PROS Holdings, Inc. (NYSE:PRO) Q1 2024 Earnings Call Transcript May 11, 2024
PROS Holdings, Inc. 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 First Quarter 2024 Earnings Conference Call. At this time, all participants will be in listen-only mode. The 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, Head of Investor Relations. Please go ahead.
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 are also available on our website, 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. 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. We delivered a strong start to 2024, exceeding the high-end of our guidance ranges across all metrics. We grew subscription revenue by 15% and total revenue by 10%, while delivering a near 300% improvement in adjusted EBITDA year-over-year, reflecting our continued focus on our 2026 goal of being a Rule of 40 company. Core to our strategy to fuel our growth is to continue to bring groundbreaking AI innovations to market and drive market adoption of the PROS Platform with our land, realize, and expand strategy. In Q1, we officially launched the PROS Copilot for Sales Plugin in partnership with Microsoft. In today’s environment, customers place a premium on speed and efficiency, and research shows that 35% to 50% of sales go to the vendor that responds first.
The PROS Copilot for Sales Plugin seamlessly integrates PROS AI-powered quote insights into Microsoft Copilot for Sales, empowering sellers to deliver fast, personalized offers to customers directly from email threads. PROS is the first vendor to integrate quote insights into Microsoft’s Copilot for Sales, uniquely harnessing the power of data from across PROS Smart CPQ, Microsoft 365 apps, and CRM platforms to drive AI- powered offers that win. Our platform innovations are resonating, evidenced by our wins across industries. I will share a few of our exciting wins, starting with new customers. In Q1, ECE Group and Les Schwab made the strategic decision to adopt the PROS Platform. ECE Group, a global leader in real estate management, chose to activate Smart CPQ to power offers for their retail rental spaces to accelerate time-to-quote and drive a better customer experience.
Les Schwab, a leading automotive tire and parts distributor, chose to activate Smart Price Optimization and Management to power real-time dynamic pricing across their more than 500 retail stores, fueling their profitable growth strategy. We also welcomed Air India as a new PROS customer in Q1. Air India selected the PROS Platform to activate our Offer Marketing solution to seamlessly market personalized offers to passengers online, bringing them into their direct booking channels to drive higher conversion of online sales and fuel profitable growth. Now onto some of our incredible expansions in Q1. Hyatt has expanded its use of Offer Marketing on the PROS Platform to continue to drive exceptional experiences for their guests through optimized and personalized marketing campaigns.
The new innovations enable Hyatt to enhance customer acquisition strategies by launching customizable pages at scale across all digital campaigns. Air Baltic, the flag carrier of Latvia, expanded their use of the PROS Platform by activating Dynamic Ancillary Pricing. Airlines around the world are increasingly focused on driving revenue growth through ancillaries, and PROS has the only AI-powered solution in the market for ancillary pricing. PROS DAP uses reinforcement learning techniques to present tailored ancillary service prices to passengers, aiming to drive more overall ancillary sales at more optimal prices. Based on PROS initial estimates, DAP is expected to drive 2% to 6% revenue uplift through AI-powered dynamic pricing. With DAP, Air Baltic has already seen revenue uplift on assigned seating, which is one of their largest ancillary revenue contributors.
Cargolux expanded their use of the PROS Platform by activating our Gen IV AI Price Optimization including our Capacity-Aware Optimization. With this expansion, Cargolux will take advantage of our latest AI innovations to drive even more value as they continue to use the PROS Platform to power their omnichannel sales motion. We are so proud to see how the PROS Platform is helping businesses across industries and around the globe drive immense value. You will hear more from our customers directly and learn more about the new AI innovations we are bringing to market at our upcoming Outperform with PROS conference. Now, onto our recent organizational update. We welcomed Todd McNabb as Chief Revenue Officer. Todd will lead our global go-to-market team, bringing to PROS over 25 years of experience in driving sales and scaling organizations.
A businessperson using modern technology to analyze and research airline performance.
Todd's leadership will amplify our growth momentum, building upon our land, realize, and expand strategy. I’m excited to welcome Todd to the team and I’m enjoying working closely with him on our growth objectives. Lastly, our core values of ownership, innovation, and care show up in everything we do, including our efforts to build a more sustainable future. This is reflected in our recently published 2023 Sustainability Report, which highlights our progress across environmental, social, and governance related topics and embodies our company's culture in action. You can find our new report in the Investor Relations section of our website. Before I close, I would like to thank our incredible global team for their passion and dedication to PROS, our customers, and our communities.
I would also like to thank our customers, partners, and shareholders for their ongoing support of PROS. With that, I’ll turn the call over to Stefan to cover our financial performance and outlook.
Stefan Schulz: Thank you, Andres, and good afternoon, everyone. It has been almost one year since we outlined our 2026 financial objectives, and I am pleased with the progress we have made during that time, including the first quarter of this year. In the first quarter, we set new highs for non-GAAP subscription and overall gross margins as well as our second-best adjusted EBITDA result. I mention this because we typically see our best adjusted EBITDA and free cash flow results during the second half of each year. Now with that, I will dive into our results for the first quarter. Subscription revenue was $64.3 million, up 15% year-over-year and total revenue was $80.7 million, up 10% year- over-year, both exceeding the guidance ranges.
Our first quarter recurring revenue was consistent at 84% of total revenue, and our trailing 12-month gross revenue retention continued to be better than 93%. Calculated billings in the first quarter increased 3% year-over-year and 11% for the trailing 12 months, in-line with our expectations and the seasonality of our business. We expect the trend of calculated billings this year to continue to be consistent with what we saw last year. Our non-GAAP subscription gross margin was 79% in the first quarter, an improvement of over 140 basis points year-over-year. We also delivered a 9% non-GAAP services gross margin in the first quarter, an improvement of over 1,500 basis points year-over-year. With these improvements, our overall non-GAAP gross margin increased to 67% in the first quarter, an improvement of 315 basis points in non-GAAP gross margin year-over-year.
I’m very pleased with the progress we are making on our key gross margin metrics. We generated adjusted EBITDA of $4.6 million in the first quarter, significantly exceeding guidance and achieving a near 300% improvement year-over-year. Our continued focus on operational efficiency through the initiatives we have in place, such as infusing AI in all aspects of our operations, are helping us continue to drive better profitability. Our free cash flow burn in the first quarter was $4.9 million, which is about in-line with our burn in the first quarter of last year. I am very pleased with this outcome given the increase in incentive payments made in the first quarter of this year versus last year. As a reminder, it is typical for us to have higher expenses in the first half of the year because of payroll taxes as well as marketing initiatives and events.
From a balance sheet perspective, we exited the first quarter with $166.4 million of cash and investments. Later this month, we have $21.7 million of our convertible notes due, and we currently plan to pay this balance with our existing cash and investments. Our first quarter non-GAAP earnings per share was $0.04 per share, also exceeding guidance. Now turning to guidance for Q2. We expect second quarter subscription revenue to be in the range of $64.0 million to $64.5 million, representing 12% growth at the mid-point. We expect second quarter total revenue to be in the range of $80.5 million to $81.5 million, representing 7% growth at the midpoint. We are anticipating services to be essentially flat due to the out-sized 25% growth we saw in services revenue during the second quarter last year.
This is impacting our expected total revenue growth rate by as much as 2 percentage points. We expect second quarter adjusted EBITDA of between $1.0 million and $2.0 million, an improvement of $1.4 million year-over-year. We are expecting an increase in selling and marketing expenses for Outperform, which will take place later this month. Using a non-GAAP estimated tax rate of 22%, we anticipate second quarter non-GAAP earnings per share at breakeven to $0.02 per share based on an estimated 48.2 million diluted weighted average shares outstanding. For the full year, we are raising our guidance for subscription revenue, total revenue, and adjusted EBITDA. We now expect subscription revenue to be in the range of $263.5 million to $265.5 million, representing 13% growth at the midpoint, and total revenue to be in the range of $332.5 million to $334.5 million, representing 10% growth at the mid-point.
Similar to what we saw in Q2 of last year, we have visibility to a higher level of services revenue in the second half of this year, from what our guidance would imply for the first half of 2024. Adjusted EBITDA is expected to be in the range of $17.0 million to $20 million, representing an improvement of $12.5 million year-over-year. In closing, I would like to thank our global team and our customers for their continued support of PROS. We also thank you, our shareholders, for your support of 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?
