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

Good afternoon, everybody. Thanks so much for joining us on day 1 of the 2023 Cross Sector Insight Conference. I'm Adam Borg. I'm a analyst on the software team here at Stifel. Thrilled to have with us Procore and Procore CFO, Howard Fu; and of course, from IR with Vivian Wu. We're going to keep this pretty informal. I'll kick it off with some questions. We'd love to make it interactive and hear what's on your mind as well. So again, Howard, thanks much for being here. We really appreciate the support.

Thanks for having me. Good to be here.

So -- and I should [indiscernible].

Forgot mine.

Procore as have a lot of success digitized in the construction life cycle. But there are some folks all newer to the story. So maybe just spend a quick background of the big opportunities that you guys are going after?

Yes. If we -- the first place that I'll start it is probably with our mission and vision. And the mission really is to connect everyone in the construction industry and to improve the lives of everyone in construction by connecting everyone in the construction industry. And when you think about what that means, you have to really think about what it means to actually complete a construction project. it's actually extremely complex. When you think about the stakeholders that have to be involved, from owners, to general contractors, to subcontractors. And then when you think about the communication that needs to take place, between the stakeholders and you think about the communication that needs to take place where between the field and the main offices. And then you start to think about the larger projects and the layers of subcontractors that you might have and the amount of communication, coordination and information exchange that needs to happen, it becomes extremely complex. In terms of the opportunity, today, the vast majority of how that gets done today is very analog and analog is exactly what that means. It can literally mean when you ever walk into a job site, put on your hard hat, go into the trailer and you will see a [ white with sharpies ] and black tape on that white board with lines and columns and people writing stuff on the board, all the way through to things like Excel and people managing their companies on Excel. The digitization of all that communication of all that information, creating a repository and a system of truth for all that information, so that things can be built on time, so that things can be built with better budget management, so that things can be built more safely, so that we can digitize the industry and improve the lives of everyone in construction, that is really the opportunity that's out there for us and it's extremely exciting to be able to help the industry and move the industry forward.

That's great. And probably the #1 question in my conversations, and you probably had it in your meetings today was really on the [ macro ] right. And on one hand, like you mentioned, tools like Procore can help projects get completed on time, on budget, reduce safety concerns. You have a lot of tailwinds like the chips Act, infrastructure bills, but you have challenges, too. Rising rates are not helpful. They're still ongoing supply chain issues, a shortage of qualified labor. So there's a lot of push and pull here. So maybe help us understand kind of what's happening and also bring in the context of some incremental observations or changes that you observed in the macro on the last earnings call.

Yes, yes. So the way to answer that is I have to step back and talk a little bit about how digitized the industry is and then how penetrated Procore is in the entire market. And so when you look at construction as a digitized industry, I think it's second to last out of all the industries, right? So there's tremendous opportunity, meaning that even with all the things that are going on in the macro environment, there's still construction going on some. And so there's still a tremendous amount of space. Now again, I have to say, I'm not sitting here and telling you that Procore is immune from any macro economic volatility, absolutely not. But it's important to note that context. And then when you think about the built-in diversification of the industry, there's kind of a natural damping effect in terms of how that shows up within Procore. So when I think about the construction segments within the U.S., let's say, Procore does not play in residential. So what you hear about is housing and so forth. We don't play in single-family residential. We play a multifamily, might have some large custom homes. But we really play in the nonresidential. When you break down the nonresidential pieces, that diversification starts to become very clear. A lot of what you're also going to hear and see every day, if you're going into the office again as you'll see commercial in office and say, wow, what's going on there? But when you look at the components of those pieces as a percentage of the overall market, it's really around 5% each. So there's places in that macro construction industry in the different segments where there's going to be components like office, but there's going to be other components like data centers, hospitals and those types of segments that are doing well. And so there's a layer of diversification there. The other layer of diversification is when you think about those segments and how our customers play in the segments, they have an opportunity to shift their business around depending on where the construction is happening. Now where does Procore play? Well, Procore -- the way that Procore engages our customers and how that plays within Procore is, we have a pricing model that is based on construction volume. And that construction volume is agnostic to the segment in the construction industry. So to the extent that the macro environment has differing impacts on the segments of construction to the extent that our customers can shift are exposed to different parts of those segments and then to the extent that, that shows up to Procore is how it would [ show ] up. Specifically to what we talked about in Q1, it's really about the sentiment. When you look at the sentiment and the cautiousness in a small portion of our customers, they're saying that at the same time, their backlogs are still there, right? And so it's really the cautiousness and that sentiment in terms of what's changed between what we talked about that and what is happening right now in Q2, nothing has really changed in terms of whether or not this has become a trend. And having said that, June is our last month of the quarter, this is when we do our biggest volume. So there's still a lot of the quarter left. And we'll provide an update when we do our Q2 earnings.

That's great. And we will all, of course, be anxious to hear what you guys have to say. And so when you think about all those cross currents we talked about and you think about not just history since it's been public, but even last quarter, you still raised guidance. You still raised -- beat and raise [ topline ] and margin. So let's talk about how you think about kind of the evolving macro backdrop in the context of setting [ guidance ]

Yes. So we really started to make a shift in probably the second, third quarter of last year -- last fiscal year is probably around the spring. But we decided to take a little bit more of a cautious approach to our guidance philosophy because of some of the things that were happening in the macro environment. And that has really persisted now through the first quarter of this year. And we don't see a change in that as of right now in terms of how we're approaching that for the remainder of the year. And what we have actually built into our guidance philosophy is some very dramatic downturns and the impacts that it would have on Procore and still be able to beat those numbers. And we think that that's the prudent thing for us to do. We, obviously, don't want to surprise anyone in terms of pulling the rug out from you all or anything like that. But I think it's the right thing to do to make sure that we continue to be able to meet our cadence of our beat and raise and to make sure that we are appropriately risk adjusted in terms of what the potential results might be. And I think it's [indiscernible] for us to do.

Got it. What's interesting is, obviously, the challenges that we've been talking about the industry faces is not a U.S. phenomenon, it's a global phenomenon. And today, I think still roughly 85% of the business is U.S. [ 15% ] International.

Correct.

And beyond just starting in the U.S., there's some what I'll call some growing pains that you've gone through as you look to get deeper into the international market. So I guess, First, let's talk about how do we think about the U.S. market versus the international market, overall sizing and opportunity? And two, kind of what gives you comfort that this is just internal execution, not maybe competitive or some other product markets that...

Yes, yes, I'll take those in line here. So in terms of the market size, most of the construction volume TAM is actually outside of the U.S. I mean, the vast majority is outside the U.S. Obviously, we started in the U.S., and specifically, we started in mid-market GCs in the U.S. And when we look at the level of penetration of our business in the U.S. and non-U.S. GOs, the non-U.S. GOs are even way more early stages than we're talking about in the U.S. markets. We shared some data points and some disclosures at our Analyst Day, what we talk about global ACV penetration for Procore is less than 6%. When you specifically look at the U.S., that's less than 14% of the U.S. construction volume. And then when you look -- and then when you look international, I think it's less than [ 2% ]. I'm looking at Vivian just to check me. So there's still tremendous opportunity there. If I look at the difference between where we are in the U.S. markets versus the international markets. You mentioned some of those missteps, we were frankly a little bit naive to think that we could take the model that we had in the U.S., pick it up and say, hey, let's plop it in these different geos in the non-U.S. markets and we have an international business. And that worked to an extent. It worked to an -- extent until we grew to a point where it didn't make sense for individuals that we put on the ground to wear multiple hats. And we got to a scale where people really needed to start to compartmentalize what they did. And so that's where we are. If you think about the international markets, where 15% of our revenue as of Q1, roughly around there. We haven't actually been there for that long. And so the evolution of those markets is really early on. And early on, we have significant investments. So what we started to do is to realize and to appreciate the nuances of what it means to build a brand in some of these markets. The nuance is that the sequencing of building the brand and then building in the capacity to then sell against that brand to build a pipeline against that brand to enable our sellers to sell to our customers and to communicate the value specific to that market. And that's what we're specifically doing now. The first part of that is really around organizationally how we have organized the team with [ several direct teams ] now that are independently -- they're not independently that are specifically focused on each market. And that's the first phase. And in parallel, in some cases, sequencing a combination of those, it's really about how we play that out for each one of those markets. And we expect that to start to turn around a little bit by the end of the year. And I mentioned the investments in international, how that outpaces the revenue that we see today. Eventually, as those markets start to mature, we'll see the CAC efficiencies and so forth start to approach that of the U.S. business, and that's the expectation.

Got it. No, that's really helpful. Let's take a question from the audience. Just repeat the question for the audience?

Yes, the question was construction is largely relationship based and do we leverage that both in the growth of the U.S. business and the international business? I'll answer that in a couple of ways. And if you have a follow-up, please ask. A lot of times, we get questions about if it's so underpenetrated and so under digitized, why can't we grow faster? And what are the things that prevent the industry from digitizing faster? Some of the things are what you talk about, and I would categorize this under relationship. We often talk about the digitization of the industry as moving a tanker ship, the range of potential inertia that we have to overcome can be something as I don't know how to characterize as simple as some of these companies have people leading them for 30 years, and they are used to having somebody print out an e-mail for them, handed to them and say, this is what we're going to do, right? And so there's that inertia. The other piece just structurally in terms of how construction works is, even if somebody bought Procore today, they still have a lot of in-flight projects that they can't just lift and shift and put on to Procore right away. They have in-flight projects. They have projects in their backlog. And when they buy Procore, they might take some of those backlog projects and start to run them through Procore. So there's going to be a natural progression of how that transition happens. And so relationships, yes, there's different parts, for example, when we get into some of the insurance and FinTech products that we're talking about is highly relationship-based. But those are some of the dynamics that is kind of we have to work through to help digitize the industry.

Great. And maybe even before talking about the FinTech opportunity, maybe just 30 seconds on what a typical -- I'm sure the answer is it depends, what a typical customer journey looks like on the construction life cycle management side? Because you have 4 real interesting pillars, if you will, I think 13 plus products across pillars. So help walk us through, what do you start with? And what do you evolve to over time, knowing it depends?

Yes. So project management, obviously, is where we started. It's our flagship product. So that still represents greater than 50% of our ARR today. And so typically, customers will start there. When you start to branch off of project management, this is where [ the depends ] comes into play, there is a slide that we shared in the Investor Day when we look at different stakeholders. And we said, what are the biggest pain points, the highest pain points for each one of those stakeholders? And you can kind of think about the progression following some of those pain points and what we're trying to mitigate in terms of those pain points. So as an example, if you start with project management, if you're a specialty contractor, you're probably more going to -- more likely going to take the path of, let's say, preconstruction where you're going to do things like estimating and bidding. You're probably going to be more inclined to make progression into things like workforce management because as a subcontractor, that's what you're doing. You're managing a lot of workers. Whereas when you're looking at the owner side of things, maybe you're going from project management to something like financial suite, so including project financials, invoicing and so forth. So that's where things start to branch off and it depends on the different stakeholders. So you would do project management, maybe quality and safety, maybe project financials and so forth.

Got it. Got it. And so maybe now that we have a foundational overview of the industry, the products, the international opportunity, let's talk about FinTech for a minute, right? Even since the IPO process, there's been talk about doing a lot more than the big opportunity you're going after digitizing construction life cycle, we're getting deeper into FinTech. So -- in fact, it's such an important priority that you're now CFO because Paul is going to help spearhead this, right? So as we think about materials financing, we've talked about insurance, how do we think -- walk through kind of the FinTech opportunities that you're thinking about? Why these are important problems and why you're uniquely positioned to help solve that?

Yes. So -- when we think about FinTech and Materials Finance and Procore Risk Advisers or Insurance...

And even payments, right? Include that.

Payments, we actually wouldn't categorize in FinTech. We actually would categorize that more akin to software or workflow, but we can talk about payments as well. We can talk about payments as well. So at the highest level, conceptually, what we're trying to do is, again, solve for these pain points. And we're trying to solve for these pain points in the flow of the entire project life cycle via the data that we have and the information that we have and all the data that runs through our platform, which actually is proprietary and unique. Specifically on materials financing, it's about capital, it's about access to capital. And so where does the data piece come in? Some of the proof points that we have to prove out are, can we use the data to identify the right customers to offer financing. Can we then when we offer that financing, identify the customers that are going to be repeat customers. And then when we find those repeat customers, what does it actually cost us in terms of being able to collect from those customers? And so those are kind of some of the proof points in terms of materials financing that we're trying to prove out. And it's all based on the data that we have. The other piece around insurance is insurance in construction, it's required, it's expensive, it's complex. Literally, it's a pain in the butt, okay? But it's required. And so similarly, how does that relate to leveraging the data that we have? Well, the premise is that we can take the data that we have, the unique the proprietary data that we have. And we can present our customers to the insurance carriers and secure them better terms and better pricing. And so that's the premise that we have to prove out and again, very early stages, [ MatFi ] and insurance. I have to say very early stages because it's really that. We're really in test mode. And we've got a tremendous amount of runway even with our current core SaaS software offerings and the permutations of that actually before we even get to FinTech. When you think about payments -- payments is -- we're going to test initially, and we're targeting back part of this year as an initial release is we're going to first test the relationship and the movement of dollars between the GC and the SC and then first testing the monetization of the GC. And so the way that it would work is we would take a -- we would have a take rate on the volume that goes through that payment. And very, very early stages, making sure that movement of capital is there, making sure that we incorporate the lean rights component from our Level set acquisition to get folks comfortable to pay. All those pieces are in that workflow. When I go across all three, we get excited about this, but again, it's further out. Materials finance, initially, we will finance offer our balance sheet. We've publicly said that we will not finance more than 10% of our cash balance with this. As it gets bigger, we will get a capital partner. In terms of the Procore Risk Advisers or the Insurance, we will act largely as a broker. So we're not taking any type of underwriting risk or anything like that in terms of the insurance. And then in terms of the payments piece, we are partnering with Goldman Sachs, transactional banking to build that functionality into our platform.

Got it. And a follow-up that I admittedly will be an unfair question, but you -- as we think about these, a, you have to build out these proof points we're talking. But assuming that your initial hunches are right as you 5 years from now, think about the core construction life cycle management that we just talked about as a bucket. Think about FinTech as a bucket and decide if payments has been bucket 1 or bucket 2. Which is a bigger piece of the business?

Good question. So let's add a little bit of context, in 5 years, when you think about the penetration of the core software -- SaaS software piece, the size of that business, I'm not going to give a number out there because I don't want you to put a long-term target in your models or anything like that. But that is going to be a fairly large business. And when you think about the stage of the FinTech businesses and the payments piece, but let's just even the FinTech businesses, the growth rate that they would have to achieve to catch up to the core SaaS software in those 5 years is tremendously large. So if I had to say, I would say that I'm still -- I would still anchor on the core SaaS software piece. Now having said that, if the proof points come out, and we can actually have that astronomical growth, as a CFO, I would love to do, right? But right now, where we are right now, I would still focus on that core SaaS software piece.

Great. Let me sneak one more and then we'll just get more questions from the audience. When we think about -- you just mentioned several times, unique [ data today ]. And obviously, it wouldn't be a conversation in 2023 without talking about generative AI . And the ability to harness just large language models more broadly to do some interesting things with that data. So how do you think about harvesting the massive data you have and introducing things like generative AI, like what does that mean for Procore?

Yes. Generative AI, large language models work site. This is something that's very real. -- like everyone that's out there, not just in construction but overall software and maybe non-software. There's a lot that needs to be figured out in terms of how this will be productized, okay? So we do have that tremendous amount of data and growing every single day. I'll give you an example that I think [indiscernible] likes to tell, which is -- we have access to chatGPT. And we didn't tell it anything, we just told a bunch of engineers to enter some project data into chatGPT and say, hey, can you identify the risks. We didn't say anything, teach anything. And it came back and identified a specific submittal that said, hey, this is going to have this risk because this, this and that. We didn't even tell it what a submittal is. And this was just telling a bunch of engineers to start putting into chatGPT without any training. So that's just one example, but there's tremendous opportunity, I think, in terms of the value that this can bring to our customers. And we're very early stages in trying -- like everyone else, trying to figure out what the productization of this looks like, but we're excited. The other piece that I'll mention in terms of AI is there's the customer component, but there's also the internal component in terms of how we improve the way we operate across product and technology, across sales and marketing, across even G&A. Examples would include even internally ourselves in that risk example, identifying the customers that are at risk, the customers that have the opportunity, what does that look like? So there's opportunities, both in terms of the value that we add to our customers as well as internally in terms of the way that we operate.

That's really helpful. What's on your mind?

It's probably a little all of [indiscernible].

Maybe just repeat, sorry...

How do I think about that inertia in terms of the inertia that we have to overcome to help digitize the industry. Is it a generational thing? Is it something else, right? Is that -- that sums it up. So there's a number of things. It's probably a little bit of all of those things. But I think when you think about the place and time we are right now, it's -- there are a number of catalysts that I think have built up over the last 5, 10 years that make this a right time to make this push, not just from a Procore standpoint but from a customer standpoint. If you think about just at the most basic level in terms of sharing and exchanging information, that didn't really become widely possible until about 10 years ago in terms of everyone having a cell phone and the connectivity being able to reach job sites, because the communication needs to happen between not just between the stakeholders, but from job site to the headquarters. That became widely available about 10 years ago. And we're still fairly early in terms of that evolution. The other pieces are things like there's been an increase in the amount of regulatory requirements from a construction standpoint, that have increased over the last 30 years, 20 years and even more recently, whereas a number of years ago, those requirements and those regulations might number in the hundreds, which is still large. Today, they're in the thousands. And so why is that an important catalyst is because remember, Procore is about connecting everyone in construction and connecting everyone into construction on a core set of data like a system of record that's accurate and that can be actionable. And it becomes increasingly important in an environment where regulations are increasing. And then in addition to that, when you think about over the last 10 years, the supply side, meaning labor and how that relates to the demand side, which is the demand for construction, labor is the primary constraint. And then when you think about labor as being the primary constraint, there's always going to be an imperative or desire to look for efficiencies in terms of the way that the construction companies operate. And that's what Procore provides. It allows folks to actually operate more efficiently. It allows projects to be more efficient. We've actually done some surveys of our customers and ask them how much efficiency they get. And there are a couple of numbers that come back. For our customers, they talk about almost just shy of 50%. Their employees can do just shy of 50% more work if they use Procore. When you think about a huge part of the cost of a construction project, it's rework and change orders. And when we ask our customers, a big part of the return on that investment and why it's needed is folks that use Procore see roughly around 15%, 16% less amount of rework. So when you think about all those things put together, there's a lot of catalysts that in this time in place that make it not a nice to have, but also probably more so of an imperative that these companies that the industry starts to digitize in addition to some of those relationship type of things that we already talked about. We are excited.

Just the question, I'm sorry.

How do I think about some of the initiatives around the government funding of IIJA and so forth? And how do we think about how that will impact Procore? So -- and my response, we're excited. So one mechanical piece that's I think important to note is when you think about that IIJA being deployed, it takes time for that deployment to come and hit Procore. So the way that I think about it is it is another piece of the puzzle that allows us to sustain our growth even longer. So just to give you a sense of the $1.2 trillion of the IIJA, I think I saw the latest information on the census data was that I think 200 -- roughly $200-some-odd billion of it has been deployed. So when it gets deployed, then what happens is it starts to go into, hey, we got to get bids for us. And then companies start bidding for it. Once they start bidding for it, they start winning the projects, right? And so when you think about that flow, you have to think about when that then flows into a customer contracting for Procore. So it actually comes a bit later on. And we're -- I think we're starting to see those bids come through. And it's only a portion of that IIJA that has been deployed so far. And we see that, again, as a way to really sustain our growth over a much longer time frame.

Awesome. I think, unfortunately, we're out of time. Thanks for the great question, Howard, thanks for supporting the conference and the chat today. Thank you.

Appreciate it.

All right, guys. Have a great rest of the day. Thanks.