PROS Holdings, Inc. Reports Third Quarter 2018 Financial Results

October 25, 2018 4:15 PM | 120 min read | Make a Comment
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  • Subscription revenue up 51% year-over-year.
  • Total revenue up 17% year-over-year.
  • Free cash flow improvement of $7.2 million year-over-year.

PROS Holdings, Inc. PRO, a provider of AI-powered solutions that optimize selling in the digital economy, today announced financial results for the third quarter ended September 30, 2018.

CEO Andres Reiner stated, "We have strong momentum in our business and, in the first nine months of the year, we increased our deal volume by 34% as we continue to execute on our land-and-expand strategy. As companies across industries put commerce at the heart of their digital transformation strategies, we have an exceptional opportunity to grow and scale our business. We are seeing the market embrace our AI solutions, which contributed to our Q3 outperformance and gives us confidence to once again improve our growth outlook for the year."

Third Quarter 2018 Financial Highlights

Key financial results for the third quarter 2018 are shown below. Throughout this press release, all dollar figures are in millions, except net loss per share. Unless otherwise noted, all results are on a reported basis and are compared with the prior-year period.

       
GAAP Non-GAAP
Q3 2018     Q3 2017     % Change Q3 2018     Q3 2017     % Change
Revenue:
Total Revenue 49.1 41.9 17% n/a n/a n/a
Subscription Revenue 23.9 15.8 51% n/a n/a n/a
Subscription and Maintenance Revenue 40.1 32.9 22% n/a n/a n/a
Profitability:
Gross Profit 29.6 24.2 22% 31.2 25.7 21%
Operating Loss (11.9) (17.8) nm (5.1) (9.9) nm
Net Loss (15.8) (21.2) nm (4.6) (6.9) nm
Net Loss Per Share (0.44) (0.67) nm (0.13) (0.22) nm
Adjusted EBITDA n/a n/a n/a (4.9) (9.2) nm
Cash:

Net Cash Used in Operating Activities

(1.2) (8.5) nm n/a n/a n/a
Free Cash Flow n/a n/a n/a (2.6) (9.8) nm

The attached tables provide a summary of PROS results for the period, including a reconciliation of GAAP to non-GAAP metrics.

Recent Business Highlights

Financial Outlook

PROS anticipates the following based on an estimated 37.2 million basic weighted average shares outstanding for the fourth quarter of 2018 and a 22% non-GAAP estimated tax rate for the fourth quarter and full year 2018:

                       
Q4 2018 Guidance v. Q4 2017 at Mid-Point Full Year 2018 Guidance v. Prior Year at Mid-Point
Total Revenue $50.0 to $51.0 9% $194.4 to $195.4 15%
Subscription Revenue $26.25 to $26.75 39% $93.1 to $93.6 54%
ARR n/a n/a $187.0 to $190.0 17%
Non-GAAP Loss Per Share $(0.14) to $(0.12) nm n/a n/a
Adjusted EBITDA $(5.0) to $(4.0) $0.4 $(22.0) to $(21.0) $12.2
Free Cash Flow n/a n/a $(5.0) to $(2.0) $26.0
 

Conference Call

In conjunction with this announcement, PROS Holdings, Inc. will host a conference call on Thursday, October 25, 2018, at 4:45 p.m. ET to discuss the Company's financial results and business outlook. To access this call, dial 1-877-407-9039 (toll-free) or 1-201-689-8470. The live webcast of the conference call can be accessed under the "Investor Relations" section of the Company's website at www.pros.com.

A telephone replay will be available until Thursday, November 8, 2018, at 1-844-512-2921 (toll-free) or 1-412-317-6671 using the pass code 13684013. An archived webcast of this conference call will also be available in the "Investor Relations" section of the Company's website at www.pros.com.

About PROS

PROS Holdings, Inc. PRO provides AI solutions that power commerce in the digital economy. PROS solutions bring intelligence to commerce by providing companies with predictive and prescriptive guidance that enables them to dynamically price, configure and sell their products and services across all channels with speed, precision and consistency. To learn more, visit www.pros.com.

Forward-looking Statements

This press release contains forward-looking statements, including statements about our future financial performance; positioning; management's confidence and optimism; customer successes; demand for enterprise revenue, profit realization and modern commerce software solutions; business expansion; business predictability; ARR; revenue; adjusted EBITDA; free cash flow; shares outstanding and effective tax rate. The forward-looking statements contained in this press release are based upon our historical performance and our current plans, estimates and expectations and are not a representation that such plans, estimates or expectations will be achieved. Factors that could cause actual results to differ materially from those described herein include risks related to: (a) our ability to execute on our cloud strategy, (b) reduced revenue and cash flow resulting from our transition to a cloud strategy, (c) threats to the security of our or our customer's data, (d) potential business or service disruptions from our third party data centers, cloud platform providers or other unrelated service providers, (e) market acceptance of our new products and product enhancements, (f) the risk that the markets for our software do not grow as anticipated, (g) the length of our sales cycles, (h) the risk that we will not be able to maintain historical maintenance, support and subscription renewal rates, (i) competition from vendors of sales, pricing, revenue management and configure-price-quote solutions as well as from companies internally developing their own solutions, (j) potential unauthorized or improper actions of our personnel, (k) the risk that acquisitions we have and may enter into in the future may be difficult to integrate, fail to achieve our objectives, disrupt our business, dilute stockholder value or divert management attention, (l) any downturn in sales to our target markets, (m) potential delays or other challenges related to the implementation of our solutions, (n) the difficulties of making accurate estimates necessary to complete a project and recognize revenue, (o) personnel risks associated with growing a business generally, (p) the impact that a slowdown in the world or any particular economy has on our business sales cycles, prospects' and customers' spending decisions, timing of implementation decisions, payment and renewal decision, (q) our debt repayment obligations, (r) the impact of currency fluctuations on our results of operations, and (s) civil and political unrest in geographic regions in which we operate. Additional information relating to the uncertainty affecting PROS' business is contained in our filings with the Securities and Exchange Commission. These forward-looking statements represent PROS' expectations as of the date of this press release. Subsequent events may cause these expectations to change, and PROS disclaims any obligations to update or alter these forward-looking statements in the future, whether as a result of new information, future events or otherwise.

Non-GAAP Financial Measures

PROS has provided in this release certain financial information that has not been prepared in accordance with GAAP. This information includes non-GAAP income (loss) from operations, annual recurring revenue, adjusted EBITDA, free cash flow, tax rate, net income (loss) and diluted earnings (loss) per share. PROS uses these non-GAAP financial measures internally in analyzing its financial results and believes they are useful to investors, as a supplement to GAAP measures, in evaluating PROS' ongoing operational performance and cloud-first transition.

Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measure as detailed above. A reconciliation of GAAP to the non-GAAP financial measures has been provided in the tables included as part of this press release, and can be found, along with other financial information, in the investor relations portion of our website. PROS' use of non-GAAP financial measures may not be consistent with the presentations by similar companies in PROS' industry. PROS has also provided in this release certain forward-looking non-GAAP financial measures, including non-GAAP income (loss) from operations, annual recurring revenue, adjusted EBITDA, free cash flow and non-GAAP tax rates (collectively the "non-GAAP financial measures") as follows:

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Non-GAAP income (loss) from operations: Non-GAAP income (loss) from operations excludes the impact of stock-based compensation, amortization of acquisition-related intangibles, acquisition-related expenses, amortization of debt discount and issuance costs, and related taxes. Non-GAAP income (loss) from operations excludes the following items from non-GAAP estimates:

  • Share-Based Compensation: Although share-based compensation is an important aspect of compensation for our employees and executives, our share-based compensation expense can vary because of changes in our stock price and market conditions at the time of grant, varying valuation methodologies, and the variety of award types. Since share-based compensation expense can vary for reasons that are generally unrelated to our performance during any particular period, we believe this could make it difficult for investors to compare our current financial results to previous and future periods. Therefore, we believe it is useful to exclude share-based compensation in order to better understand our business performance and allow investors to compare our operating results with peer companies.
  • Amortization of Acquisition-Related Intangibles: We view amortization of acquisition-related intangible assets, such as the amortization of the cost associated with an acquired company's research and development efforts, trade names, customer lists and customer relationships, as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are continually evaluated for impairment, amortization of the cost of purchased intangibles is a static expense, one that is not typically affected by operations during any particular period.
  • Acquisition-Related Expenses: Acquisition-related expenses include integration costs and other one-time direct costs associated with our acquisitions. These amounts are unrelated to our core performance during any particular period and are impacted by the timing and size of the acquisitions. We exclude acquisition-related expenses to provide investors a method to compare our operating results to prior periods and to peer companies because such amounts can vary significantly based on the frequency of acquisitions and magnitude of acquisition expenses.
  • Amortization of Debt Discount and Issuance Costs: Amortization of debt discount and issuance costs are related to our convertible notes. These amounts are unrelated to our core performance during any particular period, and therefore, we believe it is useful to exclude these amounts in order to better understand our business performance and allow investors to compare our results with peer companies.
  • Taxes: We exclude the tax consequences associated with non-GAAP items to provide investors with a useful comparison of our operating results to prior periods and to our peer companies because such amounts can vary significantly. In the fourth quarter of 2014, we concluded that it is more likely than not that we will be unable to fully realize our deferred tax assets and accordingly, established a valuation allowance against those assets. The ongoing impact of the valuation allowance on our non-GAAP effective tax rate has been eliminated to allow investors to better understand our business performance and compare our operating results with peer companies.

Annual Recurring Revenue: Annual Recurring Revenue ("ARR") is used to assess the trajectory of our cloud business. ARR means, as of a specified date, the contracted recurring revenue, including contracts with a future start date, together with annualized overage fees incurred above contracted minimum transactions, and excluding perpetual and term license agreements recognized as license revenue in accordance with GAAP. ARR should be viewed independently of revenue and any other GAAP measure.

Non-GAAP Tax Rate: The estimated non-GAAP effective tax rate adjusts the tax effect to quantify the impact of the excluded non-GAAP items.

Adjusted EBITDA: Adjusted EBITDA is defined as GAAP net income (loss) before interest expense, provision for income taxes, depreciation and amortization, as adjusted to eliminate the effect of stock-based compensation cost, amortization of acquisition-related intangibles, depreciation and amortization, integration costs and other one-time direct costs associated with our acquisitions, and capitalized internal-use software development costs. Adjusted EBITDA should not be considered as an alternative to net income (loss) as an indicator of our operating performance.

Free Cash Flow: Free cash flow is a non-GAAP financial measure which is defined as net cash provided by (used in) operating activities, less additions to property, plant and equipment, purchases of other (non-acquisition-related) intangible assets and capitalized internal-use software development costs.

Calculated Billings: Calculated billings is defined as total subscription, maintenance and support revenue plus the change in recurring deferred revenue in a given period.

These non-GAAP estimates are not measurements of financial performance prepared in accordance with GAAP, and we are unable to reconcile these forward-looking non-GAAP financial measures to their directly comparable GAAP financial measures because the information described above which is needed to complete a reconciliation is unavailable at this time without unreasonable effort.

           

PROS Holdings, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 
September 30, 2018 December 31, 2017
Assets:
Current assets:
Cash and cash equivalents $ 281,889 $ 160,505
Trade and other receivables, net of allowance of $981 and $760, respectively 46,170 32,484
Deferred costs 3,413 3,137
Prepaid and other current assets 7,123   5,930  
Total current assets 338,595 202,056
Property and equipment, net 14,855 14,007
Long-term deferred costs 11,481 3,194
Intangibles, net 21,229 26,929
Goodwill 38,373 38,458
Other long-term assets 4,643   4,039  
Total assets $ 429,176   $ 288,683  
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable and other liabilities $ 5,542 $ 2,976
Accrued liabilities 6,313 6,733
Accrued payroll and other employee benefits 16,375 16,712
Deferred revenue 100,504   75,604  
Total current liabilities 128,734 102,025
Long-term deferred revenue 14,492 19,591
Convertible debt, net 222,124 213,203
Other long-term liabilities 815   843  
Total liabilities 366,165   335,662  
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; none issued — —
Common stock, $0.001 par value, 75,000,000 shares authorized;
41,556,620 and 36,356,760 shares issued, respectively; 37,139,035
and 31,939,175 shares outstanding, respectively 42 36
Additional paid-in capital 360,021 207,924
Treasury stock, 4,417,585 common shares, at cost (13,938 ) (13,938 )
Accumulated deficit (279,948 ) (238,185 )
Accumulated other comprehensive loss (3,166 ) (2,816 )
Total stockholders' equity 63,011   (46,979 )
Total liabilities and stockholders' equity $ 429,176   $ 288,683  
           

PROS Holdings, Inc.

Condensed Consolidated Statements of Income (Loss)

(In thousands, except per share data)

(Unaudited)

 
Three Months Ended September 30, Nine Months Ended September 30,
2018       2017 2018       2017
Revenue:
Subscription $ 23,888 $ 15,809 $ 66,876 $ 41,457
Maintenance and support 16,238   17,124   49,037   52,332  
Total subscription, maintenance and support 40,126 32,933 115,913 93,789
License 1,093 603 2,854 3,883
Services 7,856   8,401   25,644   24,800  
Total revenue 49,075 41,937 144,411 122,472
Cost of revenue:
Subscription 9,053 7,868 26,308 19,605
Maintenance and support 2,852   2,859   8,762   8,886  
Total cost of subscription, maintenance and support 11,905 10,727 35,070 28,491
License 63 73 200 210
Services 7,508   6,924   22,451   21,718  
Total cost of revenue 19,476   17,724   57,721   50,419  
Gross profit 29,599 24,213 86,690 72,053
Operating expenses:
Selling and marketing 17,513 16,980 53,671 50,625
General and administrative 10,179 10,324 31,013 30,514
Research and development 13,773 14,046 41,517 42,429
Acquisition-related —   613   95   613  
Loss from operations (11,866 ) (17,750 ) (39,606 ) (52,128 )
Convertible debt interest and amortization (4,266 ) (4,094 ) (12,671 ) (9,078 )
Other income, net 521   347   967   315  
Loss before income tax provision (benefit) (15,611 ) (21,497 ) (51,310 ) (60,891 )
Income tax provision (benefit) 175   (271 ) 176   55  
Net loss $ (15,786 ) $ (21,226 ) $ (51,486 ) $ (60,946 )
 
Net loss per share:
Basic and diluted $ (0.44 ) $ (0.67 ) $ (1.53 ) $ (1.93 )
Weighted average number of shares:
Basic and diluted 35,676 31,867 33,568 31,527
           

PROS Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 
Three Months Ended September 30, Nine Months Ended September 30,
2018       2017 2018       2017
Operating activities:
Net loss $ (15,786 ) $ (21,226 ) $ (51,486 ) $ (60,946 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 3,165 3,042 9,785 7,047
Amortization of debt discount and issuance costs 3,029 2,853 8,958 6,363
Share-based compensation 4,957 5,571 16,355 17,665
Deferred income tax, net — (486 ) (252 ) (453 )
Provision for doubtful accounts — — 215 —
Loss on disposal of assets — — 37 —
Changes in operating assets and liabilities:
Accounts and unbilled receivables (6,796 ) (278 ) (13,898 ) (141 )
Deferred costs (875 ) — (1,517 ) —
Prepaid expenses and other assets (1,822 ) (5,320 ) (1,884 ) (6,301 )
Accounts payable and other liabilities 840 (1,104 ) 2,569 1,734
Accrued liabilities (2,647 ) (760 ) (533 ) (473 )
Accrued payroll and other employee benefits 3,985 2,879 (342 ) (5,722 )
Deferred revenue 10,775   6,290   22,508   11,379  
Net cash used in operating activities (1,175 ) (8,539 ) (9,485 ) (29,848 )
Investing activities:
Purchases of property and equipment (219 ) (540 ) (1,406 ) (1,235 )
Acquisition of Vayant, net of cash acquired — (34,130 ) — (34,130 )
Capitalized internal-use software development costs (1,202 ) (688 ) (3,686 ) (1,996 )
Purchase of intangible asset — (75 ) — (75 )
Proceeds from maturities of short-term investments —   6,009   —   15,992  
Net cash used in investing activities (1,421 ) (29,424 ) (5,092 ) (21,444 )
Financing activities:
Exercise of stock options (59 ) 1,071 1,142 6,347
Proceeds from employee stock plans 886 759 1,720 1,535
Tax withholding related to net share settlement of stock awards (185 ) (1,489 ) (9,153 ) (7,243 )
Proceeds from Secondary Offering, net 141,954 — 141,954 —
Payments of notes payable 1 — (54 ) (155 )
Debt issuance costs related to Revolver — (25 ) — (150 )
Debt issuance costs related to convertible debt — (2,673 ) — (2,673 )
Proceeds from issuance of convertible debt, net —   —   —   93,500  
Net cash provided by (used in) financing activities 142,597 (2,357 ) 135,609 91,161
Effect of foreign currency rates on cash 21   (290 ) 352   (549 )
Net change in cash and cash equivalents 140,022 (40,610 ) 121,384 39,320
Cash and cash equivalents:
Beginning of period 141,867   197,969   160,505   118,039  
End of period $ 281,889   $ 157,359   $ 281,889   $ 157,359  
 

PROS Holdings, Inc.

Reconciliation of GAAP to Non-GAAP Financial Measures

(In thousands, except per share data)

(Unaudited)

We use these non-GAAP financial measures to assist in the management of the Company because we believe that this information provides a

more consistent and complete understanding of the underlying results and trends of the ongoing business due to the uniqueness of these charges.

See breakdown of the reconciling line items on page 10.

               

Three Months Ended
September 30,

Quarter
over
Quarter

Nine Months Ended
September 30,

Year
over
Year

2018     2017 % change 2018     2017 % change
GAAP gross profit $ 29,599 $ 24,213 22 % $ 86,690 $ 72,053 20 %
Non-GAAP adjustments:
Amortization of acquisition-related intangibles 1,125 1,055 3,547 2,017
Share-based compensation 445   479   1,325   1,569  
Non-GAAP gross profit $ 31,169   $ 25,747   21 % $ 91,562   $ 75,639   21 %
 
Non-GAAP gross margin 63.5 % 61.4 % 63.4 % 61.8 %
 
GAAP loss from operations $ (11,866 ) $ (17,750 ) (33 )% $ (39,606 ) $ (52,128 ) (24 )%
Non-GAAP adjustments:
Acquisition-related expenses — 613 95 613
Amortization of acquisition-related intangibles 1,790 1,713 5,702 3,062
Share-based compensation 4,957   5,571   16,355   17,665  
Total Non-GAAP adjustments 6,747   7,897   22,152   21,340  
Non-GAAP loss from operations $ (5,119 ) $ (9,853 ) (48 )% $ (17,454 ) $ (30,788 ) (43 )%
 
Non-GAAP loss from operations % of total revenue (10.4 )% (23.5 )% (12.1 )% (25.1 )%
 
GAAP net loss $ (15,786 ) $ (21,226 ) (26 )% $ (51,486 ) $ (60,946 ) (16 )%
Non-GAAP adjustments:
Total Non-GAAP adjustments affecting loss from operations 6,747 7,897 22,152 21,340
Amortization of debt discount and issuance costs 3,016 2,844 8,921 6,337
Tax impact related to non-GAAP adjustments 1,461   3,602   4,628   12,012  
Non-GAAP net loss $ (4,562 ) $ (6,883 ) (34 )% $ (15,785 ) $ (21,257 ) (26 )%
 
Non-GAAP diluted loss per share $ (0.13 ) $ (0.22 ) $ (0.47 ) $ (0.67 )
 
Shares used in computing non-GAAP loss per share 35,676 31,867 33,568 31,527
               

PROS Holdings, Inc.

Supplemental Schedule of Non-GAAP Financial Measures

Increase (Decrease) in GAAP Amounts Reported

(In thousands)

(Unaudited)

 
Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
Cost of Subscription Items
Amortization of acquisition-related intangibles 947 874 2,997 1,504
Share-based compensation 77   58   165   187
Total cost of subscription items $ 1,024   $ 932   $ 3,162   $ 1,691
 
Cost of Maintenance Items
Amortization of acquisition-related intangibles 168 170 517 482
Share-based compensation 53   45   185   218
Total cost of maintenance items $ 221   $ 215   $ 702   $ 700
 
Cost of License Items
Amortization of acquisition-related intangibles 10   11   33   31
Total cost of license items $ 10   $ 11   $ 33   $ 31
 
Cost of Services Items
Share-based compensation 315   376   975   1,164
Total cost of services items $ 315   $ 376   $ 975   $ 1,164
 
Sales and Marketing Items
Amortization of acquisition-related intangibles 665 658 2,155 1,045
Share-based compensation 779   909   3,347   3,313
Total sales and marketing items $ 1,444   $ 1,567   $ 5,502   $ 4,358
 
General and Administrative Items
Share-based compensation 2,635   2,864   8,202   8,546
Total general and administrative items $ 2,635   $ 2,864   $ 8,202   $ 8,546
 
Research and Development Items
Share-based compensation 1,098   1,319   3,481   4,237
Total research and development items $ 1,098   $ 1,319   $ 3,481   $ 4,237
       
Acquisition-related expenses $ —   $ 613   $ 95   $ 613
       

PROS Holdings, Inc.

Supplemental Reconciliation of GAAP to Non-GAAP Financial Measures

(In thousands)

(Unaudited)

 
Three Months Ended September 30, Nine Months Ended September 30,
2018     2017 2018     2017
Adjusted EBITDA
GAAP Loss from Operations $ (11,866 ) $ (17,750 ) $ (39,606 ) $ (52,128 )
Acquisition-related expenses — 613 95 613
Amortization of acquisition-related intangibles 1,790 1,713 5,702 3,062
Share-based compensation 4,957 5,571 16,355 17,665
Depreciation 1,375 1,329 4,083 3,985
Capitalized internal-use software development costs (1,202 ) (688 ) (3,686 ) (1,996 )
Adjusted EBITDA $ (4,946 ) $ (9,212 ) $ (17,057 ) $ (28,799 )
 
Free Cash Flow
Net cash used in operating activities $ (1,175 ) $ (8,539 ) $ (9,485 ) $ (29,848 )
Purchase of property and equipment (219 ) (540 ) (1,406 ) (1,235 )
Purchase of intangible asset — (75 ) — (75 )
Capitalized internal-use software development costs (1,202 ) (688 ) (3,686 ) (1,996 )
Free Cash Flow $ (2,596 ) $ (9,842 ) $ (14,577 ) $ (33,154 )
 
 
Guidance Q4 2018 Guidance Full Year 2018 Guidance
Low High Low High
Adjusted EBITDA
GAAP Loss from Operations $ (12,300 ) $ (11,300 ) $ (51,800 ) $ (50,800 )
Amortization of acquisition-related intangibles 1,700 1,700 7,400 7,400
Share-based compensation 5,300 5,300 21,700 21,700
Depreciation 1,500 1,500 5,600 5,600
Capitalized internal-use software development costs (1,200 ) (1,200 ) (4,900 ) (4,900 )
Adjusted EBITDA $ (5,000 ) $ (4,000 ) $ (22,000 ) $ (21,000 )

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