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

All right. Good afternoon, everyone. Thank you again for joining us. My name is Luv Sodha. I'm part of the software equity research team here at Jefferies. And super lucky to have Procore CFO, Howard, join us. Howard Fu, he joined Procore in 2021, but he's been CFO since 2023. He has an awesome background, was at DocuSign, LinkedIn, Salesforce previously. So thank you again, Howard, for joining us.

Maybe to start out at a high level, for those who might not be as familiar with the Procore story, could you just talk a little bit about how the story has evolved over the past year or so and your big growth levers that you have?

Yes. Sure. Well, first of all, thanks for having me. It's always great to be here with you and the rest of the team. In terms of the Procore story, I mean, how far back do you want me to go? If I think back to maybe when I first joined, which was during the height of the pandemic. And I was joining at a time when we were coming off a time when -- or in the time and coming off a time when job sites were literally empty. And so that was pretty catastrophic for an industry that was -- or a company that was focused on construction management and software, right? The good part about that is coming out of that period, there was a tremendous amount of pent-up demand that we ultimately felt the tailwind of going into 2021, not just in the U.S. but globally. And we did what we could to invest according to that growth across all areas of the business. And then that brought us into '21 and '22, which where we saw a tremendous amount of growth from that pent-up demand. And in 2023, obviously, we started to see some of the macroeconomic headwinds, which was a bit delayed from when the rest of software saw those headwinds. And well before that, we started to -- with my predecessor, Paul, hopefully, you all know, really started to think about what this would look like, not just up to this point but going forward. That's where we are today in terms of how we think about capital allocation, how do we think about deploying our resources appropriately, where do we want to put our resources, what is our strategic direction. And I think where we are today is you're seeing the execution against a lot of what we've been putting in place over the last several years regardless of what the macroeconomic environment is doing. And so that's a really high level kind of over the last several years.

That's perfect. The macro challenges, all these -- all of the software companies are facing. Maybe talk about, like, obviously, you've been seeing them over the past year or so. Maybe talk about how the environment has changed, and what are your expectations going forward?

Yes. So as I mentioned before, we started to see some of the impacts of this in Q1 of last year. And going into this year, fiscal 2024, we actually had to make an assumption and a prediction about what we wanted to assume in terms of the macroeconomic environment going into this year. And our assumption was that it would remain steady at a much depressed level throughout the remainder of this year. And what we started to see towards the back part of last year in terms of how the customer base specifically impacted our business at Procore is that we saw some relative strength in the enterprise space and in our expansion motion. And what we started to do going into fiscal '24 is made some shifts in our business from a proportionality standpoint of where we focus, when we put our investments, consistent with where we saw that relative strength in addition to assuming that the macroeconomic environment continues to remain at a depressed level throughout this fiscal year. How that's progressed into this Q1 and the first part of Q2 is that hypothesis and that assumption about the stability, although at a lower level, has maintained -- has proven out, right? And one data point that we talked about was when we first started to see the macroeconomic impacts from last Q1, we looked at the cohort of customers that signed with Procore either as a new customer or as an expansion deal, a renewal deal last Q1. And what do they do in Q1 of this year? And what gave us confidence and what gives us confidence that, that stability is there and that our assumptions are appropriate for the remainder of the year is that of that cohort, the customers that actually downgraded significantly last Q1 largely renewed flat this Q1. And the customers that renewed flat Q1 last year largely upgraded a little bit in Q1 of this year. And those that renewed in Q1 of last year, a little bit also renewed a little bit in Q1 of this year -- expanded Q1 of this year. Now they are expanding at the levels that we had seen back in 2021 and 2022 coming out of the pandemic. But this gives us a lot of confidence that there is starting to be some stability in the market and in the industry and in construction, and it gives us confidence to maintain that assumption throughout the remainder of the year.

Got it. That's perfect. On the -- I mean cRPO was clearly a key metric that everyone tracks on the story. You obviously have a tough comp coming up in Q2, but you've indicated that you expect to see some stabilization in the back half of the year. Maybe walk through some of the key assumptions there and what gives you the confidence around that stabilization, let's say, in the second half?

Yes, just to really clarify, the stabilization actually from Q4 and back half of last year persists into Q1 and Q2, and we expect that to persist throughout this year. So that stabilization, we're already starting to see. I think what you're referring to is our comments and my comments around cRPO growth starting to pick up in the back part of the year and cRPO growth declining in Q2, and cRPO growth will decline in Q2 before picking back up towards the latter part of the year. There's a couple of things going on there. One is the back part of last year is just an easier comp. And so with that easier comp, you're going to see cRPO growth accelerate towards the back part of the year. The second piece of it, I think, is that when you think about cRPO, the cRPO is a reflection of not just what happened within that particular quarter. It's a reflection of what has happened in 4 quarters before. So just like cRPO growth declined from quarter-to-quarter, takes time to work through the system as our internal ARR bookings are struggling relative to the macroeconomic demand environment, there's going to be a same lag as that starts to pick up and when that shows up in cRPO. And that's what you're seeing when we talk about cRPO growth in Q2 likely dropping to the mid-teens in Q2 and then exiting the year in the high teens. And that's what you're seeing is that lag effect when we start to see the bookings seasonality in the back part of the year start to pick up. The other piece is, remember, I mentioned earlier towards the back part of the last year, we saw relative strength in enterprise and in expansion. And when we started to move our focus and our resources towards enterprise, there's a couple of elements going on. One, those resources are going to take time to ramp. But more importantly, the deal cycles in the upper end of the market are going to take longer. That naturally moves our business more towards the back part of the year.

Got it. Talk a little bit about this new enterprise focus, if you will. Obviously, you've had it for some time. But the traction you're getting in there and what types of deals. Are these -- just additional color there.

Yes. So I want to double down on a point. When you look at -- we made some disclosures over the last couple of Investor Days, where we talked about the proportion of our ARR that's from enterprise. So one clarification is we're not just moving into enterprise. We've been in enterprise. It's about shifting the higher proportion of our business to that enterprise business because we saw some relative strength there. So that's the first thing. And when you think about the progress and what some of the positivity that we've seen and some of the changes that we've made is we've continued to evolve how we think about going to market in that space. And that's something that naturally we would do in every single segment as well. And this, in particular, there are things around things like making evolutions and better account planning, making sure that we have better account coverage ratios for the major accounts, getting better and more insightful about identifying the potential in each one of these accounts and making sure that we line up our resources to support that. And so those are just a few of the examples that we've done in terms of making that shift more towards the enterprise space. A lot of what we've seen so far has been good, has been positive. Now when you think about what that means for the back part of the year and the shift more towards a proportion on enterprise, what you're going to see is that those -- they're going to be larger deals, which could have some volatility, which is why we continue to be cautious but optimistic about what that looks like for the back part of the year, assuming that the macroeconomic environment stays consistent.

Got it. I mean one of the big areas of focus for a lot of investors is generally tends to be a lot of conversation around interest rates and how that would impact the construction -- the overall construction environment. Is lower interest rates a key factor to drive higher growth for you? Or would you be able to attain some of the success even without that happening?

The relative strength in the back part of the year does not assume any benefit from interest rates reductions for this year. I want to make that piece very, very clear. Now if I step back a little bit, we shouldn't think about -- and you shouldn't think about interest rates reduction as a direct and immediate correlation to the buying decision of our customer. What that will impact is one data point that impacts the sentiment of our buyer. And there's a lot of other things that our buyers will look at inclusive of what does their backlog look like, inclusive of actually what the interest rate impact is on inflation and more so what the interest rate impact is on labor and inflation on labor. And those are some of the considerations that our end customers are thinking about in terms of their buying behavior. So look, over the longer term, if interest rates continue to decline, yes, that will be a boost to our -- a likely boost to our business because it flows through to a benefit to our customers. The other thing though, if interest rates stay where they are and inflation stays where it is, I think it's only fair that we ask ourselves, is this a new normal that we are dealing with. Recall that several quarters ago, we talked about customers acclimating to this new environment of inflation and higher interest rates and higher labor costs. Just as an example of that, the backlogs that are in our customers' backlogs today, when you think about it from a funding perspective, from an owner's perspective -- remember, there's owners, GCs and subcontractors. From an owner's perspective, those deals were penciled at an interest rate that was much lower. So even if this inflationary and interest rate environment continues, at some point, the customers that we have already on the books and the backlogs that they have are going to work through that backlog and then new deals are going to come online with higher interest rates penciled in to make those deals viable for the owners and, ultimately, those projects happening through GCs and SCs. And so that's the acclamation that even if the interest rate environment stays where it is, that ultimately construction will get done somehow.

Got it. That's super helpful. I wanted to maybe turn the focus on AI. I think, I mean, on the vertical side, it's -- I don't want to say it's insulated, but it's a little more protected in terms of that AI cannot disrupt the processes, if you will. But maybe just talk a little bit about Procore's Copilot. What type of innovation are you bringing with that? And what efficiencies would that drive, be it at the job site or other parts of the ecosystem?

Yes. We're quite excited about AI and Copilot. And we'll certainly have more to announce as we get to the latter part of this year at our Groundbreak user conference. But here's how I think about Copilot and AI as it relates to our business. When you think about what humans have to do in the construction process, there's a lot of what humans in that ecosystem do that they have to be proactive about identifying areas to go explore, going and getting the information, processing that information and determining if there's something that they need to do if there's an issue that exists somewhere. And they have to do it with a level of accuracy. So an example would be for AI in the construction industry and specifically for Procore is as an enhancement to that process. So instead of me being with my dirt on my boots having to be proactive about that, imagine an AI Copilot and assistant proactively serving up to me areas that I need to focus on and not only serving up to me and identifying the areas I need to focus on in a construction process or in a construction site but also identifying areas of potential issues and not only identifying areas of potential issues but actually doing it in a more accurate way, in a faster way, in a more efficient way. And think about what that does to me as somebody who's working on that site, whether I'm actually hammering a nail or I'm a superintendent, it takes a tremendous amount of risk. It reduces the amount of time, and it actually allows me to build that project much safer, better, more on budget and more quickly. And so think about that as somebody -- a Copilot or an AI in construction as somebody that enhances what I would have to do as a human proactively, but now it's something that's more proactively served up to me. So that's the best way that I think I described it.