Q3 2020 Pros Holdings Inc Earnings Call

Welcome to the Pros Holdings third quarter 2020 earnings conference call. At this time, all participants are in listen only mode.

Question answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.

I would now let's turn the conference over to Shannon Tucker Vice President of Investor Relations. Please go ahead.

Thank you operator, good afternoon, everyone and thank you for joining us.

Earnings press release, FCC filings and a replay of today's call can be found on the Investor Relations section of our website at <unk> Dot com.

With me on today's call is Andres Reiner, President and Chief Executive Officer, and stuff in shops, Chief Financial Officer.

System with our global teams operating today, the three of US are hosting this call from our homes.

Please note that some of the commentary today will include forward looking statements, including without limitation those.

It's about our strategy future business prospects and market opportunities and our financial projections.

Actual results could differ materially from such statements in our forecast.

In particular, there is significant uncertainty around the duration and impact of the Cove in 19 pandemic.

This means that results could change at any time and the contemplated impact of COVID-19 on the company's business results and outlook is the best estimate based on the information available as of today.

For more information please refer to the risk factors described in our FCC filings.

<unk> assumes no obligation to update any forward looking statements to reflect future events or circumstances.

As a reminder, during the call we will discuss non-GAAP metrics reconciliations between each non-GAAP measure and the most directly comparable GAAP measure to the extent to which available without unreasonable effort are available in our earnings press release.

With that I'll turn the call over to you Andreas.

Thank you Shannon good afternoon, everyone and thank you for joining us on today's call on behalf of pros, We hope that you and your families continue to stay healthy and safe.

Pandemic has impacted our customer centric business, but I'm incredibly proud of how our team is executing in supporting our customers.

Pleased to report that even in this particularly challenging macroeconomic backdrop, we beat our revenue and profitability guidance last quarter.

These results reflect our commitment to our mission of helping people and companies outperform in the incredible value or digital selling solutions provider.

We're vision is to be the <unk> platform to power still selling in companies across industries now recognize its selling digitally is essential to win in todays new reality.

In the first few months of 2020 E commerce penetration in the U.S. rose from 16% to 33% according to industry analysts there.

There has been more growth in the past few months then they hold last decade. This.

This rapid shift in buying behavior creates an incredible opportunity for companies that embrace self service and we're uniquely positioned to power omni channel selling with our E <unk> pricing and selling solutions.

Well eating <unk> platform that powers digital commerce continues to set the pace of innovation and we're laser focused on helping our customers win in this digital era.

I'd or outperformed customer conference earlier this month will be old many new digital commerce innovations like most companies we held our conference virtually this year.

Well I missed connecting with every morning person. He was amazing to have more than 5000, Brad just friends from over 8000 companies to hear about our latest innovation in digital selling thought leadership.

This kind of reach simply what's impossible before in the strong turnout we had four outperforms a testament to the importance of pros empowering digital commerce today.

During the event, we release, our next generation dynamic pricing capabilities for B to B E Commerce do accelerate companies shift to digital commerce.

We're innovative algorithms enable companies to quickly deliver dynamic market driven prices across online low touch no touch channels.

This next generation solution give companies the ability to harmonize between negotiated in non negotiated channels to winning in their markets and deliver a great customer experience.

We were also excited to announce the expansion of our relationship with Adobe Adobe has been an incredible customer and we look forward to expanding our partnership with them after releasing or magenta accelerator in joining the magento marketplace.

Now or joint customers can empower their online channels with our market, leading digital commerce platform.

For travel customers, we showcased dynamic class free pricing, which is the first in the industry. This.

This innovation enables airlines to better identify passengers willingness to pay by delivering dynamic pricing, along a continuum and removing the limitations historically imposed by fare classes.

Additionally, we release our latest innovation for group sales to help airlines to address the challenges of today, our latest innovations offer extend the reservation windows with refund in change capabilities. So airline customers can provide group travelers with increased flexibility integrate touch.

Summer experience.

Innovations like these are helping companies better serve their customers adopting an ever changing market.

Now I'd like to share a few customer examples from the third quarter.

Last quarter, we welcome diversity as a new customer diversity as a global leader in hygiene infection prevention in cleaning solution that is playing a critical role in helping businesses same facilities reopen safely.

Diversity selected or guidance and opportunity detection solution to personalize their offers same prices based on the customers' unique needs were.

We're incredibly proud to partner with diversity and help them adapt their business to capture growth opportunities.

Last quarter, we also expanded with existing customers.

For example, a leading international health diagnostics provider chose to migrate to our smart CPQ in guidance solutions with our technology. The company plans to deliver a better customer experience to physicians hospitals and clinics to ensure their patients across the world receive diagnostics such as coal.

Test faster.

Finally example of how our customers leaning into self serve is Qatar Airways.

Qatar Airways has many customer for more than two decades in last quarter chose to migrate toward next generation group sales optimizer in one search solutions.

With these solutions, Qatar Airways will be poised to deliver a frictionless self serve booking experience for group travelers across the world in advance of the FIFA World Cup in 2022. These.

These are just a few examples of how we're helping our customers remapping, how they sell to win in the digital era.

Now shift to comment on the piece of our business. While we continue to feel the effect of Kobin in B to B or pipeline continues to grow and the market demand is improving over the first half of the year, we're focused on helping customers start smaller and achieve faster time to value.

In travel our main focus continues to be supporting airlines on their way to recovery.

Were lower retention with airline customers remains best in class, which is a testament to the significant value that are solutions provide dan.

The ongoing impact of Colgate is putting some pressure on the dollar based retention associated with our travel customer renewals, which stephane will cover in more detail overall.

Overall, we're pleased with how we're continuing to deliver on our mission. We are excited about the new innovations were bringing to market. They will help us lead in the area of digital selling and capture or attractive market opportunity.

I want to thank or image seen global team for your unwavering commitment to our customers.

In thank our shareholders partners and customers for your continued support at pros with that I'll turn the call over to Stefan to cover our financial performance and business outlook.

Thank you Andreas.

She would like to extend my best wishes to everyone on today's call and to your families.

Also thanks to all of you who attended our virtual outperformed conference.

If you weren't able to join all of those sessions are available online and several sessions feature more information on the new innovations Andreas mentioned in his prepared remarks.

I'd like to congratulate our marketing team for successfully executing our first ever fully virtual customer conference and driving more than a 600% increase and even registrants year over year.

Now turning to the third quarter, our subscription revenue was $42 million, increasing 9% year over year.

Total revenue was $61.5 million and representing a decline of $2.6 million year over year.

Our recurring revenue as a percent of total revenue was 86%, which was our highest quarterly mark to date.

The recurring portion of our deferred revenue was $105 million up slightly sequentially and our trailing 12 month calculated billings increased 3% year over year.

Moving onto our profitability metrics non-GAAP subscription gross margins were 71% down two percentage points sequentially, largely due to slightly lower sequential subscription revenues.

Non-GAAP total gross margins were 62% up.

One percentage point year over year, driven by improvements to our services gross margin.

Our adjusted EBITDA loss was $6.2 million for the quarter, which was better than expected largely due to higher total revenue than expected.

An additional cost savings, we realized in the quarter.

We continue to drive savings across our business from reduced hiring lower variable compensation reduced program spend as well as the continued benefit from lower travel expenses as a result of our virtual work environment.

We have also taken additional steps to realize the benefit to our sales team of working in a virtual first world as.

As a result, the number of quota carrying personnel is down slightly from the beginning of the year and it's expected to be below 60 by the end of the year.

As a result of these actions we now expect to save a total of $22 million in 2020, which is $4 million above our previous forecast.

Our free cash flow burn in the third quarter was $15.7 million, which was slightly below our expectations and was driven mainly from an increase in customer payment deferrals.

As of the end of the third quarter approximately $26 million was included within accounts receivable related to payment deferrals provided to our customers.

From a balance sheet perspective, we ended the quarter with a cash balance of $322.4 million up $102.2 million sequentially due to our successful completion of the convertible debt offering in early September.

Net proceeds from this transaction for $120.9 million after the purchase of capped call transactions.

Our strong cash balance provides us with great financial flexibility as we look to invest further in our vision of powering digital selling.

Now before I cover guidance I want to cover the continuing impact cobot is having on our business.

Many of our customers, especially those in travel related industries continue to be significantly impacted by Kobin.

Well, we have seen signs a slight improvement in certain areas. It is clear the pandemic continues to impact the global economy, and the impact will last longer than we had originally hoped.

The pandemic has impacted several aspects of our business.

First our subscription bookings from new and existing customers. This year are anticipated to be down by approximately $25 billion from last year.

Second we have responded to some of our hardest hit customers by granting extended payment terms and.

And as I mentioned earlier this has had the impact of delaying a total of $26 million in cash collections out of the first three quarters of 2020 and into the fourth quarter and into 2021.

And finally in a smaller number of instances we have agreed to a man previously signed contracts. For example, we've agreed to delay some implementations restructure certain customer agreements and in one case agreed to cancel the contract after a customer declared bankruptcy.

We currently estimate the annualized revenue impact from these contractual changes could be up to $18 million.

We do expect much of this impact to be recovered in future years as our customers rebound from Cowen.

With this information is added insights into our business I will provide our guidance for Q4 and the full year 2020.

We expect our annual recurring revenue or a are are to be between 207 and $209 million at the end of 2020.

Lower estimated in your bookings customer bankruptcies and customer contract restructurings are expected to negatively impact ending a R.

Our estimated gross revenue retention rate for the year is expected to be in the range of 88% to 89%.

Now absent the impact of coated our gross revenue retention rate would be in the 92% to 93% range, which is consistent with our renewal rate from last year.

We expect Q4 subscription revenue to be in the range of $41.1 million to $41.6 million up 2% year over year at the midpoint.

We expect our full year subscription revenue to be in the range of 168.7 million to $169.2 million up 16% year over year at the midpoint.

Again, lower in your bookings customer contract restructurings in customer bankruptcies, all resulting from the cobot pandemic have significantly reduced the growth rate we expected for 2020.

We expect total revenue to be between 58.9 and $59.9 million in the fourth quarter in between 250.5 and $251.5 million for the full year.

We expect our adjusted EBITDA loss to be between 8.1 million and $9.1 million in the fourth quarter.

In between 31.5 and $32.5 million for the full year.

Our efforts to reduce costs by an estimated $22 million will allow us to minimize the reduction to our adjusted EBITDA loss for the full year.

We expect our free cash flow burn to be between 60 and $65 million for the full year.

And this implies a roughly $10 million to $15 million free cash flow burn in the back half of 2020, which is a significant improvement from the first half of 2020, but higher than what we forecasted last quarter and largely driven by the impact of customer payment deferrals that I mentioned earlier.

Lastly, with an estimated non-GAAP tax rate of 22% in the fourth quarter, we anticipate a non-GAAP loss per share of between 16 and 18 cents per share.

Based on an estimated 43.4 million basic shares outstanding.

We realize this pandemic will continue to impact our customers for at least several more quarters and we are purposefully approaching these challenges with a long term view.

We remain committed to delivering value and insights to our customers and we are confident in our long term market opportunity as we believe powering digital selling will be more important going forward.

We thank you for your support of pros and we look forward to speaking with you at our upcoming events.

So with that let me turn the call back over to the operator for questions operator.

Thank you at this time, we will be conducting a question and answer session. If.

If you would like to ask a question. Please press star one on your telephone keypad.

Confirmation total indicate your line is that the question queue. You May press star two if you relate to remove your question from the queue for.

Participants is speaker equipment, it may be necessary to pick up your handset before pressing sarkies well.

One moment, please while we poll for questions.

Our first question comes from top Roderick with Stifel. Please go ahead.

Everybody great too great to hear from you. Thank you for taking my questions.

Andreas.

With you and I'll, just kind of rip some data points from your outperform user conference from one of your Brazilian airline operators, but I think they're kind of indicative of what you're probably seeing from a lot of customers around the world I think the numbers or something like that the operator was operating 950 departure today that fell.

70 in March and has since recovered to maybe 500 departures a day, but you know as we sort of look around the world. We're seeing similar you know modest recoveries not all the way back to where we were but but but they are recovering so I guess in that context I'd love to hear how your conversations are going it looks from the subscription revenue yes.

Churn numbers that you've given that they are hanging in there pretty well.

I understand it's not an environment, where they can necessarily by your net new software and I think all that strategically, but what are the discussions like and when do you think the spending patterns might return if not to normalcy at least at some level of growth at this low level.

Yes, Tom Hey, Great question, Yes, I would tell you like there's been a slight recovery and they're starting to see some buddy Buddy varies by area. We've seen some airlines have been impacted.

More than other areas, depending on the region and the world there in <unk>, but overall I think like we've aligned very closely to support them and have very close collaboration with all of our customers. They still see a ton of value for more solutions and the new innovations specially around digital commerce.

I talked about in my prepared remarks around Qatar expanding with DS. So I think airline sorry leaning in much harder to self serve as youve seen many airlines as taking out all census, which means that you can cancel at any time in those abilities now.

For them, it's really important that passengers, whether its group or individual passengers can be more self serve so a lot of very innovation.

Has been focused on how we help them support that enable frictionless way to both improve customer experience and that's well let them adapt quickly. So overall I would say like the conversations are improving I think airlines are very focused on building a recovery plan.

In in we're supporting them through that process as well as helping them think of what the future I should be and how we innovate toward sat future with our new.

We also.

On chart or new.

Dynamic pricing capabilities that that aren't constrained by fear classes.

We charge again to be very high value to airline says they bounced back and recover.

Direct to consumer models, as well, where we brought in a lot of experience historically and frankly, we're one of the probably the only company. They can help <unk> company said, they think of the B D. C model and did direct to consumer from a digital perspective, so those serious our area that we see resonate.

Being in the market uhm in companies kind of looking at focusing more on those serious than than just the direct sales model.

Wonderful really helpful. Thank you I'll jump back into cute. Thank you.

Next question <unk> Stanislavski, what Morgan Stanley. Please go ahead.

Hi, This is Elizabeth Elliott on for Stan.

Some color on the beta be selling cycles last quarter. You mentioned there was some lengthening of the sales cycle. So curious how that's changed this quarter and what your customer conversations are like and what you were expecting for trash next quarter.

Yeah. That's a great question. So we've seen a slight improvement from where we saw in the first half so still I would say.

<unk> back to what it was pre covid, but definitely we saw it positive uptick in Q3.

And we're seeing a lot of organization. So I think we're trying to understand how covid was impacting them also trying to understand what they needed to do internally to help support their customers send their go to market and we're seeing more of them now wanting to take action and and move forward. We also.

<unk> did quite a bit of innovation in areas, where we allowed them to land in much smaller scope <unk> with much faster time to value and we're seeing this resonate well in the market as well.

Great. Thank you so much for the color and then just as a follow up thinking more onto the travel side I'm curious do you still expect to see 2021 and see here, we can see there we could see bookings.

Start to return here.

Like I would say, it's still premature we would hope that going into 2021, the the environment continues to improve and their load factors continue to increase but I would say at this point is still premature <unk> to call out and say that travel will be back.

Two historical norms next year, we see things slightly improving and we're continuing to monitor but it's still I would say premature to call out 20th 21.

Yep. Thank you. Thank you very much yep.

Next question comes from Alec associated with RBC capital markets. Please go ahead.

Hi, This is Robert Simmons on for Alex Thanks for taking our questions.

I was wondering if you could give us a little more car on your customer bankruptcy situations like how much of your base is actually filed for bankruptcy here that are seven or 11, and what have you seen so far in terms of the kitchen to pay go through check Rohan.

Yeah. So Robert this is stuff and I'll take that we really haven't seen any increases in bankruptcies in the last quarter. So you know the the number who were looking at and the impact that we were we're thinking about at the end of last quarter is there somewhere to what we're seeing now so that that number remain.

To me the same and then in terms of as a percentage of the of the total it's a it's a very small percentage. So I think the last time, we talked about it was eight bankruptcies, but we had unfortunately had missed one so it's really nice it was a small one so but it had been factored into the into the calculus. So right.

Now, it's it's non customers that we've seen with an impact which is consistent with where we were last court.

And have you ever been able to be designated as what was the term mission critical or <unk> <unk> business <unk>, having to keep students head.

Yeah. So you know I think last quarter, we had talked about the fact that you know there was there was one of the bankruptcies, where they had leverage the you know the the rules bankruptcy to cancel the contract to date, that's the only time that's happened and so all the other eight in this case have continued to to.

Use us and you know I think the term is you know critical vendor I think the the term you're looking for and and and in many cases, we have been being that but not know, but that that doesn't necessarily determine whether or not they're gonna continue to use us or not it just really depends on on how they're going to handle the <unk>.

<unk> payments that are due and but in all cases other than that one our customers are continuing to work with us and and continue to to to to to pay their bills actually.

Okay, Great and then can you just talk about what about what you've seen biogeography like House Asia performer in Europe, the America's where things could be better or worse.

Yeah, I'll I'll handle that we've seen is Europe, we've seen perform well it's been one of the areas that that frankly uhm. We're please with how it's been performing in in we're continuing to see strong demand coming out of Europe areas that we we have seen named.

Packed I've been <unk>, most rest of world and the Americas.

Got it <unk> takes furniture questions.

Mhm.

Next question comes from Jackson, <unk>, what J P. Morgan. Please go ahead.

Great. Thanks for taking my questions guys Uhm first one on the on the sales reps and the expected declined here in the <unk> towards the end of the year, but as you look at maybe the start of 2021, you know the the remaining cohort of reps any any sense you can give us for.

The tenure of those reps compared to maybe the cohort that started out in in 2020, and then and then just a quick follow up on on those those same sales reps I assume the mix will be more heavily weighted toward b b than they were at the beginning of the year, but any color you can give their as well would be great.

Yeah. So a couple of points. So the the changes that Stefan talked about in terms of reduction too quota care and personnel.

All of that has happened early in the fourth quarter and predominantly has been some positions that we eliminated on the travel side and some performance oriented in in for US really was preparing for getting in advance preparation for 2021. So in terms of you know <unk>.

Bridge tenure no no major changes in that we we have a pretty strong sales theme continuing to build it we expect to continue to invest in the sales organization, but to start preparing for 2021.

Okay, great. Thanks, and then a follow up on there was a press release the N. A press release for the other day or the other week.

<unk> about their kind of move to the cloud with this is something that was planned all along what was it actually accelerated because the need for the digitization because of the pandemic Internet it factor in their decision at all.

Yeah. This was a very strategic initiative for them that started uhm early and was very important for them to continue and go live during Covid and I would tell you that this was a very strategic initiative for them they want it to be able to leverage our latest.

Generation technology, and our latest generation science and we work hand in hand is was one that I commented that we did uhm fully uhm you know virtual go live and enjoying it between organizations and was a very huge success amongst spot.

The car teams in a north team.

But it was a very strategic initiative for them.

Alright, Okay. Thank you yeah.

Next question.

<unk>, Jason Silly now with Quebec. Please go ahead.

Hi, Thanks for taking my questions. One Ferrandez you talk about the car companies leaning into online both touch and no touch channels.

Which of these most anything have our immediate opportunities or what are you, saying the most interests and then maybe can you tie end up which <unk> solutions what would be used for these.

Yeah. So we're we're seeing uhm both areas, we're seeing organizations <unk> to how they're supporting Morvillo touch fine leveraging more guidance and C. P Q solutions.

<unk> for traditional negotiated channels as well as partner or E. Commerce in in terms of the solution mix Uhm, when we're seeing a lot and where we've seen an incremental is selling to see P. Q in our guidance solution combine so really getting are are any.

Great a platform.

To help support both did negotiated and non negotiated channels.

Okay, great. Thank you and then one quick one for Stefan Yeah, Let me think about visibility I know things are still pretty cloudy, but what are some internal processes that you're implementing <unk> with garage sales teams and your and your pipelines.

To kind of project.

Sure opportunities.

And then you're kind of confidence maybe today and visibility versus three months ago.

Yeah, you know I think <unk> talked about the the cycle times and some of the things. We're doing around you know are are are kind of shifting R. B b focus from you know say a larger transactions to more land opportunities. You know those are those typically are higher predictable transactions because they're not they don't.

[noise] requires much of a of an approval process from the from the the the customer and so that's giving us a better feel for for how you know the the futures Gonna look it also take risks some of the transactions because as you might imagine larger transactions typically or you know.

You know less predictable because there there are even in normal times, you know more of an approval process. So I think the the land motion that we really started to develop in the third quarter and and we're you know we're seeing moving forward into queue for beyond I think that's just gonna help us get a better feel of of how that pipelines going to convert.

And and you know so cute three was the first one that we saw that and to address this point, we did see some moment I'm coming from it in our daily will continue to see that if we go into the fourth quarter as well.

Great. Thank you that's available.

Thank you.

[noise]. Our next question comes home Chad Bennett with Craig How please go ahead.

Great. Thanks for taking my questions. So maybe for Stephan first so a couple for me just on the 26 million.

And kind of payment related relief you gave customers that's reflected in account receivables and the 18 million and I think amendments you indicated two contract terms I guess are.

Are those numbers I assume they're reflected in the billings or deferred revenue on the recurring side, but are are they also reflected in your ear and a our our number or or are they still in that number.

Yeah. So so good question Chad just for clarity the the 26 million dollar could you will deferral a payment terms those would be in the E R or number and they would be in the calculator billings number. So there you know they're in voice said they would be counted.

The the other component the the 18 million dollar number that that you're referring to in many cases is not some cases it may be that in many cases it will not be included because we will not have have build it.

Okay.

And that wouldn't be in the E R or obviously if that is correct that is correct.

Correct.

And and then do we I guess in in terms of you know heading into year end.

Do we anticipate kind.

Kind of more of this this kind of headwind or activity for the next quarter or two or.

Do you think the worst is behind you.

You know I'd I'd love to say the worst is behind this I I can certainly tell you. We have been you know we have a customer success team that has been you know really working hard to work with our customers and and find ways not just structurally from a contract perspective, but how we can actually come to.

Five of them and and work with them and the new reality that we're all working with so there's been a tremendous amount of work put together to to to help our customers a longer than this. This this time period. So I would tell you were pretty engaged with our customers in that regard and so we certainly have had conversations with.

Just about all of our customers at this point I think the question really remains how long is this going to continue to play itself out I'll take one of the questions that came up earlier is when do we see you know passenger boarding metrics doctor to get closer to where they were pre pandemic and it's just really hard to say, we're seeing some improve.

But we still have a ways to go before we before we get there.

And then maybe one last one for me just in the the 22 million in cost savings you cited I I think that's far but maybe for the full year. I mean, opex was was kind of flattish sequentially on a dollar basis, how much of that is reflected in in the P&L and and how much.

Is ahead of us.

So you know the the the 22 million dollar number is actually from two to three to four so that's where the bulk of it is is well that's where all of it's gonna be generated and it is you should see quite a bit of it coming in the fourth quarter. So.

Not quite.

A little bit more than a third let's put it that way.

God of those I think you'll find their way.

And by the way check real quick just just to clarify. This is first is what we were you know what we had guided to spend at the beginning of the year not necessarily off of what we spent last quarter. So just to make sure. We're we're we're the reference points the same.

Got it thanks for the clarification Yep.

Yep. Thank you.

Next question Joshua O'reilly with made up please go ahead.

Hey, guys as Josh on for Scott, what kind of interest or you seen from clients in adopting.

The dynamic pricing for airlines following that product launch it outperform do you think that Covid will accelerate the timelines move away from the favorite class system and then how do you think the big three.

Well adjust their pricing strategy for the current market environment. Thank you.

Yeah. So I would tell you like there's a lot of interest I think airlines right now the biggest challenge cheese that they're still I'm very light staff and in from an internal people standpoint, they don't have the the resources to embark on a new initiative, but there's death.

In Italy, there was a very positive reception Uhm tour, new willingness to pay algorithms in in I believe that as they start coming back uhm in bringing some of the employees back from furlough, we will see uhm strong interests coming out but but.

Right now, it's hard to predict when that will be.

Okay, Great. That's all I had thank you yep.

Yeah.

Ladies and gentlemen, we have reached the end of the key what a session.

I would like to type a call back to Shannon taps for closing remarks.

Thank you for listening to today's calm we look forward to speaking with you at conferences and events with court.

And mentioned playback of that contact from our outperform customer conference is available on our website.

This quarter, we will be attending the steeple Midwest grass conference on November 11th.

R V C capital markets Global T. I M. T conference on November 18th and the need them SaaS Conference on November 19th we.

We will also be marketing virtually with bird in December.

You have any questions filing today's call. Please contact us at I R at Chris Dot Com, Thank you and goodbye.

This concludes today's.

Teleconference. You may disconnect you light at this time, thank you for your participation.