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

Yes. Well, airlines are looking for ways in which they can differentiate themselves versus other airlines. For years, it's been all about a seat on a plane and that was it. Now, there's so much more to the experience or so much more to the travel experience that airlines want to offer to differentiate themselves. And the United situation was one where they wanted to offer a differentiated service to their corporate travelers and their corporate travel customers. And they didn't really have a way to differentiate themselves except through some of our solutions. And so that was the way in which we were able to win that business was helping them differentiate themselves on the corporate side. And the same is true when you look at airlines that are looking to make a differentiation around how they attract individuals, how they provide offers that may be unique to you or unique to me. They're looking for ways in which they can do that. And some of the tools that we have built and acquired are allowing us to provide a solution for our airlines to do that. So it's all about really regaining control of their product and how their product is seen in the marketplace and leveraged in the marketplace.

Got it. So within obviously, the airline space, you guys have an outstanding -- absolutely outstanding reputation and the product really does -- you hear it from customers when we talk to customers, the product really adds a ton of value. When you think about some of the large airlines that there are out in the world, which ones -- just remind us, which ones don't you guys are still not your customers? And if they're not your customers, what are they running, like that could be anything close?

Yes. So it's primarily -- if you look at our customer base of airlines, think about the majority of the world's largest airlines outside of the U.S. So the ones that we still don't have using our revenue management solutions would be like the big 3 here in the U.S., United, Delta, American. They're all using solutions that are kind of in-house that they've been using for quite a bit of time. We did get our foot in the door with United, as we just talked about, but they're a different area of our solutions. So we'll continue to kind of look for ways to -- and those are sales cycles that will just never end. We'll always be talking to them about multiple facets of what we do. But it's really the big 3. I mean outside of the U.S., we've got a pretty predominant market share. I think the recent stat is closer to 50% of all passengers -- passenger volumes globally are priced with the PROS solution. And when international travel was obviously doing better than it is right now, that number was north of 60%.

So maybe switching gears slightly, let's jump over to the B2B side of the business, right? What are some of the big trends that you guys have been seeing on your B2B, the CPQ part as we've been going through the pandemic?

Yes. So I think early on, one of the challenges that we faced on the B2B side was a really mass movement by a lot of B2B companies to digitally enable their workforce, whether that is digitizing files and signatures or either -- whether that was being able to have Zoom calls or Teams calls. So we saw a hit to our B2B business in that first year of 2020 as a result of that. We started to see our B2B business start to, to do better again than in 2021, and that rate of trajectory has continued into 2022. So those are some of the bigger trends that we're seeing from a macro perspective. I think as it relates specifically to our product set and you mentioned CPQ, that's probably the product that we've made up the most ground in the last couple of years than any other product in our portfolio. We acquired CPQ back in 2014 from a company called Cameleon. And at the time, we acknowledged that relative to what the CPQ providers had in the space, we were coming from behind. And it was an effort that our product engineering took on and that we essentially rebuilt the engine. And in so doing, arguably have the best solution in the marketplace now and that's not just us saying that, that's what industry analysts are saying about that solution as well. And that has really provided a boost for us in the marketplace as we compete with other CPQ providers. And so as a result, we're competing more favorably. We're being seen now as a far more comprehensive solution than a lot of our customers -- that a lot of our competitors have. And honestly, seeing ourselves come in and replace previously acquired CPQ solutions that really didn't fit the bill that our solution is now able to do.

The interesting thing that I -- that really kind of stood out to me over the last few months is the renewed partnership with Microsoft, right? Maybe walk us through what's going on there? What was new in this partnership versus the prior relationship with Microsoft? And how does this further expand the moat that PROS might have versus other vendors?

So yes, the relationship with Microsoft is arguably our strongest partnership that we have in our go-to-market. And the reason for that is there's a tremendous amount of synergy or complementary nature of the products they offer and the products we offer. We built our CPQ and pricing solutions to be platform agnostic. So we can sell our solutions in an SAP ERP environment or a Dynamics ERP environment, in a Salesforce CRM environment or in a Microsoft CRM environment. But obviously, when you think about an SAP, they already have a CRM and a CPQ solution to go along with their ERP. So the partnership isn't as strong with SAP. And similarly with Salesforce, they also have a CPQ solution and a CRM solution. So -- and even though we sell in all of those accounts, the opportunity for us to partner with Microsoft actually helps us and Microsoft competing with SAP and Salesforce. So that relationship has just continued to evolve over the years. And in addition to that part of the relationship, we also utilize Azure as our predominant cloud services solution. And so the bulk of what we find on a given day is going to be supported by Azure. So it's a win-win for us and Microsoft. As a result of that, we entered into a new SAA agreement or a Sales Alliance Agreement where there's only a few of those that Microsoft does. But again, it's an evolution to the relationship. And essentially, what it means is we have a plan that both executive teams are managing to. We have set aside times that will meet in QBRs twice a year to go through how we're performing, what we need to do to do better with stated objectives that are built into the contract and there's some incentives built into the sales teams to act on each other's behalf that we haven't had before.

So is that the main change between this agreement and the prior one?

Yes, that and the stated objectives and the -- in those Quarterly Business Reviews where the 2 executive teams are going to come together and really assess and adjust the go-to-market plans as necessary to hit the objectives.

Got it. So is it possible that we could hear a similar type of relationship with other providers? Or is it -- what was really truly unique here is that it's a 2-way mutually beneficial relationship beyond just potential kickers on selling products?

Yes. I think and certainly, there's opportunities for that. I mean, it's the kind of the combination of factors that led to this are a bit unique with Microsoft; the Azure relationship, the complementary nature of what Microsoft sells and what PROS sells. So all those factors came together to really bring us together. But yes, I mean, to your point, can we see opportunities to do -- to complement other company's solutions and things like that, yes, it's just those -- that exact combination of complementary things is kind of rare.

Got it. Well, maybe just more broadly, right, how are you thinking about your partnership strategy, whether it's between the CPQ side of the business, the B2B side of the business or the travel side of the business, are there any meaningful changes that you're contemplating moving forward?

Yes. So I mean we primarily sell through a direct sales version. I think we've estimated like 1/3 of our business is partner sourced or influenced and so obviously, with Microsoft, we expect that to contribute even more as we roll out this new partnership. But we primarily sell through our direct sales team. Our direct sales is involved with the partners that we co-sell with. But we do have strong partnerships with global SIs, think like EY, Accenture, and those -- the likes of those. And then I would say from like an overall geographical perspective, when there's an area where we maybe don't have as strong of a presence, that's when we'll definitely leverage a partner to kind of help us in that regard. If you think of like certain areas of Latin America, for example, we don't really have like an office or a dedicated presence there. So I would say it's just more about continuing to leverage partners to expand our reach, but we still are pretty involved in the sales process.

Got it. Shifting gears to the B2B side of the business. Are there certain verticals where your B2B product is having either better traction? Or is it just more geared to? Because I mean your CPQ solution is it's a quite robust solution, right? So for somebody who might be looking for a lightweight CPQ, that might not necessarily be the best option, but does that mean that you're kind of focused a little bit more on the more complex verticals?

Yes. So I'll take that in 2 parts, Stefan will add color. But from a go-to-market perspective, we target a specific set of industries. So I think like automotive, industrial, manufacturing, which is where you definitely would have some more complicated CPQ workflows. We also do services, healthcare, high-tech, chemicals and energy, food and consumables. And those can kind of range between simple and complex use cases. I will say, historically, we might have been more focused on the complex. But over the last couple of years, we've done a lot from an innovation perspective to kind of streamline the platform and offer different ways for customers to land with our solutions. So you don't have to buy all of CPQ. If you want to buy PROS CPQ, we have different packages like ESSENTIALS, ADVANTAGE and ULTIMATE, that kind of range and complexity. So a customer that has a more simple quoting workflow can take full advantage of PROS and all the great things we offer, but start with an ESSENTIALS package and kind of get their stuff live and then expand out from there. And so we've really done that to drive at making it easier for any company really to adopt our solutions.

Got it. Maybe let's shift to just your overall go-to-market strategy between U.S. and international. We've kind of dug in on the travel side of the business, but on the CPQ side, right, the B2B side, are there any changes that you're contemplating as we go into 2022 to really drive penetration of the B2B products more broadly internationally?

I think it's going to be an area of focus. There's a -- historically, we're a truly global company, probably one of the most global companies around. Literally 1/3 of our business is outside the -- or 1/3 of business is in the U.S., 1/3 is in Europe and 1/3 is in rest of the world. But I think as we go to market in our B2B motion, it's going to be about how do we focus in the major markets that -- where we see the biggest opportunity and that's going to be primarily in Europe and in the United States. Now, as Belinda shared earlier, that doesn't mean we're not going to look at opportunities and pursue opportunities say in South America or other parts of the Far East. But we'll leverage partners to a much greater degree there who already have a presence and have capabilities there. But our direct go-to-market is going to really focus mostly on the United States and Europe.

Got it. I wanted to hit for a second on your acquisition of EveryMundo. I think it was announced in...

We closed it last day of November.

Right. So what was the rationale for the acquisition? And how is -- I mean, obviously, I realize it's only been a few months, but how is the integration going? What do you expect from this business into 2022?

Well, EveryMundo is known as a marketing platform, primarily for the travel industry. And so while that certainly was an attraction to us in their technology, but we also saw the opportunity for this to parlay into our B2B business. And so we're -- as you know, we're big believers in e-commerce. We think that self-serve e-commerce is going to be the way the world is going to trend to or adapt to over time. And whatever Mundo does is it provides a marketing platform that allows someone to promote their tools or their products and then go directly to the booking engine from there. And so what they've done in the travel space is really enabled airlines and some in the hospitality space to create a product or an offering that's going to make it very attractive and then simple to book right then and there. And as we think about the way we think the world is going to be working, is it's going to be thinking about you can literally book an airfare on hundreds if not thousands of different platforms, not just the airline.com or just on travel agency, you're going to have the ability to book on a number of different sites because that's where you're -- when you're focused on a particular experience or you're focused on a particular event, you're able to take care of all that in one spot. And so we feel like that type of convenience is only going to help companies excel in a e-commerce or a self-serve type of a world. And then when you combine that capability with our science where we can continuously update and enhance our offers to be more tailored and to be more attractive to people, we feel like the combination is going to be a big winner for us as we see the world moving in that direction and we kind of create an opportunity for people to get their bookings in a number of different formats.

Got it. Let's maybe -- we're running -- getting towards the end of the presentation. Wanted to hit on guidance for this year. And I think in your guidance for 2022 and it assumes an acceleration in total AR to 9% and subscription ARR growing 13%. What was the thinking, the thought process for -- what has to go right this year for us to hit those numbers? And what are the assumptions underpinning that guidance that would potentially drive upside to those numbers as we go through the year?

Yes. So I think let me start with the airline space first. There is an assumption that there is a moderate recovery out of the airline space. The belief is that countries will open up, airlines will start to see more bookings and then, therefore, be ready to make more investments in their technology. So there's nowhere near what we saw in 2019, but we are expecting to see some recovery on the travel side. On the B2B side, we're expecting to continue to see what we saw happening out of '20 into '21 and going into 2022. The market is looking for our type of our science solutions, especially given what's happening with inflation, what's happening with commodity prices. There's a bigger and bigger demand for those -- that type of expertise, that type of capability. So we expect to see that increasing over the course of the year, primarily for those trends.

Awesome. All right. Well, we're out of time. But great discussion. Thank you so much for joining us today. And I hope you guys have a great rest of your day.

Thank you. Thanks for having us.

Thanks for having us.