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

Well, thank you, everybody, for joining us. My name is Dylan Becker for those of you that don't know me. I'm the analyst here at William Blair that covers Procore Technologies. For all the necessary disclosures, you can find those on -- at williamblair.com. It's a pleasure today to have Procore's CFO, Howard Fu. Thank you for joining us.

Thank you.

And Howard, I think a lot of people here probably have a high-level understanding of the business. But maybe for those that don't, it is worth taking a step back and giving the idea of what Procore is, where they started, what the challenge that you're trying to solve for the construction industry and how the business has really evolved since its founding.

Yes. Yes, I'll start there. Thank you for having me. It's a pleasure to be here. The first thing that I'll start with is, it's probably best to start with talking about the mission and vision of Procore. And that is to improve the lives of everyone in construction by connecting everyone on a single platform. And when you think about what that means, you kind of have to talk about what the problems that we're trying to solve within the construction industry. And when you think about the construction industry, it's actually highly complex. And in any particular project, you have a number of stakeholders, you have 3 stakeholders from owners to general contractors to subcontractors. And those folks have to communicate with each other, both in the field, between the field and the main office. And there's multiple levels of subcontractors in some of these larger projects. And today, the way that communication happens and the way that the data flows today is highly analog and highly manual. And so the way that Procore is going about solving some of these issues is to trying to digitize the way that workflows work within the construction industry. And the way that we do that is getting everyone on a common platform and making sure that the information is presented in a timely and accurate way such that construction can be built more on time, more on budget and safer, the right materials are at the right place at the right time and the right type of work is delivered in the right place by the right folks. And it's really about solving a lot of those workflow pain points that exist today and that has been with the industry for decades. And when you think about where the evolution of that is, the opportunity that is there, it's -- construction is one of the least digitized industries today. I think the only least digitized industry compared to construction is around agriculture. And so there's a tremendous amount of opportunity to solve a lot of these pain points for the industry. And that's what we're here to do and that's what we're here to do.

And maybe they're -- it's a function within that as well, too. You touched on maybe not at the cutting edge of digital adoption. But they're obviously having to deal with a lot of their own operational headwinds now, too, whether that's labor, growing backlogs, et cetera. Can you talk about some of the core drivers that are really kind of pushing digitization to the forefront for these businesses?

Yes, sure. So one of -- Procore has been around for more than 20 years. And so what's causing and some of the catalysts that's causing some of these shifts and why things are converging right now, why this is a good time is, when you think about digitization, when you think about communication and the information exchange that needs to happen at a job site, cloud and the prevalence of mobile phones and so forth hasn't really actually been around for that long. If you think about this, it actually has only been around for about 10 years. And with that capability to be able to have mobile devices and connectivity on the job site, that actually has been a catalyst to this digitization. And people can now communicate between the office, across stakeholders in the field way more prevalently than historically the folks in the construction industry could have. And that's a huge catalyst over the last 10 years. The other catalyst over the last 10 years is when you start to think about the amount of regulations that has to be dealt with in a construction project. A number of decades ago, there were still a lot of regulations numbering in the hundreds. Those regulations have only grown over the last decade or so to -- in the thousands. And to be able to manage and navigate across those regulations requires an even increased amount of coordination between all the different stakeholders and the communication becomes that much more important. So that's another catalyst. The other catalyst over the last 10 years that you hear a lot about and that we are hopefully here to try and mitigate at Procore is, there has been a labor shortage in the construction industry for the last 10 years. And when you think about that labor shortage, we think about that as the supply side for construction. Demand for construction has been extremely high for the last multiple years, decades. And labor is that primary constraint. If labor is the primary constraint what happens in the industry is, the industry starts to look for ways to operate more efficiently. And Procore allows the industry to operate more efficiently. When we actually have a ROI report that we put out and it's a survey of our own customers, asking them how much more efficiently they can operate and just a couple of those data points include things like, some customers will say that their employees can do almost 50% more work when they use Procore. And then one of the biggest cost components within the industry is change orders and rework and our survey actually turned out, results were, roughly around 15% to 16% less rework happens when customers use Procore. So those are a few examples of some of the catalysts that are coming together and following this transformation to occur and Procore is at the forefront of that.

Wonderful. And a lot that we'll dig into that as well. But maybe from a financial perspective as well, how should we think about what this all means relative to the market opportunity, where Procore sits in that position today? And what kind of excites you, the nearly appointed CFO.

Yes. I'm extremely excited. I've been in this seat officially for about a month. But the reality of it is this transition into this role has really occurred over the last couple of years, 2.5 years that I've been with the company. And Paul, my predecessor, Tooey, the Board and the rest of the management team have done a tremendous job of making sure that I get the right exposure and get up to speed and they've just been tremendously supportive of this transition. So that's the first thing. In terms of where we sit, I'll get into where we are, I'm most excited about, when you think about the -- I talked about the digitization of the industry and construction being the least digitized. The way that we think about the industry is in terms of construction volume. So think assets under management as an equivalent. Construction volume is a very known quantity within the industry. It's how things are evaluated and measured. And if you think about Procore's penetration into that construction volume, globally, we're about 6% penetrated into the global construction volume, the Global TAM. And then in terms of the customers, we're less than 2% penetrated in terms of the global construction company in the world. So it's still very early stages in terms of where Procore sits in terms of that penetration. So there's tremendous opportunity there. And there's tremendous opportunity there to add new customers, to expand the volume that's run on our platform, to cross-sell the different products and 13 plus or so products that we have. So there's tremendous opportunity there. So what excites me? What excites me is that there's so much runway left both in terms of just some of the basic value add that a consolidated system of record, the catalyst for the ability to communicate and coordinate, there's so much opportunity there to add value to the construction companies, the companies that build the world. And that's exciting. Now that's the first order piece that's directly in front of us. What truly gets exciting is, when you think about what Procore is here to do, is we're here to really help our customers manage risk. And we do that via the data and the information that we have across our platform. So what excites me is, as we start to get more customers across all 3 different stakeholders engaged in this platform, we start to generate information that we can turn around and add even more value to our customers, more so than just presenting information in an accurate way, more so than just making information available to all 3 stakeholders. When you start to get into intelligence about that information from an industry, from a customer standpoint, that, that, then second and third order iterations and the value add that Procore can provide to our customers, that is extremely exciting for me over the longer term. So...

It's very exciting and we'll get into some of that as well, too. But the business has also been executing exceptionally well from a macro perspective, to your point of how we should think about maybe the broader volume trends across the business. I think people perceive construction to be overly cyclical. But there's dynamics and fundamentals underneath the hood, I believe, that obviously kind of help provide a little bit of insulation or resiliency in the core markets that you guys are actually serving.

Yes, yes, absolutely, absolutely. So maybe it's best for me to answer that question by starting with just giving a landscape of the construction industry and where Procore is actually exposed. When I think about, for example, the U.S. construction industry, it can generally be categorized into resi, residential and nonresidential and that's roughly about 50-50. Procore is not -- does not play in the single-family residential space, which is a significant component of the overall construction industry. Where we do play on the residential side is in things like multifamily, very large custom homes. We don't do remodels or anything like that. But most of our exposure is on the nonresidential side. Now a common question that I get is nonresidential, well, commercial and office space, well, they're struggling. When you start to look at the segmentation of the nonresidential part of construction, commercial and office accounts for roughly about 5% each of the construction put in place. And so why that's important is, there's a built-in diversification within the industry from the different segments where different economic environments will impact that -- those segments in different ways. So in instances where, let's say, office and commercial are maybe struggling a little bit, other areas like manufacturing, data centers, hospitals, other parts of those segments are actually doing quite well. And so there's a natural diversification and dampening effect. And then when you think about how that exposure shows up in our customers, our customers also have the ability to say, "hey, if office is not doing well, I'm going to go and move to where the construction is happening." And so they have the ability to diversify within those segments as well. In terms of how that shows up for Procore, Procore contracts are based on construction volume. So we are agnostic to the segment and the type of construction volume that is contracted or that is run through our platform. And so when you think about those different layers, there is a dampening effect across all those different layers of diversification. Now I will not say that we are immune to any type of [indiscernible] environment. We will absolutely see that. And the way that we would see that and the way that we have seen that in small pockets today, is through some of the sentiment that's out there. So what I mean by that is, when you see there are -- when you hear from our customers and we see that backlogs are still fairly strong in the 20- to 24-month backlog. But at the same time, that small pocket is still saying, "You know what, I hear some of this noise out there. So I'm just going to be a little bit more cautious. I may contract for a little bit less volume, even though my backlog is there, I'll sign up for it when I get to that point." And so that's where it would show up in our results and that's what we saw in Q1 for a very small portion of our customers, not a trend, natural dampening effect in terms of the diversification but that's how we do our job.

And to your point earlier around kind of the platform evolution of the business as well, too, having more tools that you can sell and deliver value across this ecosystem, starting as a core kind of mid-market [ GSD ] project management tool, now 4 integrated suites, servicing all 3 of those stakeholders. How do you think about the cross-sell initiative or the cross-sell opportunity to offset maybe what was largely dependent upon volume growth in the past?

Yes. So it's really interesting because when you look at -- the way I think about the immediate growth opportunities, again, in the context of that low penetration that we've got, we still got tremendous opportunity to expand even with those other aspects going on. So let me talk about that a little bit. So today, roughly 50% of our business, of our bookings, of our ARR is from new customers and roughly 50%, give or take 1 point or 2 points is from expansion, so existing customers. And when you look at that expansion component, most of that actually is still from construction volume expansion. And a smaller portion is from the cross-sell piece. And then when you think about that in the context of the penetration we have, we actually have the opportunity to continue to grow across all 3 of those I mentioned in terms of adding new customers, in terms of construction volume expansion as well as cross-sell across those 13 products. Specifically with respect to those cross-sell pieces across those 13 products, a lot of those products haven't actually been around for that long, right? And a lot of those 13 products were actually added in the last several years. We started in the U.S. mid-market GC in order to recognize our vision and mission. We started to expand into owners. We started to go down into SCs. And we started to evolve our product portfolio to facilitate that expansion from GC up to owners and down to SCs. And so we are in the process now, we are in the stage now, where that's kind of the next larger opportunity to be able to do those cross-sells before we even start to get into a lot of those second, third order opportunities that I had mentioned before around the data components.

Right. And so data will be next. But as a precursor to that, the value proposition of your unlimited user model, within the pricing kind of motion, within the space, enabling more users to adopt the platform, drive more of that data effort, visibility for what you guys will potentially be on that second or third derivative.

You're absolutely right. So we can't realize our mission and vision without making sure that all 3 stakeholders are engaged. And one of the big determinations that we had upfront was the unlimited user model. And the way that we price, as we price based on basis points off of construction volume with unlimited users because the maximum value that our customers can get, is to make sure that everybody can collaborate on any particular project. And so that's why we chose that model. And you also said, the second piece, which is, well, it's a mutually beneficial business model because, one, if there's unlimited users, our customers get benefit because everyone is collaborating on the same platform and there's limitations or constraints to do that. But there is a feedback loop or a flywheel benefit where the more collaboration that happens, the more data and information is run on the platform and that then facilitates additional business opportunities, monetization opportunities, value-add for our customers down the road. And that's a critical point in our business model, is that unlimited user model.

And maybe the value, again, as that helps fuel the growing data asset, the value of being kind of that industry, that project system of record to drive potential future monetization opportunities, it's a big one, obviously, people talk about, it's kind of the broader fintech suite. There's multiple components within each of those. Maybe can we talk about why that's interesting and attractive to your customer segments and what that really can mean for the take rate of Procore relative to the core platform as it sits today?

Sure. I'll start a little bit earlier than that. First thing before I get into the fintech piece is, I just want to say there is still -- reiterate that there is still tremendous opportunity just to offer up information and to make that information -- accurate information available to the different stakeholders. So specifically on fintech, there's 2 components. There's materials financing and then there's insurance. Payments is not really -- we consider fintech and we consider that more of a workflow. So when we think about fintech across insurance and across materials finance, what we're really trying to do is, what I mentioned before, help our customers manage the biggest pain points that they have within the overall flow of the construction project. And so those pain points are going to be risk and also in the case of materials finance, capital. And so specifically for those 2, we feel like we are uniquely positioned because, one, we have a trusted brand. We have access to the industry, as we have 15,000-plus customers. And so we feel like we are in a good position with all the data that's running through our platform and the access to the industry, to be able to provide this value in terms of risk management as well as the capital. Specifically for materials finance, what this is, is it's very early stages, actually, all of these things are very early stages. And there are a few proof points that we still have to prove out for materials finance. The premise is that we can use the data on our platform to be able to identify attractive financing customers. And the thing that we have to prove out is that data will identify attractive financing customers. That data has to prove out that we can get repeat customers. And we also have to prove out that we have the operational capability and the ROI to be able to collect in an efficient way. So those are some things that we have to prove out. In terms of insurance, the premise is that we can use our data to present our customers, to insurance carriers in a way that they can get better pricing and better terms. And in that case, we would act as a broker, we wouldn't take any underwriting risk. And so we have to prove those pieces out. Going back to the materials finance piece for just a second. Right now, we are testing that business by financing the capital off of our balance sheet. We've publicly talked about that we would never finance anything past 10% of our cash balance. And remember, this is in a test phase. And so if that business continues to take off, we would absolutely get a capital partner. I'm not in the business of being a bank. So those are those 2 components. The payments piece is more about workflow. And the pain point there is not just about the movement of money but it's about getting the comfort for our customers to move the money. And so when we think about payments, coupled with lien rights management, which relates back to our acquisition of Levelset a little while back. it's really putting that workflow together and getting that comfort together to make sure that folks are comfortable moving those dollars. And we are -- also wouldn't be building our own payment functionality. We would contract out. We're partnering with Goldman Sachs transactional banking to build that functionality within our platform. And all 3 of those are in very preliminary stages. Think about those opportunities that as multiple years out. So we have a tremendous amount of opportunity within our current product portfolio and the penetration that we have within our current TAM. The fintech opportunities, that would only expand the TAM but that's in test phase.

Right. And maybe fair to say, too, obviously, there's a ton of runway within the core segmentation of the business and integrated platform. And that really is the differentiator in why this fintech suite hasn't been addressed or unlocked in its full capabilities yet today. And then obviously, a unique differentiating capability for you.

Absolutely. Honestly, if we didn't have to disclose fintech, we wouldn't. But we had to because it's showing up in our financials, right? So -- but you're absolutely right. And I get a lot of questions about how do I think about investments and profitability. And part of this fintech piece and the components that we have in front of us, is really balancing where our product in fintech, our technology investments are deployed with making sure that we have the right sequencing of when the returns from those investments will come. And so the fintech component is the piece that's a bit right further out.

And you kind of stole the thunder on the next question within that. But how do you think about that from the CFO seat, right, the balance of growth and profitability, the investments, obviously, on the R&D front to support the sustainability initiatives of that top line, as well as, obviously, the emphasis on efficient growth and scaling past breakeven in the business.

Yes, yes. So we have told everybody that, on average, you should expect roughly 350 basis points on average of margin growth, non-GAAP operating margin growth on average, some years higher, some years lower. And we believe that, that level gives us enough flexibility to do that balancing. And when you look at our latest guide, we are actually guiding to higher than that, right? And so -- so that -- we believe that, that level gives us the flexibility to do that balancing. It's important to note that where we came from just a few years ago. Back a few years ago, in COVID, construction sites were empty, right? And that was a very unique time in this industry. And in that case, what we did was we pulled back on our go-to-market investments, rightly so because the demand wasn't there. And -- but we still continue to invest, largely maintain our investments in product and technology. And so what happens in that case is, when we come out of that and construction sites begin to buzz again, there is kind of a gap in terms of bringing that capacity back online. And that gap is roughly around 12 to 18 months and we're largely past that now. And so just fundamentally and structurally, given that dynamic in that context, there is a natural stage that we are in right now, where we are at the good point to be able to make progress against those operating efficiencies just from that alone. In addition to that, there is obviously other things that we are continuing to make progress on in terms of operating efficiencies but we would expect that the efficiencies will come across all 3 of our functional line, component sales and marketing, product technology and G&A. But in general, that 350 basis points is a good anchor. I think in my CFO seat, internally and externally, you will never hear me stop talking about operational efficiency. And it's something that is going to be a constant drumbeat and that drumbeat, along with myself and Tooey and the rest of the management team, the company has really started to internalize that way of thinking, in terms of how we deploy our resources and that's really great to see.

And maybe sticking with the efficiency theme as well, too. There's a lot of opportunity for the business in international segments. The vast majority of, obviously, construction volumes are out there. There's U.S. firms that are doing work globally. How should we think about the sales efficiency improvements across the business, the segmentation kind of between the 2 sales forces and where that can kind of trend over the next several years?

Absolutely. If you go back and look at some of the concept that we provided during Investor Day, you can see the dichotomy between U.S. sales and marketing efficiency and the non-U.S. sales and marketing efficiency. And you'll see that on the non-U.S. side, obviously, it's less -- well behind the U.S. Well, there's a number of reasons for that. One is we actually haven't been in international markets all that long. And so any time you move into a new market, it takes quite a bit of investment to stand out in that particular market. And so that's the stage that we're in right now. And so we didn't really make a push in international until maybe 2017, 2018. And there are a couple of years of COVID within that, right? So that's one thing. The other thing is, when we think about U.S. and non-U.S., in the non-U.S. geos, there's a lot of different nuances across the different geographies. And we have to make sure that we are going to market appropriately for those specific nuances. And frankly, we made a mistake, right? We made a mistake. We thought that we could take the [ stamp ] that we use in the U.S. and put it into these markets and say, "hey, we have an international business. And that is something we realized fairly early on and we're in the process of making sure that the nuances are being considered the way that we're sequencing branding, enablement, capacity and those different types of dimensions to make sure they're sequence appropriate for each market. And that's kind of where we are right now. Eventually, the efficiency in the international markets and each one of those international markets, we will approach that out of the U.S. and that's an opportunity, a huge opportunity for us.

So a lot of -- summing it up, maybe a lot of visibility into the levers -- the operational leverage across the business as well. I know we're kind of brushing up here. Maybe 2 other quick questions. Again, you talked about where construction sits on its digitization curve. How should we think about what you guys are displacing on site today, what the competitive landscape ends up looking like? Maybe it's a lot of manual processes, it's posted notes, I don't know, it's Excel spreadsheets on site, I don't know, what are you guys seeing and where are you guys driving that?

Yes. And look, the -- when we think about what we're competing against when we go out to the point of sale, roughly 50% is still exactly what you just described. It is manual. It is actually Excel or if you ever put on a hard hat and go into a construction trailer, it is literally a whiteboard with sharpies and black tape with lines and vertical and horizontal lines and people keeping track. And so that's still 50% of what we're competing with. The other 50% are in a number of categories, as an example, point solutions. So when you think about our product portfolio where there's 13-plus products, some of those competitors are going to be 1 or 2 parts of our entire portfolio. So there are those players out there. And the other major component is some of these aggregators, folks that don't necessarily specifically play within construction or other parts of the entire construction landscape upstream and aggregators, meaning they'll do acquisitions and they'll pick and buy some of these point solutions, try to integrate them within their overall solutions and those are the other 50%. Overall, nothing has really changed recently in terms of our competitive dynamics. And we feel like we're in the pole position.

Right, right. It's a good place to be. Maybe just wrapping it up, kind of summing the entire conversation. What gets you most excited about kind of the next 3 to 5 years in the business? There's a lot of irons in the fire here. And maybe what should investors be most focused upon, from your point of view?

Yes. What I'm most excited about is, I think I've talked about before, there is so much that's just directly in front of us and so much lined up past that and the potential of having all this information and this collaboration on our platform. And what I get excited about is that we are in the pole position to be able to execute against that opportunity. And from an investor standpoint, I think thinking about the opportunity even at the basic level for what we can do to improve the construction industry, before even some of those other components. And the excitement is really about the early stage that we are in, in this transformation of the industry and where Procore sits within that.

Wonderful. Thank you. Thank you, Howard. Thank you, everybody, for joining us. I think we will have a breakout presentation upstairs in the [indiscernible] room. Thank you.

Thank you.