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

All right. I think we're ready to get going. I'm DJ Hynes. I'm Canaccord's senior software analyst. You guys have heard me say this before, but this is the 42nd year that Canaccord has done this conference. We couldn't do it without the support of our corporates, the clients. So thank you all for being here. We're delighted to have Procore with us today. We have CFO, Paul Lyandres. We're going to do this as a fireside chat. But please if there are questions, raise your hand. I'll integrate them into the conversation, but I have a list of topics that I want to cover, so we'll get right into it. I'm assuming that folks are fairly familiar with the Procore story, so I'm not going to do the like tell us what you do. But what I always like to do because I think you are unique in terms of your experience getting to the CFO seat, is to give us a little bit of background about you, how you kind of got involved with Procore, what you've done over the years because it shines a light on the perspective you bring to the business.

Sure. Well, thanks, thanks for having me. Excited to be here. So I'm coming on just over 8 years now at Procore. And prior to joining Procore, I was actually one of you all. I used to be an investor focused in the venture capital world, on vertical SaaS, working on a firm called Bessemer Venture Partners. I was fortunate enough to spend about a year diving into the world of construction specifically and led the investment in Procore back in 2014. About a month after leading the investment, I joined the business. And really up until taking the CFO role about 3.5 years ago, I have an assortment of 10 different jobs that span business operations, quotas, compliance, territories, revenue planning. I was fortunate to start our business development team, our nonprofit, lead our international expansion, our M&A. I always joke that my job was doing whatever it was that no one else on the executive team believed was their job, and that put me in a place about 3.5 years ago as we prepared to go public to really be in a position to articulate the nuances of our business, the strategy we were driving, why we believed in the different growth levers, in the investment areas we were doing and how we thought about articulating that narrative to the investor community and ultimately to the broader set of constituencies. And so I like to tell folks that I can pretty much answer any question to some degree of depth, and then I will find you a smarter person from there.

You know it all. You're selling yourself short. Let's talk about macro. I mean it's top of mind for everybody. I mean we hear about inflation, supply chain challenges, skilled labor shortages, all headwinds you would think to the growth of the construction industry. What are you seeing? And how does it kind of influence what's going on in the business?

Yes. I mean I think there's an interesting distinction. We talked about this in our most recent earnings call between how we're thinking about guidance and articulating our narrative to the Street, which is to say we're going to bake in a potential future that we just aren't seeing ourselves in the business. When we talk to our customers, when we look at our demand environment, we have seen a pretty consistent theme for the last decade plus, which is that supply is essentially not our -- or demand is not our constraint. Supply is. We have not been able to hire enough people in this industry. We've not been able to keep up with the construction work that needs to happen. When we talk to our customers, they continue to tell us that their backlogs are 1, 2, 3 years, which means when they're going out to seek new work right now, they're seeking work for 2026. This doesn't include things we've seen in the government passing the infrastructure bill and CHIPS Act. And so the reality of it is, today, do we believe that the macro environment, the headwinds will have some degree of impact on demand? I think we'd be silly enough to think that. From the same side, what we can't really articulate well is how much does the demand side really need to drop to actually go below the supply curve, particularly knowing that if you look back at past recessions, construction actually grew through some of them. Even in the worst impact to construction, that was the 2008 financial crisis, industrial infrastructure, it grew. Commercial dropped by a little bit. It was residential that truly took the large impact. And for us, while we have a pretty healthy mix -- so we get this question a lot from customers -- or from investors of how indexed are we to any part of construction. And the answer is we're not, with the exception of we don't really do this -- we don't sell to builders who do less than $2 million of volume, which means it's your TIs, your home remodel. Like that side of the world is one we're not really exposed to, and that's the one we believe to be the most cyclical. And so while it's possible depending on kind of what we say the length and the depth of a recession that we could see that demand curve drop through below the supply curve, it's just not the sentiment nor the data that is bearing out today in our industry.

Yes. One of the questions I get a lot, which gets at kind of the opportunity, is just the large DC market, right? I think there's a perception like, hey, they should be further along in terms of like adoption of modern cloud-based platforms. And you guys have gotten some really good TAM work kind of analyzing the opportunity with large GCs. Can you just revisit that conversation for us?

Yes. I mean first of all, I'll take a step back and say the reason we would argue they're not further behind, there's a couple of data points I'll take you to. McKinsey did this great study. I talked about it a lot, where they analyze the largest industries in the world -- or in the country and where they are in the digitization process. construction was second from the bottom, above hunting and agriculture, were 3 behind government. So to give you a sense of where we are in this journey, we are the furthest behind. Part of the biggest reason for it is our industry more so than almost any other truly is in the field. So until WiFi made it to the job site, until mobile was actually a thing, until LTE, 3G, 5G, these things didn't really exist or weren't really in the hands of our customers until, call it, 2010. And so all you've seen other cloud names that started in the late '90s, early 2000s, the reality is this industry could not adopt technology until 2010, 2012. And it is an old-school industry. These folks have been doing work this way for 100-plus years. Therefore, to get them to change takes time. What we have always found going back to the macro dynamic though is even in the midst of COVID, our gross retention went from 95% to 94%. It's back to 95%. Once you go to technology, there's no going backwards. And so when we talk about the large GCs, we would tell you that we see that as our most penetrated industry. They are the biggest. They actually have IT departments. They have people who have the competency and the capacity to actually think about a digital transformation. And yet even when we break down that market, and we put this in, I think it was our Q4 earnings call, we talked about how we think there's about 2,500 large GCs to go after in the U.S. Those 2,500 GCs represent about $900 billion or so of volume. And when we take that cut, we believe we have about 25% of those logos on the platform and still a tremendous amount of white space within those logos. And so in our most penetrated, most advanced market, we're still looking at a pretty low penetration into a market that we do believe has a lot of winner-take-most characteristic. Then when we start thinking about the remainder of the GC market, it's notably less penetrated. When you start looking at the owner market, the subcontractor market and then, of course, international because the numbers I'm just talking about are domestic, we think we're still in the really early innings of digitizing this massive market.

Yes. Let's talk about all the constituents that you serve, right? You alluded to it, but you have the GCs, you have the owners, you have the specialty contractors or the subs. A couple of questions here. So you have this unlimited collaborator model, right? The GC is typically the payer, not always. What's the incentive for a sub, an owner to have their own subscription? Maybe we'll start there, and then I'll bridge into the next topic.

So when we think about these stakeholders, it's really important to note that in order for a job to get done -- right, everybody is incentivized along with same lines. They want to get the job -- the work done on time, on budget, safely. And to do that is this orchestration of 30, 40 different entities between the subs, the GC and the owner that have to collaborate together to get the work done. And so the reason I would say that the GC has historically been the payers, that was where we started our business, right? It really wasn't until, call it, 2018 that we started going and making a deliberate motion to sell to the subcontractor and builder. That means standing up your go-to-market, your marketing engine, being able to walk the walk, talk the talk and really connect with these particular stakeholders around the way they see their problem statement. So as you had said, we're in a limited user model. So any of our customers, we will charge them based on the amount of construction they actually run on the platform. Now we're not a usage model. We're not a transaction model like they will sign up for it upfront, they'll pay upfront, we'll recognize that revenue over the course of the contract daily. However, because it's an unlimited user model, they can invite everyone on the project. And it often leads to that question of like, "So fine, if you get to use it, why would you pay for it?" And the reality is -- I'll take the subcontractor as the easy example. The subcontractor has to have, as I was saying, a lot of interactions with the general contractor to do their work. So hey, they need to go out and they need to accept a set of drawings. They need to mark it up. They need to ask a question or respond to a question that is going on in real time on the site. Prior to Procore, they would get this thing called a request for information. They had asked, "Hey, I need you to confirm. Do I put the door handle over here, over there?" They would get that in an e-mail. More likely they'd get it in fax. They'd have to go type it back. They'd have to re-fax. This would take days. And frankly, some other times, this process wouldn't happen. Something would go wrong, and this is why it's one of the most litigious industries out there. By being a collaborator or subcontractor, you get to complete your part of the workflow in a digitized fashion, saving yourself a tremendous amount of time, ensuring you document everything, that you kind of control your own liability. But you don't get to manage your own business. A subcontractor is probably working with dozens of different general contractors. In this case, they're using the general contractor's instance when they're going to respond to a question, submit a photo. But they're not managing their own budgets. They don't have their own copies of drawings. They are not able to actually analyze the performance of their own business across their own suite of projects. And therefore, if anything, by being a collaborator, we found it introduces you to the power and the potential of technology, but it actually doesn't give you the full capabilities of what you can achieve. That's where owning your own data and being able to manage your own information is such a big value prop and why we're seeing really strong growth and success in both of these alternative stakeholders.

Yes. And so that was going to be my next question, is like -- it's just a quick numbers question, but like ARR split across the kind of 3 constituents and respective growth rates.

Yes. So we haven't broken it out specifically. The kind of couple of comments we've shared to give folks a sense of these businesses is to say -- and this was my comment, pre the markets correcting. So I don't -- I always joke I don't know what private multiple is anymore. But if you broke out the sub and the owner business, they'd each be unicorns on their own. If you think about our overall business, GCs are closer to 1/2 to 2/3 of the directional revenue with the other 2 being both really healthy share to the remainder and that ultimately, when we look at those 2 businesses, they're growing faster than the underlying GC business.

Yes. Let's hit on competition. I think the easiest way to start is like, what are you typically replacing most often? And then the second conversation with -- which public investors always like to have is around Autodesk, right? Or just maybe talk about kind of competitive differentiation and why you win, what see them doing in the space, that sort of stuff.

Yes. So I'd tell you, we've always bucketed our competitive landscape into 4 buckets. You've got analog pen and paper, Microsoft Office, fax machines. You've got a suite of point solutions. And in most cases, we have about 400 partners in our ecosystem. It's a suite of those solutions where they try to stitch together 18 different solutions. Then you've got what are really the old legacy ERPs. So as I was saying, it wasn't till 2010, 2012 that mobile WiFi made its job site. So there were solutions. There was accounting solutions, scheduling solutions. These were all on-premise, and folks would bolt on some form of document storage or management. And then the last one is the big 3, the public players, and I'll get to that one last. Our biggest competition, I'd say, still directionally about half of our overall pipeline and competition is tied to pen and paper Microsoft Office, analog solutions. Like these are not people who have truly adopted technology. These are people who are still doing business the same way they were doing it 50 years ago. When we look at the next bucket, it tends to be pretty evenly split between the point solutions, and increasingly so, we don't see those as competitors, right? They are integrated solutions. We have found really thoughtful ways to partner with them, to integrate, that we believe that our platform is actually only strengthened by the community of integration partners. And so more and more so, they're just not head-to-head competitors to us. The ERP solutions, the on-premise folks, similar story. More and more they've become our partners. They've really looked to double down on their strength, which is ERP and accounting on managing the debits and the credits side of this world and would rather maintain that installed base while partnering with us because at this point, we can integrate with pretty much any of these ERP solutions. And so where we lose to those, it's people being unwilling to spend the money and change. And then I'd say the more kind of frequent conversation with investors, the more predominant names, it's Oracle, it's Trimble and it's Autodesk. The more common one is Autodesk. Look, I think our narrative there is that while we actually don't see them in the majority of our deals by any stretch, they also have gone out there and acquired a number of different softwares. And so when we really think about competing with Autodesk, we actually are really competing with PlanGrid or BuildingConnected or one of these suites because to date, there's still a lot of work ahead in kind of bringing those 2 solutions together, stitching them together. They've bought really good technology. We believe that there's room in this massive market for there to be multiple winners. We don't necessarily subscribe to the thesis that by being in design, it gives you a competitive advantage in construction. We have a number of integrations that kind of bridge that moment in time. We believe those integrations are stronger and more performant than any of our competitive landscape. And so when we really think about who we are competing with and our biggest narrative, it is getting an old-school industry that is used to doing work in a certain way to change against what they're doing today. It's not losing to some new implementation of a new solution.

Yes. It's probably a hard question to answer. I'm going to ask anyways. Like what percent of deals that come up do you think Procore gets to look at? I guess it gets at like sales distribution reach. What's your sense?