PROS Holdings' CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: PROS Holdings, (PRO)

PROS Holdings, Inc. (NYSE:PRO)

Q4 2013 Earnings Conference Call

February 27, 2014 4:30 PM ET

Executives

Charles Murphy - EVP and CFO

Andres Reiner - President, CEO and Director

Analyst

Chad Bennett - Craig-Hallum Capital Group

Bhavan Suri - William Blair & Company

Jesse Hulsing - Pacific Crest Securities

Scott Berg - Northland Securities

Matt Van Vliet - Stifel Nicolaus

Greg McDowell - JMP Securities

Operator

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

I would now like to turn the call over to your host for today, Mr. Charlie Murphy, Chief Financial Officer. 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 fourth quarter and year-end 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 fourth quarter and full year of 2013 and then I will provide the 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, 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 the 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 risk 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 on a non-GAAP basis. We are not able to reconcile these non-GAAP financial measures to those directly comparable GAAP measures because the information needed to complete the reconciliation is unavailable at this time without unreasonable effort. 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 who are joining us on today’s call. I am pleased to report that 2013 was another great year for PROS. We achieved a number of key milestones across the business, including introducing several new products, announcing our first two acquisitions, and strengthening our leadership team to position us for long-term growth. Our business is more diverse, our markets are expanding and our customers in more than 40 sub-industries increasingly rely on PROS to turn their big data into selling advantage.

I would like to thank our incredible people approach for their relentless passion and commitment to innovation and customer success. I would also like to extend a warm welcome to the employees, customers and partners of SignalDemand. On December 16th we announced our acquisition of SignalDemand. The big data SaaS Company that provides predictive and prescriptive analytics to help companies make product mix decisions in resource base commodity driven industries. We’re excited to work together to deliver compelling and innovative solutions to the market.

Turning to the high level financial details, fourth quarter revenue came in at a high-end of guidance at 38.9 million, a 19% year-over-year increase. Non-GAAP operating income exceeded the high-end of guidance at 6.5 million for the fourth quarter, up 31% year-over-year. Non-GAAP EPS was $0.16. For the full year 2013, we achieved 144.8 million in revenue, a 23% increase over 2012. Non-GAAP operating income for the full year was 21.9 million resulting in non-GAAP operating margins of 15.1%, full year non-GAAP earnings per share was $0.58. We’re pleased with these strong results, which were driven by the diversified growth strategy we have implemented over the past three years to drive consistent annual revenue growth of 20% plus.

For example in late 2012 we invested in a dedicated customer success team to provide deeper and broader support for expanding customer base. By continuing to focus on helping our customers outperform in 2013 this team achieved a record level of business from existing customers. We expanded relationships with customers such as Ecolab, Lufthansa, Panduit, Penske, Southwest and Swiss among others. We continue to invest in our ongoing commitment to customer success, to ensure customers realize unmatched value from their PROS partnership. In 2013 PROS won the Star award for innovation in service by the Technology Services Industry Association, recognizing PROS ongoing commitment to customer success through professional services excellence.

In addition Gartner Research noted in their 2013 market scope reports on price optimization, that PROS receives a highest grades overall in ease-of-use, ease-of-deployment and overall satisfaction. We’re pleased with these results and we’ll continue to expand our partnerships with existing customers to help them outperform. In 2013 we were very pleased with our performance in our B2C industries. The revenue growth of 21% year-over-year, this was fueled by investments to accelerate growth in new product innovations across new and existing airlines.

In 2013 we welcomed Air Berlin, Air Seychelles and Virgin Australia among others to the PROS community. We’re confident we will continue to grow our B2C industries given the strength of our product portfolio and our leadership position in the market. We’re proud of our performance in B2B, over the past three years we’ve more than doubled our B2B revenue. And in 2013 B2B revenue grew 25%, underpinning these great results was our expansion with existing customers as well as addition of new B2B customers, such as ABB, Airgas, Alliance Laundry Systems, BW Rogers, Gates Corporation, Great Lakes Cheese, Sterling Infosystems and TRW among others.

We believe this is further validation of our attractive value proposition and that more companies are investing in big data applications for sales growth. As solid as we performed in our B2B industries in 2013, we believe we could have done even better. We experienced some execution challenges like those we have previously discussed in Europe. However the pipeline remains strong and we’re confident in achievements we have already made will result in even better performance in 2014.

With the acquisition of Cameleon we realigned European leadership team to capitalize on the growth opportunity and leverage Cameleon’s strength in this market. We recently announced the promotion of Sebastian Mamro to lead Europe as our General Manager. Sebastian is a proven leader inside our process, played a key role in driving better execution in the region. Sebastian spent the past six years successfully supporting our sales and customer strategies as Head of Professional Services in Europe. His deep understanding of our customers is a great asset for growth in Europe. Sebastian is complemented by strong European leadership team from Cameleon. In addition we’re scaling our leadership team to meet our long-term growth goals with the recent addition of Blair Crump our Chief Operating Officer. In this newly creative role Blair will lead our sales, marketing and professional services organizations globally.

Blair has a tremendous track-record of helping companies grow, having served most recently as the President of salesforce.com’s Global Enterprise Business Group. Prior to that Blair led a team of more than 5,000 people at Verizon Business as the President of Worldwide Sales & Consulting Services. We welcome Blair to the team and look forward to working with him to drive sustainable long-term growth.

In 2013 we expanded this portfolio through new innovations and through acquisitions. According to Gartner our acquisition of Cameleon nearly doubled the size of our market and with acquisition of SignalDemand we’re broadening our co-offering to create even more value for our customers. We’re making investments across these businesses to capture the expanded opportunity. These acquisitions complement for internal innovations which remains a key driver of those success and one of the three pillars of our growth strategy. During 2013 we introduced three new products to the market. We doubled our number of patents bringing us to 27 patents, our data science patent center on turning big data into actionable insights to improve sales and pricing performance.

For example one patent covers who we improved prescripted capabilities for cross sell and up sell opportunities in B2B selling empowerment. Innovations like these help give customers better confidence in their decisions and actions as well as the performance advantage in their markets. In terms of new products we expanded and strengthened our mid market SaaS offerings with the introduction of PROS Step. Step arm sales reps with greater focus, confidence and agility by bringing the power of PROS data science to the cloud to reveal revenue opportunities. We continued our strong legacy of innovation in the travel industry with the introduction of PROS Group Tool and PROS Availability Server both of which help airlines leverage big data to further enhance your competitive advantage. We will continue to invest in expanding our product leadership position to further differentiate PROS and to drive long-term growth.

Our strategy for accelerating awareness and adoption of PROS big data applications are paying off, evidenced by our strong pipeline and further recognition by third-parties, net proceeds in market leader. In the fourth quarter Gartner Research gave PROS the highest rating possible in their market scope report on B2B price optimization. Gartner also validated our strong leadership position with the acquisition of Cameleon noting that our combined organizations will post a real threat to peer play CTQ and price optimization vendors. We’re honored to be recognized for our market leading innovation and commitment through customers’ success.

Equally important is having more of our customers tell their stories. In 2013 we were privileged to have our customers share their PROS experiences. This contributed to our great attendance at our 2013 Outperform Events in North America and Europe. Guests heard presentations from PROS customers such as 3663, American Standard, Arrow Electronics, Ecolab, Johnson & Johnson/DePuy, HP, Novozymes, Panduit and Volvo. One customer described how the increased gross margins 260 basis points, five times higher than their goal and now they reported that they increased their average selling price by 6%. During the same time one of their competitors saw their average selling price fall by 11%. Results like these are fueling further recognition of process and market leader. We’re proud to have so many passionate and committed customers share their great PROS experiences. We will continue to invest in driving awareness and adoption of PROS to drive long-term growth.

In 2013 we continued to expand our global reach and scale through direct sales coverage and our partner ecosystem. We finished the year with 46 quota-carrying reps up 21% year-over-year. We expect to grow our number of quota-carrying reps by approximately 40% in 2014 to meet the sizable market opportunity ahead. We also made great progress with our partners in 2013. From a technology partner standpoint we are pleased to have been named the Microsoft Application Partner of The Year in recognition of our continued commitment to co-innovate with Microsoft across their platform. Our Microsoft partnership remains a key differentiator for PROS and we will continue to broaden and deepen the relationship.

We also continue to invest in our SAP partnerships as we have done for the past 8 years. In 2013 we joined SAP’s OEM partnership program for HANA enabling PROS to offer HANA as a real time analytics engine embedded in PROS big data applications. We achieved the latest SAP product certifications that set the standard for the most complete and seamless integration experience with SAP. We believe our depth of the integration with SAP ERP, SAP CRM and SAP HANA is a key reason why SAP customers chose PROS. It’s more than half of our enterprise B2B customers running SAP we believe this indicates strong preference for PROS in the SAP community.

Overall we’re pleased with the progress we’re making against our stated growth strategies and we’re proud of our team for their many accomplishments in 2013. We enter 2014 a strong and more diversified company with an expanded value proposition and deeper product portfolio a larger geographic presence and an extended go to market reach.

Today we’re also announcing that Charlie Murphy will retire at the end of January 2015. Charlie will stay on as an advisor through the end of January 2016 to assist with the CFO transition. We will be initiating a search for his successor. Charlie has been the CFO of PROS since 1998 and has been instrumental in our success, guiding PROS through a successful IPO, creating a track record of strong financial results and providing outstanding leadership. He embodies our PROS values and culture of integrity, pride and commitment to customers’ success. I want to personally and publicly thank Charlie for his significant contributions and dedication to PROS over the years. I’ve been privileged to work with him for more than a decade and I look forward to working closely with Charlie through this transition.

I will now turn the call over to Charlie so he can provide you with the review of our financial results and our outlook for the first quarter and full year of 2014.

Charlie Murphy

Thanks, Andres. I appreciate your kind words. PROS is a great company that I am proud to have helped build. And I look forward to working the team and our analyst and investors throughout this year and into the next. Now back to our results.

I will be discussing some of our financial results on a non-GAAP basis. Our full GAAP to non-GAAP reconciliation is included in our earnings release which can be found on our website in the Investor Relations section. As a reminder our GAAP consolidated results include the impact from the acquisition of SignalDemand which closed on December 16th as well as some transaction related cost for the acquisition of Cameleon. We closed the Cameleon acquisition on January 8th and currently control approximately 91% of the outstanding capital of Cameleon and will be integrating their operations with ours in 2014. We are pleased with our performance in the fourth quarter with total revenue of 38.9 million which was at the high-end of our guidance and an increase of 19% from a year ago. This includes approximately 200,000 in revenue from SignalDemand. License and implementation revenue was 26.9 million, up 21% from a year ago. Maintenance and support revenue was approximately 12 million, up 14% from a year ago and represent 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 39% of total revenue in the fourth quarter. Non-GAAP gross margins for the fourth quarter were approximately 74% as compared to 72% in the fourth 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. Total non-GAAP operating expenses for the quarter were 22.2 million compared with 18.6 million a year ago, an increase of 19%. Non-GAAP operating income in the fourth quarter was 6.5 million compared with 4.9 million a year ago, an increase of 31%.

Non-GAAP operating margins for the quarter were 17%. Our non-GAAP operating income exceeded guidance, as a result of lower compensation and related expenses from the timing of new employee hiring. I would also like to note that approximately 1.5 million of acquisition and integration expenses associated with the Cameleon Software and SignalDemand acquisitions is being excluded from our non-GAAP results. The non-GAAP effective tax rate for the fourth quarter was approximately 22% compared to 34% last year, resulting in non-GAAP net income of 5 million for the quarter, an increase from 3.3 million in the prior year. Non-GAAP earnings per share exceeded guidance and was $0.16 per share compared to $0.11 per share a year ago.

GAAP earnings per share for the quarter was breakeven compared to $0.05 profit in 2012, reflecting an increase in non-cash stock-based compensation expenses in 2013 and acquisition and integration cost associated with our recent acquisitions. Now turning to our strong full year results, revenue was 144.8 million compared to 117.8 million in 2012, an increase of 23%. License and implementation revenue increased 21.1 million or 27% over 2012 and maintenance revenue increased 6 million or 15% over 2012. Our maintenance renewal rates continue to be best-in-class, exceeding 95%, adding to our future revenue visibility. Total recurring revenue, which includes maintenance and support revenue and revenue from a number of term license and cloud-based service offerings, was approximately 38% of total revenue for the year.

We have strong growth in term license and cloud-based service offerings bookings in 2013 which helps us with our long-term revenue visibility. Non-GAAP gross profit was 103.8 million for the year, yielding gross margins of approximately 72% compared to gross margins of 73% for the year ended 2012. Our non-GAAP research and development expenses were 29.3 million or 20% revenue, an increase of 3.6 million from the prior year. Non-GAAP selling, general and administrative expenses for the full year were 52.6 million or 36% of revenue, an increase of approximately 10.7 million over 2012. During 2013, we increased our investments relative to 2012 to support the growing demand for our big data solutions and to drive long-term revenue growth.

We believe these investments were effective and are reflected in our solid year-end backlog, growing pipelines, expanded product offerings and increased market awareness. Non-GAAP operating income was 21.9 million for the year, an increase of 23% as compared to 2012, resulting in non-GAAP operating margins of 15.1%. This compares to operating income of 17.8 million and operating margins of 15.1% in 2012. Our non-GAAP effective tax rate was 19% for the year that’s compared to 32.5% in 2012. Our 2013 annual non-GAAP effective tax rate includes both the 2012 and 2013 research and experimentation tax credits.

Non-GAAP earnings per share for the year was $0.58 compared to $0.42 in 2012. The 2012 R&E tax credits that was recorded in the first quarter of 2013 contributed $0.05 to 2013 earnings per share. On the GAAP basis, earnings per share was $0.11. We generated operating cash flow of 5.8 million in the fourth quarter, yielding a cash flow margin of 14.9%. For the full year, operating cash flow was 17 million, yielding cash flow margins of 11.7%.

Now moving to the balance sheet. We ended the year with unrestricted cash and cash equivalents of 44.7 million, a decrease of 39 million from 2012. At year-end, there was restricted cash on our balance sheet of 39.7 million related to the Cameleon Software tender offer. Our year-end unrestricted cash and cash equivalents balance also reflects the 13.5 million we paid for the acquisition of SignalDemand in the fourth quarter of 2013. Capital spending for the year which includes infrastructure and facility improvements was 4.5 million. We expect capital spending in 2014 will approximate 8 million. Gross accounts receivable at the end of the year were 46.8 million. Days sales outstanding were approximately 107 days, within the range that we have experienced in previous quarters.

Before providing guidance for the first quarter and full year I would like to provide some addition insights into our 2013 performance across geographies, our B2B and B2C industries and our revenue visibility going into 2014. For the full year 2013, our B2B revenue increased 25% to 82.4 million and we are pleased with our ongoing growth strategy and the opportunities we see across our B2B markets. Our B2C business increased 21% to 62.4 million for 2013. Our travel B2C business which is predominantly outside of the United States continues to perform well driven by our ongoing innovation, new product introductions and investments in our go-to-market initiatives.

Our United States revenue increased 26% and made up 45% of revenue for the year compared to 44% in 2012. Revenue from Europe was 23% of total revenue in 2013 as compared to 27% of total revenue in 2012 and grew 7% as compared to 2012. Europe contributed to our sales execution challenges which impacted our B2B growth. We have made and continue to make improvements in our go-to-market initiatives in this region and we feel good about the opportunity in Europe going forward. In addition with the acquisition of Cameleon we have more presence and scale across Europe to strengthen our go-to-market strategy. The rest of the world made up 32% of revenue and increased by 33% which was driven by strength in our travel B2C business.

We are pleased with our non-GAAP backlog at the end of 2013 of 182 million compared to 147 million at the end of 2012, an increase of 24%. Our term and cloud services business increased significantly in 2013 compared to 2012 contributing to recurring revenue visibility more than one year out. The portion of our 2013 ending backlog estimated to be recognized as revenue in 2012 is 122 million. Including Cameleon our total non-GAAP backlog is approximately 206 million and the portion of our total backlog revenue estimated to be recognized as revenue in 2014 is 132 million. We are pleased with this good revenue visibility going into 2014. Also we have visibility to approximately 75 million of revenue beyond 2014 which was almost twice as much visibility beyond one year than we had when we entered 2013 which we believe positions us well for long-term growth.

At the end of 2013, headcount including outsourcing was 848, which increased 20% from the end of 2012. This reflects our increased investments in sales, marketing, professional services, engineering and administrative personnel to drive growth as well as the addition of SignalDemand. The markets we serve are large and expanding and we are pleased with the return on our investments as we continue to execute on our diversified growth strategy.

I wanted to make a few comments on the acquisitions of Cameleon and SignalDemand. We believe these are highly attractive acquisitions and are consistent with our goal of investing our strong cash flow to improve long-term shareholder value. Both companies will contribute to recurring revenue growth and will contribute to our strategy of growing the business at 20% plus over the long-term. From a revenue perspective, Cameleon’s revenue comes from a combination of on-premise licenses, maintenance, SaaS and services with a growing percentage coming from SaaS. SignalDemand’s revenue has been all SaaS and the associated services. Our expectation is that for the calendar year 2014 the acquisitions will contribute between 17 million and 19 million in non-GAAP revenue, more on this in a moment.

Both companies were relatively small and as such they were not able to invest enough in sales, marketing and services staff to realize their full potential. We plan on making investments in these areas as well as incremental integration investments to ensure that we set ourselves up for continued growth in 2014 and beyond. When we consider the investments we are making in the first year and the revenue impact of converting from IFRS to GAAP the acquisitions are expected to be dilutive to non-GAAP operating margins by approximately 400 basis points in 2014 and to become accretive on a non-GAAP basis in 2015.

If it were not for these items related to the acquisitions we would expect our organic business to achieve operating margins of approximately 14% which is in line with what we discussed with you a year ago and includes ongoing investments that support PROS’ growth, as well as spending on some programs and hiring that we move from 2013 to 2014.

Now turning to guidance, commencing in 2014 we will be providing guidance only on a non-GAAP basis which we believe is more reflective of the performance of our business and provides for a more meaningful comparison of results between periods. In addition we plan on reporting non-GAAP revenue in 2014 which will include the amount of the acquired deferred revenue that was adjusted down due to purchase accounting. Our estimate of the deferred revenue adjustment is approximately 13 million of which approximately 10 million will flow through 2014 with the remainder recognized over the next few years. As a result the reported non-GAAP revenue will be higher than GAAP revenue in 2014. Non-GAAP expense items for 2014 will include stock-based compensation, amortization of acquired intangibles, employee retention incentives and other one-time acquisition and integration related costs.

Now turning to our outlook, we continue to be optimistic while remindful of the global economic environment. We enter 2014 with solid backlog, strong pipelines and a good contribution from SignalDemand and Cameleon. For the first quarter we anticipate non-GAAP revenue in the range of 41.5 million to 42.5 million, approximately 25% growth year-over-year at the midpoint. We expect a total non-GAAP operating loss in the range of 200,000 to 700,000. This performance reflects higher overall personnel levels based on our prior quarter hiring in support of our strong backlog, expected first quarter employee additions and planned strategic investments in sales and marketing in support of our business, including in our acquisitions of Cameleon and SignalDemand.

In addition it also includes a significant seasonal expense for employment taxes in the first quarter which is up approximately 1.6 million over the fourth quarter. Non-GAAP operating income excludes approximately 4.5 million of stock-based compensation expenses and 3.5 million of acquisition related costs, including amortization of intangibles, retention payments and others. On non-GAAP basis we expect the tax rate to be approximately 45% in the first quarter. Non-GAAP earnings per share are expected to be a loss to $0.01 breakeven based on an estimated 28.7 million basic shares outstanding. For the full year we expect non-GAAP revenue in the range of 190 million to 194 million, an increase of 33% at the midpoint.

Organic revenue growth is expected to be approximately 20%, non-GAAP operating income is expected to be approximately 10%. Non-GAAP operating income excludes approximately 23 million of stock-based compensation expenses and 8.5 million of acquisition related costs including amortization of intangibles, employee retention payments and others. On a non-GAAP basis we expect the tax rate to be approximately 45% for the full year compared to 19% for 2013.

Our non-GAAP effective tax rate will increase in 2014 over 2013, principally as a result of the R&E credit not being renewed for 2014 and expected foreign operating losses from Cameleon our newly acquired foreign subsidiary. The R&E credit reduced 2013 taxes by approximately 15%, the estimated foreign operating losses of 2014 is expected to increase to consolidated effective tax rate by 13%.

In summary we’re pleased with our performance in the fourth quarter and the full year and believe we’re very well positioned for a strong performance in 2014. We’re confident that our growth strategies and investments across the business have been working and expect to continue this in the future with accelerated investments in Cameleon and SignalDemand, which we believe positions us well to capture the growing opportunity for real time big data solutions.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question comes from the line of Chad Bennett. Please proceed.

Chad Bennett - Craig-Hallum Capital Group

Hey guys, good afternoon.

Charles Murphy

Hi Chad.

Andres Reiner

Hi Chad.

Chad Bennett - Craig-Hallum Capital Group

Hey, a couple -- I guess first thing, not that you are leaving anytime soon Charlie but it’s been great working with you over the past several years and you have done a great job of scaling the business and growing the business, so hopefully when you’re done you’ll have more fun in the sun in Miami. So it’s been a pleasure.

Charles Murphy

Thanks Chad I appreciate it and I will have more fun in the sun in Miami, that’s good for you.

Chad Bennett - Craig-Hallum Capital Group

So just I think some housekeeping things from me, so the 17 million to 9 million of revenue from Cameleon and SignalDemand for this year. Charlie can you give us a rough idea on a non-GAAP basis how much of that is in the L&I line versus maintenance?

Charles Murphy

It’s interesting, because SignalDemand is going to be all SaaS, okay until we get to a point where SaaS is a predominant portion of our business, that’s currently in the L&I line. Cameleon is going to be a mix, it will be a mix but it’s going to be predominantly in the L&I line as well, as Cameleon has perpetual which should be in the L&I, it has SaaS and it has maintenance so it’s going to be phenomenally in the L&I line.

Chad Bennett - Craig-Hallum Capital Group

Okay. And how should we think about -- it’s probably more of a question for Andres, but how should we think about -- are you going to sell those products primarily on a standalone basis at least for the next couple of quarters? And not necessarily go after kind of integrating with your pricing optimization product, or is SignalDemand kind of more likely to be more integrated sooner than the CPQ solution? Any idea of kind of what the roadmap is there?

Andres Reiner

Yes now that’s a great question. We see good opportunities to provide integration with both solutions, especially for example on the SignalDemand bringing their strength for analytics platform integrated with their technology will drive significant value for their customers. On the CPQ area we have very well defined interfaces to integrate with quoting solutions so we’re going to leverage those integration points to provide seamless integration into the Cameleon platform. And we are actively working on embedding our data science capability at the beginning you can see the technologies can run standalone and customers can buy Cameleon only or they can buy combined offerings that are integrated using our web service APIs.

Chad Bennett - Craig-Hallum Capital Group

Okay but there is probably not a huge amount of customer overlap there, not that Cameleon is a huge, but there is probably not much, is that fair to say?

Andres Reiner

Yes, that’s fair to say, there’s a few customers that overlap but for the most part they are complimentary customers in same industries that we can see bringing value. And the great thing about our product offering, getting back to you is that a customer of Cameleon may choose to enable or analytics capabilities together with their quoting solution to bring more insights around deal compliance, deal performance, and that is one of the areas where we have seen weaknesses in the market in the CPQ spaces the strength in analytics and we want to compliment that quickly.

Chad Bennett - Craig-Hallum Capital Group

Okay. And are the sales people, Andres going to be selling all three products, or are you going to have specialists for the other ones?

Andres Reiner

Yes, that’s a great question. We will have our sales organization selling the full product portfolio. We have SEs, that have experience and are trained on the different product sets, so think about the SE team having more specialization. But overall the sales reps are selling the full product portfolio.

Chad Bennett - Craig-Hallum Capital Group

Okay. Okay. And then one last one for me, if I may. Should we think about the growth rates of SignalDemand and Cameleon, as I assume differently than maybe your organic pricing optimization business? And if so, can you give us an idea of that?

Andres Reiner

Yes, the expectations that we want to set is our focus in our diversified growth strategies having every part of our business grow at 20% plus, and we are confident that both of these acquisitions can grow at those rates.

Chad Bennett - Craig-Hallum Capital Group

Alright guys thanks. Good job again.

Andres Reiner

Thank you.

Operator

And your next question will come from the line of Bhavan Suri. Please proceed.

Bhavan Suri - William Blair & Company

Hi, guys thanks for taking my question. Just a follow-up on the questions around the product. As you look at the midmarket Step offering and the potential integration with configure price quote, and then with a sales force automation tool, is that the natural progression there? So that if you were to embed this on force.com, the sales guy in force could use this to use the analytics to drive the right pricing and configuration? Am I thinking about that correctly? And how are you approaching the CRM vendors in that space?

Andres Reiner

Absolutely, and that’s why we’ve been investing on the CRM and as you said that’s probably the most important part of the strategies that it is integrated with the CRM platform, in providing those insights to help guide the sales organization into what products they should be selling in which accounts, which customers have the biggest opportunity in and at what price points they can win, and bringing this easier, faster and kind of smarter approach on top of automating the process of lead-to-quote. So those are the areas that we’ve been innovating on, and both of these actually bring those capabilities.

Bhavan Suri - William Blair & Company

And so, Andres, if you were to look at the CRM systems out there -- obviously salesforce, Microsoft Dynamics, Oracle SAP -- which ones are you integrated in today?

Andres Reiner

Yes, so today we are integrated with salesforce.com, Microsoft Dynamics and SAP CRM. And our focus is to maintain the integration points with these three CRM solutions which -- based on our top customer end-market insights, they are the leading providers for sales oriented CRM solutions.

Bhavan Suri - William Blair & Company

Sure, sure. And then as you look at the Step offering, you've targeted it towards midmarket, but a little color on maybe some of the customers you added. Where they across manufacturing and services? And maybe a little bit on the size of them, too, would be helpful, I think.

Andres Reiner

Yes so we have seen, so in mix that we have some that’s been in the 50 to couple of hundred million in revenue, standalone businesses both in distribution and manufacturing, we have also seen some that may be a small division of maybe a larger company, maybe half $0.5 billion company to small division starting to use. So that’s the power of SAP is that we can see different size of customers and different paths to begin to really leverage this strong capabilities, quickly. A couple of examples that I have talked about in this script are Alliance Laundry Systems, and BW Rogers, of which one is manufacturing and one is in distribution.

Bhavan Suri - William Blair & Company

Alright. And then one thing that's surprising -- and maybe you guys can both touch on this -- was obviously you gave nice guidance on the top line for 2014, but you've talked about some of the services shifting to the SIs. And I would've thought maybe some of that implementation work might shift out this year to the SIs. Help me understand that. Is that still happening, and growth is still pretty solid? Or are you still thinking that the SIs may still be a little ways out?

Andres Reiner

Now, we’ve made good progress in the SI community, and I would say we are more bullish on that today and we continue, it’s part of our core strategic initiative is really to leverage the SI community and we’re starting to see success in that and expect to continue in 2014.

Bhavan Suri - William Blair & Company

Okay, great. That’s helpful. Thanks for taking my questions guys. Nice job.

Andres Reiner

Thank you.

Operator

Your next question comes from the line of Jesse Hulsing. Please proceed.

Jesse Hulsing - Pacific Crest Securities

Hi guys thanks for taking my question. Charlie, did I hear you correctly when you said your backlog likely to be recognized in 2014 was $122 million?

Charles Murphy

Yes. With Cameleon, it was 132, yes.

Jesse Hulsing - Pacific Crest Securities

132 or 122?

Charles Murphy

132 with Cameleon.

Jesse Hulsing - Pacific Crest Securities

Okay yes got it. So…

Charles Murphy

Yes go ahead.

Jesse Hulsing - Pacific Crest Securities

Yes, organic perspective was 122, right, up about 13% year-over-year?

Charles Murphy

I think that’s about right, yes.

Jesse Hulsing - Pacific Crest Securities

I guess the next logical question from that is, from a coverage perspective, a coverage ratio perspective, you're a bit lower than you have been the last few years, as far as from just an organic perspective. What gives you comfort that you can get to that 20% organic [indiscernible] coverage ratio? And maybe give us an update on how Europe is trending within that broader coverage ratio perspective question.

Charles Murphy

Sure absolutely. Yes, actually the coverage ratio was about 69% which we feel good about, because historically to the back beyond 2012 70% was generally above the average. And we feel good at about 69%. And of course as we go into next year we just talked about the SIs, so we would expect SIs to get an opportunity for us to have more end-year revenue, and in general we see a trend towards a bit more end-year revenue, from ’11 to ’12, to ’12 to ’13, and ’13 to ’14. So we’re pleased with that. So the end-year revenue is going to allow us I think comfortably to get to what we believe is the overall guidance that we are providing. And as far as Europe, Europe actually had a good fourth quarter. When you take a look at the numbers and that fourth quarter in Europe was supported by both our B2C and B2B business, and we are pleased, and we’re pleased with that, and just in general we expect really good growth in both the United States and in Europe, as we are going forward into 2014.

Jesse Hulsing - Pacific Crest Securities

Okay. From a B2C versus B2B perspective, when you look at that organic 20% growth rate, what's embedded in your expectations for those two groups?

Charles Murphy

Yes, the expectation really hasn’t changed. We are still expecting the B2B to be the growth driver for the Company and within the B2B we’re looking at mid-20% revenue growth; and B2C we’re thinking about mid-teens. And we would be very pleased with mid-teens for the B2C business in 2014 and again continue with over 20% revenue growth for the B2B.

Jesse Hulsing - Pacific Crest Securities

Thanks, that's helpful. And when I looked at Cameleon before they were acquired, they were doing about EUR9 million year-to-date, I think, through the first three quarters of the year; so maybe EUR12 million, EUR13 million through Q4, which would be $15 million or so in 2013. So, are you expecting much growth? Because, when combined with SignalDemand, that would indicate you're expecting flattish growth from Cameleon. Is that how you are thinking about it as you integrate?

Charles Murphy

Yes, the one thing that’s changed here is first, Cameleon was reporting at the IFRS staff which is actually appropriate, in fact everything you looked at during the due diligence, the revenue recognition was absolutely appropriate under IFRS. However, under GAAP the revenue recognition does change a bit for Cameleon. And it happens on the U.S. GAAP is, revenue is actually deferred over a longer period of time, than it is under IFRS. So it’s really difficult to go from a metric that you are quoting which is the EUR9 million under IFRS, and convert that to a comparable GAAP number. So we’re talking GAAP as opposed to IFRS. And we are seeing growth for 2014 over 2013, but the number is going to be different than you would have had under IFRS.

Jesse Hulsing - Pacific Crest Securities

Got it that’s very helpful. Great, great guys thanks for taking my questions.

Charles Murphy

Thank you.

Operator

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

Unidentified Analyst

Hi guys Asham on for Ross. Can you maybe talk a little bit about the competitive environment, is Vendavo still the primary competitor you see out there or have anybody else come up more recently?

Andres Reiner

The competitive environment hasn’t changed at all, it continues to be predominantly with Vendavo, we see Cilium in some cases, but it really has had no change.

Unidentified Analyst

Okay. And then just in terms of like implementation times, I believe you have certain modules which typically, you can get customers up and running, pretty quickly, I mean have you seen any trend as sort of lower implementation times across your process?

Andres Reiner

Yes, that’s been a continuous initiative over the last three years, really to drive faster implementation time, so we typically see right now about approximately 4 months per module, the implementation time. And we have had customers up with full a solution obviously in less than that, but that’s been an initiative that we’ve had within our professional services organization that’s driving a much faster time to value than any competitor in the space. And it is one of our competitive differentiators.

Unidentified Analyst

Okay great thanks a lot.

Andres Reiner

Thank you.

Operator

Your next question will come from the line of Scott Berg. Please proceed.

Scott Berg - Northland Securities

Andres and Charlie, congratulations on some continued success here. Couple questions. First of all, Andres, on the sales side, I believe you guys went into 2013 expecting to increase your sales quota-bearing headcount by 30%, and did not achieve that goal. Two-part question -- first of all, what was the delta there in achieving that goal, and I guess why wasn't it met? And then, secondly, you're guiding to 40% growth here in 2014. Is that just a little bit of catch-up, maybe, from some of the headcount in 2013 that wasn't added? And on a normalized basis, should think of it as, say, 30% and 30% growth between the two years?

Andres Reiner

Yes I would say that we definitely, our expectations was 30% growth and we came in at 21%. We feel at that scenario, we invested in our hiring process, training and development areas around the sales organization and we feel the investments we have made will allow us to stay more on-track. In terms of the 40% growth in quota-carrying headcount it’s more reflective of what we see as the overall market opportunity, especially when we start to the CPQ and price optimization as a combined offering and differentiated offering. We feel this is the opportunity to really invest to capture this large market opportunity. So some of it could be due to the shift, but it really is related to us looking at the overall pipeline and the demand that we see in making sure that that we really filled out the right sales organization to capitalize on the opportunities.

Scott Berg - Northland Securities

Alright, great. That is helpful. And then on the growth of the B2B business for the year slowed substantially in 2013 versus 2012. I believe it was up 40% year-over-year in 2012, and 25% in 2013. And obviously the challenges in Europe were well-documented over the last year. But was the growth in the US business in line -- better, faster, slower -- than expectations going into 2013?

Andres Reiner

I would say we have more than doubled U.S. revenue over the past three years and we’re pleased with the 26% U.S. growth last year. I think this is definitely an area that we believe we could have done better. We do have a larger team now, and we are confident that the changes we have made specifically around hiring on the leadership development, on-boarding, and training programs as I discussed earlier. We believe this will drive higher growth and better consistency and performance as we capitalize on these opportunities. For outlook for 2014, it is very positive in the U.S. we expect it to be strong growth.

Scott Berg - Northland Securities

Fantastic. And then the last question I had, Charlie, was on gross margins. They were substantially higher in the fourth quarter. And I know they do bounce around for you guys on a quarter-by-quarter basis, but that was much stronger than anything in the last couple of years. I assume this gross margin level shouldn't be held consistent, especially with the two acquisitions and the investments required for those? We're just trying to think about how we should look at them, either on an individual line item or a blended basis moving forward?

Andres Reiner

Well that’s correct, we expect the Cameleon and the SignalDemand gross margins are less than the PROS gross margins. If you’re thinking about PROS, you probably want to think about that historical event 72% and then when you combine the two acquisitions to be a bit lower, that’s very, very high 60s, 59% perhaps. But there’ll be some deterioration in the overall gross margins as we saw with these two acquisitions, at least initially as we wrap-up our investments on those entities.

Scott Berg - Northland Securities

Great that’s all I have I will jump in the queue. Thanks.

Andres Reiner

Thank you.

Operator

Your next question comes from the line of Matt Van Vliet. Please proceed.

Matt Van Vliet - Stifel Nicolaus

Yes, hi for Tom this afternoon. First question, in terms of the sales headcount growth for 2014, does that include bringing in Cameleon people? Or is that excluding that addition?

Andres Reiner

Yes, it does include bringing in the Cameleon people as well.

Matt Van Vliet - Stifel Nicolaus

Okay. And then in terms of training for those salespeople, how expensive is that? And then on the flip side, for the existing PROS sales, how much of a learning curve is there to more effectively sell the Cameleon product? Or are they all pretty well-versed in that aspect of the CPQ?

Andres Reiner

Yes I would say that one of the areas that obviously we have been investing as part of the integration is on the training programs and we made pretty good progress on those areas. In terms of our sales organizations selling CPQ, we don’t believe that’s going to be so different than selling our current solutions and our offering sets. But we’re definitely enabling them with the right training programs that we need as well for on-boarding new reps. So that’s an area that we have had a team dedicated to not only build up but help with the training and development programs around both our CPQ and our overall product offerings. In that scenario where we have built an organization already around the PROS offerings that we are leveraging.

Matt Van Vliet - Stifel Nicolaus

Okay. And then what kind of internal timeframe are you looking at, to feel as though the -- with all three companies fully integrated into just one PROS platform?

Andres Reiner

So I would say 6 to 12 months is the right timeframe to be fully integrated. For us it’s very important that we have one customer experience both from sales, from services, from EPS, and also one employee experience for all of our customers. A lot of emphasis is around the one PROS and having really to reach our full potential every organization has to standardize. And the great thing is that we’re very aligned from a cultural perspective and we all believe in this large market opportunity which is helping us to align in every area across the organization, to bring really a larger platform for both of these companies.

Matt Van Vliet - Stifel Nicolaus

Okay. And then lastly, could you just talk a little bit about some of the management changes that we've seen in Europe, and what drove those over the last few months?

Andres Reiner

Yes so Eric Allen which was the previous General Manager really was not there long enough to make an impact. We brought him in the last month of Q3, and right after we announced two big changes, both Cameleon, and bringing Blair in, and this certainly influences personal decision to leave, at the same time we really saw an opportunity to promote within and to bring Sebastian with his great success within PROS, because he knows customers really well and has the experience to lead, as well as complementing the organization with the Cameleon leadership. And it was part of bringing the one PROS in the organization. So we’re pretty excited about having Sebastian lead in Europe, and having a combined team with the Cameleon organization.

Matt Van Vliet - Stifel Nicolaus

Alright great. Thank you.

Andres Reiner

Thanks.

Operator

(Operator Instructions) Your next question comes from the line of Greg McDowell. Please proceed.

Greg McDowell - JMP Securities

Great thank you very much. Hi, guys. Andres, my first question is for you. I do want to understand or dig a little bit into the need to bring on a COO. When you look at Blair Crump, what does he bring to the organization that you felt was lacking before? And what are some of the marching orders you've given to Blair Crump to help grow the business? Thanks.

Andres Reiner

Yes, now that’s a great question. I think one of the things, why we have achieved the growth that we have achieved over the last three years and doubling the business is, because we are constantly thinking of the end-state 3 to 5 years off. And for me it’s very important that as we see us scaling the business we’re complementing our leadership team with the right talent. And I had the privilege of getting to know Blair and his experience in running large-scale organizations, and felt that this was the right time to bring a leader like him to help us scale as we move forward. So he definitely understands this space we are in, he was very excited about the capability of bringing intelligence to the selling process and seeing that as the next generation of technology and we are very excited to have him here. My plan for him is to really help us feel they’re very scalable organization and draw up our three year strategy around scaling growth of our business. It was also very important to experience around the partner ecosystem, in global experience that he has which really compliment us very well.

Greg McDowell - JMP Securities

Great. And, Charlie, maybe one quick question for you. How should we think about free cash flow margins in 2014? And maybe a second part of that question is -- could you help us understand maybe some of the cash collection characteristics of SignalDemand and Cameleon? And would they do three-year deals, but you'd collect all the cash up front? If you could just help us understand that. Thanks.

Charles Murphy

Yes let me start with SignalDemand and Cameleon, they may do a three year deal that would be the annual one year contract filed that would be billed outside. Not the full three years, that’s what the model that they've been on. So that helps you with thinking through those businesses. As far as cash flow for 2014 -- we expect to continue to generate good operating cash flow as we have historically. But it's expected to be less than our historical non-GAAP relationship. To start we've been pretty close on cash flow, operations including to our non-GAAP operating income. We expect it's going to be a little less than that going forward, and takes into effect the onetime non-GAAP items that we have, such as retention and other cash, acquisition expenses.

So if you back those out the cash flow would be probably in line with non-GAAP operating income again. But we are going to have those costs they our cash, so they are included in our cash flow. And we do also expect to have some significant CapEx spending outside of cash flow from operations but none the less if you're looking at free cash flow that’s going to have an impact on the free cash flow. So net-net we expect to continue to be positive cash flow, but because of the CapEx and because of the -- and also even just taxes on stock brands, they're increasing each year as well. So the non-operating cash flow elements are going to have an impact on our cash flow generation for the full year. Cash flow from operations, if you could add back the non-GAAP items, I think we will get back in line with the operating income. Does that help?

Greg McDowell - JMP Securities

That helps. Thanks guys, that's all I have.

Charles Murphy

Thank you.

Operator

Alright, ladies and gentlemen we have no more questions in the queue. I would now like to turn the conference back over to Andres Reiner for any closing remarks.

Andres Reiner

Thank you for your participation in today's call and for your support of PROS. We're confident that our growth strategy is still working, we believe there is a big market opportunity as more and more companies look to PROS to monetize their big data. We continue to invest in our diversified growth strategy in order to capitalize on the market opportunity and to drive long-term sustainable growth. I would like to thank our PROS team worldwide for an incredible 2013. I'm proud of their relentless passion and commitment to innovation in customer success. Thank you also to our customers, partners and shareholders for your support of PROS. We look forward to a strong 2014 and to speaking with you on our next call. Thank you and goodbye.

Operator

Ladies and gentlemen, that will conclude today's conference. Thank you for your participation, you may now disconnect. Have a great day.

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