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

Good day, everyone. Welcome to our second day of Bank of America's Global Technology Conference. I'm Bank of America's European tech research analyst, Victor Cheng. In this session, we are delighted to have Stefan Schulz, PROS CFO; and Belinda Overdeput from Investor Relations at PROS joining us today in this session. And just quickly to start, Belinda or Stefan, can you give us a quick brief overview of the company for the audience, please?

Sure. I'll go ahead and give a quick intro. So we're PROS Holdings. Our vision is to optimize every shopping and selling experience. We serve primarily B2B and B2C businesses. On the B2C side, that's mostly airlines. We got our start in 1985. Amidst the deregulation of the airline industry, our founders set out to leverage data science and algorithms and machine learning to manage overbooking of fares and optimize revenue management and customer experience. Since then, in the early 2000s, we kind of took all of our learnings from airlines and servicing them and entered the B2B market, servicing industries such as manufacturing, distribution, health care and technology and chemicals with our products. In 2007, we went public. In 2015, we actually transitioned to the cloud. And now today, we are about a $248 million company, with 85% of our revenue as recurring. So we are a healthy SaaS business. And we have a total addressable market of about $30 billion that is largely under penetrated. So I'll wrap up the intro now. We can go on to questions, Victor.

Perfect. So just jumping into the questions then. First of all, a lot of people obviously are talking about accelerating digital transformation post-COVID. And obviously, your B2B solutions, for example, like Smart CPQ and guidance and control naturally play a key role empowering shift to e-commerce. But however, on the flip side, we also see there's some lengthening of sales cycle and some of the initial deal size being smaller with customers. So how should we reconcile this? And what should we expect the demand for AI-based solutions? When should we expect that to reaccelerate?

Yes. Victor, this is Stefan. I'll take that one. Also, I just want to thank you for having us here. We're delighted to be here. But it's a good question because I would say when do we expect to see the AI-based solution base reaccelerate? I'd say that's actually happening now. All the things that you mentioned about sales cycles lengthening and us responding with smaller deal sizes so we could go through the approval process easier with our targeted prospects and customers. We're seeing that trend shift back to what we were seeing pre-COVID. And while we're not all the way back to where we were pre-COVID, we're certainly seeing signs in that area. So as we exited 2020, as we got into 2021 in the first quarter, I'd say sales cycle started to be reduced. We're seeing our pipeline get healthier and stronger, and we're seeing a much better engagement with our prospects and customers now. So I think what happened during 2020 was when the pandemic hit, we saw a lot of our companies really refocus their digital efforts to internal operations. In other words, how do they get their employees to be productive in a virtual world. Once that took place, and they took care of all the video conferencing and all the digital workflows and things of that nature addressed, they're now turning their attention back to e-commerce and to the digital transformation that relates to their go to market. And we're certainly seeing that and feeling that with what we saw as we ended 2020 and now, like I said, getting into the first quarter of 2021.

Got it. That's clear. Just to also think a bit more near term and other aspects of recovery. When do you expect to recoup some of the impact that you have had with some of the contract restructuring that you did last year due to COVID?

Yes. So we talked about an impact from bankruptcies and from restructurings of about $18 million on our revenue base, and we talked about that in the 2020 time frame. We're still feeling most of that effect right now. And what we said is a lot of that has the opportunity to come back, not all, but I'd say most of it has the opportunity to come back. And it's largely going to be when the travel industry is recovered. I think a lot of us here in the United States are seeing a recovery of sorts for leisure travel in domestic travel. And so we're seeing airports fill back up. We're seeing flights, especially to more leisure destinations, fill up. But we still haven't seen, in the United States, the business traveler pickup. And then also importantly, across Europe, Asia and parts of the -- of Asia -- sorry, Europe, Middle East and parts of Asia, we haven't seen that the volumes pick back up yet as they're not as far along in the recovery with the vaccines, say, the United States is. So I think we'll start to see that recovery as we exit 2021 and as we get into 2022. And that's when I think you'll start to see some of that $18 million come back into our business. But it's probably -- we're probably looking at 2022 time period for that.

Got it. That's fair. And obviously, you touched upon travel, which we have a few questions on that later. But just still thinking about the overall market. With data becoming a bigger focus for companies while thinking on how to use data and how to store and gather data, where do you think the aggregation of data should sit, for example? Is it ERP? Is it CRM? Or is it at a different layer, if you will? And just thinking of that, in the very long time, is it likely that PROS will be more tightly integrated into any single CRM platform? Or will it be build out -- will build out other CRM features yourself?

So I can take that one, Victor. This is Belinda again. So we're really less concerned with where the data sits or where it lives. Access to data is really not a challenge for us. If we're looking for -- basically, what we're looking for is which data is going to drive the most value for our customers. Given that we are doing a lot of price optimization and sales optimization for them, we're looking at a wide range of data sources to kind of tailor our algorithms and make sure that they're driving the results that our customer needs. So yes, CRM and ERP data is important. And it's definitely like first level data that we go ahead and gather from any customer. But we also aggregate data from many other sources. So you can think even competitive data or market indices or currency exchange rates or weather events, a wide range of outside or third-party or market data can also be consumed by our platform to optimize our algorithms. So in that sense, we've really designed our platform to be CRM and ERP agnostic. We have standard APIs and interfaces that allow us to integrate quite flexibly with third-party systems. We do have, obviously, some standard connectors and managed packages with the big CRMs like Microsoft and Salesforce and ERPs like SAP. But we really want to make sure that our platform is dynamic and flexible and can operate in a truly almost headless sense. And that's even more important as we start thinking about e-commerce and digital selling and integrating with more websites and e-commerce platforms to make sure that our customers can not only support their direct sales motion but also their digital sales motions.

That's fair. Before I jump to my next question, I would just like to remind the audience that if you have any questions, you can type your questions probably on the right-hand side of the screen or maybe at the bottom of the screen depending on what device you're using. And your question will come to me, and I can help you ask your questions. And -- so before that, I will just continue with some of my questions. So on -- just thinking -- just tapping into some of the products that you have, can you elaborate on your competitive advantage against other CPQ2s coming from big CRM or ERP players?

Sure. Sure, I'll take that one as well. So our B2B platform, and specifically our CPQ solution, but our entire platform was designed for the digital era. So it was designed with this shift from direct sales to digital selling in mind. That's one area that we feel we're very differentiated. We're also differentiated in the depth and breadth of our capabilities and the scale in which we're able to handle from the clients that we service. So first and foremost, omnichannel, as I mentioned. So as companies look to sell less through direct sales and more through digital channels, they really need an experience that is fully connected, where there is harmony and consistency between one channel and another and visibility kind of across that from their platform. And our CPQ solution allows our customers to do that. So that's one way that other CPQ vendors aren't there -- out there have not designed or have their platform enabled for that shift. Another differentiator that we bring to market is the strength of our science and our AI. AI is at the core of what we do. We've been doing AI and machine learning since the early '80s or mid-80s on the airline side, and we've taken a lot of time to perfect our algorithms and drive a lot of value for our customers. So this is something that when you buy a PROS CPQ, you have the ability to leverage our AI capabilities such as opportunity detection or price guidance to even further grow revenue and margin. And then lastly, I'll point out just the combination again of pricing and CPQ capabilities. So we are not just a CPQ platform, we have a full price management, price optimization capabilities. And then actually, last point is the complexity and the volume in which we can handle. So a lot of the major CRMs and other CPQ vendors out there are, I guess, really more of a sales efficiency play and kind of building just simpler quotes, but we're able to handle a level of complexity that not many other vendors can't handle. We have a very sophisticated constraint-based engine that works very well if you're configuring more complicated products. It allows you to set rules and parameters. If you're assembling a laptop, for example, this level of memory has to go with this level of processor and make sure that they're not selling invalid combinations of what you can actually build. And so in areas where companies need to sell is something even more complex or something at a higher volume, our CPQ solution plays very well in that scenario because we're able to process and handle that level of volume and level of complexity given that we're running our CPQ solution on our own servers and not embedded within the CRM itself.

Got it. And then on the question of -- all right. I'm hearing some feedback. Okay. Perfect now. So on the question of, yes, having more sophisticated capabilities, just thinking, given some of the big players in the machine learning space, do you think your current R&D spend is enough to maintain the need that you have when it comes to machine learning? And who else do you think rate similarly as strong in the field?

So yes, I would say, first of all, I think to your primary question, do we feel like we're spending enough? I would say yes. I mean there's always opportunities. I mean there's no shortage of good ideas where we could be spending money. But we spent almost 30% of our total revenue in R&D, which is on the high end of what most companies are going to invest. And as Belinda just mentioned, we've been doing this for a long time. There's a number of data scientists that we have employed for a number of years. We worked with our customers for decades now on how we can refine and improve and understand how our algorithms can drive value. And I'm glad you pointed the question into machine learning and not just artificial intelligence because there's an aspect to our software that really truly does machine learning. Our algorithms actually get smarter over time even without human intervention. So our algorithms are taking in current information and giving it more weight and more influence in the outcomes of our calculations, which then allows us to automatically revise outcomes as the markets are changing. So that's really where the machine learning in our technology comes to play. And we're quite far along and far advanced in that capacity. I mean our work -- our innovations are actually making those decisions without anybody being involved. And that's pretty unique even with some of the big players that are investing heavily in AI and machine learning. So yes, we feel very good about where we are. We're not resting on our walls. You probably saw when we were in the pandemic, we did cut back a lot of our spending in other areas, but we really didn't cut back our spending in R&D. We continue to invest. We continue to look for ways in which we can add more value, and that's a hallmark of who we've been, and that's a hallmark of who we're going to be going forward. And I also must put a little shameless plug-in here for being recognized and winning as a leader in our space, the 2021 AI Excellence Award for Machine Learning. So we're very proud of that. And I think it's a testament to the work we've been doing and what we continue to do to stay ahead.

Got it. That's very clear. I've got a few other questions, jumping to travel. But before that, I got a question from the audience. You mentioned the recovery that you're seeing already happening right now and shifting back to kind of closer to the pre-COVID levels. Is there any particular verticals that you see that's leading that recovery?

Not really, actually. We're seeing it across the board. We commented during the -- during 2020, we were surprised to see how engaged and involved the energy sector and chemical sector was, which we kind of combine as one vertical. That continues to be strong. Our distribution business lines continue to be strong. We announced with Siemens and HP, some of our technology customers, which are obviously pretty strong. So we are seeing it across the board, not just in one or two verticals. We're seeing companies really want to emphasize this part of their business, and we're seeing it across the board.

Okay. Got it. And then -- so now just wanted to jump a bit to travel. Obviously, we know travel is still -- recovery is a bit slower relative to other sectors. But just thinking about longer term, how do you see the relationship with airlines will evolve going forward beyond the current disruptions that we see? And obviously, we saw the new wins like United that you announced last quarter, a new strategic areas. Can you talk a bit about which parts of your airline solutions that maybe see a bit more interest, particularly post-COVID?

Sure. I'll take that one. So I think, overall, the themes that we're seeing from airlines is that they're really looking to drive more of their business through direct channels through their dot-coms and become less reliant on the GDSs. By powering their direct channels, they are able to give a better customer experience and have more control over that customer experience while also reducing some of their costs. We're seeing also a huge focus in delivering that customer experience and making sure that it's a digital self-service motion. I think the pandemic even further highlighted the need that customers don't want -- or passengers don't want to engage with a call desk or with a call center to change their flights or to reschedule their trips. They really want to make sure that they can have full control over their itinerary and their booking from their phone or their laptop and really be able to manage the services the airlines are offering themselves. And so airlines are now changing their focus to not even just with passenger sales but across all of their business lines, how do I power, self-service and digital selling for my customers. And so first and foremost, from a product set, this does not mean that revenue management is not -- is no longer important. Revenue management has increased. It remains important and remains a key area that airlines will be looking to invest, which is kind of our flagship product. We had a new airline come online in Q4 or they're coming online later this year, but they purchased our solution in Q4, which is Breeze Airways, and they did purchase our revenue management solution. There's definitely still interest there and active sales cycles there. But on some of our newer innovations and newer offerings, we're seeing a lot of focus on real-time dynamic pricing, allowing airlines to have real-time availability across all of their channels and respond to price requests in real-time dynamic offers, which is one of our latest innovations that we announced last quarter. This is AI-powered personalized offers that kind of combined fair seat, ancillary products together to provide bundles that are tailored to each individual customer. This is, obviously, very critical for giving customers a personalized and self-service experience, but in other areas like corporate sales. So as airlines look to bring business travelers back to the sky, they want to make sure that they can drive that business, which is typically a more complex sale, frictionless, personalized selling of corporate travel contracts. So that corporate customers don't need to, again, go through a deal desk, that they can actually contract and self-service their contracts online and also kind of run their business off of those contracts online. Group sales is another big area. Booking groups can be a complex thing. You've got a lot of passengers. It's a large itinerary. And so we've done a lot of innovation to make that sales process very seamless and digital so that customers can actually have that same self-service experience even when booking something is complex and as large as group. And then that's also powered by our AI pricing science. And so making sure that, that group sale is revenue optimal for the airline. So again, a wide range. There's a lot of our latest offerings are generating interest. But I think there's just a huge focus on direct channels, digital and self service.