Q3 2021 Pros Holdings Inc Earnings Call
Greetings and welcome to the Pros Holdings third quarter 2021 earnings conference call. At this time, all participants are in a listen only mode.
A question and 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'd now like to turn the conference call over to Belinda over to put director of Investor Relations.
Thank you operator, good afternoon, everyone and thank you for joining US our earnings press release, SEC filings and a replay of today's call can be found in the Investor Relations section of our website at pros Dot com. Our prepared remarks will also be available on our website immediately following the call and will be replaced by the official transcript which is.
<unk> participant questions once available.
With me on today's call is Andres Reiner, President and Chief Executive Officer, and Stefan Schulz Chief Financial Officer.
Please note that some of the commentary today will include forward looking statements, including without limitation, those about our strategy future business prospects and market opportunities and our financial projections and actual results could differ materially from such statements and our forecast in particular, there remains significant uncertainty around the duration and impact of <unk>.
19. 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 SEC filings pros 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.
Before I hand, the call over I'd like to remind our investors and analysts about our upcoming virtual investor Fireside chat taking place on November 17th from 130 P. M to three P. M central time during the 2021 pros outperform conference.
With that I'll turn the call over to you Andres.
Thank you Bill and good afternoon, everyone and thank you for joining US we ended the quarter with significant outperformance on our guidance ranges for profitability and cash flow and deliver revenue results in line with our expected ranges.
We did see impact from the Delta Varian in our Q3 results and our Q4 outlook Stefan will expand on this later.
Our strategy is to accelerate market adoption of the pros platform delivering incredible experience and drive significant value for our customers. Despite the challenges we face because of COVID-19, our team continues to execute well against our strategy, we welcome new customers across industries.
From new market segments Stuporose during the quarter, we continued to drive incredible value for our customers evidenced by our expanding partnerships in best in class gross revenue retention rates, we received industry recognition of our leadership in both C B Q and price optimization and Matt.
Management when I look at all of this in the progress of the recovery I couldn't be more excited for what is to come.
In travel, we're starting to see international restrictions ease in some carriers are seeing significant increases in passenger demand issue resolved for example, when the announcement was made that the Europe to U S. Travel ban would be lifted in November carrier saw an immediate hundred and 40% increasing tick.
It feels in a single week for European travelers. This demonstrates the pent up demand for travel, both leisure and business and energizes us for the pace of recovery heading into 2022 it's more borders open.
In Q3, we welcomed two new low cost carriers to the pros family Air Transact and Scoot. Historically this market segment didn't have access to the best of breed AI powered revenue management solutions. We designed our approach. Our aim is Saint Joseph addition, on the protein platform to enable T.
Sabini size to adopt or industry, leading AI and grow with pros over time.
With brochure and me St Charles customers like gear, transact and scoot can forecast demand in dynamically price to maximize revenue.
Now moving to beat a b.
In the health care space, we've seen demand for solutions as companies look to digitize their selling motions.
We welcome Korean it provider of long term care services in radio meter medical manufacturer of diagnostic devices to the pros family as new customers.
We're also seeing momentum in transportation and logistics, where companies are looking to pros to enable them to deliver a frictionless sales experience as demand continues to rise.
This year air cargo demand is expected to increase approximately 20% year over year.
In Q3, Emirates Sky cargo adopted or B to B platform to empower their customers with this self service buying experience to drive a higher conversion of seals, using our omnichannel quoting capabilities and capacity of where price guidance.
Similarly, marking a division of U P. S healthcare logistics that is essentially the delivery of vaccines globally also adopted or b to b platform to power digital selling across your enterprise.
Our latest innovations are also inspiring existing customers to expand their partnerships with pros.
In Q3 P connectivity approach customer of eight years chose to migrate to a cloud platform, which allowed them to expand adoption across your business. He connectivity is a leading manufacturer of electronic connectors and sensors that powers vehicles factories and homes across the globe.
With hundreds of billions of products manufactured annually pecan activities relying on this scale speed and precision of pros price optimization and management capabilities to drive winning offers.
Honeywell also expanded adoption of where price optimization and management solution like many businesses today Honeywell is experiencing the impact of rising commodity prices and the risk of inflation.
To effectively manage volatility and continue to produce winning offers honeywell named process their global pricing solution vendor and effectively rolling out or solution to all their strategic business units.
Sheila Jordan Honeywell, Chief Digital Technology Officer will be joining me my keynote at outperformed to share more on their success with burrows.
Now I'm excited to share that we've been named a leader in the 2020, one Gartner magic quadrant for configure pricing quote application suites.
When we acquired or see PQ technology, we acknowledged that we were coming from behind and we set a bold strategy to become the leader in this space. This acknowledgment from Gartner recognizes our passion for innovation to drive customer success.
Our flexibility to support Omnichannel, selling the combination of pricing and selling capabilities in a single platform.
The performance usability and scalability of our platform, where all sided askey strengths.
We also had the honor of once again be named a leader in the 2021 I D. C market scape assessment of worldwide B to B price optimization and management applications I.
D C emphasize the ease of use in transparency within our solutions as a key differentiator.
A core part of our strategy has been making more AI algorithms accessible explainable and extensible, which allows companies of all sizes to adopt their market, leading AI powered platform.
As an engineer at hard I'm incredibly proud of the market recognition, we're receiving for our innovations and I would like to express my deep gratitude to our amazing product and engineering teams.
With these most current designations where the only platform with a leadership position in both the C P Q and price optimization and management markets.
In addition to our product awards I'm thrilled to share that pros has been certified by Great places to work for the second year in a row. This year's designation extends the company's original certification to all eligible countries recognizing or inclusive people.
First culture on a global scale. This award is space entirely on what current employees have to say about working at pros, which is what makes this award so special to me.
Finally in September we announced Rob Reiner seen tension to retire from pros.
As Chief Technology Officer, Rob has been key in driving our culture of innovation Ford Rob joined proceed 2016 to leader pivotal transition to the cloud with his leadership, we transform more traveling <unk> solutions into the most comprehensive and innovative SaaS offerings in their remarks.
<unk> like to thank Rob for all his contributions to pros and wish him the best in his retirement.
Succeeding Rob a jade the money has been promoted to the role of executive Vice President of Engineering and Sunil John has been promoted to the role of Chief product Officer.
Eight games chenille, each have over 15 years of experience with pros and have been a huge part of our success I look forward to working closely with them and continuing to accelerate our innovation leadership.
In closing I'm proud of how our team is executing to drive adoption in the market delivering industry, leading innovations through our platform and create a culture that empowers every employee to breach your full potential.
Thank you to our global team for making pros an amazing company. Thank you to our customers partners and shareholders for your ongoing support of pros with that I'd like to turn the call over to Stefan to cover financial performance and outlook.
Thank you Andreas and good afternoon, everyone.
In the third quarter, we significantly outperformed our profitability and cash flow metrics and delivered revenue results that were in line with our expectations.
Our team continues to look for ways to drive efficiencies as well as improve our customer satisfaction and collection processes.
As a result of our strong operational execution our outlook for the full year is now much better on profitability and cash flow.
As Andres mentioned, the ongoing impact from COVID-19, and specifically the Delta variant did affect some of our travel customers in the third quarter.
Examples of the impact during the quarter include a travel customer declaring bankruptcy, a small number of contract restructurings and some of our new opportunities in implementations being pushed by a few months.
Individually none of these items significantly impacted our revenues, but the combination of these items did impact our subscription and services revenue slightly in the third quarter.
These items will also impact our fourth quarter revenues and we expect total revenue for the year to be at the low end of our previous annual guidance range.
All of these items impact in the second half 2021 are temporary in nature, we expect to recover most if not all of these amounts during 2022.
Now moving onto our results.
Subscription revenue in the third quarter was $44 $1 million up 5% year over year, and total revenue was $62 $7 million up 2% year over year.
Our third quarter recurring revenue was 84% of total revenue.
Our gross revenue retention rate for the trailing 12 months was approximately 91%.
As a reminder, we disclose gross revenue retention rates not net revenue retention rates gross revenue retention does not include bookings from existing customers, which can mask real customer churn.
Our revenue retention rates have continued to improve throughout 2021, and we anticipate ending the year at approximately 93%.
This returns us to world class gross revenue retention rates and demonstrates the value our customers see in our solutions.
Our non-GAAP total gross margins improved sequentially again to 61%.
And our non-GAAP subscription gross margins were 72%, which are up sequentially from 71% and also up year over year.
We expect subscription margins to remain relatively constant in the fourth quarter of 2021.
We also continue to make steady progress on our services margins and were within $200000 of breakeven in the third quarter.
As I mentioned before we continue to make progress on adjusted EBITDA and we're very pleased with our performance this quarter.
Adjusted EBITDA loss was $4 $4 million as compared to $6 $2 million last year.
Revenue growth and reduced operating expenses led to this improvement.
Total operating expenses declined by 5% in the quarter and 6% in the first nine months of the year.
I am proud of our team's strong operational execution and how we continue to look for ways to drive more efficiency into our business.
Our calculated billings decreased 5% for the quarter and for the trailing 12 months.
And as previously mentioned, we anticipate calculated billings will grow in the fourth quarter, which would result in full year growth of at least 10%.
Our free cash flow burn was $8 $5 million in Q3, and $18 $9 million year to date.
A significant improvement over last year, driven by a combination of operating expense efficiencies strong customer collections and better gross revenue retention rates.
We exited the third quarter with $308 $6 million of cash and investments.
We also made nice progress towards our year end target of adding quota carrying personnel and.
And we ended the quarter with 64.
We were able to hire ahead of plan, which allows our new team members to ramp up so that they can be productive earlier in 2022.
We do not anticipate growing this metric further in the fourth quarter.
And as previously discussed we expect to exit the year with 60 or more quota carrying personnel.
Now turning to guidance.
We expect Q4 subscription revenue to be in the range of 45 to $45 $5 million in total revenue to be in the range of $63 million to $64 million.
We expect fourth quarter, adjusted EBITDA loss to be between nine and $10 million.
Using an estimated non-GAAP tax rate of 22%, we anticipate fourth quarter non-GAAP loss per share of between 22 and 24 cents per share based on an estimated 44.4 million shares outstanding.
For the full year, we expect subscription revenue to be in the range of 176 to $176 $5 million.
In total revenue to be in the range of $249 $5 million to $255 million.
We expect an adjusted EBITDA loss of between 27.3, and $28 $3 million and our free cash flow burn between 22 and $25 million.
We also expect our ending ear are on a constant currency basis to be between 214 and $217 million.
In closing I would like to thank our amazing employees and customers for their continued passion and support.
We also thank you for your support of Pros and we look forward to speaking with you at our upcoming events.
I'll now turn the call back over to the operator for questions operator.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the Q.
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Our first question comes from the line of Rob Oliver with Robert W. Baird. Please proceed with your question.
Great. Good afternoon, guys. Thank you for taking my question.
A couple ones for me so first God.
Just a question on <unk>.
The outlook relative to kind of previous expectations and some of what changed in the quarter and Stephane you mentioned the.
Is the are some of the or the Andres mentioned in his prepared remarks, some of the commentary around the additional bankruptcies or perhaps how would you can you talk a little bit about that and was it all travel that was the swing factor or is there anything on the beta beside to call out as well and would love to hear about some of the momentum there and then I just had a quick follow up question.
Yeah, Hey, Rob This is Stefan yes, it was all travel related.
And it had to do with the direct effect of certain airlines and really we're talking about certain regions around the world that we're still feeling the effects.
Really not having much in the way of their operations taking place in the third quarter. So we did see an additional bankruptcy as you pointed out.
We also saw.
A couple of customers asked for some contract restructurings and as I pointed out.
Some of our opportunities and implementations got pushed out now.
Just to put it in context.
The restructuring that we're talking about here were much smaller than what we were talking about back in 2020.
As I said there were just a couple of them, but when you take all of these things in totality and you look at it it did impact our total revenue by about a couple of million dollars in the second half of the year. When you look at Q3 and Q4.
Got it Okay. That's helpful. And then just one follow up Stefan just on the.
The free cash flow and profitability profile, obviously strong and you guys have been able to find a lot of you have you've always had a lot of levers to pull in your it sounds like you're pulling some of that was on the operating expense side. So just curious is this represent a paradigm shift in terms of process for you guys. So we can expect our focus on free cash flow and profitability going forward and then of the.
Adding expense improvements that you cited.
We assume that those are more sustainable even as we emerge from Bob.
Covid situation. Thanks, a lot.
Yeah. So you know.
There's a there's been a lot of work that's taking place by the teams around the company and I think the ones that really impact our free cash flow really has to do with the folks in teams that are working on the collections.
Building, a much better process around how we work with our customers on timely collections and we've made a lot of improvements there. That's that's one area.
The other area is commented on our gross revenue retention rates, so as those continue to get better.
As we got into the the nineties this quarter at 91% and then we move into deeper into the ninety's going to 93% in Q4.
That's also driving more for cash.
So from a cash standpoint, we're executing on the cash opportunities better, but then the third dimension to that is how we're doing on expense management and being more efficient to your point and Thats also driving the EBITDA performance and yeah, I think it's something that.
What you see is working on as far up the income statement line as the cost of subscription that's been an area that we've really focused on this year and we've seen those margins improved throughout the year, but we're also looking at ways in which we can operate our business in a more efficient way.
So I think we want to continue to see progress on that but I will stop and say, we don't want to do anything that's going to hamper our growth opportunities. We still feel like there's a tremendous amount of of growth ahead of us and we will continue to make those investments all of what we're doing with our with our quota carrying personnel and really.
Going beyond where we were thinking we'd be at the end of the year and making the investments where we see there is an opportunity. So we will continue to make those investments to fuel that top line, but always with an eye on making improvements on the bottom line as well.
Great. Thanks, again, Steph and thanks guys.
Thank you.
Our next question comes from the line of Chad Bennett with Craig Hallum. Please proceed with your question.
Great. Thanks for taking my question so.
Stefan maybe thanks for the color on the the restructurings and the bankruptcy and so forth that impacted the quarter. So that was $2 million for the second half. So if we just kind of I guess annualize that and I'm just thinking in terms of like our P L and deferred revs would.
Would that kind of have a 4 million dollar impact on that figure how should we think about those secondary metrics.
Yeah I think.
It's a good point because I don't think we will see a $4 million impact over a sequential four quarter period.
But what we saw here was more timing related. So for example, we had some implementations in some deals that were pushed out by a few months and that's youre feeling that impact in the in the third and fourth quarters, but we do expect to see that revenue come back online for us in the in the first part or I should.
Say at some at some point in the first second and third quarters of 2022, and the same thing with the contract restructuring so the.
If you think about how we worked in the particular restructurings, we're talking about it was a.
A bit of relief today for.
A future obligation in the future and in this in these cases not distant future, but near term future.
Right got it okay, and and so from a from a R. P. O a deferred Rev standpoint that impact was much less I would take it correct Thats correct. Okay. So from an RP O calculated billings deferred revenue and from an IRR perspective, the impact was negligible from the contract restructuring standpoint.
That's correct got it got it Okay and then just curious you know Andres maybe for you just on on the travel side of the business. I mean, you talked about the Europe reopening from a travel standpoint, you know I saw some earlier in the week that business travel bookings are basically almost a pre.
Pandemic levels at this point, which I think is good from a from a margin standpoint for airlines.
Well I mean, september's, although you can see over but just.
As you look at October and maybe even the end of September and November year, what are you seeing in terms of.
Progress or pick up on the travel side of the business. If you are seeing that.
Yeah, I would tell you still early from a sales perspective, I'm pretty proud of the team. If you see we focused a lot on net new airlines that we sign.
Including Eric Transact in Scoop.
This quarter as an example, so what I would tell you certain regions are recovering faster than North America, obviously recovered much faster than we saw strength in that market Europe is starting to recover.
Your comment that even business travel is starting to pick up.
Especially after the U S lifted the ban.
Travel that's definitely helping we started to see bookings.
Silver for November and beyond now what they will want to see the materialization of those bookings to see because remember that now you can cancel those bookings.
They are closely watching to see the conversion of those bookings to actually passengers traveling so overall.
I would tell you that from a booking perspective, 80% of our bookings have been <unk> year to date.
So that's really driving.
The growth in the business I do expect travel to continue to improve and I would tell you that youre going to see probably Europe come next Asia will probably bleed further out and I would say that's the region.
That that is still experiencing more.
Any impact compared to 2019, but the good news is that we're starting to see the wave continued to improve and we do expect that to pick up in 'twenty two and beyond.
Okay, No that's great color and fair point on the kind of late cancellation and wanted to see bookings actually translate to revenue.
And then maybe just one one last quick question for me if I may just on the <unk> side.
Are you seeing just in terms of CP Q rfps.
Obviously, there's no see PQ has been around for a number of years now a number of competitors and so forth.
The stuff Youre seeing today on the CPU front is it is there still a fair amount of Greenfield out there.
For you guys as Youre looking at new logos or are we are we I can't imagine, we're doing rip and replace but but is it still largely a greenfield underpinning a traded market. Thanks.
I believe it is very much greenfield.
I would tell you that.
I've talked about several of the deal side Cymrite Sky go that includes our smart EQ mark them as well as Orient radio meter.
Many of our deals include its not the only solution.
Obviously the areas of Omnichannel commerce are resonating really well in the market in self service Commerce I think what we're seeing is a lot of companies really change your view of <unk> have not looking at it purely from a sales glints and direct sales Lynch.
But looking at it from an omni channel selling lens.
And one of the powers.
And greatest differentiation of our solution is being able to power both the digital and the direct sales channel all with the same platform same configuration same catalogs same floating object.
In a seamless way and I think that's resonating.
So we do see a lot of greenfield opportunities, we are seeing some replacement.
I think that there is that the level of sophistication in our solution to handle scale the configuration capabilities and obviously, our AI powered guidance.
<unk> bring another level of value.
The market that is resonating site I'm very bullish I'm also really proud of us getting to a leadership position in the gardener markets fell and being the third year in a road that we've been bands.
Visionary challenger and a leader in and its really kudos to our engineering team.
Their passion and innovation innovation that we drove around the solution in getting to this point.
Makes sense thanks, much for taking my questions.
Thank you.
Our next question comes from the line of Scott Berg with Needham. Please proceed with your question.
Hey, guys. This is Josh on for Scott, Thanks for taking my questions.
So starting off on the <unk> side, if you look across the <unk>.
Ecosystems of opportunities for your business.
Are you seeing a pickup in activity around the SAP ERP.
ERP ecosystem or maybe some other ecosystems like Microsoft dynamics.
Driving more net new business activity any color there would be helpful.
Yes, that's a great question, Josh I would tell you safety ecosystem is usually a very important target for us in the large enterprise. So yes, we see a lot of.
Our customers.
All are in the ecosystem and I would say that that's probably an area salesforce ecosystem is another one.
We are seeing even in the Microsoft ecosystem and dynamics as well so I would say those three are.
What's driving the growth.
Okay, Great and then.
Moving on with the cash flow question.
Are you thinking about I know, it's early but.
How are you thinking about cash flow next year as travel returns is there any chance for breakeven free cash flow next year or maybe give us a sense of what are the puts and takes that could kind of get you into that kind of key breakeven level next year.
Yes, so Josh I don't think we'll be getting quite to breakeven next year, but what we have signaled in the past is that we will be we will be approaching that by the time, we end 2022, and looking for a free cash flow breakeven year in 2023, but our goal.
As to is to consistently improve to show progress from last year to this year and then this year to next year, but I don't think we'll get all the way there.
In 2022.
Okay, great. Thanks, guys.
Thank you.
Our next question comes from the line of Jackson Ader with Jpmorgan. Please proceed with your question.
Great. Thanks for taking my questions guys I was curious to hear whether any of the volatile commodity prices is driving any incremental demand.
Yeah.
<unk>, we can't hear you very well.
Oh, sorry.
Hmm.
Peter one more time I heard about commodity embolic, LLC, but I did not catch everything really well selling them.
Yeah, just just curious whether whether the commodity price volatility that we've seen kind of.
Whether it's lumber oil it doesn't matter but.
Whether that led.
Led to any impact and increased demand on the <unk> side for price optimization.
I would say that that's top of mind for pretty much every company, we talk to and I would say the overall.
This notion that the world we're living in.
There is a lot of uncertainty and there's a lot of volatility and how you drive success with that and the need from moving from me in all manual.
Static process to have more dynamic AI powered model they can adjust much faster to trends and changes is resonating really well.
I think that that every company is facing with these changes.
Think of the overall supply chain issues.
Costs.
<unk> raw material.
Inflation and being able to drive precision in changes quickly yet in the faster you can drive these changes.
The better your business is going to be in terms of capturing revenue and profitability and winning deals.
I think those are areas that are top of mind around all buyers.
Okay great.
Great that makes sense.
Stepping in the past on kind of third quarter calls you've given some directional.
Preliminary expectations for the following year I'm curious if you have any initial thoughts on 'twenty two or if that's a.
A little too far out at this point.
Yes Jackson.
To tell you I would love to be in.
And our market position, where we could.
I'll make a comment on 2022 I think there is I think there is some encouraging things that are happening in the marketplace that we discussed on some previous questions.
So we're very optimistic about what could be the case as we look into 2022, but at this point just not ready to.
To call, what we see happening for our own business in 2022, but do expect to provide that type of color and guidance on our next call.
Okay, Alright, great. Thank you.
Thank you.
Ladies and gentlemen, we have reached the end of our question and answer session.
I would like to turn the call back to Linda.
Over to put for closing remarks.
Thank you for listening to today's call. We look forward to speaking with you at conferences and events. This quarter, we will be attending the Stifel 2021 virtual Midwest one on one growth conference on November 11th the Bird Virtual bus tour on November 16th and the Needham virtual SaaS one on one.
Conference on November 18th if you have any questions. Following today's call. Please contact us at IR at <unk> Dot com, Thank you and goodbye.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.
May disconnect your lines at this time and have a wonderful day.