PROS Holdings, Inc.
Q1 2008 Earnings Call Transcript

Published: 26 May 2008

[Operator:]

Welcome to the Q1 2008 PROS Holdings earnings conference call. (Operator Instructions) At this time I would now like to turn the presentation over to your host for today's call, Charlie Murphy, CFO.

[Charlie Murphy:]

Thank you for joining us today for the PROS Holdings financial results conference call for the first quarter of 2008. This is Charlie Murphy, PROS Executive Vice President and Chief Financial Officer. Joining me on today's call is Bert Winemiller, PROS Chairman and Chief Executive Officer. On today's conference call, Bert will provide a commentary on the highlights of the first quarter ended March 31, 2008, and then I will provide the review of the financial results and our outlook before we open up the call to questions. Before beginning, we must caution you that today's remarks in this discussion, including statements made during the question-and-answer session, contain forward-looking statements. The statements are subject to numerous important factors, risks and uncertainties which could cause actual results to differ from the results implied by these or other forward-looking statements. Also, these statements are based solely on the present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements. Please refer to our prospectus, Form 10-K and other filings with the SEC for the risk factors contained therein and other disclosures. Also, please note that a replay of today's webcast will be available in the Investor Relations section of our website. I would also like to point out that the company's use of non-GAAP financial measures is explained in today's earnings press release, and a full reconciliation between each non-GAAP measure and the corresponding GAAP measure is provided in the tables accompanying the press release filed earlier today. It also can be found on our website in the Investor Relations section. With that, I'd like to turn the call over to Bert.

[Bert Winemiller:]

We are very pleased that we have exceeded our revenue and earnings per share targets in the first quarter of 2008. These results are validation of PROS proven business model of delivering high return on investment, pricing and revenue optimization software products to our customers and our high visibility revenue model. PROS proven track record, proven processes and proven solutions are the keys to our success and drive our high level of customer satisfaction. We are pleased with our strong first quarter results and believe it was a solid start to the year. Our first quarter results affirm the value of PROS pricing revenue optimization software as a strategic innovation and a risk migration initiative in a challenging economy. PROS reported first quarter revenue of $17.9 million, slightly above our guided range, and a 33% increase from the first quarter of 2007. Non-GAAP operating income of $4.4 million was up 78%, demonstrating the leverage in our model, primarily from gross margin improvements. Non-GAAP earnings came in at $3.2 million or $0.12 per share. We have successfully executed our growth strategy and enhanced our market leading position of experience and expertise in developing high performance, real-time dynamic pricing technology, embedding world-leading science in our software products, and providing a high return on investment to our customers by implementing pricing excellence best practices and PROS pricing and revenue optimization software. We believe that the pricing of revenue optimization software industry is still in its early stage, and that PROS is in the center of this shift to science-based pricing from spreadsheets and the current destructive pricing practices used at most companies. CEOs and CFOs are starting to recognize that traditional pricing strategies such as cost-plus and match the competition cause unnecessary discounting and destructive pricing practices, and are especially harmful in a weak economy. The natural reaction in a downturn is to retreat, cancel all new initiatives, roll back to just the basics, and tighten the ship. Some companies even accelerate unnecessary deep discounting. But companies that focus on price optimization projects during a challenging economic environment will be in a better position to remain profitable industry leaders as competitive opportunities arise and economic conditions improve. The momentum we built in 2007 as a leader in the pricing and optimization market continued in the first quarter of 2008. Reflecting, last quarter I told you that our strategy for 2008 was going to be to further penetrate our five target vertical markets, continue to sell additional products to existing customers, and extend our pricing thought leadership and technology leadership by applying science innovations to our products. In the first quarter, we made headway in each of those areas. Q1 marked record revenue driven by the market momentum that continues to build for pricing and revenue optimization software products. We are seeing increasing adoption of price optimization software products across all of our target industries - manufacturing, services, distribution, hotel/cruise, and airline. In Q1 we continued to execute on our strategy of further penetration and expansion into our five target vertical markets, and we had sales in each of these target industries. In addition to diversification across our five target vertical markets, our revenue is also diversified geographically and between businesstobusiness and businesstoconsumer pricing solutions. In the first quarter, approximately 55% of our revenue came from outside the United States. We believe this diversification and multiple dimensions provide us with some level of protection from economic uncertainties as we have been largely shielded from the recent concerns about the economic environment. It's also important to recognize that the pricing optimization industry, where we hold a leadership position, is still being driven by innovative companies, and that our customers tell us that the return on investment benefits they receive by implementing our technology are just as important in a down market as they are in an up market. Regarding successes in thought leadership, two weeks ago we conducted our 14th Annual Pricing Excellence Summit, and it was a resounding success. Many of the people on this call and participating on the call actually attended our Pricing Excellence Summit, and we appreciate that. We had over 500 attendees from 40 countries participating in over 80 sessions, with topics ranging from price strategies and tactics for a decentralized sales force to strategic price optimization for an uncertain economy. Customers and prospects from each of our five target vertical markets were in attendance. Key notes and presentations were made by customers in these industries as well as other notable industry pricing experts. What I observed at the conference was that regardless of what's happening in the economy, managers at innovative companies all over the world across our five target vertical markets are recognizing the increasing value of pricing science and are adopting PROS software based pricing solutions to improve their bottom line. Our products, PROS Scientific Analytics, Price Optimizer and Deal Optimizer were highlighted at the summit. These high performance real-time dynamic pricing products deliver all of the relevant pricing information that a salesperson needs to effectively negotiate a transaction at the time the price is quoted and the sales transaction is actually made. This is very different from static retail pricing. PROS provides the pocket price, pocket margin, customer willingness to pay, customer cost to serve, win-loss ratios, market price, stretch price, and all the other relevant information so that our customers can maximize revenue and profitability by using optimized prices that reduce profit leaks. PROS software products optimally and dynamically price millions of individual transactions every day. Our pipeline of opportunities in all of our target markets - manufacturing, distribution, services, hotel/cruise and airline continues to be healthy. We will continue to invest in sales and marketing and R&D so that we can continue to deliver against our strategies and objectives and build on the momentum we have generated as a leader in the pricing and revenue optimization industry. We're thrilled with our first quarter results. This achievement is the result of the hard work of over 300 employees at PROS who are smart, dedicated people doing great things to bring pricing excellence and high value to our customers. Also, we have a very experienced management team. Today on the call I am very pleased to announce four promotions. These individuals are great leaders and have been exceptional high achievers at PROS for many years. PROS Board of Directors has approved the promotion of Andres Reiner and Jeff Robinson to the position of Executive Officer, and [Bobit Dusai] and [Oscar Marino] to Corporate Vice President. Now these individuals will introduce themselves.

[Andres Reiner:]

Hello. My name is Andres Reiner. I joined PROS in 1999. I'm the Senior Vice President of Product Development, and I'm responsible for the PROS time-to-market activities. I lead Product Management, Research and Development, Quality Assurance, [inaudible] Level Support for all PROS pricing revenue optimization software products.

[Jeff Robinson:]

Hello. My name is Jeff Robinson. I joined PROS in 2000, and I'm Senior Vice President of Pricing Solutions. I'm responsible for sales, marketing, solutions and professional services for manufacturing, distribution, services and hotel/cruise. I provide executive leadership for PROS time-to-value activity and world class sales and marketing best practices.

[Bobit Dusai:]

Hello. My name is Bobit Dusai, and I'm the Vice President of Pricing Professional Services. And I'm responsible for PROS timetovalue activities. I joined PROS in 2001, and I lead the Business Professional Services, Technical Professional Services, and Customer Support Services for PROS pricing and revenue optimization software products.

[Oscar Marino:]

Hello. My name is Oscar Marino. I joined PROS in 1999. I'm Vice President of Product Development and responsible for PROS time-to-market activities. I lead Product Development, Quality Assurance and [inaudible] Level Support for the PROS Pricing Solutions Suite. The major products in this suite are the Scientific Analytics, Price Optimizer, Deal Optimizer and the Real-Time Integrated [Science].

[Bert Winemiller:]

All of us at PROS feel good about our future prospects and we are confident we can capitalize on the market momentum we are experiencing, so now I'll turn the call over to Charlie so he can provide you with the financial details and our outlook for the second quarter and the year.

[Charlie Murphy:]

PROS had a solid first quarter and is off to a good start in 2008. Revenue for the first quarter of 2008 came in at $17.9 million, up 33% from the first quarter of 2007 and slightly above our guided range. In accordance with our revenue recognition policy, PROS does not recognize any revenue at contract signing. License and implementation revenue is bundled together and recognized using percentage of completion over the implementation period. This provides visibility into future quarters' revenue. There can be variability, however, in revenue from quarter to quarter not as a result of seasonality but rather the timing of when an implementation starts or finishes, the implementation effort needed, the number of products being deployed and the contract size. Within revenue, license and implementation revenue was $12.8 million in the first quarter or 71% of revenue. This was an increase of 42% over the first quarter of 2007. Maintenance and support, which makes up the balance of revenue, was $5.1 million in the first quarter and was up 15% over the first quarter of 2007. Our revenue is diversified across many dimensions, geography, across our five target vertical markets, and between B2B and B2C customers. In the first quarter, approximately 55% of our revenue was generated outside the United States compared to 63% for the full year 2007. It is also notable that over 90% of our airline revenue is from outside the United States. Unless I indicate otherwise, my comments and our statement of operations will refer to results on a non-GAAP basis. Our earnings press release issued today includes a full GAAP to non-GAAP reconciliation and can be found in the Investor Relations section of our website. Gross profit was $13.5 million in the first quarter, resulting in gross margins of 75.4% compared to gross margins of 69.1% in the first quarter of 2007. We are pleased with the continuing improvements in gross margins. We continue to see some of the same benefits in our gross margins that we saw in previous quarters, namely, the continuation of improvements in our implementation processes, the continued standardization of our products, and the amount of implementation services required to deploy our products relative to the contract price, and the current mix of our business. In addition, a foreign exchange gain of $129,000 in the first quarter added approximately 0.7% to our gross margin. We can't be certain that the previously mentioned factors, which contributed to significant gross margin growth, will continue to contribute to margins in 2008. R&D expenses in the first quarter were $4.4 million or 24.5% of revenue, and increased 18.5% from the first quarter of 2007 as we continue to make investments in our suite of pricing and revenue optimization software products. As we continue to make these investments, we expect R&D spending will increase in absolute dollars in future periods. Selling, general and administrative expenses in the first quarter were $4.7 million or 26.1% of revenue, and increased 51% from the first quarter of 2007. The year-over-year increase is partly due to public company costs as well as due to our planned increases in marketing and personnel expenses. We expect SG&A costs will continue to increase in 2008 due to SOX compliance costs, a full year of other public company costs, and our continued investment in sales and marketing activities and personnel in order to extend our leadership position in the market. Non-GAAP operating income was $4.4 million in the first quarter, up 78% from a year ago, exceeding our guidance. Operating margin in the first quarter was 24.8% compared to 18.5% in the first quarter of 2007. As in the fourth quarter, our year-over-year increase in operating margin was primarily attributable to increased games. Operating profits exceeded guidance as a result of gross margins achieving a record of 75.4% including the $129,000 gain from foreign exchange and lower operating expenses. Lower operating expenses was the result of lower personnel growth earlier in the quarter, reduction in benefit costs as a result of changing health insurance carriers, and other costs coming in less than planned. Interest income was approximately $422,000 in the quarter, and interest rates declined more than originally expected during the first quarter. While average cash balances increased, we experienced a decline in the average interest earned due to declining interest rates. As discussed on our last call, Congress recessed for 2007 without extending the research and experimentation tax credit which has bipartisan support for the credit. The Senate Finance Committee chairman, with bipartisan support in committee, unveiled legislation on April 17 to extend the credit through 2009, however passage remains uncertain. The credit has expired a number of times since it was originally enacted in 1981, and each time, except for a brief period 1995, it has been retroactively reinstated. If the credit is reinstated in 2008, as we expect, and if it is retroactive to the beginning of the year, as has been the case in the past, then we would make a cumulative adjustment in the quarter in which the law was reinstated. If the R&D credit is passed we believe our effective tax rate will be 28%. On a pro forma basis, we are using a tax rate of 28% for the second quarter and the year 2008, expecting that the past 26 years of extending this credit will continue going forward. If it is not extended, our effective tax rate will be 35% until the credit is extended. We are using a non-GAAP effective tax rate of 35% in the first quarter as the R&D credit has not been reinstated compared to an actual tax rate of 21% in the first quarter of last year. Our effective tax rate historically has been lower than the statutory rate of 35% largely due to the application of the research and experimentation tax credit. The increase in our non-GAAP effective tax rate in 2008 compared to 2007 is due to the utilization of research and experimentation tax credit carryforwards in 2007 and to the higher levels of pre-tax income in relation to research and experimentation credits earned going forward. Non-GAAP net income for the first quarter of 2008 was $3.2 million or $0.12 using a 35% tax rate per diluted share, exceeding our guidance. Diluted shares were 26.7 million. In the prior quarter, the non-GAAP net income was $2.4 million and $0.11 per diluted share. 2007 reflects a much lower preIPO share count of 20.2 million shares. 2007 earnings per diluted share for the first quarter would have been $0.09 using the post-IPO Q1 2008 weighted average shares outstanding of 26.7 million shares. Had the R&D credit been reinstated retroactively during the three months ended March 31, 2008, there would have been a $0.01 increase to non-GAAP diluted earnings per share to $0.13 per diluted share. As I stated earlier, the previous discussion was based on our results on a non-GAAP basis, which includes certain noncash items such as stock-based compensation expense. During the first quarter, stock-based compensation expense was approximately $907,000. GAAP net income was $2.6 million or $0.10 per diluted share in the first quarter at a tax rate of 35%. A GAAP to non-GAAP reconciliation is presented in our earnings press release issued today. Moving to our balance sheet, we ended the quarter with cash and equivalents of $45.5 million, up approximately $1.1 million from the end of the fourth quarter. Accounts receivable at the end of the quarter were $19.8 million, up approximately $4.9 million from the prior quarter. Trade accounts receivable days sales outstanding of 70 days was consistent with our 2007 full year DSOs. As we have stated in the past, accounts receivable balances can vary in a quarter based on the timing of invoicing contractual milestones, which vary from quarter to quarter. Total deferred revenue at the end of the first quarter was $28.9 million, an increase of $2.8 million from the end of the fourth quarter. As with accounts receivable and cash flows, deferred revenue can fluctuate quarter to quarter depending on the timing of contractual milestone billings. Deferred revenue balances do not correlate to total contract value and therefore we do not believe it is a meaningful forward indicator. Turning to cash flows, our operating cash flow in the first quarter was $1.3 million. As with receivables, there is quartertoquarter variability in operating cash flow due to the variability in invoicing contractual milestones and payments for accruals. Capital expenditures for the quarter were $369,000, and we expect capital expenditures for the full year to be approximately $1.8 million. Overall headcount at the end of the quarter was 355 compared to 342 at the end of December, and we continue to increase staffing throughout the organization to support our continued growth. Since the close of the quarter we had a customer action that you should be aware of which is disclosed in our Form 10-Q filing that was filed along with our earnings release. Let me start by saying that PROS values very highly all of its customers and works tirelessly to deliver value to them through our solutions. We have a tremendous track record of successful implementations and are very proud of the work we've been able to do for our customers. We were disappointed to find out that one of our customers is seeking to terminate a contract related to one of our implementations. We intend to enforce our contract and to defend ourselves vigorously against their claim. It's premature to say much more at this time except to say that we believe the litigation to be incidental to our business and considered it in determining the guidance we are providing. Now let me turn to our guidance for the second quarter of 2008 and the full year. For the second quarter, PROS anticipates total revenue in the range of $18.3 million to $18.5 million, representing a growth rate of 28% from 2007 at the midpoint of our guided range. We are projecting non-GAAP operating income of $3.3 to $3.5 million, and we are anticipating non-GAAP net income of $2.6 to $2.8 million and non-GAAP earnings per diluted share of $0.10 based on an estimated fully diluted share count of 26.9 million shares and the estimated effective rate used was 28%. Non-GAAP operating income for the second quarter excludes estimated FAS 123R stock option expense of approximately $935,000. For the full year 2008, our expectations are unchanged at the top line, and we continue to expect total revenue in the range of $76 to $78 million or a growth rate at the midpoint of 24% compared to the prior year. We are projecting non-GAAP operating income of $15.3 million to $16.2 million. We are projecting non-GAAP net income of $12 million to $12.6 million and non-GAAP earnings per diluted share of $0.45 to $0.47. Non-GAAP operating income and net income for the year excludes estimated FAS 123R stock option expense of approximately $3.7 million. Diluted shares outstanding at the end of the year are estimated at 26.9 million, and the estimated effective tax rate used is 28%. The 2007 non-GAAP earnings per diluted share for the full year would have been $0.40 using estimated 2008 weighted shares outstanding, reflecting the post-IPO share count. Considered in the guidance provided are costs associated with being a public company that we'll be incurring on a full year basis. These include higher audit and legal fees, director's compensation, director's and officer's insurance, and SOX compliance costs. In addition, the guidance includes other factors, including lower interest income given the current interest rate environment and a non-GAAP effective tax rate assumption of 28%. We remain confident in our full year expectations, which also include our forecast for full year bookings in the range of $53 to $55 million, consistent with the guidance we provided last quarter. And as always, this bookings forecast is exclusive of maintenance and support. With that, let me turn the call back to the operator so that we can take your questions.

[Operator:]

(Operator Instructions) Your first question comes from Tom Ernst - Deutsche Bank Securities.

[Tom Ernst:]

So it seems like you're expressing a lot of optimism and enthusiasm for health of the business. I'm curious; did you see any signs at all of customer apprehension in the quarter in terms of the environment from the macro? And in particular - as you look across your product sets you've got kind of the big new engagements with customers, where you go through some of the design pocket margin and pocket pricing and some of those deployments can be long, and then you have some of the upgrades and the Optimizer and some of the smaller initiatives that can go much quicker - did you see a differential between those types of projects in terms of the customers' behavior and appetite? Has that shifted here in this quarter?

[Bert Winemiller:]

Tom, that's an excellent question. We monitor and measure all aspects of our business, and we look at the entire makeup of our revenue, which consists of maintenance, the revenue generated from already existing contracts with implementations in progress as well as the new business revenue needed from bookings in a quarter under a high visibility revenue model. We also have between 50 and 60 active projects going on at any particular point in time, and we do a deep dive audit on every single project every single month. The accounting department and the professional services team that is responsible for time-to-value and implementation get together and audit every single project. What we are seeing based on all the metrics that we use is no indication at this time that the macroeconomic environment is affecting our business. Now you know we had an incredible attendance at our pricing summit. We continue with our aggressive marketing program with webinars. Attendance at the webinars continues to be strong. You know and have reviewed our world class sales best practices, which include a thorough evaluation of the sales pipeline on a regular basis, taking all of the companies that are in our target market as suspects and then monitoring very objectively with fact-based metrics how they move from suspect to prospect to C account, B account, A account and forecastable. And as a result of all of those activities, at this point in time we obviously feel comfortable because we are reconfirming our annual guidance. Now that's not to say things might not change in the future, but right now, based on our traditional way of managing our business, the traditional metrics that we have used, we are confident in the future prospects of our business and we are reconfirming our annual guidance.

[Tom Ernst:]

One of the things - Wall Street doesn't expect the airlines category for you to be a growth driver, and I haven't expected that as well - so one of the things that surprised me at the [user's] conference was the number of customers in the airlines category that were talking about upgrading and talking about evaluating or actually have already purchased the O&D product. I'm curious, is there an inflection in that business? Is there new demand that you're seeing, particularly on the O&D product?

[Bert Winemiller:]

The airline business has always been a good business for us. The interesting profile characteristic about that is that 95% of our business is international, and what you saw - well, at the conference we had over 40 countries represented, and the interesting thing is we had global representation in all of our industries. But the airline industry in 2007 outside the United States actually was very robust. It was profitable. They were growing. They're buying A380s, and they're expanding their networks. And what you read about the domestic characters here in the United States is not representative at all of what has gone on historically with international carriers. Now all carriers face high fuel costs. All carriers are facing the same kinds of pressures on a global basis. But so far, and you know airlines are the most sophisticated and the most mature users of science-based revenue and pricing optimization systems, so they will innovatively and strategically invest in such things - and you mentioned as our very advanced O&D network optimization system. They will continue to strategically invest, you know, even in an uncertain economic climate. So we were thrilled with our participation at the summit from all the industry groups, but our airline business continues to be healthy. We're pleased with it, and the kind of headlines you read here in the United States are not representative of what we're seeing in that particular target industry.

[Tom Ernst:]

You mentioned that the healthy environment you're seeing may change potentially. If it changes, what's your ability and flexibility to keep costs [incentives] and continue to deliver profit expansion?

[Bert Winemiller:]

I think the answer to that question is historically we've always benefited from the high visibility revenue model. I mean, it's been an incredible, powerful tool to allow us to manage the business prudently and properly. At the beginning of a year we typically have had 70% revenue visibility into our revenue goal for the year. At the beginning of a quarter, we have 90% visibility into the revenue for the quarter. It's not obvious us, just to sidebar on your question, it's not obvious to us that a down economy doesn't create demand for our products. We've actually seen companies that are facing economic uncertainties and as a result they actually accelerate the implementation of our software products. But back to if the economy got to the point that it did affect our business on a slowdown basis, then we would continue to benefit from the high visibility revenue model, you know, we would have great visibility into our future streams. And as you know, we've got a very aggressive hiring program. We continue to invest very aggressively in sales and marketing and R&D, and obviously we could slow down that investment if we thought it was prudent to do so.

[Operator:]

Your next question comes from Ross Macmillan - Jefferies & Co.

[Ross Macmillan:]

So the first question I have is for you, Charlie. The gross margin number is really expanding very nicely here. And as we go forward I can understand what your guidance what your overall cost assumptions are, but can you maybe just add some color as to how we should think about it between the gross line and the operating line? And I guess my assumption is that we shouldn't see any deterioration on the gross profit line from here on out so that what it implies is a lot more, you know, investment in operating line items, i.e., mostly headcount. Is that fair?

[Charlie Murphy:]

Again, we don't provide guidance at the gross margin level. We provide the guidance at the operating profit level, and the reason for that is we want to maintain ultimate flexibility relative to the investments we're making. But also, there is variability. There is variability and the gross margins have improved very nicely over the last three years or so now, but product mix is a factor in that. Obviously, the implementation efficiencies is a factor. But that can change. The implementation efficiencies will continue, but the actual current mix of business from one quarter to the next can change. So we're not providing guidance on that because we're not comfortable giving guidance at the gross margin level. We're comfortable giving guidance at the operating margin level. And we are spending across the entire organization. So we're spending on professional services, other groups that go into the cost of services, such as our maintenance and support groups, and of course we're spending on sales and marketing and R&D as well. So our view is we should give guidance at the top line, guidance on operating profits and guidance with the EPS.

[Ross Macmillan:]

And then just one on the customer - you mentioned the customer litigation. I know you probably can't say much about it, but just I guess two questions. One is has this occurred before, and secondly, does it have anything to do with a new product or can you provide any color on whether it relates to a new product or an existing product?

[Charlie Murphy:]

I appreciate that. I can't comment much on it because it just happened. I mean, this is an absolutely new event for us, a new development, I should say. Has it happened before? No, it has not happened before. Is it a new product? No, it's not a new product, okay? This is an existing product that's in production. There's circumstances surrounding this situation that we haven't quite been able to sort out, but we don't believe that this the circumstances relate entirely to PROS. But this is still very early, and we're just now getting - really, just now, quite frankly - getting organized around this. This is a real surprise.

[Operator:]

Your next question comes from Tom Roderick - Thomas Weisel Partners.

[Tom Roderick:]

I wanted to ask a little bit about the demand environment here. Charlie, you indicated that 55% of your revenues now are coming from international, but with respect to where your pipeline is building, where you're focusing your efforts, where some of your new deals are coming in, can you speak to whether you're seeing stronger demand in having that geographic diversity? Is that really helping you out as the U.S. economy slows here?

[Charlie Murphy:]

Well, I'd say that, one, remember, our scope, as far as our sales effort is global, as they have been for many, many years. We get variability from period to period. We're not suggesting that the revenues for the entire year this year are going to be 55% domestic. There will be some changes from quarter to quarter. But our initiative is a global initiative. We happened to have closed some contracts, obviously, that have shifted some of the revenue towards domestic, which we think is terrific. That's not a bad growth story for us to have the domestic percentage of our business going up when there's obviously sentiment out there that domestic business should be going down. But remember, our revenue lags our bookings. So we book earlier, we recognize the revenue over the implementation period. So I guess in summary, global scope as far as our sales and marketing efforts. We still expect to have a very substantial portion of our business to be international.

[Tom Roderick:]

You've indicated, of course, that your bookings are on target for the year. You've reaffirmed your guidance for the year. But knowing that you do bigger deals and that the sales cycle is longer for a PROS sale than for many other software sales out there, what sort of signs will you be looking for to gauge customer behavior? How will you know if customers are slowing their purchasing cycles down or what will give you a sense that some of those bigger deals you might be counting on later on in the year may not close? How are you sort of monitoring that process and what signs do you look for to make sure that you're on track?

[Bert Winemiller:]

We have a very metric-based, fact-based sales cycle and territory management, world class best practice process. And what we do is we use very objective metrics in order to measure how a company is moving through the sales funnel from suspect, prospect, C to B to A, very specific activities, like do they have a budget, do they not have a budget. That's very objective. It's not subjective at all. And we have a number of metrics that we use in order to measure how companies are moving through the sales cycle. And then, when they become an A account, it becomes very clear that in order to close the business there's a number of other metrics such as we have been selected after the decision-making process. There are usually strategic purchasing people involved; there are usually the customer's or the prospect's legal counsel involved. Are they involved, are they engaged, have we had an initial conversation on terms and conditions and statement of work, and are they consistent with our best practices in the past. And do we have C-level sponsorship? This is very important because if you've got a CEO or CFO that gets it and they want it and the recognize it has value even in an uncertain economy, they can make it happen. So we go through this very objective analysis of the sales cycle then, when it gets to an A account before it moves to forecastable, we have very specific criteria. And I don't want to outline all of those because that's part of our best practices, you know, that we've developed here at PROS, but it's worked very effectively in the past. It gives us confidence in our assessment of what the sales pipeline is. And we continue to manage that exactly the same way we have in the past and, as I mentioned in my earlier statements, right now it's a healthy situation that we're in. Obviously, if we were concerned we would not be reconfirming our annual guidance.

[Operator:]

Your next question comes from Richard Davis - Needham & Company.

[Richard Davis:]

The question I had for you with regard to, I guess it would be Deal Manager, but does that get pushed out to me if I'm a sales person, and do I get that on a wireless device or how am I accessing that? And if not or if so, how are you kind of keeping up with the increasingly diverse ecosystem on that kind of edge of the network?

[Bert Winemiller:]

The Deal Manager product, we've got a new generation of Deal Manager. It's primarily a web-based product where you come in through the web, you know, with a very thin client user interface. It obviously is there primarily for sales forces, where you have a territory salesperson that is either negotiating ad hoc single transaction deals or a series of deals. It can be used in a wide variety of ways. One of the versions of our product actually has an autopilot version where the customer interacts and actually submits the request for the deal, and then the deal is optimized and the deal is actually closed without any human intervention. So we're looking for ecommerce and electronic transactions in our Deal Optimizer capabilities as well as supporting sales forces. But we think the big opportunity going forward and what we've seen as we've diversified into manufacturing, distribution and services is the use by sales people when they're actually out doing a B2B transaction and they need all of the information, including willingness to pay, recent velocity of sales, cost to serve of a particular customer, and you can present all of the information they need in order to actually quote and complete the sales transaction at that particular time. So different ways of delivering that capability are obviously within our capacity and our architecture and technology, but right now the primary use - and there's tens of thousands of salespeople using this product today is that they interact with the system, put in certain information that are related to the order entry process, and then we come back with an optimized price or an optimized set of products or an optimized bundle of products or an optimized offer that they should make to the customer. And we see that as a big market opportunity for us as we go forward.

[Richard Davis:]

Two of the kinds of sub-verticals inside manufacturing are chemicals and petroleum, particularly the latter. Have you seen especially good uptake there? What is their kind of capital budget view because, I mean, obviously they kind of open the windows now and money flies in the door. But I was just kind of curious if they're spending aggressively or what's your point of view there?

[Bert Winemiller:]

Well, some of that money that's flying in the door is coming out the back window to PROS. We've got an excellent footprint in both of those industries. We've got global customers in both of those industries. Part of our diversification strategy was to focus on both discrete and process manufacturing, and we're very pleased with the progress we've made in chemicals and petroleum.

[Operator:]

Your next question comes from Nabil Elsheshai - Pacific Crest Securities.

[Nabil Elsheshai:]

On the verticals, is there any color you can give us, either in terms of numbers of airline versus non-airline business in the quarter, and then any commentary on penetration and uptake in the verticals in some of your newer verticals and how that's progressing?

[Bert Winemiller:]

That's an excellent question, Nabil. As I mentioned in my comments, we had sales in every one of our verticals. We don't talk about sales contracts and bookings by industry and the reason for that is it can vary from quarter to quarter. But I said that we thought our sales pipeline was healthy. You were at our summit. I mean, you could see there were companies there from all the industries that we have targeted and customers on panels. So we have not seen one industry have really an accelerated demand pattern over another. We're seeing steady awareness at a CEO, CFO level of the power of price optimization and the power of PROS software products really pretty uniformly across all the industries that we've targeted.

[Nabil Elsheshai:]

What was the top line currency impact in the quarter?

[Charlie Murphy:]

The foreign exchange impact was $129,000 gain. That went through gross margins and contributed 0.7% to the gross margins in the first quarter.

[Nabil Elsheshai:]

And then any change in the competitive environment? Is it still Zilliant and PROS? Are there any newer guys out there that you see in the manufacturing side?

[Bert Winemiller:]

We track about 30 different companies that are either directly or indirectly in our space with some scientific capabilities or analytic capabilities. We continue to see the same competitors 80% to 90% of the time. That's Zilliant and Vendavo in the manufacturing, distribution and services business, in that segment of the business. And that's been consistent for the last two years. So we really haven't seen any change in the competitive landscape.

[Operator:]

And as we have no further questions in queue, I will turn it back over to management for closing remarks.

[Bert Winemiller:]

Everyone on the call, we thank you very much. We know your time is valuable, and we appreciate you investing time to learn more about PROS. We look forward to meeting you at investor conferences. We're going to be at a number of conferences later this month, and we look forward to continuing our communication with you. We're particularly thrilled with the results of the first quarter, and we look forward to working with you in the future. Thank you very much.