PROS Holdings, Inc. (NYSE:PRO) Q3 2023 Earnings Conference Call October 31, 2023 4:45 PM ET Company Participants Belinda Overdeput - Director, IR Andres Reiner - President & CEO Stefan Schulz - CFO Conference Call Participants Chad Bennett - Craig-Hallum Capital Group Rob Oliver - Baird Jason Celino - KeyBanc Capital Markets Scott Berg - Needham Parker Lane - Stifel Camden Levy - Oppenheimer Victor Cheng - Bank of America Operator Greetings. Welcome to the PROS Holdings Third Quarter 2023 Earnings Conferenc ...

The Power of AI Drives Measurable Business Outcomes Updated October 31, 2023 ir@pros.com 2 Investors are encouraged to review the reconciliation of our historical non-GAAP financial measures to the comparable GAAP results, which can be found, along with other financial information, on the investor relations' page of our website at PROS.com. We are unable to reconcile forward-looking non-GAAP financial measures to their directly comparable GAAP financial measures because the information needed to complete a ...

[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section presents the company's interim condensed consolidated financial statements and management's discussion and analysis of financial performance [Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Interim%20Condensed%20Consolidated%20Financial%20Statements%20%28Unaudited%29) This section presents the unaudited condensed consolidated financial statements, including the balance sheets, statements of comprehensive loss, cash flows, and stockholders' (deficit) equity, along with detailed notes explaining the company's financial position, performance, and significant accounting policies for the periods ended September 30, 2023 [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity as of September 30, 2023, and December 31, 2022 **Key Balance Sheet Data (in thousands)** | Metric | September 30, 2023 | December 31, 2022 | | :----------------------------------- | :------------------- | :------------------ | | Total Assets | $431,854 | $452,952 | | Cash and Cash Equivalents | $159,080 | $203,627 | | Total Liabilities | $486,732 | $488,425 | | Total Stockholders' (Deficit) Equity | $(54,878) | $(35,473) | | Current Portion of Convertible Debt | $21,635 | — | | Derivative Asset, Noncurrent | $22,260 | — | [Condensed Consolidated Statements of Comprehensive Loss](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Loss) This section presents the company's revenue, expenses, and net loss for the three and nine months ended September 30, 2023 and 2022 Revenue Performance (in thousands) | Category | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Change ($) | Change (%) | | :-------------------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Subscription | $59,987 | $51,763 | $8,224 | 16% | | Maintenance and support | $4,693 | $7,071 | $(2,378) | (34)% | | Services | $12,570 | $11,514 | $1,056 | 9% | | **Total Revenue** | **$77,250** | **$70,348** | **$6,902** | **10%** | | Category | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | Change ($) | Change (%) | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Subscription | $173,260 | $150,914 | $22,346 | 15% | | Maintenance and support | $15,498 | $22,175 | $(6,677) | (30)% | | Services | $37,466 | $32,113 | $5,353 | 17% | | **Total Revenue** | **$226,224** | **$205,202** | **$21,022** | **10%** | Net Loss and EPS (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | | :-------------------------- | :------------------------------ | :------------------------------ | | Net Loss | $(13,868) | $(13,853) | | Basic and Diluted EPS | $(0.30) | $(0.31) | | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------- | :----------------------------- | :----------------------------- | | Net Loss | $(46,159) | $(64,899) | | Basic and Diluted EPS | $(1.00) | $(1.44) | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section details the cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2023 and 2022 Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2023 | 2022 | | :---------------------------------------- | :--------- | :--------- | | Net cash used in operating activities | $(3,967) | $(21,936) | | Net cash used in investing activities | $(2,281) | $(1,014) | | Net cash (used in) provided by financing activities | $(28,269) | $2,510 | | Net change in cash, cash equivalents and restricted cash | $(34,547) | $(20,729) | - Net cash used in operating activities significantly improved from **$(21.9) million** in 2022 to **$(4.0) million** in 2023, primarily due to increased sales, cash collections, interest income, and reduced cash operating expenses[18](index=18&type=chunk)[81](index=81&type=chunk)[109](index=109&type=chunk) - Net cash used in financing activities increased to **$(28.3) million** in 2023, mainly due to a **$22.8 million** purchase of capped call and higher tax withholding payments on stock awards[18](index=18&type=chunk)[111](index=111&type=chunk) [Condensed Consolidated Statements of Stockholders' (Deficit) Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders%27%20%28Deficit%29%20Equity) This section outlines the changes in the company's stockholders' (deficit) equity, including accumulated deficit and additional paid-in capital, for the period ended September 30, 2023 Stockholders' (Deficit) Equity Changes (in thousands) | Metric | December 31, 2022 | September 30, 2023 | | :-------------------------- | :------------------ | :------------------- | | Total Stockholders' (Deficit) Equity | $(35,473) | $(54,878) | | Accumulated Deficit | $(590,898) | $(637,057) | | Additional Paid-In Capital | $590,475 | $617,402 | - The accumulated deficit increased from **$(590.9) million** to **$(637.1) million**, reflecting the net loss incurred during the period[23](index=23&type=chunk) - Additional paid-in capital increased by **$26.9 million**, primarily driven by noncash share-based compensation and proceeds from employee stock plans[23](index=23&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the interim condensed consolidated financial statements, covering significant accounting policies and specific financial items [Note 1. Organization and Nature of Operations](index=9&type=section&id=Note%201.%20Organization%20and%20Nature%20of%20Operations) This note describes PROS Holdings, Inc.'s business, its AI-powered solutions, and the markets it serves - PROS Holdings, Inc. provides AI-powered solutions to optimize shopping and selling experiences for B2B and B2C companies, leveraging artificial intelligence, self-learning, and automation[26](index=26&type=chunk) - The company's solutions cover selling, pricing, revenue optimization, distribution, retail, and digital offer marketing, enabling personalized experiences across various sales channels[26](index=26&type=chunk) [Note 2. Summary of Significant Accounting Policies](index=9&type=section&id=Note%202.%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the key accounting principles and policies used in preparing the unaudited condensed consolidated financial statements - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial reporting and SEC regulations[27](index=27&type=chunk) - No material changes in significant accounting policies were reported compared to the Annual Report on Form 10-K for the fiscal year ended December 31, 2022[29](index=29&type=chunk) Fair Value of Treasury Money Market Funds (in millions) | Date | Amount | | :----------------- | :------- | | September 30, 2023 | $149.7 | | December 31, 2022 | $168.1 | - Amortization expense for deferred sales commissions was **$1.4 million** for Q3 2023 and **$4.4 million** for YTD Q3 2023[35](index=35&type=chunk) - No impairment charges on long-lived assets were recorded for the three and nine months ended September 30, 2023, compared to **$1.6 million** in the prior year period[37](index=37&type=chunk) [Note 3. Deferred Revenue and Performance Obligations](index=11&type=section&id=Note%203.%20Deferred%20Revenue%20and%20Performance%20Obligations) This note provides details on revenue recognized from deferred balances and the company's remaining performance obligations Revenue Recognized from Deferred Balances (in millions) | Period | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Three Months Ended September 30 | $52.5 | $46.0 | | Nine Months Ended September 30 | $100.7 | $86.4 | - As of September 30, 2023, remaining performance obligations totaled approximately **$403.9 million**, with **$199.0 million** expected to be recognized over the next 12 months[40](index=40&type=chunk) [Note 4. Disaggregation of Revenue](index=11&type=section&id=Note%204.%20Disaggregation%20of%20Revenue) This note breaks down the company's total revenue by geographic region for the reported periods Revenue by Geography (Three Months Ended Sep 30, in thousands) | Region | 2023 Revenue | 2023 Percent | 2022 Revenue | 2022 Percent | | :--------------------- | :----------- | :----------- | :----------- | :----------- | | United States of America | $26,925 | 35% | $24,952 | 35% | | Europe | $25,691 | 33% | $20,816 | 30% | | The rest of the world | $24,634 | 32% | $24,580 | 35% | | **Total Revenue** | **$77,250** | **100%** | **$70,348** | **100%** | Revenue by Geography (Nine Months Ended Sep 30, in thousands) | Region | 2023 Revenue | 2023 Percent | 2022 Revenue | 2022 Percent | | :--------------------- | :----------- | :----------- | :----------- | :----------- | | United States of America | $80,381 | 36% | $72,054 | 35% | | Europe | $73,388 | 32% | $62,504 | 31% | | The rest of the world | $72,455 | 32% | $70,644 | 34% | | **Total Revenue** | **$226,224** | **100%** | **$205,202** | **100%** | [Note 5. Leases](index=11&type=section&id=Note%205.%20Leases) This note details the company's operating lease arrangements, including types of leased assets, lease terms, and associated cash payments - The company holds operating leases for data centers, computer infrastructure, corporate offices, and equipment, with terms ranging from **1 to 10 years**[43](index=43&type=chunk) Cash Paid for Operating Lease Liabilities (in thousands) | Period | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Three Months Ended September 30 | $1,859 | $2,175 | | Nine Months Ended September 30 | $5,767 | $6,370 | - Total operating lease liabilities as of September 30, 2023, amounted to **$29.8 million**[46](index=46&type=chunk) [Note 6. Earnings per Share](index=13&type=section&id=Note%206.%20Earnings%20per%20Share) This note presents the basic and diluted loss per share and explains the treatment of potential common shares in the calculation Basic and Diluted Loss per Share | Period | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Three Months Ended September 30 | $(0.30) | $(0.31) | | Nine Months Ended September 30 | $(1.00) | $(1.44) | - Potential common shares from RSUs, MSUs, equity consideration, and convertible notes were excluded from diluted weighted average shares outstanding as they were antidilutive[47](index=47&type=chunk) [Note 7. Noncash Share-based Compensation](index=14&type=section&id=Note%207.%20Noncash%20Share-based%20Compensation) This note provides information on the company's equity incentive plan, share-based compensation expenses, and unrecognized compensation costs - The 2017 Equity Incentive Plan's authorized share limit was increased to **10,550,000 shares** in May 2023, with **4,281,409 shares** remaining available for issuance as of September 30, 2023[48](index=48&type=chunk) Share-based Compensation Expense (in thousands) | Category | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Cost of revenue | $1,033 | $1,050 | $2,850 | $2,881 | | Selling and marketing | $2,992 | $2,897 | $9,023 | $9,413 | | Research and development | $2,817 | $2,995 | $7,840 | $9,607 | | General and administrative | $4,091 | $3,684 | $11,876 | $10,716 | | **Total** | **$10,933** | **$10,626** | **$31,589** | **$32,617** | - Unrecognized compensation costs related to share-based arrangements totaled an estimated **$79.5 million**, to be recognized over a weighted average period of **2.6 years**[51](index=51&type=chunk) [Note 8. Convertible Senior Notes](index=15&type=section&id=Note%208.%20Convertible%20Senior%20Notes) This note details the company's convertible senior notes, including their principal balances, interest rates, and recent exchange transactions Convertible Senior Notes Summary (as of Sep 30, 2023, in thousands) | Note Type | Date of Issuance | Unpaid Principal Balance | Contractual Interest Rate | | :-------------------------------- | :--------------- | :----------------------- | :------------------------ | | 2024 Notes | May 2019 | $21,713 | 1% | | 2024 Notes (subject to exchange) | May 2019 | $122,037 | 1% | | 2027 Notes | September 2020 | $150,000 | 2.25% | | **Total Notes** | | **$293,750** | | - An exchange of **$122.0 million** of 2024 Notes for 2027 Notes was initiated on August 23, 2023, resulting in a **$1.8 million** loss on debt extinguishment[57](index=57&type=chunk)[58](index=58&type=chunk) - A derivative loss of **$3.8 million** was recorded for the embedded derivative feature related to the variability in the principal amount of the 2027 Notes issued in the exchange[59](index=59&type=chunk) - The fair value of the Notes in aggregate was **$296.3 million** as of September 30, 2023, up from **$263.7 million** at December 31, 2022[61](index=61&type=chunk) - An Additional Capped Call transaction was entered into in August 2023, initially recorded as a **$22.8 million** noncurrent derivative asset, with a **$0.5 million** derivative loss for Q3 2023[64](index=64&type=chunk)[65](index=65&type=chunk) [Note 9. Credit Facility](index=17&type=section&id=Note%209.%20Credit%20Facility) This note describes the company's secured credit agreement, including the revolving line of credit, minimum cash balance requirements, and compliance with covenants - The company entered into a three-year secured credit agreement in July 2023, providing a revolving line of credit up to **$50.0 million**[66](index=66&type=chunk) - The Credit Agreement requires maintaining a minimum cash balance of **$10.0 million** with the administrative agent, which is included in restricted cash[67](index=67&type=chunk) - As of September 30, 2023, there were no outstanding borrowings under the Credit Agreement, and the company was in compliance with all financial covenants[68](index=68&type=chunk) [Note 10. Commitments and Contingencies](index=17&type=section&id=Note%2010.%20Commitments%20and%20Contingencies) This note addresses the company's legal proceedings and significant purchase commitments as of the reporting date - The company is not currently involved in any outstanding litigation that is expected to have a material adverse effect on its business or financial condition[69](index=69&type=chunk) - A remaining purchase commitment of **$3.5 million** for software support services exists as of September 30, 2023, expiring in March 2027[70](index=70&type=chunk) [Note 11. Severance and Other Related Costs](index=17&type=section&id=Note%2011.%20Severance%20and%20Other%20Related%20Costs) This note details the severance, employee benefits, and related costs incurred due to organizational changes during the period - The company incurred **$3.6 million** in severance, employee benefits, and related costs during the nine months ended September 30, 2023, due to organizational changes[71](index=71&type=chunk) - Cash payments for these costs totaled **$3.9 million** for the nine months ended September 30, 2023[71](index=71&type=chunk) [Note 12. Other (Expense) Income, Net](index=18&type=section&id=Note%2012.%20Other%20%28Expense%29%20Income%2C%20Net) This note provides a breakdown of non-operating income and expenses, including interest income, foreign currency fluctuations, and derivative losses Other (Expense) Income, Net (in thousands) | Category | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Interest income, net | $2,086 | $891 | $5,867 | $889 | | Foreign currency (loss) gain, net | $(238) | $(7) | $(700) | $(514) | | Loss on derivatives | $(4,343) | — | $(4,343) | — | | Loss on debt extinguishment | $(1,779) | — | $(1,779) | — | | Gain on equity investment | — | $3,308 | — | $3,308 | | Other | $(14) | $(34) | $(91) | $55 | | **Total** | **$(4,288)** | **$4,158** | **$(1,046)** | **$3,738** | - The shift from net income to net expense was primarily driven by a **$4.3 million** derivative loss and a **$1.8 million** loss on debt extinguishment related to the convertible notes exchange, partially offset by higher interest income[101](index=101&type=chunk) [Note 13. Subsequent Event](index=18&type=section&id=Note%2013.%20Subsequent%20Event) This note discloses significant events that occurred after the reporting period, specifically the settlement of convertible notes exchange - On October 10, 2023, the company settled the exchange of **$122.0 million** aggregate principal amount of its 2024 Notes for **$116.8 million** aggregate principal amount of newly issued 2027 Notes[75](index=75&type=chunk) - Following the exchange, **$21.7 million** of 2024 Notes and **$266.8 million** of 2027 Notes remain outstanding[75](index=75&type=chunk) - The deferred premium on the Additional Capped Call was settled at a final value of **$22.2 million**[75](index=75&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=19&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations for the three and nine months ended September 30, 2023, discussing key financial highlights, factors affecting performance, and liquidity [Q3 2023 Financial Overview](index=19&type=section&id=Q3%202023%20Financial%20Overview) This section summarizes the company's key financial performance metrics for the third quarter and year-to-date periods of 2023 - Subscription revenue increased by **16%** for Q3 2023 and **15%** for the nine months ended September 30, 2023, compared to the same periods in 2022[79](index=79&type=chunk) - Total revenue grew by **10%** for both the three and nine months ended September 30, 2023[79](index=79&type=chunk) - Recurring revenue constituted **84%** of total revenue for Q3 2023 and **83%** for the nine months ended September 30, 2023[80](index=80&type=chunk) - Cash used in operating activities improved significantly from **$(21.9) million** in the nine months ended September 30, 2022, to **$(4.0) million** in the same period of 2023[81](index=81&type=chunk) Free Cash Flow (in thousands) | Period | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Three Months Ended September 30 | $8,494 | $(9,067) | | Nine Months Ended September 30 | $(2,265) | $(22,781) | [Factors Affecting Our Performance](index=19&type=section&id=Factors%20Affecting%20Our%20Performance) This section discusses macroeconomic conditions, strategic priorities, industry trends, and technological advancements influencing the company's financial results - The company operates in a complex macroeconomic environment, but pricing volatility and inflation are catalysts for demand for its price optimization and management solutions[84](index=84&type=chunk)[85](index=85&type=chunk) - A strategic priority is profitable growth through disciplined investment, aiming to decrease product development, sales and marketing, and general and administrative expenses as a percentage of total revenues[86](index=86&type=chunk) - The travel industry, particularly airlines, continues to recover, driving increased technology investments, especially in direct booking channels[86](index=86&type=chunk) - Mainstream interest in generative AI is increasing focus on business applications leveraging AI, with PROS's solutions already powered by **4th generation AI**[86](index=86&type=chunk) - Ongoing customer migrations from on-premises to cloud solutions are expected to lead to a decline in maintenance and support revenue and an increase in subscription revenue[86](index=86&type=chunk) [Results of Operations](index=21&type=section&id=Results%20of%20Operations) This section analyzes the company's revenue, cost of revenue, gross profit, and operating expenses for the reported periods Revenue Mix and Gross Profit Percentage | Metric | Q3 2023 | Q3 2022 | YTD Q3 2023 | YTD Q3 2022 | | :-------------------------------- | :------ | :------ | :---------- | :---------- | | Subscription Revenue % of Total | 78% | 74% | 77% | 74% | | Maintenance & Support Revenue % of Total | 6% | 10% | 7% | 11% | | Gross Profit % | 63% | 61% | 62% | 60% | [Revenue](index=21&type=section&id=Revenue) This section analyzes the performance of subscription, maintenance and support, and services revenue streams - Subscription revenue increased by **16%** (Q3) and **15%** (YTD Q3) due to growth in new and existing customer contracts[88](index=88&type=chunk) - Maintenance and support revenue decreased by **34%** (Q3) and **30%** (YTD Q3) primarily due to customer migrations to cloud solutions and, to a lesser extent, customer churn[89](index=89&type=chunk) - Services revenue increased by **9%** (Q3) and **17%** (YTD Q3) driven by higher sales of professional services related to subscription contracts and follow-on services[90](index=90&type=chunk) [Cost of Revenue and Gross Profit](index=22&type=section&id=Cost%20of%20Revenue%20and%20Gross%20Profit) This section examines the cost of revenue and gross profit percentages across subscription, maintenance and support, and services segments - Subscription gross profit percentages improved to **76%** (Q3 2023) and **75%** (YTD Q3 2023) from **73%** in both prior periods[93](index=93&type=chunk) - Maintenance and support gross profit percentages decreased to **62%** (Q3 and YTD Q3 2023) from **72%** in prior periods, mainly due to lower revenue and relatively fixed costs[94](index=94&type=chunk) - Services gross profit percentages improved to **3%** (Q3 2023) from **(3)%** (Q3 2022) and to **(1)%** (YTD Q3 2023) from **(9)%** (YTD Q3 2022), driven by increased revenue and greater efficiencies[95](index=95&type=chunk) [Operating Expenses](index=22&type=section&id=Operating%20Expenses) This section analyzes changes in selling and marketing, research and development, and general and administrative expenses - Selling and marketing expenses decreased by **9%** in Q3 2023, primarily due to reduced events, employee-related costs, and intangible asset amortization[96](index=96&type=chunk) - Research and development expenses decreased by **5%** (Q3) and **7%** (YTD Q3) due to prior organizational changes, reduced use of contracted resources, and lower noncash share-based compensation[97](index=97&type=chunk) - General and administrative expenses increased by **5%** (Q3) and **1%** (YTD Q3) due to higher employee-related expenses, including share-based compensation, and professional fees[98](index=98&type=chunk) - No impairment of fixed assets was recorded in 2023, compared to a **$1.6 million** charge in the nine months ended September 30, 2022[99](index=99&type=chunk) [Non-operating Expenses](index=23&type=section&id=Non-operating%20Expenses) This section discusses convertible debt interest, amortization, and other non-operating income and expenses - Convertible debt interest and amortization remained relatively stable[100](index=100&type=chunk) - Other (expense) income, net, shifted from income to expense, primarily due to a **$4.3 million** derivative loss and a **$1.8 million** loss on debt extinguishment related to the convertible notes exchange, partially offset by higher interest income[101](index=101&type=chunk) [Income Tax Provision](index=23&type=section&id=Income%20Tax%20Provision) This section details the income tax provision and effective tax rate for the reported periods - The income tax provision decreased by **5%** in Q3 2023 and **32%** in YTD Q3 2023[102](index=102&type=chunk) - The effective tax rate was **(1.8)%** for Q3 2023 and **(1.0)%** for YTD Q3 2023, primarily influenced by valuation allowances on deferred tax assets and foreign income/withholding taxes[103](index=103&type=chunk) [Liquidity and Capital Resources](index=24&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the company's cash position, working capital, and ability to meet its financial obligations through operating, investing, and financing activities Liquidity Position (in millions) | Metric | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :----------------- | :------------------ | | Cash, Cash Equivalents and Unrestricted Cash | $159.1 | $203.6 | | Working Capital | $42.5 | $106.3 | - Principal sources of liquidity include cash and cash equivalents, operating cash flows, and potential borrowings under the **$50.0 million** Credit Agreement[106](index=106&type=chunk) - Management believes existing liquidity, including future operating cash flows and the Credit Agreement, will be adequate to meet operational requirements and debt obligations for the next twelve months[107](index=107&type=chunk) [Operating Activities](index=24&type=section&id=Operating%20Activities) This section analyzes the net cash flow generated from or used in the company's core business operations - Net cash used in operating activities improved to **$(4.0) million** for the nine months ended September 30, 2023, from **$(21.9) million** in the prior year, driven by increased sales, cash collections, interest income, and reduced cash operating expenses[109](index=109&type=chunk) [Investing Activities](index=24&type=section&id=Investing%20Activities) This section details the cash flows related to the acquisition and disposal of long-term assets and investments - Net cash used in investing activities increased to **$(2.3) million** for the nine months ended September 30, 2023, primarily due to higher capital expenditures, including a third-party software license renewal[110](index=110&type=chunk) [Financing Activities](index=24&type=section&id=Financing%20Activities) This section outlines cash flows from debt, equity, and dividend transactions - Net cash used in financing activities was **$(28.3) million** for the nine months ended September 30, 2023, a significant increase from **$2.5 million** provided in the prior year, mainly due to a **$22.8 million** purchase of capped call and higher tax withholding payments on stock awards[111](index=111&type=chunk) [Off-Balance Sheet Arrangements](index=24&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms the absence of material off-balance sheet arrangements that could impact the company's financial position - The company does not have any material off-balance sheet arrangements that would significantly affect its financial condition or results of operations[112](index=112&type=chunk) [Contractual Obligations and Commitments](index=25&type=section&id=Contractual%20Obligations%20and%20Commitments) This section discusses any material changes to contractual obligations and commitments, including covenants under the Credit Agreement - No material changes to contractual obligations and commitments were reported other than those described in Note 10[114](index=114&type=chunk) - The Credit Agreement includes affirmative and negative covenants, with financial covenants becoming effective if liquidity falls below a certain level[115](index=115&type=chunk) [Recent Accounting Pronouncements](index=25&type=section&id=Recent%20Accounting%20Pronouncements) This section confirms that no significant recent accounting pronouncements have materially impacted the company - There have been no significant recent accounting pronouncements or changes during the nine months ended September 30, 2023, that are of significance or potential significance to the company[38](index=38&type=chunk)[116](index=116&type=chunk) [Critical Accounting Policies and Estimates](index=25&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section highlights the significant estimates and assumptions inherent in the preparation of the financial statements - The preparation of financial statements requires significant estimates and assumptions affecting reported amounts, including those for receivables, credit losses, leases, asset useful lives, income taxes, and stock awards[117](index=117&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=26&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section outlines the company's exposure to market risks, specifically foreign currency exchange risk and interest rate risk, and its current strategies for managing these exposures [Foreign Currency Exchange Risk](index=26&type=section&id=Foreign%20Currency%20Exchange%20Risk) This section discusses the company's exposure to foreign currency fluctuations from international operations and contracts - The company is exposed to foreign currency exchange risk from foreign-denominated contracts and operations in countries like France, the United Kingdom, and Germany[119](index=119&type=chunk) - A hypothetical **10%** adverse change in exchange rates would result in an approximate **$0.8 million** loss on foreign denominated receivables[119](index=119&type=chunk) - The company currently does not use derivative financial instruments to mitigate foreign currency exchange risks but may consider them in the future[120](index=120&type=chunk) [Interest Rate Risk](index=26&type=section&id=Interest%20Rate%20Risk) This section addresses the company's exposure to interest rate changes, particularly concerning its variable-rate credit facility and fixed-rate convertible notes - The company is exposed to market risk from changes in interest rates related to the variable interest rate on borrowings under its Credit Agreement, though no borrowings were outstanding as of September 30, 2023[121](index=121&type=chunk) - The 2027 and 2024 Notes are fixed-rate instruments, meaning results of operations are not subject to interest rate fluctuations, but their fair values are exposed to interest rate risk[122](index=122&type=chunk) [Item 4. Controls and Procedures](index=26&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting [Disclosure Controls and Procedures](index=26&type=section&id=Disclosure%20Controls%20and%20Procedures) This section confirms management's conclusion on the effectiveness of the company's disclosure controls and procedures - Management, with the participation of the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[124](index=124&type=chunk) [Changes in Internal Control over Financial Reporting](index=26&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) This section reports on the absence of material changes in internal control over financial reporting during the quarter - There have been no material changes in internal control over financial reporting during the three months ended September 30, 2023[125](index=125&type=chunk) [PART II. OTHER INFORMATION](index=27&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and other disclosures [Item 1. Legal Proceedings](index=27&type=section&id=Item%201.%20Legal%20Proceedings) This section states that the company is not currently involved in any legal proceedings or claims that are expected to have a material adverse effect on its business, financial condition, results of operations, or cash flows - The company is not currently aware of any legal proceedings or claims that are believed to have a material adverse effect on its business or financial results[126](index=126&type=chunk) [Item 1A. Risk Factors](index=27&type=section&id=Item%201A.%20Risk%20Factors) This section highlights the risks associated with the company's indebtedness, including convertible notes and potential borrowings under its credit agreement, and their potential adverse impact on financial condition and cash flows - The company's indebtedness from convertible notes (2027 Notes: **$150.0 million** outstanding; 2024 Notes: **$143.8 million** outstanding as of Sep 30, 2023) and potential Credit Agreement borrowings may adversely affect its financial condition and cash flows[128](index=128&type=chunk)[129](index=129&type=chunk)[130](index=130&type=chunk)[131](index=131&type=chunk) - Post-exchange (October 10, 2023), **$266.8 million** of 2027 Notes and **$21.7 million** of 2024 Notes remain outstanding[128](index=128&type=chunk)[129](index=129&type=chunk) - Failure to comply with debt covenants or repay debt could lead to default and acceleration of repayment obligations, impacting the ability to obtain future financing[131](index=131&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=27&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section reports on the company's share repurchase authorization and confirms no common stock repurchases were made during the three months ended September 30, 2023 - The company has an ongoing authorization to repurchase up to **$15.0 million** in common stock, with **$10.0 million** remaining available as of September 30, 2023[132](index=132&type=chunk) - No purchases of common stock were made under the repurchase program during the three months ended September 30, 2023[132](index=132&type=chunk) [Item 3. Defaults Upon Senior Securities](index=27&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section states that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities were reported[134](index=134&type=chunk) [Item 4. Mine Safety Disclosure](index=28&type=section&id=Item%204.%20Mine%20Safety%20Disclosure) This section indicates that there is no mine safety disclosure required for the company - No mine safety disclosure is applicable or required[135](index=135&type=chunk) [Item 5. Other Information](index=28&type=section&id=Item%205.%20Other%20Information) This section discloses the adoption of Rule 10b5-1 trading plans by certain directors and executive officers during the third quarter of 2023 [Securities Trading Plans of Directors and Executive Officers](index=28&type=section&id=Securities%20Trading%20Plans%20of%20Directors%20and%20Executive%20Officers) This section details the Rule 10b5-1 trading plans adopted by various directors and executive officers - Leland Jourdan (Director) adopted a Rule 10b5-1 trading plan on August 1, 2023, to sell up to **2,162 shares** for tax obligations[136](index=136&type=chunk) - Scott Cook (Chief Accounting Officer) adopted a Rule 10b5-1 trading plan on August 10, 2023, to sell up to **12,000 shares**[137](index=137&type=chunk) - Stefan Schulz (Chief Financial Officer) adopted a Rule 10b5-1 trading plan on August 11, 2023, to sell up to **64,000 shares**[138](index=138&type=chunk) - Andres Reiner (Chief Executive Officer) adopted a Rule 10b5-1 trading plan on August 30, 2023, to sell up to **200,000 shares**[139](index=139&type=chunk) [Item 6. Exhibits](index=29&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including various certifications and XBRL documents - The report includes certifications from the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32.1)[141](index=141&type=chunk) - XBRL Instance Document and Taxonomy Extension Documents are provided as exhibits (Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[141](index=141&type=chunk) [Signatures](index=30&type=section&id=Signatures) This section contains the formal signatures of the company's principal executive and financial officers, certifying the report - The report was signed on October 31, 2023, by Andres Reiner, President and Chief Executive Officer, and Stefan Schulz, Executive Vice President and Chief Financial Officer[147](index=147&type=chunk)

Financial Data and Key Metrics Changes - Subscription revenue grew by 14% year-over-year, totaling $57.3 million, while total revenue increased by 11% year-over-year to $75.8 million [73][45] - The second quarter recurring revenue accounted for 82% of total revenue, with calculated billings rising 27% year-over-year [73][74] - Non-GAAP subscription gross margin improved to 78%, up from 76% a year ago, and non-GAAP services margin was reported at 11%, a 15 percentage point improvement [74][55] Business Line Data and Key Metrics Changes - The company reported a record quarter in deal activity, particularly in B2B, with win rates and sales velocity improving [11][120] - The land-and-expand strategy has led to quicker customer onboarding and expansion, with new customers adopting the platform rapidly [48][54] - The professional services team achieved a non-GAAP services gross margin of 11%, indicating improved efficiency in service delivery [55] Market Data and Key Metrics Changes - Strength was observed across various B2B industries, including technology, automotive, industrial, chemical, energy, and healthcare, with positive reception in both EMEA and the Americas [25][54] - The travel sector is recovering, but IT spending remains below pre-pandemic levels, with airlines still facing staffing shortages [1][2] Company Strategy and Development Direction - The company is focused on a platform strategy that emphasizes rapid customer adoption and expansion, leveraging AI capabilities to enhance pricing and sales processes [54][62] - There is confidence in achieving the long-term growth goal without needing to expand into new industries immediately, as current focus areas are expected to drive growth [6][10] Management's Comments on Operating Environment and Future Outlook - Management noted that sales cycles for new customers have improved by 30% year-over-year, driven by effective go-to-market strategies and the adoption of AI solutions [21][64] - The company anticipates positive free cash flow in the second half of the year, with expectations for total revenue to reach between $300 million and $302 million, representing a 9% year-over-year growth at the midpoint [32][29] Other Important Information - The company has a current liability of approximately $143 million related to convertible debt due in May 2024, which is expected to be retired with cash and investments [30][31] - The company raised its guidance for adjusted EBITDA to a range of $5.5 million to $7.5 million, reflecting a year-over-year improvement of over $21 million at the midpoint [33][32] Q&A Session Summary Question: Can you provide insights on the sales cycle improvements and macro factors influencing them? - Management attributed faster sales cycles to both internal go-to-market improvements and external demand factors, including interest in AI solutions [21][22] Question: What are the geographical performance trends, particularly in Europe and the U.S.? - Strength was noted in both the Americas and EMEA, with positive growth across various B2B industries [25][24] Question: How does the RPO performance align with strong billings and subscription revenue growth? - Management explained that the RPO metrics are influenced by the focus on shorter-term deals, which are expected to trend upwards in the latter part of the year [27][28] Question: What is the outlook for the travel sector and its impact on revenue? - While the travel sector is recovering, it is not yet back to pre-pandemic IT spending levels, but there is an expectation for revenue contributions from booked deals in the second half of the year [35][1] Question: How is the competitive environment evolving? - Management indicated no major changes in the competitive landscape, with continued improvements in win rates and sales velocity [76][120]

[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Interim Condensed Consolidated Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Interim%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) This section presents PROS Holdings, Inc.'s unaudited interim consolidated financial statements for Q2 2023 [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets decreased to **$434.0 million** by June 30, 2023, with **$143.0 million** convertible debt reclassified to current liabilities Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $184,567 | $203,627 | | Total current assets | $256,364 | $267,278 | | Total assets | $433,964 | $452,952 | | Current portion of convertible debt, net | $143,003 | $0 | | Total current liabilities | $304,998 | $160,936 | | Total liabilities | $485,418 | $488,425 | | Total stockholders' (deficit) equity | $(51,454) | $(35,473) | [Condensed Consolidated Statements of Comprehensive Loss](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Loss) Q2 2023 total revenue grew **11%** to **$75.8 million**, with net loss improving to **$13.3 million** from **$22.4 million** Q2 and H1 2023 vs 2022 Performance (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | Y/Y Change | H1 2023 | H1 2022 | Y/Y Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $75,792 | $68,362 | +11% | $148,974 | $134,854 | +10% | | Subscription Revenue | $57,304 | $50,386 | +14% | $113,273 | $99,151 | +14% | | Gross Profit | $47,221 | $40,721 | +16% | $90,861 | $79,852 | +14% | | Loss from Operations | $(13,355) | $(20,537) | +35% | $(32,151) | $(47,040) | +32% | | Net Loss | $(13,289) | $(22,406) | +41% | $(32,291) | $(51,046) | +37% | | Net Loss per Share | $(0.29) | $(0.50) | +42% | $(0.70) | $(1.13) | +38% | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash used in operating activities remained flat at **$12.7 million** for H1 2023, with a total net decrease in cash of **$19.1 million** Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(12,685) | $(12,945) | | Net cash used in investing activities | $(1,823) | $(938) | | Net cash (used in) provided by financing activities | $(4,531) | $1,231 | | Net change in cash and cash equivalents | $(19,060) | $(12,375) | [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Notes detail **$407.6 million** in remaining performance obligations, convertible debt terms, **$3.6 million** severance, and a new **$50 million** credit agreement - As of June 30, 2023, the company had **$407.6 million** in remaining performance obligations, with **$204.2 million** expected to be recognized as revenue over the next 12 months[41](index=41&type=chunk) - The company has two series of convertible senior notes: **$143.75 million** at 1% due in 2024 and **$150.0 million** at 2.25% due in 2027; the 2024 Notes are now classified as a current liability[56](index=56&type=chunk) - In the first quarter of 2023, the company incurred approximately **$3.6 million** in severance and related costs due to organizational changes[67](index=67&type=chunk) - Subsequent to the quarter end, on July 21, 2023, the company entered into a new three-year, **$50 million** secured revolving credit agreement[68](index=68&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=16&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial results, highlighting **14%** subscription revenue growth, improved operating loss, and adequate liquidity - Subscription revenue grew by **14%** for both the three and six months ended June 30, 2023, compared to the same periods in 2022[71](index=71&type=chunk) - Recurring revenue (subscription plus maintenance) constituted **82%** of total revenue in Q2 2023, with gross revenue retention rates remaining above **93%** for the trailing twelve months[72](index=72&type=chunk) - Key factors affecting performance include the complex macroeconomic environment, a strategic focus on profitable growth, the ongoing recovery of the travel industry, and increased demand for digital purchasing and AI-powered solutions[75](index=75&type=chunk)[77](index=77&type=chunk) - Free cash flow usage for the six months ended June 30, 2023 improved to **$10.8 million** from **$13.7 million** in the prior year, primarily due to increased cash collections and lower annual incentive payments[74](index=74&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=23&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) Primary market risks are foreign currency and interest rate, with limited foreign currency exposure and minimal interest rate risk from fixed-rate notes - A hypothetical **10%** adverse change in the euro exchange rate would have decreased revenue by approximately **$1.2 million** for Q2 2023[111](index=111&type=chunk) - The company's outstanding convertible notes are fixed-rate instruments, so results of operations are not subject to fluctuations in interest rates[113](index=113&type=chunk) [Controls and Procedures](index=23&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal control - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2023[115](index=115&type=chunk) - No changes in internal control over financial reporting occurred during Q2 2023 that have materially affected, or are reasonably likely to materially affect, internal controls[116](index=116&type=chunk) [PART II. OTHER INFORMATION](index=24&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Legal Proceedings](index=24&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business - The company is not currently aware of any legal proceedings or claims that it believes will have a material adverse effect on its business[118](index=118&type=chunk) [Risk Factors](index=24&type=section&id=Item%201A.%20Risk%20Factors) Indebtedness from convertible notes and new credit agreement poses risks to future financing and cash flow, with no other material changes - The company's indebtedness from its convertible notes and potential borrowings under its new credit facility could impair its ability to obtain additional financing and adversely affect financial condition[120](index=120&type=chunk)[123](index=123&type=chunk) - The new **$50.0 million** credit agreement contains covenants that restrict the company's ability to create liens, incur more debt, and engage in certain transactions[122](index=122&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=24&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No common stock was repurchased in Q2 2023, with **$10.0 million** remaining available under the current repurchase authorization - No common stock was repurchased during Q2 2023; **$10.0 million** remains available under the current repurchase authorization[124](index=124&type=chunk) [Defaults Upon Senior Securities](index=24&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities - None[125](index=125&type=chunk) [Mine Safety Disclosure](index=25&type=section&id=Item%204.%20Mine%20Safety%20Disclosure) The company reported no mine safety disclosures - None[126](index=126&type=chunk) [Other Information](index=25&type=section&id=Item%205.%20Other%20Information) No director or officer adopted or terminated a Rule 10b5-1 trading arrangement in Q2 2023 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement in Q2 2023[127](index=127&type=chunk) [Exhibits](index=25&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with Form 10-Q, including CEO/CFO certifications and XBRL data files [Signatures](index=26&type=section&id=Signatures)

Disclaimer / Forward-Looking Statements ©2023 PROS, Inc. All rights reserved. Confidential and Proprietary page 2 ©2023 PROS, Inc. All rights reserved. Confidential and Proprietary page 3 ©2023 PROS, Inc. All rights reserved. Confidential and Proprietary page 4 | --- | |-----------------------------------------------| | | | We believe the combination of artificial | | intelligence and omnichannel, digital selling | | technology | | buyers' expectations and | | | | --- | --- | |-------|---------------------- ...

PROS Holdings, Inc. (NYSE:PRO) Q1 2023 Earnings Conference Call May 2, 2023 4:45 PM ET Company Participants Belinda Overdeput - Director, Investor Relations Andres Reiner - President and Chief Executive Officer Stefan Schulz - Chief Financial Officer Conference Call Participants Patrick Schulz - Baird Chad Bennett - Craig-Hallum Capital Group Matthew Kikkert - Stifel Brian Schwartz - Oppenheimer Scott Berg - Needham Devin Au - KeyBanc Capital Market Operator Greetings. Welcome to the PROS Holdings First Qu ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 ___________________________________________________________________________ FORM 10-Q _________________________________________________________________________ ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ...

Part I [Business](index=4&type=section&id=Item%201.%20Business) PROS delivers AI-powered SaaS solutions for B2B/B2C pricing and sales optimization, leveraging its platform, global sales, and R&D investment - PROS provides AI-driven SaaS solutions to optimize B2B and B2C shopping and selling experiences, focusing on pricing, revenue optimization, and digital marketing[19](index=19&type=chunk) - The company's main offerings are the PROS Platform (Smart Configure Price Quote and Smart Price Optimization), specialized solutions for the airline industry, and Digital Offer Marketing tools[22](index=22&type=chunk)[28](index=28&type=chunk)[30](index=30&type=chunk) - PROS sells to a diverse customer base across industries like manufacturing, transportation, and travel. In 2022, **64%** of total revenue came from customers outside the U.S., and no single customer accounted for **10%** or more of revenue[42](index=42&type=chunk) - The company faces competition from a variety of providers but believes its key differentiators are its deep expertise in AI, the breadth of its platform's functionality, and its ability to handle large data volumes at scale[43](index=43&type=chunk)[44](index=44&type=chunk) - PROS made significant investments in research and development, with expenses totaling **$93.4 million** in fiscal 2022, representing over **30%** of annual revenue[46](index=46&type=chunk) - As of December 31, 2022, the company had **1,528** full-time personnel. It emphasizes a culture of innovation, diversity (**37%** female global employees), and a hybrid work model[49](index=49&type=chunk)[53](index=53&type=chunk)[56](index=56&type=chunk) [Risk Factors](index=12&type=section&id=Item%201A.%20Risk%20Factors) The company faces various risks including economic uncertainty, cybersecurity threats, reliance on third-party data centers, and evolving global data privacy laws - Strategic and operational risks include economic uncertainty, inflation, the ongoing impact of the COVID-19 pandemic, and the Russia-Ukraine conflict, which could affect customer spending and operating costs. The company has approximately **16%** of its personnel in Sofia, Bulgaria[64](index=64&type=chunk)[66](index=66&type=chunk)[67](index=67&type=chunk) - Cybersecurity is a major risk, as the company's systems are regularly under attack. A security breach could lead to operational disruption, reputational harm, and significant financial liabilities[69](index=69&type=chunk)[70](index=70&type=chunk)[73](index=73&type=chunk) - The business depends on third-party data centers and cloud providers like Microsoft Azure and AWS. Any disruption from these providers could impair service delivery and harm the business[79](index=79&type=chunk)[81](index=81&type=chunk) - The company faces intense competition and lengthy sales cycles (up to a year or more for large enterprises), which can impact revenue predictability[96](index=96&type=chunk)[98](index=98&type=chunk)[99](index=99&type=chunk) - Evolving global data privacy laws (e.g., GDPR, CCPA) and restrictions on cross-border data transfers create compliance challenges and expose the company to increased liability[106](index=106&type=chunk)[107](index=107&type=chunk) - The company has significant debt from its 2027 and 2024 convertible senior notes, with principal amounts of **$150.0 million** and **$143.8 million** outstanding, respectively. These obligations may affect financial condition and cash flows[120](index=120&type=chunk)[121](index=121&type=chunk)[122](index=122&type=chunk) [Unresolved Staff Comments](index=26&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the SEC - None[132](index=132&type=chunk) [Properties](index=26&type=section&id=Item%202.%20Properties) The company's headquarters is a leased 118,000 sq ft space in Houston, Texas, with current facilities deemed sufficient - The company's headquarters is a leased space of approximately **118,000 square feet** in Houston, Texas. Existing facilities are considered sufficient for current needs[133](index=133&type=chunk) [Legal Proceedings](index=26&type=section&id=Item%203.%20Legal%20Proceedings) PROS is not currently involved in any litigation expected to have a material adverse effect on its business or financial condition - The company is not currently involved in any litigation expected to have a material adverse effect on its business[134](index=134&type=chunk) [Mine Safety Disclosures](index=26&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[135](index=135&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=27&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) PROS common stock trades on NYSE under "PRO", with no anticipated cash dividends and **$10.0 million** remaining for stock repurchases - The company's common stock is listed on the NYSE under the symbol "PRO"[138](index=138&type=chunk) - PROS has not paid dividends and does not anticipate paying them in the foreseeable future, expecting to retain earnings for business operations and development[138](index=138&type=chunk) - As of December 31, 2022, **$10.0 million** remains available under the company's stock repurchase program. No purchases were made in 2022[144](index=144&type=chunk) [Reserved](index=28&type=section&id=Item%206.%20Reserved) This item is reserved and contains no information [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2022, total revenue grew **10%** to **$276.1 million** driven by subscription revenue, despite a net loss of **$82.2 million** and increased operating expenses [Executive Summary](index=29&type=section&id=Executive%20Summary) In 2022, PROS grew subscription revenue by **15%**, maintained gross revenue retention above **93%**, and achieved **$247.5 million** in total ARR - Subscription revenue increased by **15%** and total revenue by **10%** in 2022 compared to 2021[151](index=151&type=chunk) - Gross revenue retention rates remained above **93%** for the trailing twelve months ended December 31, 2022[151](index=151&type=chunk) Key Performance Metrics (as of Dec 31, 2022) | Metric | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Total ARR (Constant Currency) | $247.5M | $226.7M | +9% | | Subscription ARR (Constant Currency) | $229.0M | $195.1M | +17% | | Net Cash Used in Operating Activities | ($23.9M) | ($18.6M) | +28.5% | | Free Cash Flow | ($21.7M) | ($20.2M) | +7.4% | [Results of Operations](index=32&type=section&id=Results%20of%20Operations) Total revenue increased **10%** to **$276.1 million** in 2022, driven by subscription growth, while operating expenses rose **11%** leading to an **$82.2 million** net loss Revenue Comparison (2022 vs. 2021) | Revenue Type | 2022 (in thousands) | 2021 (in thousands) | Variance % | | :--- | :--- | :--- | :--- | | Subscription | $204,041 | $178,006 | 15% | | Maintenance and support | $28,592 | $35,111 | (19)% | | Services | $43,504 | $38,306 | 14% | | **Total revenue** | **$276,137** | **$251,423** | **10%** | Operating Expenses Comparison (2022 vs. 2021) | Expense Category | 2022 (in thousands) | 2021 (in thousands) | Variance % | | :--- | :--- | :--- | :--- | | Selling and marketing | $94,986 | $86,445 | 10% | | Research and development | $93,412 | $82,268 | 14% | | General and administrative | $54,202 | $49,742 | 9% | | **Total operating expenses** | **$244,151** | **$220,841** | **11%** | - The increase in subscription revenue was primarily due to the acquisition of EveryMundo and new customer contracts, while the decrease in maintenance revenue reflects the migration of legacy customers to cloud solutions[167](index=167&type=chunk)[168](index=168&type=chunk) - The company recorded a net loss of **$82.2 million** in 2022, compared to a net loss of **$81.2 million** in 2021. The effective tax rate was **(1.1)%** for both years, impacted by a valuation allowance on deferred tax assets[267](index=267&type=chunk)[180](index=180&type=chunk)[181](index=181&type=chunk) [Liquidity and Capital Resources](index=34&type=section&id=Liquidity%20and%20Capital%20Resources) As of December 31, 2022, PROS had **$203.6 million** in cash, with **$23.9 million** net cash used in operations, and a **$143.8 million** convertible note maturing in 2024 Cash and Cash Equivalents | Date | Cash and Cash Equivalents (in thousands) | | :--- | :--- | | December 31, 2022 | $203,627 | | December 31, 2021 | $227,553 | - Net cash used in operating activities was **$23.9 million** in 2022, an increase from **$18.6 million** in 2021, primarily due to a higher annual incentive payment[189](index=189&type=chunk) - The company's 2024 Convertible Notes, with a principal amount of **$143.8 million**, mature on May 15, 2024[187](index=187&type=chunk) [Critical Accounting Policies and Estimates](index=36&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The company's critical accounting policies involve significant judgment in revenue recognition, deferred costs, share-based compensation, income taxes, and business combinations - Revenue Recognition: Significant judgment is required to identify distinct performance obligations in customer contracts. If services are not distinct from the subscription, revenue is recognized over the subscription term[202](index=202&type=chunk)[203](index=203&type=chunk) - Deferred Costs: Sales commissions are capitalized and amortized over a determined benefit period of five to eight years[204](index=204&type=chunk) - Noncash Share-Based Compensation: The fair value of Market Stock Units (MSUs) is estimated using a Monte Carlo simulation model. As of Dec 31, 2022, there was **$68.1 million** of total unrecognized compensation cost[207](index=207&type=chunk)[212](index=212&type=chunk) - Accounting for Income Taxes: The company maintains a full valuation allowance against its net deferred tax assets due to a history of losses, meaning it does not recognize a tax benefit for these losses[214](index=214&type=chunk) - Business Combinations and Goodwill: Management makes significant estimates in determining the fair value of assets acquired and liabilities assumed in business combinations, with the excess recorded as goodwill[216](index=216&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=39&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks are foreign currency fluctuations, mainly the Euro, while interest rate risk is low due to fixed-rate convertible notes - The primary market risk is from foreign currency fluctuations, mainly the Euro. A hypothetical **10%** adverse change in the U.S. dollar versus the Euro would have changed 2022 revenue by approximately **$3.9 million**[221](index=221&type=chunk) - Interest rate risk is not significant as the company's outstanding convertible notes (2024 and 2027 Notes) are fixed-rate instruments[223](index=223&type=chunk) [Financial Statements and Supplementary Data](index=40&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section incorporates by reference the consolidated financial statements and supplementary data indexed on page F-1 - This item incorporates by reference the consolidated financial statements indexed on page F-1[225](index=225&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=40&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[226](index=226&type=chunk) [Controls and Procedures](index=40&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[227](index=227&type=chunk) - Management concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[230](index=230&type=chunk) - The effectiveness of internal control over financial reporting was audited by PricewaterhouseCoopers LLP, which issued an unqualified opinion[231](index=231&type=chunk) [Other Information](index=40&type=section&id=Item%209B.%20Other%20Information) The company reports no other information for this item - None[232](index=232&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=41&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[234](index=234&type=chunk) [Executive Compensation](index=41&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's 2023 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the 2023 Proxy Statement[235](index=235&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=41&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership is incorporated by reference from the company's 2023 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the 2023 Proxy Statement[236](index=236&type=chunk) [Certain Relationships, Related Transactions and Director Independence](index=41&type=section&id=Item%2013.%20Certain%20Relationships%2C%20Related%20Transactions%20and%20Director%20Independence) Information regarding related party transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[237](index=237&type=chunk) [Principal Accountant Fees and Services](index=41&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information regarding principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[238](index=238&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=42&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the financial statements, financial statement schedules, and exhibits filed with the Form 10-K - This item references the Financial Statements, Financial Statement Schedules, and Exhibits filed with the report[241](index=241&type=chunk)[242](index=242&type=chunk)[243](index=243&type=chunk) [Form 10-K Summary](index=77&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company has elected not to include a voluntary summary of the Form 10-K information under this item - The Registrant has elected not to include summary information[428](index=428&type=chunk)

©2023 PROS, Inc. All rights reserved. Confidential and Proprietary page 29 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. A reconciliation of GAAP to the non-GAAP financial measures has been provided in these tables and in the earnings press release. PROS' use of non- ...