Procore Technologies, Inc. (NYSE:PCOR) Q3 2023 Earnings Call Transcript

Procore Technologies, Inc. (NYSE:PCOR) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: [Abrupt Start] I will be your moderator today. [Operator Instructions] I would now like to pass the conference over to our host, Matthew Puljiz with Procore. Please proceed.

Matthew Puljiz: Thanks. Good afternoon and welcome to Procore’s 2023 third quarter earnings call. I am Matthew Puljiz, VP of Finance. With me today are Tooey Courtemanche, Founder, President and CEO; and Howard Fu, CFO. 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 and macroeconomic and geopolitical conditions. You should not rely on forward-looking statements as predictions 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, November 1, 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 or viewed 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 Courtemanche: Thanks, Matt and thank you everyone for joining us today. This quarter, we continue to expand the depth and breadth of our platform as well as make great progress on our efficient growth journey. While Q3 proved to be a challenging quarter amidst an increasingly difficult demand environment, I’d like to start by sharing a few highlights in the quarter. In Q3, we grew revenue 33% year-over-year and surpassed 16,000 customers by the end of the quarter. We made improvements on our efficiency profile, returning to non-GAAP operating profitability this quarter and our partnership in the industry continues to be recognized. We are ranked number four on the Software Report’s top 100 software companies in 2023, our highest ranking to-date.

We are awarded the TrustRadius 2023 Tech Cares award for the third year in a row. And we received the Stevie award for most innovative tech company in the year in the 2023 Annual International Business Awards. These results reflect our continued focus on innovation, delivering technology that transforms the way people build and our partnership with the construction industry. In September, we hosted our annual user conference, Groundbreak, where we showed a number of exciting product announcements and I want to highlight a few now. Starting with Procore Connectability, we are introducing platform-level functionality beginning with drawings, which is commonly known as blueprints. All project stakeholders will be able to collaborate on a project and share data with one another, all while staying within their own accounts.

This means that when the general contractor updates the drawings, those updates will automatically be pushed to the specialty contractors’ account. Procor Connectability is a major milestone in our efforts to deepen the connection across all people, workflows and data on our platform. It reduces elevated entry, thereby driving further efficiencies and is only made possible through our connected platform strategy. But the real benefit of better connecting everyone’s construction is that the data generated on our platform becomes even more powerful. Data that can power generative AI technologies to help our customers, not just resolve issues, but to anticipate them. Last quarter, I shared some of our existing AI and machine learning capabilities and why we are well-positioned to further leverage this technology.

Now with the introduction of Procore Copilot, we will be bringing a truly conversational and predictive experience to the Procore platform. Procore Copilot essentially serves as an extension of the project team, automating time-consuming processes, surfacing information in real-time and suggesting next best actions. Construction professionals spend an estimated 35% of their time looking for project data, resolving conflicts, we are dealing with mistakes and rework. Innovations like Procore Copilot can greatly reduce these inefficiencies and free up time for more protective activities potentially returning many hours per person per week to the industry. At Groundbreak, we also announced the launch of Procore Pay, which tackles one of the biggest pain points in construction, getting paid.

As we have talked about in the past, the real challenges stem not necessarily from the moving of money but from all of the complicated upstream workflows and processes that must come first. All of these processes exist in the Procore platform today. The beauty of Procore Pay is it essentially automates the last mile of the payments workflow. We now seamlessly facilitate the payments and lean labor process between general contractors and specialty contractors, thereby minimizing complicated paperwork and ultimately giving our customers full transparency into their entire payments flow. Additionally, we recently announced our acquisition of Unearth, a leader in geospatial information mapping for construction. This is a small tuck-in acquisition that’s going to allow us to better support all types of construction on our platform, but in particular, civil and infrastructure projects that are horizontal in nature.

These horizontal infrastructure projects can be vast. So think of a highway that stretches many miles or an airport that covers a wide expanse of lands. These projects often lack easily identifiable reference points, which could make them incredibly challenging to manage. Every minute spent determining the location of materials, equipment and teams can increase the risk of delays and negatively impact the project’s budget and performance. The importance of location intelligence on these massive budgets cannot be overstated. Simply put, the Unearth acquisition allows us to put construction automate, adding a new dimension to Procore data in the context of geo locations. With Groundbreak, I love getting to share some of the latest innovations Procore is bringing to the construction industry.

But for me, what’s most valuable is getting to connect with so many customers and industry leaders from around the globe. Overall, it is clear that Procore’s vision is resonating. Our connected platform is driving value for our customers, especially as they seek ways to find efficiencies and maximize productivity in a dynamic environment. The majority of my conversations with Groundbreak have been positive, yet I recognize that these groundbreakers represent a small sample size, which is typically the industry’s most tech forward and productive businesses. On a broader scale, it is clear that the demand environment has become incrementally more challenging. The construction industry reserve while massive and scale and highly diversified is not immune to broader economic conditions.

We have continued to see heightened cautiousness from customers in response to external uncertainty around a potential downturn, which has translated to increased scrutiny and purchasing decisions. However, we’ll expand on this dynamic and how we plan to continue growing while improving our efficiency in this tougher demand environment. While we anticipate these headwinds will continue in the near-term, my conviction in the long-term opportunity for cohort has not changed. What I do now and think about the opportunity ahead of us, a few things remain constant. First, we are serving a massive critical industry that must continue to build the world around us. Second, our customers work across a diverse array of sectors and third, many of these customers have been operating for decades and have successfully navigated multiple economic cycles.

The keyword here is cycles. These customers have experienced these cycles and expect the markets to accelerate and decelerate over time. Many see times like this has a chance to invest in their businesses so that they are ready to capture the next acceleration. In this way, technology could be a deflationary lever, they further invest in to streamline their operations and do more with less. In fact, I recently spoke to my good friend and our customer, John Cowles, who has been working in the construction industry for over 30 years. He is the COO at Hathaway Dinwiddie, one of the oldest largest general contractors in the U.S. and he shared with me the following “construction is cyclical. We know the market will dip and we know it will pick back up.

Similar to the Navy Seals, who have two modes either training or fighting we are either training or building. And we are obviously not Navy Seals, but we use a similar mantra. When the markets dip, it’s actually a great opportunity for training, an opportunity for us to retool, add new workflows and technology and train ourselves up so that we’re ready to take full advantage of the inevitable upswing.” This illustrates how even in the midst of a more tempered demand environment, Procore has multiple levers to sustain our efficient growth trajectory, thanks to the evolution and expansion of our product portfolio over the past 6 years. So I’d like to share an example of the customer that’s doing just that, adopting new products. McCownGordon is an ENR top 200 general contractor with a long history of building projects in education, health care, manufacturing, science and technology and more.

As a long-time Procore customer, they have embraced the Procore platform as a best-of-breed solution for their business needs. They previously managed their payments and lean waiver processes manually through banks, credit cards, Excel as well as another industry point solution. We have continually search for ways to improve and consolidate processes on our platform as they grow their business. A critical piece of this was bringing efficiency to their payment process, which is why they participated in our beta payments program. And I am thrilled to share that this quarter, McCownGordon added Procore Pay to their existing suite of Procore solutions. Procore Pay ties in with the tools that they already use everyday and will help automate and centralize their entire payments process.

ServoTech is a full-service general contractor operating internationally and is one of the current European leaders in the [indiscernible] utility sector or utility scale solar power. They delivered over 500 ground master projects with a capacity of over 7.2 gigawatts. They have seen substantial growth in their business, but they’re still managing their projects manually. ServoTech decided they needed a robust project management solution that can provide productivity and efficiency gains as they continue to scale. After evaluating the competitive point solution, ServoTech chose Procore as the best fit for enabling collaboration across both the field and the office, enhancing visibility across projects, with more than 40 projects running concurrently at any given time and in the future, integrating with our ERP system.

Royal Electric is a leading specialty contractor for electrical and underground projects throughout the Central and Western United States. They previously relied on multiple competitive tools, and we’re in the process of a full tech audit to migrate systems onto a single platform. They recognize the value of the Procore platform and providing standardization and efficiency across their operations. They selected Procore as their single source of truth to improve communications between the field and the office teams, provide greater visibility across projects and drive efficiencies across functions, including labor scheduling and management. Their goal is to leverage Procore for the vast majority of the projects, beginning with a vitally visible improvement project of the Hollister Municipal Airport in California.

The partnership we are building with Royal Electric will undoubtedly help them set themselves apart as an industry leader. So in summary, this quarter, we continue to innovate and bolster our platform capabilities while meaningfully improving our operating leverage. Looking ahead, my excitement and conviction in the long-term opportunity for Procore and our ability to execute on that opportunity has not wavered. We continue to focus on delivering value to our customers while thoughtfully balancing growth and profitability. Navigating the increasing pressure of the demand environment with discipline will ensure that we optimize for the best outcomes in the near and the long-term. With that, let me hand it over to Howard.

Howard Fu: Thanks, Tooey, and thank you to everyone for joining us today. Today, I’ll recap our Q3 financial results, share some color on the quarter and conclude with our outlook. So let’s jump in. Total revenue in Q3 was $248 million, up 33% year-over-year, and international revenue grew 30% year-over-year. Similar to prior quarters, our Q3 international results were impacted by currency headwinds. On a year-over-year basis, FX contributed approximately 5 points of headwind to international revenue growth. Therefore, on a constant currency basis, international revenue grew 35% year-over-year. Q3 revenue benefited from approximately $2.5 million in one-time overage payments from customers that materially exceeded their volume commitments.

While this dynamic can occur from time-to-time, it’s rare to have this level of materiality in a single quarter. Therefore, we do not expect this level of materiality to continue and consider this a one-off anomaly unique to Q3. Q3 non-GAAP operating income was $8 million, representing an operating margin of 3%, and our key backlog metrics, specifically current RPO and current deferred revenue grew 27% and 29% year-over-year, respectively. Now let me take a step back and share some additional color on our Q3 performance. First, I’d like to provide an update on the dichotomy and customer behavior at renewal that we observed over the last two quarters. In our last earnings call, we described how this dichotomy became more pronounced from Q1 to Q2.

We’re abiding greater share of customers demonstrated strong expansion activity while at the same time, the greater share of customers, also demonstrated cautiousness in construction volume commitments. In Q3, this dichotomy stabilized or improved slightly as compared to H1, though still remain elevated relative to historical norms. Specifically, we saw an increase in the proportion of customers renewing flat for the quarter, signaling greater stability in our installed base, particularly driven by large enterprise customers. Moving to our backlog metrics. I want to acknowledge the deceleration seen in CRPO as compared to prior quarters this year. As a reminder, Q3 last year was a strong quarter that benefited from large deal activity that was anticipated to close in Q4 of 2022 but instead closed in Q3 of 2022, making it a difficult comparison period.

Out of the 6 point sequential decline in CRPO growth, approximately 2 points can attributed to the large deal activity in the year ago period. However, even when taking this dynamic into consideration, the quarter still fell short of our expectations. As Tooey described, the demand environment has clearly become increasingly difficult. More broadly, we are seeing increased scrutiny on deals, causing sales cycles to elongate. Customers are taking longer to finalize purchasing decisions with more decision-makers involved and more layers of required approvals. As an example, deals that used to get approved timely by the internal champion are now requiring CFO approval and deals that used to require CFO approval may now require board approval. While this dynamic is not overly concentrated in any particular facet of the business, generally, we are finding more success expanding with large enterprises.

In Q3, some deals that we would have expected to close in a more stable environment slipped out of the quarter. This is an indication that the heightened sense of conservatism among customers have continued and we are seeing evidence of this both during renewal conversations and in new business. Similarly, this also impacted new customer growth with 363 net new customer adds in Q3, which is lower than previous quarters. That said, this was not a function of increased loan as our gross revenue retention rate has remained healthy at 95% despite the sequential decline in new logo pads. On the one hand, a cohort of the industry, particularly down market is demonstrating more hesitation to make new purchases given the external uncertainty. On the other hand, this is also a reflection of our focus and strength with an expansion opportunities, particularly within upmarket customers.

This is a trend we believe will continue in the near-term as larger customers continue to prioritize their investments in Procore. That said, we are assuming that, in aggregate, these headwinds will continue into fiscal 2024. While the demand environment is outside of our control, we remain focused on what is within our control, which brings me to our efficiency profile. At our recent Investor Day, we shared a financial framework for how we plan to manage the business through various economic conditions over the next few years. Specifically, we noted that a potential driver that could move us to the left of that framework is further deterioration in our demand environment. Given the softening demand we are seeing, and that we are assuming this dynamic will persist into fiscal 2024.

We anticipate progressing towards the far left side of the revenue growth range in the framework over the next upcoming quarters. This means we intend to be even more disciplined in managing spend as well as equity dilution. Our Q3 margin performance is as an example of that as our incrementally-disciplined approach resulted in our first non-GAAP profitable quarter since 2020. Just like our customers are displaying a higher level of scrutiny in the purchasing decisions, Tooey, myself and the broader leadership team are aligned and exercising a higher level in our own investment decisions and challenging ourselves to ensure a meaningful ROI. Above all, we are committed to being disciplined stewards of capital with a focus on compounding free cash flow per share through various economic environments.

Now moving on to our outlook. Our guidance assumes current macroeconomic headwinds persist through the remainder of the year. As a reminder, we have taken a prudent approach to guidance over the past several quarters to factor in the external uncertainty of potential for incremental weakness in the market. From a revenue perspective, we continue to set guidance at a level that we have very high conviction we can deliver on even in a weaker economic environment. While we are disappointed by the headwinds on the top line, we remain more committed than ever to driving incremental operating leverage in the current environment. As a reflection of our increased focus on efficiency, we are guiding operating margins with less conservatism but still with high conviction we can deliver on to give shareholders greater visibility into the margin trajectory that we intend to achieve.

We will naturally continue to monitor demand trends and we will provide formal guidance for fiscal 2024 when we report Q4 results in February. However, as previously mentioned, we are not anticipating that the demand environment will improve and expect to move to the far left side of our financial framework over the next upcoming quarters. With that, here is our guidance for Q4 and full year 2023. For the fourth quarter of 2023, we expect revenue between $247 million and $249 million, representing year-over-year growth between 22% and 23%. Given the size of the Unearth acquisition, we are not expecting a material revenue contribution from that business. Q4 non-GAAP operating margin is expected to be between 2% and 3%. For the full year of fiscal 2023, we expect revenue between $937 million and $939 million, representing total year-over-year growth of 30%, which is an increase of $15 million from our previous full year guide.

Non-GAAP operating margin for the year is expected to be between 0.5% and 1%, which represents an improvement of 500 basis points from our previously issued guidance last quarter and implies year-over-year margin expansion of 1,100 basis points. With this guidance, we now expect to reach non-GAAP operating profitability in both Q4 and for the full year and are optimistic about maintaining a positive cadence within our future guidance. To close, it is clear that we are operating in a demand environment that has become more challenging. We are actively managing the business to optimize our efficient growth trajectory while continuing to expand our market leadership and build towards our longer-term vision. I’d like to close by again thanking our customers, partners, employees, shareholders and the industry as well as the communities we serve for giving us this opportunity.

With that, let’s turn it over to the operator for Q&A.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Brent Bracelin with Piper Sandler. Please proceed.

Brent Bracelin: Hi, good afternoon. Tooey, obviously, Procore is not immune to the high interest rate environment here and some of the pressures it’s putting on construction. I was hoping you could provide a little more visibility on the Q4 backlog and pipeline that you see. You talked about increasing deal scrutiny, lengthening sales cycles, how does that look relative to historical Q4 trends, given what we saw with CRPO in Q3? Thanks.

Tooey Courtemanche: Yes, Brad. Well, great question. So I would just say the trend, actually, if we rewind time a little bit, the trend actually started long before the quarter that we’re in right now. where we were seeing more scrutiny on deals. We’re seeing elongated sales cycles. But in Q3 in particular, we saw that step up significantly. So we think it’s coming into Q4 that it’s going to be much the same. We don’t see any real improvement in that on that front. But we do kind of just are preparing ourselves for tougher demand environment going forward. And that’s just the market we’re in. I’m actually particularly disappointed that as a business, we’re facing these demand environment, macro environment problems because we have so much to offering the industry’s rooting for us.

You saw a Groundbreak how much the industry wants us to win. So this is just the reality of the time. The other thing I want to point out is that the industry goes through cycles. As I mentioned in the opening remarks, and this is just one more cycle. That’s pretty much the sentiment I’m getting from all of my contacts that I called out in the industry is that, yes, there is more cautiousness, but these cycles happen, and they just are inevitable.

Howard Fu: Brent, this is Howard. Just a quick comment on your pipeline question. We still are generating a pipeline at the top of the funnel. However, with the cautious sentiments that we’re seeing out there from our customers, it is taking longer for that pipeline to flow through to flow through the funnel. And that’s what we mentioned in terms of elongated sales.

Brent Bracelin: Yes, completely makes sense there. And then I guess one quick follow-up for you, Howard. In the efficiency profile, you outlined at the Analyst Day super helpful. But as you think about growth next year, there are scenarios where growth could slow to the mid-teens or high teens if it does slow below 20, do you think you could still drive 500 to 600 basis points of margin improvement in that type of environment?

Howard Fu: Yes. It’s a good question. So first of all, we believe that the framework is actually a reasonable range of outcomes given certain economic conditions. And in this case, on the [indiscernible] in the perspective. And in that case, we would absolutely still be able to drive improvements in our operating margin that is consistent with that framework. And keep in mind, it’s not just the margin, the operating margin, it’s also the free cash flow per share that we will continue to focus on.

Brent Bracelin: Helpful color. Thank you.

Operator: Our next question comes from DJ Hynes with Canaccord. Please proceed.

DJ Hynes: Hey, thanks, guys. Tooey, Brent asked about the demand environment as it pertains to kind of new business, and I think that’s pretty clear. I actually would take the other side of that and asked about behavior in the base because it sounds like actually things maybe are getting more stable, if not a little bit better there. Can you just double quick on kind of what you’re seeing for customers that are coming up for renewal and kind of their appetite and behavior?

Tooey Courtemanche: Yes, DJ. So you’ve heard us talk about this dichotomy that we had on our renewal book last quarter. What we are seeing this quarter is that to kind of your point that there is a slight improvement with that, which is actually good news for Procore, because it means that our book is a lot more. It is more predictable. And so I’m sure, Howard, do you want to add something that?