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

Okay. Great. Thank you very much, Natalie. Good morning, everyone, and welcome to the 48th Annual JPMorgan Technology, Media and Communications Conference. My name is Jackson Ader. I'm part of the software technology team here at JPMorgan. Very pleased to have the PROS team here with us this morning. We have Stefan Schulz, PROS CFO; Matt Bennett, Director of IR. So just quickly on the format. We'll let Stefan and Matt introduce the company, introduce themselves. Then we'll jump into a bit of Q&A. If you're participating on the webcast or webinar, there's a Q&A queue that you'll see as part of the meeting functions. Please toss in some Q&A for the company. We'll be happy to answer any questions that you have. But without further ado, Matt, Stefan, please. Just spend a couple of minutes, introduce PROS and yourselves and the company.

Sure. Stefan, would you like to start?

Sure. Good morning, everybody. Jackson, thank you very much for hosting us here. And my name is Stefan Schulz. I'm the Chief Financial Officer at PROS. I've been with PROS a little more than 5 years now.

Good day, all. My name is Matt Bennett, and I'm the Director of Investor Relations with PROS. And Jackson, thank you to you and the JPMorgan team for having us today. This is our first virtual conference and it's really been fantastic and it's been a great experience. I've been with PROS for over 6 years, prior to IR working in our professional services team as well as our strategic consulting team, so close to our products and capabilities. And Jackson, to your first question around kind of giving an overview of who PROS is, we are an AI software company that's focused on providing AI-powered solutions for the digital economy. So we're focused today on powering this transition and the shift to digital commerce for companies of all sorts and sizes in B2B and travel. But I'd like to start a little bit with what our heritage is. And in 1985, our founders, Ron and Mariette Woestemeyer, saw an opportunity amid deregulation of the U.S. airline market. And they saw this opportunity to apply data science and algorithms to help airlines deal with new problems such as overbooking and demand forecasting and revenue management. And we went on to pioneer and lead a lot of innovation in the revenue management space, figuring out very sophisticated ways to give airlines a competitive advantage when it came to forecasting their demand and optimizing the capacity of their flights and of their routes. And we've now come to really dominate in the global markets with a very significant share of the international airline carriers as well as several in the U.S. And in the early 2000s, we diversified our business and got into the B2B space. We saw some similarities around the opportunities for dynamic pricing and algorithms in B2B opportunities. So today, we now serve customers, leading companies across automotive, food and consumables, health care, technology, energy and chemicals, cargo and logistics. And in 2015, we started our cloud transition. And this was a big shift for our organization, and we took the opportunity to really reengineer and re-architect our solutions and capabilities to prepare companies for this digital shift in the e-commerce trend. And today, we're now focused on end-to-end commerce, whether that's pricing optimization or the configuration, pricing and quoting of offers, interacting with customers in a digital manner. This is all -- these are all some of the capabilities that our solutions support. And innovation is still core to who we are today, and we're really excited about what's ahead. We think that the current environment today around COVID-19 is really going to provide an opportunity for companies to look at their digital capabilities and power their sales motion. And there's going to be disruption in markets, and we're excited to help customers take advantage of this disruption and come out stronger than ever before. So with that, I pass it back to you.

Yes, that's perfect. Thanks for that great overview. Can we dive in a little bit on to travel, travel and airlines? That's obviously in the headlines today. And I think, Stefan, you mentioned the last time that the company disclosed the breakdown, it was about 40%, 45% of the business. So what is it that you're actually doing? You talk about forecasting seat demand and trying to manage overbooking. What is the fit -- PROS is actually doing for these airlines? Because I think a lot of people are familiar maybe with ticketing or maybe with bookings engines, but what is PROS specifically is doing for the airlines?

Yes. So Jackson, first of all, the COVID-19 impact has impacted just about every company around the world. And our hearts go out to them, but especially to the good portion of our customers, I think you just referenced the 40% to 45% of our revenue base is in the airline space. And so what we do for those -- for the airlines is we help them, as Matt alluded to, is we help them forecast what their demand is going to look like, both on tomorrow's flights and also flights for the next 365 days. And we're not just forecasting the flights they have. We're also forecasting routes that may or may not develop. And so we're helping them optimize planes, helping them optimize pricing, and we're helping them figure out how they're going to be as optimal as they can and make sure they've got the right number of seats available for some of their higher-profit travelers. And what we've done now, since the -- in the last few weeks as it relates to the impact that COVID-19 has had, is we've spent a lot of time with our scientists and our engineers working together with our airline partners in helping them adjust to this new reality. And as you might imagine, there's things that we have to build into and tweak within the models to help them understand and work within this new reality. And those are some of the things that our team has done and very early in reaching out. We've hosted a number of webinars to help with broad-based -- to help, in a broad-based way, help our airlines deal with this new reality.

And how are the airline contracts actually structured? Is it based on the number of seats that PROS is forecasting? Is it based on the number of flights? I mean, how is it that PROS remains on this kind of subscription nature even while most flights are grounded?

Yes. So airlines, and not unlike a lot of other customers, want predictability in costs. And that's something we heard a long time ago. And so we structured our pricing in such a way that, that provided that kind of certainty, if you will, or predictability, I should say, in the cost line item. Now that works against us a little bit in a rising environment, but it works kind of for us in a declining environment. And so having said that, we do understand that when the airlines and us got into a contractual relationship, I don't think anybody predicted what we -- who we'd be dealing with in terms of a global shutdown of travel. So we have been working with our airline customers in some capacity, typically around their payment terms and offering some relief in terms of payment, just simply because their cash flows have been [ decimated ].

Sure. So I certainly want to get into what the steps PROS has taken to -- for your own internal operations for COVID, but one thing that you mentioned, Matt, was in the early 2000s, going into the B2B space, what is it about these particular verticals that make sense for price optimization or dynamic pricing for the -- B2B is so broad. So what is it about those specific industries that makes sense for what PROS does?

Sure. Great question. So when it comes to pricing optimization, there's really a broad array of challenges that we can solve. When we're thinking about are we going to focus on a direct sales channel, a digital channel -- so e-commerce -- or a partner channel as well. So we provide pricing optimization across all of our B2B verticals, whether it's chemicals and energy, where we're very focused on competitive environments, or whether it's cargo and logistics or food manufacturers, industrial distributors and manufacturers. So some of the consistent attributes where we see pricing optimization really being a sweet spot are things such as the ability to control pricing dynamically for customers to accept that, thinking about a lot of transactions. So we support significant scale for some of our customers who are looking at millions of transactions per year. We also work in environments where there's lots of customers and products. And if you think about the permutations that are possible there, we want to make sure that we're delivering the right price for that right product to the right customer at the right time. We also do look at the omnichannel, the omnichannel perspective, and then also configured offerings. So the way that companies go to business now is changing. So whether it's driving a configured offering or subscription agreements, you want to think about how you can best serve your customers.

That's great. Yes, that makes a ton of sense. High transaction volume, large list of SKUs, right, is something that we hear from customers a lot. So that makes a ton of sense. Stefan, can we just talk about the COVID impacts that have happened on PROS' internal operations? You talked about, I think, the headline impacts on your airline customers are an obvious unknown, but what has PROS done internally to try and make this as little disruptive -- disruption as possible for your employees?

Yes. Jackson, that's -- I'm glad you asked that question, because I feel like our PROS team has responded in an outstanding fashion. And I really mean I had some reservations, quite frankly, when we made the decision because I think a lot of us on the call here were in the same boat where it just seemed like every day the environment was shifting, and before we knew it, we were not going into the office and working remotely. But looking back on it, one of the things that our team really did a tremendous job of was preparing for this. And a lot of you know that our company headquarters are in Houston. And we have had the opportunity, if you can call it that, to work in some situations that we've been involved, a local disaster like Hurricane Harvey. And we learned some valuable lessons about how to work remotely, how to make sure we have the right amount of bandwidth and capability and communication. And communication is so important and our teams did a tremendous job of communicating and working together. And our IT teams did a tremendous job of ensuring we had the right level of communication equipment, bandwidth, ports for our VPNs, and the list goes on and on. And I can add to it our office services team who ensures that physical mail gets to the right people [ on time ] so we don't miss a payment is -- we're looking for. So I would say our team has done tremendously well, and to my surprise, as I said earlier, Jackson, I think I looked across the board, I don't see where our business has missed a beat. We raised some examples where we actually did a very sophisticated implementation for one of our Japanese carriers, ANA, and we went live with a revenue management solution, which is an extremely complicated implementation, and we did that virtually and we've highlighted that. And we've also helped a lot of companies, as we've talked about, either in a broad-based webinar or in kind of one-on-one consultation. Our professional services team, our customer success teams have really continued to support our customers and help them as they go through this environment. And as I look just across the board, from a development perspective, from a customer support perspective, from a selling perspective, our teams have not let this get in the way at all. And they've really performed very, very well. And I'm surprised at how successful, how efficient we've been able to do it. And I think that's probably more of a statement about me being an old school guy than anything else. But we've done remarkably well.

Luckily, we have a former professional services professional here joining us, Matt. So the implementation times, I think Andres has, the PROS CEO, has talked about the time between the handshake to implementation has compressed dramatically. A lot of that has to do with the deployment mechanism now going to the cloud. But Matt, as you think about what the difficulties are in implementing a revenue management at ANA, what are the major workarounds that a professional services team is going to have to utilize during this time to keep those implementation times within an acceptable range?

Sure. And I think this has been a topic that we've really focused on over the past few years, has been accelerating our time to value for our customers. And it's nothing new. We've been supporting our customers in implementations remotely for years, significant milestones such as kickoff and solution design and go live. Those have been typically done in person for those types of readouts and kickoffs. But we've really seamlessly transitioned. Andres and Stefan mentioned on our earnings call that was -- that Nestlé and thyssenkrupp were new customers in Q1. Those projects have been entirely kicked off and implemented remotely thus far without a hitch. So to your point around the SaaSification of our solutions, now being able to co-configure alongside our customers, we've made a lot of progress in our data preparation capabilities with our cloud solutions to make sure that we can get started and compress that time line even faster. So those are some of the elements that we're taking advantage of, of course, leveraging Zoom and Microsoft Teams and the latest collaboration and communication tools as well.

A quick question that came in from the audience, Stefan. You talked about some of the financial impacts of COVID-19 that you're expecting in the second quarter. But the question really gets to a worst-case scenario or how bad could it get. So what financial assumptions are baked into what you're looking for the second quarter? And what could we expect going forward in terms of downside scenarios for the airlines?

Yes. I mean, first of all, and I'm sure you're not surprised at my answer here, it's hard to tell, right? It's hard to say how we are all going to come through this and what the consumer behavior is going to look like. But it's hard to imagine the airline industry being hit harder than they have. And many airlines have just completely shut down operations completely. Others are down something like 90%. And so that's a pretty devastating blow to anyone's business. And -- but what we've seen is we've seen airlines react. We've seen them look for ways in which they can be on the front lines of supporting customers and getting customers to be back comfortable flying, with how they're arranging their cabin configuration, their seating configuration, how they're doing the cleaning and disinfecting and the like. And so I see airlines doing everything they can to make it -- the people be more comfortable to fly again. And it really comes down to consumer behavior and how fast governments open up and how they come back. I think the other piece that plays into this is what are the local governments around the world going to do to support these airlines that are -- that have hit these hard times? How much of a bailout are these airlines going to get? And to the opening comments we had, we have airlines all over the world. And so I think one of the challenges for us in looking at our revenue projections going forward is, all right, how are all the different countries going to react to the different flagship airlines that they -- that represent their countries? And that's a -- that's difficult to predict at this point in time. But I think getting to the heart of the question, for us, it really came down to stepping back and looking at our entire portfolio. And by the way, we looked at more than just our travel customers. We looked at all customers, and we did a pretty thorough assessment of the health of the industry they're in, what their financial profile look like. And we decided to put a reserve that we put towards our guidance for the second quarter. Now that reserve is not a final number. It's an estimate on our part. And there's an assumption in there that some of these businesses may not make it. Now the reality is, I think a lot of these businesses may decide to declare bankruptcy. We've seen a couple around the world already do that. But if that were to happen and they were to reorganize their business, there's a very high likelihood -- as a matter of fact, in our history, every time one of our customers has declared bankruptcy and reorganized, we've been deemed a critical vendor, which isn't surprising given what we do, right? We provide the forecasting, we provide the price points to help them be as efficient and optimal as they can in flying their planes. So without us, it'd be hard for them to even price a ticket for the next several days. So they really need our solutions in order to do that. So that gives us some confidence that even in those scenarios that our business will continue and will continue to get paid. So -- but again, these are very uncertain times and predicting how this is going to unfold is very difficult.

Yes. What about B2B segments? Are there pockets of strength? Are there particular pockets of weakness that are more impacted than others?