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

Welcome back. We have Alex, Head of IR at Procore with us today. Alex, thank you so much for being in this packed room. It's way more packed than if Matt was here. So...

Well, thank you for having me. I will definitely let Matt know.

But maybe just to kick off, the Procore story is, I think, one of the greater stories in vertical SaaS, which is the size of your market is so big. The opportunity you can go after is incredible. And I think everyone would just love to start kind of state of the union. You put your hard hat on the state of the union of your end market and how you would kind of frame the 40,000-foot view and what you guys are seeing today?

Yes. Well, I would say through Q1, we're obviously off to a good start to the year. We're really pleased with our performance to date. We spoke to a host of growth levers at the Investor Day, and we've continued to see really strong progress through those. So new logos, you've heard us reference new wins across all of our stakeholders, so not just within the GCs, which is where we started, but also upmarket with owners and with subs as well. We're continuing to get more wallet share of our existing customers. So that's both in terms of volume, in terms of product attach. And then international is another very exciting growth lever for us, one in which we continue to reference new customer wins there as well. Naturally, the go-to-market transition is something that's very top of mind to everyone, something we've been talking about for quite a bit, continuing to see really good progress there. So things are shaking out as we've expected, both in terms of some of the disruption that we did anticipate as a result of the change management, but also the green shoots that continue to validate that this is the right model for our business. What I would say, obviously, we're operating in a macro that certainly is challenged. It has been challenged for quite some time. Certainly, the tariff policy, we don't yet know how that will unfold. So in terms of our expectations for the back half of this year, what we are doing in terms of our guidance is one that is more conservative than we have done in the past. But to your point, this is absolutely such an exciting market. It's one of the largest, one of the least digitized. We're the clear leader in this market. There's so much value to be had in terms of the construction process and how Procore helps our customers really run their business on a day-to-day basis. And so we feel really good about where we sit today and what that means for our ability to drive durable long-term growth while also compounding free cash flow per share.

And just back to the comment about taking a little more conservative view, maybe expand on what you've baked in, what elements you're putting a little more conservatism in and maybe just one layer deeper on what that means.

Yes. So what we've effectively done from a revenue guidance perspective is we looked at a host of different scenarios in terms of how that tariff policy could play out. And for guidance purposes, the scenario that we have effectively pushed through is one that is a very significant headwind to demand. It's one that we do think is unlikely. But again, we wanted to ensure that the guidance that we put out there was something that we could beat.

Great. You mentioned there are a lot of different moving pieces inside the story. Your CEO, who is the founder, decided to step down. You brought in a brand-new kind of go-to-market function. That change was very well broadcast. Kudos to you guys, I wish every other software company would follow your pathway, which is -- we're going to do this. It's going to take time. We're taking more conservatism. I don't know why the rest of the industry doesn't follow you, but kudos to you that was a great approach. But there's a lot of moving pieces. And so maybe if you kind of unpack both with Tooey, obviously, the spiritual driving force of your story and anyone that's met Tooey understands what I'm talking about. He's one of the most affable individuals that you'd want to be around. And so everyone is like, all man, like we're losing Tooey. But it seems like his view is, you're not losing me, I'm just going to spend a lot more time with customers and less time on other parts of the business and let the next person run those parts of the business. Is that an accurate?

That's exactly right. Tooey is a very, very special person, and I know this probably sounds very savvy, but all of us really love working for Tooey. What we did in terms of the succession announcement was atypical. And that's because we, Matt and I, jokingly called to save the day, where we effectively like told you that we were going to announce a succession without having the successor already appointed. On the flip side of this, the benefit of doing that, certainly, it's given, I think, some agitation to the investor community. And I do understand that. You guys want to know who's going to fill his shoes. But on the benefit to it, we do actually get to have a very public search. And so we have actually gotten quite a few very strong inbound candidates. And then I think to your point, and this is something that I'm not sure we anticipated, but from the standpoint of both customers and employees, there actually now is a longer time in which we have to adjust to this news. And we actually get to see firsthand just how involved Tooey continues to be ever since we've made this announcement. So I do think that actually kind of helps in people believing that when Tooey does transition to this Executive Chair role that he will still be just as involved. Tooey jokes that like all of his hobbies are Procore related. He truly codes in his spare time on behalf of Procore.

He swings a hammer.

Yes. He -- this is his baby. This is what he's been working on for the past 25 years. And so when Tooey steps into that Executive Chair role, he will not shift his priority in terms of the amount of time that he spends on Procore. He will instead shift his focus. So to your point, he'll be able to really spend more time with customers, with -- on product and really with our employees and kind of move away from some of the areas that maybe don't energize him as much. But those areas, focusing on our customers, our products, our employees are really where he brings the most value. So we don't have any updates yet to share in terms of the search. It's still very new. But we'll certainly continue guys to keep you abreast of what we're -- what we see. And what we're really looking for is someone who's a true operator at scale. So what we want to do is find someone who has very successfully run a multibillion-dollar business and can bring that knowledge and that expertise and that playbook to Procore.

And the go-to-market changes you've made, I know you put those in. It wasn't kind of a massive unraveling like sometimes we see. I think it was obviously well planned, well communicated. But how is it going? What would you say has gone well? What are the areas you think -- I think you said on the call, there are some areas that you still need to maybe improve on, obviously. And where are the -- what would be both an example of what's gone well and what are the areas you think you need to work on still?

Yes. So it's definitely going well. We are getting really positive feedback kind of across the board. So we're hearing from customers that they're really pleased with just the sheer amount of technical resources that they're now getting. This is helping them really understand how Procore can help them manage their business and manage their business better. Our customers are telling us that this more local approach that we've now employed with the GM model is also something that it's -- they really like. It's, again, very much focused on what is most central to their needs. Our sellers are also really positive in terms of these changes. If you think about what's changed, effectively, we had GMs who were expected to be product experts across a dozen or so products. And they also had to not only know our products, but be very deep in terms of our different buyer personas. And this is a big oversimplification, but if you were to just bucket those buyer personas into 2 groups, it's your hard hat wearing mud on the boots, construction folks, and then it's people like us who are sitting in a back office. So there's just a very different language and skill set that's required to speak to all these different individuals. So they're so happy now to have these technical specialists who are this partner in really helping them articulate the value of our platform in the language, right, that is going to most benefit those particular buyer personas. And then these technical specialists, they're industry folks. So this is like what they've done. This is what they love. A lot of them have been customers who've used Procore and seen firsthand the experience and the benefits of Procore. So they're really excited to have this partnership again in helping our customers get as much value as they can. It's still only 1 quarter in. So I know we've been talking about it for a while, but Q1 is the first quarter in which we now have our sales team operating under this new model. So going well, but still early. On the flip side, the disruption that I referenced, it's more so in terms of change management as our reps are acclimating into these new roles. So the technical specialist is not a role that existed before, right? It's now a very critical part of our go-to-market strategy. And so if you just think about some of the, I would say, very natural challenges that might arise when you just have 2 new roles working together, find your AE and you're my technical specialists, and we're going into the Jefferies Construction Corp. Perhaps our first meeting might not have been the smoothest. But we're doing everything we can around any...

You would be paused, I'd be slightly awkward and yes, I know how that goes. So we...

Yes, yes.

You would help me get more less awkward.

That's the hope, exactly. But -- so yes, so again, we just -- we wanted to be very thoughtful in terms of communicating that given the magnitude of changes, this wasn't going to be something that's just like you flip a switch and overnight, everything is working. So that's what we mentioned when we say disruption. We do expect that will continue at least through Q2 because, again, we're only 1 quarter in. We just need some more time for our reps to get better acclimated to this model. But we feel very good, the feedback we're getting and what we're seeing internally that this is absolutely the right model for the business.

There's been a lot of focus on -- you already have many of the top construction companies in the U.S. But everyone keeps asking, well, what's next? And I think you've said if you could grow your wallet share inside those customers you have is more meaningful than adding new customers. Can you describe kind of what's happening inside? I think you have -- I don't know what the exact update is if you have the exact percentage of the big ones.

The ENR 400?

Yes.

So we have 70% of the ENR 400 logos, but only 40% of their volume. But I do just want to caveat that while the ENR 400 is a very important category, they are not the only enterprise GCs in the U.S. By no means are they the only enterprise customers, GC customers once you go globally. And then also, we have owners and subs that owners in particular, can be as large, if not larger, than GCs. So GC is all important. I just -- I don't want to assume that, that strength that we have with them suggest any type of saturation. That's -- sorry.

Yes. And then getting that wallet share up, what is the -- I mean, that wallet share, you move a little bit of a wallet given how big they are, that's a big move. What's the next leg to get their wallet share up with you?

Yes. So there's 2 ways in which we can drive expansion with existing customers. So one is volume attach. That metric, that growth driver, it's not going anywhere. So historically, within expansion, volume has been 80% of our growth and then cross-sell has been the remaining 20%. Now this is one of the reasons why it was so apparent to us that we wanted to have these technical specialists to help with the product attach piece. And so now that we have these technical specialists, there's absolutely an expectation that, that mix shift between the volume piece and the cross-sell should -- I would say, I don't think the volume piece would ever be less than 50%, but we certainly want to see both that overall pie grow and then the mix shift just kind of like become larger on the cross-sell piece. Now today, our average customer has 3 to 4 products, but our average U.S. enterprise customer has 5 to 6. And so we absolutely believe, particularly now that we have these technical specialists that there's an opportunity to 2x that. So we think our customers really should have anywhere from 6 to 8 products. I can get a little bit more deep into like what we think that looks like. But I mean, there's just -- there's so much opportunity to go after within our existing customers, both with the volume and the cross-sell.

What's the total number of products you could take?

Effectively like a dozen.

So your average is 3 to 4 Seer.

Today, yes.

Your total pie is 12, say a year...

Yes. So what we've done -- so there's basically 4 suites within our platform. So we have preconstruction, then we have project management, we have resource management and then financials. Project management is where we started. We've effectively put technical specialists on products in each one of those suites outside of PM, like our AEs know how to sell PM, almost every one of our customers has PM today. So we know how to sell that effectively. We think there's massive opportunity within each one of those suites. And then if you were to go at the product level, like in Precon, BIM viewer, bidding, resource management, it's very exciting because customers now have the ability to manage their labor, their materials and their equipment all in one place. And then within financials, pay is something that continues to be a very exciting opportunity for us, not material in terms of revenue this year, but one that's creating huge value for our customers.

The one thing that stuck with me from the IPO was when Tooey said, 90% of this industry is outside North America. But your percentage of total revenue is tiny.

15%, yes.

So how do you flip that? Why not go faster? What are you doing there to kind of unlock that, the biggest part of your TAM, which is not even here?

Yes. No, that's exactly right. Construction is a very local industry. And this is one of the reasons why we've been so successful in the U.S. because under our prior model, we really had -- even though we had a global model, we really did have a very U.S.-centric approach. And so we noticed that what had worked for us in our strongest market was something that actually really could be applicable in all of these other markets outside of the U.S. So this is why we've set up that GM approach. We have GMs in North America. We have a GM in Europe. We have a GM in Australia and New Zealand and then a GM in the Middle East. But you're absolutely right that it's so crucial because each one of these markets does have just very different requirements, different regulations, the stakeholder dynamic and the way in which they collaborate is very different. And so it's so crucial that we utilize that approach in each one of these markets. Now to be clear, it's the same product. It's the same platform in each one of these markets. It's just the way in which we go to market that's most relevant. So like to give you one example, in the U.S., we were able to start selling 2 GCs. This is why our penetration there is so high. But because the GC is the central node of construction in the U.S., we were able to move both up to the owners and down to the subs. That approach would not work in the Middle East. That is a very owners-heavy market. You have to start with the owners, and then they will effectively push down who you're going to be partnering with to the GCs and the subs. So it's that type of knowledge and know-how. And again, it's really the customer centricity piece. So meeting them where it's going to be most impactful to them.

Great. AI doesn't matter yet? Or is it just, hey, this is part of the platform? Like what -- how does AI...

It matters. It matters. It's not -- we're not monetizing it yet. The intent is certainly to monetize it at some point. But if you think about just like the way our platform operates today, so let's say, Brent, you're a foreman on a construction site. And you're going to show up to work, you're going to open your iPad, and there's going to be like a host of information that you're going to look for, like physically look for and identify and you're going to upload into Procore so that you can ensure that all the relevant stakeholders have what they need at the same time, you're going to be getting inbounds about RFIs or things that you need to look at, make decisions and improve, so much of that can be automated and optimized through AI, through powerful search through agents. And so our users are not the most tech-savvy folks. We think there are almost like endless opportunities in which we can really help with saving time, with increasing productivity. To give you a really interesting example, I was actually just on a job site at our Austin office, and we have a robot dog, and he sits in his little like crate charging. And then when he's charged, his job is to literally walk the floor and look at materials to make sure that we have all the materials that we need for whatever is needed that next day, next week. And he's then ordering those materials to ensure that what needs to be completed can be done. Now this is something that's being piloted in this particular office. But if we didn't have that robot dog doing that, you, foreman, Brent would have to be walking the floor and doing that. So if you just think about what can be done in terms of AI, we think the options are -- the opportunities are just incredibly exciting and almost limitless. They don't need to be super sexy. They can be really simple things like robot dog looking at materials and saying, okay, we need more like 4x4s, right? We only have half as many. So it's going to be something that delays tomorrow's workflow. And then just more broadly, we've been in this space for almost 25 years. your AI outputs are only going to be as effective as those AI inputs. And so we have like the largest corpus of construction-specific data. And again, since we have unlimited users, we really have the data across all of those different vantage points. So we think that's another really unique differentiator, not just in terms of like construction benefiting from AI, but what Procore can truly generate in terms of our AI outputs.

The investor questions around Autodesk have picked up. Maybe you aren't seeing a pickup in competition, but the investor questions have picked up. What are you seeing between Autodesk who, again, someone that's going to -- so many families, our families building something now. You build an Autodesk, but you collaborate in Procore. It seems like the industry is gotten behind that, but there's a view, well, maybe you can build and collaborate in Autodesk. What do you...

I would say we feel incredibly strong about our competitive positioning. If you guys haven't looked at it, I highly recommend you look at our Investor Day, we pushed out some very detailed disclosures around what we're seeing from a competitive positioning that gives us that confidence. And ultimately, I would say, if you just look at our results, I think those numbers speak for themselves.

Have you seen anything new from them?

No. The degree of questions that we get from investors, I know you said it seems like the questions from investors have picked up. I would say like the line of questioning is consistent and frequent.

Okay. So nothing new.

No.

And nothing new from a portfolio or pricing or any type of go-to-market from them that you've seen different?

No. If you -- like if you look at what we said at the Investor Day, just like in terms of the frequency in which we even see them in deals, we didn't specifically call out which competitor they are. They are our biggest competitor. So you can look at the slide, it's 44. We see our top 3 competitors 20% of the time, and that was over nearly a 2-year time frame. So just like the frequency in which investors ask about them and their relevance, I just -- we say that to put it in context that it's just -- we're not seeing them at that same rate. And then even when we do, we have incredibly strong win rates, which again, we spoke to and then we have very high retention rates. So they continue to be a point that investors ask about more than we see them.

The one most appreciated part of the story that you see that we can't see?

That's a good question. I feel like I'm going to speak to a commitment that we've made to The Street, which is our commitment to control what we can. And that means that regardless of how the macro shakes out, we will continue to optimize free cash flow per share.

And the thing that you're most concerned about that we need to all keep an eye on.

Brent didn't prem me for these questions. So give me a moment. I think...

Sorry for the current.

No, that's okay. That's okay. It's a fair question. I think, honestly, it's a very cyclical macro, so I'm not going to go there. Like our customers know that. They have their own like things that they do to manage their business regardless of what happens in the macro. So I don't think that's something that I'm overly concerned about. We want to make sure that the go-to-market transition goes well. Everything we're seeing continues to suggest that. I guess the one thing I would call out is if, say, the macro were to materialize in terms of a really significant headwind, then I think that could perhaps delay maybe the timing in which we see the benefit from the go-to-market model. So maybe that is certainly something that we're looking to. We are keeping an eye on the macro. And then certainly, if something like that were to materialize, we have levers that we could pull to, we think, rightsize what that would mean from a capacity standpoint.

You made really good progress on margins, and you're guiding to another 350 bps of margin this year. Where is that coming from? Where are you getting the efficiency?

Yes. The beauty of our business is we've actually demonstrated quite a bit of operating margin leverage over the past several years. So 800 bps of margin improvement last year, guiding to another 350 bps this year, and that's even with quite a bit of investment associated with headcount pertaining to our go-to-market changes and investments. We know that even with that investment, even with this improvement in operating margin, there is still -- we are more bloated than some of our peers in terms of some of the P&L line items. So there's more operating leverage to come. Certainly, last year, in particular, there were quite a few onetime expense items that we did touch on that did -- we're not going to see that this year. So that is yet another way in which we can see continued operating improvement. But there is a company-wide initiative really tops down for continued efficiency really in each line, I'd say, with the exception of gross margin.

Great. Thanks, Alex. Appreciate you being here.

Thanks, Brent.