Q2 2023 Procore Technologies Inc Earnings Call
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Good afternoon. Thank.
Thank you for attending the probe.
23, Q2 earnings call. My name is Matt and I'll be your moderator for today's call, although I could be muted during the presentation. Unfortunately call up an opportunity for questions and answers at the end if you'd like to ask a question. Please press star one on your telephone keypad.
I'll have to pass the conference over to our host Matthew beliefs VP of finance.
Alright. Thanks, Good afternoon, everyone welcome to <unk> 2023 second quarter earnings call I'm, Matthew Please VP of finance.
With me today are TUI cord March founder, President and CEO and Howard suit CFO further disclosure of our results can be found in our press release issued today, which is available on the Investor Relations section of our website and our periodic reports filed with the SEC today's call is being recorded and a replay will be available. Following the conclusion of the call comments made on this call may incur.
Forward looking statements regarding our financial results products customer demand operations and macroeconomic and geopolitical conditions.
You should not rely on forward looking statements as predictions of future events. All forward looking statements are subject to risks uncertainties and assumptions and are based on management's current expectations and views as of today August <unk> 2023.
<unk> undertakes no obligation to update any forward looking statements to reflect new information or unanticipated events, except as required by law.
If this call is replayed reviewed after today the information presented during the call may not contain current or accurate information. Therefore, these statements should not be relied upon as representing our views as of any subsequent date. We will also refer to certain non-GAAP financial measures to provide additional information to investors a reconciliation of non-GAAP to GAAP measures is provided in.
Our press release.
With that here's TUI.
Thanks, Matt and thank you everyone for joining us today I am proud of the results that we delivered this quarter. Despite the challenges we continue to see in the demand environment.
Let me start by sharing a few highlights from the quarter.
Q2, we grew revenue, 33% year over year and added over 600, net new customers, reaching a total of over 15700 customers by the end of the quarter.
We continue to make progress on our journey of efficient growth by improving operating leverage in the business, while sustaining revenue growth and.
<unk> was once again ranked number one across 11 construction categories and <unk> 2023 Summer report.
I've had the opportunity to spend a lot of time on the road this past quarter and I want to share something that is top of mind for my travels.
At <unk>, we have a vision to improve the lives of everyone in construction.
The only way to further this vision is to protect the industry's most precious assets its people.
Over the last century, we have made tremendous progress to improve the physical health and safety of workers in construction.
But it's becoming increasingly clear is that we must prioritize mental health alongside physical health.
In the U S. The rate of suicide for men and construction is about four times higher than the general population.
That's why this quarter, we came together with the <unk> a leading construction video channel to officially launch that construction talking a global initiative to improve mental health in construction.
By combining the <unk> reach of over $2 9 million Youtube subscribers with <unk> network of over 2 million users across more than 150 countries. We can bring awareness to mental health in construction and raise money to amplify the efforts of charities working in this space.
I am honored to work alongside construction industry leaders to Destigmatize mental health in the industry and provide resources to workers and organizations in need.
During my travels I had an amazing opportunity to tour the international Thermo nuclear experimental reactor also known as eater.
As an alternative energy and construction enthusiasts. This was a real career highlight for me.
The complexities and the scale of this project cannot be overstated, it's one of the largest construction projects on the planet and it's a collaborative effort between 35 countries and over 700 contract.
I'm incredibly proud that <unk> customer for OBO as one of the prime contractors on this project and its contributing to building this game changing technology.
Examples like Easter that illustrate the sheer complexity of construction are an important reminder, while the industry continues to seek ways to optimize their efficiency and position themselves for continued growth.
And this is only becoming more important given the current demand environment.
You know in the past we've talked about the many puts and takes in construction and how the aggregate construction volume and overall demand is what really matters most.
As the demand environment continues to evolve a tale of two stories has emerged.
While some sectors in construction, we renamed muted other sub sectors are experiencing unprecedented growth.
The dichotomy were seeing in the broader industry is not unlike the behavior, we're seeing within our customer base.
On our last earnings call, we shared a new dynamic that has surfaced in Q1 in which a portion of customers began demonstrating cautiousness and construction volume commitments, while at the very same time, a greater portion expanded their volumes.
In Q2, this dynamic became more pronounced relative to Q1, a greater portion of the industry showed incremental conservatism while at the same time, a greater portion grew their construction volumes with pro forma.
Similar to last quarter.
Both the incremental cautiousness and expansion activity was not concentrated in any particular facet of the business, but rather spanned multiple stakeholders customer sizes and geographies.
And given this is the second quarter of seeing this dynamic it's no longer just a data point, but it's becoming a trend that we're paying close attention to and how it is going to elaborate on this further.
Speaking of strong expansion momentum, we continued to build upon our partnership with the industry with a number of notable customer wins in the quarter.
I'd like to share a few examples starting with P. J hegarty incentives, leading general contractor with over 95 years' experience undertaking projects across the U K and Ireland they.
They manage a diverse portfolio across commercial office healthcare education, industrial and civil with a particular focus on large scale complex projects P.
PJ Hecate initially bought pro court displacing competitive solutions in order to consolidate their field and desktop solutions onto one connected platform and enable easier adoption for their project teams. They.
They are particularly valued our mobile accessibility, which allowed them to have better visibility into what was happening on site.
They had previously been using <unk> for their data center projects, but expanded this quarter and that will be using our platform across all of their projects.
As part of this expansion Theyre, adding pro Corbin and analytics to their product suite to enable collaboration on been models and enhance their analytical capabilities.
During my travels I had the pleasure of meeting the P. J hegari team in person in our offices in Dublin.
This is a great example of the relationships, we continue to foster with our customers around the world.
I'd like to share. Another example.
Guilford County School District is the third largest school district in North Carolina, serving nearly 70000 students across 126 schools.
They originally purchased <unk> for our intuitive collaborative platform, particularly the real time insights analytics and data ownership we provide.
Guilford County recently passed two major public bonds totaling approximately $2 billion to support much needed construction expansion and improvements across $12 5 million square feet of school facilities.
As a result of these bonds Guilford County is partnering with <unk> to build several new schools ultimately expanding their commitment with pro four by four X.
Our expanded partnership will benefit students teachers, the surrounding community and the long term educational goals for all our Greensboro North Carolina.
<unk> contributing to build the schools hospitals and homes that we desperately need and the infrastructure that powers them and bringing them to life.
This is just one great example of why I am proud to support the industry that builds the world around us.
Another Great example, as Palmer, though one of Canada's leading construction companies with nearly 200 active project sites.
They've been involved in building incredible projects across Canada, including the Grand Theater to Quebec, The University of Toronto student residences, and the <unk> Bridge.
Since becoming a FERC core customer in 2019 panel is focused on standardizing on the <unk> platform, reducing the need for multiple other software solutions.
This quarter pomelo increase their investment with broker expanding construction volume on the platform.
As part of this expansion Pomerleau has started this journey, bringing bim models onto <unk> for easier viewing and collaboration.
Pomerleau will also be leveraging the <unk> extracts application as part of their data strategy to more easily digest data and enable flexible reported.
It's been fascinating to see how quickly our customers have evolved from talking about data so talking about how they can leverage AI to get as much value out of that data as possible.
In fact, AI now comes up and most of my customer conversations and we're going to share more on our perspective on this at our upcoming Groundbreaker conference, but I wanted to take a moment to share how I'm thinking about the opportunity for <unk>.
It's becoming abundantly clear that we are on the cusp of a transformational shift degenerative AI.
This powerful technology has the potential to transform how we work how we think how we operate as a business and how we serve our customers.
We have been expanding our AI and machine learning capabilities for years from our acquisition of Nevada intelligence, and just thought AI to reporting enhancements and pro forma analytics to new product features like search functionality, some middles automated area takeoff and voice enabled capture.
Now with the advent of large language models, we have yet another tool in our toolbox to unlock the value of the project data and drive greater efficiencies for our customers.
By nature of being built on a single platform generating a massive amount of data <unk> is well positioned to leverage this technology to deliver even greater value to our customers and further our vision of improving the lives of everyone in construction.
To achieve this vision, we must begin thinking of ourselves not just as tech providers or partners, but as trusted co pilots for all of our users the.
The future of our business is to be there for them to guide them to assist them and help them increase their productivity.
I've heard this referred to as customer intimacy, which makes sense. When you think about where conversational AI will mean for our end users.
Connecting users across workflows on our platform has been the key to our success.
Walgreens to provide intelligence to all of the work that is done in <unk> every single day.
We ultimately want our users to instinctively turned to <unk> to help them do their jobs.
Generative AI is one of the tools that will enable us to do this allowing us to create solutions that are not just reactive but proactive <unk>.
Solutions to understand our users' needs even before they do.
Solutions that can adapt learn and improve over time.
We're not just building products. We're building partnerships, we're not just solving problems. So we are anticipating that and we're not just reacting to the industry. We are shaping up.
So to wrap up I want to invite all of you to our 2023 Investor day, which will be held alongside our annual user conference Groundbreaker on September 19th and 20th in Chicago. This.
This is shaping up to be our largest groundbreaking effort with thousands of construction leaders from dozens of countries expected to join us.
We planned a jam packed couple of days, including over 80 breakout sessions and Expo Hall showcasing the latest advancements in construction technology and an exciting lineup of keynote speakers, including where now the athletes like Michael Phelps and Laila Ali and the founder and former executive director of Stanford's disruptive technology.
Program Michael steep.
Couldn't be more thrilled to get together with our customers our partners and our shareholders and I hope to see you all there with that let me hand, it over to Howard.
Thanks, Julie and thank you to everyone for joining us today.
We are pleased with the results we delivered against a challenging demand environment.
Today I'll quickly recap our financial results share some color on the quarter and conclude with our outlook, let's jump into our Q2 results.
Total revenue in Q2 was $229 million.
Up 33% year over year and international revenue grew 29% year over year.
Similar to prior quarters, our Q2 international results were impacted by currency headwinds on.
On a year over year basis, FX contributed approximately seven points of headwind to international revenue growth there.
Therefore on a constant currency basis international revenue grew 36% year over year.
Our non-GAAP operating loss was $3 million.
Representing an operating margin of negative 1%.
And our key backlog metrics, specifically current RPI in current deferred revenue grew 33% and 32% year over year, respectively.
I'd like to take a step back and share some additional color on our Q2 performance.
As Jimmy mentioned the dichotomy in customer behavior, we saw in Q1 became more pronounced in Q2.
This quarter, we saw a greater share of customers demonstrates strong expansion activity both in the form of additional construction volume as well as the addition of new products.
This expansion momentum was well rounded across multiple facets of the business.
And we believe is a positive reflection of the continued optimism within cohorts of the construction industry.
Conversely, we also saw an increase in customers demonstrating cautiousness in construction volume commitments, which we continue to believe reflects a heightened sense of conservatism with in other cohorts of the industry.
This has translated to longer sales cycles and smaller initial deal sizes, while we managed to be resilient in Q2 through these headwinds should this cautious sentiment persists and may further impact us in future quarters.
And similar to the expansion activity. We saw this cautiousness was not concentrated in any particular part of the business, but rather spans multiple stakeholders customer sizes and geographies.
The elevated expansion and cautiousness as compared to historical norms, and partially offsetting impacts and therefore isn't obvious when reviewing our financial results.
Nonetheless, it represents an unusual occurrence that has persisted and that we wanted to share to help illustrate why the current demand environment remains dynamic and challenging.
Moving further down the P&L given this is our second quarter, a stronger margin performance I want to share some context on how we view our margin trajectory as a whole.
At last year's Investor Day, we provided a framework of approximately 350 basis points on average of non-GAAP operating margin expansion per year with our current revenue growth rate.
We continue to believe this is the right balance of improving our margin profile sustaining top line growth and allowing the flexibility to react to our business landscape.
This year, we set a plan for 2023 that included meaningful margin expansion incremental to this framework.
We recognize the need for our margin profile to catch up relative to our revenue scale and set a plan to accelerate that path of improvement without compromising our business needs.
Additionally, you have heard us referred to efficient growth previously.
Internally leaders and teams have leaned into this concept evaluating every expense and investment opportunity to identify ways to improve operational efficiency and scale the business.
This has resulted in an accumulation of smaller savings across multiple areas of the business that has allowed us to meaningfully outperform our margin expectations over the past two quarters, while giving us the flexibility to continue investing in future growth opportunities.
Ultimately the combination of these dynamics as translate it's a faster margin expansion this year and investors should not expect the same magnitude of margin expansion in future years.
Going forward, we continue to believe the framework we provided at last year's Investor Day is what investors should expect.
At our upcoming Investor day, we plan to share more about our philosophical approach to managing our financial profile at various revenue trajectories.
With that let me move on to our outlook.
We continue to operate in a challenging demand environment as a reminder, our guidance philosophy takes into account this uncertainty and factors in the potential for incremental weakness in the market.
We have taken a similar approach over the last several quarters to set guidance at a level. We have very high conviction, we can deliver on in almost any environment.
Additionally, when reviewing our future results investors should note that the second half of 2022 serves as a challenging compare period as we noted on our Q3 earnings call last year, our backlog metrics benefited from large deal activity that was anticipated to close in Q4 of 2022, but instead closed in Q3 of 2020.
Two.
As a result current ARPA in Q3 of 2022 accelerated to 38% growth year over year on an organic basis, approximately four points higher than any other quarters in 2022.
With that here's our guidance for Q3 and full year 2023.
For the third quarter of 2023, we expect revenue between $232 million and $234 million.
Representing year over year growth between 24% and 26%.
Q3, non-GAAP operating margin is expected to be between negative, 6% and negative 5%.
For the full year fiscal 2023, we expect revenue between $921 million and $924 million.
Representing total year over year growth of 28%, which is an increase of $12 million from our previous full year guide.
non-GAAP operating margin for the year is expected to be between negative four 5% and negative 4%.
Which represents an improvement of 150 basis points from our previously issued guidance last quarter and implies year over year margin expansion of 600 basis points.
And finally, although we do not guide free cash flow you may recall that we provided a framework at last year's Investor day that free cash flow margin should expand in line or slightly faster than non-GAAP operating margin.
With our updated guidance this quarter I am pleased to share that we are on track to reach positive and sustainable free cash flow in 2023.
We expect this to be the first of many years of generating free cash flow as we continue our pursuit of efficient growth.
Looking ahead, we remain focused on delivering growth at scale in a disciplined manner, which allows us to both invest in extending our market leadership as well as drive operating leverage ultimately improving free cash flow per share.
Before I wrap up I'd like to build on <unk> comments and invite you all to join US at our 2023 Investor day, taking place on September 20th in conjunction with groundbreaking Chicago.
Reach out to our Investor Relations team, if you would like to attend.
I'd like to close by thanking our customers partners employees shareholders and the industry as well as the communities we serve for giving US this opportunity with that let's turn it over to the operator for Q&A.
If you would like to ask a question. Please dial star followed by one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by two again to ask a question press Star one as a reminder, if youre using a speakerphone. Please remember to pick up your handset before asking your question, we will pause briefly as questions here already.
Sure.
The first question is from the line of D. J Hynes with Canaccord. Your line is now open.
Hey, guys. Thanks for taking the question. So I wanted to follow up on the dynamic that you talked about with some pockets of some conservatism some pockets of faster expansion. It wasn't totally clear to me if that's a net positive or net negative in terms of growth for program its hard to discern in your numbers and then maybe.
The second part of that question that I've been asked a couple of times from investors is just with the customers that are opting for smaller commitments.
If they were to exceed those commitments.
Remind us how the business model works like.
How common is that and how do you guys are there overcharges or how do you handle that.
Yeah. Thanks T. J. This is Howard so the first thing is in terms of the net impact the net impact is actually positive. So we're seeing greater amounts of expansion versus downgrades and thats why its not apparent in our financial results.
The dichotomy has continued to get more pronounced but the net impact is positive.
In terms of the lower volume commits one.
One of the things that we do when customers exceed those volume commence as we actually they actually have to pay a higher basis point typically when they exceed the volume commits that they have.
And it's an incentive for customers typically to commit to higher volume upfront and so as they do that then they have to pay higher basis points and we typically so if we don't see a ton of that and so we typically get more volume commits upfront.
Yes that makes sense and then how would I want to ask you on margins.
You did a good job laying out that this year was kind of a catch up year, they've obviously been really strong in the first half guide.
Guidance seems consistent with your under promise over deliver mantra, but are there any kind of notable planned investments in the back half of the year that would drive margins materially lower than what we've seen in the first half.
There really isn't a keep in mind that our margin guide, it's something that we believe leaves us enough room to continue to make investments as those opportunities of ryzen as we evaluate our environment and what's available to us towards the back part of the year.
If those investments and that flexibility and we don't see a great opportunity to do that there could be potential upside to that margin profile.
Yes, it makes sense okay. Thank you guys for the color.
Thanks C J.
Thank you for your question.
The next question is from the line of second Kelly with Barclays. Your line is now open.
Okay, Great Hey, guys. Thanks for taking my questions here.
Howard maybe maybe for you just zooming out a little bit from the quarter. I was wondering if you could just talk a little bit about the international business right now clearly a lot of investment there for the future I think we have reviewed that at last year's analyst day, how do you sort of think about that business growing and eventually contributing to.
This operating leverage and an even bigger way.
Yes. Thanks.
So we continue to remain focused on that investment on the international side and it is it is something that we view as growth investments.
Remember that our framework that we have provided on an ongoing basis of that 350 basis points average expansion that actually does not contemplate any additional upside that we would see from the international investments and the leverage there and so that's how I'm thinking about.
The components of our margin profile going forward relative to international we still remain focused on that investment, particularly in the back part of this year, we still expect improvements to come about in the international business towards the back part of this year, we will provide an update later on in the year.
Got it got it very clear to me maybe for my follow up for you.
Realize it's still very early but any early observations from premier payments product here in beta testing I mean, just high level anything just in terms of customer preferences or comments on pricing anything you want to say about payments.
Second I love talking about payments I'm talking about a product so.
You know what I would say is we have learned a lot.
We are partnering very very close with the industry to deliver the solution.
And I am.
Constantly gratified by the enthusiasm that I see in the market and the customers that I'm talking to you about us solving this problem of getting people paid faster.
So.
I would encourage you all to come to groundbreaking.
Groundbreaking Investor day, because you made learned a little bit more at that at that moment.
Yeah.
Got it looking forward to it thanks guys.
Thank you.
Thank you for your question.
The next question is from the line of Adam Borg with Stifel. Your line is now open.
Yeah.
Great and thanks, so much for taking the question maybe just for you to in the past you've talked a little bit about.
Adopting more of a product led growth strategy I was just curious kind of where are we with it and in terms of better refining product and packaging to serve the low end of the market.
Yeah, well so products like growth is.
It's definitely not an event, it's a journey right and so this has been something we've been working on for quite some time, but if I was to characterize where we are in the process I would say we're still in early days.
We talked a little bit about PCM in the past things like PCM. Our connected strategy is going to help support expanding our customer base across our collaborators.
As that becomes more prevalent and adopted so.
Early innings, yet but at journeys.
Add on a little bit there.
Remember to not think about <unk>, specifically for the lower end of the market. It is a broader.
Broader strategy around how we go to market across the board.
Two we mentioned, including things like PCI. So just keep that in mind in terms of when we talk about <unk> and it is very early innings, Adam I'm going to throw on top of this.
We know so much about our customers and we have so much of their data that we have the opportunity to present them with the next test offering our next best action for them to take and expanding their relationship with <unk> and those are areas that its not dependent upon the size of the customer.
Everybody benefits from learning about how they can use <unk> to run better businesses.
That's super helpful and maybe just as a super fast follow up just on the insurance front again I'm sure we'll hear more ground break, but just on poker with advisors again, no. It's super early but any interesting customer feedback or any initial learnings there youre willing to share. Thanks, so much.
Yes, sure. So still again very early days and I would encourage you to definitely come to Investor day, our friend Paul will be there and he will have a lot to talk about but but yes, I would say stay tuned theres going to be more to come.
I will say that it's it's an area where I think there is a lot of opportunity we are a trusted partner to the industry.
And that trust goes a long way.
Okay.
Great. Thanks again.
Thanks, Adam.
Thank you for your question.
The next question is from the line of Sterling Auty with Moffett Nathanson. Your line is now open.
Okay.
Yeah. Thanks, Hi, guys I appreciate the commentary on the macro but bringing this home to procure specifically can you talk to us a little bit about how you view your current.
<unk> pipeline and your pipeline coverage ratios in light of those dynamics in other words is it gotten stronger is it getting weaker.
Are you doing anything specific to manage that pipeline coverage in light of the trends that you mentioned.
Hey, Sterling. This is Howard here. Thanks for the question. The first the first part of this is that our pipeline generation still remains strong when we talk about the cautiousness that we're seeing in certain pockets of the business. It really has to do with those that pipeline, taking a little bit longer in terms of the deal cycle and the smaller.
In terms of what we're doing in terms of internally, our investments and where we focus that is something that I think we continuously do in terms of managing the business and making adjustments and we're certainly evaluating those those options each and every single quarter, but that's what I would say is how things are showing up from pipeline down to what we're seeing in terms of the cautiousness.
Got it thank you guys.
Yes, Thanks Charlie.
Yeah.
Thank you for your question.
Next question is from the line of Brent Thill with Jefferies. Your line is now open.
Hi, <unk> Hi, Howard this is <unk> on for Brent. So thank you again for taking my question.
I wanted to add sure Juan.
Alright.
On the expansion activity that you saw this quarter.
One of the comments you made was it's not just volume based expansion, but it's also.
Adoption of additional products could you just give us some insight into our <unk>.
You're working with the go to market team to incentivize them to sell of additional products and then what additional products have been adopted.
Great question left.
The good news is that our products are in demand from our customers. Great example is that we will.
Folks that are coming onboard and thereby project management theyre quickly seeing the need for <unk> to help them manage their financials and I think that's been one of the reasons why we've been successful in and really what sets US apart is the fact that project management and financials are disjointed separate pieces of software.
We acknowledge the integration that requires required between project management financial management on our platform. So it's kind of a natural progression and then it really depends on the type of customers owners are going to purchase different.
Products in Gcs in the beginning and then specialty contractors are going to are going to choose more workforce management.
Ben tools that they need for the field. So it really depends on the person that we're talking to as to how they progressed in purchasing our different products.
Yes from an incentive standpoint, we don't have anything thats overly specific or direct in terms of product incentives. At this point. There is a lot of opportunity to continue to cross sell as most of our expansion is still from a volume for volume perspective.
Got it that's helpful. And then just one quick one Howard if I may on the gross retention side.
Could you just.
Elaborate but was there anything that led to the moderation to 94% or any additional color you could share there. Thank you.
Sure the 94%.
Likely there was some of the cautiousness that made its way into that 94% gross retention.
Keep in mind that that 94% is still within our historical range of 94%, 95% and so we still feel good about that gross retention number.
Thank you for your question.
Next question is from the line of Matt Broome with Mizuho. Your line is now open.
Alright, thanks, very much tightly and congrats on another strong and consistent quarter.
I guess it sounds the increased polarization of customer behavior, I, just be interested to understand a little bit more about.
What's really causing that behavior and did those trends sort of become more pronounced as the quarter progressed, and indeed sort of carry on into into July .
Yeah.
Yes.
So we mentioned this earlier, but I'll just say it again, which is I wish I could tell you that we have data that points to one particular area. One segment, one Geo one stakeholder where this was this was happening more than others.
It was generalized across the entire portfolio, which is a little.
A little bit.
Given gives us a little bit more interest in looking deeper into this.
But it's really interesting if you were going to ask my personal opinion that what.
What I think is happening is if I look over the last few quarters.
And forget about construction, but anybody when you read the news things Havent gotten more rosy things seem to continue to getting a little bit more scary about the overall macro environment. So I think sentiment goes a long way in that.
But also there is a lot of optimism because you hear about the infrastructure Bill as you hear about all these big Mega projects coming online you hear about data centers you hear about all the manufacturing. So there's this kind of world where there is things to be very optimistic about and then things that concern you and it's really interesting I was talking to a customer this quarter and he said to me.
We are increasingly optimistic that we may dodged, a bullet right about the economy. He goes but we're increasingly worried that we may not be right in that optimism.
That to me is like it shows how you can hold two thoughts in your head that are counter to each other and actually articulate that which I think illustrates it well.
Alright Thats helpful.
And then I guess just in terms of the incremental cautiousness from some of your customers in those volume commitments are there any sort of value signs that this is sort of ultimately translating into lower usage.
What is the effect on users there if any.
Yes, no. So we do not believe there's any correlation at all.
We track usage very closely.
And there has been no in fact usage is on the increase is not on the decrease.
Alright.
Okay. Thanks, so much.
Thanks, Matt Thank you.
Thank you for your question.
Next question is from the line of Josh Tilton with Wolfe Research. Your line is now open.
Hey, guys. Thanks for thanks for taking my questions I kind of want to go back to that last one actually and maybe go back to some of these customer conversations that you're having I get that.
There is no like data points or trends in the customers, who are spending more of our customers who are spending less but I guess when you go out and talk to customers who are choosing to expand like what exactly is it that they are pointing to that's giving them the confidence and spending more and kind of how does that compare to what you're hearing from those customers who are spending less.
Yes.
Or do they pointing to and being like this is why we are spending less as it is the obvious macro was it more than that but maybe go back to some of those conversations.
Yes. So I can just tell you my anecdotal stories of the conversations that I've been having and by the way as I mentioned I've been on the road a lot. So a lot of these conversations were deep in person conversations and not just quick phone calls.
What I found in some cases, where these businesses are running more volume because they were newer to <unk>, but they may have only been running their datacenter business with us, but not the rest of their business and <unk>. They had been awarded a large project or two that they hadn't anticipated in that lead them to want to increase their <unk>.
<unk>.
Other pieces is that the customers will start off with project management as I mentioned earlier, there is an opportunity for us to expand those accounts with the people that are.
Betting on the future.
Around things like quality and safety around things like financials around things like invoice management.
And so I think there is on that side the optimism side that's that's.
That's kind of how we see it and by the way I would say I have a biased sample, though to be honest with you Josh I talked to our biggest and best customers.
And so I don't want to over generalize here, but.
But clearly with 15700 plus customers.
Youre going to get all.
All ends of the spectrum in terms of optimism.
I have not spoken to many customers who are pessimistic.
But so I can't really speak to that but obviously in the numbers there is southern power.
Yes, Josh on the on the downgrade side of things I think we have to come back to really it's about the sentiment in those customers and what they're feeling in terms of what they're seeing for themselves and so.
It may not be necessarily because their backlogs arent, there or anything like that it's purely about the sentiment that they are feeling and they decided to downgrade keep in mind, when they downgrade and if they do over achieve or overviews on the volume they do have to pay a higher basis point at that point, but.
But the good news is when you look at that in relation to our gross retention it still remains relatively stable.
Totally totally makes sense and I guess, just my follow up sticking.
Sticking with this topic.
It sounds like it was an offset in the quarter, but a net positive.
But I think in the prepared remarks you also.
Appropriately warned us that it just continues it could be a negative.
In the future. So I guess outside of the obvious answer which is you need more cautious customers then expanding customers.
Like what would what from your perspective would have to change for this to kind of flip from being a net positive.
To go into being a net negative.
What would have to change let me answer in a couple of different ways first in terms of that cautiousness that we're calling out from my seat when I look at the proportion of customers that are expanding that are renewing or that are downgrading when.
When you see a smaller proportion of customers that are renewing and go either going expansion or downgrading that profile in and of itself actually causes the predictability of the business to be a little bit less less accurate and so from that standpoint, or I said I have to prudently make sure that we call out that cautiousness.
And so what will we have to see for that cautiousness too to materialize, we would have to see the sentiment on the downside really start to really start to get to a place that that outpaces the expansion side, but.
But just the profile of what we're seeing really causes that predictability to be a little bit less accurate in the volatility potential to increase.
Super helpful guys. Thank you so much.
Thanks, Josh.
Thank you for your question.
The next question is from the line of Brent <unk> with Piper Sandler Your line is now open.
Thank you good afternoon.
<unk>, maybe starting with you.
Volume of net new customers on a year over year basis had declined for two quarters, which totally makes sense given the challenges out there just was a little surprised in net new ads that were strong in the quarter of 615 back to year over year growth there.
A little stronger than seasonally we've seen in the last couple of years. So what's driving the net ads as they are approved file either specialty or owner or.
Our unique cohort.
Driving some of that just wanted to get a little more color on the net new customers that looks a little healthier than I would've thought given the environment. Thanks.
So Brendan I would not over index on customer count. The thing is because we have so much such a large SMB business.
That really creates a lot of variability in those numbers.
So we don't really see it as being something that we track really closely it's much more about the construction volume our customers bring on to the <unk>.
And that remains strong, yes, I'll just jump in.
We're happy with the customer adds historically, we've been in that 5% to 600 range in terms of the quarter on quarter increase and Thats still remains consistent in Q2 to <unk> point, we're really managing to the dollars that those customers bring in versus the actual health of the customer and so we feel good about the customer count.
Great and then Howard one quick follow up on the renewal discussions in and dollar volumes Youre seeing an expansion versus contractions I think we heard from avid exchange earlier today, they had a call out around a commercial building being a sub segment for them, where they're seeing softness as you.
Think about the.
Yes.
Contracts that are up for.
Our renewals that are screened skiing is it tied to commercial building.
Erosion is it hard to predict just trying to get a little more color on those contracts that are downgrading is it tied to commercial office building, where we're clearly seeing weakness.
So Bryan I'm going to jump in over Howard and Howard can jump in on this one but.
The answer is simply no that's not that doesn't come up in the conversations.
I think what Howard said, if somebody that I've been trying to say for a long time, which is.
Our success is driven primarily by by sentiment.
And so it's more about how did these executives feel about the opportunity ahead.
Then it is about any particular segment that's on the downturn as we mentioned before.
Say it again that the.
Our customers run these diversified portfolios and they don't.
The ones that were in heavy into commercial office buildings, two years ago. They have shifted their portfolio mix dramatically away from that two datacenters in manufacturing and warehousing in areas, where they can actually.
See some.
So no it's really it's not in that remember, they're 70 sub segments in the construction industry. So.
Thats, just one and it's in the single digit percentage of the overall industry.
Sorry Howard.
Got it.
Heard everything too.
Sure.
70 sub segments, certainly helps explain maybe the diversification that some don't appreciate really helpful color there. Thanks.
Sure. Thank you. Thank you.
Yes.
Thank you for your question.
The next question is from the line of Nick Altmann with Deutsche Bank. Your line is now open.
Awesome. Thanks, guys.
Just with some of the pockets of weakness on the volume commitments and I'm wondering how you guys are sort of combat that from a go to market perspective, I think you had mentioned earlier.
That financials.
As an area or a SKU that you guys can be gained traction with but I guess, what is sort of the remedy or how are you guys sort of combat some of the weakness in volume commitment is it.
Incentives in place to drive expansion through new Skus is it.
Shifting focus to other product categories or areas, just any sort of color you can get around sort of how you plan on combating some of that.
And volume commitments I think it would be really helpful.
Yes, sure Nick Thanks, So similar to what I mentioned before a regular part of what we do in evaluating and determining where we put our resources on a quarter on quarter basis takes these things into account.
And not necessarily specifically around products, although that could be part of the equation. We will look at things like where do we want to double down on things like driving pipeline or specific geos are specific teams and we continuously make those adjustments as we execute throughout the quarter and throughout the year and those are things that are a normal part of the decisions that we may.
And any particular quarter. So those adjustments are definitely happening as we move throughout throughout the year.
Great and then just.
A quick follow up on the margins, it's great to see that the outlook on the margins in some of the comments around free cash flow.
Just given your cleaning up the expense line a bit can you maybe just talk about the areas, where you're maybe adding the incremental dollar.
Where you guys want to sort of double down on the expense line and maybe on the flip side of the equation.
So what are the areas, you're maybe cleaning up a little bit more.
If you could talk about product categories International et cetera, I think that'd be interesting. Thanks.
Yes.
The margin improvement really was was planned in terms of being above that that framework that we've been given about the 350 basis points on average and it really has come from a diverse and wide range of areas from go to market R&D to G&A. So that's the <unk>.
First thing.
Second thing is we continue to invest in the business largely in the front office because of the demands that we see that we're reacting to there and so we still invest in the go to market, we're still investing in the product side keep in mind in terms of the headcount investments in the capacity investments we've come into fiscal <unk>.
<unk> thousand three and we've said before that we're going to add less resources in fiscal 'twenty three than we have in fiscal 'twenty two.
And that has certainly contributed also to the margin expansion that we saw.
We are seeing this year and we'll continue to see this year.
Yeah.
Thanks, guys.
Thanks, Nick.
Thank you for your question.
The next question is from the line of Doom Becker with William Blair. Your line is now open.
Hey, guys, it's Stefan for gallon and thanks for taking our question I wanted to touch on the evolution of the business outside of the macro dynamics. So now let there.
More of a platform approach versus a point solution tool. When you guys started wondering how we should think about dealing in CE.
And your durable growth framework, but maybe now that the equation ships model a balanced mix of both product and volume to support business efficiency versus solely relying on the volume growth that Don.
Historically.
Understandably it still has a lot of white space in itself.
Yes.
Thank you.
So <unk> has been a multi product platform.
Platform for since 2017.
So I wouldn't characterize us as having just shifted to being more of a platform play.
What we have done as we've matured the products that we have had that accompany our project management.
Kind of flagship products.
And so that's giving us the opportunity.
Now provide obviously additional value by providing more products.
And by virtue of the fact that we're helping our customers run their entire business. We think we can grab more of their volume because it doesn't make a ton of sense to run your business on a platform that not all of your projects are on.
Okay.
Alright, that's it.
And then just quickly if I can ask a.
Follow up I wanted to touch on pro core construction construction network.
And how this can drive efficiency through the sales process by enabling more sell through the optionality or that collaborator conversion efforts to open up new scopes of work to the different stakeholders. How are you guys thinking about that.
Yes, so the <unk>.
Way, we think about PCN as our mission is to connect everybody and construction on our global platform and PCM is just one tool that we use to acknowledge that the collaborators that are on our platform every single day.
Are entitled to an experience that will.
Get them and keep them engaged on our platform. So it isn't it is an enabler, but it's one just one of many different ways that we are.
Yes.
Increasing our customer count just by virtue of the fact that we have more people on our platform that are actually engaged in and using our products.
So that's just one example, but we have lots of different examples of how we provide value and get people interested in it helps the sales process and all of that.
On top of that faith, specifically for example in PCM.
Our intent is to increase the volume of customers participation in that PCN and also engagement and with that participation and engagement comes an ability an increased opportunity to meet the customer at the point of need and when we have that opportunity. It starts to then play into the efficiencies that we.
Further up the chain in terms of the pipeline and how we generate that pipeline and how we ultimately close that pipeline into a $1.
Alright awesome. Thanks for the color. Thank you guys.
Thank you.
Thank you for your question.
The next question is from the line of Kash Rangan with Goldman Sachs. Your line is now open.
Thank you very much.
<unk> to an hour.
But a slightly different take.
I think for this macro recovery and we're not getting what we want but at the same time in the two years since <unk> been public <unk> been putting up the numbers in your growth rate in fact, that's accelerated from when you went public in the first quarter, you're going public was 27% now.
The 32% your margins up better free cash flow is better number of customers added just keeps growing I think it's about 15% 17% growth in your customer base the revenue per customers growing in yield is getting better so.
What are we waiting for.
What if we don't do any I mean, what if we don't get a recovery quote unquote right, but this is a new normal how does it leave the company I mean are you.
Still keeping the same optimism with respect to the Tam the growth opportunity of the company maybe.
Need to set aside a notion of.
Commercial.
Recovery, because you have enough strength in your end markets.
And your business model seems to be doing nothing, but just performing and outperforming so tell us more about why we're all worried about something we should be should not be worried about.
Well Kash.
Cash good to hear from you and you are now hired under our Investor Relations team have a slip.
That's probably the nicest thing anybody in the rest of it.
So yes so.
The macro demand environment continues to be a challenge.
I'm personally convinced that the overall need for construction is going to be there. It just may shift from one segment to another and that's the beauty of <unk>. So we sort of all.
All sectors.
And that really helps when our customer shift their portfolio. They all have to shift products or anything they just shift their portfolio.
So I may firm believer that the overall demand for construction.
Is going to is going to remain look we've seen the 2009 downturn. We saw COVID-19 downturn. We also saw demand didn't didn't wane dramatically during those time frames and you've got to remember we I.
Like I say this for our friend, Paul, but Paul used to always use the oil tanker analogy, which these things.
Even if it does slow this industry and the way that this works is it's like an oil tanker and it doesn't speed up fast and it doesn't slow down in the past and it certainly doesn't turn very agile. So we believe that over time, we will be more of a steady Eddie when it comes to writing the ups and downs of the overall macro economy, just because of that name.
<unk> of construction, yes.
Just to add on a little bit more of their cash.
A doubling down on the oil tanker analogy.
You won't see any particular period.
We will have an outsized outsized uptick or downtick in the growth because of that dynamic.
And we've always talked about our steady state growth rate in that high <unk> or high <unk> to low <unk> range and Thats still is consistent and we still maintain that perspective going forward.
Got it thanks, so much.
I appreciate the nice words, you would make a great analyst Stuart in case it does that.
The proceeds lineup.
Right back Gotcha. Thanks, Thank you guys.
Mike.
Thank you for your question.
The next question is from the line of Jason <unk> with Keybanc. Your line is now open.
Great.
Sure.
I'm just kind of gains in perspective here.
It sounds like your customers are expanding more and they are decreasing.
This is kind of an extreme comparison, but just trying to gain perspective. If we go back to 2020, there were really only one or two quarters, where you saw the sequential therapy.
Minimum wage.
To what extent at that time.
<unk>.
On the down.
<unk> sizing exceed the ones that work.
Thanks.
Yes, Jason so I want to make sure that.
Folks understand how how severe the situation was in 2020, when you think about 2020 jobs sites, where literally empty.
And so that is a very different situation than we are in right now because backlogs are still their construction is still going on and there is still a business out there being being done and so I wouldn't necessarily look at that as a fair compare because literally job sites with MTN that was thats, the only scenario, where you would see.
Something that severe happen.
Okay, Yeah, no that's fair.
And then just competitively given these changing market dynamics wondering if you've seen any changes to the competitive landscape competitive tactics.
Hi, Jason.
No no changes whatsoever really as far as we're concerned.
Again.
It's always shocking to me, but.
The vast majority of the people that we're talking to every day to join the <unk> platform are coming from more analog solutions, Microsoft office, those types of things as opposed to competitors and.
So we don't really look at it that way.
But if anything just to kind of put a bow on it no no changes to report.
Perfect. Thank you.
Yeah.
Thanks, Jason Thank you Jacob.
Thank you for your question.
And the next question is from the line of Mark Schappell with loop capital markets. Your line is now open.
Hi, This is Tim Greaves on for Mark.
One for me is.
Last quarter, you guys noted that cut.
Employee attrition came in lower than anticipated.
Did that trend continue over Q2.
Yes, attrition attrition remains at low levels, and and we're really happy with where we are from a hiring perspective.
Yeah.
And if I could you add another one and expand that.
National side.
Can you provide us the update on these new sales reps that you hired.
If I recall correctly, you mentioned a few quarters ago.
With the changes in the international business and particularly around the Onboarding of new sales reps are these new to old rep fully productive yet or if not where do they stand.
So the way I would characterize it is we are always evolving the kind of maturation of how we.
Enable our sellers.
And we have been working on this not only internationally, but domestically as well.
And so I would say.
Some folks are ramped the newer ones are not.
And it's a never ending.
Process of enabling and ramping.
But I would say the process is getting better, but when we think about international kind of as a entity. We really don't see to think we're going to see significant changes that we would even talk about until later this year.
I hope that helps thank you.
Yes, yes. Thank you. Thank you.
Thank you for your question.
There are no additional questions waiting at this time, so that concludes the conference call. Thank you for your participation you may now disconnect your lines.
There are no additional questions waiting at this time, so that concludes the conference call. Thank you for your participation you may now disconnect your lines.