PROS Holdings Inc. Q4 2008 Earnings Call Transcript

| About: PROS Holdings, (PRO)
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PROS Holdings Inc. (NYSE:PRO) Q4 2008 Earnings Call February 12, 2009 4:30 PM ET


Bert Winemiller - Chairman and Chief Executive Officer

Charlie Murphy - Executive Vice President and Chief Financial Officer


Tom Ernst - Deutsche Bank

Richard Davis - Needham & Company

Tom Roderick - Thomas Weisel Partners

Sandeep Madhur - J.P. Morgan

Ross MacMillan - Jefferies


Good day ladies and gentlemen, and welcome to the fourth quarter 2008 PROS Holdings, Inc. earnings conference call. My name is [Anicia] and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Executive Vice President and Chief Financial Officer, Mr. Charlie Murphy.

Charlie Murphy

Thank you, operator. Good afternoon everyone and thank you for joining us today for PROS Holdings financial results conference call for the fourth quarter and full year of 2008 and this is Charlie Murphy. Joining me on today’s call is Bert Winemiller, PROS Chairman and Chief Executive Officer.

On today’s conference call, Bert will provide a commentary on the highlights for the fourth quarter and year ended December 31, 2008 and then, I will provide the 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 and this discussion, including statements made during the question-and-answer session contain forward-looking statements. These statements are subject to numerous 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 can cause actual results to differ materially from those projected in the forward-looking statements. Please refer to our prospectus, 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.

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 corresponding GAAP measure is provided in the tables accompanying the press release filed earlier today and also can be found 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 this afternoon. We are pleased with our financial performance in the fourth quarter of 2008. For the full year we are reporting results inline with or above expectations with the strongest revenue cash flow and profit in our history.

We believe this was a solid performance given the challenging economic environment in 2008. These results are validation of PROS proven business model of delivering high return on investment, pricing and margin optimization software products to our customers and our revenue visibility based on our percentage of completion, revenue recognition model.

Companies implement PROS pricing and margin optimization software as a strategic innovation and a risk mitigation initiative, particularly as these companies face unpredictable demand in volatile cost. PROS proven track record, proven processes and proven solution are the keys to our long-term success and drive a high level of customer satisfaction.

Our fourth quarter revenue of $19.8 million was a record and it was up 11% year-over-year. Our full year revenue of $75.6 million was also a record and was up 22% year-over-year. Our non-GAAP earnings were $0.17 per diluted share for the quarter and $0.51 per diluted share for the year. Bookings for 2008 came in at the high-end of our expected range of $46 million to $51 million.

PROS, is a global company with revenue diversified across geography and our target industries. 54% of 2008 revenue came from outside the United States and 61% of 2008 license and implementation revenue came from our target industries of manufacturing, distribution and services. During these difficult economic times, CEO’s and CFO’s are starting to recognize that traditional pricing strategies, such as cost-plus and match the competition cause unnecessary discounting and destructive pricing practices.

The message that a small improvement in pricing can have a large impact on operating profit is resonating with executives, who recognize that pricing is one of the most strategic and powerful tools available to them. As executive face market challenges, the innovators will continue to embrace pricing optimization. Our customers and prospects are facing unpredictable demand in volatile cost and need proven science based pricing to margin optimization solutions more than ever.

CEO, CFO’s and COO’s are the ultimate decision makers for pricing software. To achieve the high return on investment and fast time to value C-level executives must embrace pricing excellent best practices, focus on optimizing margins and implement the science-based price optimization software from PROS. PROS, has unique strength and managing in a challenging economy and there are four key trades I’d like to point out.

First; PROS has proven management experience, from PROS 9011 years of 2002 through 2004 were very challenging and PROS still achieved its track record of profitability and positive cash flow during those difficult years.

Second; PROS has financial strength including a strong balance sheet with $52 million in cash at December 31, 2008 and no debt, which helps PROS standout positively and one of the most important criteria in current sales situations, which is vendor viability.

Third; PROS has an attractive business model based on one, a high return on investment value proposition by providing pricing and margin improvements. A recent example of the quick initial ROI that our customer realize is demonstrated by the fact that a leading manufacture with 3500 retailers and 150,000 active products used PROS scientific segmentation, scientific and analytics and price optimizer to uncover $4 million in profit leaks in the first 28 days of the implementation.

Two; PROS revenue visibility is based on our percentage of completion revenue recognition model. Three; PROS has an appropriate mix of license implementation and maintenance, revenue and best-in-class high maintenance renewal rates. Four; PROS, employees have experience and expertise in pricing that is unequal. Five, PROS, has a diversified revenue mix across industries and geography.

The strengths facing management in the challenging economy, is that we believe PROS has a superior product strategy. A cornerstone of this strategy is the PROS pricing solutions suite, common code platform a single integrated data base and the PROS configurator. The strategy is focused on the strategic goals of lowest total cost of ownership, highest return on investment and shortest time to value.

Now, let me address the current economic conditions. On a positive note, we’re pleased to 2008 bookings worth high-end of our guidance. Our sales activity continues to be high. On our contracts have already been signed in the first quarter and new prospects continue to be identify. However, reflecting of the weakening economy we have seen some instances that company delaying purchase decisions.

Even though the awareness of the power pricing is increasing and the ROI is impairing getting a multimillion dollar deal and project approved in this environment is more challenging. There is much more rigorous review of any capital expenditure and often the traditional metrics of probability at close are not good indicators. The final decision is made by Senior Executives, who are focused on cost cuts and very selective innovative investments.

As a result, why we do have good visibility in the near-term revenues, it’s difficult in this economic environment to provide guidance for the full-year 2009. Particularly, as our sales cycles continued to be long and could get longer. We believe the market for pricing and margin optimization software is in the innovative early stage and the PROS in the center of shift, the science-based pricing from spreadsheets and the current destructive pricing practices.

Our target markets of manufacturing distribution services represent a multibillion dollar market opportunity and today are under penetrated. Looking beyond 2009, our opportunity remains considerable and PROS intends to increase market share and build our relative competitive advantage during these tough economic times.

While we have increased our focus on managing expenses, we’ve remained committed to R&D and to supporting our customers. So, on the other side of this economic downturn, PROS emerges in a much stronger position to serve the price optimization software market. We will continue to innovate and selectively invest to accelerate our competitive advantage in pricing and margin optimization software and science, total cost of ownership and time to value.

In summary, we are pleased with our fourth quarter and 2008 results, this achievement is the result of the hard work of over 350 employees of PROS who are smart, dedicated people doing great things to bring pricing excellence and high-value to our customers.

As we enter a challenging 2009, we have a very experienced management team, that we believe is focused on the right strategies. We have the expertise and resources to continue to deliver innovative products to our customers and as a result, PROS will emerge even stronger relative to our competition. Also we feel good about our long-term future prospects.

Now, let me turn the ball over to Charlie, so that he can provide you with a review of our financial results and our outlook for 2009.

Charles Murphy

Thanks, Bert. PROS had a solid Q4 and full-year 2008. I will begin with a review of our statement of operations for the quarter and the year, which ended December 31, 2008. Then I will provide some commentary on the balance sheet and cash flow items, before starting you with finical guidance in the first quarter of 2009.

As Bert indicated, we are very pleased with our performance in the fourth quarter and for the year. Revenue for the fourth quarter of 2008 and the full-year came in at $19.8 million and $75.6 million respectively, which is up 11% from Q4, 2007 and up 22% for the full-year. Revenue for the quarter in the year was within the guided range we provided on our last call.

There can be variability in revenue from quarter-to-quarter not as a result to seasonality, but rather the timing of when implementation starts or finishes, the implementation effort needed and the contract size.

For example, we were recently impacted by one customer’s decision to postponed implementation to a later date with the restart hopefully in 2009 and another customer has been selling down their implementation while waiting for phase of ERP implementation to be completed. These are examples that can impact the timing of revenue recognition; even though transactions are booked and implementations were in progress.

I will be discussing the statement of operation information on a non-GAAP basis. Our earnings press release includes a full-GAAP to non-GAAP reconciliation, which can be found on our website in the Investor Relations section and accordance with our revenue recognition policy PROS is not recognize any revenue contract signing. License and implementation revenue are bundled together and recognized using percentage of completion over in the implementation period.

Within revenue, license and implementation revenue was $14 million for the fourth quarter of 2008 and $53.9 million for the full-year or approximately 71% of total revenue for both quarter and year. This is up 11.6% over the fourth quarter of 2007 and 24.9% year-over-year respectively. Maintenance and support which makes up the balance of revenue was $5.7 million for the fourth quarter of 2008 and $21.7 million for the year, up 10% over the fourth quarter of 2007 and 14.5% year-over-year respectively.

We are pleased that are maintenance renewal rates for the year continues in the historical mid 90% range. Our revenue is diversified geographically across our five target vertical markets and between B-to-B and B-to-C pricing and margin optimization solutions. Our revenue generated outside the United States remains strong at approximately 54% in 2008. Historically we have had success denominating our contracts principally in U.S. dollar.

During 2008 we did have a loss on foreign exchange of approximately $100,000 for the year. With the volatility in foreign exchange we may be required by our customers to have more contracts in the future denominated in foreign currency. On non-GAAP basis gross profit was $14.8 million for the fourth quarter of 2008 and $56.9 million for the year, yielding gross margins of 74.8% and 75.3% respectively. This compares to gross margins of 73.6% for the fourth quarter of 2007 and 71.5% for the year ended 2007.

We are pleased with the improvements in gross margins over prior years, which is a result of improvements in our implementation processes and continued standardization of our products. As previously communicated gross margin may vary from period-to-period depending on factors such as the amount of implementation services required to deploy our products relative to the total contract price.

Year-over-year margins have been improving, however while the overall trends for gross margins have been up year-over-year we can’t be certain that the previously mention factors which contributed to 2008 gross margins will have an impacted 2009.

Margins are maintenance increased from 75.1% in 2007 to 79.9% in 2008. Non-GAAP R&D of $4.9 million for the quarter and $19 million for the year were up approximately 17% over the fourth quarter 2007 and year-over-year as we continued to invest in our pricing and margin optimization software product suite. R&D for the year represented 25.2% of total revenue compared to 26.3% of total revenue in 2007.

Non-GAAP selling, general and administrative expenses for the fourth quarter of 2008 and full-year were $5 million and $19.9 million respectively and were up 12.2% over the fourth quarter of 2007 and 28.8% year-over-year. The SG&A expenses increased for the year largely due to increased marketing and sales expenses and to a full-year of public company cost incurred in 2008.

Non-GAAP operating income was $4.9 million for the quarter and $18 million for the year, with non-GAAP operating margins of 24.7% and 23.8% respectively. These results were about our previous guidance. These compares to operating income $4.4 million in the fourth quarter of 2007 and $12.6 million for the year 2007 and operating margins of 25% and 20.3% respectively in those period.

With strong expense management our operating margins increased in a record level in the fourth quarter of 2008. In absolute dollar our operating income has increased $5.3 million for the year 2008 over 2007 or approximately 42%. The improvement in non-GAAP operating income for the full year was principally attributable involve to increased revenue and higher gross margin. On non-GAAP basis interest income was $100,000 for the quarter, a decreased of $400,000 from the fourth quarter of 2007.

The decrease was attributable to lower interest rates despite higher cash balances. On a full year basis net interest income was approximately $1.1 million for both years. Our effective tax rate historically has been lower than the federal statutory rate of 35% largely due to the application of research and experimentation credits. In the fourth quarter of 2008 Congress extended the research and experimentation credit act to January 1, 2008 and through December 31, 2009.

As a result our GAAP effective tax rate in the fourth quarter was 9% as the full year benefit of the research and experimentation credit was reflected in the fourth quarter. Similarly, our non-GAAP effective tax rate was 9% and 28.5% in the fourth quarter of 2008 and for the full year respectively, compared to 19.7% for the fourth quarter and 20.3% for the year ended 2007.

The reconciliation of GAAP to non-GAAP net income and EPS in the press release uses the 9% and 28.5% in the fourth quarter of 2008 and for the full year respectively. As we use the GAAP effective tax rate for the reconciliation. 2008 effective tax rate is higher than 2007, due to the utilization of research and experimentation tax credit carry-forwards in 2007 and to the higher levels of pretax income in relation to research and experimentation credits earned in 2008.

Non-GAAP net income was $4.6 million for the quarter and $13.6 million for the year. using the non-GAAP effective tax rate of 9% for the quarter and 28.5% for the year compared to net income of $4 million for the fourth quarter 2007 and $11 million for the full year 2007 using the non-GAAP effective tax rate of 19.7% for the quarter and 20.3% for the year.

Non-GAAP net income for diluted share was $0.17 compared to $0.15 per diluted share in the fourth quarter of 2007. For the full year net income for diluted share is $0.51 compared to $0.46 for 2007. Note that our full year 2007 earnings per diluted share would have $0.41 using the post IPO 2008 weighted average shares outstanding. On that basis EPS for the full year would have been up 24%.

During 2008, in our quarterly guidance we provide quarterly non-GAAP net income and EPS guidance using a pro forma tax rate of 28% to 29%. Anticipating, Congress would pass the research and experimentation tax credit legislation. During our last earnings call, we provided fourth quarter 2008 non-GAAP net income and EPS guidance based on a pro forma non non-GAAP tax of 29%.

Using our actual effective tax rate of 28.5%, our fourth quarter pro forma non-GAAP net income would have been $3.6 million or $0.14 per share exceeding the high-end of our pro forma non-GAAP guidance of $3.3 million and $0.12 per share respectively. With the expansion of the research and experimentation tax credit legislation through 2009, we do not expect there will a need to communicate a pro forma tax rate for guidance in 2009.

Now the previous information has been reported on our non-GAAP operating results because we believe that excluding certain non-cash items such as stock-based compensation for 2007 and 2008, deferred financing cost in the reversal of the evaluation allowance against deferred tax assets in 2007 and other onetime items provide you with the best indicator of the health of overall business.

This is also how we measure the success of the business internally. That said, we appreciate and we also need to analyze or result on a GAAP basis. So, we have provided the reconciliation of GAAP results and non-GAAP results as part of the earnings release.

For the quarters ended December 31, 2008 and 2007 our income from operations in accordance with GAAP was $3.8 million. Net income in the quarter was $3.6 million or $0.14 per diluted share, compared with $3.5 million or $0.13 per diluted share in the fourth quarter of 2007.

For the year-ended December 31, 2008 GAAP operating income was $13 million, compared to $11.0 million in 2007. GAAP net income in 2008 was $10.8 million or $0.40 per diluted share compared with $10.5 million or $0.45 per diluted share in 2007. For the full-year 2007, net income for diluted share would have been $0.39 using the PROS, IPO 2008 weighted-average shares outstanding.

Moving to our balance sheet, we ended the year with cash and equivalent of $52 million up from $44.4 million at December 2007. During the year we repurchase 570,545 shares of common stock at a cost of $5 million of which $2.3 million was spent in the fourth quarter. We have $10 million remaining under authorization.

Let me turn to cash flows. We were pleased with operating cash flow in the fourth quarter of $6.3 million, compared to $3.3 million in 2007. For the year, operating cash flow was $13.8 million or 18% of revenue, compared to $10 million or 16% of revenue in 2007. Free cash flow was up 50% over 2007. The strong cash flow contributed to net accounts receivable at the end of the year of $16.2 million, down from $22.8 million in September, 2008.

Trade accounts receivable, days outstanding were approximately 60 days, which is lower than our typical DSOs at the end of the year. Cash flow and accounts receivable balances can vary in a quarter based on among other things, the timing of collections and invoicing of milestone billings under our contracts, which may vary from quarter-to-quarter.

Total deferred revenue at the end of the year was $19.5 million, as with receivables and cash flow deferred revenue can fluctuate on a quarter-to-quarter basis, depending on the timing of milestone billings under our contracts. Because deferred revenue is not tied to total contract value, we do not believe it is a meaningful forward indicator.

For the year end of December 31, 2008, we were at the high-end of our bookings guidance range of $46 million to $51 million, which excludes maintenance and support that commences at the time implementation is completed. Headcount at the end of year was 381 compared to 342 a year ago. We slowed headcount growth in Q4 in response to the uncertain market conditions and continued to monitor expenses carefully going into 2009.

As Bert mentioned, because of the uncertainty in U.S. and global economy, at this time we will not be providing full-year guidance as longer-term forecasting is considerably more challenging. Now, let me turn to our guidance for the first quarter of 2009.

For the part of 2009, PROS anticipates total revenue in the range of $17.5 million to $18 million. We are projecting non-GAAP operating income of $2.8 million to $3.4 million and non-GAAP diluted earnings per share of $0.08 to $0.10 based on estimated fully diluted share count of 26.5 million shares and effective tax rate of 28%.

Non-GAAP operating income and net income for the first quarter, excludes estimated FAS 123R stock option expense of approximately $1.1 million. This first quarter guidance is based on our current expectation, which assumes no meaningful improvements in the macro environment.

Historically, revenue growth PROS has not been solely impacted by current year bookings. Revenue growth has also primarily impacted by four areas; one the duration of implementations, particularly those that exceed one year; two, growth and maintenance revenue resulting from completed implementations, which has been an ongoing trend.

Three, enhanced efficiencies in the implementation processes that we have seen with shortening of some implementations, well customer delays have lengthened other implementations; and four, cost of living increases for maintenance services, which we continue to see as maintenance agreements are renewed.

It is the layering effect of bookings for more than one year, the time durations of our implementations and maintenance growth of this tradition given PROS good revenue visibility based on our percentage of completion revenue recognition model.

While there is height in uncertainty regarding future expectations given the current economic environment, I would like to remind everyone that the PROS management team has experienced challenging periods in the past and the company remained profitable and achieved positive cash flow during those periods.

We ended 2008 with $52 million of cash, working capital of $58 million excluding deferred revenue and no bank debt. While there no assurances that past performance can be continued our experienced management team, the financial strength of the company and our revenue recognition model is particularly helpful during such periods.

In summary, even with the challenging economy 2008, we are pleased with the solid results we achieved last year and with our very strong financial position going into 2009. We will face additional challenges in 2009. However we believe we are in a very strong competitive position given among our other strengths our financial position.

With the growing awareness of the benefits of pricing technology, we remained confident that PROS has an attractive long-term growth opportunity. With that let me turn the call back to the operator, so that we can take your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Tom Ernst – Deutsche Bank.

Tom Ernst - Deutsche Bank

I apologize for the background noise. I’ll try to mute out while I am not talking. So, my question is I think all of us or many of us in the Wall Street un-appreciate that the customers want your product and like the product and it’s no surprise that there is delays in implementation, what I guess is surprising is that you made the high-end of your bookings target.

So, the question for you is. Was there something anomalous in that, was there one big deal? Was there perhaps an extended term contract? Or perhaps did you just make it in the fist half and the second half was very weak? Thank you.

Bert Winemiller

Well that’s a great question. Charlie you want to --

Charlie Murphy

Yes, let me take that Bert. Tom, I think you really headed here. What happen in the fourth quarter of 2008, the contracts we closed and I want to remind everyone that we did come very close to the high-end of our booking guidance, but the contracts we closed came principally in the month of December.

So, when you close business in the last month of a quarter obviously it gives you very little opportunity to get any revenue in that quarter, which we did in the fourth quarter of ‘08 and similarly there is ramp up time between the time you book the business and you actually can really ramp up and get the full benefit of those bookings in the quarter. So, we are not getting the full benefit of the bookings in the first quarter of ‘09 from the bookings we got in the fourth quarter, so that’s one factor.

The other is, we mentioned that there was one project that postponed, with hope they’ll restart in 2009, but that revenue from our guidance purposes is taken out in the first quarter entirely. Then we did have a project that delayed, as you mentioned delays are not surprising. We’ve had projects delay in the past, some accelerate. We just had, I think the convergence of basically two to three items here that are impacting Q4, at the low end of the guidance we are still very pleased with that, but I think more importantly impacting the first quarter.

Tom Ernst - Deutsche Bank

Just to be clear there was noting anomalous that inflates that strong performance in the bookings this quarter?

Bert Winemiller

Nothing anomalous, it was a standard sales process and the bookings were consistent with our historical profile of bookings.

Tom Ernst - Deutsche Bank

One follow-up question on those bookings. Where are the bookings getting the strength? Is it up-sell into the base modules or new customers? What was the source?

Charlie Murphy

I think going back to our historical metrics and this I think probably continues to surprise all of us, but we’re really staying pretty much of the same mix. One third of our business continues to come from our existing customer base and approximately two thirds of our business comes from new customer acquisition.

So, that metric hasn’t changed and we continue to monitor that very carefully and across the industries we did close, I should mention we did close bookings in all five of our industry’s in the fourth quarter.

Tom Ernst - Deutsche Bank

One more question, the margin expansion it seems to continue. That has been a multiyear trend and I think you mentioned that it was performance on deployment times. I’m curious, are you also seeing a longer-term trend towards just a greater mix of licensing revenue in that line and what do you expect to see as you look forward through a tough environment to the mix of the business on those lines?

Charlie Murphy

Yes, first let me comment on the mix. I haven’t seen any discernable change in the mix, if I take a look at the quarters last year versus the end of 2007, no discernable change in the mix. We do see situations that can impact the margins. That’s why we wanted to be very cautious regarding what the margins might be in 2009. Obviously, we did great in ‘08; we did great in ’07 as you mentioned continuing improvement.

We are cautious because if there were a delay in a project that’s obviously going to have a negative impact on our margins in the quarter. Because we’re not going to be able to react that fast to change in cost and we may chose not to react that fast to the changing cost. So, but as we go into 2009, for us it’s a period of cautious in this on our part.

So, I really don’t want to get into projecting 2009 margins, I’ll say we still see implementation efficiencies taking place. That part of the equation hasn’t changed, the product we can’t control is the economy and the impact of the economy may have on other components of our margins.


Your next question comes from Richard Davis - Needham & Company.

Richard Davis - Needham & Company

Thanks. There is a strategy, is it possible for you guys to, because I know you do kind of smaller start-up introductions in the companies. Is there a way to sell your software in smaller chunks, so that people don’t go all over and not spend any money in any large amounts, I mean then you can kind of prove out your ROI and kind inch your way in from the smaller beached?

Bert Winemiller

Great question Richard. We have what we call our color easy on-ramp sales strategy and really that involves a phased implementation were scientific analytics goes in first. That’s where we find the negative pocket margin products and customers, that’s where we show the very quick phase one ROI of our three phase delivery. That’s the example I gave, wherein 28 days we found $4 million of price raised profit leagues. The interesting thing and its still find interesting is that once a CEO or CFO decides that they are committed, they’re not interested in contracting for just the one module and just the phase one.

Now maybe in a difficult continuing and weak economy that will change, but as we mentioned a few years ago, we’ve got a lot of companies would start with only phase one and then progress sequentially to phase two ROI, phase three ROI, but it hasn’t happened so far, by the way to be clear though we do make that option available during the sales cycle.

Richard Davis - Needham & Company

And what would that price point be, if I did that?

Bert Winemiller

Well our ASP is historically been $1.8 million; that represents 2.2 products and even though I’m not going to tell you, you can divide --

Richard Davis - Needham & Company

Even I can do the arithmetic on my HP-12C. Okay, that’s the question I had, thank you so much.

Bert Winemiller

Thank you Richard.

Charlie Murphy

And perhaps I could just add one little point of clarification and that is the average ASP as Bert mentioned, the $1.8 million is out for 2008, we’re very pleased with that. We did have a few more one solution deal for the fourth quarter, not suggesting it’s a trend here. We really don’t think it is -- we think it’s probably just anomalous, but we did have a few more one solution deal that didn’t take a little over ASP in Q4 versus the first three quarters of the year. Not enough to change the overall average for the year.

Charles Murphy

We’re very open in the sales cycle to accommodating whatever the prospect, feels as appropriate to get started and get launched with PROS.


Your next question comes from Tom Roderick - Thomas Weisel Partners.

Tom Roderick - Thomas Weisel Partners

Hi gentleman, thanks and good afternoon. Maybe if I could build on the Tom Ernst question, from a few minutes ago here in terms of that the bookings that you had during the year, finished at the high-end of your range. I’m curious though, to the extent you can give a little bit of definition around it.

How much of those bookings were you able to recognize throughout the year in your revenue versus how much do you still have in existing projects as you go into 2009? In other words, how doest the visibility looking your top-line for 2009?

Bert Winemiller

Okay, I can comment on a portion of that. We said like going into 2008, we said that approximately 70% of our revenue for the year we believe has already been somewhat booked and we need about 30%.

That metric held pretty good for 2008 Tom, that helped pretty good, now what I can’t comment on is how that metrics is going to hold for 2009 beyond the first quarter and we still feel comfortable with our traditional guidance we’ve given and we talk about what portion of your guidance is already booked.

We’re still comfortable with the 90% range, but we really can’t get into what percentage might it be for 2009, because there is uncertainty relative to the economic environment that we’re dealing with.

Tom Roderick - Thomas Weisel Partners

Did you see projects lengths, the lengths of deployments? Are they holding pretty consistent or do you find that your customers are dragging projects out a little bit more slowly now?

Charles Murphy

First, I’d say the length of deployments have been coming down, that’s what’s been contributing to our improving margins over the last several years and we didn’t see change in that in 2008 as far as the overall months.

What we did see, hopefully there were anomalies in the fourth quarter, where a customer is delaying because of the ERP implementation and another customer postponing. So that’s where, we really can’t comment specifically on what we expect kind of happen in 2009, again getting back to the uncertainty in the economy. For 2008 no continuing improvements relative to implementation highlights.

Tom Roderick - Thomas Weisel Partners

Okay. Last question quick question for me. Can you offer a brief update there was a customer dispute you’ve highlighted in prior quarters? Can you just offer an update on that?

Charles Murphy

Sure, really no change. Like we commented before that, this dispute process could take us to the very end of 2009 and very likely into the first half of 2010. I’d say that doesn’t change as we sit here today. We’re all going through the motions, I think a bit slowly. I think there is any rush here, but everyone is going though the motions relative to that processing that you through. I think we’ll be talking about this in 2010.


(Operator Instructions)Your next question comes from Sandeep Madhur - J.P. Morgan.

Sandeep Madhur - J.P. Morgan

This is actually Sandeep Madhur on behalf of John Difucci. Just a couple of quick questions over here. First; if you could just talk about the maintenance renewal rate. I think you’d talked about mid 90’s. Are you seeing any pressure on that either in terms of the renewal rate or in terms of pricing on that?

Charlie Murphy

Sandeep this Charley. I’d be happy to respond to that. We’re very pleased, 2008 we maintained our historical which we think is very high best-in-class, maintenance renewal rate of the mid 90’s and that’s held very, very nicely. We did have some anomalies in 2008 just started towards the end of the year that we experienced that to September 11.

We get a few customers that come to us, that have got some situations who are looking for a little bit of relief. We provided some of that, which had no impact with all our maintenance renewal historical percentage.

Sandeep Madhur - J.P. Morgan

Second deferred revenue, I know you said that it’s not exactly the best indicator of the future quarters on business momentum. Just kind of trying to get a sense of what actually is recognized in deferred revenue? I mean what does that then mean given your percentage of completion on that part of recognizing revenue?

Charlie Murphy

Okay. Well deferred revenue, it starts with what do we bill and we bill based upon milestones and that’s where the variability comes in and those milestones do not reflect the total contract value. Milestone billings take place over a period of time, over the implementation period.

So for example, we signing a contract, we’ll get a percentage of the contract signing and then each quarter they maybe or maybe there isn’t the milestone that’s achieved, but then drives the next billing on that contract. So what drive it are the billings and then with of course the decremented deferred revenue is the revenue that’s being recognized on that project, but there is no correlation between deferred revenue and total contract value.

Sandeep Madhur - J.P. Morgan

Okay, that’s great. Just lastly, if you could just talk about, I think you mentioned your five verticals just kind of which one do you see the most weakness in relative to the others and which ones are kind of the bright spot and maybe if you can kind of give any kind of color on how big each one is? Just something that would be helpful to I guess give us some context?

Charlie Murphy

Good question. We chose once we decided to diversify from airline and travel transportation hotel crews. We chose industries that had the same pricing problems that we had already solved, negotiated deals, lots of transaction, willingness to pay characteristics by customer base, scientific segmented markets, and significant variance in service and price sensitivity, typically multiple line item deals were offer optimization.

Its important maintaining customer relationships and the kinds of transactions in pricing problems that we’ve really feel we excel at were the same ones that are the challenges of manufacturer’s distribution and service companies.

Many years ago especially right after 09/11 that’s really where we started to focus on those industries and was very earlier stage for number of the years and now we have the blue-chip customer base of the innovators that have embraced pricing excellence and price optimization, in each of those newer target industries of manufacturing ,distribution and services.

The momentum in those industries, it’s still an innovator, first mover, market and it’s still relatively small against the under penetrated market opportunity and we close deals in all five of our target industries and we don’t see any real adoption rate differentiation across the newer target industries.

So, that may happen overtime and I think the fact that there is a global economic recession and it’s affecting all industries, maybe it just affecting all industries equally. So, we’re not seeing any change relatively across any of the industries that we currently serve, but the most important thing is we’re still early stage, it still innovators. Unfortunate leader in up, CEOs and CFOs that recognize the power of pricing and as a result, we’ve done pretty well.

Sandeep Madhur - J.P. Morgan

Just one really quick last question, can you just, I don’t know if you can disclose this, but what the breakout was between license and implementation?

Bert Winemiller

No, we have not broken them out Sandeep, under our GAAP revenue recognition. We have to combine the license and implementation together and recognize both of the implementation period. So, historically we had not broken out the percentages.


Your next question comes from Ross MacMillan - Jefferies.

Ross MacMillan - Jefferies

So, help me understand, I’m a customer and I signed a contract with PROS. What commitment do I have as a customer to deploy under certain timeframe? In other words, where you see delays and postponements, to what extent is that customer obligated to start a project by certain or hit a milestone by a certain time?

Charles Murphy

Ross, this is Charlie, I’d say with the few exceptions, of course these are all heavily negotiated contracts we’re doing with very, very large companies. With a few exceptions, we actually have a no-delay provision in the contract. So, the customers cannot delay the implementation.

Having said that practically there is not much we can do, if the customer chooses the delay. I mean for a factual standpoint, but there isn’t much you can do. I would expect going forward, contractually companies in this environment will want to have provisions in the contract that they can have delays and again I would say, from a factual standpoint its doesn’t have any impact on our business because even if they didn’t have the right to delay and they chose the delay, we’re not really in a strong position. If we want to be good long-term partners we want to force them to complete their obligations of the contract.

I would say, my experience of 10 years with the company this is not been an issue. 2009 maybe different, in the fourth quarter 2008 it maybe different, but it has not been an issue.

Ross MacMillan - Jefferies

Okay, that makes sense. Maybe just as an adjunct to that, when I sign the paper as a customer, what typically is billed as a portion of maybe that contract value? In other words, am I paying for something such that if I postpone, I’m really foregoing the ROI for long-run.

I’m trying to understand from the perspective of the customer, why would I sign the piece of paper, if I then choose to postpone if you sort of mean. It would seen that if I’m signing I would want to get moving because that was already something that committed to and I will probably be writing a cheque to you for a portion of the value of the total contract.

Charles Murphy

Ross, you’re absolutely right. That’s why in my 10 years of experience at PROS, this has been an issue. It has not been overwriting consideration it just hasn’t been. If once they’ve made the decision to deploy the pricing and margin optimization solutions, they get an appreciation for high ROI. They want to finish the project.

Those delays historically have not been an issue for the company and they do sign and they do pay cash upfront to your point. So, if there is no motivation for them to delay.

Ross MacMillan - Jefferies

So, I guess the bottom line as you’d expect the postponement of delays to be a minority of cases?

Charles Murphy

Historically, it’s been a non-event.

Bert Winemiller

We have over the years, we’ve had a couple of projects that got delayed for various reasons, business reasons and that they came back. So, we’ve had a few handful over years, but one somebody recognize the value and especially if they get through Phase I ROI, so in a few weeks they see it even if they decide delay Phase II or III.

Later they comeback and it start to accelerate, but the universe of contracts, you have historically some that accelerate, some that get delayed slightly and as a result the overall average on those contracts is pretty consistent, but clearly as Charlie said, we had a couple in the fourth that made a difference.

Ross MacMillan - Jefferies

So maybe the other way to ask, you obviously had a good performance in your bookings in ’08 relative to that mid-year change guidance point. So, that was really constructive, it was at the high end of your revise range. So, if you have to think about what you think will the bigger influence in ’09. Is it going to be the absolute bookings number or will it be this kind of question on delays or performance? Is their way to think about that, like which one who maybe the bigger issue to think?

Bert Winemiller

The bigger issue for us is probably going to be the economy. Because it’s clear in these cases the concern about the economy as driving those decisions. So, we’re hopeful that the new sensitivity around pricing and margin optimization and the questioning that good analyst like you ask on quarterly calls of major industrial companies, “what are you doing about pricing? What do you doing about margins?”

We have the experience to hear historically where a weak economy correlated with more awareness of the power pricing, more sensitivity around margin and some innovators selectively invested in order to capitalize on a short time to value on our high ROI, but in this environment we’re not applying our traditional metrics and we think we’re being very prudent in the way we’re approaching the business.

Now that said, the biggest opportunity for us is manufacturing and distribution industries and when that moves from innovator stage to mainstream at eventually to a must have that and we’re even more convinced today that that’s going to happen. That every indicator of CEO and CFO awareness around pricing and margins and science-base price optimization is accelerating.

So, our confidence is even higher today that the future opportunity is going to be great for PROS and we got to mange through this period of time, manger our expenses and selectively invest our resources and assets to make sure we get stronger and emerge stronger and when the markets turns, we’re able to capitalize on it.

Ross MacMillan – Jefferies

One last one then for Charlie, just on the gross margin on license implementation that sort of peak in early ’08 and started to come down very slightly, is that just a function of some of these things we’ve talked delays, deponents where your carrying some of those implementation costs and you’re not able to hit those milestones on revenues hence the slight diminution on that number?

Charlie Murphy

Well I think that certainly way a fact in the fourth quarter because again, we had postponement and we had an implementation with was delaying. So I would agree with you, but that is a contributing factor towards margins, sort of peak somewhere around the high 74.7% I guess or 75% and currently at 72% for the fourth quarter. I would agree with that because it’s not because the efficiency is not improving, that’s not the case.

Ross MacMillan - Jefferies

Right, because you’re getting more efficient funds from some of these new verticals, right?

Charlie Murphy

That’s exactly right. I’d say it’s the revenue delay is a result of their postponement.


I would now like to turn the call over to Mr. Bert Winemiller, CEO for closing remarks.

Bert Winemiller

Thank you very much for joining the call. We are very pleased with our 2008 results. We think we are well potion to capitalize on what we think it’s going to be a terrific longer-term future opportunity. The company that you’ve invested in continues to get stronger everyday.

We’ve got great people, we got great products and we’re going to mange through this challenging time very appropriately and make sure that we invest appropriately to capitalize on what we think is a big market opportunity down the road. So, thank you very much we appreciate you taking your valuable time to listen to the call.


Thank you for your participation on today’s conference. This concludes the presentation. You may now disconnect. Good day.

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