Q2 2022 Procore Technologies Inc Earnings Call
Concentrated exposure to any one particular sector of construction.
And history has shown that not all pockets of construction respond the same to downturn.
Which is why when investors ask me, how we performed during the potential recession my answer is nuomi.
It all really depends upon the severity and length of a recession and how different sectors within the industry may respond.
Customers, often remind me that they are larger projects can take 24 to 36 months or even longer so many of their projects span the duration of previous recessions.
All of this is to say that no recession looks to say and while the construction industry isn't immune to downturns as a whole. It has historically remained resilient.
We will continue to focus on what we can control, which is executing on our mission of connecting everyone and construction on our global platform.
I maintain conviction that we're solving the industry's most pressing challenge and if anything we're hearing in the industry say more and more that they're seeking.
<unk> in the construction process.
<unk> that <unk> platform provides.
Over the past few quarters, you've heard us talk about the strategic value that level set brings to our long term fintech initiatives.
These initiatives tie back to our overarching goal of helping our customers manage risk and accelerate growth to ultimately run better businesses.
You've also heard us talk about our focus on creating a robust set of solutions for specialty contractors, which you may know as subcontractors or subs.
One of the Fintech initiatives, we have been exploring as a material financing programs, specifically aimed at addressing a core challenge that many sub space.
When <unk> started a new job one of the biggest upfront expenses as the procurement of materials.
Subsequently received 30 day payment terms from their material suppliers, but they may not get paid by the general contractor for approximately 120 days after procuring the materials.
This mismatch in payment timing creates working capital constraints for subs.
Subs represent the majority of firms on a given project and yet they often have limited credit history and difficulty accessing capital from traditional sources.
Due to the complex nature of construction traditional sources of capital typically have limited insight into the industry specific information that they need to evaluate the full financial health of subs on a given project, including the upstream stakeholders that theyre working with.
This lack of capital often forces subs to juggle funds between projects and hold off on bidding on new projects, but they get otherwise be qualified ulta.
Ultimately this adds uncertainty to <unk> cash flow constricting their ability to grow which in turn constrained as the industry's overall growth and efficiency.
<unk> and level set of shared a long term interest in solving these working capital constraints for the industry.
This is an area we've discussed with you in the past and I would like to dig deeper on this today as we've made some early strides and started to deploy a small amount of capital.
At the highest level our material financing program facilitates the purchase of construction materials on behalf of subs.
<unk> helps to alleviate working capital constraints, but purchasing materials directly from suppliers and then selling them to subs on deferred payment terms that are better aligned with their time.
We charge an origination fee at the beginning of the arrangement as well as a weekly finance charge with the expectation that the subs will typically pay us back and approximately 120 days.
So let me walk you through an example.
When a sub starts a new job or needs to procure materials, rather than paying the supplier, but a sub will come to us with the project details in his list the materials needed.
We conduct a short underwriting process.
During that underwriting process, we leverage our available proprietary data, including credit worthiness of not just the subs, but also other upstream stakeholders to determine whether to provide financing.
Once an applicant has approved cohort purchases the materials directly from the supplier, who then ships the materials to the job site.
And because we purchased the materials directly and sell them to the subs for use on the job we were able to obtain lien rights, which means our financing can be secured against the property itself.
And where need be enforced to ensure replacements.
We believe we are uniquely positioned to solve this challenge for several key reasons.
First as a connected platform for the industry, we have a huge audience of cash strapped subs, both collaborators and customers.
Second thanks to our single global cloud based platform, we have a unique and massive amount of data inclusive of levels that dataset, which provide specific insight into performance of payment history.
And third our deep domain knowledge of lean right.
By structuring this program so that we secure for the ethane with lean rights. We are a powerful tool to collect outstanding balances not just from the subs, but in circumstances, where they are unable to pay from the upstream stakeholders.
Moreover, we can leverage levels Thats core lead management offering to manage track and enforce our lien rights with various states and jurisdictions.
Also it's important to note that this program does not require us to warehouse ship or otherwise take possession or control of material and we are not responsible for the sub's performance on the job.
I want to emphasize that we are in the very early stages of this program and our focus is to continue learning and optimize.
And while it's still early.
Cited for the potential impact and the value of this program can bring to the industry.
Ultimately, we believe if were successful with this program it should provide meaningful expansion to our Tam that is highly complementary to our existing SAP platform strengthening the procure flywheel.
Speaking of the protocols flywheel, we continue to grow our customer base with a number of notable customer wins in the quarter.
I'd like to share a few of these things starting with a notable one.
Tampa General Hospital is one of the largest hospitals in America with the main campus outpatient facilities urgent care settings.
<unk> had previously been using this solution that was time consuming and labor intensive and the desire to platform that was easy to use and that the reporting and integration.
They selected <unk> after the contractors, who they frequently worked with urge them to explore us.
It was also our existing customer relationships with other hospitals, serving this references for our partnership abilities that gave them additional conviction to become appropriate customer a testament to the flywheel effect of our platform.
In addition to owners, we continue to build relationships with general contractors J P. Cohen is a fifth generation family owned general contractor managing projects across multiple construction sectors in the Midwest and nationally.
The project teams have been struggling with disconnected systems and they needed an integrated platform that can increase their efficiency improved financial controls and enhanced user experience for employees in the field.
After evaluating several options. They ultimately chose <unk> given their confidence in our platform to support these needs.
Their decision to become a customer was bolstered by the positive feedback they received from their employees, who had previous experience using the platform.
We also signed that'd be homes, the largest privately owned homebuilder in North America with over 40 years of history across U S and Canada.
They have plans to grow the residential property offering with speed and scale.
That may have been using a number of point solutions and were looking to consolidate their business under a single platform that could scale along with their growth ambitions.
After an extensive evaluation they selected cohort.
<unk> is going to be initially used on a large high rise mixed use development projects that subsequently on future residential projects as they are rolled out.
Brokers platform will allow them to have all of their project information accessible on a single platform gain real time insights into projects and seamlessly share information across stakeholders as their business grows.
We look forward to supporting their continued growth.
In addition to expanding our customer base of owners of Gcs, we continued to bring specialty contractors onto the platform.
<unk> electric has won a British columbia's largest electrical contractors they desired an all in one platform that can bring together critical business processes, like timesheets productivity and inspections and be standardized across the field and off.
After a competitive evaluation process, who will ultimately chose <unk> as their platform of choice with the ROI. We can provide in the form of increased efficiency productivity and accessibility of information there.
They are particularly valued our strength and open API, our local presence in Canada, and our focus on specialty contractors, including our workforce management capabilities.
Speaking of building relationships with customers a huge part of how we connect with the industry is through our annual conference groundbreaking.
I am thrilled to share that after two years of doing virtual ground break will be taking place in person this year.
With that I'd like to invite you all to join US the groundwork 2022 in New Orleans from November seven in November nine.
It's going to be an incredible three days of exchanging ideas here about new products and innovation and connecting with our customers partners and the broader community.
We hope to see you all there.
Now I'm going to hand, it over to Paul.
Thanks, Steve and thanks, everyone for joining us as Jimmy mentioned, we delivered another solid quarter today I'll quickly recap our financial results provide some color on the quarter and conclude with our outlook.
We had strong top line performance with revenue in the quarter of $172 million up 40% year over year and up 34% organically when excluding levels at $7 million contribution.
Backlog metrics, specifically short term remaining performance obligation and short term deferred revenue continued their strong trajectory in the quarter.
On an organic basis, we ended the quarter with 13403 customers, representing 20% growth year over year.
Our non-GAAP operating loss was $25 million.
Representing a consolidated operating margin of negative 14, 7%.
Taking a step back therapy things I want to call out with respect to Q2.
As Tony mentioned, we currently view our performance is being driven primarily by internal factors rather than external.
I first wanted to touch on two areas, where we saw unexpected impacts related to internal factors.
First while we delivered Q2 operating margin in line with our guidance. There were a couple of expense areas that came in both higher than anticipated and towards the very end of the quarter.
One we saw an increase in travel and entertainment specced reflective of more people returning to travel and in person customer engagement.
While it's a great sign that our pipeline is healthy and customers are eager to me. It is also a reminder of the importance of re engaging the protocols of managing <unk> that were utilized pre COVID-19.
Therefore, we do not anticipate the teeny trajectory, we saw in Q2 to persist for the remainder of the year.
We also saw incremental expenses related to our cloud hosting provider driven by higher consumption and usage of the platform, which led to a slightly lower gross margin reflected within our Q2 results.
Our combined <unk> and hosting expenses contributed an impact of approximately 160 basis points of headwind to Q2 operating market.
Second, although we saw pockets of strength in certain regions like Canada overall, our international business experienced some growing pains in Q2.
Over the last 18 months, we have expanded into multiple countries and have been judicious with building the right team.
As a result in some cases it is.
Taking longer than expected to onboard the appropriate talent and get them productive.
We are cognizant that there is more work to be done as we focus on our international execution.
We're also mindful that there is a higher potential for recession in Europe , which could further impact our business theyre.
Therefore, we have tried to factor all of these dynamics into our outlook and guidance.
Ultimately, we continue to have conviction in the product market fit and need for our offering internationally and we remain excited about the massive opportunity of our international business long term.
Despite these items, we delivered solid results in Q2, and there were several highlights that I would call out.
First overall pipeline generation remained healthy in the quarter continuing the momentum we've seen this year. This is another data point, reflecting that even in times of uncertainty demand remains strong for <unk> platform.
Second specialty contractors in particular, some meaningful year over year growth. This is a key stakeholder for which we have been doubling down on creating robust solutions. So seamless performance in Q2 this promising.
And third we saw strong momentum and expansion across all facets of the business. This strength and expansion drove continued improvement in net retention.
We intend to provide additional disclosure on the dynamics of this metric later this year.
Before I turn to our outlook and comment on free cash flow dynamics I want to spend a few minutes sharing a bit more on our material financing program as.
As <unk> stated, we have a unique opportunity to solve a huge working capital problem and construction.
I want to emphasize that while we are making early strides we are still in the learning phase of this opportunity.
Our current priority is building our game too, which means thoughtfully distributing a select amount of capital. So we can identify signals and our data and better predict potential repayment there.
As we continue to learn and develop the program our intent is not to scale it using our own balance sheet. If the program proves to be successful, we would expect to partner with a capital provider in the future who can help us scale. This initiative.
As of the end of Q2, we had $12 million in it.
Originations outstanding of which we expect the vast majority to be repaid generally and approximately 120 days during.
During that period, we would continue to collect the weekly finance charge associated with the amounts outstanding in addition to the origination fees we received.
To date defaults have been limited and amounted to fewer losses than the revenue collected from the program that said the program is not expected to generate a material amount of revenue this year.
As we continue to learn and build our portfolio of data we are comfortable with having up to approximately 10% of our cash position on the balance sheet tied to this program prior to Onboarding a capital partner. We believe this is an appropriate amount of capital to collect sufficient data on this program to evaluate performance.
And if and when appropriate secured the best capital partner.
In the broader context of our Fintech ambition material financing is just one of several early bets, we are making to address the industry's biggest priorities of managing risks and accelerating growth.
Pending on what we learn and what our game tape shows this program could evolve and take different forms overtime.
Ultimately, we remain focused on determining the highest value opportunities to pursue.
With that let me move on to our outlook.
As <unk> noted the broader environment remains highly dynamic.
Regarding our revenue guidance, we have tried to take into account this uncertainty and factor in the potential for incremental weakness in the market that we have still not seen in our business today.
Should our demand environment remains stable, we see room for upside to our guidance.
We took a similar approach during our Q1 earnings call to set guidance at a level. We felt was appropriate based on the same external dynamics.
Now here's our guidance for Q3 and full year 2022.
For the third quarter of 2022, we expect revenue between 174 and $176 million representing year over year growth between 32 and 33%.
Q3, non-GAAP operating margin is expected to be between negative 30 and negative 14%.
For the full fiscal year 2022, we expect revenue between 690 and $694 million <unk>.
Including the contribution of $29 million from levels that representing total year over year growth between 34 and 35%.
Given the small size of our material financing program, we are not expecting a material revenue contribution from that initiative this year.
non-GAAP operating margin for the year is expected to be between negative 13, and negative 14% an improvement of 50 basis points from our previously issued guidance last quarter. This also represents 200 basis points of improvement compared to our original operating margin guidance issued in February.
And finally, although we do not guide free cash flow, we have provided directional color in the past on the trend line for free cash flow margin for the year.
We would reiterate the commentary we shared back in May.
Note that due to the timing of collections and various outflows the distribution of free cash flow by quarter is not linear specifically free cash flow in Q2 is expected to be the trough and not indicative of free cash flow for the year.
For the full year, we would note that the analyst consensus of approximately negative 6% free cash flow margin remains in line with our expectations as it relates to material financing. We would note that the activities associated with the program are included in investing activities on the cash flow statement and therefore excluded from the definition.
Free cash flow.
Before I wrap up building on <unk> invitation to ground break I'd also like to invite you all to join US at our inaugural Investor day, taking place in conjunction with groundbreaking on November <unk> in New Orleans.
We'll be sharing more details on how to attend over the coming weeks. We hope you can join us.
To close out 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 to begin the Q&A session.
Thank you Sir.
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Our first question comes in from the line of Juan Dawn Becker with William Blair.
<unk> Your line is now open.
Hey, guys. Thanks for taking the questions and congrats on the quarter here, maybe if we start on the materials financing piece, something we've kind of talked a lot about but can you talk about maybe how the platform data and the visibility you have seen what these guys are bidding on what their backlog looks like and that enabled us to make better underwriting.
Decisions right and maybe better offer better financing terms for these stakeholders and wireless data is something that I can't maybe necessarily easily be replicated and is something that has taken time for you guys to build out as well.
Yes.
Question area that we're all very excited about so.
So we do think that we have this unique.
Vantage point that others don't and we have all of the data that you mentioned, it's around data like performance and payment history, and credit creditworthiness of subs and stakeholders and it gives us visibility kind of across the spectrum. We also get to see the entire job ecosystem that they're involved with which is something that most.
People will not have access to so exist.
It's a broad amount of data that we have access to that really is something that can only come from a solution that is a single connected platform.
Maybe the only thing I'd add is it's an interesting call out on the bidding side of the house because with the bidding side of the house not only does is it gives the vantage points to a provider, but it also really reflects on other point, we had talked about of having this massive audience of cash rent upside.
Time of fab that Youre able to actually here. We are what is the size of the amount of money they need for material financing and get to them at the right moment of need because that is essentially the time by which they will be awarded a job and be looking to go out and procure this financing for these materials and so there's a lot of reasons why both the huge audience.
The data set and frankly, our knowledge on lean rates really makes us unique and a unique position to go after this opportunity.
Yes, it's a very exciting I appreciate the color look forward to hearing more on that one.
Maybe you could talk about I think you called out some of the international component.
About the business model in its own right can you think about as maybe some of your customers are dealing with their own cost pressures, obviously some of the macro landscape as well with the value and that collaborator model.
And maybe that the ease of adoption there getting that upfront burden out of the way it is time to value.
Net increase is not only that top of funnel, but maybe accelerate those customers realizing that.
And anything that onboarding process from a new customer perspective as well.
I mean, I think you said it better than we may be able to and the fact that the model that has been so successful for us in the U S where we are in limited user model and that our average new customer.
Many many new collaborators, who arent customers that could be potential customers is something that is equally applicable as we look about look out to our international expansion and one of the reasons why when we highlighted our excitement around the international opportunity of new investments, we wouldn't be making over the years.
That is why we think we're in such a unique position to be successful internationally and why its something that we remain really excited about from an opportunity for us.
Quickly I spoke to one of our largest international customers today and they reminded me that when we enter a new market. There is incentivized as we are to build our brand and the spread the word about protocol and to get everybody on the platform because they are making an investment in our platform and they want to see that we succeed so.
That is one <unk>.
Difference that we're seeing just because we're a new brand in a new market that's really exciting.
Great I appreciate the color guys and congrats again on the quarter.
Thanks Bill.
Thank you for your question.
Our next question comes from the line of one second <unk> with Barclays. Your line is now open.
Okay, Great Hey, guys. Thanks for taking my questions here.
<unk>, maybe for you and apologies if this was addressed.
Addressed earlier joined the call late but I was wondering if you could talk a little bit about the subcontractor segment.
It sounded like that grew faster than the overall business. So maybe if you could just touch on what product areas are subcontractors using the most from from pro core and remind us how they are paying for it.
Yes. So first the subcontractors are a vital component in the vital stakeholder for us.
They represent the vast majority of folks on any particular job. So for us it's always been a market that we wanted to go out and serve and we've been investing in in this segment for the last couple of years, that's where the Labor chart acquisition came in and Thats, our workforce management products that we are doing as well as a whole host of other things that we're doing to capture that.
They pay us the same way all of our other customers fast and.
There is no we don't have a different program for them.
But ultimately we need to get all of the players on the project connected.
We couldnt, we couldnt be successful in our mission that we didn't bring them into the fold.
The only thing I'd add is when we think about the product mix of sub contractors are adopting maybe thats one of the most exciting aspects about the platform that we are able to monetize our existing offerings across project management quality and safety financial while also offering very differentiated value in places like workforce management and this is where we believe.
These investments we've been making are critical and have started our continued really to pay off as we go after this massive opportunity with sub contractors.
Got it got it that makes sense, Paul maybe for you while I have you.
Talk a little bit about about how you're approaching Europe right. I think you said it well the highest probability of.
The macro hiccup here I know, it's not a big part of the business, but obviously somewhere.
<unk> would like to grow what are you seeing there again, just kind of given the limited sample size and how have you thought about that business. This year as part of the guide.
Yeah, I think you called it out Europe is not a large part of our business our biggest investment area in Europe has been in the U K and even still it's still a relatively small part of our business. When we talked earlier in the quarter or last quarter I should say about entering France and Germany. These are really multiyear.
It's meant to put ourselves in a position to have a really meaningful market share as we grow in those regions and so as we think about Europe . We still believe today our success not just in Europe , but really the broader international market is going to be on our own execution and that there will certainly be headwinds associated with different components of the macro over time, but that is still.
So early days and the markets are so massive that we're going to continue to invest there. We're just going to be really thoughtful and intentional around how we do that.
The dynamics in Europe are very similar to the U S where when they see these macro headwinds the government step in and they invest in infrastructure.
In fact in a lot of cases are investing now in housing because interest rates are.
<unk> is so high that people can't afford rents. So those dynamics are very very similar so.
We're obviously remaining very optimistic about what we can achieve there.
Very helpful guys. Thank you.
Thanks, Ed.
Thank you for your question.
Our next question comes from the line of one Brent <unk> with Piper Sandler.
Your line is now open.
Thank you good afternoon.
<unk> I wanted to double click into the specialty contractor segment as well if I look back over the last.
Four five years I know the owner segment really kind of took off and became a meaningful driver of the business as they adopted the platform. It sounds like now specialty contractors are starting to come alive.
Driving that is it is it new product that's resonating.
To give us a little more color on kind of why are you seeing the momentum with its specialty contractors now.
Yes, so Brent great question, I would characterize it a little bit differently.
We've been serving the subcontractor community for a long time, and so they've always had a place in our stakeholder customer base, but we have made a very intentional push to make sure that we're satisfying the need their needs over the last two years or so.
And the good news is is that as all the collaborators on our platform number 60% of the folks using <unk> dot paying customers. Most of those are some of our specialty contractors as they see the value approach work is there in the general contractors or an owner's account they start asking themselves how can I get the value and now that we have specialized features and products that actually.
And serve their needs directly.
Think that that's just an accelerant of them coming onboard but ultimately.
We need everybody on the on the platform and just I'm grateful that they are joining us material financing is another great example, which is we're here to help the specialty contractors with their business needs and deemed cash strapped as they are because they are having the frontal the money for materials is just another way that we're leaning into the specialty contractor market.
I would build on top of that it's also say like hey, as we've decided to focus into the subcontractor market. We put the resources. They can go to market as well and so we try to be really thoughtful about how we marry those investments on the R&D product side alongside that go to market. So that we're able to really show that success that comes from those investments and we're just continuing to see.
That pay off.
Great.
<unk> focus in putting some.
Sales efforts behind it is certainly paying off here and then Paul just as a quick follow up.
For you if I just look at.
The short term our <unk> build here are still pretty strong even with some of the the.
The flags around international is that just because international is only 15% of the business and the bulk of the business in the U S. You are still strong just walk us through what drove the strength in short term on our <unk> build this quarter that looked really healthy.
Yes, I think that international is a smaller piece and as we said hit some growing pains. It still performed quite well. So I don't want to say that international Hasnt continued to contribute.
<unk> revenue in backlog.
I would say we've continued to see strength in the various facets of the U S business as well that's the various stakeholders, we called out in particular, we're seeing really good momentum and expansion and so it is a permutation of all of those different things coming together to continue to show strong execution on the business segments.
Great. It sounds sounds like the business is performing pretty well here. Thanks for the update.
Thanks Brent.
Thank you for your question.
Our next question comes from the line of Juan DJ Hynes with Canaccord.
Your line is now open.
Hey, Thanks, guys appreciate all the macro demand commentary today on the call.
Paul one for you if I understood your comments around the revenue model for materials financing this should be a massively profitable effort at scale and I thinking about that right.
Okay.
We think it has a lot of potential and that it should drive great economics that scale and the thing that we would continue to bring people back to is that we're really early days and so we're learning a lot. We still have a lot of data points that we're collecting and as you've heard US say this program continue to take many different forms of shapes.
But I assure you when we think through the investments we're making in the Fintech World, We're very thoughtful in making sure we're going to put our money, where we see the most opportunity and the best kind of economics for the business.
Yes, It makes sense and then two weeks, but what's the appetite for M&A. These days I mean are you seeing more point solution consolidation opportunities out there in this environment.
No.
I would say in general the appetite is very.
Very low.
We are definitely still digesting the last two that we had acquired.
There are there are a lot of players in this space and I think back D. J to the early days of our platform, where we had I think what we had 20 partners building on our platform and today, we have over 400. So the opportunities are somewhat enlist but for now we are we think focus matters and so we're.
Keeping an eye out but but.
Really right now just same service and the benefit of that platform and those partnerships as Jerry alluded to is that we're constantly having conversations with all the different folks out there building relationships getting to know their management teams. Their R&D development team's go to market as we pursue partnerships and integrations together and so by no means are we.
Refraining from making sure we're.
Watching the market understand what's out there have the right relationships. We just believe that it's really important we focus on being very successful integrations. We've already brought on and that's our immediate short term focus and actually Vijay. We just hosted 10 of our top integration partners on campus.
To help them build their business and refine their tech stack and learn how to attract and retain talent. So we invest heavily in these relationships.
Yes, yes, great great to hear and congrats.
Thank you.
Okay.
Thank you for your question.
Our next question comes from the line of one Adam Borg with Stifel.
Adam Your line is now open.
Hey, guys.
Thanks for taking the questions maybe just.
To beat a dead horse.
On the macro side, so it's great to have the strength on the specialty contractor front.
But maybe talk a little bit more about customer trends either by size right. We've talked in the past about SMB versus the larger gcs and owners and then maybe just on the international front just to be clear.
Is what youre seeing today simply that it's taking longer to higher than you expected or some of those macro headwinds that are impacting Europe are starting to impact your business I just want to be clear on.
Which is it all of the above or which one is it. Thanks so much.
Yeah, maybe let me try to break those down into two different questions. So when we look at the U S side and you talk about the mix of customer size of stakeholder I would tell you that there isn't a lot to say of our new things to add here versus what we had commented on last quarter from an absolute customer count add it's always important to remember.
The largest driver of our customer count in any quarter is going to be the F&B audience. They are still the ones as we continue to face supply chain dynamics uncertainty that are the ones who are most impacted just in their ability to focus on new things, while they manage their existing businesses, but beyond that I wouldn't tell you there's anything unique to call out between.
<unk> stakeholders, so owners GC subs other than we continue to see the investments pay off in subs in particular is showing really great promise.
If I go to the other question focused on international I think right now we are deliberate in saying that it's not the macro environment that we want to call out were really saying that hey, the business is still really early right international represented 15% of our business and we will see lumpiness from quarter over quarter as we invest in these regions because theyre smaller in bringing on the right.
<unk> is so important and so we.
We're being really judicious to double down on that and we want to make sure. We have the best talent and then we spend the time to invest and getting them productive and making sure that they are the best.
Folks on the team, we can have and Thats why we have seen some growing pains there, but we remain really opportunities are pretty optimistic and believe that the original thesis for which we entered these markets and why we were so bullish on international has not changed and I want to point out out of that one thing that I'm really proud of in 2021 are international.
Our team was one of the highest performing teams that we had a broker so I am confident we've got the right people and the future is bright and these are just learnings that come as you enter new markets.
Got it and maybe just a very quick follow up just on inflation. Obviously is another macro data point, we keep on talking about just curious what kind of impact that's having if anything on your annualized that construction volumes. Thanks again.
Yes, well, let me, let me tell you a little bit about what I'm hearing from our customers.
Inflation is not the number one issue.
By the way the sentiment and people don't really ask this question I'll just answer it this customer sentiment from all the calls if I am doing very similar similar to last quarter, where mostly everyone that I'm talking to you as remains largely optimistic they have not seen for the most part the dynamic macro environment in their business. So when they.
But when they tell me about how they look at their business Youre talking about the diversified portfolio and so that diversified portfolio will.
We'll be anything for like public sector private sector.
And they are very focused on doing that so we're seeing strength areas of strength in healthcare education energy and manufacturing, but they are not bringing up inflation has been the number one issue.
As a matter of fact, one of our customers told us they were actually purchasing materials at the beginning of the job starting off site. So they can lock in the material cost so inflation is not a matter.
And what's really cool about that is that demonstrates to all of us health resourceful. The industry is that we serve and.
However, they can be to solve these challenges.
I would just remind everyone that as we look back over the last two plus years that this industry has been going through nothing but constant change and turbulence from supply chain dynamics to inflation that's been around for some time, particularly when we talk about material and these different components that go in this is an incredibly resilient industry and they continue to prove that.
Why they are always reminding us labor is their biggest constraint and they're always focused on getting more effective and efficient.
Excellent. Thanks, so much.
Thanks, Adam.
Thank you for your question.
Our next question comes from the line of <unk>, Brent Thill from Jefferies.
Your line is now open.
When you think about the bottom line and there was a little bit worse than the street thought.
In your guidance, assuming still some some some pretty big losses here I guess, when you think about the pathway to breakeven.
And profitability can you can you talk to.
As your path changed at all or are you still holding path.
CT with with the current plan.
Yeah look I would tell you that we kind of outlined in the call a couple of things that came in unexpected.
Operating margin perspective, we feel really good we have those in mind and will not persist. That's why we felt very confident to improve our annual guidance by 50 basis points. I think we will continue to be very judicious as we went there.
That we believe.
Change the way, we think about profitability as we've talked about in the past.
Look at our last three years it can be effective fee rates in defense that COVID-19 really through some abnormalities into our three year P&L. We went from a world in 2019 were negative 21% operating margin do you fast forward to this year and really look at it from an organic perspective, taking out the headwinds we've talked about some level set that looks closer to about next.
At a 10% in 2023 will be the period of time, where we returned back to a normal progression of operating improvement in efficiencies and so while the world is highly dynamic we remain confident in our focus on both getting the breakeven from a free cash flow perspective, as well as continuing to show efficiencies in the operating margin line item and we're going to continue to do that.
Okay.
Thank you.
Sure.
Thank you for your question.
Our next question comes from the line of Juan Matthew Broome with Mizuho Mizuho Securities. Matthew Your line is now open.
Thanks, very much Matt.
<unk>.
It sounds like Youre, making progress in terms of leveraging your data.
Data to address the financing opportunity and I'm really just curious.
What extent.
You are taking a similar approach to addressing the insurance opportunity, especially.
I know a couple of months ago.
You issued a press release.
On that topic, just curious how much progress you've made in that regard.
Great glad you asked that question data is a massive.
Asset broker has and with joy drilling onboard our new Chief data officer, putting a hyper focus on how we can leverage all of this data that we have across the platform and the levels of data to put together risk profiles is really exciting and we can use that for <unk>. We can use that for insurance and I know Paul is really passionate about this so I'll let you.
Kick it over.
Yes look I think it's a good call out and if you've noted as we talked in our transcript.
We're making several bets in the world of Fintech.
We think about the focus of those those bets it really it's around helping companies manage risk and grow their businesses. So Max I really is a focus on how do you help grow these businesses because if these people do not have access to capital. They just don't bid on jobs and a key strength of our whole industry from.
The flip side, when we think about managing risk that is where we've talked about some of the biggest costs that come to construction or in the world of insurance and we believe we have really interesting opportunities to think about how we can leverage our data leverage our customer base to help make meaningful improvements to the overall industry when it comes to that statement.
That said I will always reiterate these are very early days. These are early that they are not in any of our models and we would encourage you all to continue to keep the amount of yours as we are in the learning phase and we'll continue to keep folks up to date as we learn more and not that there is another aspect, which we've talked about immaterial finance, which is not just about the data, but it's captured.
People at their time of need.
Subcontractor gets awarded the job they need to purchase specific insurance at that time. So there is two aspects to the to the advantages that we have both the data and the time it needs.
Alright, thanks for the detail there.
Of course, you get to see the top line momentum continue.
But I guess your guidance does reflect.
Quite a bit of deceleration in the second half of the year.
Is that primarily due to some tougher comps or maybe the macro and maybe just what are the puts and takes that we should think about.
As we are modeling that thanks.
Yes, I think as we commented earlier in the script, what's important to take here is we are mindful that we are in a highly dynamic macro environment that there's a lot going on that as we said, we don't see in our business today.
And when we think about guidance in this dynamic environment, we want to be really mindful that we bake in what could be weakness that comes that we don't see today and so if the demand environment remains stable, we think there's upside to that guidance otherwise I don't think theres any in particular areas I would call out beyond that.
Okay. Thanks.
Very much.
Thanks Heather.
Thank you for your question.
Our next question comes in from the lineup one Jason <unk> with Keybanc, Jason Your line is now open.
Perfect. Thanks, guys. Thanks for fitting me in.
Two I think in your prepared remarks, you mentioned that some of your customers providing recession proof work.
I guess curious on.
But what that what that means.
Yes no.
Im glad you asked that.
Its clarity is important here so our customers as I mentioned earlier are always seeking to diversify their portfolio. So it's easy to think that a contractor does one type of work, but most of them do not and so having that diversified portfolio. It means that there are they are going to look at different types of work and one of them would be more recession proof. So.
I'm carrying because theres a lot of our government advanced projects that are coming online infrastructure bills. The chips Act, which was just passed I think $52 billion.
And so they're seeing that there's those kind of infrastructure bills are somewhat recession proof in fact, the government spends money during the recession in order to stimulate.
The economy. So also theyre looking at projects that are either cash on hand or their bond measures that were passed a long time ago that are coming online. So there's just a lot of opportunities outside of.
The standard like bricks and mortar home construction that you might think of where folks can focus our energy to diversify that portfolio.
And it's worth calling out.
Even in this World Society has to keep running so theres always going to be healthcare power are manufacturing. These things have to persist because these are revenue revenue generating asset for these companies that they have to continue to focus on their long run projects.
Perfect No that's a fair point off.
And then when I think about the competitive landscape at the sub contractor level are there I guess.
Is it a different set of competitors or is it the same typical ones curious on.
What that looks like.
It's very similar to our other prospects that we talked to you and most of them are coming from analog solutions, sometimes to point solutions.
So it's really not all that different so this isn't really as much of a competitive sale is it helping.
Helping people through the digital transformation from analog to digital and there are so many out there that are on that journey and I think we're well positioned to help them.
Yeah.
Okay.
Thanks.
Thanks, Jason.
Thank you Jason.
Our next question comes from the line of one Ken Wong with Oppenheimer. Ken Your line is now open.
Great. Thanks for taking my question.
Everyone.
Wanted to kind of dive in on the material financing side, but perhaps take it from a different angle.
Recognize there is some transactional component to it and they will come over time.
How does that product potentially drive incremental attach of other software product.
Is there a possibility that you get more data therefore, better qualify some of the.
Some of the sub and that May force. Some of these these customers to potentially pursue a broader suite of solutions.
Yes, I think that we think these are highly synergistic and when we take folks back to the overall mission of improving the lives of everyone. In construction you have to look at the needs of these stakeholders sub contractor in particular on the whole they absolutely need software to make them better more efficient, but they have risk they have working capital problems as.
We introduced them to solutions to bail us we find that they increasingly look to what else we have to offer them and how we can really help drive better business for them and so that's where when we think about the fintech opportunities more broadly you heard TUI comment earlier, just about how we can leverage their usage of the software platform to understand when we can best get to them in their most.
It needs. We think there are synergies across so many different factors when it comes to these different.
Core platform and it's one of the reasons. We think this is an important thing for us to pursue a big opportunity ahead and I Love that you asked that question because there is a lot of folks that were calling that are not <unk> customers and even collaborators today. So.
The universe of specialty contractors, even in just the U S is enormous so once we have those conversations and we start providing becoming a trusted partner material finance. We believe that there is a lot of opportunity to bring them over to a product line. We believe every subcontractor pretty much in America could benefit from using program.
Got it thanks for that color and then maybe just a follow up.
You guys have consistently highlighted.
Building pipeline, but potentially some bottlenecking because of all the macro factors.
Have you started to see that loosen up at all where the deals are starting to flow through a little more on the pipeline or is it still feel pretty gummed up relative to past quarters.
I would say it looks similar to past quarters as <unk> commented, we haven't seen a meaningful shift in the conversation around macro dynamics, we still have supply chain issues, we still have constraints on labor, it's a dynamic environment out there, but customers are coming to us to help make their businesses more efficient to grow.
So we believe we are positioned in all these different environments really be able to deliver value to these different stakeholders and we continue to read the payment information you do about the evolution of the world until we do believe there are puts and takes of what's going to create constraints and what's also going to loosen that broader pipeline.
I will say the overall sentiment all of the folks that I talk to is still remains very optimistic.
Got it great. Thanks for the color guys.
Nice to meet you again.
Thank you for your question.
And with that we will conclude today's <unk> technologies, Inc. Fiscal year 2022, Q2 earnings call. Thank you for your participation you may now disconnect your line.
Okay.
Okay.