NYSE:PRO Analyst Day Presentation - 4Mar11

PROS Analyst Day 2011
4 March 2011

Leading Provider of
Enterprise Pricing Software
©2011 PROS Holdings, Inc. All rights reserved.
1

Forward-looking Statements
Included in this material are forward-looking statements including,
but not limited to, those related to earnings and other financial
projections. These predictions, estimates, and other forward-
looking statements involve known and unknown risks and
uncertainties that may cause actual results to differ materially
from those expressed or implied in this presentation. We refer
you to the documents we file with the Securities and Exchange
Commission, which identify and discuss important factors that
could cause actual results to differ materially from those
discussed in these forward-looking statements. All statements
included in these materials are based upon information known at
the time, and PROS Holdings assumes no obligation to update
any such statements.

2

Agenda
Time Speaker Topic

8:30 am Andres Reiner, President & CEO Welcome and PROS Update

9:00 am Craig Zawada, SVP Pricing Excellence The Current and Future State of Pricing

9:30 am Tim Girgenti, Chief Marketing Officer Marketing Overview

10:00 am BREAK

Wilbur Reid, Director of Strategic
10:15 am SP Richards and PROS
Pricing SP Richards

11:00 am Chris Jones, Chief Sales Officer Sales Overview

11:30 am Charlie Murphy, EVP & CFO Financial Update

12:00 pm PROS Executive Team PROS Leadership Q&A Panel

3

PROS Update
Andres Reiner, President and CEO

Leading Provider of
4

Company Overview
to leverage the power of pricing to
improve

FY 2010 revenue $74.2 million up 8% YOY, Q4 up 19% YOY
500+ implementations in 50 countries over 25 year history
$2M average sales price
Serve four major verticals across B2B & B2C
~95% maintenance renewal rate

5

Why Pricing Software?

Pricing Complexity

Limited Visibility

Dynamic Markets

6

PROS Prescriptive Pricing Software
Improve

Market Share

Improve

7

Large Market Opportunity

Enterprise ~7,500
$500M+ Targets

Mid-Market
$100-500M ~ 18,000 Targets

Enterprise B2B Market Penetration: 3% to 5% -Gartner

Market Data Source: Hoovers December 2010
8

Why We’re Confident

9

PROS Momentum
2011 backlog revenue $72M,
Three consecutive quarters of YOY growth
Stronger pipeline and win rates
Higher ASP

1Q10 2Q10 3Q10 Q410 FYE2010
Revenue $17.3 $17.8 $18.8 $20.2 $74.2
YOY ∆ -3.9% 3.0% 14.0% 19.0% 7.8%
Operating
Income 12.6% 11.5% 12.8% 14.3% 12.9%

10

Maturing Buying Process Favors PROS
Increased activity
More emphasis on
More emphasis on

11

Intensifying Market Dynamics

Wall Street Journal
Feb 11, 2011

“Tata Steel Profit Misses Estimates on
higher European Raw Material Costs”
Bloomberg
Feb 15, 2011
“Valspar First Quarter Margins
Down to Raw Material Pricing ”
“Electrolux operating income declined Toronto Star
due to rising raw material costs” Feb 15, 2011
Wall Street Journal
Feb 2, 2011

12

Increased Visibility of Pricing Success
“With strict cost and pricing discipline, we “We expect our annual big book pricing
were able to increase earnings considerably cycle to provide gross margin expansion in
despite the difficult market environment.” excess of 100 basis points for 2011 first
- BASF quarter vs. 4th quarter.”
–MSC

Top Concerns of CFOs for 2011
• Ability to maintain margins
• Ability to forecast results
• Deal with rice pressure from competitors
February 2011

13

Investing for Long-term Growth

sales and marketing

innovation

partner ecosystem, M&A

14

The Current and Future State of Pricing
Craig Zawada, SVP Pricing Excellence

Leading Provider of
15

Contents

$ $ $

1. Rising importance
of pricing
2. The rising of
importance
3. Implications for
PROS
software – in
getting it right

16

Why is pricing strategic?
Price is the Most Powerful Lever to Drive Profits

Revenue
Comparison of Profit Levers focused
*Source: Baker, Marn, Zawada,
8.7% McKinsey & Company –
The Price Advantage (2nd Edition 2010)
Increase in 5.9% John Wiley & Sons
Operating
Profit
2.8%
1.8%

Fixed Volume Variable Price
Costs Costs
Improve by 1%

17

B2B pressures intensifying…

Channel World Increased
concentration sourcing volatility

Increased Excess Open- Higher price
buyer capacity book transparency
sophistication costing

Source: The Price Advantage, McKinsey & Company

18

… as well as B2C pressures

Graying Increased
baby quality
boomers private
brands

Growing Frugal Higher price
Discount Gen-X and trans-
chains Millennials parency

Source: The Price Advantage, McKinsey & Company

19

Sophisticated buyers
Spend on software tools – ($ Millions)

3,200

~180

E-Procurement Pricing

Source: McKinsey & Company Research (2009), Gartner Research (2010)

20

Finding cost savings more difficult
Cents/lb
Copper smelting and refining cost curve
USD
30
1992
25
2009
20

15

10

5

0
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000
Cumulative capacity
Source: Brook Hunt Report Kilo tons

21

Contents

$ $ $

of pricing
2. The rising of
importance
3. Rising to theby
challenge –
software – in raising the profile
getting it right of pricing in your
company

22

Pricing problems much more complex…

Shorter product
lifecycles

Volatile input costs

Segment proliferation

Multi-country pricing

Distributed decision
making

23

Increased volatility of input costs

“Eastman deals with Rising Raw-Material Costs”
Morningstar
Feb 1, 2011

“Tata Steel Profit Misses Estimates on
higher European Raw Material Costs”
Bloomberg
Feb 15, 2011 “Valspar First Quarter Margins
Down to Raw Material Pricing ”
Toronto Star
“DSM looks to price hikes after Feb 15, 2011
Q4 slightly misses”
Reuters
“Electrolux operating income declined
Feb 22, 2011 due to rising raw material costs”
Wall Street Journal
Feb 2, 2011
24

Increased volatility of input costs (2)
Average month to month price change across 20 commodities
Percent

6.3
+ 42% 5.49

4.64
4.09
3.84 3.82 Average monthly
price change
Std. Deviation

1981-1990 1991-2000 2001-2010
Source: Indexmundi.com, PROS analysis

25

Segmentation challenge - example Percent of revenue
Overall goal: Move the curve and
increase profits
PRECONDITION: Develop a superior fact
base on account and transaction
profitability and source of leakage

Account net Difficult
pocket margin <0 0-5 5-10 10-15 15-20 20-25 >25
Percent Easy

3. Increase share of attractive
1. Cut off the losers or make 2. Raise average though improved
Actions them profitable customer insight
customers
4. Reduce Churn
Typical % of impact 20-30% 60-70% 10-15%

Relative challenge
A “hunting license” for
Difficult to argue with outliers Difficult to identify
increasing revenue is welcome
Rationale Policy-based changes easier Harder to convince sales force;
However, often difficult to
than behavior-based requires behavior change
identify true, at-risk customers

26

Pricing software is key Percent of revenue
Overall goal: Move the curve and
Provide on-going access increase profits
to account and transaction
profitability and salesperson
performance

Account net Difficult
pocket margin <0 0-5 5-10 10-15 15-20 20-25 >25
Percent Easy

3. Increase share of attractive
1. Cut off the losers or make 2. Raise average though improved
Actions them profitable customer insight
customers
4. Reduce Churn

Floor
prices, approval Scientific At risk customer
flow segmentation assessment
Audit trail Target and High value account
Accountability stretch prices identification

27

The role of pricing software…
Shorter product Decipher trends
lifecycles Quickly react to changes

Ensure cost recovery, react to changes
Volatile input costs

Identify underpriced segments
Segment proliferation

Multi-country pricing Quickly react to market trends
Provide transparency to performance

Distributed decision Provide guidance to decision-makers
making Bring accountability to actions

28

Good news: Pricing organizations
Number of pricing dedicated professionals per $ billion in revenue

9.3

2.7

Source: PROS analysis Ten years ago Today

29

Contents

$ $ $

of pricing
2. Thegettingbarright
for
rising
it
– 3. Implications for
PROS

30

Tremendous market opportunity
Increased importance of software to capture pricing opportunity

Companies that do not adopt pricing software at substantial risk of
falling behind (and losing other advantages)

PROS provides the engine for a broader array of companies to create
pricing power

Companies faced with a complexity and leadership challenge want to by
from the leader

31

Marketing Update
Tim Girgenti, Chief Marketing Officer

Leading Provider of
32

PROS Serves B2B and B2C Markets

Fortune 500: 4 of top 20

Healthcare Wholesalers: 3 of top 7

Office & Electronics Wholesalers: 2 of top 6

Airlines: 15 of top 25

Automotive Services: 2 of top 5

Heavy Equipment: 2 of top 5

33

PROS Differentiation

Prescriptive Sustainable

Most Advanced Unmatched
Pricing Science Commitment to
Customer Success
Unparalleled
Experience &
Most Complete
Financial Stability
Solution

34

Marketing Objectives

35

Segmented Approach
• Pricing
• Marketing
Roles
• Sales
• CFO

• Manufacturing
• Distribution
Industries
• Services
• Travel

Technology • ERP
• CRM

36

37 37

Project 95
Create provocative messages
Target the office of the CFO
Tap into markets already in motion

38

Provocative Messages
Competitive Pressure
• 71 Fortune 500 companies
• 71% of Fortune 500 Distributors
• 21% of Fortune 500 Manufacturers

Performance Pressure
• High performers 230% better than S&P 500

Risk Pressure
• Pricing is your profitability safety net

39

Target the Office of the CFO

• Ability to maintain margins
• Ability to forecast results
• Price pressure from competitors

40

Tap into Markets Already in Motion

41

Global Partner Ecosystem
System Integrators Technology Partners

42

SP Richards and PROS

Wilbur Reid
43 Director of Strategic Pricing

Time Tellers
vs
Clock Builders

44

Agenda
Overview of SP Richards / Genuine Parts

SP Richards Pricing Challenges
Understanding Profitability
Segmented Pricing Strategy
Pricing Complexity
Dealer Challenges: MyAnalystPro

Positive Results

45

Genuine Parts Overview
2010 Revenue: $11.2 billion

Fortune 500: ranked #236

55 Consecutive Years of Increased
Dividends

46

SP Richards
Founded in 1848
Oldest Company in Atlanta
Tradition of Trust
44 Distribution Centers in US and Canada
Primary customers are independent office supply
dealers
Culture is conservative and traditional, but is also
very innovative.
History of slow, steady growth, but 7 consecutive
years of declining margin going into 2008.

47

Sales Breakdown
Furniture Technology
12.9% Products
32.0%

Cleaning and
Breakroom
Supplies Power
7.6% Channel
18%

Independent
Dealers
Office Supplies
82%
47.6%

48
Sales by Product Category

Challenge #1: Understanding True Profitability
Gross Margin was THE measure of profitability

Established a centralized customer incentives database

Established activity based costing cost-to-serve metrics

Solution:
Implemented a customer waterfall and other reporting
tools in PROS Scientific Analytics

49


50

Challenge #1: Understanding True Profitability
Early Wins
Analyze data to eliminate losses
– $200k error with one customer caught in training
– Margin Summits
Identify low price index and low margin products and customers to take increases

51

Challenge #2: One-Size-Fits-All Pricing
Majority of sales priced at nationally published benchmarks.

Most customers get our ‘best price’

Solution:
Use PROS Segmentation and Optimized Price Guidance to
target the right products at the right prices for the right
customers.

52

SPR Peer Groups
Power Internet Independent
Bookstores
Channel Resellers Dealers

Not
Committed
Committed
Other customer
attributes to consider in
Stocking Stockless Regular
future segmentations:
geography, life cycle,
buying group, etc.
1 Small 5 Small Penetration

2 Medium 6 Medium

3 Large 7 Large

4 Super 8 Super

53 Move away from one-size-fits-all pricing

Challenge #3: Pricing Complexities Too
Much For Excel or Human Brain
Institutional memory needs to be captured
Chuck

Solution: utilize Price Policies in PROS Price Optimizer

54

Product Relationships
Identifying product strategy by brand and category
DRA90135

Create pricing policies (rules) based on those strategies
Proprietary Brand to Branded:
− Genuine Joe glass cleaner to be priced 10% less than the comparable
Windex product
− As long as margin is at least 20%
− And within 3% of the competitive equivalent
Multi-packs
Good/better/best
GJO10350
More profitable options

55

Product Relationships

S PR04501 BINDER,3-RNG,LBLHLD,2"-BK $ 2.64 AVE04501 $ 3.49 -24.4%
S PR03602 BINDER,3-RNG,3"-BK $ 3.07 AVE03602 $ 4.66 -34.1%
S PR05711 BINDER,VUE,3-RNG,1"-WE $ 1.37 AVE05711 $ 2.49 -45.1%
S PR09700 BINDER,VUE,S-RNG,3"-BK $ 3.79 AVE09700 $ 7.22 -47.6%


56

Scientific Analysis – Demand and Price Modeling

57

Promotional Analysis

58

PROS Scientific Analytics for Dealers

• Patent Pending
“… a stunning success”
- OPI Magazine

59

60

MyAnalystPro™ Dashboard

Period over period
Top
sales and margins
Customers, period to
date

Monthly Sales and
Margin Trend

61

Market Price Points

62

SP Richards 2010 Service
Vendor of the Year

63

NAPA
PROS Implementation in progress
Scientific Analytics
Price Optimizer

64

Northeast Division
Vice President

Pricing
Dept

65

Questions?
Wilbur Reid
Director of Strategic Pricing

66

Sales Update
Chris Jones, Chief Sales Officer

Leading Provider of
67

Executive Summary-What has changed

Early majority buyer focus

Go to market

Processes and infrastructure scalability

Clear repeatable winning formula

68

Early Majority Buyer-What they value
From Jeffrey Moore’s Crossing the Chasm

Incremental, measurable,
predictable progress

Highly reference oriented

Risk is negative to them

Like to see competition

Want to buy from the
proven market leader

69

Go-to-Market
Inside Sales

Customer Outside
Executive Sales

Delivery Strategic
Team Consulting

Value
Engineering

70

Winning Formula

Strong messaging to match superior product

Strong sales playbook execution

Rigorous pipeline management

Thorough win/loss analysis

Exceptional references

71

Voice of the Customer - Why They Select PROS

Prescriptive product and
services

References indicate
unparalleled level of
commitment to their success

Superior capabilities

72

Voice of the Customer - References

“….PROS references were also substantially
better than any competitor
- the biggest differentiator...”

73

Voice of the Customer - Ability to Deliver

“We felt there would be a huge difference
in success of the project with PROS,
we gained trust, we were a lot more
comfortable with PROS.”
74

Voice of the Customer - Superior Capabilities

“…the combination of your optimization
and no custom code was a
big differentiator on the
value creation and TCO analysis”
75

Financial Update
Charlie Murphy, EVP and CFO

Leading Provider of
76

Investment Highlights
Differentiated product leadership with proven results

Large underpenetrated global market – ~7,500 enterprise targets*

Increasing awareness of need for pricing software

Strong revenue visibility

Mid 90% maintenance renewal rate

Strong balance sheet, solid $55.8 million cash position, no debt

Q4 2010 record revenue of $20.2 million

*Source: Hoovers - December 2010

77

Financial Model
Diversified Revenue Mix Across Industries and Geography
Manufacturing, Distribution, Services, Travel
58% of FY 2010 revenue came from outside US
Customers in 50 countries
Historically High Revenue Visibility
Revenue recognized using percentage of completion
No revenue recognized at contract signing
45 % of FY 2010 revenue was recurring revenue
Total FYE 2010 record backlog $107M, up 27% YOY
2011 record backlog anticipated revenue $72M, up 40% YOY
FY 2010 maintenance revenue was up 16.5% YOY
Strong History of Profitability and Cash Flow
11+ years of non-GAAP profitability and positive cash flow

78

Financial Track Record
$75.6 $74.2
$62.1 $68.8
YE December, $ in millions
License & Implementation
Maintenance & Support $46.0 $53.9
$44.9
$43.7
$35.1 $43.2
$29.6
$29.3
$20.2 $25.1
$21.7
$18.9
$16.4
$14.9

2005 2006 2007 2008 2009 FY 2010

Gross Margin* 61.9% 66.1% 71.5% 75.3% 74.2% 73.5%

Operating Margin* 9.5% 14.8% 20.3% 23.8% 18.7% 12.9%

SG&A* - $ $12.0 $13.3 $15.5 $19.9 $19.7 $25.5
SG&A* - % 34.2% 28.9% 25.0% 26.3% 28.6% 34.4%
* Non-GAAP R&D* - $ $6.4 $10.3 $16.3 $19.0 $18.5 $19.4
R&D* - % 18.2% 22.4% 26.3% 25.1% 26.9% 26.2%
79

Backlog Growth
YE December, $ in millions
Backlog at 12/31
Estimated Revenue from Backlog
FY Total Revenue

$107.0

$83.6 $84.3
$75.6
$68.8 $74.2

$72.0
$51.3

2008 2009 2010 2011

80

Financial Highlights - Growth Trend
Non-GAAP, $ in millions

1Q10 2Q10 3Q10 Q410 FYE2010
Revenue $17.3 $17.8 $18.8 $20.2 $74.2
YOY ∆ -3.9% 3.0% 14.0% 19.0% 7.8%
Operating
12.6% 11.5% 12.8% 14.3% 12.9%
Income

Trend in Revenue Growth thru 12/31/10
Q410 $20.2M record revenue
5th consecutive quarter of sequential revenue growth
3rd consecutive quarter of YOY revenue growth, believe trend will continue
Operating Income
Strategically investing for revenue growth, scalability and market share
Continued to increase expenses during recession and recovery

81

Cash Flow and CapEx Spending
2010 Cash flow from operations below historical level
Lower operating income - invested for what we believe is a big market opportunity
Higher level of bookings in 2009 were term contracts which result in cash flow over a longer
term than a perpetual license
First year with stock settled stock appreciation and restricted stock units settling net of tax –
use of cash of $1.M
Variability in cash flow depending on timing of milestone billings and timing of expenses
No federal tax payments
2011 Cash flow from operations expected to approximate net income
Continued investment for what we believe is a big market opportunity
Bookings expected to be predominately perpetual license contracts
Continuation of settlement of options net of tax estimated at $2.0M
Federal tax refund of approximately $3.6M in 2011
Federal tax payments of approximately 34% of pretax income
Variability in cash flow depending on timing of milestone billings and timing of expenses
CapEx spending
2010 - $1.6M for IT infrastructure and software
2011 – Estimated $3.4M for IT infrastructure and software; systems upgrade and facility
improvements

82

PROS Leadership Q&A Panel
PROS Executive Team

Leading Provider of
83

NYSE:PRO Analyst Day Presentation - 4Mar11

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