Procore Technologies, Inc. (NYSE:PCOR) Q1 2023 Earnings Call Transcript May 3, 2023

Procore Technologies, Inc. beats earnings expectations. Reported EPS is $0.01, expectations were $-0.12.

Operator: Good afternoon, everyone. I would like to welcome you all to the Procore Technologies, Inc. Full Year 2023 Q1 Earnings Call. My name is Rebecca, and I’ll be your event specialist, operating today’s call. After the speaker’s presentation today, we will conduct a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to Matthew Puljiz. So, Matthew, please go ahead when you’re ready.

Matthew Puljiz: Thanks. Good afternoon, everyone. Welcome to Procore’s 2023 first quarter earnings call. I’m Matthew Puljiz, VP of Finance, With me today are Tooey Courtemanche, Founder, President and CEO; Paul Lyandres, CFO; and Howard Fu, SVP of Finance. Further disclosure of our results can be found in our press release issued today, which is available on the Investor Relations section of our website, and our periodic reports filed with the SEC. Today’s call is being recorded and a replay will be available following the conclusion of the call. Comments made on this call may include forward-looking statements regarding our financial results, products, customer demand, operations, macroeconomic and geopolitical conditions.

You should not rely on forward-looking statements as a prediction of future events. All forward-looking statements are subject to risks, uncertainties and assumptions and are based on management’s current expectations and views as of today, May 3, 2023. Procore undertakes no obligation to update any forward-looking statements to reflect new information or unanticipated events, except as required by law. If this call is replayed reviewed after today, the information presented during the call may not contain current or accurate information. Therefore, these statements should not be relied upon as representing our views as of any subsequent date. We will also refer to certain non-GAAP financial measures to provide additional information to investors.

A reconciliation of non-GAAP to GAAP measures is provided in our press release. And with that, let me hand it to Tooey.

Tooey F. Courtemanche: Hi, thanks Matt, and welcome everyone and thank you for joining us today. I’m going to begin by expressing my sincere gratitude for the team’s hard work to deliver our Q1 results. So, let me dive straight in and share a few highlights from the quarter. In Q1, we grew revenue 34% year-over-year and we added over 600 net new customers reaching over 15,000 total customers by the end of the quarter. We continue to demonstrate durable growth, while improving operating leverage in the business. And, for the third year in a row, we were named one of G2’s Best Global Software Companies, reaching our highest ever ranking of number 14 out of 100. This is a testament to the value that our platform continues to deliver to the construction industry.

Over the past 90 days, I have spent a lot of time on the road, and had the privilege of meeting with our customers and shareholders all around the globe. Investors often asked me about the broader demand environment, and I continue to stay close to our industry owners. Our customers continue to share that their backlogs remain healthy, and that in many cases they’re busier now than ever. And, that the labor shortage is still the biggest challenge in beating demand. Additionally, in aggregate, third party external indices that we watch have remained stable. However, we did notice a new dynamic surface in Q1. Specifically, we saw some cautiousness on construction volume commitments, but work that hasn’t yet been awarded. We saw this within a small portion of our customers that came up for renewal in the quarter.

Let me give you a hypothetical example, which I believe will help you illustrate this. Imagine that you’re a construction company here in the U.S. You’re hearing in the news about a potential recession and difficulty obtaining financing, but you’re also reading about new government spending, record employment and on top of that, you have a fully committed project backlog, which means that you have secured work for the future and are not necessarily concerned about the future pipeline of jobs. These mixed signals, leave you confused and naturally leave you be more cautious, just in case your business takes a turn for the worse. This simple scenario illustrates the slight conservatism some of our customers demonstrated in Q1. However, the external uncertainty has not reduced our customers’ desire for efficiency or demand for technology.

In fact, we’ve seen demand drive a return in net new customer adds, and the majority of customers are continuing to grow construction volume with Procore. Paul, will elaborate further on these points later. They help illustrate why it’s important to take each individual data point in context, and to look at all of the internal and external indicators in aggregate, to gauge the overall health of the industry. Another nuance topic investors regularly bring up is the commercial real estate crisis and its impact on office construction. Let me be very clear, we do not believe that this is a notable headwind to our business for two reasons. First, office construction has been muted since 2019, and largely did not contribute to our success over the past two years.

Second, office construction represents only a small percentage of the overall industry. Historically, we’ve described the construction industry as commercial, infrastructure and residential. This has created some confusion, because folks often mistakenly equate office buildings with commercial construction. So, I think it’s important for me to take a moment to clarify how we view the overall industry. Great place to start is with the U.S. Census Bureau’s definition for construction spending. The highest level, they break down the construction landscape between residential and non-residential. Within non-residential, there are over 70 subcategories across lodging, commercial, healthcare, education, office buildings, public infrastructure transportation and much, much more.

To give you some perspective, office buildings comprise less than 5% of the total U.S. construction value put in place in 2022. As I’ve shared before, when demand in one sector wanes, oftentimes demand in other sectors grow. And while some areas within non-residential like office buildings, have been impacted for a long time, more recently, we have seen healthy growth in other areas. Such as manufacturing, education and data centers. Longer term, we also anticipate seeing further tailwinds from public infrastructure spend. Ultimately, our customers manage diverse portfolios of work, and they will go to where the demand is. This is why when investors ask me about commercial real estate and office construction, my answer is more holistic. It’s the aggregate construction volume and overall demand that matters most.

While the broader environment continues to evolve in the near-term, what is clear is that in times of uncertainty customers prioritize efficiencies in the construction process, efficiencies that the Procore platform provides. Our focus remains on delivering powerful ROI to our customers with a mission critical platform that helps them build better, faster, safer and more efficiently. Let me share a few examples, starting with a new specialty contractor customer. Tri-City Electric Company of Iowa is one of the oldest and largest electrical contractors in the U.S. They work on a diverse portfolio spanning the industrial, commercial, multifamily and sports markets. Their legacy solutions lack the functionality that they required. And as a result, their field staff pushed for a change.

Upon evaluating Procore, Tri-City Electric estimated that Procore could help them save over 300 hours per week in labor hours, through more efficient field to office communication, representing a significant value add. Ultimately, they chose Procore to displace their existing systems due to the meaningful ROI we deliver, advanced functionality and the support from our existing clients. Not only our customers continuing to join Procore, they’re expanding with us. W. A. Richardson is a Las Vegas based general contractors with a focus on hospitality and entertainment, and has built some of the largest projects in the history of Las Vegas. They originally became a Procore customer because of our advanced platform that enabled collaboration and efficiencies across their teams.

Over the course of our partnership, they continued to add new product offerings and expand construction volumes, including billions of dollars in construction value for two major hotel casino resorts this quarter. They plan to leverage our continued partnership to secure additional large scale projects throughout Las Vegas. In addition to general contractors, we continue to expand with owners. I mentioned earlier that data centers are in an area within non-residential construction experiencing continued growth. Vantage Data Centers is a leading provider of hyperscale data center campuses around the world. Over the past five years, they have grown exponentially to become a global operator across North America, EMEA and Asia Pacific. Having been a Procore customer in each of these regions, this quarter they committed all of their construction volume to us globally to manage the execution and financials of their projects.

Previously, they’ve been using project management, quality and safety and analytics globally, and testing out our financials and ERP Connector products in each region. As part of this expansion, they are now using financials globally and are actively evaluating additional Procore products. These customer relationships underscore the value our customers are getting from the Procore platform and our ability to help the industry solve its most pressing challenges. Speaking of which, over the past several quarters, you’ve heard us talk about our long-term Fintech opportunities, and how they tie-back to our overarching goal of helping our customers manage risk and accelerate growth. In March, we announced the launch of Procore Risk Advisors, one of our Fintech initiatives aimed at solving one of the construction industry’s biggest challenges and largest upfront costs, insurance.

As a reminder, insurance and construction is complicated, cumbersome and expensive. All stakeholders on a project are contractually obligated to have relevant coverage for each individual project they work on. Insurance brokerage processes are still highly manual and time consuming and insurance carriers lack visibility into new sources of risk data to properly select and price risk. Which means, construction as one of the most expensive insurance costs as a percentage of the industry’s revenues typically comprising multiple percentage points of a projects budget across all of these stakeholders. This represents a great opportunity for Procore to help solve one of our customers’ biggest pain points. Procore Risk Advisors is a modern construction brokerage that offers enhanced insurance and surety solutions.

Ultimately, Procore will serve as a broker and in some cases help underwrite a subset of our customers’ policies by leveraging our unique risk data. We aim to reward our customers for leveraging our technology and data to mitigate risk by providing them with better insurance pricing and terms. But, to be very clear, Procore is not incurring any exposure to insurance claims with this program. We believe that we are uniquely positioned to solve this challenge for a couple of reasons. First, we’ve developed a trusted brand with over 15,000 customers and millions of users, giving us valuable access to and relationships with the construction industry. Therefore, we have a unique opportunity to expand our platform of solutions, enabling a virtuous cycle of product adoption.

What I mean by that is the more product lines and the higher adoption a customer has, the more data they generate that can help them drive insurance savings. And second, our customers generate proprietary data that we can leverage to help them obtain favorable terms as well as enable us to offer proprietary insurance programs. This can also help our customers realize direct and tangible value from adopting Procore in the form of insurance savings. So, Paul is going to share a bit more color on this later, but I want to emphasize that we are in the very early stages of this opportunity, and while it’s a long-term initiative, we do look forward to sharing our progress as we continue to evolve and grow this offering. Finally, many of you know that effective next week, Paul is going to be starting a new role at Procore, as the President of Fintech and he will be passing the CFO torch onto Howard.

Look personally, I want to just take a moment and thank, Paul, for his tremendous leadership and partnership over the past four years a CFO, helping to scale the business to where we are today. And I am thrilled to continue to partner with them to help unlock further value for our customers and his new role as President of Fintech. I also want to take a moment to welcome, Howard, as our new CFO, and I look forward to working more closely with them as we continue to scale. To wrap up, we had another quarter of growth on both the top and the bottom line, as we continue our journey of efficient growth. Looking ahead, we remain focused on executing on the long-term opportunities in front of us, and advancing our mission of connecting everyone in construction on a global platform.

I believe our close partnership with the industry, the exceptional team we have in place, and our commitment to solving the biggest challenges in construction will create significant value for our customers and shareholders over the long-term. With that, let me hand it over to, Paul.

Paul Lyandres: Good afternoon, everyone, and thank you, Tooey, for the kind words. As Tooey indicated, today marks my last earnings call as CFO. It has truly been a privilege working with all of you. And I want to thank you for the partnership as I embark on my next chapter at Procore, leading our Fintech organization. Now on to the quarter. Today, I’ll quickly recap our results, share some color on our performance and hand it over to, Howard, to conclude with our outlook. Revenue in Q1 was $214 million up 34% year-over-year. Our non-GAAP operating loss was $4 million representing an operating margin of negative 2%. And our key balance sheet metrics, specifically short-term RPO and short-term deferred revenue continued growing 30% or greater year-over-year.

Our Q1 performance was well rounded, in that we saw growth across multiple facets of the business. I’d like to take a step back and share some additional color on our performance. First, you may recall back in Q4, we noted a sequential drop in net new customer adds from Q3, primarily driven by higher logo churn within our smallest customers. As we shared, this did not have a material impact on our Q4 financial results given dollar churn performed as we expected. That said, we wanted to call out that what we saw in Q4 is not yet proving to be a trend, as we saw net new customer adds return to historical lows. Second, as Tooey mentioned, This quarter, we started to see a small portion of our customers exercise some cautiousness in their construction volume commitments.

Although this wasn’t apparent in our financial results, in the interest of transparency, we wanted to provide some color on what we saw. We believe this reflects a heightened sense of conservatism within a minority of customers only committing volume for work that has already been awarded. Despite this, we still saw an increase in the share of our customers growing construction volumes within Procore, representing the majority of our customer base. As, Howard, will explain shortly, our previous and current outlook already factor in the potential for cautious customer sentiment. Third, Similar to prior quarters, our Q1 international results were impacted by currency headwinds. On a year-over-year basis, FX contributed approximately eight points of headwinds to international revenue growth and one point of headwind to total revenue growth.

Therefore, on a constant currency basis, international revenue grew 35% year-over-year and total revenue grew 35% year-over-year. And finally, over the past few quarters, you’ve heard us reference our pursuit of efficient growth and how this is being instilled across the organization as a priority we need to improve upon. This quarter, we saw this mindset manifest in the business. Specifically, our lower expense profile in Q1 was unique, as it was a result of relatively smaller savings across numerous areas that an aggregate resulted in meaningful outperformance as compared to our guidance. While this included things like less travel and one-time hosting [efficient] (ph) fees unique to Q1. Notably, it did not consist of intentional hiring delays, lower commission expenses, or other reductions typically related to sacrificing top line objectives.

In fact, we actually had a lower employee attrition rate in Q1 than anticipated. While we intend to continue making improvements to our efficiency profile, the magnitude of the savings captured in Q1 is not necessarily something investors should expect to repeat in Q2. Before I turn it over to, Howard, to provide our outlook, I want to spend a few minutes sharing a bit more on Procore Risk Advisors. Procore is a unique opportunity to help alleviate a major pain point for construction in the world of insurance. I want to emphasize, that we are in the early stages of this offering, and are expecting a long journey ahead in growing the types of coverage we can broker and help underwrite. In terms of monetization, there are currently two avenues.

The first is through serving as a broker, by which we sell policies from third party carriers and earn a brokerage commission, which varies by policy type. And the second, is through serving as an underwriting agent for select policies whereby Procore partners with the carrier who is taking on the claims risk in their evaluation of the policy, providing additional industry expertise and enhanced data in exchange for a share of the premiums. It’s important to note, that in both of these cases, we take on zero balance sheet exposure to claims, because to be clear, we are a distribution partner for the insurance carrier who bears the risk of the insurance claims. From a financial perspective, we do not expect material top-line contribution over the next few years related to this effort.

I’m incredibly proud of the work our team has done to launch Procore Risk Advisors and I look forward to nurturing this initiative in my next role as President of Fintech. With that, I’ll pass it over to, Howard, to provide our outlook.

Howard Fu: Thanks, Paul, and thank you to everyone on the call. Before I share our outlook, I want to remind folks of our guidance philosophy which remains unchanged. We set our revenue and margin guidance at a level that we have very high conviction we can deliver on in almost any environment. Specifically, our guidance not only takes into account the cautious customer sentiment we observed this quarter, but also allows flexibility for it to become further pronounced. With that, here is our guidance for Q2 and full year 2023. For the second quarter of 2023, we expect revenue between $216 million and $218 million representing year-over-year growth between 25% and 27%. Q2 non-GAAP operating margin is expected to be between negative 7.5% and negative 8.5%.

For the full year of fiscal 2023, we expect revenue between $908 million and $912 million, representing total year-over-year growth between 26% and 27%, which is an increase of $12 million from our previous full year guidance. As Paul noted, given the early stages of our Procore Risk Advisors insurance offering, we are not expecting material revenue contribution from that initiative this year. Non-GAAP operating margin for the year is expected to be between negative 5.5% and negative 6.5% which represents an improvement of 100 basis points from the guidance we issued last quarter and implies year-over-year margin expansion of 450 basis points. As Tooey and Paul indicated, next week, I will be starting my next chapter with Procore as CFO. Over the last two years, I have had the opportunity to work with Tooey, Paul, and the leadership team.

And I have developed an appreciation both for everything Procore has accomplished over the past two decades, as well as the tremendous potential ahead. I look forward to working closely with all of you in continuing to advance Procore’s mission from my new capacity as CFO. To close, I’d like to thank our customers, partners, employees, shareholders and the industry as well as the communities we serve for giving us this opportunity. Now let’s turn it over to the operator to begin Q&A.

Q&A Session

Operator: Thank you. [Operator Instructions]. We have the first question in the phone line is from Sterling Auty of SVB MoffettNathanson.

Operator: We now have DJ Hynes of Canaccord.

Operator: You now have Saket Kalia of Barclays.

Operator: Thank you. Your next question comes from Brent Bracelin with Piper Sandler.

Operator: We now have Brent Thill of Jefferies.

Operator: Your next question comes from Dylan Becker of William Blair.

Operator: Thank you. We now have Adam Borg with Stifel.

Operator: Thank you.

Operator: We now have Ken Wong of Oppenheimer.

Operator: Your next question comes from Kash Rangan from Goldman Sachs.

Operator: Thank you. We now have Matthew Broome of Mizuho Securities.

Operator: Thank you. Our final question comes from Jason Celino of KeyBanc Capital Markets.

Operator: Thank you. I can confirm we have no more questions, and this does conclude today’s call. Please have a lovely day, and you may now disconnect your lines.