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

We're excited to have the Procore team here. Matt is here as well. Spent a lot of time with him at Salesforce, now Procore. I appreciate your support of the conference. And guys, if you don't know him, reach out. Phenomenal individual and knows the story very well.

Most of the time, most of the time.

Most of the time And Howard is our -- probably our youngest cropped new CFO, May of '23, announced CFO. Congratulations on that.

Thank you. Youngest in tenure, the grade gives away. Not much young by [indiscernible], but yes.

But his time at Visa, Salesforce, LinkedIn, DocuSign, I'm seeing an incredible list of stories that you worked for. So congrats on that, and thanks for the time.

Thank you.

Maybe that's a good place to start, Howard. Just when you think of -- you're not new to the story, but in your role, kind of top priorities for you coming in, I know you've helped build the team and there's probably a lot of the infrastructure is there that you need. But I mean when you think about just this year for you, how do you think about your top 3 big priorities in your new role?

Yes. Well, the -- when I think about the top priorities, I categorize them probably into 3 big categories. And one category is going to be around operational excellence. So operational excellence in terms of how we go to market, the foundational pieces around our data infrastructure and everything around how we operate. The second piece is going to be around capital allocation. So capital allocation around where do we put our investments, international, which products do we put our investments in and so forth. And the third piece is around monetization, monetization of the products that we have, that we're building, monetization and the synthesis of the products that we've acquired through some of our M&A. So it's really across those 3 categories. And I could go into each one of those categories and kind of give you a list of things that we're focused on this year. But really, it's about synthesizing those 3 pieces to make sure that we're set up in a way that we don't just want to get to $1 billion, but we're talking about $2 billion, $3 billion, $4 billion, $5 billion long term what the growth rate looks like and to make sure that we do that in a very efficient way and efficient growth. So a lot of different categories under those 3 broader themes.

Yes. If we can pull that in efficient growth, like one of the biggest questions we get is, I love this team. I love the end market. I love 34% growth but I'm still at a negative 2% op margin in the last quarter. So everyone asked, like, what does it take to get the bottom line moving faster? Can you be the catalyst? Can you help push this harder? Or is this TAM just too big, the international opportunity is too big? We should all just be a little more patient on the margin to come?

Look, I think in my role as CFO, I don't think there's ever going to be a day where I don't push operating efficiency. There's just not a day that I will stop pushing operating efficiency. Now, the trick right now is to balance that with making sure that we still continue to take advantage of that growth. And so when we think about historically where Procore was in the 5, 4, 3 years ago, rightly so, we were about growth at all costs, and we were building out the foundations across products and across some of our operational capabilities to prepare for a time like this when we believe we have the infrastructure in place to really start to take advantage of that and really start to get more ROI and get more efficient. It's not because somebody in the market told us to do that. That was the plan all along. And I think we're in a really good spot right now to really start to leverage some of those investments. And you'll never hear me say I'm good with the efficiency that we've got as a CFO.

And where are the biggest sources of efficiency come? I mean the things that I've seen when I came to visit last time, too, you talked a lot about how Texas has become a big hub, maybe it's cheaper to hire. You can get better efficiency there. There's -- I mean what are the other kind of big things that you see opportunities ahead to take that to the next level?

Yes. Yes, great question. So I'll talk -- I'll speak to a couple of them on the go-to-market side, and I'll touch on a couple of other pieces across the other functional areas. In terms of go to market, when we think about the stage of the business in international as an example, it's very early stages, right? We really didn't make a push into international until roughly around 2017, 2018 and we had 2 years of COVID in between there. And so when you look at that evolution of where the stage is in that international business, in those early stages and the nuances and the specifics of each of the fragmented markets, it takes a lot of investment to go in there. And you're going to see an investment that is over-indexed versus the revenue that we're getting from international. And as those businesses start to evolve, you're going to see that efficiency start to approach that of the U.S. from a go-to-market standpoint. And so that's one example. The other example from a go-to-market standpoint is in the down market. Today, we have a human going to market down market. That is not what we're going to be doing going forward. We don't want to have a human touch every single $7,000 customer that we have. Eventually, that's going to work itself into a way where it's more product-like growth or it's more low-touch and no-touch type of growth, and that we can get a ton of efficiency out of in terms of CAC, not -- let alone the data that we can get from down market and how that supports overall the growth of the top line and some of our first, second order product derivations that we have based on the platform that we have. So those are a couple of huge things. Other areas around G&A. Ultimately, we want to get G&A to a place now that we're 2.5 years, let's say, past our IPO, there's a lot of efficiencies we can just get in terms of our foundational operations. And in terms of how we use data, our data infrastructure internally and being more efficient about how we operate there. R&D, I think it's something that we'll continue to get efficient on, but we're always going to take advantage of opportunities and make sure we make progress against our product road map. And so all those pieces come together as tremendous opportunities for efficiencies.

Last call, there was some -- a little cautiousness in construction volume commits, which makes sense where rights are at. But when you think about just overall, I know you have the customers we speak to are like, we have incredible backlog, we have commitments to them. We -- maybe by the time we get rates lower, that backlog, even if some or off, they may be rebuilding backlog at that point. So I mean when you think of just overall where we're at in the cycle and ultimately, kind of what happens, maybe just frame how we think of it because there's a group of investors that just think that higher rates [ meet up ] the construction, that's not going to help your business, but that's not what's happening?

Yes. So there's a number of ways to look at this number on lenses to look at this from. The first one is the fact that we talk about these things openly, it's really our opportunity and our intent is to be transparent with everybody about what we're seeing. And we were clear that this is something that we're seeing. It's not necessarily a trend that we're seeing in terms of the impact on Procore. But we wanted to make sure that we were transparent with everyone in terms of what we're seeing. In terms of the impact on Procore, the broader context that you got to remember in terms of that impact is there's kind of a natural muting effect in terms of interest rates and in terms of the macro environment in terms of how that shows up for us at Procore. And that muting effect is really around the multiple layers of diversification that we see in terms of that impact. we've got diversification in terms of our customers, the GEOs out were the stakeholders, the segments and so forth. And we've got diversification in terms of customers and their portfolios. And then we've got diversification in terms of the way that the macro impacts the construction industry very differently depending on the environment or the specific point in time. And so there's multiple layers of that diversification, that meets the impact on Procore. I'm not sitting here and telling you that we are immune from macroeconomic impacts and interest rates and so forth. If there is widespread macroeconomic impacts. If demand starts to fall below supply, demand, meaning demand for construction supply largely labor is the price constraint that we're seeing. If that starts to get in balance, which we don't see right now, of course, there will be an impact on Procore. But right now, there's kind of those muting impacts in terms of the impact on our business.

And many ask, when you think about just contract duration, where you're at today with your customers, I know there are some customers that have multiyear, some may have less. But is there -- just the average contract duration? Is there...

There hasn't been a significant change. Now obviously, when we talked about a small pocket of our customers signing up for a little bit less volume, there's a little bit in terms of the duration, but nothing that's of significance in terms of calling out saying the duration is less. It's really about that pocket of cautiousness, which we haven't seen become widespread throughout our customer base yet. And keep in mind, that cautiousness and that volume that the customer signed up for being less, they pay higher basis points on that. And the way that I interpret that is customers want to stay with Procore,and they're willing to pay those higher basis points knowing that as they work through their backlog that they do have, they're going to be continuing to pay those higher basis points. And so we haven't really seen anything significant in terms of the durations and again, small pocket of customers showing some cautiousness that is widespread.

At the IPO, the thing that struck me the most of the entire conversation was that 90% of the TAM is outside the United States and only 15% to 20% roughly is of your revenue is outside the United States.

That is correct.

So there's one school of thought. Let's go big, hammer it, throw it down to 11%. Let's go get it. And then -- but it seems like you're taking a more measured approach maybe the opportunity set so big in the U.S. that you don't want to take our eye off that ball and that this is a 20-, 30-, 40-year gain that you can play. Like how do you...

Yes.

And I know you're a sports guy, so if you want to put a sports analogy and you can --

You want to write the guy that's hot, right? No. So which is true, which is true. So we absolutely want to. Ultimately, our goal is to make inroads into that massive opportunity in international. The one thing to remember that I said is when we go to the non-U.S. markets, -- it's actually way more fragmented than what you see in the U.S. And so therefore, you have to think about the different models to go after in each one of the markets that we go into. And frankly, we've had some missteps in terms of how we've done that. We've essentially thought that we could take the model that we had in the U.S. and just replicate it throughout these different genes and what we've learned early on is that's just not the right play. And so what we've done is to start to think about across a lot of different dimensions across people, organizational structure, how we think about, for example, the right path and the right sequencing of marketing in each one of these markets. and then enabling our folks on the ground such that they're approaching customers in the right way and really demonstrating the value that Procore can add and then to enable the customers as well we're actually being very deliberate now about how that looks like in each market that we go into. And so there's -- we're still a huge believer in that international market. We -- nothing has changed about our strategy. There's still product market fit all that from a macro and a 30,000-foot level is still in place, and we still believe that. It's really about operationally how we go after that. In the U.S., I think at Investor Day, we shared some of the numbers in terms of the penetration in the U.S. And even from an ACV or construction volume standpoint in the U.S., we're less than 14% penetrated. We're less than 2% penetrated from a logo standpoint. So even in the U.S., there's still tremendous opportunity to continue to grow. And so we're being very cautious here. And like I said, even on the international side, the investments right now outweigh the revenue that we're getting. So we are making a push in international. It's just a little bit of a different path in terms of how the U.S. took just because of the fragmentation of the nuances.

You got some great software, but now you have some really cool side thrusters, if you will, with pay insurance materials financing. Can you just lay out like when does this start to have an impact? And I know you love all 3 equally, but like which one could be the biggest?

First of all, don't put it in your models yet, right? It's several years away. All these 3 are actually in Tesla, right? We mentioned it specifically with, for example, Materials Finance, which is the one that was started the soonest out of all we're really starting to build the game tape and testing out a lot of hypotheses. So that's the first thing. The second thing I would say is I wouldn't necessarily think about each one of those independently. I would think about it as Procore is trying to solve the pain points for the construction industry. And those pain points, when you start to peel that back is really about capital, capital management, capital access, capital movement and are about managing risk. And when you think about Procore Pay and you think about Materials Finance and you think about Procore Risk advisers or insurance, it's really managing the capital and the risk. And if I were to break those pieces down, materials finance, we believe -- well, actually, let me step back, Materials Finance, Insurance and Procore Pay. All of that is predicated on the tremendous amount of data that is being generated on Procore's platform. And that's the foundation of everything in terms of what we are going to leverage in our hypothesis that we can leverage that to solve the problems around risk and around capital. Specifically for Materials Finance, we believe that the data can help us assess the risk of financing different folks in the industry. And that's the hypothesis, that's the game tape that we're looking at. And we're doing that right now by committing a small amount of capital from our balance sheet. But if this starts to take off, we will absolutely get a capital partner. I am not going to finance all this financing off of our balance sheet. And then when you think about pay, it's about the movement of capital but also the access to capital for, let's say, the subcontractors. And initially, the tests are going to be around the movement of dollars between the GC and SC and looking at really the payer model. So the GC paying for that functionality, and we're working with Goldman Sachs transactional banking to make sure that, that functionality is built into our platform. When you start to expand that, the interesting opportunity you start to get really around the SC, where you start to think about, well, if I could pay something to get paid earlier, what does that look like? And so we're testing out all those different models. And then the piece around insurance is -- that's just straight risk management. We believe the data that we've got can help our customers present themselves better to insurance carriers to hopefully receive better terms, better pricing and then Procore as a broker will receive a commission on the top of that, which will span depending on the project, the GEO and the stakeholder, that will span a range of percentage points, and that's what we're testing right now.

This is in concert. It's not like you're going to be a full-fledged insurance company or at yet this is all partnered ecosystem?

That's exactly right. That's exactly right. So its entire ecosystem. That's why I said you got to kind of think about all those components together, not that I have a favorite child. It's all these pieces put together to solve the different pain points, and we will get partners throughout all the business.

There was a huge article about the insurance costs skyrocketing, and you can't get things built. So we got to fix the insurance thing to let things get [indiscernible]? .

That's exactly right. That's exactly right.

Maybe this is a short conversation on AI, but I'd say all the companies are here, you're probably the least impacted. I'm curious, do you -- have any of your customers asked you about AI?