PROS Holdings, Inc. (PRO) Earnings Call Transcript

All right. Thank you, everybody, for joining us on today's webcast. I'm Belinda Overdeput, the Head of Investor Relations for PROS. Joining me on today's call is Jeff Cotten, PROS President and CEO; and Stefan Schulz, our CFO. Before we get started, I'm just going to state that please note 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 in 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 session, we will discuss non-GAAP metrics. Reconciliations between each non-GAAP measure and the most directly comparable GAAP measure to the extent available without unreasonable effort are available in our earnings press releases. And as we near the beginning of our quiet period and close out Q2, we really wanted to take this opportunity to give investors and analysts a chance to engage with Jeff and Stefan and ask questions. I know that 4:30 Eastern Time on a Friday is not ideal. I'm well aware. But given the timing of the debt exchange that we completed late into last night and the availability of our team given customer commitments, this is really the only time that worked. As most of you know, we do go quiet on Monday afternoon, but we wanted to really get a chance to talk to all of you before then. I'll be monitoring the online platform for questions. So please send anything in. And I'm going to kick us off with a question for each of Jeff and Stefan and make sure that we cover the background on the announcements that we made via 8-K filings this week.

So Jeff, I'm going to start with you. Obviously, we're wrapping up your second week as President and CEO of PROS. It's been so great working with you so far. Can you start by giving our investors some insights into your first couple of weeks and kind of the decisions that were made this week as well?

Absolutely. Thank you, Belinda, and let me add my thank you for joining on a Friday afternoon. It's great to be able to get in front of our shareholders and analysts for my first official call. Right now, I am mostly in listening mode as my first 30 days are primarily focused on meeting employees and customers and assessing how we operate, what our customers really value and want from our products, et cetera. So far, what I've seen is that our products command great value in our customers. I've met with new customers and some long-time customers and the strategic value that our products offer to orchestrate their sales and revenue management processes are mission-critical to their businesses. There's palpable opportunity in the business, which I've seen as I've dug deeper into both our B2B and travel businesses. Specifically, looking within the current customer base, I'm seeing amazing opportunity to expand. A great example on the B2B side is we have a large customer base who have purchased our core pricing optimization product, and this creates an entry point to now show them the power of using our market-leading CPQ product as an integrated platform. This opportunity is a great area where a recent partner conversation reveals a mechanism to leverage them to actually execute on this opportunity. On the travel side, we have cross-sell opportunities across the portfolio. From airlines that use our digital offer marketing product, we now have the opportunity to sell our core pricing and revenue management offering. In fact, I was at an existing offer management airline customer just this morning where this opportunity is playing out. Then there's an opportunity for the reverse where we have core revenue management and plenty of opportunity to expand with our other travel products like digital offer marketing. Next, many of you have already heard me and my excitement on the alliance and partner ecosystem side and have already engaged a potential new partner who could further open the flow of deals that are going on in larger ecosystems like CRM, e-commerce and the ERP space. We will be more aggressively going after partners such as this in the coming days and months. But I do want to stress, it will take time to cultivate these relationships, get agreements in place and then start to generate joint business opportunities. But the opportunity is there, and I believe this will be a game changer for PROS. Finally, I have been assessing our organization and evaluating the opportunity in the market, along with our structure to attack that opportunity. As we announced on Wednesday, we have made the decision to eliminate the CRO position with Todd's departure at the end of the quarter. First, let me reiterate, I am more excited about this opportunity this week than I was even just 2 weeks ago before I started. This company is performing. Our sales cycles have reduced further this year by more than 10%, our reps are more tenured, our inbound demand is accelerating. I am not here to disrupt any of this. I am here to elevate it and accelerate it. This move with our CRO is about my skills and expertise in go-to-market and what I'm seeing in the opportunity to drive tie alignment by elevating and working closely with our go-to-market teams for faster decision-making that will ultimately accelerate growth. That's why I'm here. This is what you all are looking for and it's a critical component on our journey to Rule of 40 by 2027.

Thanks, Jeff. That is all super helpful color. And I can attest firsthand that your excitement and engagement in our opportunity to accelerate growth and your commitment to Rule of 40 has been front and center in many of the conversations that I've been a part of with you just in the last couple of weeks and since we've met. . I'm sure we're going to come back on some of the topics you mentioned. I see some questions coming in, so we'll get to those. But before we go out for more questions, Stefan, I'm going to turn it to you. We put out an announcement this morning reaffirming our Q2 guidance. And before I ask this, I also want to say the reason we put that announcement this morning is because we wanted it to encompass the 2 announcements that we made this week with regard to the CRO position and the convertible debt. So that's a little insight into the timing. But Stefan, can you give some color to investors on reaffirming Q2 guidance? Stefan, I think you might need to unmute if you're there.

Thank you. That's exactly what the problem was. So thanks, Belinda. Given the 2 announcements that you just mentioned over the last couple of days, we want to provide another data point that our position in the quarter hasn't changed and our team is actually executing well.

Perfect. And also, we've been getting the question and it's in the queue right now. Can you give any color on annual guidance as well?

Yes. As Jeff mentioned, the business is performing well, and we feel good about our year. Nothing has really changed from how we see the business, and we'll update our annual guidance in a few weeks as a part of our second quarter earnings announcement.

Perfect. Now again, to the point that we were talking about earlier, we did make an announcement this morning regarding our convertible debt. Do you mind walking investors through the rationale behind this transaction?

Yes. First of all, we're very pleased with this transaction. It's a $235 million transaction, but mostly in exchange of our existing 2027 bonds for new 2030 bonds. Essentially, we swapped about $187 million of '27 bonds for $185 million of new notes. So it was effectively a slight deleveraging just simply by making the exchange in of itself. . We did raise an additional $50 million or about 20% of the overall transaction, primarily to cover the costs associated with the transaction, including a capped call. Now we opted to purchase the capped call because that effectively increased the conversion price from up 35% to now and up 100% and that's above the reference price, which is an averaging period that will take place over the course of the next week. So by the end of the next week, we'll know exactly what that will be and the disclosure will be made about that shortly thereafter. The last thing I'll say is that this transaction is pretty consistent with what we've communicated recently, including our last webcast that we did at Outperform. I mean we're pretty happy with our overall capital structure. But we always felt that if we could gain some optionality by pushing out the maturities from 2027 to 2030, that actually give us more gun powder to go and execute on some of the things that we wanted to or potentially might want to do. So this gives us that flexibility, while at the same time, actually producing less debt than we would have had otherwise. So after 2026, our debt position comes down by about 12%. So like I said, we're very happy with the transaction and feel like it's going to provide a significant amount of flexibility at the same time in the end, reducing the level of debt on the balance sheet.

Perfect. Thank you, Stefan. Okay. So Jeff, one of the questions I received from one of our sell-side analysts in the queue is a little bit about our AI. So I'm going to go to you next on this. So one of PROS core competencies has traditionally been the development of algorithms and machine learning models for pricing and revenue optimization. In a world where developers gain access to more and more powerful LLMs or coding tools, how does the company maintain its moat and defend itself from businesses taking more of these services in-house.

I'm so glad this question was asked. I love this question. Let me start first with a bit of a level set. And I apologize to those of you who have this all figured out, First, LLMs are, as their name implies, simply based on language. They're good at natural language interaction and the latest models are good at constructing a chain of thought reasoning to come up with a plan on how to do something. They've been trained on all the data publicly available out in the world, accessible by the public Internet or public APIs. Our specialty is in numeric models. . That are trained on numbers, and these numbers are found in data that is not available on any public data source. It's typically our customers' data sources. So these models excel at real-time predictions like prices, discounts, demand forecast, opportunity costs and similar predictions, predictions you're not going to get out of a standard LLM. At PROS, any LLM can fit, though we have chosen to use Microsoft Azure OpenAI to ensure we adhere to our strict standards of governance, isolating each customer's data, which is a really critical point on that customer data isolation. We solve a very complex problem that has high stakes, pricing and revenue optimization, and that has provided a strong moat given our algorithms cannot afford to be wrong and we deliver a high degree of accuracy. Additionally, our AI is flowing through the operational workflows of a company. They deliver high value because they're running in real time at scale where the work is happening. This is why we also have customers that even embed and operationalize their own algorithms into our platform, which is a unique capability versus a standard LLM. So our platform is extensible and enables us to maintain our relevancy even when a customer wants to embed some of their own secret sauce.

Perfect. Well, that was a great overview. And then another question from one of our analysts as well. So over the past few years, the company has emphasized selling smarter -- sorry, sorry, faster, smaller through high-velocity sales. So this is in reference to our land, realize and expand approach, which we've talked about quite a bit with the market. And this leads to a greater and obviously, faster opportunity for expansion on the fast -- at the back end of successful deployment. So Jeff, how do you plan to accelerate that motion? Or how do you think about that? And what sort of benchmarks are you using to measure sales?

Yes. So look, over the last 2 weeks as I've been doing a lot of assessment and deep dives with our go-to-market team, it's clear the team has made phenomenal progress in accelerating deal velocity, and I want to build on this. While we've made incredible improvements, there's a lot more we can do to accelerate. This is part of the reason I want to work more closely and directly with our go-to-market leadership as we elevate them up to the executive leadership team level to align around the opportunities to drive demand acceleration, light up the channel and get us more at-bats. We have a really strong competitive win rate. So we've demonstrated already that we can win when we get into these opportunities and now want to widen the top of the funnel and get us into more of these opportunities and apply that same win rate.

Perfect. Another question again from another one of our analysts. Thank you guys. I am seeing these, and I'm working through the queue. As part of your Rule of 40 framework, you plan to drive solid expansion of free cash flow over the coming years and headcount is roughly in line with late 2023 levels, so driving some of that upside. At the same time, you've continuously emphasized how large and underpenetrated the market is. How do you, Jeff, feel about the balance of profit gains and investment in the context of free cash flow goals and TAM opportunity? And is it the right choice to maintain current headcount levels? Or where can you do more with less or the same?

Yes. So as I've been digging in with the team and also really studying our sort of last year to 2-year historical financial performance, one of the reasons we've been able to keep headcount relatively stable is because of how we're using AI across the business, and Andres has done a great job leading this that I want to continue. It's one of the reasons I was really attracted to PROS and an initiative that frankly makes running a company in this current era really fun. So just last week, we prioritized 4 high-impact areas in the business where we're going to drive aggressive automation and AI programs to improve productivity. Andres did a great job sort of rallying the whole organization of getting focused on this, and now we're going to drive high impact. And as we realize those productivity gains, we will then use the savings from those productivity gains to shift that OpEx into areas like demand generation to accelerate growth. So an example of one of these high-impact areas is our customer support operation. We have an opportunity to utilize agents to first make our customer support engineers faster and more accurate in providing customer responses and then eventually exposing those very same agents directly to the customer for self-service, driving even more productivity gains. I know this works because we just executed a similar play at my last company and an even improved customer satisfaction as an added bonus. Thus, through reallocation, we can shift expense into areas of the business to drive growth while maintaining our current OpEx envelope allowing us to scale into roughly 20% on the growth side and 20% on the free cash flow margin side, implied by a Rule of 40 goal. So this strikes the right balance and one we cannot just hit once but sustain over the long term.