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

Good afternoon, everybody. Thank you for joining us today. My name is Maya Kilcullen. I work on the software equity research team here at JPMorgan. And today, I am joined by Stefan Schulz, CFO; and Belinda Overdeput. Could you just introduce yourself for a few minutes?

Yes, sure. I'll go first. So I'm Belinda Overdeput. I've been with PROS for 9 years actually in June. I'm the Head of IR. But previously, I spent about 6 years in the field working with our customers, directly implementing and selling our B2B solutions. We've got a lot of deep experience in that space. And I'm joined by Stefan, our CFO.

Yes. Thanks, Belinda. My name is Stefan Schulz. I've been with the company for about 7 years now. Prior to that, I was CFO of an e-commerce outsourcer called Digital River. And then before that, CFO at an ERP software company called Lawson Software.

Thank you. And for those who aren't as familiar with PROS, can you just give a quick overview of the company?

Sure. I'll do that. So at PROS, our vision is to optimize every shopping and selling experience. And we primarily focus on solutions built on the PROS platform that solve problems related to revenue management, price optimization, price management and configure-price-quote or CPQ. We target mainly the travel industry and then a series of B2B industries such as manufacturing, distribution, services, health care, high tech. We've been around since 1985, but we've been public since 2007. In about 2015, we went and started our SaaS transition, migrated our solutions to the cloud, completely rearchitected our platform and rebuilt them in a cloud format. And today, we are about 255 -- over $255 million in size. About 85% of our revenue is recurring. And about 40% or more than 40% of the world's passengers price are priced using PROS revenue management solutions so travel passengers. And a lot of leading B2B businesses have adopted our technology, the likes of Honeywell, McCain, ExxonMobil and et cetera. So happy to answer any questions.

Great. And so you started off primarily in the travel industry, but B2B has been a big driver of growth over the last several years. Can you talk a little bit about the ARR split today in terms of the B2B segment versus travel?

Yes, you're exactly right. We started out in the travel space 35 years ago. And so travel had a head start, if you will. We just got into B2B about 20 years ago. And today, they're about equal. They're about the same size. The B2B business is, over the last several years, has been a much faster growing vertical for us or set of verticals for us. Our travel industry, if you exclude the pandemic, think of our travel industry growing somewhere in the mid-teens, low to mid-teens kind of thing. And we feel like that's a sustainable type of a growth, absent unusual macroeconomic conditions like we saw with COVID.

And what is -- what have been some of the main drivers of growth on the B2B side?

Good. Okay. So I'll talk about it. So I mean, primarily, if you think about what B2B businesses are facing today, especially today, if you think about things like inflation, market volatility, supply chain constraints, and then also the whole shift to digital. So B2B businesses are needing to recalculate prices and put those prices out to all of their shoppers and their buyers in different channels at a much faster pace than they ever have before because of everything that's happening. I mean, we have customers that used to do mass price changes once or twice a year that are now doing them a couple of times a month. And further complex of -- making this more complex is the shift to digital. I mean businesses over the last few years, have accelerated to selling their products and services online. And unlike the B2C space, where every shopper or buyer pays the same price, B2B is very personalized in terms of the prices that are put out for shoppers. And so getting pricing right in an omni-channel world, that's where your buyer could be shopping with you directly or shopping in your e-commerce site or shopping with a partner or reseller and making sure they have a consistent experience is a really difficult challenge to solve when you're trying to make it personalized for that individual buyer and understand their history and their long-term relationship with you. And so that's the unique problem that our platform solves. It's end-to-end pricing and CPQ in an omni-channel nature and we kind of play in a CRM and commerce platform agnostic space so we can integrate with any of the major CRMs or commerce platforms to deliver these -- the pricing and CPQ technology. And so I think those industry trends, especially now are leading to even more opportunities coming to PROS as businesses look to try to manage this volatility that they're seeing.

Yes. Just to add to that, if you think about it, we haven't seen inflation like we're seeing now in 40 years. And so the way e-commerce and the way transactions are conducted today is very different than the way it was 40 years ago. So to Belinda's point, the need for speed is unlike anything we've ever experienced. And so what we're seeing is opportunities, because of this economic environment we're in, we're seeing opportunities that we have never seen before because companies have to respond much faster in order to stay competitive. It's -- they can't wait to make these price adjustments. They have to make them real time. And there's no way to do it without tools such as the tools we provide.

Great. And when you are typically signing on a new customer, do -- are they generally coming from a different provider, something in-house or just didn't have an existing system in place before?

Most oftentimes, it's a new -- it's someone who's getting into this for the first time. They've had some sort of homegrown usually spreadsheet-driven type of a process where they update prices. And it's the result of years and years and years of building a complicated template and complicated spreadsheets that help them do that. Obviously, that has risks associated with it. There's a lot of time that is involved in maintaining that. So that's probably the biggest opportunity is companies that are coming at this for the first time. That said, we do also see a large number of displacements. So I'd say 20% of what we book in a quarter could be a displacement of someone else who had a failed implementation or an implementation where the results just didn't stack up to what was sold initially.

And in those instances, who are you typically competing with?

We are typically competing with some of the typical names that we see, such as companies that have been in the space for a long time, a Vendavo or a Zilliant or a Price f(x). Price f(x) is a company that started by the same founders that had worked on Vendavo. So a lot of the same usual suspects are the ones we see. All 3 of those are much smaller companies than what PROS is. And those are the ones where we see a lot of opportunity for displacement.

And so talking about the travel industry, how has travel rebounded from the troughs of the pandemic? And can you talk a little bit about your outlook exiting 2022 in terms of passenger volume and what you see for that segment?

Yes. It's hard to talk about travel without talking about the geography. Clearly, in the United States, the travel has come back much faster than the other parts of the world. So if you go back to the last year, we've seen very positive signals on booking data, on the TSA data. The U.S. carriers have really been able to rebound much faster than, say, the European or the Middle Eastern or the Far Eastern carriers. And we saw an impact from that in our own business. Last year, we had a lot of domestic business with wins at United, Breeze and Hawaiian which was 2 of those -- or all 3 of them were brand-new customers that we hadn't had before. So that's the really good side of it. What's happened on the international side, especially in the Middle East and in Asia, it's been a little slower. And those carriers are very dependent upon cross-border traffic. And if you think about what's been happening even in 2021, a lot of the countries had not opened up their borders yet. And because those borders had remained closed, it really stifled a lot of the business and the opportunities those carriers had. And as a result, that business has not come back as fast. Now as we get into 2022, we have seen borders starting to open up. We've seen international carriers start to show signs of increased bookings and some of the things that we were seeing a year ago in the U.S. carriers, we're now starting to see in the Europeans and in the Middle Eastern as well as Asia Pacific. So from a leading indicator perspective, that gives us a lot of optimism about our business as we carry out through 2022 and into '23. I would say -- I would characterize the overall industry, when you put it all together as a package, it's not back to where 2019 was. And I feel like we could be seeing signs of getting close to that in '23, assuming everything kind of carries out like it is now. A new variant could change all of that. Obviously, some of the things that are happening on the more macroeconomic situation could impact that as well. But as we see things now, we see a pipeline that's improving. We see customers interacting with us, to buy some of our newer technologies, to make migrations to the latest generation of our SaaS solutions. So we're seeing those things happen as a result of what's trending now. And as long as those macroeconomic conditions stay in good shape, we see a very good travel industry for the next several years.

Great. And can you help us understand how the contracts are actually priced. And so what happens if this year an airline increases its passenger volume by 15%. What happens to revenue?

Yes. So it's not an immediate change. So if you think back when we went through the early stages of the pandemic and you looked at software companies that supported the travel industry that had a high degree of correlation between passengers booked and the amount of revenue they received or fees that were paid to them from airlines, those companies took a significant hit. Their revenues dropped like the airlines dropped. Ours didn't do that as much. Ours kind of hung in there, and we were able to maintain a reasonable level of revenue relative to the revenue we came into the pandemic with because of the way we provide somewhat of a fixed nature and cost. Airline executives asked us to be fairly predictable in what they were going to pay, which helped us in downtimes, and it actually slows down the revenue that we get to pick up in good times. That's not to say that we don't get revenue, it just -- it slows it down a bit. And what I mean by that is we do price on a volume-based metric, but those volume-based metrics are in tiers. And those tiers are fairly broad, again, providing that forecast ability for airline executives to know what the cost of our solution will be. So to your point, as we see volumes come back, that's a great leading indicator of what we think will happen to our revenue, but it will happen at the next renewal point, which is there's annual renewal cycle. So at the next renewal point, we'll take a snapshot and say, hey, you're now in this next tier. We're able to charge you more for the revenue management solution and we'll generate more revenue. If they're in that same tier, if they haven't grown enough to get outside of that tier, then the revenue levels will be the same. But we do see an opportunity to grow as airlines continue to grow, but it's not an immediate gratification kind of a thing. It's going to take a little while before that finds its way to our income statement.

I also just want to remind anyone in the audience that you can submit questions online through the conference website, but also feel free to just shoot your hand up at any point, and we have microphones that can come around. So shifting to the B2B side, can you talk about any of the impacts that you've seen from some of the supply chain constraints on your customers?

Yes, happy to talk about it. So I think, obviously, what's happening right now in the markets is impacting all of us on a personal level, right? We're all feeling it in our wallets with inflation, going to the grocery store, we're like how is milk this much money? But from a PROS business perspective, it's actually been a great tailwind for us from a B2B perspective because of what I was alluding to earlier. As people grapple with these constant changes in supply and shortages that are driving up prices or having to swap out materials and figure out the impact on their margins, they need a system like PROS that's able to handle that flexibly in real time that can help them manage that change and not only recalculate prices to achieve their business outcomes, but actually deliver those prices to everywhere their shoppers are. I think so often, people think about, I'm able to just get new prices calculated and manage this change and simulate it, that's great. But it's also how fast are you able to actually get those prices out into the field so they can be transacted on. And that's what PROS does is we give you the engine to do the price recalculation, but we also give you the way to feed it into all of the channels that you're selling into, whether it's partner, reseller, distributor, e-commerce channel, direct sales channel. And so I mean, I think for us, it's actually been kind of a tailwind recently.

And you also talked about the increase in demand for real-time pricing. What are some of the changes that you've made on the technology side to be able to support that demand?

Yes. So our solution is built to -- essentially to scale and to deliver prices in a sub-second response time. And so businesses, especially if you think about super high-volume distributors, speed is everything. I mean we have examples of companies that sell auto parts in the B2B space that are using our solutions to sell to all of their mom-and-pop auto shops, but also to power their online websites and price their parts for their customers that want to shop online. And so our solutions are allowing them -- the way we've built them is to be able to scale up and down and support changing levels in volumes and still meet that SLA, which is guaranteed in our contract and is a competitive differentiator for PROS versus the competition, that we're actually contractually agreeing to delivering an answer to your customers in under a second.

Yes. I think to emphasize the point around real-time pricing availability, sometimes -- it's worth mentioning how that happens. So for example, historically, what would happen is we would help companies optimize their price list and price points. And we might do that on a daily basis. We may do that on a weekly basis. It could -- whatever the company wanted to do. However, in environments where prices can literally change within the hour or within the day, based on availability, based on supply levels, companies needed the ability to change prices in real time. And what Belinda was talking about is we're really the only company that provides an SLA on how fast we can recalculate an optimized price on the fly based on the current situation at that particular second. And so that's a very unique proposition that we provide, and it allows companies to maximize their take even when things are in a highly uncertain situation. And it's really one of the things that differentiates our technology.