PRO - PROS Holdings Guides Moderate Revenue Growth Amid Continuing GAAP Operating Losses

2023-03-07 18:11:02 ET

Summary

• PROS Holdings reported its Q4 2022 financial results on February 9.
• The firm provides sales and quoting software to organizations worldwide.
• PRO has guided 2023 revenue growth at 7% but will likely produce continued GAAP operating losses.
• I'm on Hold for PRO in the near term as a higher cost of capital environment may pressure its stock valuation multiple.

A Quick Take On PROS Holdings

PROS Holdings ( PRO ) reported its Q4 2022 financial results on February 9, 2023, beating revenue and EPS consensus estimates.

The company provides enterprises with a variety of selling software tools and services.

Given the risk of higher interest rates producing downward pressure on its stock multiple, the company's tepid revenue growth expectation and continued elevated operating losses, I’m on Hold for PRO in the near term.

PROS Holdings Overview

Houston, Texas-based PROS was founded in 1985 to provide configure-price-quote software originally as on-premises software and more recently on a subscription basis.

The firm is headed by Chief Executive Officer Andres Reiner, who has been with the firm since 2007 and was previously Software developer at Platinum Technology and Product Architect at ADAC Laboratories.

The company’s primary offerings include:

• Smart Configure Price Quote

• Smart Price Optimization

• Airline Revenue Optimization and Management

• Airline Real-Time Dynamic Pricing

• Group Sales Optimizer

• Digital Retail

• Related Services

The firm acquires customers through its in-house sales and marketing teams as well as through partners, resellers and systems integrators.

PROS Holdings’ Market & Competition

According to a 2022 market research report by Global Industry Analysts, the market for configure-price-quote software was an estimated $1.6 billion in 2020 and is forecast to reach $3.9 billion by 2026.

This represents a forecast CAGR of 16.3% from 2021 to 2026.

The main drivers for this expected growth are a rise in demand as a result of the COVID-19 pandemic, as customers seek more efficient ways to power their sales efforts.

Also, the on-premise segment is expected to continue to dominate even as growth shifts to cloud-based CPQ environments

Major competitive or other industry participants include:

• Apttus

• Aspire Technologies

• Callidus Software

• Cincom Systems

• ConnectWise

• FPX

• Infor

• International Business Machines

• Model N

• Oracle Corp

• Salesforce.com

• SAP Ag

• Vendavo

PROS Holdings’ Recent Financial Results

• Total revenue by quarter has risen per the chart shown below:

• Gross profit margin by quarter has trended slightly higher in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter have dropped recently:

• Operating losses by quarter have remained substantially negative, as shown below:

• Earnings per share (Diluted) have made little progress toward breakeven:

(All data in the above charts is GAAP)

In the past 12 months, PRO’s stock price has dropped 8.0% vs. that of the Nasdaq 100 Index’s fall of 8.7%, as the chart indicates below:

As to its Q4 financial results, total revenue rose 9.1% year-over-year, while gross profit margin increased by one percentage point.

The company’s gross retention rate was only 93%, indicating moderate product/market fit and sales & marketing efficiency.

SG&A expenses as a percentage of total revenue dropped while operating losses were slightly reduced.

For the balance sheet, the firm ended the quarter with $203.6 million in cash and equivalents and $289.8 million in long-term debt.

Over the trailing twelve months, free cash used was $24.8 million, of which capital expenditures accounted for $900,000. The company paid a hefty $42.7 million in stock-based compensation in the last four quarters, the highest four-quarter figure in the last several years.

Valuation And Other Metrics For PROS Holdings

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

PRO’s most recent GAAP Rule of 40 calculation was negative (12.5%) as of Q4 2022, so the firm has performed poorly in this regard, per the table below:

(Source - Seeking Alpha)

Future Prospects For PROS Holdings

In its last earnings call (Source - Seeking Alpha), covering Q4 2022’s results, management highlighted the expected growth of digital channel B2B sales interactions from 55% to 85% by 2026.

This growth, if realized, would be favorable to the company's platform and offerings.

Management believes that its organizational changes earlier in 2023 will result in free cash flow and positive adjusted EBITDA in 2023.

Furthermore, on the sales front, management looks to grow per-rep productivity rather than increase headcount in this area.

Looking ahead, management guided to 7% total revenue growth for 2023 and adjusted EBITDA of $4.5 million at the midpoint of the range.

The company's financial position is relatively strong, with ample cash to cover a long runway based on trailing twelve-month cash use.

Regarding valuation, the market is valuing PRO at an EV/Sales multiple of around 5.0x.

The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.2x on February 23, 2023, as the chart shows here:

So, by comparison, PRO is currently valued by the market at a discount to the broader Meritech Capital SaaS Index, at least as of February 23, 2023.

Notably, the multiple has expanded in recent months, from 4.3x in September 2022 to its current level of 5.0x.

The primary risk to the company’s outlook is the threat of higher interest rates, resulting in a higher cost of capital environment, putting downward pressure on the stock price multiple.

Given this risk, the company's tepid revenue growth expectation and continued elevated operating losses, I’m on Hold for PRO in the near term.

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