PROS Holdings, Inc. (PRO) Earnings Call Transcript & Summary

Everybody, thank you so much for joining us today. My name is Stan Zlotsky, from the Morgan Stanley software research team. And with us today, we have the pleasure of hosting PROS. Stefan and Shannon, thank you so much, guys, for joining us. Before we get started, a quick note. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk.

So guys, just to kick things off, we're doing this for all the companies that we present this year at the conference. With all of the noise out there with the virus going around and you guys having some exposure to the travel industry, what are you hearing out there? I'm sure you're obviously paying attention to what your sales and your customers are telling you. Give us a little bit of just what you're hearing out there.

Yes. So Stan, first of all, thanks for having us. We appreciate being here. I'd say, we've been in the airline space now for over 30 years. We've seen situations similar to the coronavirus in our history and our first order of business, our first priority is, how can we help our customers navigate through this changing time. As you know, we have a tradition and a track record of building forecasts and adjusting those forecasts as circumstances in the environment shift. And so that's where our first focus is right now is how can we help our customers adapt to these changing conditions. And that's -- we have people on the ground at our customer sites now working with them on those types of opportunities, if you will. Now in terms of how it impacts our business, one of the things that we have going for us in terms of how our business is structured is we're -- as you know, we're a SaaS business, we charge an annual fee for our SaaS products, but we're not necessarily a volume-based software solution. So what that means is we're not necessarily subject to wide swings in either positive or negative momentum. Only just a handful of our products have that type of exposure, and that's a very small component of our business. So when we gave guidance a couple of weeks ago, we were asked a similar question. And our answer is, as long as this is more of a temporary in nature type of an environment, we don't really feel a tremendous amount of exposure from it. However, if this is more of a prolonged type of a scenario, we can see a scenario where maybe people change their investment patterns and that could have a different impact on our business from a growth perspective. But in terms of us being impacted negatively, like some of the companies who've announced recently, we're not impacted like that.

Okay. Well, that's great. And I think that provides a great segue into just what PROS is. So when you talk to companies, right, today and a lot of times, they adopt PRO solutions as part of a broader digital transformation strategy. When you look at your 2020 -- just put the virus aside for a second, right, when you look to your 2020, how are you thinking about these -- this pace of digital transformations and how does PROS play into that?

Yes. So I mean that is core to our vision and where we want to go as a company. We've spent many years developing algorithms and automation capabilities that are helping companies, but we've really, in the last, call it, 2 to 3 years, really have pointed those solutions in how we can help companies transform their digital channel. I'll characterize it this way, just about everybody has a website and more than likely, they also have some sort of commerce capability on that website. The challenge is, how effective is that channel at driving traffic. And one of the bigger challenges that companies face, especially on the B2B side, is how do you put the price point that the buyer is expecting to see in a way in which that would promote them or -- and encourage them to actually conduct that transaction. That's where we help. We can help companies identify in real-time fashion what that price needs to be so that the e-commerce channel will become more realistic. Otherwise, if it's a list price or if it's some random general discounted price, most buyers, especially corporate buyers, are not going to settle for that type of a price point and either not finish the transaction on that e-commerce channel or potentially go to someone else or pick up the phone and call, which is growing -- that kind of a transaction is growing to be less and less of a desired way in which buyers are wanting to buy. So that's a big part of our strategy. And it's been, I'd say, as you look at our 2019 results, that was a big reason why we had such a strong year in 2019 as we're seeing the fruits of that strategy starting to pay off. And we think that's going to happen as we go into 2020 and beyond.

Perfect. And the business, if you back up, right, historically, was very much tied to airlines and travel, but now you've really branched out, right? And you've really levered your AI platform to apply it to well outside of the travel industry through your CPQ and your e-commerce solutions to really a much bigger piece of the overall business world, right? Can you give us a little bit of background of where you are today as far as what part of the business is travel, what part of the business is outside of travel? And how you think about the market opportunities in those 2?

Yes, absolutely. So today, travel is about 45% of the business from a revenue standpoint and B2B is about 55%. And when we talk about B2B, we're solving use cases for customers in the areas of cargo and logistics, high-tech, health care, automotive, industrial, oil and gas, chemicals. So very broad use cases. But what's common amongst a lot of them is the opportunity to buy and sell frequently. So these are very dynamic industries where there's multiple opportunities to sell, multiple opportunities to price and that's where the solution really works well. And in terms of the market opportunity, we address a target market of $9 billion, about $1 billion of that is travel, $8 billion of that is the B2B space. We view our TAM as being much broader than that, but we have go-to-market teams really focused on the B2B side in those industries, which account for that 8% -- or I'm sorry, that $8 billion on the B2B side. Long day of talking. Sorry.

No. It's, yes, that tends to happen towards the end of the day. So when you think about the remainder, right, like everything outside of the $9 billion, right, how do you go after that, which is a much, much bigger chunk, right, what does it take to go after that, the big remainder?

Yes. I think it's moving beyond the target industries we're addressing today in the target geo. So when we talk about that $8 billion in B2B, it's predominantly focused on the U.S., certain parts of Europe, Australia and New Zealand. But over time, as we look to further penetrate that TAM, building out either the go-to-market teams or reseller relationships in Asia, in South America, that presents a big opportunity going after other industries, where we've seen success already, like insurance and telecom, where we have customers today, putting more dedicated focus there, would start to open up those other markets. But even today, we do have a team -- our strategic accounts team that's dedicated to taking those opportunities as they come inbound. So that way, if and when we do have customers in these verticals, where the solution works well, we get the opportunity to start getting some of those use cases in, get more learnings from them. So ultimately, over time, as we want to branch out the team, we really, we have that foundation, we have that knowledge, and we can really leverage those use cases and those customer examples.

Got it. Well, let's maybe -- let's take those 2 things separately, your travel business and your B2B business, the 45% and the 55%. On the travel part, specifically in airlines, right, you guys have been a leader in that category, both from an innovation perspective and also from a market share perspective for a very long time. But when we talk to partners and just doing industry checks, there are other competitors that are starting to kind of pop-up in the market space, specifically for airlines. What are you guys seeing out there as far as competition in the airline space?

Yes. So the airline space has always been an attractive space. And you're right, we do see -- we are seeing companies want to invest more in being a part of that industry. But for the most part, our competition for the products in which we provide are similar in there, the, what I'll call, the usual suspects, primarily the GDSs that we compete against. But you said it earlier, Stan, our focus, and one of our key differentiators, is how much investment and how much we partner with our customers in coming up with our next ideas. So our customers in the airline space are some of the most sophisticated and most advanced technology users in the world. And they love to partner, and we love to partner with them on ideas and innovations that we can do to take our technology a step further, to take our science a step further. And oftentimes, they become launch partners for some of these new ideas that are kind of combined -- are the result of combined minds coming together. And that's really fueled a lot of our latest innovation, whether that be in the RM space or revenue management or whether that be in our Group Sales space or in our Real Time Pricing space. All of those have come as a result of tight partnerships with our airline customers and having them be a part of our launch program in helping us work out the details so that we can have a viable go-to-market product.

Got it. And are there, specifically within the airline and maybe probably broader in the travel space, are there any specific competitors that you've really seen trying to make a more aggressive move or somebody that maybe comes up more often in RFPs than in the past?

From a travel perspective, it's -- no, not really. It's been the same -- it's just been the same suspects. Like I said, it's primarily the large GDS providers.

Okay. Great. Staying with the airline space, you recently made an acquisition of Travelaer to really complete your broader e-commerce cycle capabilities, right? What is the market opportunity that you're able to address now with this pickup?

Yes. I think it positions us to further penetrate the travel space. So if you think of what we've done in the travel space, historically, it's been about powering the back-end experience. So providing the intelligence to get to the right forecast, to get to the right price. With Travelaer, it really helps us connect the front end to you. So as the airlines are trying to use their mobile experience or the web and they're trying to figure out what to display and when and how to really provide a winning customer experience through their own airline-dot-coms and direct channels, which are the most cost-effective to them, this enables us to really help with that process. So we're able to kind of connect what we've been doing in the background with the front end. So from a TAM expansion standpoint, I think, this just better positions us to go after the overall travel space.

Does this acquisition shift at all the competitive landscape in this space to maybe bring in a new group of potential competitors?

Not really. I mean to a certain degree, could you see, kind of, Spiralogics or -- but could ultimately be Sabre there, yes, a little bit more on that end. But you still see predominantly the GDS players also looking to penetrate in this space. So I think it's more so chipping away from other areas, where maybe they are looking to sell a broader portfolio into the airline space.

Got it. Maybe just more broadly, how do you guys think about your M&A strategy, right, in terms of building out some of this functionality natively versus maybe going out and buying somebody?

Yes. So our -- we have a very specific M&A strategy, and it's mostly around how do we complement the technology, to your point, that furthers our vision around our strategy of really being the AI that powers commerce in the digital economy. That's really what we're going after. So things that can complement our existing capabilities to further our lead in that space is really where we focus. But it's not just there. Technology is the first step that we need to make sure it's a nice complement, and it's very much in alignment with where we want to go strategically. But there's also another important component and that is cultural fit. PROS really values culture in our organization. And I think, if any of you who have had an opportunity to spend any time with our people, you see it immediately. I saw it when I joined the company and, I think, we still have it today. And that's an important dimension that we look at when we look at strategic M&A, and that is: one, making sure that we have the right fit from a technological perspective that it's really going to move the needle in terms of where we want to go strategically around digital commerce; and second, that it's not going to disrupt the culture that we've built over a longer period of time. And we feel like if we have those 2 pieces identified and pulled together, the acquisitions have a much higher rate of success probability. And that's certainly been the case with the deals we've done so far.

Got it. That makes sense. Maybe switching gears to the B2B side of the business, right? And the much broader opportunity that you have on the B2B side, right, what are some of the low-hanging fruit that you guys are looking to go after in order to go -- in order to attack that much bigger addressable market? Maybe what are some of the geographies or verticals that you're looking to really attack immediately, I mean, but most immediately?