Q1 2023 PROS Holdings Inc. Earnings Call
Greetings and welcome to the Pros Holdings. This caution on 23 earnings conference call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
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Key pad.
As a reminder, this conference is being recorded.
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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 on 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 <unk>.
The official transcript, which includes 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.
<unk> and our financial projections and guidance actual results could differ materially from such statements and our forecast 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 analyst day, which will take place at 130 P. M Mountain time on Tuesday may 23rd during the tour.
Twenty-three pros outperform conference at the Hyatt Regency in Denver, Colorado, the event will be webcast live for those unable to attend in person.
Busters and analysts who wish to attend the phone conference. In addition to the analyst day, we will receive a discount on the conference registration for more details on outperformed 2023 or to register visit pros Dotcom slash outperformed.
I'd also like to notify investors of our recently published 2022 ESG report available on <unk> Dot com.
Our ESG report highlights pros views and approach to key environmental social and governance issues that matter most to our stakeholders with that I'll turn the call over to you Andres.
Thank you Bill and good afternoon, everyone and thank you for joining us on today's call.
Proud to share that we delivered a strong start to 'twenty to 'twenty three we grew.
Subscription revenue by 15% in total revenue by 10%, while delivering a 75% improvement in adjusted EBITDA year over year.
We're laser focused on fueling our own profitable growth in our performance in the first quarter is a testament to this focus.
As a result, we're raising our full year 2023 guidance across all metrics, which stephane will cover in his remarks.
Underpinning the success of routine Miss our platform strategy, we continuously extend our market leadership position by consistently driving new innovations to market through our platform.
Our modular ice capabilities deliver real quantifiable value to our customers, creating the flywheel effect that is sort of land and expand sales strategy.
At the heart of the pros platform, sorry I E.
AI algorithms have been training across industries to drive immense value for businesses we.
We have product type C. I algorithms that predict demand optimize supply chains drive customer cross selling upsell recommendations detect customer attrition and predict customer willingness to pay among many others.
We're algorithms not only driving incredible value, but are explainable extensible in highly scalable.
We're explainable AI approach is what drives high customer adoption of our market leading algorithms.
Or he ice extensible, enabling our customers and partners to infuse their own algorithms into our platform, bringing new innovations to life.
Where AI platform is extremely scalable and supports mission critical availability to deliver results in real time to businesses around the globe.
To put our scalability and availability perspective.
We're now processing 5.9 million transactions per minute with platform uptime of 99.97%.
Annualize that puts us at over three trillion transactions processed in a year.
That's more than two and a half times said 2022 equity trading volume of the New York Stock exchange.
There has been an acceleration of market interest in the technology to drive business outcomes.
And I believe the growing acceptance of AI will be a long term tailwind for pros.
In Q1, we launched a new generation of pros dynamic pricing for ancillary is powered by AI.
For airlines ancillary revenues and increasingly important growth driver with ancillary revenue as a percent of global airline revenue increasing 40% in the last five years.
Bruce dynamic pricing for ancillary uses reinforcement learning techniques to exploring present ancillary service prices to passengers aiming to drive more overall ancillary seals at more optimal prices over time.
Dynamic pricing, France, Larry Sixteens, Pro's leadership position and offer optimization for airlines, along with our digital offer marketing dynamic offers in digital retail capabilities.
In Q1, we made or innovations, even more accessible to customers across industries by enabling businesses to embed pro smart see PQ solution in Microsoft power apps.
Businesses can now integrate our market leading capabilities with other applications and selling workflows. So you're seeing a low code no code development approach further extending the digital footprint of pros platform.
Now I'd like to talk about some of the incredible new customer lands, we had in Q1.
Europe car one of the world's largest rental car companies selected pros to optimize P to P. M Bdcs Sally yeah.
Europe car will benefit from more expertise in the rental car industry using rei models for demand forecasting fleet optimization and fleet distribution empowering them to optimize revenue management and capacity controls.
With our pricing and see PQ capabilities Europcar will also streamline the buying experience for corporate agreements to drive a higher conversion of sales.
With the addition of Europcar pros now powers commerce for three of the top five rental car market leaders globally.
We also continue to welcome new customers across areas of manufacturing and distribution.
My Lai and manufacturer and distributor of automotive parts selected pros to optimize pricing in fueled their profitable growth in the wake of inflationary pressure in supply chain disruption.
Another example of this nature starch, leading manufacturer of frozen fruit, who selected pros to streamline and deliver market relevant prices to customers around the globe.
We also welcome quit all ortho, a leading manufacturer of diagnostic health care products.
We Delaware authorities beginning their journey with pros powering high volume quotes to integrated delivery networks and group purchasing organizations.
Now I'll share a few examples of expansions from Q1.
Air Europa expanded their solution to incorporate our latest innovations in group sales optimization, including dynamic pricing ticketing and payment capabilities to enable if fully digital into an experience for their customers with this expansion are euro based.
Now driving value from every airline centric capability of the pros platform.
We continued to see success in Dania G space, where pros provide solutions to five of the top 10 largest oil and gas companies in the world.
In Q1, we expanded our relationship with Phillips 66 with their decision to migrate toward cloud solution to take advantage of our latest C. I innovations for fuel price optimization.
Yeah.
A core component of our land and expand strategy is value realization.
<unk> Commission Forrester consulting part of leading global market Research Company Forrester research to independently interview several pros customers to access the value generated from the pros platform.
The Forrester total economic impact study showed any vast many pros paid for itself within nine months and generated a 400% return on investment in the first three years for the interviewed customers.
Most senior price software solutions have a hard time to demonstrate directing quantifiable value, but this study conducted by Forrester showed once again the direct correlation between pro solutions in a quantifiable improvement to revenue and margin.
We're going to share more about our new innovation center, how industry, leading companies are leveraging this new innovations to drive profitable growth at our upcoming outperform conference scheduled for later this month.
Outperform is one of the preeminent AI conferences in the world and we're looking forward to bringing together experts from across industries to discuss how we I can drive business forward.
Before I close I'd like to thank our incredible global team for their passion and dedication to pros or customers and our communities.
I'd also like to thank our customer partners and shareholders for their 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.
Our team delivered a strong first quarter, putting us in a position to improve our growth and profitability outlook for the year.
I'd also like to highlight a couple of positive signs from the first quarter that should help us going forward.
First in the Echo Andras, we continue to see success in our land and expand sales motion.
A great example, as Victor security, a new customer in Q4, who just one quarter later expanded their see PQ capabilities to support their dealer network. In addition to their direct sales channel.
Second the continued recovery of travel is a good leading indicator for our business.
Despite economic uncertainty airline projections of passenger demand remains strong.
IATA is projecting that global industry passenger volumes will recover to 2019 levels sometime in 2024.
While the benefit to pros is not immediate we are pleased to continue seeing positive signs in the travel industry.
In Q1, we did recover approximately $1 million from a carrier that previously declared bankruptcy.
This puts us in a strong position to recover a total of $2 million to $3 million for the year from carrier through either declared bankruptcy or from carriers, who were offered concessions during the pandemic.
Now for our first quarter results.
Subscription revenue in the first quarter was approximately $56 million up 15% year over year, and total revenue was $73 $2 million up 10% year over year, both exceeding the guidance ranges.
Our first quarter recurring revenue was 84% of total revenue.
non-GAAP subscription gross margins were 78% for the quarter, improving from 76% a year ago, and our non-GAAP recurring gross margins, which combines both subscription and maintenance margins was 77% for the quarter up approximately 100 basis points over last year.
As we discussed last quarter, we have largely completed our migration to the cloud and as of Q1 maintenance revenue now accounts for less than 8% of our total revenue.
By the end of 2023 we expect maintenance to account for approximately 6% of our total revenue.
There are certain fixed cost to support the remaining maintenance customers, causing the decline in maintenance margins, but given the declining size of this revenue component there is minimal impact on overall recurring gross margins.
For this reason, we will focus on reporting subscription gross margins going forward.
As expected we experienced a decline in services margin in Q1 due to the seasonal increase in travel and payroll taxes. We continue to project a services margin that is slightly positive for the year.
Our trailing 12 month gross revenue retention rate in the first quarter continues to be above 93%.
Our adjusted EBITDA loss in the first quarter was $2.3 million, beating guidance and a 75% improvement year over year, reflecting our continued focus on driving efficiency improvements.
Free cash flow burn in the first quarter was $4.5 million, which was slightly better than our expectations and a 61% improvement over last year.
As a reminder, it is typical for our business to see a cash burn in the first half of the year and cash generation in the second half of the year.
We expect a free cash flow burn in Q2, mainly due to the timing of some larger expenses such as our outperform conference.
We exited the first quarter with $192 $4 million of cash and investments.
Our non-GAAP loss per share was six cents per share.
We were pleased with our first quarter bookings, but our calculated billings declined 4% year over year and increased 6% for the trailing 12 months.
The year over year decline in quarterly calculated billings was due to some timing anomalies related to renewals and customer migrations, where the new SaaS anniversary dates differ from the historical maintenance renewal dates these.
These timing anomalies will be offset in the coming quarters with much of it anticipated to occur in the second quarter. When we expect calculated billings growth to improve significantly.
Now turning to guidance.
We expect second quarter subscription revenue to be in the range of 56 to $56 $5 million, representing 12% year over year growth at the midpoint.
We expect second quarter total revenue to be in the range of $72.2 million to $73.2 million.
We expect second quarter, adjusted EBITDA loss to be between 2.2 to $3 $2 million and reiterate the second quarter is our highest marketing expense quarter for events such as outperform.
Using an estimated non-GAAP tax rate of 22%, we anticipate second quarter non-GAAP loss per share of between five and eight cents per share based on an estimated $46 1 million shares outstanding.
Because of our strong start in the first quarter, we are raising our full year revenue and profitability guidance.
We now expect subscription revenue to be in the range of 231.7 to $233 $7 million in total revenue to be in the range of $295 million to $297 million.
We expect full year adjusted EBITDA profit of between 3.5, and $6 $5 million and free cash flow in the range of 2.5 and $6 $5 million.
We are also raising our subscription are our guidance range for the full year.
We are now anticipating a range of between $251 million and $254 million.
In closing I would like to thank our global team and our customers for their continued support of pros. We also thank you for your support of pros and we look forward to speaking with you at our upcoming events, including our analyst day on May 23rd which will take place within our outperform conference I will now turn the call back over to the operator for questions.
Operator.
Thank you.
At this time that will not be conducting a Christian and answer session.
If you look at our house Christian treat space, So and then one on the telephone keypad.
A confirmation tone will indicate that demand is in the Christian Kim.
He mcchrystal talked too if you talk to remove your question from the queue.
Well participants using speaker equipment, it may be necessary to pick up your handset before pressing just talk cans.
Our first question comes from Patrick show off that.
My question and I appreciate the updated guidance, we provided just from a revenue standpoint subscription revenue growth is implied to accelerate in the back half of the year from 12% growth guidance for Q2 can you just provide some additional color on the level of confidence you have in this acceleration and maybe what visibility you have in the second half of the year.
Yeah. So Patrick this is Stefan I'll I'll take that so you know as we said in Q1 and it's still true today, we haven't really factored in the bookings opportunities that we see in the second half we're still focused primarily on what we see today for the next call it quarter or two.
Really not factoring in a lot for Q4.
That said.
Cause of some of the revenue recognition patterns, we've had especially in our travel part of our business. We have good visibility to what what deals that have already been booked that are gonna be queued up for revenue recognition starting in the second half of the year. So we have pretty good visibility to what we're seeing from a subscription acceleration to your point in the second half of the year based on.
Deals that have already been booked.
Okay. That's helpful. And then maybe one quick follow up on on travel in General and you guys pointed out to you that it appears that travel and flight data has shown some improvement over the recent months, especially across Asia Pacific can you just maybe comment on how the travel recovery has been relative to your expectations at the start of the year and with the conversations you were having with the airlines.
Customers, how would you describe their ongoing capacity to invest in digital solutions, even as we potentially enter into a more challenging macro.
Yes, Patrick this foundry, we're very pleased with the overall performance of the travel business and I would tell you airline serving that seem very aggressive on digitizing their customer experience I talked about are in Europe , I'm not prepared remarks, moving to DSL or some move moving all of the group sales.
So a full digitized experience.
Those areas are resonating very very well in the market. So our dynamic offers or get a retail platform next generation are in areas around ancillary revenues, which we talked about one of the newest innovation. So on our next generation.
You know AI solution.
Those are the areas that are resonating very well in the airline industry and they see the value that that drives for the business. So overall, we're seeing.
Strong market demand.
Great. Thanks for taking my questions guys.
Thank you.
The next question comes from Chad Bennett of Craig Hallum Capital Group.
Great. Thanks for taking my questions.
Jeff in the quarter and it's good to see the incremental raise on the guide.
So I hopped in kind of mid mid prepared remarks. So I just wanted to hopefully are not redundant, but just in terms of the <unk> business and in deal activity. There I know last year deal activity was very robust I think doubled year over year.
Andre answers for Stephane just.
Did you address that in the prepared remarks or can you kind of give us an update on how deal activity that's going there.
Yes, Chad great. Great question overall, we're very pleased with the overall performance of <unk> had a very strong start for the year and overall as we talked about last year was our first year then we move.
So our platform launch, which happened in late in 2020, one and we saw a pretty significant deal volume growth. We're seeing now more normalized growth rates off of that that solution.
But we're very pleased with the overall performance and overall growth I would tell you that it's been great to see.
How we can start in in many organizations from small lance.
Very sophisticated lands with the platform and the rest of it he has been very positive. So overall <unk> continues to drive our growth and very strong.
<unk> performance in the first quarter.
And did you did you have any mention or have you seen any any additional deal scrutiny, especially on the larger end of the deal sizes.
Great question, Chad I would tell you look at the market continues to be a challenging market I will say, we I talked about it last year a lot of focus on making sure that we're landing small.
Proving ROI in our value.
In that we're getting time to value fast and where that message is resonating and we're seeing that get our projects through through to success. So so overall I will tell you that you know we haven't seen any major shifts from man you know deal delays overall.
But I will tell you our sales team very focused on finding a path to land small yet to value quickly and be able to prove the ROI and that's why we all sat in prepared remarks around the Forrester research.
Values study and another data point independent on the value that we drive and I think that that that's just another testament to the direct correlation that our solution strive to helping companies drive both revenue and margin improvement.
Got it. Thank you and then maybe one quick one for Stefan if I could.
Steffan just on the billings the timing of the customer migrations and renewals in the quarter, which which looks like they'll reverse here in Q2, which is is there any way to quantify the impact that you saw in the first quarter of the timing issues.
Yeah, you know Chad.
We spent a lot of time looking at this because you know when you look at our quarterly calculated billings. They literally there is no trend to really identify.
But what we can tell you as we look forward and we look at what's up for renewal and what we plan to bill, including some of those anomalies that we talked about from Q1, you can expect to see a growth rate in the quarter next quarter north of 20%. So I mean that kind of gives you an idea how much it's going to move.
Just between quarters.
It does give us an idea alright, thanks nice job again.
Thank you.
Okay.
The next question comes from Parker Lane of Stifel.
Hi, This is Matthew kicker on for Parker. Thanks for taking my questions to start have you seen any inflection this year and the number of conversations around your AI excuse me AI capabilities with your Gen. Four AI and how often is that one of the primary factors that companies are having in their decisions.
To go with pros.
Yeah, Great question definitely I will say that.
There is a lot more conversations about AI and AR or Gen. Four AI, we they love the simplicity of the new neural network algorithm in and how we can show the value opportunity even during the sales cycle by loading data very quickly showing what the value potential.
And I think that's definitely driving Lance it's also helping us drive expansions are faster. So overall definitely I will say that.
The attention on AI has increased quite a bit in and we're seeing that as a positive benefit to our business.
Okay, that's great to hear and then secondly, how successful has the build out of your quota carrying fashion team been so far and have you seen any type of early returns there.
Yeah. So we're very pleased with the quota carrying team and the team we have delivered to our updated guidance. So overall, we feel very good about the team. We're also seeing you know some of the new members that come in.
And you know drive performance and close deals in the first quarter. So it's still early it's small sample size, but I would tell you the not just the building out the team, but they enable meant really really proud of the sales leadership and the sales team and everything they're doing to scale the organization.
Terrific. Thank you very much.
Thanks.
The next question comes from Brian Schwartz of Oppenheimer.
Yeah, Hi, Thanks for taking my questions. This afternoon I'm Andre just wanted to dig in deeper again on the AI conversation.
When you're talking with customers and your demo ing out and they're starting to deploy it or the customer is starting to see improved productivity and conversions and then the question I wanted to ask you. If they are seeing that can you talk about the potential additional monetization path that there could be for pros to be able.
To capture some of that increasing benefits that your customers are likely to start seeing what the embedded AI on the products.
Yeah, Great question, Brian the beauty about our or Gen. Four technologies, we can monitor that uplift that our guidance is generated so we can give them a minute trial, let's say they start to run in a region.
Sure reps are you seeing the technology, we can quantify same time over time same type of business.
Left that we're generating both revenue and margin and and there we can create a real real value estimation that AI is generating.
Our opportunity to expand our many folds its one deploying across more innovations.
And deploy more and more advanced capabilities within our platform. So if you look at both our or price optimization platform more CPU platform, we have everything from essentials advantage to ultimate edition. So the level of sophistication that you can drive, let's say you may start with your spot deals.
Then you May move two agreements you may move to channel and digital channel steers, many different expansion point.
That we can drive within a <unk> company.
And and and that that to me was for us game, changing and moving to our platform in late 'twenty or 'twenty, one is giving us that ability to start small quantified the value quickly and then be able to drive more sophistication and capabilities for a customer over time.
And Stefan talked in his prepared remarks on factor as an example of of landing and in it and a follow up quarter expanding.
So we're seeing that play out.
Thank you and one question Stefan for you I'm just looking at the updated guidance for the full year.
It's just a question around the assumptions because it did look like you beat in Q1 more than you're raising the full year revenue and profitability guidance and so I'm just wondering if there's extra conservatism in there or if there are some moving pieces. Thanks.
Yeah, Brian its more the ladder we have.
Noted in our in my prepared comments that we had a we had a recovery from a bankruptcy that that occurred in the first quarter and that represented about a $1 million and so that was a part of the beat not the whole part, but a part of it and.
That's really more one time, so we're not going to see that benefit throughout the rest of the year and so that's why you see a little bit of a.
They appear to be conservatism, but reality, we're just taking that out of the comparisons between Q1, and then the rest of the quarters of the year.
Thank you for taking my questions.
Thank you.
The next question comes from Scott Berg of Needham.
Hi, Andres and Stefan Thanks for taking my question Congrats on the good.
Quarter.
I just got a couple of things following up on Brian's question their stuff on the extra $2 million to $3 million per year, that's coming from some of the recovered contracts can you remind us where we are in that process. I believe there is 18 $5 million that went into kind of either forbearance or bankruptcies, but what does that recovery path look like.
How much more do you think you'll ultimately recovered from that number. Thank you.
Yes, so Scott we were probably about halfway this year will be about a little over halfway in collecting.
We feel like is recoverable now not all of that $18 million is recoverable, we estimate somewhere between 10 and $12 million is going to be ultimately recoverable and and.
And some of it like we saw in the first quarter is that all recurring.
Most of it is recurring by the way.
And so but I would say, we're about halfway to getting to that $10 million to $12 million and the balance of it will come in.
In 'twenty, four and 'twenty five.
Got it helpful and then Andreas both you and stuff and talked about the land and expand strategy and some of the successes you had in the quarter.
How should we think about kind of what I guess, what that cadence looks like versus pre pandemic levels. I know you are having a lot of success, they're selling some smaller deals but getting customers to.
Expand their relationships really quickly and maybe what maybe the first quarter, maybe multiple quarters in a row do you feel like you're on the same cadence as you were pre pandemic or did you sell a little ways to go there.
I would tell you from a beta V, absolutely, where where they are or even beyond because we didn't have the same platform that we had that we have now I would say travel we're getting to that point, but we still are not fully back to the pre pandemic level.
Definitely travel, it's continuing to improve and I would tell you that he and travel all so our platform strategy allows us to land smaller in terms of capabilities, which has been part of our strategy is to bring more new capabilities.
That we can activate quickly and get to that are you.
And that's working well as well.
Great Thats all I have thanks for taking my questions. Thank you. Thank you.
The next question comes from David My apologies, ladies entrance if you knock off the Christian here welcome to press Star and then one on your telephone keypad took place itself into question Kim.
The next question comes from Devin of Keybanc capital markets.
Great. Thanks for taking my question first one I have is around I guess, the general of AI, you know a lot of buzz and nice to see that process I'll say kind of an uptick from customers looking at AI, but maybe internally within froze I mean, how are you guys kind of leveraging that technology to drive automation and efficiency.
Yeah, Great Great question. So we've always been at the forefront of AI and have been working actively with Microsoft I know Benny I.
Various areas, both our internal operations.
And in areas around our overall operations of the business, but also in terms of product keep the ability.
And those will we'll showcase some of those that are upcoming outperformed but very focused think of it on the customer experience angle in the employee experience angle of our application generative AI really complements a lot of more predictive AI capabilities in the combination.
<unk> can be very powerful we've been very very active with Microsoft.
And they are open AI team and collaborating directly with our science team months on those areas.
Got it no that's great to hear and then just one quick housekeeping question I think you know currency move slightly more favorable than the past quarter.
Maybe just any update on how currency is being contemplated now in the updated revenue guidance.
Yeah, you know, there's an old adage of its good rather be lucky than good and I think that certainly applies to us and how currencies have impacted as you may recall last year, we didn't really have that much of a currency impact we had.
Very minor, maybe maybe 1% at the peak in a given quarter and now that they've turned.
It's worked out to where our billings from an international perspective, we've got to pick back up on the better rate environment and so we've I think we're gonna be in a situation.
Assuming currencies stay where they are where theres going be a very limited impact on currency for us are both last year and this year.
Got it thanks Andres. Thanks. Thank you. Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session.
I'll now turn the call.
You blend it over to Tim.
Okay.
Thank you for listening to today's call. We look forward to speaking with you at conferences and events. This quarter. In addition to hosting our analyst day, we will be attending the Needham technology and media.
Conference on May 16th in New York City, the Craig Hallum, 20th annual institutional Investor Conference on May 31st in Minneapolis, The Jefferies Software Conference on June 1st in Newport Coast. The Stifel Cross sector Insight conference on June six in Boston, and the Baird consumer Tech and services.
Conference on June 7th in New York City. If you have any questions. Following today's call. Please contact us at IR at <unk> Dot com, Thank you and goodbye.
Thank you, ladies and gentlemen that does conclude today's conference. Thank you for attending human now disconnect Your line.
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