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

Ajei, great to meet you, and thanks for doing the call here. I'd be curious, and Matt asked one of my questions on international, so I'll skip that. What are the 3 things that you're most excited about when you think about the value creation plan over the next 5 years? I'm thinking low-hanging fruit or big step changes in value. And if margins is one of them, like what is the low-hanging fruit there, but I'll leave it open-ended for you.

Well, I mean, look, I think that -- and maybe I've sort of touched on this, and I feel like you guys are looking for -- it's sort of a level of detail that I can't give you. So maybe I'll take a slightly different approach here that perhaps might give you a sense of the philosophy of how I think about what success looks like in 5 years. So perhaps -- I mean every company has stakeholders, right? And who are the stakeholders perhaps who are the ones that stand out, and it would be employees, customers and shareholders, right? So it's the people who are working in the company, it's the people who are taking advantage of the products and services of the company and of course, the people who are making the investments in the company. And I think they all have potentially different points of view, but they all want to make sure that the company is successful at the end. And so from an employee perspective, I think culture is really important. I want to make sure that for the Procore employees, they feel like this is the best company that they've worked for. Because I think that if you can focus on culture and if you can create the right environment, you can foster the right set of talent, you can create the capabilities that will drive the organization forward. And you want to get the best and the brightest in the industry that are available who are committed to the cause because that's what allows you to create ultimately the magic that enables everyone else to be successful. So I think employee success and creating an environment for employee success is really important. The second is, of course, customers. And as I've said and at the risk of repeating myself, we've built an amazing platform with technology that's purpose-built for this end-to-end digital chain for construction. It's purpose-built for construction. We really understand how people are using our technology, and we're excited about the capabilities. I gave you -- I mean, I've talked to customers. I have a sense of what that -- of the positivity from customers. And I want to make sure that we can maintain that depth and breadth of relationship that we have with our customers today, build on that and also expand that to other stakeholders around the globe. So it's taking what we have, expanding it and expanding to the other stakeholders as we've already discussed. And then finally, from a shareholder perspective, I see tremendous value and opportunity to being able to drive that shareholder value that we've all been talking about for Procore in a manner perhaps similar to what we did at ANSYS. Now the path is different or maybe different from what we did at ANSYS, but I really am excited about the opportunity ahead.

And clarifying question. When you say new stakeholders, are there TAM unlocks, geographies, selling products to new customers?

It's the stakeholders, for example, being -- owners being subs between GCs across geographies. So I don't -- I mean, it's all of the above, right? It's things that we've already discussed, it's all of the above.

DJ From Canaccord.

I appreciate all the time. Probably not a fair question to ask with 1 month and 50 customer conversations under your belt, but I'll ask...

3 weeks to be clear, DJ.

Yes, yes. Do you think Procore has the right pricing model? And then the second part of that question is, is some of the feedback we hear is when you go further down the customer size spectrum, we hear that the software is expensive for those folks. So I'd love your thoughts on any of that.

Look, I think the pricing model is -- from everything that I've seen, I think the pricing model makes sense. And I think that the ACV pricing model makes sense for the majority of our customers. So I'm not sort of starting off by saying, let's go look at pricing and change pricing. That's not my starting point here. From a perspective of price and value, at the end of the day, Procore adds enormous amounts of value to our customers. And the conversation is -- with customers is around the value that we provide. I've never been in an industry where customers are going to say, "Hey, you don't charge me enough for your software." It's never the case. Customers are always looking at areas to be able to improve their business. And this is no -- this industry is no different. But the reality is you have to compare the value -- you have to look at the value that we provide. And we provide significant value to our customers, and they're betting their business on us when it comes to being able to operate their business at lower risk, more efficiency, all of the things that are necessary for an industry that's as mission-critical as this.

Adam with Stifel.

Ajei, great to see you again and do look forward to working with you. Great to see you. So when I think about the pattern recognition comment you made earlier from ANSYS, one of the things that ANSYS has talked a lot about was this idea of democratizing simulation upstream and downstream. And I think there's some nice parallels to Procore around democratizing the construction life cycle as well. And so when I think about the completeness of the portfolio today, any thoughts on moving further upstream perhaps into BIM design more directly or further downstream perhaps into operations or fintech more aggressively? Any color there would be super interesting.

Well, certainly, Adam, we have solutions in the BIM space, which obviously you guys are aware of, and that's clearly an area that we're excited about. The business right now, when you look at the breadth and the depth of the business, to your point about upstream and downstream, one of the points of differentiation for Procore was taking an approach that was field-centric. It was really looking at the existing workflow and taking a field-centric approach to saying how can you drive decision-making down to the stakeholders who actually are trying to make the decision as opposed to sitting somewhere else in the back office and making a decision, can you actually give -- enable people with field tools so that they can get their job done. And I think that's the philosophy that we have within the company, which is understand what the problem is, understand exactly what you need to solve the problem and then solve the problem accordingly. So it's really about trying to get and enable a solution that allows for that end-to-end digitization. That's been the philosophy of the company, and that's obviously something that we'll be excited to continue.

Dylan from William Blair.

Great to see you again. I guess you hinted at different businesses with similar playbooks. Wondering if you could kind of maybe dive deeper on to -- or into the parallels around kind of change management, right? If we think about kind of the evolution of generative design and manufacturing and simulation playing into construction and underdigitized space and embedding kind of intelligence across the platform, how you kind of maybe help think about driving conviction in making this change, just given the value proposition similar, right, of completing projects faster on time, on budget, et cetera.

So Dylan, just to clarify the question, you're asking what would -- you're asking what's the level of conviction that you can drive change with the kind of technologies that we provide in an industry of...

Yes, sorry, more like the applicability kind of pattern recognition parallels, right, of driving change management with what you did around kind of the evolution of simulation and generative design, driving intelligence for productivity in an industry in construction, which we've talked about, that's been a technology laggard kind of helping them get over that hurdle of here's where efficiency can be valuable and how you solve that pain point.

Yes. No, I get the question. That makes sense. So I think the -- one of the -- so again, I'll go back to simulation and Procore is not a simulation company. ANSYS was a simulation company. And with simulation, the real unlock was when the customers understood that the simulation results were consistent with real-life performance, right? And so they could rely on the simulation to give them a -- to understand what the performance of a physical object would look like. And that allowed us to take that same value proposition and move forward. And of course, ANSYS was a tool provider and not a platform provider. In construction, I believe that the real unlock is to be able to provide that end-to-end digital workflow. And because once you're in a position to manage the digital artifacts and create that end-to-end workflow, you take essentially an industry which has a lot of risk associated with. You're dealing with multiple stakeholders, multiple players, you're dealing with the vicissitudes of the physical world that you're dealing with in a very different way than you are with other industries. And helping the digital thread helps to minimize or helps them to -- help our customers to manage risk. And so they have to trust that we're in a position to make that happen. And that's what I see taking place. So the change management, as you rightly point to, comes from showing up every day and proving to them that they can trust the integrity of that end-to-end workflow and they could trust the data that they're making decisions on. If you have someone who's historically made decisions one way to persuade them to change requires them to feel like they can trust you, both from a company perspective as well as trust the platform that you're delivering. And we have many customers. I mean we have so many customers, like the individual I mentioned from the large GC earlier this week, we have so many customers who will talk about how Procore is made that happen for them, how it helped them change their industry, how it move things forward, change their company or how they allow them to do things they wouldn't have otherwise been able to do. So the fact that we have that end-to-end platform gives us the ability to have that conversation of high trust with our customers, which -- and gives us the right to have a conversation with them about how we can help them introduce new technologies into the Lexicon. And so that's why I mentioned the comment about AI. We have the right to have that discussion because we are enabling the end-to-end digital workflow. We're creating those end-to-end digital artifacts for them to be able to work with AI. So we have the right to have that conversation. And there is an implicit trust built up as a result of the work that we're doing with them.

Taylor from UBS.

Ajei, really appreciate and look forward to working with you going forward. Maybe just Procore has undertaken a number of changes over the last year plus, particularly on the go-to-market side. So what's been your impression with the changes so far and how they've been progressing based on the customer conversations that you've had? And I know it's early, but just in terms of the strategy that you think would put Procore up to be most successful, do you believe that they were already on that right path? Do you see opportunities for bigger and more material changes to be made? So I guess it's a question of, is this more potentially tinkering going forward? Or are there opportunities for greater strategic changes?

Well, Taylor, I think the -- I mean, it's a great question. I mean, unfortunately, it's a little bit early for me to respond, I think, at the level of detail that you're looking for. I'm excited by what I've seen. I'm excited by the work the team has done. There's been a lot of great thinking. There's been some great execution. But I'm 3 weeks in as CEO, I still need to be in a position to do the work that I want to do, which is I want to look at the strategy, I want to look at the go-to-market, I want to look at products. And I want to be thoughtful about following a sort of a methodology, which allows me to be confident in whatever decisions get made as opposed to jumping to conclusions on one way or the other. But I'm excited about what I've seen so far, and I'm excited to continue to learn more.

Joe from Baird.

Great. I wanted to go back to pricing, and I hear you on ACV making the most sense. But do you think we could see creativity with pricing or maybe reformulation around the ACV? And I just think back to ANSYS and like I always considered ANSYS pretty creative with its licensing approach, like there was the ability to monetize compute that led the HPC licenses that was obviously very successful. Not saying that really matters here, but the creativity point, could we end up maybe seeing some new methods around commercial arrangements?

Yes. I think, again, the -- I think it's, again, too soon to say, Joe. But I think the sort of philosophically coming into it, my view is you've got to be flexible to meet customers where they are. I mean it's got to make sense for people, and it's got to make sense for the company. And companies are successful because they can be flexible as market changes, as market needs change and as customer needs change. So obviously, I want to make sure that we approach this conversation from a point of -- I want to approach from a point of understanding what the strategy looks like. But as you noted, at ANSYS, we were able to be quite flexible in the way that we thought about pricing, and that, I think, helped us from a business perspective.

Andrew from Baron.

Ajei, great to see you. Baron team is excited to work with you again.

Thank you.

As you -- so I realize that 3 weeks in, it's kind of hard to get definitive answers on a lot of these questions. So mine is more on your information gathering process since you started. As you sort of take the data, whether inside of Procore or external that you use to make day-to-day or month-to-month decisions, what are some of the types of metrics or analyses that you're looking for to kind of help you inform your strategy? So like we're financial analysts, we look at outcome metrics like RPO and revenue and cash flow, but they're all byproducts of things like, I don't know, like project volume per customer or like the go-to-market pipeline. If we just had a picture of the dashboard that you're looking at every morning or that you're building to help you inform these decisions, what are some of the metrics that you think are kind of important to focus on?

I think, Andrew, you're asking a great question. There are sort of a different set of metrics now perhaps that are important to me than would be important to me sort of on a day-to-day operational basis. Obviously, when you're running the business, things -- as you say, revenue is a trailing indicator of activity. And you can look at many other things, you can look at customer conversations, you can look at pipeline building. You can look at rate and pace of innovation in the R&D organization. There are many, many different things. You can even look at customer escalations. There's lots of different internal metrics that you can look at, some of which I've looked at in different companies in my previous company, some of which might be unique for us to look at, at Procore. But that's a dashboard that I'll continue to work my way through as I get comfortable with what I want to see, what are the leading indicators for success in the quarter, what are the leading indicators for success in the year. So I think that's one set of questions. The other where I thought you were going to go was how do I think about the analysis that -- I'm sort of in the analysis phase right now. It's like what do I think about -- what do I think is important from a -- to understand. And I think, obviously, -- and there are many elements that you would look at it, but at a high level, what I'm really trying to understand is where is the maximum market opportunity for the company, right? And it is looking externally at the market where people are spending money, what they're spending money on, how they're thinking about this particular industry, who are the different stakeholders who are involved in investing in this industry and then connecting that to our products, right? And then mapping that into where we have a set of offerings and where we need to make investments and where we have complete sets of offerings and then connecting that to our go-to-market to make sure that when there is a market opportunity and we do have product capability that we've actually built out a go-to-market to be able to take advantage of that and monetize it. I mean the worst situation is to have a market opportunity, you have great product and not have a go-to-market. And an equally bad situation is if you have a market opportunity and you have -- you build a go-to-market and you don't have product. So it's all kind of got to come together. And obviously, you've built a product and you have the go-to-market opportunity, but you don't have a market. I mean that seems like a dull thing to do as well. So there's a lot of -- it's really about connecting the different pieces. I will tell you that another area to think about, and I mentioned this when I talk about employees is culture, right? I think culture is very important in an organization. You need to have -- you want to have a strong culture of commitment to the success of the business. And that's also something that I really care about. And I'm looking at things like the employee engagement surveys and feedback from one-on-ones and roundtables and group meetings and things of that nature to understand what the employees see. Because at this point, there's a lot of wisdom in the company, right? It's not about just looking at external metrics or looking at numbers. You can talk to people and people will tell you things that they feel passionately about. And if you extrapolate from enough numbers of conversations, you can extract a lot of wisdom from the crowd, if you will. And so those conversations with employees are also really important. And so you start to put all of these different vectors together. They may not be sort of long-term dashboard like things, but these are continual activities. Every company needs to continue to have a strategy cadence. That's something that we will continue to have. Every company needs to focus on employees and culture. That's something that we will continue to do. Every company needs to focus on its own internal systems to make sure that you take the friction out of doing business within your own company. That's obviously something that I'm looking at as well. So there's a number of different elements here. But at the end of the day, I think it all comes together. And that's what ultimately translates into the big set of things that you want to do. And then you have to then allocate from a prioritization perspective, what goes into the next operating plan and what goes into the operating plan afterwards and then you create that, and that leads to the dashboards that Andrew spoke of. So hopefully, this was -- hopefully, this answered the question.

Mark from Loop.

I recognize that M&A is likely not among your top priorities, at least over the near term here, which, if you recall, is kind of a similar situation to when you first joined ANSYS. However, during your tenure there, you oversaw several significant acquisitions, Livermore, AGI, they both come to mind. Could you just maybe share your thoughts on how you plan to approach M&A at Procore, particularly when it comes to potentially meaningful transactions?

So Mark, my philosophy on M&A hasn't really changed for many, many, many years, which is that M&A is not a strategy unto itself. M&A is in support of a strategy. You really need to have a clear understanding of what your strategy is. And then you can think about what acquisitions, what you build organically, what you develop organically, where you build partnerships and what acquisitions you might need to do in order to be able to execute your strategy. And so ultimately, the decision about M&A and what that M&A footprint and profile is going to look like will depend on ultimately how I think about the strategy. But with all of that being said, I want to make sure that we can deliver the best solutions that are available for our customers. And so I want to make sure that those -- that conversation about the build partner buy, which is an important aspect of any company's operating rhythm that those customers -- those conversations are -- had within the organization. And if we are doing M&A, I want to make sure that we are successful at being able to do M&A. I think many companies love to do M&A, but then it's unclear what the success is. And I want to make sure that if we do M&A, our M&A is successful. And certainly, from my own experience, we've seen how to do that.

Greg from Praesidium.

On the margin structure. I mean when you were running ANSYS circa 2018, kind of similar scale to Procore, growing similar growth rates, you're operating with kind of mid-40s operating margins versus Procore here at 14% today. I mean as you look at kind of comparing these 2 companies in kind of similar stages, what are the obvious differences to you that kind of enabled ANSYS to be at such higher margin levels at a kind of similar stage versus Procore? Or another way to ask, are there any kind of easy low-hanging fruit kind of you see at Procore to kind of maybe kind of adjust the margin structure higher?

Well, I think just to correct one point that you made, when I joined ANSYS in 2016, the growth was not in the teens. The growth was in single digits. And the growth had not been -- and the company was much more -- had been at -- the growth rates had sort of asymptoted down to a much lower level and it was sort of a declining growth business at a different level of its maturity. It was a much older company. So there were some differences between where ANSYS was and where Procore is today. When I got to ANSYS, the -- and if you look back a few years, what it happened was as growth had been declining, margins had just gone up. And so we had a situation where we had very high margins, but relatively low growth on the top line. And part of that was -- and I think someone alluded to earlier, part of that was taking -- coming to the street and basically asking for permission to take some of the margins -- take some of the margin down and spend more money to reignite growth. And so it was a different -- the financials there were different and the circumstances were different. The other thing that is important to note was ANSYS was a tool company. And a tool company is much more subject to changing circumstances because -- at least at the time, and we had to build out a simulation platform. So at the time when we got there, it was much more about individual tools, and we had to build out a simulation platform, which is -- now Procore is a platform already. That work doesn't have to be done. It's already been done. That's intrinsic to where Procore is. And so creating the tech investment and creating that end-to-end platform, is -- I think it's great. And so from my perspective, I see -- in fact, I started with this. I see a path for us to continue to drive durable growth and to be able to do so while we're improving margins and where we're seeing this free cash flow per share expansion that we've talked about. So that's the direction that I see. And the similarities are not quite the same with ANSYS when you get down to that level of detail. But from a Procore perspective, that's what I'm excited about. Does that help?

I think we're going to have time for one more question. So Brent with Jefferies.

I know you were asked about international, but I go back to the IPO when Tooey highlighted 90% of the TAM is outside North America. And if you look at the last 2 years, the international business as a percent of revenue has been in a pretty tight range. There's been really no breakout play. And I'm just curious how you think about this. And I know you gave an answer earlier, but it just seems like such a big opportunity that you guys could do a lot more. And so maybe if you can go a little level deeper or maybe we're going to have to wait for you to go through your listening tour in international, but just curious if you could comment on that.

I think with international, I think it's obvious when you look at the numbers that there is opportunity international. I don't think anyone is confused about the potential international opportunity. The question ultimately becomes what's the most effective way to address that opportunity? And how does that compare with all of the other priorities that the company has. And that ultimately goes to a discussion about strategy. It also goes to a discussion about product market fit, how does that work in the specifics of the market? Are there local regulation? Is there localization that needs to be done. So there's a lot of complexity in the answer, the sort of the level of detail -- the next level of detail of the answer. So it's not a high level, is international good? I mean, absolutely, it is good, no question. It's how you get from here to there. What needs to be done? What is the level of investment? What is the level of completion? And what is the ultimate opportunity that we need to pursue. And so that's how I'm -- I want to be thoughtful in terms of how we're thinking about it as opposed to just a blanket statement about international being good.

Okay. So I think we're actually going to close out on that note. Thank you all so much for coming. This really was Ajei's very first investor touch point in the CEO seat. So certainly, there's going to be a lot more to come as time progresses. We're very, very excited to have him on board. And if there are any other questions, feel free to reach out. We are going to be entering our quiet period shortly, but we're looking forward to connecting with a bunch of you in the coming days.

And I want to thank all of you for taking the time out of your schedules to spend with us. It means a lot to us that you're willing to do that. And I look forward to conversations over the coming quarters and years with all of you. So thank you very much.