Procore Technologies, Inc. (PCOR) Earnings Call Transcript & Summary

All right. Well, good afternoon, everyone. Welcome to day 1 of the Barclays Tech Conference. My name is Saket Kalia. I cover software here. I am honored to have with us the team from Procore. We've got Howard Fu, Chief Financial Officer; also got Alexandra Geller, Head of Investor Relations in the audience. We've got about 30 minutes together. Let's take the first 20 or 25 minutes just to do some fireside chat here with Howard, which I know is going to be fun. And then in the last few minutes, I'd love to make it interactive. So if anyone's got any questions, just pop up your hand and we can just get a mic around to you. So with that, Howard, thanks so much for being with us.

Thanks for having us.

Yes. Absolutely. Absolutely. There's a lot to talk about at Procore. But maybe just to start, could you just talk through some of the points that you and the team are most proud of coming out of the last quarter?

Yes. I can rattle off statistics, but I think the biggest thing that we are proud of is Q3 is going to mark 3, 4 quarters of really strong consistent execution and results. And that level of consistency, I think, sometimes gets lost in the quarterly numbers and some of those metrics. And we're really proud that we've been able to sustain that and get to a place where that is really durable over the last 3 or 4 quarters. And that gives us a tremendous amount of confidence going into Q4, but not only that, but going into fiscal '26 and beyond. And so we're definitely very proud of that. Look, some of the stats, I could rattle off stats on the 6- and 7-figure customer growth, which has been fantastic and consistently strong, and it's much more reflective of where our business is going. We've got $1 trillion of ACV that's committed on our platform now. Previously, when we talked about this in prior Investor Days, that was closer to $900 billion. Now we're at $1 trillion. Just the progress on all those components of the business and our place in the industry has us really excited, and we're really proud of that. So those are a few things.

What a way we've come, right, from last year. What we were talking about and we're talking about now. Boy, it's great to see -- very helpful level set. I want to dig into a few of those things. But I want to hit the CEO transition here upfront. And it's funny, we were saying this before the mics turned on, but I'll say it again, I think we're -- all of us are happy to see that Tooey is still going to be very involved in the business going forward. It's been about a month since Ajei started. A lot of us worked with Ajei who he was at Ansys, thought it was a great hire. But maybe you could share with us some high level, what are some of the things that he's thinking about or is going to be focusing on in these first few months on the job?

Yes, sure. Well, first of all, like you said, this is literally week 4 of Ajei being [indiscernible]. So let's just set that context here. The other thing that I'll say is you mentioned Tooey is still actively involved. He is actively involved in the company. We had a Board meeting yesterday. Tooey is involved, and he's staying involved, and he's doing the things that he loves, engaging customers, talking about product. And when you think about that in the context of the stage that Ajei is in ramping and learning and in this discovery mode about the business, putting those 2 pieces along with the operational mindset that Ajei has, has just been a really good interaction to see even at this early stage. And obviously, that's going to continue to evolve. In terms of where Ajei is going to focus, we did an intro call last week. It's now posted on the website. If you all haven't seen that, we can go and take a look at that. In that discussion, he goes through how he's going through that discovery phase and how he's learning about the business and meeting with customers. It's going to be too early to talk about specific focus areas. But one thing that is consistent with what we've been talking about even before Ajei joined is whatever fingerprints that he's going to put on the business from a strategic or operational standpoint, all of that is still going to be in service of continuing to improve free cash flow per share. That does not change. But it's too early to say the specific areas. And when he attends his first official Q4 earnings call, we can have more insights and he'll say more about that. But I can say the interactions have been really fantastic. He's got the buy-in from the executive team, from the Board and everything, and it's been really great to see.

That's really, really great to hear. And it was a very helpful call last Friday, by the way, in case you could tune in on the website. So maybe with all that out of the way, I want to shift to the business. And maybe a good place to start is with the health of your customers, right? And I think what we said last quarter was that U.S. nonresidential construction was down something like 2% year-over-year. Can you maybe talk about what you're hearing on the health of the construction market kind of going into next year into 2026?

Yes. Look, the overall construction market and the macroeconomic environment and how our customers are pursuing that is stable but still challenged, right? And that hasn't changed, and that is what we're going to assume going forward until we see some evidence of that changing. And so even in that environment, we've continued to gain share. When you layer in our growth rate, Procore's growth rate on top of that negative 2% growth that we've seen in nonresi over the last 3 quarters, our growth has had a pretty significant premium on top end. So we continue to gain share. And so our customer sentiment is that, one, it's the same. It's stable, but it's still challenging. And I think the premium that we've been able to achieve in that environment really speaks to 2 things. One is the consistency in our execution, inclusive of the transition that we made in our go-to-market, which has been paying off really well. And it also speaks to the partnership and the relationship that we have with our customers that they continue to trust us to be their partner as they go on their journey. So that's what we're seeing.

Yes, absolutely. I mean, I thought that was a super interesting point, just the idea of Procore outgrowing that nonresi market by, I think, 10 to 20 points is what we called out, implying clear market share gains. I'd love to dig a little bit deeper into that just in terms of the market, I want to ask about competition as well. But how much of some of that outperformance versus underlying construction is coming from greenfield opportunities versus maybe replacing legacy processes or systems?

Yes. So I think it's important to answer that question to step back just a little bit. Even though we've now crossed $1 trillion of contracted ACV on our platform, even though we've continued to maintain this durable growth, even though we've continued to do that and continue to increase margins, you got to remember, the overall digitization of the industry is still very, very low. And so when you put it in that context, these gains and where those are coming from is going to largely mimic what we've talked about before and the way that we've executed before. And a big portion of that is still coming from greenfield, right? A big portion of that is going to come from point solutions. And so it's still the same mix in terms of where we're getting those share gains, again, in that context of the overall industry and more specifically the way that we've executed over the last several quarters and the last several years. It's been really great to see.

Yes. Yes. Absolutely. My view, what I tell investors in this space is this is a rising tide that's lifting all boats in my view, right? So it's natural to see competitors like Autodesk, right, for example, call out their growth in their construction offering also. But maybe just to make sure the question is asked, can we just talk a little bit about competitive win rates and how those are trending?

Yes. We feel really great about our competitive runway. We feel really great about our competitive position. I can't speak to what Autodesk or any of the competitors are talking about. We can only speak to our numbers. And we feel like from a product standpoint, from a go-to-market standpoint, we are in a really, really good position. We're happy with the sustained and high win rates. The other thing that I'll say is, I think there's a misconception out there that this space that we operate in is more competitive than it actually is, right? And sure, we keep -- we obviously look at competition and things like that. But we control what we control, and we are fully bought into the value that we're bringing to our customers. And the win rates and the competitive positioning and our position in the industry and what customers tell us prove that out to us. And so those are the things that we can continue to go by. And so that's how we're going to continue to execute.

Well, it's an interesting point because I think it was Tooey's last call where he said -- and correct me here on the stat, but something like 5 of the top 10 deals or something like that didn't even have sort of additive bake-off. So to your point around overestimating kind of the competitive intensity of the market, that's maybe a data point that's worth remembering here.

Yes. So half of our large new logo wins in the quarter didn't have a competitor in there. And so that's a perfect data point that exemplifies this.

Understood. I want to move to some of the go-to-market changes that Procore made last year, particularly the focus on the ENR 400 and really increasing the cross-sell into that base. We're about a year into when we announced that transition, right? What a year it's been. Maybe the question is, what are some data points you can share that show that, that strategy is paying off? And what are the metrics that you think are going to show that going forward as maybe a corollary?

Yes, sure. So the first thing is it's interesting you're talking about this in the context of the ENR 400. I just want to make it clear, these changes that we made on the go-to-market side was not specifically for any part of the business. So it wasn't specifically for ENR. It wasn't specifically for one stakeholder. It wasn't specific to any geo. It was really more broad-based in the way that we approach the go-to-market globally across all 3 stakeholders and across all the different markets. And to that end, we've made a tremendous amount of progress across all those dimensions. Some of the metrics that we look at internally, we've talked about before, we're seeing record pipeline generation. We're seeing that the quality of that pipeline improved. And we know that because the conversion rates are trending much higher than what we've seen over the last several quarters. And we are now seeing the productivity on a per rep basis start to improve as we go to the back part of this year, and that will continue on and the expectation will continue on into the next fiscal year where we get leverage. And then just from a subjective and anecdotal basis, the amount of unsolicited feedback that we get from customers about how positive that experience has been with the engagements with our technical specialists is just another proof point that this is the right model. And that's not just U.S., it's globally, right? And so that gives us a tremendous amount of confidence. And those are the things that we'll continue to track as we go into fiscal '26.

Got it. Got it. Historically, ever since the IPO, I mean, we've always thought about Procore as a leading vendor for the GCs, the general contractors. But that's not necessarily the case or that's not necessarily the direction of travel for the business. So maybe could we just talk about the growing owners business that we have? What products are they buying? And how that's impacting the model, if at all?

Yes. So we obviously started in U.S. mid-market general contractors. But remember, our mission is to connect everyone in construction on a global platform. And you can't do that unless you have solutions and bring that value, not just to GCs, but to the owners and the subcontractors, right? So every dollar -- every project is going to have an owner, a general contractor and a bunch of subcontractors. And so our intent has always been to expand beyond general contractors into subcontractors and owners. Specifically for owners, remember that owners are very diverse. A lot of times, investors will think about owners as a real estate developer, but they could be your big box retailers, right? They could be a trucking company. They could be a farm egg producer. They could be anybody that has a large CapEx budget. And not only that...

Someone building a data center?

Somebody building a data center? Yes. Of course, right? And then you have owners that are then going to act more like builders and you're going to have owners that are more operators. And in terms of the opportunity there, remember, about 25% of our ARR is from owners, right? And that is just the beginning because the penetration in the owners market is extremely low. So there's a tremendous amount of opportunity there. And when you think about some of the things that we talked about at groundbreak and some of the product things that we are making inroads on, things like portfolio management, things like asset management, things like capital planning. Those are all meant specific to make sure that the product that we're putting out there and the value that we bring are directly addressing some of the needs of the different types of owners. And so we see a tremendous amount of opportunity there, both in terms of the additional value that we can add to that stakeholder, but also the penetration is so low that there's a huge opportunity there. But it's not just owners, right? There's -- I feel like Steve Jobs, but -- one more thing. There's the subcontractors as well. When you think about the progress that we're making and what we're focusing on from a product standpoint, resource management is a big deal. And when you think about resource management, it's labor, equipment and materials. That's the lifeblood of a subcontractor, and that's the lifeblood of a general contractor who's a self-perform general contractor. And when you think about that from that context and the chessboard that we're building out, we're not just DCs, we're building out the chessboard for the owners, building out the chessboard for the SC so that the entire construction life cycle is run on a Procore platform. And that's really exciting for us.

Right. Yes. Absolutely. I deliberately kind of put in that data center joke in there just purposely just to maybe set up for this next question. I mean, I think on that, we all see the headlines around large data center builds that are taking place are expected to take place -- could we talk about how much of the business comes from that vertical and how that might evolve?

Yes. Look, there is no doubt that our customers and we are benefiting from the strength in data centers. But remember, Procore doesn't contract on a project basis. We are ACV agnostic. And so it's actually going to be really difficult to parse out the specific parts of the ACV that are dedicated to data centers. But look, there is no doubt that data centers have benefited us. But I think that speaks much more to the diversification of the construction market overall. You've got data centers that are super strong. You may have other areas that are weaker, but that is a dampening effect that as long as there's construction going on, given the low level of digitization and construction in general, that's how we've been continuing to be able to gain a market share even in a down construction market. I have to say -- keep in mind in the context of that diversification, data centers is 2% of the construction market. We were talking to folks today, and it's growing at 100%. So it could grow at 300% and data centers would be 6% of the overall construction market, absolutely a benefit to us. But put it in context, right, don't over-index on that.

That's a great framing actually, right? So very helpful. Before we jump into some financial questions, I want to hit on a product that I'm actually really excited about. I've asked Tooey about it over multiple quarters, and that's on Procore Pay, right? And I think that's a really exciting product just within your already popular financial management portfolio. Can we just talk a little bit about where that product is today? And what helps drive that adoption in '26 and beyond?

We are extremely happy with the number of customers that are continuing to buy Procore Pay and get on Procore Pay. We are very happy with the progression of the adoption of that once customers buy Procore Pay. It is still a small proportion of our overall revenue in terms of the direct contribution of revenue. But remember, Procore Pay, the value of Procore Pay is way more than the direct revenue contribution from that specific part of the functionality of not just overall our financials product, but the overall functionality of the platform. The value is the halo effect of Procore Pay being a part of the platform and to really compete -- further complete the workflows in the ecosystem and the flows that our customers are going through with pay being that last component where the money is getting transferred without that being connected to the other parts of our financials product into the platform, the value is not as much. We're excited about it. And even though there is a tremendous opportunity for the direct contribution of the revenue, the value of that really is the fact that it's a part of the platform, right? We're really happy about those works.

Yes. Absolutely. It makes it very much end-to-end in, right? Yes, for sure. I want to shift to some financial questions and maybe hit on another topic that's been a focus this year, I would argue, that's pooled contracts. Maybe just to start, could you just provide the audience a little bit of an overview of the mechanics around a pooled contract? What are they? How popular they are within the customer base? And also maybe start to touch on some of the dynamics of how they impact RPO, CRPO, NRRs for those funds [indiscernible] .

Sure, sure. So I'll start -- let's talk about the mechanics of this, first of all. In a normal ramped contract, let's say it's a 3-year contract, let's say it's a $300 million ACV contract. In a normal ramp contract, the customer might contract for $50 million of ACV in year 1, $100 million of ACV in year 2 and $150 million of ACV in year 3. But in a normal ramped contract, the customer has to then consume that amount of ACV in those particular years of the contract. Now that is limiting for the customer. They have to be really good at predicting how their volume is going to grow. And the way that it impacts NRR is actually really good for NRR because there's a natural built-in NRR from going from $50 million to $100 million to $150 million, but that reduces the flexibility for the customer. The pool contract, though, they can sign up for the same TCV, which is $300 million, but they're not locked into consuming that $300 million in any particular year. That's a tremendous value to the customer because they have that flexibility to consume it all in year 1, all in year 2 or all in year 3. And the tricky part though, then is that NRR is 100%. And so even though it's a good thing for the customer, it's actually a good thing for Procore, it's actually a headwind to NRR. So there's going to be a nuance on that piece. In terms of how these things impact CRPO, the fact that there is a ramped or a pooled contract doesn't necessarily -- it actually doesn't impact CRPO. What impacts CRPO is when you go from a customer that signs up for a 1-year deal to a 3-year deal. And so this is what we talked about in terms of the divergence of CRPO growth from out-quarter revenue growth, right? If a customer signs up for a 1-year deal and they run through that first year, you don't refill CRPO until the renewal at that 1-year mark. But if you sign up for a 3-year deal, it automatically keeps on getting refilled, right. So essentially, you're kind of pulling forward the refilling of that CRPO. And so that's why you're seeing that divergence in terms of CRPO growth and the revenue growth -- out quarter revenue growth. And to the extent that, that continues, we'll continue to provide commentary to make sure that folks have the transparency and the insight of what the business is actually doing. So those are the mechanics of kind of what's going on.

Yes, absolutely. Super helpful explanation, by the way, right? So maybe just to kind of put a bow on that point, if I look back, I think where pooled contracts really started to impact the model was in Q4 of '24. And you correct me there if I'm wrong-- I'm sorry, the duration, right, the longer durations. And I think that this quarter here in Q4 of '25, we're going to lap that. And right, we talked about that divergence between underlying, let's call it, mid-teens CRPO growth, as reported RPO growth, which is kind of high teens, 20% level. Maybe the question is, should we see that divergence end this quarter? Or will there be a scenario where underlying and as reported CRPO could gradually converge?

It will not converge in 1 quarter. It's going to be multiple quarters as that continues to converge. When we started to see this dynamic in Q4 of last year, even if that stayed at those levels from that Q4 all the way through now, you're still going to see convergence over 4 quarters. What we saw in Q3 was an additional increase in terms of that contract duration. And our average contract duration has now reached about 23 months. And so you're going to see a gradual convergence. And the more that the contract duration continues to get longer, it's going to extend the time of that convergence. And so we'll continue to provide commentary to make sure everyone has visibility into the normalized rate, which is what we did with a onetime commentary about the ending ARR growth and how that is more consistent with our Q3 revenue growth, and that's to provide that normalized growth rate.

Absolutely. Well, I mean, it's -- maybe one question I want to ask, just zooming out from the accounting of it is what percentage of your customer base has adopted the pooled -- and I understand longer duration pooled contracts are somewhat separate, but I want to go back to pooled contracts. It's so much more flexible for the customer, right, in terms of flexibility around how much they consume in a given year. What inning are we in, in terms of how much of the customer base has moved to a pooled contract structure?

I'm going to answer that in a little bit different way. I don't know how much on pool contracts, but in terms of longer duration contracts, it's about half that's on those longer duration contracts. I think there's give or take a few percentage points. What inning are we in terms of folks moving to that? That's a little tough to say, right, because there's a lot of factors that go into that, upmarket versus downmarket. They're going to have very different dynamics. We're definitely going to move upmarket. So those dynamics, we'll have to see how that plays out. But regardless of how those play out, we'll provide visibility and commentary to make sure folks understand what's actually happening [indiscernible].

Understood. Understood. Maybe one more before we shift to profitability because I really want to talk about profitability. That's been a really fun story to see. Should we continue to view sort of exit rate CRPO as kind of the best future revenue indicator of -- future revenue growth indicator of the business? I mean maybe the question -- the broader question is what are some of the puts and takes that we should keep in mind as we think about that revenue growth going forward vis-a-vis the CRPO growth that we have. And sorry to get into the weeds on that one [indiscernible] about that.

Perfectly reasonable. The short answer is yes, on a normalized basis, right? Outside of actually on a regular basis, disclosing specifically the ending ARR growth, a specific number, I think CRPO is still going to be the best indicator, the normalized CRPO. And for the foreseeable future, that is still what we are going to be anchoring on. Now in terms of what we disclosed, hey, if you haven't noticed, we have a new CEO. So he may come in and decide he wants to provide different disclosures and talk about the business in a different way. We have to leave room for that. But I think at least in the foreseeable future for the short term, normalized CRPO is going to still be that best indicator.

Got it. Absolutely. Actually, before we hit on profitability, one other point that I want to touch on before we go there, just going back to the go-to-market transition was -- I want to talk about the international business, right? So I think we hired a bunch of GMs or we hired general managers to kind of manage different international -- major international markets. Maybe the question is, what are you seeing there in terms of pipeline generation, demand outside of the U.S., particularly since construction internationally, I think is thought to be growing faster. Maybe that's not completely true, but talk about the international business here.

We haven't seen that data. But international outside of the U.S. is still facing the same level of economic headwinds that we see in the U.S. In fact, in Australia, it's actually even more acute, okay? And so those headwinds are still there. Now to be fully candid, I wanted to make faster progress on our non-U.S. markets in terms of growth. And I still think we have the opportunity there. I still think that the model that we are going to from -- we went to from a go-to-market standpoint is the right one. I also think that we have product market fit that will continue to allow us to expand and grow faster in the future for international. We've certainly had a lot of learnings, both from the go-to-market and the product standpoint, and we're in a better position now than we were when all these -- the focus first started to continue to expand and take advantage of that opportunity. I would have loved to go faster, but we still see some of those headwinds. Some of the things that are happening on the international side, we talked about pipeline and how that is getting bigger, getting healthier. We're starting to see that actually in a few spots on the international side, which is great. Now ultimately, there's going to be some time before that then flows into then our bookings and then CRPO and revenue, but we're starting to see some of that pick up, which is a good sign for us.

That's a good sign. Absolutely. I'm going to wrap up here just on profitability because I think Procore has done a great job expanding margins over the past few years. And this past quarter, I think the team talked about how we might be able to expect a similar amount of margin expansion in fiscal '26 as we saw in '25, which is just a great result, right? And there were things that we were talking about this time last year that are setting up for that, and I'd love for you to touch on it. But maybe broadly, where is that leverage coming from? And where can we go from there?

A big part of where this leverage is coming from is it's going to come from sales and marketing, a big part of that, right? Well, first of all, it's going to come from sustained revenue growth, but it's going to then come from largely a sales and marketing organization. Remember, we pulled in and pulled forward a lot of those resources into the beginning part of this year. And actually, we started that towards the back part of last year. And so you're going to see a couple of things going into next year. You're going to see that natural bow wave effect of those -- that capacity having a full year capacity versus having a partial year capacity. That's the first thing. So that bow wave is going to increase the capacity and you're going to get leverage. The second piece of that is on a per rep basis, the productivity is starting to improve going into the back half of this year, and that's also going to continue on going into next year. And so you're going to see that leverage. We don't need to add a bunch of folks, okay? And so you're going to see that leverage there. And in addition to that, we've talked about on the R&D side and the product side, continuing to add capacity in lower-cost geos. So you're still increasing the capacity and the delivery from that capacity, but you're adding it at a cost that allows us to really start to trend down our percentage of revenue from an R&D standpoint, similarly with G&A. So gross margins will largely stay where they are in that mid-80s range, but you're going to see leverage across all 3 aspects of the OpEx line.

Really front-loaded those investments, right, that we talked about last year.

Yes. And we did, and we're getting the benefits of why we did that. And so those things are coming together going into fiscal '26 and beyond. And that's exactly what we orchestrated.

I actually don't think we could have thought about a better way to end this session on that point. So with that, Howard, thank you so much for taking the time.

Of course, thank you for having me.

Absolutely.