year, we expect our annual operating cash flow, excluding acquisition related costs of approximately 14% at the midpoint of revenue guidance, which approximates our annual non-GAAP operating income.

Finally headcount, including outsourcing, at the end of the quarter was 792, up from 770 as of June 30, 2013, and 665 on September 30, 2012. We continue to increase our sales, marketing, engineering, professional services, administrative resources, which reflects continued confidence in our long term opportunity.

Before I turn to our guidance for the fourth quarter and the full year, let me provide you with some additional information related to our business. Revenues in United States increased 24% over the same period last year, and represented 44% of total revenue for both the quarter ending 2013 and 2012. The primary driver for our growth in United States remains our B2B business. Revenue from rest of the world continues to perform well, and is up 40% compared to last year, and represents 36% of total third quarter revenue.

As we have discussed with you, while B2B remains our primary driver for revenue growth, B2C continues to represent a meaningful opportunity, and we are pleased to report, that we have seen an uptick in our B2C revenue, driven by strong overall demand and the recent release of new products. We continue to believe that B2C can be a long term grower in the low teens, while it is possible that we see some fluctuations above and below this target on a quarterly basis.

Revenue from Europe represented 20% of total revenue in the third quarter, as compared to 25% of total revenue in the third quarter of 2012. We previously commented that we faced some sales execution challenges, which are impacting our growth in Europe this year. We have made and continue to make improvements in our go-to-market initiatives in this region.

We recently announced a new GM for Europe, and we are confident about the enhanced team we now have in place, and feel good about the opportunity in Europe going forward. In addition, with the announced acquisition of Cameleon, we see opportunity to leverage their presence and scale in Europe across the PROS business over time.

The sales execution challenges we have been facing in Europe for the last few quarters, has had an impact on our ability to close business during the first nine months of the year. While we believe leadership changes we have made will show improvements in Q4 and in 2014, we still have some work to do. Even taking this into consideration, we continue to believe that approximately 23% annual revenue growth for 2013 is in range.

Overall, our pipelines remain strong, and we are focused on executing against our goals for a strong fourth quarter close. We continue to believe the fundamentals of the business are strong, the market opportunity is growing, and the investments we are making to drive growth are positioning us well throughout the long term.

I wanted to make a few comments on the planned acquisition of Cameleon, which we expect to close in the first quarter of 2014. We believe that it is a highly attractive acquisition, and it is consistent with our goal of investing our strong cash flow, to improve long term shareholder value.

From a revenue perspective, Cameleon reported revenue under International Financial Reporting Standards, or IFRS, of approximately €10.4 million for the calendar year 2012, and unaudited revenue of €9 million for the nine months ended September 30, 2013, a 24% growth over the same period in 2012. Cameleon’s revenue comes from a combination of on-premise licenses, maintenance, SaaS and services, with a growing percentage coming from SaaS.

From a profitability perspective, under IFRS, Cameleon generated EBITDA of approximately €500,000 or a 5% margin for the full year 2012, and approximately €700,000 or an 11% EBITDA margin for the six months ended June 30, 2013. Cameleon does not report profitability on a quarterly basis.

I wanted to note, that until the acquisition is closed, we cannot complete our analysis relating to the determination of the deferred revenue write-down, valuation of acquired assets including goodwill and intangibles; the anticipated amortization charges that we will expect to take for the P&L, and differing accounting policies between IFRS and US GAAP, which will have an impact on some of their revenue recognition. Our expectation, is that we will provide you with an update regarding Cameleon on our fourth quarter conference call.

Now turning to our guidance for the fourth quarter and full year; for the fourth quarter, we anticipate revenue in the range of $38.3 million to $38.9 million, approximately 18% revenue growth at the midpoint from the fourth quarter of 2012. The fourth quarter of last year was a particularly strong revenue quarter and is a challenging comp. We expect total non-GAAP expenses to be approximately $33 million, up from $27.8 million in the fourth quarter 2012, as we continue to make strategic investments in our business, particularly as we add expected headcount.

We expect non-GAAP operating income margins of approximately 14.5% at the midpoint of revenue guidance. Non-GAAP operating income excludes approximately $4.4 million of stock based compensation expenses, and $1.3 million of acquisition related costs.

We anticipate non-GAAP earnings per share of $0.12 to $0.14, based on estimated 30.4 million shares outstanding. On a non-GAAP basis, we expect the tax rate to be approximately 27% in the fourth quarter and 21% for the full year, which includes the impact of recording both the 2012 and the 2013 R&E tax credit in 2013. On a GAAP basis, we expect the tax rate to be approximately 30% in the fourth quarter, and we are modeling a full year tax benefit of approximately 19%.

On a GAAP basis, we expect operating margins of approximately 1% and GAAP earnings per share at approximately breakeven.

For the full year, we expect total revenue of $144.3 million to $144.9 million, a growth of 22.5% to 23% and still in line with our prior guidance of approximately 23%. Our non-GAAP operating margin guidance is approximately 14.5% at the midpoint of revenue guidance, which is higher than our prior guidance.

We continue to believe that long term, we will see increasing operating margin leverage as our business scales, and we realize the benefits of our investments.

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

Question-and-Answer Session

Operator

And your first question comes from the line of Bhavan Suri, with William Blair and Company.

Bhavan Suri - William Blair and Company

Hey guys, thanks for taking my question. Just as a couple of questions on the European pipeline. You have seen sort of the sales execution, you made some changes, but just any color on sort of how that pipeline trended, and if some of the deals would fall out of the pipeline, or sort of most of them are still there, and it’s just a question of [going to] and closing those?

Andres Reiner

Yeah, so overall the pipeline for Europe remains strong, and at all aspects at the MQL level way through to the (inaudible) pipeline, and we still feel pretty strong about the opportunities going forward. It has not been about deals falling off of the pipeline, and more just execution issues, and that’s moving the deals faster. So overall, that’s why we feel confident about the future in us executing better and driving those deals to closure.

Bhavan Suri - William Blair and Company

Great, thanks Andres. Then as you look at the macro with the rest of the world and emerging markets, any particular areas to call out say in industry by vertical or geography, in terms of pockets of strength or as you may have seen some weakness?

Andres Reiner

So overall, areas like manufacturing, we continue to see very strong, and we have also seen positive impact in our travel industry, in the B2C, as they are looking to innovate with some of the new technologies that we introduced, like the group pricing tool and our new [path] solution.

Bhavan Suri - William Blair and Company

Great. Then one last one for me, just a quick update on the mid-market offering and sort of, you know, the use of that? I know it’s still early, but any mid-market customers, and then also kind of, as an onboarding ramping for some of your enterprise customers, any color on sort of the interest there and the level of use would be helpful?

Andres Reiner

So, we have signed on new customers in the mid-market. We focused this year on building demand and awareness, as this is a new market for us. It’s still in the early stages, but we do see a bright future moving forward. We do see good interest in the solutions and we have seen that customers have adopted driving value from the solution.

Bhavan Suri - William Blair and Company

And are most of the customers there in manufacturing too or in business services, or you are seeing that a little more broadly?

Andres Reiner

We have seen that both manufacturing and distribution, like we spoke about B.W. Rogers, who is a distributor in the service parts area; and we have seen both in distribution and in manufacturing, as well as in services.

Bhavan Suri - William Blair and Company

Great. I will jump back in queue. Thanks guys.

Operator

Your next question comes from the line of Chad Bennett with Craig-Hallum.

Chad Bennett - Craig-Hallum Capital Group

Hey guys, thanks for taking my questions.

Andres Reiner

Hi Chad.

Charles Murphy

Hi Chad.

Chad Bennett - Craig-Hallum Capital Group

So, should we think about -- or I guess, are you guys still thinking that, more from a kind of mid-to-long term perspective, the pricing optimization market is still a 20% plus growth market, and the acquisition of Cameleon and the CPQ market, should we think about that being incremental to that growth?

Andres Reiner

So fundamentally, we haven’t seen any change in our prospects of the market, and we still believe strongly that price optimization is a 20% plus growth market. On the Cameleon front, I think it’s a bit too early for us to comment on the overall impact moving forward. But according to Gartner, the CPQ space is currently about $300 million in annual spend, growing at about 25%. So we believe with our offerings, we have a very competitive solution, and frankly I would say, a very innovative solution in the market, that will allow us to capture a fair share of the deals.

Chad Bennett - Craig-Hallum Capital Group

Okay. And not to get ahead of ourselves, but Andres, the product roadmap for kind of how you see at least kind of the first year out of the gate with Cameleon in the fold. Do you think you will be selling point products or Cameleon separate from your core pricing optimization solution for a while until you get the products integrated, or are you focused on integrating your pricing solutions with Cameleon very early?

Andres Reiner

Yes, so we are focused on providing integration very early, and in the market, we have integrated with other CPQ solutions and other quoting solutions in the past, so we have pretty robust APIs to allow ease of integration. So we expect the first component of integration to be very fast, and then we see the future is about embedding the data science capabilities, including both predictive and prescriptive guidance, through the lead-to-order process, and we think there is where large differentiation will come.

But early on, we see selling those solutions that integrate with our PROS price optimization solution or independently.

Chad Bennett - Craig-Hallum Capital Group

Couple more questions. So how many people came with or will come with Cameleon, and specifically, how many quota-carrying salespeople do they have?

Andres Reiner

Yeah. So there are approximately 90 people globally and in terms of quota-carrying sales, it’s under five.

Chad Bennett - Craig-Hallum Capital Group

Then a follow-up on the quota-carrying sales question. I think basically, since the March quarter, you are up about four or five net quota-carrying salespeople, which is roughly up about 10% for the year, and I think the goal was to grow more like 30, from that standpoint. What should we expect in the fourth quarter here? I know we have been trying to catch up? Any prospects there, and kind of, how should we think about that?

Andres Reiner

So overall, the goal hasn’t changed at all for the year. We are still focused on hitting the 49 goal, which would be up 30% over the 38 last year. I would say, it’s going to be a little bit more challenging, given where we ended in Q3, but we are still focused on hitting that goal, and have a lot of activity on the recruiting front.

Chad Bennett - Craig-Hallum Capital Group

Okay. Last one for me, Charlie, did anything, I guess, incrementally benefit the third quarter, whether it’s kind of an acceleration in milestone on the implementation or deal or revenue benefited Q3, and may be took out of Q4 from your planning standpoint?

Charles Murphy

No, actually I can’t be (inaudible). I think specific in Q3, that was at all, taking it in Q4, that is just an average, normal quarter for us.

Chad Bennett - Craig-Hallum Capital Group

Okay. All right. Thanks guys.

Andres Reiner

Thank you.

Operator

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

Jesse Hulsing - Pacific Crest Securities

Hey guys, thanks for taking my question. Second half traditionally is a seasonally strong quarter, or a seasonally strong half from a bookings perspective. I know you are having a little bit disruption in Europe. Can you, may be shape the trends in your bookings, relative to prior years and relative to the first half?

Charles Murphy

This is Charlie, I would say that we are expecting the fourth quarter to be a very good quarter for us, as it is historically. If you go back over a number of years now, the fourth quarter has been the strongest quarter for the company. We still have a fair amount of work to do to make sure all of that gets executed properly, but we do feel good about the (inaudible), and I wouldn’t say anything other than norm. We expect it to be big, and so we are planning for that.

Jesse Hulsing - Pacific Crest Securities

Okay. Then on the quota-carrying rep side, have you guys had any uptick in attrition? It seems like it has been a slow grind, adding since March, maybe in Europe, given the slowdown there?

Andres Reiner

Yes. So in terms of the quota-carrying reps, we have seen some churn within the salesforce, and we focus on continuing to upgrade the organization, and definitely we have seen some.

Charles Murphy

And I would say, we have been expanding aggressively the sales organization over the last couple of years, and it’s not up significant, because you know, from just three years ago. So, the churn that Andres mentioned is not at all, I think, unusual for where we are at our stage today. But it is making it a bit more difficult to get our overall goal for the end of the year, which is approximately 30% growth, and as you know, that growth is not back-end issue, that growth has really been next year, with people hiring now, based upon the training period it takes to get these people schooled out. And we do think, we are going to be able to recover from that, and we have got a plan to do it, but as Andres mentioned, it’s a bit more challenging, now that we are at 43, back then we were at 49.

Jesse Hulsing - Pacific Crest Securities

Got it. And Andres, maybe, can you talk a little bit more about the product cycle that seems to be driving stronger than expected or strong as expected growth in travel? How long historically have these product cycles lasted and maybe give us an idea of, a little bit more about how the product adds value to your airline customers?

Andres Reiner

So our focus, we have commented that we were not pleased with the low single digit growth on the travel, and part of our strategy to drive better growth in that market and to continue to leverage the incredible customers that we have, and providing them more capabilities and helping them outperform was through innovation; and we brought these two new solutions, a group pricing tool and the PROS Availability Server as examples of technology that are really new generational technology, that helps them drive significantly more value.

In both of these examples, I think one area that’s similar, is they are both around real time decisions. If you look, the group pricing now allows airlines to take a group booking all dynamically, very similar to the way they do a passenger booking. All in real time, with real time data science, driving the engine.

If you look at our PROS Availability Server, it’s the next generation of what we used to call a real time pricing engine, but now also, stores availability data, so they don’t have to hit the inventory system, when they are making a real time request, and it allows you to have a better response time and better user experience to help the customers outperform.

So in these areas, we believe these solutions are new in the market. There is a lot of interest, so we believe it will help to drive growth more in line in the future, to where we want to get in the low teens to mid teens level growth.

Charles Murphy

As far as the, you had asked first of all, maybe about how long, I guess, these products, they last for a long time in the travel space. We will be licensing these products back into our existing customer base and new customers, for a number of years to come. And I think we have started now with the early adopters kind of looking for these new technologies in the airline, and we see some real opportunities in 2014 to get more business, as we go from the real innovators to the next level. So we are pleased with that. I think as Andres mentioned, we also feel good about this, because it’s part of our overall strategy of investing in B2C, to help us get to our overall revenue growth of around 20% going forward. It’s an important part of that equation for us, and we are glad to see the progress we are making this year.

Jesse Hulsing - Pacific Crest Securities

Great. Appreciate the color guys. Thank you.

Andres Reiner

Thank you.

Operator

Your next question comes from the line of Matt Van Vliet with Stifel.

Matt Van Vliet - Stifel Nicolaus

Yes thank you. On for Tom Roderick tonight. First question is about the new GM in Europe and kind of the sales execution that you are hoping to improve on. Is there anything you can point to, that either he has implemented, or you guys overall have implemented and are already seeing traction on?

Andres Reiner

Yeah, I would say that, overall it’s focused on just ensuring we are following our well-defined sales processes, in enabling the right sales enablement tools within the organization, to ensure success. I think those are areas we have been emphasizing, and there hasn’t been just Eric Allen, we talked about Wagner Williams, who was a former GM leading Europe, has also taken an active role on helping the organization drive more consistent execution across all deals and all opportunities, and we have seen an improvement in the overall execution.

Matt Van Vliet - Stifel Nicolaus

Then, early question on the Cameleon side, but in terms of adding the low number of quota-carrying salespeople there, is this something that you would need to add even more, if you are going to be able to sell those products effectively, or do you think that the existing salesforce can pretty much bolt on those capabilities, and push that out to current and prospective customers?

Andres Reiner

We expect that between both of our organizations that sales is an area where we will have synergies. We expect that our sales team will be able to sell their solution, and will give us higher coverage across the globe. So the areas where we see their solutions driving a larger market potential, is around obviously current prospects in the target industries, as well as the new industries, and the abilities to cross-sell, and we think we complement each other well, because they have strengths in Europe, and we have significant strength in North America.

Matt Van Vliet - Stifel Nicolaus

Then lastly on a couple of the new industries that you mentioned, that you think Cameleon will help open for the legacy products, is there anything from a technology standpoint that will have to be modified or really updated to be able to sell into those industries more effectively, or is that more just being able to acquire those customer relationships that have been may be more difficult in the past, or just having been a focus in the past?

Andres Reiner

It’s really more the latter, as you said, these industries haven’t been a focus in the past, and now it brings us customers that we can provide a service. A great thing about PROS technologies, is it builds on a platform that’s very configurable, so it allows us to take our technology to various industries, and we are now in over 30 sub-industries and their strengths, their know-how of going into that industry, to be able to provide the right configuration for those industries to drive strategic value for the customers. So we see that as a big opportunity, and we see the financial services and insurance markets as industries that need our type of technology.

Matt Van Vliet - Stifel Nicolaus

All right. Great. Thank you.

Andres Reiner

Thank you.

Operator

Your next question comes from the line of Sterling Auty with JP Morgan.

Unidentified Analyst

Hi, this is [Jack Snyder] in for Sterling. Thanks for taking my question.

Andres Reiner

Hi.

Unidentified Analyst

Most of my questions actually have been answered the qualitative things from B2C compared to B2B, but if you guys just – I didn’t catch a breakout, if you disclosed maybe what the breakout is, maybe from revenue side of B2C and B2B?

Charles Murphy

We will be doing that at the end of the year, which is what we have done for the last couple of years; and the reason is, you get variability from quarter-to-quarter between geographies, as well as between B2B and B2C, and some of it even came up, I think on this quarter here, where we saw a very-very nice uptick, and what’s called rest of the world, which is predominantly B2C, not entirely, but predominantly B2C. I will use as an example, in the fourth quarter, we expected to see a sequential decrease in the rest of the world revenue. So it moves around so much that, Jack, we really feel it’s best just that we indicate that on an annual basis, because of the variability.

Unidentified Analyst

Okay. Great. Thank you.

Charles Murphy

But we are pleased though with business that we have done at B2C for the first nine months of the year, and obviously very pleased with the new product introductions that Andres has mentioned, and the outlook for that business, as we go forward into 2014, is a big contributor to our 20% growth expectations.

Unidentified Analyst

Got you. Thank you.

Operator

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

Scott Berg - Northland Capital Markets

Hi, Andres and Charlie, congratulations on a strong quarter.

Charles Murphy

Hi Scott.

Scott Berg - Northland Capital Markets

Hey, a couple of follow-ups I guess, to some questions that were out there. First of all, on the European sales challenges. I remember in the last call you had noted, may be two or three deals locked in from Q2 and where maybe hopefully, going to be completed in Q3, but trying to quantify kind of where that is – I will add, is the Q stuff left in the Q3 when it was closed, and Q3 slipped into Q4, or is it something a little bit different than that, just kind of single quarter shift?

Andres Reiner

I would say that we have seen some delay in the deals in Europe, and we did see some as well in Q3, but we expect those deals to close in the fourth quarter. The good thing is, we haven’t seen the deals move out of the pipeline, it has just been the execution in moving them through closure.

Scott Berg - Northland Capital Markets

Great. Then Charlie, you have mentioned on the hiring front, you are behind, in particular, sales and marketing, and the challenge is may be hitting the 49 goal by year end, but were there any other areas that you were behind in hiring for the year, or is that predominantly [yet]?

Charles Murphy

It’s actually it’s predominantly more, I believe it was at marketing. As I said, I’d want to stand corrected, really just one of the sales which Andres commented about, and also, one of the areas is evolving, which by the way, represents more than half the company, and it’s very interesting. Houston is a very challenging community to recruit and so you would think it would think it would be easy being in Houston, Texas, but it’s not. It’s a very robust environment here, dominated by very large companies. And if we have a challenge, it’s recruiting in general in Houston, and evolving in specifically in Houston. It’s a very highly valued group of people here. So we are a little behind in the development side. I don’t think it’s having a meaningful impact on our overall development plans. We are still well up over 20% of our R&D spend on development, and as we mentioned, we just recently announced two new products just in the third quarter.

So it’s an area though that we have doubled our efforts on, and we are looking to improve on the fourth quarter.

Scott Berg - Northland Capital Markets

Great. Then I guess the last question for me, Andres, is on the Cameleon acquisition, is looking at the customer list, you’ve kind of got a wide swathe of customers, do you see those making more of an impact more on the enterprise segments, or maybe more mid-market type customers?

Andres Reiner

I definitely see the impact more in the enterprise sector than in the mid-market. I think the mid-market, obviously has the potential. But the real focus area is the enterprise market, and that’s where we see strong interest in, and overall we had a pretty positive response from our customer base and prospects, so we are pleased with the initial response. People definitely see the effect of the technologies and the complementary nature of having a single platform, to deliver the end-to-end lead-to-order process. So definitely so far, we have seen very positive feedback from the enterprise sector.

Scott Berg - Northland Capital Markets

Great. Thanks for taking my questions. I will jump back in the queue.

Andres Reiner

Thank you.

Operator

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

Ross MacMillan - Jefferies

Thanks a lot. I wanted to ask about the geographic revenues this quarter, by my calculations, the US revenue was down sequentially, Europe was down sequentially and rest of the world was up really big sequentially, and I heard you comment on the strength in B2C, but just the magnitude of the uplift in that rest of the world, is there anything else going in there, previously signed deals that are rolling out now, or anything else that would explain that really big sequential there, that would be helpful?

Charles Murphy

Yeah Ross, this is Charlie. You know what, our rev-rec model, you book and then you recognize the revenue, and the travel group has had some very good bookings over the last 12 months, we are very pleased, as it was for the B2B business as well. But we are really pleased with the uptick in the B2C business. We commented, I think at year end, that we wanted to get that business up, into the ideally high singled digits this year, low double digits next year. Looks like we are beating those expectations that we set for ourselves. It looks like its going to be low double digits for the travel group this year, so we are very pleased with that. And that’s really on the backs of these new product introductions that is really helping us to get that travel up to where we’d like it to be, to help support 20% revenue growth going forward. So we are pleased with that.

Europe, you are right. Europe was flat to down sequentially this quarter. That really gets to the story that we have been talking about relative to our execution in Europe. Likely, that’s going to continue through the fourth quarter, plus or minus a little bit, but we expect to see improvement in that, in 2014, and it even has a mix. It’s really -- that model, it’s a little bit of a challenge. The Europe decrease year-to-date is really a travel decrease; travel is doing fabulously well outside of Europe and the rest of the world. So it moves around a bit. I think next year, we may see travel going back up a bit in Europe, based on how their bookings seem to be coming in. But we think that this variability from quarter-to-quarter and even six months to six months, that’s part of the explanation.

In the US, US is kind of flattish from Q2 to Q3. We are still very pleased with the overall growth of 40% year-to-date. So we are very pleased with that, and it’s outperforming the total company, and again part of that is just mix within the quarter. But as Andres mentioned, sales are tough. Those sales cycles are so long, and we are doing well, but we are really looking for, as we have in the past, a good fourth quarter, and we have a lot of work to do, to do that for the fourth quarter. But the pipe’s there, and it’s not too much different than really the last year and the year before that, so that’s kind of may be more than you needed, but does that answer the question?

Ross MacMillan - Jefferies

That’s helpful. Yes, that’s helpful. I guess the point is, that that rest of the world business is really a reflection of bookings that have been signed in the last two to three quarters, that are coming to fruition and turning into revenue now?

Charles Murphy

That’s correct. If you go look back over like – that’s a free quarter period. Bookings were really good, they have been good, and it’s not (inaudible) to the P&L.

Ross MacMillan - Jefferies

So on another sort of P&L question, when I think of the L&I line, on a trailing 12 month basis, which is probably a better way to look at it, rather than quarter-to-quarter, that has been accelerating. But the maintenance revenues have actually been decelerating from a growth standpoint. Why is that dynamic happening? Why are we getting this acceleration in L&I get a deceleration?

Charles Murphy

I think you may have asked this question on the second quarter call as well. We did have in the second quarter of last year, one particular customer, where we had a credit history with who was not good, we put them on hold from a revenue recognition standpoint, and that actually gave us a bit of a pickup in the – that would be the first nine months of last year. If you take that out, the growth for the nine months, this year compared to the last year, it would be about 17%, which is similar to what we commented on the second quarter when you asked the question.

Nonetheless, maintenance growth does lag L&I growth, it does lag it. Part of it can be mix though too. We still have some situations going back on our legacy, where it has been a bit of a challenge to get them on the latest convention, relative to a maintenance start. I think we are doing much better on that this year, than we have and even last year than we have in the previous years. But that – a little bit of the mix towards the travel is going to delay the maintenance a little bit as well, just as part of our overall mix of business.

Ross MacMillan - Jefferies

On sort of catch in attrition, would you say those have been consistent, better, worse, how would you describe catch in attrition?

Charles Murphy

I am sorry, I should have mentioned. It has never been better. If you are looking at the sequential growth in maintenance, it’s not because of lack of retention, it has been very-very good.

Ross MacMillan - Jefferies

Okay. Then on Cameleon, I guess, I am curious. We saw Oracle buy Big Machine and you buy Cameleon in the CPQ space. Why do you think – why now, I guess is the question? Why are you doing this now?

Charles Murphy

We have been looking at it.

Andres Reiner

It’s an area –

Ross MacMillan - Jefferies

That’s a good answer.

Charles Murphy

We have had a look at this for a while.

Andres Reiner

I would say, we have been focused on this –

Charles Murphy

We have known Jacques for a couple of years now.

Andres Reiner

And we have seen an interest – I think it all comes down to customers, right? We see what customer needs are, and we saw this area as very strategic for our customers to drive their end-to-end lead-to-order processing in integrated real-time way, and we felt that these solutions are very complementary and the only reason they want fully integrated to drive the full value potential, even in corporate, both in predictive and prescriptive was because they are sold by different vendors. And a lot of our product innovation, and obviously achieving – our vision is centered around helping our customers outperform and listening to our customers on what they are looking for. So we felt this was a very strategic direction, us driving our vision, and it’s an area that we spent a lot of time looking at the solutions in the market, and learning about the potential of these solutions being integrated.

Charles Murphy

And one of the points on Cameleon is, we did want to take a good look at their product, and we are very pleased with the transformation there we are making from – entirely on-premise to SaaS, and then going from that transformation as we speak, and have been for the last couple of years. So we are really pleased with that, and we have been looking at CPQ now, it has been one of the segments that’s at the top of our list, when we said we are looking at M&A for the last couple of years, it has been at the top of our list. Not that we are influenced by this, but Gartner did come out and say that there are two transformational technologies. We are looking at the (inaudible) progress, kind of coming out with that. But Gartner did say that CPQ and price optimization are the two transformational opportunities for technologies for companies out there today.

Ross MacMillan - Jefferies

That’s helpful. Maybe one last one, Charlie, I know you are not guiding formally for 2014, but you said a few times on the call about your intention and plan to continue to drive forward at 20% organically. Is that a reasonable starting point as we think about next year, just in terms of that long term growth rate?

Charles Murphy

We are not giving guidance for 2014 now. We have been saying that we believe, because of the stage of the market for B2B and our investments in B2C, that we believe we can have a sustainable 20% of revenue growth. So I don’t want to get beyond that, and I certainly don’t want to get ahead of ourselves. We still have a lot of work to do here on the fourth quarter, as we have for a number of years. So I’d rather just leave at that, with the confidence relative for the long term at 20% and for the reasons we mentioned, and stay away from anything specific regarding 2014.

Ross MacMillan - Jefferies

Okay. Appreciate the help. Thank you.

Andres Reiner

Thank you.

Operator

(Operator Instructions). And your next question comes from the line of Greg McDowell with JMP Securities.

Greg McDowell - JMP Securities

Great. Thank you so much. I think I am going to focus my questions on Cameleon. As I look at the salesforce app exchange and query on CPQ, Cameleon is certainly on there, and has a lot of positive ratings, but I also see your Quote 2 Win product. So I was wondering, how should we think about – now that you essentially have two CPQ code-basis, which product you are going to lead with, and maybe what’s the future for Quote 2 Win?

Andres Reiner

So if you think about the Quote 2 Win product, that’s really not a full CPQ solution, and that it’s a pure quoting solution, but it does not have any configuration capabilities. And it’s really focused on companies that are looking for very simple quoting, without really any guided selling or configuration capabilities. We still see that as a market need, for a segment of the market, whereas the Cameleon CPQ solution is a full fledged solution that provides full configuration capabilities, including data science to provide the configuration capabilities.

Greg McDowell - JMP Securities

Great. Thanks and one quick Cameleon follow-up, and maybe this one is for you Charlie, and I understand you are a little reluctant to talk about contribution to 2014, but as we translate Cameleon revenue in Euros to US dollars and kind of look at their first half of the year growth trajectory, and I mean, you talked about 19% revenue growth and 72% increase in their software order book. Are you anticipating analysts who start to adjust their models upwards for 2014 in corporate in Cameleon, and what sort of guidance would you give us or some of the puts and takes we should think about, as we think about our models, both on a revenue basis and whether it’s dilutive or accretive to earnings?

Charles Murphy

Thanks for the question, actually it’s a great question. Right now, IFRS, when you reckon, it’s going to be very different than GAAP revenue recognition incentives. So I’d be very reluctant to be providing any guidance right now, relative to Cameleon in 2014.

We are very pleased with their growth, IFRS to IFRS, we are very pleased with that. We are pleased that they were modestly profitable last year, and a little bit more profitable for the first six months of this year. But there is just too many moving parts here for me to think about, to put into a model. So I imagine the analyst will be very challenged to put Cameleon into a model for next year, just because of the change between IFRS to GAAP.

Even their conventions, which is a very good convention they have. When they talk about the book, you mentioned the book of bookings. Their concept is different than ours. That’s not bookings themselves, that’s their backlog at any particular point in time, which we communicate as well, being under the air, and their backlog, for whatever reason, their convention is not to include maintenance, where as most companies here in the States, will include the maintenance components. So the backlog isn’t quite fully representative of their business either.

So I just think, answer in a positive way by the way, the backlog is actually higher than what they are communicating, under a convention we use here in this space. I just think that there were too many moving parts with this going. It’s just too early to be getting into what might their GAAP numbers look like, as we go through 2014. Obviously, we think it’s going to be good, but between the deferred revenue write-down and everything else that’s going to happen, it’s just too early to make that call.

So I wouldn’t encourage anyone to be speculating us what that revenue would be under US GAAP.

Greg McDowell - JMP Securities

Okay. That’s all right. I appreciate the explanation. Thanks guys.

Andres Reiner

Thanks.

Charles Murphy

I am sorry Greg, is that your last question?

Greg McDowell - JMP Securities

Yes, that’s it for me.

Charles Murphy

Okay. I do like to [add] one thing that Ross asked, because he was asking about 2014. One thing I do want to comment on, is that it’s still kind of early stage for us, but still there is some movement towards -- SIs have been participating in implementations for a period of time. Some of our SIs have actually done follow-on implementations with some of our customers, we have talked about that. We have talked about what the implication of that might be for our model, as we move forward, and the implication is, basically, faster revenue recognition; because what would happen at some point in the [banner], we have the license, the SIs, we have the services.

Like there is going to be some high (inaudible) to go through 2014 and maybe 2015. But we see it as a positive point for our model next year, is that the whole relationship of backlog revenue to backlog is going to change, as we start to be able to get SIs that are participating in implementation. So we will be able to cover that hopefully more wholesomely on the call at the end of the year.

So the good point is, faster revenue recognition, the negative side of it is the cost bookings, because the SIs (inaudible) would be actually getting the booking for the services. So the model is getting a little bit more interesting as we move into 2014, and we also expect to see, just because of our existing customer base, more opportunities in 2014 than we have had in the past, to actually see license extensions with our customers with those services.

So fundamentally, there is a change that’s taking place. We believe, it’s still little early to make the call, but we talked about this before, just since Ross pointed out that 2014, I kind of mentioned that. There is going to be a change in the overall relationship of our traditional model metrics, as we go forward. It may not happen all in 2014, but we think it’s going to start certainly at that point.

Operator

Ladies and gentlemen, this will conclude the question-and-answer portion of today’s conference. I would now like to turn the call over to Mr. Reiner for closing remarks.

Andres Reiner

Thank you for your participation in today’s call. These are exciting times for PROS, and we believe we are uniquely positioned to capitalize on the growing market opportunity. The addition of committee and team and their market leading CPQ solutions will make PROS even stronger, enabling us to further shape our market, and to further distance ourselves from the competition. 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

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

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