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

All right. I think we'll go ahead and get started. My name is Jason Celino and I'm one of the software analysts here at KeyBanc. With me today, I've the pleasure of introducing Procore's CFO, Howard Fu. Welcome.

Maybe just as a first of a warm-up question that everyone kind of needs those, right? Interestingly, last year at our conference, you were just announced CFO. So kind of full circle here a year later. Maybe kind of just recap us how the last 12 months have gone, what's changed, what stayed the same, gotten worse, gone better...

Yes. So first thing is Paul, Ed and I and Tooey and the Board, I can't speak highly enough of the way that the transition happened. It was very seamless to the play where it was basically not even a consideration because things were so smooth. Remember, Paul still here. So he hasn't gone anywhere. He's still leading the fintech initiatives for Procore and that's been fantastic. I would say that over the last 12 to -- 9 to 12 months as I stepped into this role, I think there's been a really good evolution. And that evolution isn't something that I did myself isn't something that I did independently or started. It started before I even stepped into the sea. And I think there's been a lot more alignment, a lot more specificity in terms of aligning to the 3 CFO priorities that I talked about, which is around capital allocation, monetization and operational excellence. So I think the formalization of that and the continued evolution of the dissemination of that throughout the company has been something that's been -- that's evolved and that's changed. And then over the last 9 to 12 months, obviously, from a business standpoint, we've seen some impacts from the macroeconomic environment and having to manage through that. But I think putting those things together and being more specific about how we're managing the business and how we're focusing internally, has been something that the whole company has been looking at has been going great.

Okay. Perfect. Maybe next, we'll talk about kind of your midterm financial outlook. Do you give at Analyst Day. My associates likes to reference that Beyonce song, on the left, on the left. So may you just talk about -- talk about that. Yes, not a Beyonce song here.

Go ahead. I will take that.

Yes. Just talk about your midterm financial outlook and why you want us to kind of think about the left?

Sure. I'll start by talking about even why we issued a framework like that, right? The reason we did that is we hit because we really wanted everyone to understand the levers that we would emphasize and pull in different growth scenarios given what was happening in terms of the macroeconomic environment and in the cyclicality in the construction industry. And also, we wanted to issue that to everyone to give people an understanding and clarity that in all those scenarios, what we're managing to is continuously increasing and compounding free cash flow per share. That's why we issued that framework, right? So you knew the levers that we were going to pull. If this happened, then this is what we would emphasize. In terms of moving to the left side of the framework, that's a reflection of what we started to see in the back part of fiscal '23. We started to see customer impact starting in Q1 of last year. It didn't really show up in CRPO because CRPO started as a buildup of what has come before, not just in a particular quarter. It started to show up in CRPO growth in Q3. We told you it's going to happen in Q4. And we're telling you what's going to happen in the first part of this year and then how that re-bounce in the back part of this year. And so it's really based on what we've seen and it's really our transparency to make sure there are no surprises proposed.

Okay. So I guess before I get to my modeling type questions. Anecdotally, the types of conversations you're having with customers or Tooey is having, I guess, what are they saying about their project backlog -- backlogs and then that near-term outlook for the industry?

Yes. So nothing has really changed at all since the conversations from the back part of last year. Backlog still remains strong. That's what we're consistently hearing from folks. And what we're consistently hearing from customers is that there's still the same cautiousness that they took in last year. They're still taking that same approach in terms of cautiousness in terms of ACV and volume commitments that they're making. A lot of it, I think, is in a little bit of a wait-and-see mode in terms of what's going to happen in the broader economy.

Okay. So the CRPO metric is probably the one everyone always looks at. It's the metric that you're telling us for the first half could dip below 20% and then accelerate in the second half. I guess, give us that context of that linearity and why we might see that trough?

Sure. The first thing is that we're giving you the linearity of CRPOs. Basically, we're telling the seasonality of our bookings. So first of all, let's just be clear on that piece. There's a couple of components that I'll talk about. One is going -- coming out of last year and really starting at the beginning of last year, the midpoint of last year, we started to see better durability in the upper end of the market. And we also started to see that expansion was holding up better than new logo. And so what we did was we started to really emphasize and shift our resources consistent with where that strength is. And just from that going into fiscal '24, it's really about -- the first factor is really about the mix of what the business is from a segment standpoint. And so when you think about moving up market and the time it takes for the capacity to get productive and the mix of the business in the enterprise space and the sales cycles that it takes. It's a longer sales cycle. And so there's really a mix. And part of the reason we wanted to make sure we called out H1 versus H2 was when we start to report H1 and H2 CRPO growth. We didn't want folks to think that, that was anything fundamentally that was changing about what was going on in the business. It was a lot of mix. The other piece about confidence in the back part of the year versus the first part of the year in terms of that growth is when we started to see the macroeconomic impacts in Q1 of last year and over the last 4 or 5 quarters and the 6 quarter into Q2 of this year, the thinking is that the industry is -- we use the word acclimating to how to operate in this environment. And so as they adjust their ACV commitments to lower volume commitments and higher basis points, what we're thinking that those would be almost flushed out at that point over the next 18 months from Q1 of last year, which happens to be essentially our average contract line. And so as they come up for renewal in the back part of fiscal '24, look, could it get worse? Sure. Something would have to go dramatically even more negative than what we've seen currently for that to go negative. And our assumption and our plan right now is that everything remains just as cautious as it was last year.

Okay. Is it possible for sequential CRPO growth to go negative?

Negative CRPO growth?

Like sequentially, like in...

Sequentially? So the lower dollar rate, yes, yes. In the first part of the year, yes.

Okay. I guess what would drive that?

It's the same type of dynamics. It's the same type of dynamics that would drive the sequential to claims.

Okay. So -- when we think about that second half, it sounds like we're kind of just waiting for the go-to-market and the capacity to ramp. But it would kind of imply you see some pretty substantial bookings quarters in that period. So I don't know if there's a way to kind of decipher the go-to-market kind of contribution to the just recovery and kind of the sales cycle, renewal dynamics or there's any other factors, but maybe just that last question there.

The first part is, I assure you we're not just waiting.

Sure Okay.

There's a lot that we're doing to execute to the emphasis on that part of the market in terms of continuously improving our go-to-market processes, organizations investing in different parts of the lead funnel and so forth in the pipeline funnel. So I assure you we're not just waiting around. Other factors are any other factors that we might be thinking about. Interest rates are a factor. The overall economy and how they react to the interest rates are a factor. And so it's just a lot of these factors will work itself into the psyche and the mentality of the buyer of Procore. And that's really what we're trying to assess as we come up through the first half of this year going into the back part of this year to see what those dynamics are, what the actually -- the actions that are going to be taken by our customers is going to be versus just guessing of what the sentiment is, right? So that's really what we're looking to find out or as we execute in Q1 and Q2.

Okay. Perfect. I did want to touch on the cross-sell initiatives. I know that's kind of a newer area and feeds that free cash flow thesis a little bit. I guess, can you talk about that historical mix of cross-sell and construction volume related versus cross-sell of the actual modules?

So historically, our bookings distribution has been pretty evenly split almost exactly 50-50 between new logo dollars and expansion dollars. And then specifically in the expansion dollar piece, it's been roughly around 80% volume expansion historically and 20% cross-selling products. In fiscal '23, and specifically towards the back part of '23, not only did we start to see the expansion proportion get bigger above 50%, we also started to make progress in terms of that cross-sell component to go and to tip above 20%. And that's what we expect to see going into fiscal '24 as well. In terms of some of the things that we're doing, there's a number of dimensions, one of which is making sure that we continue to make improvements in our core product. Now that might seem counterintuitive and say, why is that something that drives cross-sell. It's because having a foundation and continuing to improve and have that strength and that value and that foundation, actually almost gives us the right to really engage our customers to do that cross-sell piece. And in addition to that, we continue to make progress along the entire spectrum of the construction life cycle in terms of the offerings that we provide to all 3 different stakeholders. And then also the third piece, in addition to some of those product components is really to continue to align our go-to-market motions to some of the cross-sell pieces. So as an example, this year, we started to provide different types of compensation accelerators to cross-sell bookings versus simply volume expansion. So instead of if you book $1 of a cross-sell, we would pay more to an AE for that cross-sell than if they just expanded...

I mean salespeople follow the money, right? So I guess, when did you make that change?

This is this year, at the beginning of this year [indiscernible].

Interesting. And then just feedback from the sales people, are they just following where the park could go at?

So it's not -- again, it's not going to be binary, right? So there's a lot of components to it. One of the components is going to be first setting the overall magnitude of that quota, right? When you set the magnitude of that quota, what we've done is we set the quota such that you have to do both expansion and cross-sell to hit that quota. And in addition to that, layering on top the incentive piece to support that, I think those things build up to a motion that's much more conducive to the [indiscernible].

And then maybe if I think about it in a different way, why wasn't this part of the playbook for? Was it just the maturity of the portfolio?

I think it was both the maturity of the portfolio, maturity of our organization, maturity of our motion. And frankly, if -- when you think about some AE and what they're going to go after to your point about following where the incentives are. Frankly, it was easier to go after an upsell than it is to go after a cross-sell, and there was still tremendous and there still is a tremendous amount of opportunity there. But as we start to recognize the long-term benefits of having multiple products and increasing number of products from any particular customer, then we start to evolve and adjust our incentives.

Okay. So in addition to maybe this more -- this effort to be more efficient on kind of the go to market, when we think about the operating margin improvement, the free cash flow focus, are there any other levers that you're trying to pull?

Force for free cash flow -- so I think everything leads kind of back to those pieces, right? I think there's going to be levers around product. There's going to be levers around -- especially over the medium and longer term around geographic locations in terms of where we grow. And then there's going to be levers that we pull and specifically around how we think about our capital allocation, right? So when you think about free cash flow per share, the main driver -- main focus is still going to be growth that drives free cash flow. And so we want to make sure that we don't over-index on margin too soon to make sure that growth is still a primary driver. But then in terms of capital allocation, by the end of this year, we're going to have even bigger bank account in terms of cash that's in our offers and to think about what we want to do with that both in support of growth, either organic or M&A or potentially some kind of a share buyback, if that makes sense is all in the toolbox.

Okay. Because over the last 2 years, you made a lot of good progress on the margin expansion, and it sounds like you'll make good progress, potentially more progress this year. What's the right framework that we should think of? And then is there anything that holds Procore back from enjoying those really high vertical software margins, investors known live?

The right framework, we believe, is still what we shared back at the Investor Day, right? We did a lot of work to make sure that, that was the right framework that would sustain us in terms of where we emphasized those different levers over the next few years in the medium term. And so that framework is still valid. Sorry, the second part of your question was?

I guess where could margins go long term?

Yes. Look, margins, I -- we've consistently said that we believe that our margins could be on par with the best vertical software companies that are out there. So think like we have margins. The question for me, the balance for me is how quickly do we want to get there? And that's a critical question because -- and the main big driver of how quickly we want to get there is the opportunity in terms of the growth prospects for us. So look, I can give back margins today right away. But the industry itself is so underpenetrated from a digitization standpoint, I want to make sure that we can continue to invest and take advantage of that growth. And remember, that growth is still going to be the driver of free cash flow per share, right? So that's how I think about it.

Okay. I do want to touch on international a little bit. I think that's an area that you called out some go-to-market changes. And in Q4, you actually said you're seeing signs of strength start to maybe come out of EMEA. Anything from other regions? And then I guess what gives you confidence that you can continue to drive above average growth there?

Yes. So if I could kind of just go backwards and historically, how international has transpired for us. I think a lot of folks don't realize that we actually haven't been in non-U.S. markets for all that well. I think we started 2017, 2018 or something like that. And so it hasn't really been all that look. And if you think back to 2021, it was a very high-performing part of our business. And when we saw that, we started to pour a lot of resources into the international geos. And frankly, it was way more capacity than we could consume in the right way. And so we've had to go through some shifts over the last year to make sure that we get those things the right place. And by the way, throw in the macroeconomic environment impacting that, right? And so there was a lot of progress that we made over the last year. Coming out of last year, you're right that we're starting to see some top line strength in addition to some of the foundational pieces and some foundational things that we're making is EMEA but specifically UK. And they're definitely coming into the year stronger than where they were in fiscal '24. We've recently hired a new leader in our APAC geo towards the back part of last year. So I'll take that person some time to make some of the more broader changes in that geo, but we're making progress there. Look, longer term, we still feel like there's still such a huge opportunity in the non-U.S. geos in terms of TAM. And we still feel like there's such a great fit for Procore in those geos. And the TAM is, as we said before, larger than the U.S. TAMs, so there's still a tremendous growth opportunity.

Okay. Good stuff. Before I kind of talk about fintech, are there any questions from the audience? So when we think about the fintech opportunity and the payments opportunity, I know you kind of separate them, but investors kind of get them together. Can you talk about early feedback adoption and what were on those products?

Yes. So I'll take payments separately. So specifically on the fintech side, we're talking about, historically, it's been materials finance and PR or Procore risk advisers on the insurance side. I want to make sure folks know that we've wound down or started to continue to wind down the materials finance piece. We've always talked about materials finance as needing to get game tapes to see what's the best way to solve the working capital problem in the construction industry. And so based on that, we've decided to wind that down and starting to pursue another way to solve that problem in the industry with early pace, I think, factoring and things like that, and Paul is leading that. Procore risk advisers, very early on. It's something where the dynamics of the relationship between the customers and their brokers that provide the insurance to them is so strong of a dynamic. We believe that the hypothesis is that our data can provide better pricing and better pricing for the coverage that they get. But the dynamics of those relationships are what we need to really get over to really start to get that piece off the ground. Payments from an example, we released that last year. The initial feedback has been fantastic. It has been really good. Most of our closed beta customers are now paying customers and we continue to sign up non-beta customers as paying customers. Now what we're going to focus on in fiscal '24 is really about implementation and adoption. And it's still a very small part of our business and you won't see that revenue come through for some time. And just kind of tactically and mechanically, how this works is, one, in the selling process, we're selling to a different user, an AP person or something like that. And that's just a little bit of a different motion. And then once you sign folks up, they have to get implemented, both the GC and the SC have to get implemented with our banking partner. So that takes time. And then once they're up and running, you don't just change your payment process within the middle of a project. If I'm an SE, I don't want you to change your payment process in the middle of my projects. And so you have to wait until new projects come on, just get volume to start running through Procore Pay, and that's what could take up to 24 months. But the focus this year is getting folks implement it, signed up, implement it and to really get those first payment volumes to start running through Procore Pay.

Okay. Interesting. So when we think about the pay opportunity, I think at the Analyst Day, you explained it well, how it's about the time that you might be saving different customers. Can you talk about that process a little bit? I kind of thought about my own expense report like process and let's just be submitting a receipt, but maybe walk through the different steps at Procore's helping there.

So I'm going to see if I can take that analogy and apply it to price. So the way to think about pay is not really as a stand-alone by itself. And I think when you mentioned process, it's the very last mile to a long ecosystem in a long process for somebody to actually physically make that payment for GC to make that payment to SC, one of which is the comfort to pay, and we use, for example, leans and so forth, right? And so that's really the last mile. And that also is related to how we're thinking about working capital in terms of early pay. And so those would fit together as well. If I use your own personal finances, it's not just the fact that you're doing kind of like an inventory of what you're going to pay in the bills that you're going to pay. It's actually going upstream and saying, "I had a budget, and I allocated that budget to different places." I got comfortable with spending this much on food. I got comfortable with my wife spending this much on clothes and all those different things, leading up to the last part where you have to pay your bill. It's really that entire process that pay is kind of putting a capstone already into this.

So obviously, there are some incumbent players like Textura, Autodesk seems to have made a small acquisition recently. When we think about who you're going up against, is it those competitors? And is that where the opportunity is? Or is it the folks who are manual processes? I don't know if there's a way to frame it.

Yes. So look, in the upper end of the market, it's definitely going to be Textura. And in fact, they created and set an example of a model that we would actually potentially mimic in terms of what the dynamics are in that market. So definitely AES there. When you start to get to broadly across all 3 stakeholders in GCs and SCs, I think what we're going to replace is your general AP processes right? AP systems, AP software and those types of things. And a lot of times, those processes and systems are going to be different across different companies. And so this is a way to actually put it all in one platform and a consistent platform with a consistent base that will just make it easier for folks to improve people's lives.

Okay. Any final questions before I wrap it up with Howard? So go ahead.

To go back on the new logos that customers are even more wait and see both as mentioned, audience taking more time line to evaluate vendors sense of RP? Or is it more so customers are being [indiscernible] down the road?

I don't know if they're complacent and kicking the can down the road. It's literally cautiousness about what might happen, right? And so in that instance, maybe they are evaluating different solutions. Those dynamics are not different, right? We've got -- we've had competitive situations before and we haven't seen any changes in win rates. But I wouldn't say they're kicking the can down the road. I think they're just being cautious about what might happen. And just like your own personal budget, if you're cautious about what's going to happen, you might make different purchasing decisions even though you still have the purchasing power to do that. And I think that's what we're seeing.

Great. And last question, I always like to ask you a final one. Last year, we learned you like stake in Danville. Someone we mutually know asked me and asked this, but as a Niners fan. Why do you think the team needs to do to get over the home and filing...

You're really going to end on this. You're really going to end on this. I love my Niners. What do the teams need to do to get over the home. I think they made -- I think we made some wrong calls at critical points. And unfortunately, those calls had big impacts on the win-loss outcome of the game. I think we made some progress there on the defense coordinator.

Okay. Great. Well, thank you, Howard. Thank you, Procore. And hopefully, everyone has a good rest of the conference.

Thank you.