PROS(PRO) - 2022 Q4 - Annual Report

Part I Business 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] - 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][28][30] - 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] - 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][44] - PROS made significant investments in research and development, with expenses totaling $93.4 million in fiscal 2022, representing over 30% of annual revenue[46] - 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][53][56] Risk Factors 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][66][67] - 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][70][73] - 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][81] - The company faces intense competition and lengthy sales cycles (up to a year or more for large enterprises), which can impact revenue predictability[96][98][99] - 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][107] - 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][121][122] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[132] Properties 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] Legal Proceedings 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] Mine Safety Disclosures This item is not applicable to the company - Not applicable[135] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] - 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] - As of December 31, 2022, $10.0 million remains available under the company's stock repurchase program. No purchases were made in 2022[144] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - Gross revenue retention rates remained above 93% for the trailing twelve months ended December 31, 2022[151] 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 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][168] - 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][180][181] Liquidity and Capital Resources 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] - The company's 2024 Convertible Notes, with a principal amount of $143.8 million, mature on May 15, 2024[187] Critical Accounting Policies and Estimates 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][203] - Deferred Costs: Sales commissions are capitalized and amortized over a determined benefit period of five to eight years[204] - 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][212] - 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] - 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] Quantitative and Qualitative Disclosures About Market Risk 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] - Interest rate risk is not significant as the company's outstanding convertible notes (2024 and 2027 Notes) are fixed-rate instruments[223] Financial Statements and Supplementary Data 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] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[226] Controls and Procedures 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] - Management concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[230] - The effectiveness of internal control over financial reporting was audited by PricewaterhouseCoopers LLP, which issued an unqualified opinion[231] Other Information The company reports no other information for this item - None[232] Part III Directors, Executive Officers and Corporate Governance 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] Executive Compensation 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] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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] Certain Relationships, Related Transactions and Director Independence 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] Principal Accountant Fees and Services 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] Part IV Exhibits and Financial Statement Schedules 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][242][243] Form 10-K Summary 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]