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Executives

Charlie Murphy - EVP and CFO

Bert Winemiller - Chairman & CEO

Analysts

Yogesh Amle - JPMorgan

Nandan Amladi - Deutsche Bank

Ian Kell - Northland Securities

Nabil Elsheshai - Pacific Crest Securities

Ross MacMillan - Jeffries

PROS Holdings Inc. (PRO) Q1 2010 Earnings Call May 5, 2010 4:30 PM ET

Operator

Good day, ladies and gentlemen and welcome to the Q1 2010 PROS Holdings, Inc. earnings conference call. My name is [Kiana] and I will be your operator for today. At this time, all participants are in a listen-only mode. (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. Your may 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 first quarter of 2010. Joining me on today’s call is Bert Winemiller, PROS Chairman and Chief Executive Officer. In today’s conference call, Bert will provide a commentary on the highlights for the first quarter of 2010 and then I will provide a review of the financial results and our outlook before we open up the call to questions.

Before beginning, we must caution you that today’s remarks in this discussion, including 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 the 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 could cause actual results to differ materially from those projected in the forward-looking statements. Please refer to our Form 10-Q, Form 10-K and other filings with the SEC in the risk factors contained herein. Also, please note that a replay of today’s webcast will be available in the Investor Relations section of our website at www.prospricing.com.

I would also like to point out that the company’s use of non-GAAP financial measures is explained in today’s earnings press release, and a full reconciliation between each non-GAAP measure, and the most directly comparable GAAP measure is provided in the tables accompanying the press release, distributed earlier today, and can also be find on our website in the Investor Relations section.

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

Bert Winemiller

Thank you, Charlie, and thanks to those of you listening to our call. With the challenging 2009 behind us, we have made great progress on our strategic initiatives that will position us to serve the large long term market opportunity for our high return on investment, pricing optimization software products. We are pleased with our financial performance in the first quarter of 2010, especially while we continue to invest in our product in sales and marketing initiatives.

For the first quarter, we are reporting revenue of $17.3 million, which was at the high end of our guidance and was an increase over the fourth quarter. Non-GAAP operating income was $2.2 million for the first quarter, which was also at the top end of our guidance. I'm also very pleased to report that our backlog is up over the end of 2009.

PROS is a global company with revenue diversified across geographies and our target industry sectors. Revenue that came from outside the US represented 56% of the first quarter 2010 revenue and 62% of first quarter license and implementation revenue came from our target industry sectors of manufacturing, distribution and services.

We continue to provide our customers with a high return on investment, which is in turn healthiness to attract new customers. We also had much success with our fast time to value program; where we host all of our pricing solutions meet customers and the initial phase of an implementation. This allows our customers to identify millions of dollars of pricing profit opportunities in the first 30 days. Our continuing focus on customer satisfaction and implementation success resulted in PROS been selected as the 2010 strategic partner vendor of the year by a large distributor of office products.

Case steadies like this have helped us demonstrate the return on investment potential for new prospects. For example, one of the largest chemical companies based in the United States, has executed a contract for the deployment of the PROS Scientific Analytics with segmentation. This is another significant competitive win in the chemicals industry. Many companies that understand the high return on investment that our software provides are under pressure on this tough economy to get funding for the pricing projects.

Some prospects are using proof of value engagement for by concrete ROI for business users to obtain budget authorization for a full production system purchase. A leading industrial distributor PROS to go ahead for full implementation on scientific analytics pricing optimizer and deal optimizer, with segmentation and pricing guidance capabilities after a successful proof of value engagement.

A Fortune 500 distributor of healthcare products and services also signed to move forward on the full insulation of scientific analytics and price optimizer for its medical division after their successful proof of value engagement. This is another great customer win in the healthcare distribution space. Those provide to optimize pricing guidance to the customers for proprietary sales coding system a displays slower target and stretch optimize prices using pro science. Sales management utilizes pro scientific analytics to drive value realization and create peer pricing reports to ensure adoption among the field sales organization.

We also made great progress with our partner eco system, our objectives is for greater world wide scalability and to expand the number of pro certified personal. We believe expanding our partnering program while increasing our cost in the near-term is the light investment to position us for longer-term success.

We recently signed a formal global alliance agreement with the Lloyds Consulting, and further strengthened our technology partnerships with Microsoft, SAP, and Oracle. As we mentioned on our last call, our work with our technology partners as a key focus of our R&D spending.

With Microsoft we now have customers’ end production using our integration with Microsoft SQL server, which helps drive below total cost of ownership for our customers. We have many customers using our Microsoft Office suite integration capabilities which help increase user adoption.

Our customers also use Microsoft reporting services to generate reports from their PROS data and use the integration with Microsoft active directory to manage the PROS user accounts and security. Analysis service is used for data analysis, users are able to extract, analyze and modify data from the PROS pricing optimization application using their Microsoft Office application.

Both this prior to join the SAP PartnerEdge program for software solution partners membership demonstrates the PROS maintains the most up to-date and high SAP integration certification as documented joint customer successes and confirms that PROS solution is the high value complementary solution to SAP.

A significant member of our customers has integrated their PROS solution with multiple SAP modules including ERP and CRM. With Oracle, we have customers and production using our integration to both Oracle E-business Suite and Siebel CRM allowing quote order process to be based on optimized prices.

We are continuing our focus on sales and marketing to position us to take advantage of the large long term market opportunity as the economy improves. PROS is pleased with the results of our successful Pricing Executive Summit held at the New York Stock Exchange in March. Speakers included representatives from AMR Research, Deloitte Consulting, Accenture and the Professional Pricing Society.

For PROS customer share, the real world experiences were related to the high return on investments, fast time to value and low total cost of ownership success, they have had using PROS software. As we mentioned, last quarter, Tim Girgenti recently joint PROS and served as our Chief Marketing Officer for manufacturing, distribution and services industry sectors.

This quarter, we are pleased to announce that we have strengthen our sales organization Strategic Consulting Team with the edition of John DeCarlis, who reserves a Senior Vice President of Strategic Consulting, focusing on manufacturing, distribution and services. John was a managing partner of Strategic Pricing Partners, a consulting firm focused on pricing strategy development and he was also a partner in the Pricing and Profit Optimization practice at Accenture.

We also continued to invest in people, product and processes to drive our signs and product innovation and to increase our competitive advantage. As demonstrated by our continued heavy R&D investments, which was 28% of revenue for the first quarter of 2010. Our continued investment in R&D is help to improve our product suite scalability shortened the time to value for customers as we provide industry specific solutions and decrease the time to market for product enhancement. In summary, while sales activity continues to be high with increasing participation by prospects at our sales events and webcast, translating this interest into sales is challenging sales cycles continued to be long and approval processes are rigorous.

We had responded to these market conditions and requirements with flexible ways of doing business including proof of value pilots, term licenses and other contractual arrangements were our revenue recognition is lower and longer than our traditional percentage of completion method. We have an experienced management team that we believe is focused on the right strategies and we will continue to invest appropriate leader capitalized on what we believe is a fantastic long term market opportunity.

In that remainder of 2010, we continue to make strategic investments while maintaining our historical track record of 11 years of non-GAAP profitability and positive cash flow. We will continue to be prudent about our spending in this economy with the strong balance sheet, we are in a unique position to invest in our product, processes, sales and marketing and other initiatives to improve our relative competitive position as a leading vendor in the pricing the margin optimization market.

We are pleased with our operating income and EPS for the first quarter and that there our revenue increased quarter-over-quarter sequentially, in the first quarter of 2010. We continue to believe that our market leadership positions PROS will be the pricing partner the company is turned to as market adoption increases and company’s focus on setting and executing optimal pricing strategies using signs based software product.

Now, let me turn the call back over to Charlie, so that he can provide you with a review of our financial results and our outlook for the second quarter of 2010.

Charlie Murphy

Thanks Bert, I’ll begin with a review of our financial results for the quarter ended march 31, 2010 then I’ll provide some commentary on the balance sheet and cash flow before providing financial guidance for the second quarter of 2010. I’ll be discussing our financial results on a non-GAAP basis.

Our earnings press release includes a full GAAP to non-GAAP reconciliation, which can be founded on our website in the Investor Relations Section. As Bert stated, we are pleased with our performance in the first quarter, as revenue of $17.3 million that’s the high end of your revenue guidance.

Well revenue decrease in $18 million a year ago, we are pleased that first revenue was an increase over fourth quarter revenue $16.9 million representing our second quarter in a row of sequential revenue growth. In accordance with our revenue recognition policy, those as not recognized any revenue or contract signing, license and implementation fees are bundled together, and the revenue is generally recognized on a percentage of completion basis over the implementation period.

We do have implementations where revenues differed and not recognized until the delivery of all products. Term license agreement, which we signed more of our last several quarters are an example. With a number of active implementations in the quarter, our term licenses and high maintenance renewable rate we have put this ability into near term revenue.

Maintenance revenue increased approximately $900,000 or 14% from the first quarter of 2009. This increase was the result of the completion of a number of implementation of our software products, following which we began to recognize maintenance its core revenue. We are pleased that are maintenances for renewal rates continued to be in the mid 90% range. Our total revenue continues to be diversified geographically and spread across our five target vertical markets.

On a non-GAAP basis gross profit was $12.8 million for the first quarter of 2010, yielding gross margins of 74.1%. This is relatively consistent with gross margins of 74.3% for the first quarter of 2009. As we have indicate in the past, license and implementation gross margins vary competitive period depending on factors such as the amount of implementation services, required to prior products relative to the total contract value.

Non-GAAP R&D expenses of $4.8 million grew approximately 2% from a year ago as a percentage of revenue. In accordance with our plan strategic initiatives to continued to invest in our product suite. Non-GAAP selling, general and administrative expenses for the first quarter of 2010 were $5.8 million, an increase of 19% from a first quarter of 2009 as we continued to invest in sales and marketing talent and progress.

Non-GAAP operating income was $2.2 million from the quarter with non-GAAP operating margins of 12.6% at the high end of our guidance. This compares to first quarter of 2009 operating income of $3.8 million and operating margins of 21.1% with the year-over-year decrease in margins resulting from planned investment and our long term growth combined with lower first quarter revenue in 2010.

Interest income for the quarter was approximately $11,000 down from a year ago due to lower interest rates despite our cash balances. We had a GAAP effective tax rate of 39.3% in the first quarter as the R&D tax credit has not been reinstated, compared to an actual tax credit of 27.5% in the first quarter of last year, which included the R&E credit. Our effective federal tax rate historically has been lower than the federal statutory rate of 35% largely due to the application of the Research and Experimentation tax credits.

Congress recessed for 2009 without extending the Research and Experimentation tax credit, which expired on December 31, 2009. Even though there was strong buy products and support of the credit. If the tax credits has reinstated during 2010 and as we expect and if it's retroactive to beginning of the year has been the past that will make accumulative adjustment of 2010 in the quarter and what’s tax credit is reinstated as we get into 2008.

For modeling purposes, we feel at reasonable to use a pro forma tax rate of 31% for 2010 expecting the past 28 years of legislative experience of extendedness credit will continue going forward. If it is not extended our effective tax rate is estimated to be 35% to 37%. Non-GAAP net income was $1.3 million for the quarter using a 39.3% tax rate compared to net income of $2.8 million the first quarter of 2009 using a 27.5% tax rate. In our non-GAAP net income per diluted share was $0.05 in the first quarter of 2010.

Now the R&E tax credit and reinstated retroactively during the three months ended March 31, 2010. That would have been a $0.01 increase to non-GAAP diluted earnings per share to $0.06 per diluted share at the high end of our guidance for the quarter, which did assume the tax credit would be reinstated. For the quarter ended March 31, 2010, our income from operations and accordance with GAAP was 800,000. Net income in the quarter was $0.5 million or $0.02 per diluted share compared to $10 million or $0.08 per diluted share in the first quarter of 2009.

Now moving to key balance sheet items, we enter the quarter with $61.6 million in cash, down from $62.4 million from the prior quarter. Total deferred revenue at the end of the quarter was $21.7 million, an increase of approximately $2.6 million from the same period last year and an increase of $5.2 million over year-end. Deferred revenue is not tied to total contract value and therefore is not a meaningful forward indicator of financial performance.

We had modestly negative cash flow from operations for the quarter of $0.4 million reflecting the unusually strong cash collections experienced in the fourth quarter that we discussed in our last call. Accounts receivable at the end of the quarter was $19 million, up from $12 million at year-end 2009. At year end, receivables reflected the strong collections in the fourth quarter, and the first quarter receivables benefited from some favorable billing terms in the quarter.

Trade accounts receivable days sales outstanding were approximately 61 days, which is inline with our historical average. Cash flow, accounts receivable balances, and deferred revenue can vary in a quarter based on among other things, the timing of collections and invoicing milestone billings under our contracts. Headcount at the quarter end it was 396 compared to 400 at the end of 2009.

Before I turn to our guidance for the second quarter, let me provide you with some additional information regarding our assumptions. We are pleased that interest levels in our pricing and revenue optimization solutions remain very high and this interest was reflected in improving sales trends. We continue to benefit from our diversification across many industries and geographies.

We not only had a year-over-year and quarter-over-quarter increase in license deals in our newer industries as acquired, but we are seeing improvement in airline as well.

Airlines, which happened the earlier adaptors in the most advanced users of pricing optimization software, a continuing an upgrade cycle and migrating the most advanced pricing and optimization software available from PROS. However, as our more sophisticated customers airlines typically license a wider range of products, which leads to longer implementation periods then we typically see in our industries.

Sales trends combined within an improving macro environment make us incrementally more optimistic than we have them in past six months. While customers answer has be tie all along to the economic downturn, most of our engine budgets made hard at the companies to acquire a big ticket technology despite to die or alive, we’ve responded with more flexible licensing arrangements that included more term license fields.

In addition, contract negotiations continued to be challenging with complex terms at in some instances have affected the timing of revenue recognition. All these arrangements had not impacted overall field size of profitability due to nature of these transitions, we won’t recognize revenue until after implementations completed rather than how many implementation period on a percentage of placing basis, as most of our contracts are recognized.

Result of this, as we are able to close business for easily, however revenues differed until later in the contract terms primarily starting in 2011 for these contracts, while revenue recognition is differed, these arrangements do provide a basis of backlog which will provide revenue over period of time and should support longer term revenue growth.

Last quarter, we commented on initiatives that we believe are important to position as to capture longer-term market opportunities. We continued to make these investments in product, our sales and marketing initiatives, and our partnering program. The Q1 cost associated with our starting program had a minor impact on our gross margins.

In the second quarter, the impact is likely approximately a one to two point reduction in gross margins. I also commented that sometime in a last half of the year, we planned on resuming, planned compensation increases and contributions to our 401(k) plan, both of which were stopped in 2009 and will increase overall expenses later in the year.

As we disclose two years ago, we have involve in legal proceeding related to a customer seeking early termination of a contract throughout our implementation. The litigation cost to-date have uncovered by insurance, this will change beginning in the second quarter as we approach the trial expect in the first quarter of 2011.

In the second quarter, we expect incur litigation cost of approximately $1.2 million related to this suite and increasing on a quarterly basis as we approach trail in the first quarter of 2011. In the second quarter, we expect this expense to have a $0.03 per share impact on our GAAP net loss. We believe the customers attempt to termination of the contract is wrongful and we have biggest depending is matter and seeking payment of remaining amount odd under the contract.

Given the inherent uncertainties in any litigation, we are unable to make any projections as the ultimate outcome and no provision or other costs has been recorded. You may recall we have approximately $4.9 million and other current liabilities on the balance sheet related primarily to differed revenue on this contract. This amount will remain on the balance sheet until this matter is result.

We commented on planned investment in a long term growth. We believe the overall increase in spending is the right thing to do and this strategy continues to guide management decisions. Estimate expenses assumed in the guidance we are providing in the second quarter is $15.7 million. We continue to experience low interest income that we did year ago, as we resulted lower interest rates on our cash balances, which are down from a year ago.

With that back drop let me turn to our outlook. Second quarter we are again anticipating sequential revenue growth with total revenue in the range of $17.3 million to $17.7 million, compared to $17.3 million in the first quarter. We are projecting non-GAAP operating income of $1.6 million to $2 million and we are anticipating non-GAAP diluted earnings per share of $0.4 to $0.5 based on estimated weighted-average of $26.8 million diluted shares outstanding and an effective estimated tax rate of 31%. Assuming the R&E credit is reinstated retroactively to January 1, 2010. If the credit is not reinstated, we expect our non-GAAP earnings per share will remain at $0.04 to $0.05.

The company is projecting as loss from operations of $1.8 million to $1.4 million and GAAP diluted loss per share of $0.03 to $0.04 at 36% tax rate. Non-GAAP operating income and net income of the second quarter excludes estimated non-cash stock-based compensation expense of approximately $2.1 million and litigation expense of approximately $1.2 million. While there were no assurances, the past performance can be continued, our experienced management team, the financial strength of the company, and our revenue recognition model helps us manage company profitability during difficult periods.

Looking beyond the second quarter, while we have benefited from improved sales trends, our recent license mix shift likely will result in a larger portion of our backlog being at deferred revenue until implementations are complete. We believe our flexible working terms with customers has helped to close more deals. However, we do not expect our recent backlog strength to be reflected in our revenue performance for the most part until early 2011.

In summary, given the current economic environment, we are pleased to achieve the high end of our revenue guidance for the first quarter. We continue to believe we are on a strong competitive position and we continue growing awareness of the benefits of high ROI pricing optimization software. We remain confident that PROS has an attractive long term growth opportunity and as the economy improves, we believe we are effectively positioned the company to take advantage of that opportunity.

With that, let me turn the call back to the operator. So we can take your questions.

Question-and-Answer-Session

Operator

(Operator instructions) Our first question comes from the line of John Difucci of JPMorgan.

Yogesh Amle - JPMorgan

This is Yogesh Amle for John Difucci. Thanks Charlie, one question I have, you talked about the stream from the airline industry that’s improving, do you have any thoughts around the consolidations that’s going on in the United and the Continental merger, any thought around how do you view that and is there any impact on the company?

Charlie Murphy

Certainly, the Continental and United merger, I guess is probably not unexpected, they thought about merging a couple of years ago. We have a relationship of Continental that’s been relationship for many, many years. I think if you look at the overall mix of our business, over 98% of our revenues outside the United States, merges within the United States are not expected to really have any meaningful impact on the company’s operations. These mergers also take time. We’ve had instances were airlines have been acquired, but yet actually no impact on the PROS. I’m not sure how the Continental merger may impact us, so we don’t expect to see an impact for the near term.

Yogesh Amle - JPMorgan

Just a follow-up question, you talked about the litigation expense of $1.2 million to be factored into the second quarter and I think you didn’t mentioned that we should think about increasing every quarter, you still have the approach the litigation date. So any guidance on what’s the total expense on that?

Charlie Murphy

Not with respect to total expense because it difficult to ask me that because the variability is to what motions might be above as you go for the process. We would expect a modest increase over the $1.2 million that we’re expecting for Q2.

Operator

Our next question comes from the line of Tom Ernst of Deutsche Bank; you may proceed.

Nandan Amladi - Deutsche Bank

This is Nandan Amladi behalf of Tom. Just a couple of questions, the sales and marketing expense you talked about that going up, but should we expect it to stay at a similar level as a percentage of revenue for the rest of the year?

Charlie Murphy

We wanted to do just give the guidance for Q2, then we’ve given the guidance and we’ve expensively stated with the expenses are expected to be $15.7 million for the second quarter and I think we continuing our investment scenarios and primarily in sales and marketing. So it maybe makes me own estimates as to how it might be split out. We want to make sure that the analyst understood very clearly that, based on the guidance we’re providing spending for Q2 as estimate at $15.7 million that’s non-GAAP.

Nandan Amladi - Deutsche Bank

Kind of a macro question, the recent weakness in the euro, how does that impact your outlook for the year?

Charlie Murphy

As far as FX, let’s start with the FX. Historically, we’ve had very minor gains and losses in FX, quarter-over-quarter, year-over-year. We’ve looked at the recent impact of the euro as it stands today and the contracts we have today. We don’t see a significant impact in Q2, I’m not sure, and it might be going forward. Obviously, any disruption in euro could have an impact on our ability to close he deals we’d like to close in Europe going forward

Operator

Our next question comes from the line of Chad Bennett of Northland Securities; you may proceed.

Ian Kell - Northland Securities

Yes, hi guys this is Ian sitting for Chad today. I know last quarter, you talked a little bit about the implementation that you had going on with of your some third parties. Can you give us an update on that, got a few more going on now, just how that are progressing?

Charlie Murphy

I think the utilization of systems integrated just progressing towards our expectations and we had a few implementations in the first quarter, we continued to have few implementations for the second quarter, as we’ve got to and look at the analysis, we do expect a little larger impact on our margins in the second quarter we had in the first. The overall impact in our margins in the first quarter from system integrated cost was above one percentage point, in the second quarter it could be perhaps more in the half percentage point’s maybe two percentage points. So problems expanding and it’s expanding at the rate that we’ve been anticipating

Ian Kell - Northland Securities

Can we get back to the new contract terms it sounds like you gone about here, any color on sort of what percentage of new deals, or how many of these new deals are taking these different forms and how that effects our ability to maintain sort of a sequential growth rate going forward?

Charlie Murphy

Yes, it’s difficult with the number of deals that are done in a quarterly basis, it’s difficult to discern from one part to next, and how many of these deals might be in the second quarter or in the third quarter and going forward. We don’t see it as a trend at this point we just see it as what we’ve experienced of last several quarters. So it’s really get the confidence sound with the impact might be on the company’s near-term revenue growth. We obviously see every deal that we closed as a good opportunity to contributed for long-term growth for the company, and we’re very pleased with that. We’re pleased with that our sales as I mentioned were up license sales were up Q1 over Q1 and Q1 over Q4 so we’re very pleased with the direction, as far as that mix it’s really difficult to comment on.

Ian Kell - Northland Securities

I mean this is not a trend, okay but just started Q3 I mean, or is this a new Q1 development?

Bert Winemiller

It’s on the last half of Q4, I’m sorry first year and it continued with the Q1 of this year.

Ian Kell - Northland Securities

Any particular industries if you just see more often or probably your target industries, but I mean anyone of those three in particular?

Bert Winemiller

I would say no, it’s really it’s across the board, if there’s everything on the airline side little more weighted towards the term licenses.

Ian Kell - Northland Securities

Anything out the ordinary on the maintenance gross margin in the quarter, is that serve a seasonal effects that I’m missing?

Bert Winemiller

Yes, I wouldn’t say its seasonal effect, but we clearly made a conscious effort to increase our spending relative to maintaining our maintenance phase in the first quarter. I think as general comment on margins for Q2. We expect the margins to be above the same in total in Q2 as they were in Q1.

Operator

The next question comes from the line of Nabil Elsheshai of Pacific Crest Securities.

Nabil Elsheshai - Pacific Crest Securities

Let me start at the high level, leaving a side all the REV REC in term that I mean, if you look at Q1 and so far in Q2 have you seen an improvement in close rates, and kind of just a general business trends or is that in terms of compared to 2009 as adjust hard to get that contract across the line?

Bert Winemiller

It’s still a challenge, the think that we’re encouraged about and you attended the New York Stock Exchange event, there’s just a lot more interest and awareness about top line of the P&L, and the impact of dollar that pricing going to have on margins especially, so we are encouraged by the high level of activity, but it’s still difficult to get through the sales cycle, to get budgets approved and to get final approval for a go forward and that’s reason our proof of value engagements have been successful and we’re being flexible on terms and conditions. We want to be responsive to the prospect customer and what their requirements are and we are buying being flexible ways to do business. That’s said, it’s still very good business, the ASP is still good, profitability is still good, but it does slowdown the revenue recognition.

Nabil Elsheshai - Pacific Crest Securities

Would it be fair to say that once you get somebody into a proof of value type of trail that the close rate significantly higher than the normal sales cycle?

Bert Winemiller

Yes

Nabil Elsheshai - Pacific Crest Securities

I think last year you guys have talked about trying different kind of size of deals and starter packs and its seems to take a while for people that’s to get some attraction, is that just was a time thing or was a different way you guys have approached that or is it just a matter and I guess when they do those trails or they then comeback and buy the full view on average $2.2 million average deal or are they start with the smaller kind of one module type of thing?

Bert Winemiller

No, we haven’t seen once a company at all levels embraces very high ROI. They decide pricing excellent and optimized pricing and something they want to achieve, then they continued to buy the full contract with multiple modules and at the same level of ASP, If getting them to the point where they’re comfortable making that decision, but we’ll offer a single module, that’s what they want to buy.

In other words, I’d say, if they want to find pricing weeks and they want to negative pocket margins customers and products and channels that’s one step and we can do that very effectively, and typically in 30 days with scientific analytics, but they see very quickly beyond that, the power of optimized price lists, the power of optimized deals of tracking to optimized prices throughout the entire enterprise. So even thought we’re more than willing historically they face to approach in a single module is the first contract, it just hasn’t happened

Charlie Murphy

Maybe I’ll just mention one thing, you’d mentioned 2.2, I think historically we’ve talked about the average sales were 2.1, 2.2 products in the deal. The ASP average is $1.8 million.

Nabil Elsheshai - Pacific Crest Securities

Then on the term license, I was kind of curious why with a lot of term license at perpetual models you can recognize the revenue at the beginning of the terms. So why do you in these deals, what is that is conditional you have to wait until the end of the deal to recognize and yield the license?

Bert Winemiller

The companies that to recognize at the beginning of the terms they’ll be almost 97.2 revenue recognition, while the 81.1% of completion, so the industry looks in perverse to same array, of the services (Inaudible) delivery of the software, the answer for today is, yes may not be in the future. As a result of that become at $81.1 and at $81.1 you have to defer all revenues a lot of products to deploy. The economics of course are being different it’s just how the revenues recognize.

Nabil Elsheshai - Pacific Crest Securities

What about kind of the payment in cash flow effects it should be similar to you current, that shouldn’t change, is that correct?

Bert Winemiller

Well, no. If it’s a term license, the payments are going to be made over the term. So perpetual, the payments are going to be made over the implementation period, is that answers you question.

Nabil Elsheshai - Pacific Crest Securities

Then just a follow-up, I guess your kind of wrap up comments on revenue seemed to indicate that we shouldn’t necessary expect to see the sequential increase on license that implementation in the second half, am I interpreting that correctly or is that not the way you are trying to say?

Bert Winemiller

Yes, we try to communicate that sales have been good. When you look at sales, you look at the other component maybe the composition company’s balance sheet, and the size that you see what the size of deferred revenue. We don’t want you to misunderstand what that mean, that means that in this particular case, the mix as such that we see that revenue some of that revenue being predominantly in 2011, it’s too early for us to comment on Q3, or comment on Q4.

Operator

(Operator Instructions) our next question comes from the line of Ross MacMillan of Jeffries; you may proceed.

Ross MacMillan - Jeffries

Charlie, just going back on these revenue recognition two things, how long is the term deals? What’s the duration of these term deals and is it really a year and is that way we see it short next year and then second of all, I guess the question is, you kind of alluded to some other contractual terms changing, which could also push revenue out albeit at those aren’t necessarily term deals. Can you elaborate on that?

Charlie Murphy

Yes, firstly the term deals are predominantly five year term deals, and the revenue recognition would start (Inaudible) completed than it’s recognized over the remaining term, that’s a difficult term deal.

Ross MacMillan - Jeffries

Just on that, the first bullet of recognition would be effectively the value that you’d have taken how you’d recognized revenue ratably over that implementation period?

Charlie Murphy

No, it’s all the revenues recognized ratably over the information term after the implementations completed. Even though cash is being collected, implementation charges have been provided that the economy does not reflect the economics.

Ross MacMillan - Jeffries

So just unclear five year term takes you to implement, you then recognize fives years worth of revenue over the subsequent four years ratably?

Charlie Murphy

That’s correct.

Ross MacMillan - Jeffries

Then the other question was on whether there are other contractual arrangements that are also shifting some revenue out?

Charlie Murphy

Yes, and that’s a great point. The answer is yes, if we get back to challenging economy difficult negotiations, I think the problem may have shifted more to the event to the customers as opposed to the vendor and what we’ve experienced in this situation where you could have a term in the contracts that includes revenue recognition not on a percentage of completion basis, but revenues recognized after the implementation is completed. It’s not a term related, it’s just a term within the contract that the average revenue recognition until the implementation is completed.

Ross MacMillan - Jeffries

Then as you use third parties increasingly, does that move you from 81.1 to 97.2, if you are using a third party implementation partner?

Charlie Murphy

That’s a transition, that’s correct that’s longer term and that’s the transition we expect we will be going through. Today we’re using SI as we mentioned a few implementations is an evidence of training to becoming more qualified and the implementation of our products. We have SIs that starts to implement for customers outside of the relationship with us, all of this is terrific. It really shows that we got true product and its configuration and not customization, but we as a company have to go to a transition. So over time, we may very well get to revenue recognition on the contract signing, not today, not this year, but at some point.

Ross MacMillan - Jeffries

Then just one other one, you mentioned of course that later this year you planned to reinstate salary increases and 401(k) contribution, if that likely to be at third quarter event or a fourth quarter event, can you put any color to that?

Charlie Murphy

It’s clearly in the last half of the year we haven’t picked the months better with start. If it helps, I can give you some idea of a range on what it would be approach per quarter.

Ross MacMillan - Jeffries

Yes, that will be great.

Charlie Murphy

It would be somewhere probably close to $400,000.

Ross MacMillan - Jeffries

So if it happened in midway over to Q3, would have a partial quarter and then a full in Q4?

Charlie Murphy

That’s correct. We have made the decision yet. That’s correct. I think it is maybe 125,000 a month.

Ross MacMillan - Jeffries

Then just curious you had the event here in New York in the quarter, did those events really build pipelines for you, is it tangible and do you feel like there’s more to be done around marketing or similar to drive more filling up the pipe and lead generation?

Bert Winemiller

They have been incredibly successful for moving prospects faster along through the sales cycle, but absolutely we feel like we need to do more that’s the reason we’re investing in sales and marketing and that’s the full spectrum from lead generation, seminars, webinars, more onside face-to-face meetings with executives being very active in the marketplace.

I think within a product driven company for the last ten years and really haven’t focused on sales and marketing, our whole focus has been on high quality product, integrated science, implementation success, customer satisfaction, but what we’re seeing is, there is a lot of activity and a lot of interest and awareness growing and when that manifest itself in deals we want to make sure that we have the sales and marketing presences to get into the consideration set and ultimately be selected, so we are very much focused, 2010 is going to see significant sales and marketing activity much higher than anytime and in our history.

Ross MacMillan - Jeffries

I just want to clear the SG&A and R&D were up significantly sequentially about 1 million a piece, were there particular kind of one-time cost for the events in that number that you would not necessarily expect to repeat or to plan to just till more these on a go forward basis so we should assume that’s kind of newer run rate cost?

Bert Winemiller

Year-over-year?

Ross MacMillan - Jeffries

Sequentially, just in terms of the pick in SG&A.

[Multiple Speaker]

Ross MacMillan - Jeffries

Okay, I was built into wrong thing, I was just curious, the real question just simply is was there some one time expense in the March quarter SG&A for these events.

Bert Winemiller

The answer no, but there was a one-time, I should say one-time, there was an event in the fourth quarter that reduced G&A expenses, okay that was reduction in our allowance [delta] accounts, that we commented on the fourth quarter call.

Ross MacMillan - Jeffries

That makes more senses not from the sequential standpoint

Bert Winemiller

Asset backed, Q4, $600,000, you add that back to Q4 expenses and then do your comparisons.

Ross MacMillan - Jeffries

Yeah, that makes a lot more sense.

Operator

With no further questions in the queue, I would now like to turn the call back over Bert Winemiller for final remarks. You may proceed.

Bert Winemiller

Thank you operator; in closing, we are pleased with our first quarter 2010 results and we believe the markets we’re pricing a margin optimization software it still in the vigor, really adopter stage and there are 1000 of companies that would greatly benefit from our software. We believe PROS is a stronger company today due to the continued improvements in our product suite, science capabilities, implementation process, sales and marketing and we have strong financial balance sheet. Our strategic plans focused on sailing to meet the needs of the large long term market opportunity that’s we will continue to focus on our growing pricing partner and implemented ecosystem. Thank you very much we appreciate you taking your valuable time to listen to our call and we hope to meet with you soon. Thank you.

Operator

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

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Source: PROS Holdings Inc. Q1 2010 Earnings Call Transcript
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