PROS Holdings, Inc. Travels With Management Mitigate Backlog Concern

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Last week, we hosted investor meetings with PROS’s chief financial officer, Charles Murphy; chief marketing officer, Tim Girgenti; and senior vice president of professional services, Wagner Williams. We came away from the meetings incrementally more confident in our view on near-term growth opportunities as well as the company’s strategic move to combine revenue optimization with the configure, price, quote technology acquired through Chameleon.

Some investors remained unclear about the company’s backlog coverage, which was the primary reason for the stock’s 20%-plus drop since the company reported fourth-quarter results two weeks ago. The company reported total backlog of $206 million (up roughly 24% on an organic basis) and significant growth in long-term deferred revenue that provides nice visibility into 2015. The issue for investors is that on an inorganic basis, of the $206 million, $132 million will be recognized this year. On revenue guidance of $190 million-$194 million, this implies 69% coverage at the midpoint (i.e., 69% of 2014 non- GAAP revenue is covered by the portion of backlog that will be invoiced this year). If we eliminate $17 million-$19 million in non-GAAP revenue from the acquisitions, then the portion that would be invoiced is $122 million against organic revenue guidance of $174 million at the midpoint; implying 70% coverage.

Over the past two years, the coverage has been 74%, and investors remain concerned that the company may not be able to meet its revenue guidance—that there has to be an incremental $10 million (the difference between 69% coverage and 74% coverage) that needs to be generated this year to meet the midpoint of the range.

The company has continued to engage systems integrators (SIs) over the past three years and in 2013 had SIs involved in about 30% of the deals, with less than 5% of revenue being led by SIs. We suspect that of the roughly 100 deals we expect the company to sign this year, probably 10% will have significant SI involvement.

When PROS typically sells a deal, given that there is data cleaning, integration, and algorithm/data science fine tuning, the revenue for the license portion of the deal (roughly 50%) is spread over the implementation time frame and recognized on a percent-of-completion methodology. Typical project lengths can be two years. As a result, the company’s backlog (deals that were started in the prior year but have portions that will be invoiced as the project undergoes completion) provide nice forward visibility.

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