PROS Holdings, Inc. (NYSE:PRO) Q4 2023 Earnings Call Transcript February 8, 2024
PROS Holdings, Inc. misses on earnings expectations. Reported EPS is $0.02 EPS, expectations were $0.06. PRO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the PROS Holdings Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference call over to Belinda Overdeput, Director of Investor Relations.
Belinda Overdeput: 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.com. Our prepared remarks also will be available on our website immediately following the call and will be replaced by 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 opportunities, 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 turn the call over, I’d like to remind investors and analysts of our upcoming 2024 Outperform with Pros Conference, which will take place May 20 to 22 in Orlando, Florida. Outperform with Pros is one of the world’s preeminent AI conferences, where you will hear from experts across industries on how to use AI to drive business forward.
We will also host a panel for investors and analysts on the 22. Registration is open on our website. With that, I’ll turn the call over to you, Andres.
Andres Reiner: Thank you, Belinda. Good afternoon, everyone, and thank you for joining us on today’s call. I’m so proud of what our team accomplished in 2023. We had an incredible year. Last year, we delivered 14% subscription AR growth year-over-year, significantly outperforming the high end of our guidance range. We grew our total revenue by 10% and subscription revenue by 15%, while generating $11.4 million in free cash flow, an outstanding improvement of over $33 million year-over-year. We set a goal to get to a rule of 10 in 2023 and we outperformed that goal by reaching rule of 40. We continue to be laser focused on delivering to our long-term goal of being a rule of 40 company. The PROS value proposition has never been more relevant, as businesses continue to lean into digitization, automation and AI to drive operational efficiencies and fuel revenue growth.
We continue to launch groundbreaking AI innovations that are captivating the market. We are an innovation company at our core. Every year, we provide new innovations to inspire our customers and last year was no different. We added over 400 new features across the PROS platform in 2023, including revolutionary industry first innovations such as capacity aware optimization, collaborative quoting and dynamic ancillary pricing to name a few. We’re constantly innovate to drive even more value to our customers and help them thrive in the era of AI. The strategic changes we made in late 2021 with the launch of the PROS platform made our market leading AI innovations easier than ever to adopt through our land, realize and expand strategy. The ongoing success of these changes was evident again in 2023 and in Q4 as we experienced a record-breaking quarter for deal volumes.
In Q4, we drove incredible wins in new customer acquisition and expansions across B2B and travel. Now highlight a few of our amazing Q4 wins starting with new customers. Schneider Electric and Castrol both selected the PROS platform to fuel their growth strategies. Schneider Electric, a global leader in energy technology, chose to activate our price optimization and management solution to drive winning prices in real time that continuously adjust to market changes. Castrol, a leading manufacturer of industrial lubricants chose to activate our optimization, price management and CPQ solutions to drive a superior customer experience by optimizing and automating their global sales process. In travel, we’re winning new customers around the globe, from world class airlines to brand new startups, all of whom want to lead the travel industry in innovation.
For example, Saudia, the flight carrier of Saudi Arabia and Really Cool Airlines, a new start up set to take flight this year, both selected the PROS platform in Q4. Saudia is activating our revenue management and group sales optimizer solutions to power profitable growth with dynamic market relevant offers and a seamless sales experience. Really Cool Airlines is activating our revenue management solution to offer a personalized and seamless integrated travel experience to their customers. Now on to some of our incredible expansions in Q4. Thanks to our continuous focus on innovation and value realization, we’re seeing customers such as Smith & Nephew, Air Canada and Japan Airlines among many others continue to expand on the PROS platform. Smith & Nephew, a global medical technology company continues to expand CPQ across moregeographies and business units to drive even more value by powering a seamless sales experience across their global enterprise.
Japan Airlines and Air Canada have been customers of PROS for 2 and 3 decades, respectively. And because of the innovation and success they drive with PROS, they continue to expand adoption of the PROS platform. Japan Airlines expanded their use of our digital offer marketing solution and upgraded to our ultimate addition of Group Sales Optimizer. Japan Airlines also added their cargo business on our platform with the adoption of our price optimization and management solution in Capacity Aware Optimization AI. These expansions enhance Japan Airlines’ ability to drive winning offers across their passenger group and cargo businesses. Air Canada chose to activate our corporate sales solution and upgrade to the ultimate addition of our real time dynamic pricing solution.
PROS corporate sales enables Air Canada to drive a frictionless sales experience for their corporate contracts business. With RTDP Ultimate, Air Canada drives even more value through our latest AI innovations for continuous pricing, empowering them to price fares across the spectrum with the best willingness to pay AI to date. As I said before, we are an innovation company. We’re committed to continuously innovating to provide even more value to our customers. This commitment extends beyond what our customers need now to address what they will need to drive success for decades to come. This is why we have immense pride in seeing longstanding customers like Japan Airlines and Air Canada continue to expand their partnership with PROS by adopting our latest innovations.
Where innovations are not only driving expansions, but are also inspiring customers to migrate to the cloud, like we saw in Q4 with Hewlett Packard Enterprise. HPE has been a valued PROS customer for a decade, and now they’re transitioning to the PROS platform to take advantage of our latest innovations in price optimization and management, including our industry leading real time pricing engine in our Gen 4 AI. This is such an exciting time at PROS. Today more businesses are focused on how they can use digitization, automation and AI to drive profitable growth than ever before, and we are well positioned to capitalize on this market opportunity. And as I said before, we are laser focused on our goal to achieve a rule of 40. This means we must continue to innovate to expand our growth and drive greater efficiency every year, which brings me to our strategic focus areas for 2024.
First, we’ll continue focusing on our land, realize and expand strategy. In 2023, this strategy continued to help us drive accelerated deal velocity, improve rep productivity by nearly 20%, and reduce customer time to value. We achieved a notable 28% reduction in B2B new logo sales cycle times year-over-year. We also achieved a 20% reduction in time to value across our core offerings year-over-year, while simultaneously driving significant expansion of our services gross margin, an outstanding achievement. In 2024, we will continue to innovate to extend our market leadership position, bringing even more solutions to market further expanding the value realization potential for our customers. Second, we will continue to expand our platform by expanding our marketplace.
Our marketplace currently holds over 140 solutions, over half of which are developed by partners. In 2024, we will introduce more of our offerings and extend access to a wider ecosystem of partners, driving even more value to our customers and the market. Finally, we will continue our legacy of being a pioneer and leader in AI by infusing AI into every aspect of our business. Not only we will continue to innovate to deliver market-leading AI innovations through our platform, but we’re embracing AI innovation to drive efficiency across every aspect of our business. Organization aims not only to transform how we operate, but establish a new standard for how enterprises should use AI to power their operations moving forward. Before I close, I want to say how proud I’m of our amazing team for their unwavering dedication to our mission of helping people and companies outperform, where employees embody our core values of ownership, innovation and care for each other for customers and our communities.
I want to thank our global team for making PROS an exceptional company and congratulate all of them for their great achievements. I’d also like to thank our customers, partners and shareholders for their ongoing support of PROS. With that, I’d like to turn the call over to Stefan to XHOVR financial performance and outlook.
Stefan Schulz: Thank you, Andres, and good afternoon, everyone. I am very happy with the results our team posted in 2023 and how everyone on our team contributed to our success. On a year-over-year basis, our total revenue grew $27.6 million while our EBITDA improved by $20.9 million and free cash flow improved by $33.1 million. To further emphasize this point, in 2023, we added $0.76 for every incremental revenue dollar to our EBITDA and added $1.20 for every incremental revenue dollar to our free cash flow. Additionally, we continued to improve our subscription gross margin and turned our services gross margin from a negative percentage in 2022 to a positive percentage in 2023. All of this was accomplished while continuing to grow our business.
We delivered subscription ARR that was $5 million higher than the high end of our guidance. During our Analyst Day in May of 2023, we discussed our long-term financial goals for total revenue growth and free cash flow margin, including our target of reaching a Rule of 40 in 2026. At that time, our most recent fiscal year was a Rule of 2, and our first goal was to achieve a Rule of 10 in 2023. As a result of our strong performance in 2023, we actually achieved a Rule of 14. We are really pleased with our 2023 results and are focused on making further progress towards our long-term goal in 2024. Now I’ll cover our results in a little more detail. Subscription revenue in the fourth quarter was $60.8 million increasing 14% year-over-year and $234 million for the full year, increasing 15% year-over-year.
Total revenue in the fourth quarter was $77.5 million increasing 9% year-over-year and $303.7 million for the full year, increasing 10% year-over-year. Recurring revenue for the fourth quarter the full year was 84% of total revenue, and our trailing 12-month gross revenue retention rate continued to be better than 93%. Our subscription ARR was $259 million or $257.9 million on a constant currency basis, increasing 14% year-over-year and significantly exceeding guidance. As Andres mentioned, our team also drove a strong fourth quarter and full year of customer wins, welcoming both new customers and expanding our existing partnerships. Our fourth quarter recurring calculated billings increased 22% year-over-year and 9% for the trailing 12 months.
Our non-GAAP subscription gross margins were 78% for both the fourth quarter and the full year, increasing from 77% in 2022. We delivered 5% non-GAAP services gross margin in the fourth quarter, getting us to a year-end non-GAAP services gross margin of also 5%, which is a significant improvement from a loss of 1% in 2022. Collaborative innovation between our professional services and product teams drove the impressive 20% year-over-year reduction in time to value that Andres mentioned, while simultaneously driving higher efficiency in how we deliver our offerings. Our services margin expansion is a result of this collaboration, and I want to congratulate our teams for their achievements in this area. Non-GAAP total gross margins were 66% in the fourth quarter and 65% for the year, improving from 64% in 2022.
We generated $13.6 million in free cash flow in the fourth quarter. As a result, we generated $11.4 million in free cash flow for the year, significantly outperforming our guidance. We typically experience stronger cash flow results in the fourth quarter, and this year our results were even better than expected as the percentage of on time collections improved. We generated adjusted EBITDA of $2.5 million in the fourth quarter, which puts our adjusted EBITDA for the full year at $6 million an impressive improvement from our loss of $14.9 million in 2022. We fell just short of our adjusted EBITDA guidance in the fourth quarter and the full year because of an increase in our incentives due to our outperformance on revenue and free cash flow for the year.
From a balance sheet perspective, we exited the year with $178.7 million of cash and investments. We also finalized the convertible debt exchange transaction we announced in Q3, which pushed the maturity of most of our debt out to 2027. Our non-GAAP earnings per share for the fourth quarter was $0.02 per share, bringing us to a non-GAAP earnings per share for 2023 of $0.05 per share. Turning now to our guidance with stated growth rates and amounts at the midpoint of the ranges. For the full year, we expect subscription ARR of $289 million000 to $292 million representing 12% growth year-over-year. We anticipate full year subscription revenue to be in the range of $263 million to $265 million representing 13% growth year-over-year and total revenue to be in the range of $332 million to $334 million representing 10% growth year-over-year.
We anticipate full year adjusted EBITDA of between $16 million and $19 million representing an improvement of $11.5 million year-over-year and free cash flow in the range of $22 million to $26 million an improvement of $12.6 million year-over-year. Turning now to guidance for the first quarter of 2024. We expect subscription revenue to be in the range of $63 million to $63.5 million representing a 13% increase year-over-year and total revenue to be in the range of $79 million to $80 million representing a 9% increase year-over-year. We expect first quarter adjusted EBITDA of between $700,000 and $1.7 million, which is an improvement of $3.5 million over the first quarter last year. And as a reminder, it is typical for our business to have higher expenses in the first quarter.
Using an estimated non-GAAP tax rate of 22%, we anticipate first quarter non-GAAP earnings per share at breakeven to $0.02 per share based on an estimated 48.1 million diluted weighted average shares outstanding In closing, I would like to thank all of our employees around the world for their continued hard work and dedication to PROS. I’d also like to thank you, our shareholders, for your continued support PROS, and we look forward to speaking with you at our upcoming events. I will now turn the call back over to the operator for questions. Operator?
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