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

Well, hey. Good afternoon to everyone. Welcome to day 1 of the Barclays tech conference. My name is Saket Kalia. I cover software here, honored to have with us the team from Procore. So we've got Howard Fu, Chief Financial Officer. We've also got a couple of key members of the team here. We've got Alexandra Geller, Head of Investor Relations. And then we just had Matt Puljiz here -- and where is he? There he is, yes. There we go, awesome. So we've got about 30 minutes together. Let's spend maybe the first 20 or 25 minutes doing some fireside chat with Howard, which I know is going to be fun.

Yes.

And then we'd love to make this interactive, so if anyone has a question, just pop up your hand. We've got a mic runner at the back. So maybe with that, Howard, thanks so much for taking the time...

Thank you. It's good to be here. It's good to see you.

Yes, yes, absolutely. So I was telling Howard in the back I want to take a little bit of a different approach in this Q&A because there are so many fun things to talk about, but actually I really want to focus on 3 things in our fireside chat here over the next 30 minutes, right, which are going to be go-to-market, profitability and Procore Pay, all right, just to sort of set expectations. And I want to dig into each one of them a little deeper, right, so let's start with the go-to-market change here, Howard, all right?

Sure.

Just to make sure that we're all on the same page, can you just remind us what these go-to-market changes entail? And why was now the right time to make them?

Yes, sure. There's 2 primary components of the go-to-market change. One is around the shift from a more distributed model -- or a more centralized model to a general manager model. And if you think about construction, construction is not just local. It's hyperlocal. And so shifting to a general manager model allows our teams to get much more closer to the businesses that they are supporting and looking to bring -- build partnerships with. And so that's the first major change. The second change is around this idea of product specialists and technical specialists. And when you think about how our portfolio of products has evolved, expanded; and the progress that we've made in our platform, these product and technical specialists are really going to allow us to engage the customer in a very different way to really understand the nuances of their business, how they can get the most value out of Procore. And frankly, from a go-to-market standpoint, it allows us to engage the right personas and stakeholders and the buyers in these companies from not just the folks that are in the field but also the rest of the C-suite, CFOs, CIOs and so forth. And those are the 2 major changes that we've made. In terms of why now, when we think about our end industry that we are operating in. And construction is going to be a cyclical market. And when we think about the changes that we're making: We knew that these changes are the ones we wanted to make eventually. And given the environment that we've been in over the last 18, 20 months or so where it's been a challenging demand environment, anytime there's a cyclical type of exposure, you want to make sure that you capture the upswing. And we wanted to do this now so that we could get all of the capacity onboard, get that capacity productive; and because we are in a challenging demand environment, make sure that there's actually little disruption as possible but gearing up for when that eventual upswing comes. And that was the calculus that we went through to say why do this now. It's really so that we could get prepared for the beginning of the year in fiscal '25.

Yes, sure. Listen. I think that's super thoughtful. It makes sense. I want to dig into each of those 2 major changes individually; and maybe start with the general manager additions, which to your point makes a ton of sense because construction is -- I wrote it down as a regional business, but I like how you put it. It's a hyperlocal business, right?

It is, yes.

Will each of -- right. And the GMs are sort of based on regions. Will each of these regions sort of run their own P&L and functions? And is that infrastructure largely in place? Like we've talked about marketing, for example, before, right, like how the -- and how are those functions going to sort of change? And how will that organizational sort of look...

Yes. I'll answer those backwards. The infrastructure is largely in place. We have all the GMs in place already. They'll have their leadership team in place by the end of the year, things like marketing, customer success, all those different things. All those folks are largely in place, so in terms of the foundational infrastructure, people and so forth, those are progressing extremely well. And then just in terms of what they're going to have purview over, I wouldn't think about this as them managing a P&L in the academic sense. They are going to have direct-line control over customer-facing resources. And there's going to be nuances in terms of where that line is drawn, depending on the nuances of the business. As an example. In some of these newer markets that we're in, maybe in EMENA or some of these newer markets that we're in, that line may be drawn to a place where we want more flexibility for the GM to make more calls and more decision-making authority within some of those resources across marketing and so forth, whereas in the North America market or in the U.S. market, where a lot of the centralization is going to happen, that line might be drawn a little bit differently. The important thing is the level of autonomy is going to be tailored to what's unique and specific, to be successful in each one of these markets that we're in. And that's really the idea.

Yes, yes. That makes a ton of sense. One of the things that Tooey touched on when these changes were first announced was the idea of starting to build the channel, right? And we've talked about this a little bit in the past. And just to be clear: This doesn't sound like a big part of the strategy, but I'm curious. As you've gone a little deeper into this exercise, how are you sort of feeling about using a reseller channel like some of your competitors perhaps, right, to maybe cast a wider net, to maybe get into some regions internationally quicker, if that makes sense?

Yes, sure. I think today our business, for all practical purposes, is almost 100% direct motion in terms of how we go to market. Over time, the -- a partner type of motion, whether it be reseller or something else, value-added resellers and so forth, that will eventually build over time as a larger proportion, but we're very early stages right now. So how this may show up: It may show up in the form of professional services, as an example, right? Today, professional service is a really small portion of what we do in our business, but we also recognize the importance of professional services in terms of actually delivering value to our customers and actually retaining customers. We may think about a partner motion, let's say, down market, which we today is still a very direct motion. And that's going to have direct impacts on our efficiency. It's going to have direct impacts on our breadth that we can reach and so forth, so there's a lot of these permutations that can occur. And of course, on the international side, if a GM believes and has the insights that a partner motion is the right motion to actually enter some of these new markets, whether in the markets that we're in today or adjacent to the geographies that we are today, that is absolutely going to be explored, but it's very early stages right now.

Got it. I hadn't thought about the professional services [indiscernible] make sense. I think the other part of this change, I think, is hiring more sales specialists, right, thinking about sort of the 2 major changes that were made, particularly in North America. Maybe the first part of the question is can you just remind us how many more heads are adding to that team, all right, we're adding to that team. And secondly, what part of the ecosystem do you see them sort of focusing on more? Are they going to be going after the ENR, the big ENR companies? Are they going to be going after owners, subcontractors, existing, new? Just talk to us about those additional resources. Where do you want to -- where do you expect to sort of get the return out of them?

Yes. Look. We're going to add net about a couple hundred resources in the go-to-market organization. And really there is no overconcentration in any one of those cross-sections that you described because this is about fundamentally evolving how -- the motions that we're running and the orchestration of how we go to market, which will impact all stakeholders, all geos, all segments. Now we're going to add both folks like generalist AEs, specialist AEs and also technical specialists. And there's one distinction here that I think it's important to call out. When you think about the quota carriers and the generalist AEs and the overlay AEs, they're going to hold a quota to actually be able to communicate the value and the potential value of Procore to our customers much better, but it's -- I think it's also important. Part of what we're going to add are the technical specialists that are going to really get at the nuanced detail of a customer-specific situation to say, "This is the best way that we think you can evolve and get more value out of Procore." And that is their sole job. They're not paid on a quota or anything like that. They're showing up to the customer. And the customer is going to say, "Oh, this person from Procore is here to make me successful." And I think that's a tremendous -- that's an important distinction to make. The reason I bring this all up is, when I talk about the foundational aspects of the motion that we're running, it's agnostic to what segment you're in, in terms of the value. It's agnostic to the stakeholder. It's going to add value. It's agnostic to the geo. That's why I said it's going to benefit all those cross-sections.

Got it, got it. So, I guess, with the additional sales capacity that you get with this investment, what maybe happens to your existing quota-bearing reps now that maybe you have a bunch more help to cross-sell? It feels like you're arming them a lot more actually, right, so -- I mean, do they get new accounts altogether? Do they get more accounts to sell to? Their -- do their quota -- like maybe talk to us about the existing quota-bearing reps, how this impacts them with having more resources come onboard?

[ And so ] they love it. Let's think about this just for a second, all right? So I'm a -- if I'm an AE, I'm a quota-bearing rep; and the company -- and I'm going to go to you. The company comes to me and says, "Hey. Guess what, I'm going to give you a product overlay specialist. I'm going to give you a technical specialist. I'm going to put a focus on professional services. I'm going to give you all these resources." Me as an AE, do you know what's in my mind? That's awesome. I'm going to hit my number. I'm going to make some money on this, right? And so there's been a tremendously positive receptiveness to this new model. And that's also true on the customer side. From a customer standpoint and saying -- they're saying, "Wait a second. I have an AE. Now you're going to tell me there's going to be somebody solely focused on making me successful. And you're going to have somebody that's going to educate me on the progression that I should be going through as a partner to Procore, to get the most value of Procore. Sign me up," right? And so I think there's on both sides the benefits of that. And so that's we're excited and -- both internally and externally about both of this.

Yes, yes, absolutely, so -- I mean lots of opportunity. I think you took a really prudent approach to guide next year, I mean, just right to account for the risk that's associated with all this. Can you just remind us what you said about next year's guide and sort of how that incorporates the risk as we get into 2025?

Yes. So quick summary: Our early guide, I want to make sure that it's an early guide, is revenue growth of 11% next year. Our margin guide for next year is a 13% non-GAAP operating margin, which is actually a 200 basis points improvement on the high end of our guide for this fiscal year. We've also talked about fiscal '25 as being a transition year but obviously with a lot of the go-to-market changes and also talking about fiscal '26 having a much better P&L than fiscal '25. Now I'm not going to tell you kind of what that means in specifics, but it is a better -- it's going to be a better in fiscal '26. I want to be clear, though. This transition, there's disruption. It's largely played out as we anticipated, and this is going to dovetail into the first part of the year. And that's been incorporated into that 11%. The other thing that's been incorporated into the 13% operating margin guide is that, remember, there's -- we're going to hire net 200 people. There's a tremendous amount of focus on operating efficiency and efficient growth. The go-to-market organization itself is getting more efficient in other areas to fund portions of this. And the entire company is also getting more efficient, which is a continuation of what we've done over the last couple of years, to also make sure that this is successful. That's how we're able to actually continue to expand margins even with all these investments. In the short term -- in Q3, we had a cRPO growth of 16%. We're guiding 11% revenue growth for fiscal '25 as an early guide. You can do the math of what that implies for Q4 in terms of cRPO growth. As we go through this as we get to the beginning of the year, we report Q4 and guide Q1 and for the full year. We'll provide more information then.

Got it, got it, look forward to hearing about that. I want to shift gears to Procore Pay, which is another [ really good topic ] to talk about. What's been the feedback from your beta customers? And what's going to drive scaling of that business in 2025?

Yes, yes. First of all, the business is not going to scale in 2025.

Yes, got it.

It's not even going to show up as anything meaningful in fiscal '25. It will start to show up in fiscal '26 in terms of some financial impacts, but even then, it's not going to be overly significant, so please don't -- I say this every time: Please don't put this in your models or anything like that. The feedback from customers has been tremendously positive. I think, several quarters ago, we talked about having more than 100 customers signed up for Procore Pay; and that has continued to grow. In terms of what this looks like at scale, we have to get through this initial phase of the lead time to get customers implemented and then to have that build and waterfall on each other. So what do I mean by that? So we talk about getting customers not just signed up to Pay but actually using Pay, meaning they have to sign up and get stood up on their banking partners. They have to make sure that they don't -- they can't switch payment rails and payment processing in the middle of a project. So you have to wait for projects to come onboard. As those projects come onboard, they ramp. And then they have to get their subcontractors onboarded as well. What we've learned in some of these initial phases is, as you know, that even when they add new projects and GCs add new projects, they're not adding every single new projects because this is something that's quite sensitive to that, right? We're moving money. And so what they're doing is they might be testing 1 project or 2 projects just to make sure it's working before they say, "Hey. Let's move every single new project on to Procore Pay." So that's some of the lead time. By the way, that's very prudent. I would do something like that for our company, right, for Procore. And so where this scales is when you start to see some of these companies start to stack on top of each other and really waterfall the number of projects, the payment volume that's going through Procore Pay and then the revenue that starts to show up in a significant way for Procore. So...