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

All right. Great. Thank you very much for joining us at the 49th Annual JPMorgan Technology, Media and Communications Conference. My name is Jackson Ader. I'm Software Research Analyst here at JPMorgan. Very happy to have PROS Holdings with us today. We have Stefan Schulz and Belinda Overdeput here from the company. Why don't we just start with maybe an overview a couple of minutes and then -- if you want to introduce yourselves and the company, and then we can get into the fireside chat. So Stefan, Belinda take it away.

All right.

Well, thank you, Jackson. I'll just say a quick introduction. My name is Stefan Schulz. I'm the CFO of the company. I've been with PROS now for a little over 6 years. And Belinda, I'll let you introduce yourself and take us through a little bit about who we are.

Sure. Sure. So I'm Belinda Overdeput, I've been with the company about 8 years, and I currently lead IR, but before that, I spent a lot of time with our B2B customers, in our customer success and professional services department. So I definitely happy to just give color in that area, but let me start with the company overview. So at PROS, our mission or our vision, rather, is to optimize every shopping and selling experience. And we got our start in 1985 amidst the deregulation of the airline industry, where our founders kind of set out to help airlines leverage data science and algorithms to manage overbooking and ultimately effectively manage revenue and improve customer experience. And so now we're happy to say that we help support pricing and revenue management for over 60% of the passengers globally in the airline industry. Now in the early 2000s, we moved the earnings that we got through working with our airline customers, and we started another segment of our business, which is the B2B side of our business, supporting other industries that have that type of volatility in pricing and demand, like manufacturing, distribution, services, health care, high tech. And then in 2007, we went public. In 2015, we transitioned to the cloud. And now we are a SaaS business. We are about $248 million in revenue and about 85% of that revenue is recurring. So definitely a very healthy SaaS business, with a total addressable market of about $30 billion, that is largely underpenetrated. So I'll kind of leave it there, and we can get into it. Yes.

Yes. Wonderful. Thank you, Belinda. And I should mention, before we get into -- too deep into the Q&A. If any attendees or investors, you see the ask question button right there on your -- on the conference portal. So anything you want to ask that I may miss or pop up on of my stream I will be happy to ask. But I mean, look, I mean, you mentioned that you grew up in the airline business. Airlines, very difficult 2020, just give us the lay of the land, what happened, what you saw, and now you're probably in one of the better positions to be able to tell investors what you're seeing the demand coming back in 2021. So just an overview of what you're seeing in travel?

Yes, sure. So you're right, Jackson. The 2020 was about as hard of a hit that an industry could take in what we saw in our travel customers. The traffic just pretty much came to a standstill. The good news is though that they reacted quite fast to the pandemic. The governments did step in and provide some support. And for many airlines, most of the airlines are still operating. And what we're seeing now, to the point you are making, is we are now starting to see a recovery, especially in certain pockets of the world. So here in the United States, you're seeing a lot of leisure travel coming back. And we're also seeing that in some pockets within Asia. Now we're not seeing it. We're not seeing the leisure bounce back as much in Europe and in the Middle East. They're not as far along with the pandemic relief and recovery as the U.S. is. But across the board, we're still seeing a bit of a slowdown on the corporate travel. So the business traveler still has not come back yet. And so that's a big part of the airline revenue and profitability, as you probably know. And I think, it just it be a little bit more time before we start to see that start to happen.

No, it's not as if PROS get $1 for every traveler anyway, right? It's not like, oh, airline revenue to down 85%. PROS' airline revenue down also down 85%. Can you just walk us through the mechanics? How the company is protected on the downside, but might also be able to participate in the upswing?

Yes, sure. So for the most part, our contracts are fairly stable. Meaning they don't go up a lot in really good times, but they also don't come down a lot in really bad times. And the reason for that is we optimize around primarily -- we optimize around several different dimensions, but primarily 2. And the 2 that we optimize around are the population in a plane. So in other words, how many seats are filled by leisure travelers or weekend travelers versus business travelers or travelers that may be making more profitable connections like from one city to another domestically and then overseas. So there's things that we're doing to optimize the seats on a particular flight. But the other thing that we do is we help airlines optimize RASKs. So in other words, they may be taking a certain route. And let's just take Boston to Los Angeles, as an example. That may be something they want us to take a look at and see how they can optimize around that. In other words, do they need another flight? Do they need where it is? Or should they be thinking about Boston to Seattle. They may not be taken on a particular flight at this time, and they need to think about how to look at that. So when you think about the dimension that you were just talking about that the passenger volume, that's only part of the equation. Because even when passenger volumes go down, we're still looking at all the different flight segments that the airlines could potentially be looking at and helping them to make a decision about whether they should be making those routes or not. Or how much -- how many planes they should dedicate to at a certain route. So that's one of the reasons why you see us being a little bit more stable in terms of our revenue. Now I will say this, we did decide, in some cases during 2020 that the impact of the pandemic was so hard on some of these airlines, we decided ourselves to provide some concessions on the contracts, even though the contract itself didn't lend itself to any sort of lower revenue or lower payments on our part. We made the decision to lower some of those just simply because it was such an egregious hit to them.

Yes. Yes, that makes sense. What -- I mean, magnitude was -- how many travel customers did you have and how many concessions roughly did you have to make?

Yes. So I would say in terms of actual concession, you're probably looking at 15% to 20% of the airlines. Had that not every airline we made a concession to, it depends on where they were in their contract, dependent on a number of factors. Most of the concessions would have been to relatively new carriers that had just launched with us. And obviously, there was a difference in what they were thinking just a few months earlier and what they were dealing with in reality. Some of them were more graphically oriented because of -- it was -- certain geographies were hit harder and didn't receive any sort of support but it was only about, let's say, 15% to 20%. A broader number did receive other forms of concession. You may remember, we offered some delayed payment capabilities, for example, where an invoice would have been due in 1 month and we gave them a few months later to pay that, but did not impact the revenue. The total amount, by the way, I think that was part of your question of how much was our revenue impacted by these concessions, and it was about $18 million, which was a combination of the concessions and bankruptcies, which is another form of concession, really.

Sure. Yes. But then as we start to get back, even if it's not necessarily to pre-pandemic travel levels. But as people start to travel again, again, how is PROS going to be able to capture a little upside? And then also, I think importantly, what type of behavior or products that PROS offers are now going to be front and center as travel comes back?

Yes. So without question, we're really happy to see the pockets of the world where we're seeing the recovery coming back because that's a great leading indicator to what is in-store for us. And so think about it in 2 different aspects. The first aspect is we start recovering some of those concessions that we offered. And we've talked about that $18 million, while we won't get all of that $18 million back because of the bankruptcies and what have you, we'll get a good portion of it back, better than 50% back over time. Now the passenger volume that you referenced came back is a leading indicator. I would say we're not thinking and we're not projecting that to really happen to any significant degree in 2021. We're thinking most of that's going to come in 2022. But that's the first element. The second element is starting to see airlines make investments in their business again. And we are seeing that. We saw, for example, last quarter, Breeze, which is a brand-new airline in the United States that's launching. Actually, I think they're about to make their first flight here in the next couple of weeks. And so we're excited to see that take off. And they leveraged our revenue management solutions to start their business. And we're excited about their business model and what that might mean for domestic travel anyway. We also had a recent win with United, which is obviously a great win for us and one that we've been -- quite frankly, a customer we've been pursuing for a long time. And so we were very happy to see that. And so as airlines start to feel more comfortable about the business, they'll start making those investments, which is another way for us to expand. And I think you asked, okay, so what are some of the things that airlines are investing in. While I can't get into specifics around what United decided to do. I can say that there's been a number of new innovations that our travel team has come up with. And probably the one that we talk about the most is around dynamic offers. And that is really a custom-tailoring offers that airlines can make directly from them to you as a potential consumer and tailoring those offers into the kind of the criteria that matter to you and the things that will help you make a decision about flying or not flying. They now have more information to have more flexibility on some of the things that they can do from an experience perspective. And now the question is how do they make PROS accessible to you that you haven't been able to access before. In that way, you have -- they can build more loyalty, they can build a personal relationship And hopefully, more business as a result of it. So that's one of our newer products that we're very excited about launching with our customers.

Do you think that -- a couple of years ago, you made the acquisition of Vayant, which was around kind of travel merchandising, let's say, or being able to merchandise a single flyer as more than just price per seat, right? Do you think that airlines could potentially be more aggressive there in the merchandising aspect as we come out of it?

Absolutely. Yes, that's absolutely a part of it. No question.

Yes. Okay. Now so you mentioned United, I want to -- we'll come back to United a little bit because I think that's exciting, and it's always nice to be able to penetrate one of those big 3. But we've hardly spoken about the B2B, the other areas outside of travel. So either Stefan or Belinda, whoever wants to take it, what are the nontravel verticals that make the most sense for PROS' price optimization software?

So Belinda, I'll let you take that one. I've been talking about a bit. I'll let you take that one.

Sure. Yes. So we see strength across a wide range of industries. Especially over the last year or so, I think certain industries that stick out are like manufacturing, distribution, health care, seeing a lot of need for companies, in general, across the board, to shift to digital selling from direct sales as they kind of come from the pandemic and kind of lean into that digital world through all the learnings that I think we've all experienced in 2020. So I would say those are big themes, but I would also point out that lately, I think we're seeing a lot of movement and a lot of pressure in the commodity space, and our solutions also play very well there. Given our real-time dynamic pricing is able to react to changes in market conditions or indices or third-party data and adjust and in real time, kind of send that feedback in and calculate a new price so that you're constantly staying ahead as a business of the changes going on in the macro environment. So I'd highlight that as kind of something that we see coming up a lot more in a very recent time frame. Yes, really across the board.

Yes. So I mean, without something like PROS, how would a commodity buyer or seller have reacted to these types of price spikes in the past? Andres went over this, I think, on the last earnings call, but I think it's worth kind of repeating, again, what people used to be doing and what they can be doing with PROS?

Right. Well, I mean, I think before, it was very slow, right? You're kind of consuming the different data from the different endpoints. You might be managing these things in Excel. You might be connecting with multiple teams at your company versus what our solution gives you is the power to kind of integrate all of your data sources into one place and manage it from a centralized hub and then distribute it across all of the various sales channels and endpoints that you might have. And so it's quite a hard challenge. I think, for commodity places or commodity businesses to solve without a solution like PROS and at least be able to capture the amount of ROI that they're looking for as they go out and try to win their markets.

And how quickly should we -- we think about the balance of growth, right, Travel, very challenged at the moment, obviously, but the company is still looking to grow year-over-year. And obviously, that's going to be led by B2B. But on a normalized basis or as we kind of think about the business in a 3- to 5-year time frame, how quickly should we be looking at the B2B segment in terms of its growth profile?

Yes. So Jackson, when before COVID became a part of our lives, we were -- we probably had the best year in the company's history in terms of growth in businesses being -- business that was book. And then we were looking at a B2B business that was in the almost 30% growth in travel that was looking in the call it the mid-teens growth rate. We see no reason we can't get back there. And as a matter of fact, as I think about how we're positioned from a market perspective, we feel like we're better positioned now than we were back then in terms of our capabilities. We continued to invest during the pandemic. We cut a lot of areas with our expenses, but we didn't cut our R&D. We continued to invest in our product set. I would also say that as we've gone back and analyzed how we go to market and how easy it is to do business with PROS, we made some changes. We're continuing to make changes to make it easier for us to -- for customers to see our solutions, to purchase our solutions and to implement our solutions. So we really feel like we're actually better positioned now than we were back then. And so going back to our longer-term growth profile, we see getting back to at least those levels. Now your question of when do we see that happening? I think let's set travel aside because I think that's probably going to be sometime in 2022 before we really start to see hopefully, all regions around the globe kind of firing on all cylinders, so to speak, and the business traveler coming back. But on the B2B side, I would say -- we feel like that we can see signs of that being replaced by the end of this year.

Were there any industries in those -- in the B2B segments that actually saw tailwinds? I think you mentioned distribution, but I'm just thinking about logistics maybe that actually saw tailwinds from the pandemic?

Yes. Yes, go ahead, Belinda. Go ahead.

I was just going to say logistics is a big one. I mean, health care, obviously, I mean, we saw actually a lot of our health care manufacturing types of companies were, of course, had a lot more demand than they were probably expecting for the year. So those are big wins. And then I think manufacturing more so as we entered 2021. I think the first part of the pandemic, they were trying to figure out how to operate their businesses without most of their employee base on site. But now that they've gotten through that, now we're trying to think about, well, how do I actually sell my products to my distributors and my partners without having that human-to-human interaction and looking to kind of different coding processes online and there's a greater interest in our solutions to enable that, especially in the last couple of quarters.