Pros Holdings Inc

NYSE:PRO

Earnings Call Analysis

Strong Earnings, Growth and Strategic Focus

In the second quarter, the company outperformed its guidance, reporting a 14% rise in subscription revenue and an 8% increase in total revenue. Significant milestones were reached, including an 80% subscription gross margin. Year-over-year, adjusted EBITDA improved by 554% and free cash flow by 112%. Despite challenges in the airline sector, the full-year revenue outlook is adjusted to $329-$331 million, with a 9% growth target. Free cash flow is expected to be between $20-$24 million, a 94% improvement. For Q3, total revenue is guided at $81.5-$82.5 million and adjusted EBITDA at $6.5-$7.5 million.

Introduction: A Solid Second Quarter Performance

In the second quarter of 2024, PROS delivered impressive results that surpassed expectations across key metrics. This performance is notable given the challenging backdrop of the travel industry. Subscription revenue grew by 14%, totaling $65.6 million, while total revenue reached $82 million, marking an 8% increase. These results solidified the company's trajectory toward profitability, with notable improvements in adjusted EBITDA and free cash flow.

Achieving Margins: A Significant Milestone

One of the standout achievements was reaching the long-anticipated goal of 80% non-GAAP subscription gross margin, which exceeded last year by 160 basis points. This illustrates the operational efficiencies and innovations of the engineering team, driving down costs while enhancing service quality. The overall non-GAAP gross margin improved to 67%, reflecting a strategic focus on profitability.

Financial Strength: Cash Flow and EBITDA Growth

PROS reported an adjusted EBITDA of $5.2 million for the quarter — a more than $5 million increase year-over-year, significantly exceeding forecasts. Free cash flow also saw a remarkable uplift, reaching $6.2 million, representing a 200% increase compared to the previous year. These figures highlight the company's capability to generate substantial cash flows for further investment or shareholder return.

Revised Guidance: Caution Amid Industry Challenges

Despite the strong quarter, management has revised its full-year guidance, anticipating total revenue between $329 million and $331 million, which constitutes a 9% growth at the midpoint. The service revenue forecast was lowered due to a shift toward expansions rather than new customer bookings. The subscription annual recurring revenue (ARR) is expected to fall between $280 million and $284 million, with a 9% growth outlook. Moreover, the company reiterated its subscription revenue guidance of $263.5 million to $265.5 million, reflecting a robust 13% growth at the midpoint.

Optimism for Future Growth: Third Quarter Outlook

For the upcoming third quarter, PROS anticipates a subscription revenue range of $65.8 million to $66.3 million, which represents a 10% growth rate. Total revenue is predicted to be between $81.5 million and $82.5 million, indicating 6% growth year-over-year. Adjusted EBITDA is expected to be between $6.5 million and $7.5 million, boosting confidence in ongoing financial health despite a forecasted dip due to seasonal trends in the travel sector.

Tailwinds and Innovations: Unlocking Opportunities

Management is optimistic about long-term growth stemming from current operational changes and strategic partnerships. Significant wins in new and existing customer accounts illustrate the demand for the PROS platform. The company has secured new customers in strategic sectors, including top medical devices firms, underscoring the versatility and appeal of its solutions.

Market Dynamics: Navigating Airline Industry Challenges

The airline industry faces ongoing operational challenges stemming from cost pressures and lengthy sales cycles, particularly affecting travel bookings expected for the second half. Leadership expressed caution while maintaining confidence in the adaptability of the business model. PROS is expected to leverage innovation to address these challenges, especially through its focus on Generative AI technologies.

Long-Term Goals: Progressing Toward the Rule of 40

PROS remains committed to its long-term objective of becoming a 'Rule of 40' company. This growth strategy combines revenue growth rates and free cash flow margins. Management has adjusted the timeline for achieving this target, now expecting to realize it by 2027 instead of 2026. The anticipated range includes revenue growth of 16% to 21% alongside free cash flow margins of 19% to 24%.

Conclusion: A Cautiously Optimistic Outlook

In conclusion, despite the potential volatility in the airline sector, PROS demonstrated robust performance in Q2 and established a positive momentum moving forward. The innovations and strategic decisions made during this period could unlock further opportunities for growth, positioning PROS well for the remainder of the year and beyond. Investors may view the solid cash flow generation and margin expansion as promising indicators of sustainable growth.

Earnings Call Transcript 2024-Q2

[Operator]

Greetings. Welcome to the PROS Holdings Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference call over to Belinda Overdeput, Senior Director of Investor Relations.

[Belinda Overdeput, executive]

Thank you, operator. Good afternoon, everyone, and thank you for joining us. Our earnings press release, SEC filings and a replay of today's call can be found on the Investor Relations section of our website at pros.com. Our prepared remarks are also available on our website and will be replaced by the official transcript, which includes participation questions once available. With me on today's call is Andres Reiner, President & Chief Executive Officer; and Stefan Schulz, Chief Financial Officer.

Please note that some of the commentary today will include forward-looking statements, including, without limitation, those about our strategy, future business prospects and market opportunities and our financial projections and guidance. Actual results could differ materially from such statements in our forecast. For more information, please refer to the risk factors described in our SEC filings. PROS assumes no obligation to update any forward-looking statements to reflect future events or circumstances.

As a reminder, during the call we will discuss non-GAAP metrics. Reconciliations between each non-GAAP measure and the most directly comparable GAAP measure to the extent available without unreasonable effort are available in our earnings press release.

With that, I'll turn the call over to you, Andres.

[Andres Reiner, executive]

Thank you, Belinda. Good afternoon, everyone, and thank you for joining us on today's call. We delivered a solid second quarter, exceeding the high end of our guidance ranges across all metrics. We grew subscription revenue by 14% and total revenue by 8% while achieving significant profitability milestones. Year to date, we've delivered a 554% improvement in adjusted EBITDA and a 112% improvement in free cash flow year-over-year, with both metrics yielding positive first half results despite seasonally high expenses.

In Q2, we also achieved our long-term goal of 80% non-GAAP subscription gross margin. I'm extremely proud of our team for building the market-leading profit and revenue optimization platform, which drives immense value for customers [ powering ] 4.1 trillion transactions a year, while delivering expanded subscription gross margins.

Now in the second half, we're being cautious with respect to our Travel business. Typically, the second half is seasonally strong for airline bookings, and that certainly was the case in 2023. Despite enjoying strong passenger demand, airlines continue to face operational cost and supply chain challenges. These challenges impact the approval processes and [ lengthen ] sales cycles. As a result, we're assuming our travel bookings will be down year-over-year, impacting our outlook for 2024, which Stefan will cover in more detail.

We remain fully committed to achieving our long-term goal of becoming a Rule of 40 company. We've made considerable progress, and our confidence in achieving our long-term goal is strong. Here's what fuels our conviction. First, the value proposition of the PROS platform is more relevant than ever, and we see increasingly favorable competitive dynamics, both driving continued strong deal volumes and win rates. Our clear value proposition is why more customers are prioritizing process [ and ] top initiatives supported by their [ board ] as a means for driving revenue growth and margin improvement, fueling strong expansion activity.

Second, we continue to invest in innovation to drive faster activation of our market-leading platform and accelerate time to value, bolstering our land, realize, and expand strategy. I will share a few examples from Q2 that highlight these points, starting with new customer wins. A top 3 global medical devices company selected the PROS platform in Q2 to activate Smart CPQ and smart price optimization. With goals to accelerate sales and drive increased win rates, the company chose PROS as their strategic partner to help them deliver on their growth objectives. The initial regional land is the beginning of a partnership that can span over a 100 countries around the globe.

Dynata, a leading first-party data solution platform selected the PROS platform to activate Smart CPQ, empowering their global sales team to accelerate time to quote with winning offers. Dynata chose PROS for the depth and breadth of our platform to support their direct sales and future expansion of their e-commerce channel.

Now, on to expansions. A few quarters ago I shared Ingredion's continued success with PROS, highlighting multiple regional expansions of our platform. We're proud to announce that as of Q2, Ingredion has decided to expand the PROS platform globally, underscoring the value they drive with our solution. We're also expanding the PROS platform across BASF's global operations. As the world's largest chemical producer, BASF uses our platform to drive pricing and sales excellence in the face of inflation and supply chain volatility, making PROS a strategic priority for global deployment.

Hertz expanded their use of the PROS platform by activating capacity aware price optimization across all North America locations. This solution uses patent-pending technology powered by neural network AI to assess the opportunity cost of diminishing supply against demand in real time. This allows Hertz to set real-time prices based on fleet capacity and fluctuating demand, enabling them to win more business and drive a better customer experience.

Philippine Airlines, a PROS customer of over 20 years, expanded their use of the PROS platform by choosing to activate Group Sales Optimizer. With GSO, Philippine Airlines will power a digital sales motion for group travel across channels, driving increased conversion with a frictionless end-to-end customer experience.

Innovation has always been central to our growth strategy and core to who we are. We released a new Generative AI data transformation solution to power seamless data integration between third-party systems and the PROS platform, making our AI innovations even easier and faster to activate. This is just one of the many AI innovations we showcased at a record-breaking Outperform conference in May, which had its largest in-person turnout ever. The event featured 60 customer speakers who share remarkable success stories achieved with PROS, highlighting how these innovations are driving significant business outcomes for their organizations.

Finally, Todd McNabb, our Chief Revenue Officer, has unified our B2B and Travel go-to-market teams. We're building a centralized revenue engine to drive a unified go-to-market across all phases of the customer journey, from demand generation to customer success. This change will drive further productivity, rigor and scale to strengthen the flywheel, that is our land, realize, and expand strategy.

I would like to thank our incredible global team for their passion and dedication to PROS, our customers and our communities. I would also like to thank our customers, partners and shareholders for their ongoing support of PROS.

With that, I will turn the call over to Stefan to cover financial performance and outlook.

[Stefan Schulz, executive]

Thank you, Andres, and good afternoon, everyone. A key pillar to our strategy is becoming more efficient as an organization. This is a core component to attaining the profitability range of our Rule of 40 goal. So I wanted to start by discussing the progress we have made over the last 2 years.

Comparing our results from 2 years ago, we have grown our total revenues by 10% per year while improving our non-GAAP subscription margins by 300 basis points and our non-GAAP gross margins by 400 basis points. We have also reduced our operating expenses by a rate of 1% per year during that span of time, resulting in a 1,700 basis point improvement in our adjusted EBITDA margin. We have become more efficient in every part of our company, and we have new initiatives underway to drive even more efficiencies in the future.

Now I'll share some more details on our second quarter results. Subscription revenue was $65.6 million, up 14% year-over-year, and total revenue was $82 million, up 8% year-over-year, both exceeding guidance. Our second quarter recurring revenue was 84% of total revenue, and our trailing 12-month gross revenue retention rate continues to be 93% or better.

Services revenue was $13 million, down 3% year-over-year. This was slightly below our expectations because a higher portion of our subscription bookings were related to expansions, which require less services than service -- than subscription bookings from new logos.

Calculated billings in the second quarter increased 10% year-over-year and 8% for the trailing 12 months. Looking forward, we expect calculated billings to follow a similar trend to last year, where Q3 growth is expected to be at the lowest point in the year and Q4 to be stronger. For the year, we expect the growth rate for calculated billings to approximate total revenue growth.

As Andres highlighted, our non-GAAP subscription margin increased to 80% in the second quarter, an improvement of over 160 basis points year-over-year and an all-time high. To put this achievement into perspective, we first targeted a subscription gross margin goal of 78%, 9 years ago.

Given the sophistication of our AI and the data volumes we process, we really didn't see attaining 80% subscription margins at the time. As our engineering and operations team improved the efficiency of our cloud services, we eventually saw a path to an 80% subscription margin and set that as a long-term goal at our Analyst Day 14 months ago. Now we have achieved this updated goal of 80% earlier than planned, and it is a true testament to our engineering team's innovation and hard work that we have now achieved this milestone.

Our overall non-GAAP gross margin was 67% in the second quarter, an improvement of over 210 basis points year-over-year. We generated adjusted EBITDA of $5.2 million in the second quarter, significantly exceeding guidance and improving more than $5 million over last year.

We generated free cash flow of $6.2 million in the second quarter, an improvement of nearly 200% year-over-year and delivered positive free cash flow during the first half of the year for the first time as a SaaS company. From a balance sheet perspective, we exited the second quarter with $149.1 million in cash and investments, net of the settlement of the remaining $21.7 million of our 2024 convertible notes. Our second quarter non-GAAP earnings per share was $0.07 per share, also exceeding guidance.

Now, turning to guidance. As Andres mentioned, we believe, the operational challenge airlines are facing creates some risk for us in the second half. Additionally, the stronger-than-anticipated expansion activity I noted earlier had some impact to our services and total revenue because of the lower attached service revenue that typically comes from expansions.

Accordingly, we believe, it is prudent to adjust some components of our guidance. So for the full year, we are revising our guidance in 3 areas. We anticipate total revenue of between $329 million and $331 million, representing 9% growth at the midpoint, because we are now anticipating lower services revenue from what was implied in our previous guidance.

We are anticipating free cash flow of between $20 million and $24 million, representing a 94% improvement year-over-year at the midpoint. And we now expect subscription ARR of between $280 million and $284 million, representing 9% growth at the midpoint. We are reiterating the previous guidance range for subscription revenue of between $263.5 million and $265.5 million, representing 13% growth at the midpoint, and we are raising our guideline for adjusted EBITDA of between $21 million and $24 million, representing a 275% improvement at the midpoint.

Shifting to guidance for the third quarter. We expect subscription revenue to be in the range of between $65.8 million and $66.3 million, representing 10% growth at the midpoint. We expect total revenue to be in the range of between $81.5 million and $82.5 million, representing 6% growth at the midpoint. We expect adjusted EBITDA of between $6.5 million and $7.5 million and using a non-GAAP estimated tax rate of 22%, we anticipate third quarter non-GAAP earnings per share at $0.08 to $0.10 based on an estimated 47.8 million diluted weighted average shares outstanding.

I want to echo Andres's comments in saying that we continue to have conviction in achieving the ranges for total revenue growth and free cash flow margin towards our long-term goal of being a Rule of 40 company. We've made considerable progress since we set this goal a little over 1 year ago, and we are confident that we will continue to make progress and ultimately reach our goal. Although we also acknowledge that the current conditions in the airline space will likely push the achievement of this goal by approximately 1 year.

In closing, I would like to thank our global team and our customers for their continued support of PROS. We also thank you, our shareholders, for your support of PROS, and we look forward to speaking with you at our upcoming events.

I will now turn the call back over to the operator for questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from the line of Parker Lane with Stifel.

[J. Lane, analyst]

Andres, I was wondering if you could go into a bit more detail on what you're hearing in the conversations you're having with the Travel customers about the challenges they're facing? And more importantly, when do you anticipate and what are they thinking about the potential for a time line to put some of those challenges behind them?

[Andres Reiner, executive]

Great question, Parker. I would tell you, look, we are working very close with our airline customers. In fact, myself and the executive team had numerous meetings with CEOs of top airlines and executive teams. What we're seeing right now is they are wanting to get their operational back in line, and I think that is their focus area. We're also working with them to help support in some of the changes they're making as well as provide areas where we can help them drive value with smaller investment and little team support to activate.

So what I would tell you is we're leaning in, in areas whether it be [indiscernible] continuous pricing, willingness to pay off [ for ] marketing, components of our platform that we can activate to get deals started, while we're supporting them through these operational challenges that they face in supporting their teams in the process.

I can tell you we're as close as we've ever been with the airline industry, and we've always leaned in to support them. And I feel that the guidance we're providing is consistent with what we believe. Definitely in Q3, there is going to be an impact due to that. But our approach, like always, has been in times when the airline industry has had challenges is to lean in, support them and help them come out stronger, and we're consistent and convinced that, that's going to happen.

[J. Lane, analyst]

And then, Stefan, maybe one for you. I see sales and marketing ticked up a little bit quarter-over-quarter. You also talked about the unification of the go-to-market of Travel and B2B. Just wondering, in the initial stages here, what your thoughts are on the potential efficiencies that unification can drive in both the near term and long-term?

[Stefan Schulz, executive]

Yes. Parker, the tick up in the second quarter was more to do with marketing activities. We had our Outperform event, and that is really what drove up the cost. I would tell you that we do continue to expect to see efficiency benefits that come as a result of, to your point, bringing the Travel organization and the B2B organization to be more [ along ] -- one organization.

So that said, I think, you'll continue to see that line item perform well. I think it might be slightly up as we go through the rest of the year as you compare to last year, primarily because of other marketing investments we want to make in order to continue to improve our funnel and our pipeline.

[Operator]

Our next question comes from the line of Scott Berg with Needham & Company.

[Scott Berg, analyst]

Stefan, the first question I have for you is on -- and I know it's way too early, but thinking about revenue growth into next year, into calendar '25, if you exit with an ARR growth rate here of, we'll call it, 9% or 10% here by the end of the year given your current guidance, would that drive a high single-digit 10% growth here in your subscription revenues next year? Or why would that not be the right starting point for us to start getting comfortable with?

[Stefan Schulz, executive]

Yes. So I guess, first of all, I'm not going to make a comment really on '25 just yet. We're not through our planning process to go through that. But second, Scott, what I will say is that when we look at our subscription ARR metric, that is one leading factor that can dictate what the revenue is going to be. The other part is what happens from the in-quarter bookings.

And so, I think, to Parker's question earlier, the things that we're doing to respond to the airline situation, things that we're doing to sell some ancillary products that actually help improve their go-to-market. There's things we can be doing to respond to the situation that I think could offset what you might see from a starting point, which would be our subscription ARR.

So we are not at this point conceding to a growth rate that would be in the upper single-digits for next year. However, we're also not prepared to give you what a growth rate might look like. But I think there are some things we can be doing to respond to this environment that could give us a better answer than that [ starting ] [ point ].

[Scott Berg, analyst]

And then following up on Stefan's last comment, I don't know if yourself or Andres want to tackle this one in particular, but pushing your Rule of 40 goal from what I believe was calendar '26 now into '27, if you're pushing it for 1 year is, how do we think about the components or the details of that push? Will that be more related to probably the revenue growth opportunity given what's going on in the Travel segment right now? Or is there some component around the profitability that might lag as well?

[Andres Reiner, executive]

Yes. I'll give you, Scott, my perspective. To me, the components aren't changing with what we had said, 16% to 21% growth on revenue in 19% to 24% on free cash flow. I can tell you, look, we're very excited about the market opportunity and how we're executing our land, realize, expand strategy. We always focus on deal volumes and we're continuing to focus on consistency. I can tell you on the B2B side, our sales cycles continue to improve, and improve 15% year-to-date, and if you remember, last year improved 30%. So we're continuing to drive more rigor.

I'm very pleased with Todd and the changes he's making to unify the organization, and it's all about continuing to execute on our land, realize, expand strategy and build a flywheel effect, and I believe that -- I think that's going to have a big payoff as we continue to execute on the strategy.

And on Travel, our ASPs are down a little bit over 40% is what we expect because of this. But we are trying to land and get small lands that can build growth opportunities next year and beyond. So like, we are [ rallying ] around this to drive the best outcome possible for our customers and for our business. So we're all in, in this. We're not letting go of growth and we're just trying to continue to help support them and be cognizant of the areas they need to improve, but support them to drive better business outcomes and growth for us in the future.

[Stefan Schulz, executive]

Yes. I think, just to add to that, there's a couple of ways to think about how we can achieve the Rule of 40. I mean, the comeback year, so to speak, that happens once we're through the challenges that we've referenced could be a nice way to fast start an accelerated revenue growth rate.

But that's not how we want to achieve a Rule of 40. We want to achieve a Rule of 40 and have it be sustainable. So to Andres's point, we're putting in the foundation [ more ] that basically shows that we could be at a 16% to 21% growth rate on the revenue side, not just for 1 year, but for many years to come and then also have that working off of a platform that can be generating 19% to 24% free cash flow margin.

So the reason we went ahead and decided to push it to [ 1 ] year is because we think that's really what it's going to take for us to find that consistent level of performance so that you can count on us to be delivering a Rule of 40, not just for 1 year, but multiple years.

[Operator]

Our next question comes from the line of Patrick Schulz with Baird.

[Patrick Schulz, analyst]

Maybe first on the Microsoft partnership. Can you just talk a little bit more about how that partnership has progressed? I think at the Outperform event earlier this year, there was a lot of customer interest in this. Just curious how that has translated into pipeline build looking into the second half of this year and to 2025 as well?

[Andres Reiner, executive]

Yes. So overall, look, we're very pleased with the Microsoft partnership. We just won Partner of the Year for the second time. In our innovations, I believe, in the areas of the sales copilot, this is the next generation of sales technology. We're both excited about the opportunity ahead. It's an early stage of sales adopting Generative AI technology to power the sales motion, but where we're innovating. We're very excited. And I would tell you from a collaboration, on deals on the pipeline, we continue to collaborate on many opportunities and work jointly on this opportunity.

So overall, we feel very good. As you saw, Outperform, we're very excited about Outperform, had 1,000 registrants, 60 customer speakers. And I could tell you that the feedback from it was very, very positive, and we generated more than double the opportunities this year at Outperform compared to 1 year ago. Some of these innovations with Microsoft played into that. So overall, we feel very good.

[Patrick Schulz, analyst]

Maybe a quick follow-up too on the macro. And I appreciate all the commentary just on the updated Travel expectations. But from a broader viewpoint, has anything changed from a customer's willingness to sign deals this quarter relative to last quarter, maybe more general as outside of Travel? How is the demand environment been relative to last quarter?

[Andres Reiner, executive]

Yes. Great question, Patrick. I would tell you, look, the environment continues to be a very difficult selling environment. It's not easy to get deals through. I think our team has been very focused on ensuring that we can sell fast time to value, quantified ROI, we're selling at the right level. Because right now, companies are taking a few bets that they're investing on.

So I would tell you, the environment continues to be very, very hard selling environment. Our team is doing the best to drive the best outcomes. I think in the B2B side, we're seeing the average deal size remained consistent with last year. So we're not going in and trying to reduce. We're selling a more consistent motion.

And I would tell you, we're doing very well in expansions. I would say that's a highlight. We're seeing -- we adopted the platform strategy a couple of years ago. We're seeing that play in into last quarter, a lot more customers expanding and those expansions, [ because ] we're leveraging the platform, they require little to no services to activate, which is a great story for customers because they get more value, they get value faster and it allows them to move on that journey to go from starting in one division to 2, [ to ] getting to global, and Ingredion is an example, and we have BASF working on that as well. So overall, I believe that land, realize, expand strategy is definitely working. But it is a difficult selling environment, no doubt about that.

[Operator]

Our next question comes from the line of Jason Celino with KeyBanc Capital Markets.

[Jason Celino, analyst]

Maybe on the Travel side, just curious when you started to see some of this extra cautiousness? I know there was a security software vendor that caused a lot of trouble for some of these airline travel companies recently. Wondering if that had anything to do with maybe reprioritization of some of their purchases?

[Andres Reiner, executive]

Yes. Great question. I would say, obviously, the [ CrowdStrike ] incident had a bit to do with it. That had a pretty broad impact to the travel industry, many days to recover from that. And as you would imagine, they have a lot of focus on getting back to operational. But I would tell you, late in the quarter and into the beginning of this quarter is when we started to see that impact and that probably was what compounded the effect.

[Jason Celino, analyst]

And then, more of just like a overarching question just on the guidance for the year. We obviously have the U.S. election coming up. I'm curious how you've built that into the guide? Or even if elections in prior years have had an impact on customer decision-making, but I thought I'd ask, given kind of the Q4 dynamics?

[Stefan Schulz, executive]

Yes. So I've only been here for 2 previous election cycles and I can't recall any sort of dynamic that occurred as a result of it. I think it's a good question because there's -- I know there's a lot of discussion and topic around it. But we really haven't seen an impact from it in terms of how customers are looking to invest. So we didn't factor anything one way or the other into our guidance as it relates to the election.

[Operator]

Our next question comes from the line of Brian Schwartz with Oppenheimer.

[Brian Schwartz, analyst]

I just want to ask you what you're seeing in terms of average sales cycle duration times in the B2B business in Q2 versus Q1, if you saw any [ downtick ] or still pretty consistent in tough environment out there for new logos?

[Andres Reiner, executive]

Great question. So I would tell you, overall, B2B sales cycle times have improved by 15% year-to-date. And I would say it's consistent Q1 and Q2, we're seeing that improvement, and I would say that, that's on, I think, the [ rigor ] on execution. And I think the consistency in our motion, I think is helping to improve that. We're focused. I wouldn't say we've declared victory. We're still focused on driving even more improvement to that in the changes that Todd and I are making jointly across the organization, unifying the organization. But overall, we're pleased with those improvements.

[Brian Schwartz, analyst]

A follow-up question I had for Stefan. It also was on the guidance and just thinking about Q4. The implied subscription revenue growth guidance for Q4 is for reacceleration even when you normalized comps. Is there something that you're seeing either in your pipeline or you're hearing from customers that is giving you the confidence to guide for the subscription business to reaccelerate as you're exiting the year?

[Stefan Schulz, executive]

Yes, Brian. So, when you look at our second half of subscription revenue in Q3 specifically, we're guiding to a lower growth rate. And that was planned all along because we knew we had a much higher subscription number 1 year ago because of some accelerated recognitions that we benefited from 1 year ago. So that dip that you're seeing in Q3 was -- we expected to see a dip all along and then kind of returning back to a better growth rate in the fourth quarter. So we are certainly expecting that. And as you pointed out, we are guiding to that.

I would tell you that what's driving the sequential increase between Q3 and Q4 is a little bit of what we have built into the backlog of deals that were expected to be starting the recognition, but also the revenue from new bookings. So even though we've adjusted our booking forecast down mostly from the second half, we still are expecting to see a good second half to the year relative to the full year. In other words, we still expect to see more bookings in the second half than we did in the first half. So that is a part of the guidance and while we feel like Q4 can see a bit of an increase over Q3.

[Brian Schwartz, analyst]

And then, if I could just squeeze one more in, Stefan, on the good expansion activity that you had in 2Q. Was any of that impacted at all by early renewals? Did you have customers kind of coming in and buying more ahead of their renewal season? Or was it mostly just add-on sales or expansion activities with headcount?

[Stefan Schulz, executive]

Yes. Brian, we see that from time to time, but it's not a predominant part of our renewals. So I would say we did not see anything abnormal in the second quarter from that perspective. Most of our expansions relate to -- that had -- that were attached to renewals were pretty much on time. We may have had a small number that were a little early, but that's pretty normal.

[Operator]

Our next question comes from the line of Jeff Van Rhee with Craig-Hallum Capital Group.

[Jeff Van Rhee, analyst]

I've got a couple. First, on the B2B enterprise side, did the bookings on B2B hit expectations this quarter?

[Andres Reiner, executive]

I would say the bookings -- we're pleased with the bookings on the B2B side.

[Jeff Van Rhee, analyst]

And so I guess, in terms of the forward guide, was there any change to the implicit B2B bookings expectations?

[Andres Reiner, executive]

No. I would say all -- the change in the forward guide is all due to Travel, so not [ B2B ] expectations.

[Jeff Van Rhee, analyst]

And then on the Gen 4 product, I'm kind of curious more -- to hear a bit more about the experience you've seen out in the marketplace? Specifically, it's got a lot of advantages. It takes less data to get started, which would seem to give it more broader applicability in terms of vertical industries. Have you seen it having enough impact that it's opening up prior markets that you were not able to get at with the older product?

[Andres Reiner, executive]

Look, I would tell you, in general, we have so much opportunity within the industries we're in. That for us is going deep within the industries. We could acquire technology [ to all ], but it's really about the industries we serve going deeper and deeper. And we've been very, very focused on time to value and reducing that dramatically. And [ my ] believe, long-term customers aren't going to want to pay much for activation, and we've been innovating in our product to drive these very fast activation, and this is just one of the innovations towards that focus area.

And it can -- the beauty of this innovation, it can help us with the industries we're in, it can help us expand into new industries. And the beauty of our platform is the data model is dynamic. We could go after any industry we wanted to go and expand. But we're already in about 40 industries on the B2B side. So we have plenty of [ TAM ] to go after and go deep. So for us right now is how do we activate that -- those particular industries even faster.

[Jeff Van Rhee, analyst]

Maybe if I could just sneak one last in. As you're pushing more and more into the land and expand opportunities, can you share anything with respect to the B2B side? And what a typical size of a land looks like now versus maybe 1 year ago? Just even, I don't know, broadly speaking, but I'd love to get a sense of that trade-off quantity and price and how that's playing?

[Andres Reiner, executive]

Yes. So I would tell you that the average deal size on B2B last year to this year remains consistent. It's in the [ 200,000 ] range. And that's kind of the zone -- 3 to 4 years ago, we executed on our platform strategy and our goal was to get that -- to that [ 200,000 ] range. And that to me is a great place to land and drive fast expansion. So I would say, I would expect that to remain consistent. And I would tell you, year-to-date is exactly the same as it was last year.

[Operator]

Our next question comes from the line of Nehal Chokshi with Northland Capital Markets.

[Nehal Chokshi, analyst]

Implicitly, it sounds like you did have less land than expected, albeit more expansions than expected. A, is that correct?

[Stefan Schulz, executive]

On the B2B side, that is correct.

[Andres Reiner, executive]

Yes, Nehal..

[Stefan Schulz, executive]

Yes.

[Nehal Chokshi, analyst]

And why is it that [ your ] -- less-than-expected lands on the B2B side?

[Andres Reiner, executive]

I would tell you, look, any particular quarter you're going to see changes between land and expand depending on the pipeline you're executing. And I would tell you, a lot of that has to do with the focus on the lands that we had, and those are coming up for expansions, and we executed on those. I wouldn't read too much into it.

I would say that as we've discussed, this is a difficult macroenvironment to sell in. And where you've achieved value, it's obviously easier to drive expansions because they've seen quantified value and in many cases most customers are having initiatives around driving margin uplift and efficiency in the organization. And we're in incredible technologies to help do that. So where they've already seen that is helping them scale, it's helping them drive margin improvement. They want to accelerate that, and we're allocating resources to go sell into those accounts.

[Nehal Chokshi, analyst]

And then, Stefan, I still don't quite get why we are guiding a higher EBITDA but lower free cash flow guidance in the context of the lower [indiscernible] [ '24 ] travel bookings expectations?

[Stefan Schulz, executive]

Yes. So it's really the timing between when we get the profit relative to when we get the benefits of the cash. I mean it's -- some of the EBITDA improvement that's occurring in the guidance range that we provided for this year relates to items such as some incentive payments that won't be realized until 2025. So you'll see the EBITDA improvement, but you won't see the free cash flow impact for another few months. So that's one example.

[Operator]

Our next question comes from the line of Victor Cheng with Bank of America.

[Hin Fung Cheng, analyst]

Most of them has been asked, but 2, if I may. Firstly, on new versus existing, I remember previously, it's close to a 50-50 split. Can you give us some more color on what the split is right now? And across B2B and B2C, I remember previously, B2B had more new logos. And with that in mind as well, not just for Q2, but going forward with the full year guidance, are you still expecting a lower split of new versus existing?

[Andres Reiner, executive]

Yes. So right now, we're seeing a higher percentage of existing than new. I would say for the back half we see strong new opportunities. So I wouldn't expect that to maintain. But I would say this year we're expecting where we typically are in that 50-50 range. We're definitely expecting probably closer to a 40-60 split between new and existing versus a 50-50 split.

[Hin Fung Cheng, analyst]

And maybe one regarding...

[Andres Reiner, executive]

And by the way, there is still a lot of -- I mean, we didn't go into it, but there's a lot of great lands and then new customers that we landed both on the Travel and B2B. And we highlighted just a few in my prepared remarks, but there's incredible lands and some are really like a top 3 medical device companies, some have very incredible lands that we're having. So we're very happy with the lands that we're getting.

[Hin Fung Cheng, analyst]

And maybe the other one is, any comments you can make regarding FTC's kind of study on the market data usage? And do you think they will limit maybe how your customers can use their clients' data and kind of potentially limit the value proposition in the long-term?

[Andres Reiner, executive]

Yes. At this point, I would say it's too early. We see this as -- we're just in the process of responding to that. We see them more as trying to understand the market. From [ more ] perspective, we've always had clear data segregation between customers. So no data from a customer can help the algorithm or train the algorithm for another customer, and that's been from the very beginning.

The other area that their focus is in the personal identifiable data, and we don't use EIA to help do our pricing algorithms. So for us right now, I don't see any broad implications. This is -- for us it's just the FTC learning and trying to understand this market.

[Operator]

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Belinda Overdeput for closing remarks.

[Belinda Overdeput, executive]

Thank you for listening to today's call. We look forward to speaking with you at conferences and events this quarter. We will be attending the KeyBanc Capital Markets Technology Leadership Forum on August 6th in Vail, the Virtual Oppenheimer Technology, Internet and Communications Conference on August 13th, and the Wolfe Research TMT Conference on September 10th in San Francisco. If you have any questions following today's call, please contact us at [e-mail]. Thank you, and goodbye.