Q3 2023 Procore Technologies Inc Earnings Call

November 1, 2023

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Hello, everyone.

Unknown Executive: Hello everyone. Thank you. I will be your moderator today.

Thank you.

I'll be your moderator today.

All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.

Unknown Executive: All lines will be muted during the presentation portion of the call. What's an opportunity for questions and answers at the end. If you would like to ask a question, press star one. Or your telephone keypad.

If you would like to ask a question press star one on your telephone keypad.

I would now like to pass the conference over to our host Matthew Please with progress.

Unknown Executive: I would not like to pass a conference over to our host, Matthew Puljiz with Procore. Please proceed. Thanks.

Please proceed.

Thanks, Good afternoon, and welcome to <unk> 2023 third quarter earnings call I am asking for <unk> VP of finance with me today are two record March founder President and CEO Howard <unk>.

Matthew Puljiz: Good afternoon and welcome to Procore's 2023 third quarter earnings call. I'm Matthew Puljiz, VP of Finance.

Matthew Puljiz: With me today are to record much founder, president, CEO, and Howard Fu, CFO. Further disclosure of our results can be found in our press release issue today, which is available on the investor relations section of our website. And our periodic reports filed with the SEC today's calls being recorded and a replay will be available following the conclusion of the call. Common span on this call may include forward looking statements regarding our financial results, products, customer demand, operations, and macro economic and geopolitical conditions.

So.

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 include 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 use.

Matthew Puljiz: You should not rely on forward looking statements as predictions of future events. All forward looking statements are subject to risks and certain needs and assumptions and are based on management's current expectations and use as of today November 1, 2023. Procore undertakes no obligation to update any forward looking statements to reflect new information or unanticipated events except is required by law. If this call is replayed or viewed after today, the information presented during the call may not contain current or active information.

As of today November one 2023.

<unk> undertakes no obligation to update any forward looking statements to reflect new information or unanticipated events.

As required by law.

This call is replayed or reviewed after today the information presented during the call may not contain current or accurate information and 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.

Matthew Puljiz: Therefore, these statements should not be relied upon as representing our views as of any subsequent date. We'll also refer to certain non-gap financial measures to provide additional information to investors. A reconciliation of non-gap to gap measures is provided in our press release. And with that, let me handed it to you. Thanks, Matt. And thank you everyone for joining us today. This quarter we continue to expand the depth and breadth of our platform, as well as make great progress on our efficient growth journey.

And with that let me hand, it to TUI, Thanks, Matt and thank you everyone for joining us today.

This quarter, we continued to expand the depth and breadth of our platform as well as making great progress on our efficient growth journey.

Matthew Puljiz: While Q3 proved to be a challenging quarter amidst an increasingly difficult demand environment, I'd like to start by sharing a few highlights from the quarter. In Q3, we grew revenue 33%, we were a year and surpassed 16,000 customers by the end of the quarter. We made improvements on our efficiency profile, returning to non-gap operating profitability this quarter. And our partnership of the industry continues to be recognized. We are ranked number four on the software reports.

Q3 proved to be a challenging quarter amidst an increasingly difficult demand environment I'd like to start by sharing a few highlights from the quarter.

In Q3, we grew revenue, 33% year over year and surpassed 16000 customers by the end of the quarter.

We made improvement on our efficiency profile, returning to non-GAAP operating profitability this quarter and our partnership with the industry continues to be recognized.

Number four on the software reports top 100 software companies 2023, our highest ranking to date. We were awarded the first three of 2023 <unk> Award for the third year in a row and we receive the Stevie Award for most innovative Tech company of the year and the 2023 annual Internet.

Matthew Puljiz: Top 100 software companies in 2023 are highest ranking today. We are rewarded the Schuss 3D at 2023 Tech Care's Award for the third year in a row. And we received the CV award for both innovative tech company in the year in the 2023 annual international business awards. These results reflect our continued focus on innovation, delivery technology that transform the way people build and our partnership with the construction industry.

Actual business awards.

These results reflect our continued focus on innovation delivery technology that transform the way people build and our partnership with the construction industry.

Matthew Puljiz: You know, in September, we hosted our annual user conference, ground rate, where we shared a number of exciting product announcements. I want to highlight a few now starting with pro core connectivity. We are introducing platform level functionality beginning with drawings, which is commonly known as blue prints. All project stakeholders will be able to collaborate on a project and share data with one another, all, while staying within their own accounts. This means that when a general contractor updates the drawings, those updates will automatically be pushed to the specialty contractors account.

In September we hosted our annual user conference ground rate, where we shared a number of exciting product announcements and I want to highlight a few now starting with cohort connect ability.

We're introducing platform level functionality, beginning with drawing which is commonly known as blueprints are project stakeholders will be able to collaborate on a project and share data with one another all while staying within their own accounts.

This means that with the general contractor updates the drawings those updates will automatically be pushed to the specialty contractors account.

Matthew Puljiz: Pro core connectivity is a major milestone in our efforts to deepen the connection across all people, workflows, and data on our platform. It reduces double data entry, thereby driving further agencies, and is only made possible through our connected platform strategy. But the real benefit of better connecting everyone in construction is that the data generated on our platform becomes even more powerful. Data that can power generative AI technologies to help our customers not just resolve issues but to anticipate them.

<unk> ability is a major milestone in our efforts.

Even the connection across all people workflows and data on our platform.

It reduces elevated entry, thereby driving further efficiencies and is only made possible through our connected platform strategy.

But the real benefit of better connecting everyone. In construction is that the data generated on our platform becomes even more powerful.

David that can power generative AI technologies to help our customers not just resolve issues, but to anticipate that.

Last quarter I shared some of our existing AI and machine learning capabilities and why we are well positioned to further leverage this technology now with the introduction of pro forma co pilot will be bringing a truly conversational and predictive experience to the <unk> platform.

Matthew Puljiz: Last quarter, I shared some of our existing AI and machine learning capabilities, and why we were well positioned to further leverage this technology. Now with the introduction of pro core co pilot, we'll be bringing a truly conversational and predictive experience to the pro core platform. Pro core pilot essentially serves as an extension of the project team, automating time-consuming processes, surfacing information in real time, and suggesting next best actions. Construction professionals spend an estimated 35% of their time looking for project data, resolving conflicts, or dealing with mistakes and rework. Innovation like Procore Co-Pilot can greatly reduce these inefficiencies and free at-time for more productive activities, potentially returning many hours per person per week to the industry.

<unk> essentially serves as an extension of the project team automating high consuming processes surfacing information in real time, and suggesting next best actions.

Construction professional spend an estimated 35% of their time looking for project data resolving complex, we're dealing with mistakes and rework.

Innovations like pro forma co pilot can greatly reduces inefficiencies and free up time for more protective activities potentially returning many hours per person per week to the industry.

Hi, groundwork, we also announced the launch of <unk> pay which that was one of the biggest pain points and construction getting paid as we've talked about in the past the real challenges stemmed not necessarily from the movement of money, but from all of the complicated upstream workflows and processes that must come first.

Matthew Puljiz: At ground rate, we also announced the launch of Procore Pay, which tackles one of the biggest pain points in construction, getting paid. As we talk about the past, the real challenges stem not necessarily from the moving of money, but from all of the complicated upstream workflows and processes that must come first. All of these processes exist in the Procore platform today. The beauty of Procore Pay is it essentially automates the last mile of the payments workflow. We can now seamlessly facilitate the payment and any way we process between general contractors and specialty contractors. They're by minimizing complicated paperwork and ultimately giving our customers full transparency into their entire payments flow.

All of these processes exist in the <unk> platform today, the beauty appropriate pay is it essentially automates the last mile of the payments workflow.

We can now seamlessly facilitate the payment and the waiver process between general contractors and specialty contractors, thereby minimizing complicated paperwork and ultimately, giving our customers full transparency into their entire payments flow.

Additionally, we recently announced our acquisition of other a leader and geospatial information that before construction.

Matthew Puljiz: Additionally, we recently announced our acquisition to UNR, a leader in geospatial information mapping for construction. This is a small tucking acquisition that's going to allow us to better support all types of construction on our platform, but in particular, civil and infrastructure projects that are horizontal in nature. These horizontal and infrastructure projects can be backed, so think of a highway that stretches many miles or an airport that covers a wide, expansive land.

This is a small tuck in acquisition, that's going to allow us to better support all types of construction on our platform, but in particular civil and infrastructure projects that are horizontal in nature.

These horizontal infrastructure projects can be fast so think of a highway that stretch as many miles or an airport that covers a wide expansive land. These projects often lack easily identifiable reference points, which can make them incredibly challenging to manage.

Matthew Puljiz: These projects often lack easily identifiable reference points, which can make an incredibly challenging advantage. Every minute spent determining the location of materials, equipment and teams can increase the risk of delays and negatively impact the project's budget and performance. The importance of location intelligence on these massive projects cannot be overstated. Simply put, the UNR acquisition allows us to put construction on a map, adding a new dimension to Procore data in the context of geolocation.

Every minute spent determining the location of materials equipment and teams can increase the risk of delays and negatively impact the project's budget and performance.

Towards that location intelligence on these massive projects cannot be overstated.

Simply put the other acquisition allows us to put construction onto that adding a new dimension appropriate data in the context of Geo locations.

Matthew Puljiz: You know, groundbreaking, I love getting to share some of the latest innovations Procore is bringing to the construction industry, but for me, what's most valuable is getting to connect with so many customers and industry leaders from around the globe. Overall, it is clear that Procore's vision is resonating. Our connected platform is driving value for our customers, especially as they seek ways to find efficiencies and maximize productivity in a dynamic environment. The majority of my conversations with groundbreakers have been possible, yet I recognize that these groundbreakers represent a small sample size of what is typically the industry's most tech-forward and productive businesses.

Robert I love getting to share some of the latest innovations propylene is bringing to the construction industry, but for me. What's most valuable is getting to connect with so many customers and industry leaders from around the globe.

Overall, it is clear that proposition is resonating.

Our connected platform is driving value for our customers, especially as they seek ways to find efficiencies and maximize productivity in a dynamic environment.

The majority of my conversations with graph records have been positive yet I recognize that these ground breakers represent a small sample size what is typically the industry's most tackboard and productive businesses.

On a broader scale. It is clear that the demand environment has become incrementally more challenging <unk>.

Matthew Puljiz: On a broader scale, it is clear that the demand environment has become incrementally more challenging. The construction industry we serve while massive in scale and highly diversified is not immune to broader economic conditions. We have continued to see heightened cautiousness of customers in response to external uncertainty around a potential downturn, which has translated to increase scrutiny and purchasing decisions. How it will expand on this dynamic and how we plan to continue growing while improving our efficiency and this tougher demand environment. While we anticipate these headlines will continue in the near term, my conviction in the long-term opportunity for Procore has not changed.

<unk> industry, we serve while massive scale and highly diversified is not immune to broader economic conditions.

We are continuing to see heightened cautiousness from customers in response to external uncertainty around what a potential downturn, which has translated to increased scrutiny and purchasing decisions.

Howard will expand on this dynamic and how we plan to continue growing while improving our efficiency in this tougher demand environment.

We anticipate these headwinds will continue in the near term my conviction in the long term opportunity for cohort has not changed.

Matthew Puljiz: James. What I do now and think about the opportunity ahead of us a few things remain constant. First, we are serving a massive critical industry that must continue to build the world around us. Second, our customers work across the diverse array of sectors. And third, many of these customers have been operating for decades and have successfully navigated multiple economic cycles. The key word here is cycles. These customers have experienced these cycles and expect the markets to accelerate and decelerate those over time.

When I do Matt and think about the opportunity ahead of US a few things remain constant.

First we are serving a massive critical industry that must continue to build the world around us.

Second our customers work across a diverse array of sectors. So third many of these customers have been operating for decades and have successfully navigated multiple economic cycles.

The keyword here cycles. These customers are experiencing cycles, and expect the markets to accelerate and decelerate overtime.

Matthew Puljiz: Many see times like these as a chance to invest in their businesses so that they are ready to capture the next acceleration. In this way, technology could be a deflationary lever, a further invest in to streamline their operations and do more with less. In fact, I recently spoke to my good friend and our customer, John Cowell, who has been working in the construction industry for over 30 years. He's the COO and half the way Ben Whitty, one of the oldest large general contractors in the U.S. And he shared with me the following, quote, construction is cyclical.

Let me see times like these as a chance to invest in their businesses. So that they are ready to capture the next acceleration.

In this way technology can be a deflationary lever a further investment to streamline their operations and do more with less.

In fact, I recently spoke to buy goods brand and our customer John Carroll.

Who has been working in the construction industry for over 30 years. He's the COO Hathaway's <unk> one of the oldest largest general contractors in the U S. Can you share with me. The following quote construction is cyclical we know the market was dead and we know it will pick back up.

Matthew Puljiz: We know the market was dead and we know it will pick back up. Similar to the Navy SEALs who have two modes, either training or fighting, we are either training or building. And we're obviously not Navy SEALs, but we use a similar mental model. When the markets did, it's actually a great opportunity for training. An opportunity for us to reach tools, add new workflows and technology and train ourselves up so that we're ready to take full advantage of the inevitable upswing, end quote.

Similar to the Navy seals, who are two modes, either training or fighting where either training or building and we're obviously not navy seals, but we use a similar mental model when the market is that it's actually a great opportunity for training and opportunity for us to retool add new workflows and technology and train ourselves up so.

We're ready to take full advantage of the inevitable upswing and growth.

This illustrates how even in the midst of a more tempered demand environment <unk> has multiple levers to sustain our efficient growth trajectory. Thanks to the evolution and expansion of our product portfolio over the past six years.

Matthew Puljiz: This illustrates how even in the midst of a more tempered demand environment, Crowcore has multiple levers to sustain our efficient growth trajectory, thanks to the evolution and expansion of our product portfolio of the past six years.

Matthew Puljiz: So I'd like to share an example of the customer that you would just add, adopting new products. The Cowell board is an ENR top 200 general contractor with a long history of building projects and education, healthcare, manufacturing, science and technology and more. As a long time program customer, they have embraced the program platform as a best and brief solution for their business needs. They previously managed the payments and lead waiver processes manually through banks, credit cards, Excel, as well as another industry point solution.

So I'd like to share. An example of a customer that's doing just that adopting new products metallic Gordon is an anr topped 200 general contracted with a long history of building projects with education, healthcare manufacturing science and technology and more.

As a longtime profile customer they have embraced the appropriate platform as a best in breed solution for their business needs.

They previously manage their payments and lien waiver processes manually through banks credit cards excel as well as another industry point solution.

Matthew Puljiz: They have continually searched for ways to improve and consolidate processes on our platform as they grow their business. A critical piece of this was bringing efficiencies to their payment process, which is why they participated in our beta payments program. And I'm thrilled to share that this quarter, the Gallagherton, added Pro Quart Pay into their existing suite of Pro Quart solutions. Pro Quart Pay ties in with the tools that they already use every day and will help automate and centralize their entire payments process.

We have continuously search for ways to improve and consolidate processes on our platform as they grow their business.

A critical piece of this was bringing efficiency to their payment process.

Which is why they participated in our beta payments program.

And I am thrilled to share that this quarter the gallon Gordon added cohort pay to their existing suite approach <unk> solutions.

<unk> ties in with the tools that they already use every day and will help automate and centralize their entire payments process.

<unk> is a full service general contractor operating internationally and is one of the current European leaders in the photovoltaic utility sector for utility scale solar power.

Matthew Puljiz: Subject is a full service general contractor operating in the international and is one of the current European leaders in the foldable TNT utility sector for utility scale solar power. They've delivered over 500 ground-mounted projects for the capacity of over 7.2 gigawatts. They've seen substantial growth in their business, but they've still been managing their projects manually.

They've delivered over 500 ground mounted projects with a capacity of over seven two gigawatts. They.

<unk> seen substantial growth in their business, but they are still managing their projects manually.

Matthew Puljiz: Subject decided they needed a low-bust project management solution that could provide productivity and efficiency gains as they continued to scale. After evaluating a competitive point solution, Sunatech chose Procore as the best fit for enabling collaboration across both the field and the office, enhancing disability across projects with more than 40 projects running concurrently at any given time, and in the future integrating with their ERQ system.

SEMATECH decided they needed a robust project management solution that can provide productivity and efficiency gains as they continue to scale.

After evaluating the competitive point solution SEMATECH chose <unk> as the best fit for enabling collaboration across both the field and the office enhancing visibility across projects with more than 40 projects running concurrently at any given time and in the future integrating with their ERP system.

Royal electric as a leading specialty contractor for electrical and underground projects throughout the central and Western United States.

Matthew Puljiz: Royal Electric is a leading specialty contractor for electrical and underground projects throughout the Central and Western United States. They previously relied on multiple competitive tools and were in the process of a full tech audit to migrate systems onto a single platform. They recognized the value of the Procore platform and providing standardization and efficiency across their operations. They selected Procore as their single source of truth to improve communications between the field and the office teams, provide greater visibility across projects and drive efficiencies across functions, including labor scheduling and management. Their goal is to leverage Procore for the vast majority of their projects, beginning with a widely visible improvement project of the Hollister Municipal Airport in California.

Matthew Puljiz: The partnership we are building with Royal Electric will undoubtedly help them set themselves apart as an industry leader.

Previously relied on multiple competitive tools.

And we're in the process of a full tax audit to migrate systems onto a single platform.

They recognize the value of the appropriate platform in providing standardization and efficiency across their operations.

We selected <unk> as their single source of truth.

To improve communications between the field and the office teams provide greater visibility across projects and drive efficiencies across functions, including labor scheduling and management.

Their goal is to leverage <unk> for the vast majority of their projects beginning with a widely visible improvement project of the Hollister Municipal airport in California.

The partnership we're building with Royal Electric will undoubtedly help them set themselves apart as an industry leader.

So in summary, this quarter, we continue to innovate and bolster our platform capabilities, while meaningfully improving our operating leverage looking ahead, my excitement and conviction in the long term opportunity for <unk> and our ability to execute on that opportunity has not wavered and we continue to focus on delivering value to our customers.

Matthew Puljiz: So in summary, this quarter we continue to innovate and bolster our platform capabilities while meaningfully improving our operating leverage. Looking ahead, my excitement and conviction in the long term opportunities to Procore and our ability to execute on that opportunity has not wavered. We continue to focus on delivering value to our customers while possibly balancing growth and profitability. Navigating the increasing pressures of the demand environment with this one will ensure that we optimize for the best outcomes in the near and the long term.

While thoughtfully balancing growth and profitability.

Navigating the increasing pressures of the demand environment with discipline will ensure that we optimize for the best outcomes in the near and the long term.

Heather: With that, I'm going to hand it over to Heather. Thanks to me, and thank you to everyone for joining us today. Today, I'll recap our Q3 financial results, share some color on the quarter and conclude with our outlook. So let's jump in. Total revenue in Q3 was $248 million, of 33% year over year. And international revenue grew 30% year over year. Similar to prior quarters, our Q3 international results were impacted by currency headings.

With that I'm going to hand, it over to Alan.

Thanks, Julie and thank you to everyone for joining us today.

Today, I'll recap, our Q3 financial results share some color on the quarter and conclude with our outlook. So let's jump in.

Total revenue in Q3 was $248 million.

Of 33% year over year and international revenue grew 30% year over year.

Similar to prior quarters, our Q3 international results were impacted by currency headwinds.

Heather: On a year over year basis, effects contributed approximately five points of headwind to international revenue growth. Therefore, on a constant currency basis, international revenue group, 35% year over year. Q3 revenue benefited from approximately $2.5 million in one time over teams from customers that materially exceeded their volume credits. While this dynamic can occur from time to time, it's rare to have this level of materiality in a single quarter. Therefore, we do not expect this level of materiality to continue and consider this a one-off anomaly unique to Q3.

On a year over year basis, FX contributed approximately five points of headwind to international revenue growth.

Therefore on a constant currency basis international revenue grew by 5% year over year.

Q3 revenue benefited from approximately $2 5 million in one time overdue payments from customers that materially exceeded their volume commitments. While this dynamic can occur from time to time.

Rare to have this level of materiality and any single quarter.

Therefore, we do not expect this level of materiality to continue and consider this a one off anomaly unique to Q3.

Q3, non-GAAP operating income was $8 million.

Heather: Q3 non-gap operating income was $8 million, representing an operating margin of three percent. And our key backlog metrics specifically current RPO and current deferred revenue grew 27% and 29% year over year respectively. Now, let me take a step back and share some additional color on our Q3 performance. First, I'd like to provide an update on the dichotomy and customer behavior at renewal that we observed over the last two quarters. In our last earnings call, we described how this dichotomy became more pronounced from Q1 to Q2. We're providing greater share of customers demonstrated strong expansion activities. While at the same time, the greater share of customers also demonstrated cautiousness in construction volume commitments.

Representing an operating margin of 3%.

And our key backlog metrics, specifically current RPI in current deferred revenue.

Grew 27% and 29% year over year, respectively.

Now, let me take a step back and share some additional color on our Q3 performance.

First I'd like to provide an update on the dichotomy in customer behavior and renewals that we observed over the last two quarters.

In our last earnings call. We described how this dichotomy became more pronounced from Q1 to Q2.

Whereby a greater share of customers demonstrated strong expansion activity.

While at the same time, a greater share of customers also demonstrated cautiousness and construction volume commitments.

Heather: In Q3, this dichotomy stabilized. [inaudible] While the demand environment is outside of our control, we remain focused on what is within our control, which brings me to our efficiency profile. At our recent investor day, we shared a financial framework for how we plan to manage the business through various economic conditions over the next few years. Specifically, we noted that a potential driver that could move us to the left of that framework is further deterioration in our demand environment.

In Q3, this dichotomy stabilized or improved slightly as compared to each one.

Though still remain elevated relative to historical norms.

Specifically, we saw an increase in the proportion of customers renewing flat for the quarter.

Signaling greater stability in our installed base, particularly driven by large enterprise customers.

Moving to our backlog metrics I want to acknowledge the deceleration seen in <unk> as compared to prior quarters. This year.

As a reminder, Q3 of last year was a strong quarter that benefited from large deal activity that was anticipated to close in Q4 of 2022, but instead closed in Q3 of 2022.

Making it a difficult comparison period.

After the six point sequential decline and CRP of growth approximately two points can be attributed to the large deal activity in the year ago period.

However, even when taking this dynamic into consideration with cornerstone fell short of our expectations.

As <unk> described the demand environment has clearly become increasingly difficult.

More broadly we are seeing increased scrutiny on deals, causing sales cycles to elongate.

Customers are taking longer to finalize purchasing decisions with more decision makers involved and more layers of required approvals.

As an example deals that used to get approved timely by the internal champions are now requiring CFO approval.

And Neil said Houston requires CFO approval may now require board approval.

While this dynamic is not overly concentrated in any particular facet of the business and generally we are finding more success expanding with large enterprises.

In Q3, some deals that we would have expected to close in a more stable environment slipped out of the quarter.

This is an indication that the heightened sense of conservatism among customers has continued and we are seeing evidence of this both during the renewal conversations and the new business.

Similarly, this also impacted new customer growth with 363, net new customer adds in Q3, which is lower than previous quarters.

That said this was not a function of increased logo churn as our gross revenue retention rate has remained healthy at 95%. Despite the sequential decline.

Yes.

On the one hand, a cohort of the industry, particularly down market is demonstrating more hesitation to make new purchases given the external uncertainty.

On the other hand. This is also a reflection of our focus and strategy with an expansion opportunities, particularly within upmarket customers.

This is a trend we believe will continue in the near term as larger customers continue to prioritize their investments and protocol.

That said, we are assuming that in aggregate. These headwinds will continue into fiscal 2024.

While the demand environment is outside of our control we remain focused on what is within our control, which brings me to our efficiency profile.

At our recent Investor day, we shared our financial framework for how we plan to manage the business through various economic conditions over the next few years.

Specifically, we noted that a potential driver that could move us to the left of that framework is further deterioration in our demand environment.

Heather: Given the softening demand we are seeing and that we are assuming this dynamic will persist into fiscal 2024, we anticipate progressing towards the far left side of the revenue growth range in the framework over the next upcoming quarters. This means we intend to be even more disciplined in managing spend as well as equity delusion. Our Q3 margin performance is an example of that, as our incrementally disciplined approach resulted in our first non-gaat profitable quarter since 2020.

Given the softening demand we are seeing and that we are assuming this dynamic will persist into fiscal 2024, we anticipate progressing towards thus far less side of the revenue growth range inland framework over the next upcoming quarters.

This means we intend to be even more disciplined in managing spend as well as equity dilution.

Our Q3 margin performance and is an example of that as our incrementally disciplined approach resulted in our first non-GAAP profitable quarter since 2020.

Heather: Just like our customers are displaying a higher level of scrutiny in the purchasing decisions, two in myself and the broader leadership team are aligned and exercising a higher level of regard in our own investment decisions and challenging ourselves to ensure meaningful ROI. Above all, we are committed to being disciplined stewards of capital, with a focus on compounding three cash flow per share through various economic environments.

Just like our customers are displaying a higher level of scrutiny in the purchasing decisions to wean myself to the broader leadership team are aligned and exercising a higher level of merger and our own investment decisions and challenging ourselves to ensure meaningful ROI.

Above all we are committed to being disciplined stewards of capital with a focus on compounding free cash flow per share through various economic environments.

Now moving onto our outlook.

Heather: Now moving on to our outlook. Our guidance assumes current macroeconomic headwinds persist through the remainder of the year. As a reminder, we have taken a proven approach to guidance over the past several quarters to factor in the external uncertainty of potential for incremental weakness in the market. From a revenue perspective, we continue to set guidance at a level that we have very high conviction we can deliver on, even in a weaker economic environment.

Our guidance assumes current macroeconomic headwinds persist through the remainder of the year.

As a reminder, we have taken a prudent approach to guidance over the past several quarters to factor in the external uncertainty and potential for incremental weakness in the market.

From a revenue perspective, we continue to set guidance at a level that we have very high conviction that we can deliver on even in a weaker economic environment.

While we are disappointed by the headwinds on the topline we remain more committed than ever to driving incremental operating leverage in the current environment.

Heather: While we are disappointed by the headwinds on the top line, we remain more committed than ever to driving incremental operating leverage in the current environment. As a reflection of our increased focus on efficiency, we are guiding operating margins with less conservatism but still with high conviction we can deliver on. To give shareholders greater visibility into the margin trajectory that we intend to achieve. We will naturally continue to monitor demand trends and will provide formal guidance for fiscal 2024 when we report Q4 results in February. However, as previously mentioned, we are not anticipating that the demand environment will improve and expect to move to the far less side of our financial framework over the next upcoming quarters.

As a reflection of our increased focus on efficiency, we are guiding operating margins with less conservatism, but still with high conviction that we can deliver on to give shareholders greater visibility into the margin trajectory that we intend to achieve.

We will naturally continue to monitor demand trends and we will provide formal guidance for fiscal 2024. When we report Q4 results in February. However, as previously mentioned, we are not anticipating that the demand environment will improve and expect to move to the far left side of our financial framework over the next upcoming quarters.

Heather: With that, here's our guidance for Q4 in full year 2023. From the fourth quarter of 2023, we expect a revenue between $245 million and $249 million, representing earlier growth between 22% and 23%. Given the size of the under of acquisition, we are not expecting a material revenue contribution from that business. Q4 non-gap operating margin is expected to be between 2% and 3%. For the full year of fiscal 2023, we expect revenue between $937 million and $939 million.

With that here's our guidance for Q4 and full year 2023.

For the fourth quarter of 2023, we expect revenue between $247 million and $249 million.

Representing year over year growth between 22% and 23%.

Given the size of the <unk> acquisition, we are not expecting a material revenue contribution from that business.

Q4, non-GAAP operating margin is expected to be between 2% and 3%.

For the full year fiscal 2023, we expect revenue between $937 million and $939 million representing.

Heather: $15 million dollars, representing total year-to-year growth of 30%, which is an increase of $15 million dollars from our previous whole year guide. Non-gap operating margin for the year is expected to be between 0.5% and 1%, which represents an improvement of 500 basis points from our previously issued guidance last quarter, and implies year-to-year margin expansion of 1100 basis points. With this guidance, we now expect to reach non-gap operating profitability in both Q4 and for the full year, and are optimistic about maintaining a positive cadence within our future guide.

Representing total year over year growth of 30%.

Which is an increase of $15 million from our previous full year guidance.

non-GAAP operating margin for the year is expected to be between 5% and 1%.

Which represents an improvement of 500 basis points from our previously issued guidance last quarter and implies year over year margin expansion of 11 100 basis points.

With this guidance, we now expect to reach non-GAAP operating profitability in both Q4 and for the full year and are optimistic about maintaining a positive cadence within our future guidance.

Heather: To close, it is clear that we are operating in a demand environment that has become more challenging. We are actively managing the business to optimize our official growth trajectory, while continuing to expand our market leadership and build towards our longer-term vision.

To close it is clear that we are operating in a demand environment that has become more challenging we are actively managing the business to optimize our efficient growth trajectory, while continuing to expand our market leadership and build towards our longer term vision.

Heather: I'd like to close by again thanking our customers, partners, employees, shareholders, and the industry, as well as the communities we serve for giving us this opportunity.

I'd like to close 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 for Q&A.

Unknown Executive: With that, let's turn it over to the operator for Q&A. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to remove your question, press star followed by two. And if you are using a speaker phone today, please pick up your handset before asking your question.

If you would like to ask a question. Please press star followed by one on your telephone keypad.

If you would like to remove your question Press Star followed by Tim.

And if youre using a speakerphone today.

Please pickup your handset before asking your question.

Our first question comes from Brent <unk> with Piper Sandler.

Brent Bracelin: Our first question comes from Brent Brayson with Piper Sandler. Please proceed. A good afternoon. The Tui, obviously, you know, ProCore is out immune to the high-interest rate environment here, and some of the pressures is putting on construction.

Please proceed.

Hi, good afternoon, Toohey, obviously, yes.

<unk> is not immune to the high interest rate environment here in some of the pressures is putting on construction I was hoping you could provide a little more visibility on the Q4 backlog and pipeline that you see you talked about increasing deal scrutiny.

Matthew Puljiz: I was hoping you could provide a little more visibility on the Q4 backlog and pipeline that you see. You talked about increasing deal scrutiny, lengthing sales cycles. How does that look relative to historical Q4 trends given what we saw as the RPO in Q3? Thanks. Yeah, Brent, well, great question. So I would just say the trend, actually, if we rewind time a little bit, the trend actually started long before the quarter that we're in right now, where we were seeing more scrutiny on deals we're seeing elongated sales cycles.

Lengthening sales cycles.

Does that look relative to historical Q4 trends given what we saw with <unk> in Q3.

Yes, Brian Great question so.

I would just say the trend actually if we rewind time, a little bit the trend actually started long before the quarter that we're in right now.

We were seeing more scrutiny on deals we're seeing.

Elongated sales cycles.

Matthew Puljiz: But in Q3, in particular, we saw that step up significantly. So we think it's coming into Q4 that it's going to be much the same. We don't see any real improvement on that front. But we do kind of just are preparing ourselves for capture demand environment going forward. And, you know, that's just the market we're in. I'm actually particularly disappointed that as a business we're facing these advanced environment, macro environment problems, because we have so much, you know, to offer the industry's rooting for us.

But in in Q3 in particular, we saw that step up significantly so.

We think it's coming into Q4, then it's going to be a much. The same we don't see any real improvement in that on that front.

But we do kind of just preparing ourselves for a tougher demand environment going forward.

That's just the market, we're in and I am actually particularly disappointed.

As a business we're facing these demand environment macro environment problems, because we have so much.

To offer in the industry as Rudy for she saw groundbreaking how how much the industry wants us to win.

Matthew Puljiz: You saw a ground break. How, how much the industry wants us to win. So, you know, this is just the reality of the time. The other thing I want to point out is that the industry goes through cycles. As I mentioned in the opening remarks, and this is just one more cycle. That's pretty much the sentiment I'm getting from all of my contacts that I call down in the industry is that, yeah, there is a, there's more cautiousness, but these cycles happen and they just are inevitable.

This is just the reality of the time the other thing I'll point out is that the industry goes through cycles as I mentioned in the opening remarks.

And this is just one more cycle, that's pretty much the sentiment I am getting from all of my contacts that I called out in the industry is that yes. There is a there's more cautiousness, but.

These cycles happen and they just are inevitable.

Howard Fu: Hey, Brent, this is Howard. This is a quick comment on your pipeline question. We still are generating healthy pipeline at the top of the funnel. However, with the cautious sentiments that we're seeing out there from our customers, it is taking longer for that pipeline to flow through the funnel. And that's what we mentioned in terms of logging. Yeah, completely makes sense there.

Hey, Brian This is how it certainly makes sense.

Just a quick comment on your pipeline question, we still are generating healthy pipeline at the top of the funnel. However, with the cautious sentiments that we are seeing out there from our customers. It is taking longer for that pipeline to flow through to.

Both of the follow up and that's what we mentioned in mortgage.

So forth yes.

Yes completely makes sense, there and Thats I guess, one quick follow up for you Howard in the efficiency profile you outlined at the analyst day the Super helpful.

Howard Fu: And that's I guess one quick follow-up for you, Howard. In the efficiency profile, you outlined the analyst day is super helpful. But as you think about growth next year, there are scenarios where growth could slow to the mid teens or high teens. If it does slow below 20, do you think you could still drive 500 to 600 basis points of margin improvement in that type of environment? Yeah, that's a good question.

But as you think about growth next year, there are scenarios, where growth could slow to the mid teens or high teens.

It does slow below 20, do you think you could still drive 500 to 600 basis points of margin improvement in that type of environment.

Yeah. So good question. So first of all we believe that the framework is actually a reasonable range of outcomes given certain economic conditions and in this case on the lower end.

Howard Fu: So, first of all, that we believe that the framework is actually a reasonable range of outcomes given certain economic conditions. In this case, on the floor, and in that case, we would absolutely still be able to drive improvements in our operating margin that's consistent with that framework. And keep in mind, it's not just the margin, the operating margin. It's also the free cash flow, free cash flow, for sure, helpful color.

Unknown Executive: Thank you.

At the lower end of the spectrum.

In that case, we would absolutely still need to drive improvements in our operating margin that is consistent with that framework and keep in mind. It's not just the margin. The operating margin. It's also the free cash flow and free cash flow per share.

Okay.

Yeah.

Helpful color. Thank you.

Our next question comes from DJ Hynes with Canaccord.

DJ Heinz: Hi, next question comes from DJ Heinz with Canacquart. Please proceed. Hey, thanks, guys. To we Brent asked about the demand environment as it pertains to kind of new business, and I think that's pretty clear. I actually will take the other side of that and ask about behavior in the base, because it sounds like actually things maybe are getting more stable. It's not a little bit better there. Can you just double click on kind of what you're seeing for customers that are coming up for renewal and kind of their appetite and behavior?

Please proceed.

Hey, Thanks, guys.

TUI Brent asked about the demand environment as it pertains to kind of new business and I think that's pretty clear I actually will take the other side of that and ask about behavior in the base because it sounds like actually things maybe are getting more stable if not a little bit better. There can you just double click on kind of what youre seeing for customers that are coming up for renewal in kind of their appetite and behavior.

Yeah, Vijay So you heard us talk about this on.

DJ Heinz: Yeah, DJ, so you heard us talk about this dichotomy that we had on a renewal book last quarter. Well, we are seeing this quarter is that to kind of your point that there's a slight improvement with that, which is actually good news for pro quarter because it means that our book is a lot more predictable. It is more predictable, and so I'm sure how we would add to the address. Yeah, so the dichotomy still is there it's still more elevated and what we've seen historically.

This dichotomy that we had on our renewal book.

Last quarter.

What we are seeing this quarter is that to kind of your point that there is a slight improvement with that which is actually good news for <unk> because it means that our book is a lot more about it as more predictable.

And so I'm sure Howard do you want to add to the last year. So the dichotomy still is there still more elevated than what we've seen historically in Q3, what we've seen in terms of the stabilization is a little bit more of a proportion renewal was flat remember in the last couple of quarters I talked about when theres, a lower proportion of that.

DJ Heinz: In Q3, what we've seen in terms of the stabilization is a little bit more of the proportion renewal of flat. Remember in the last couple of quarters, I talked about when there's a lower proportion of the flat renewals, it increases the beta of the potential outcomes. And so this quarter we saw a greater proportion returned back to flat renewals, which gives me a sense that there's more stability and a lower beta, but keep in mind, it's still more elevated in terms of that dichotomy than what we've seen historically.

Flat renewals it increases the beta of the potential outcomes and so this quarter, we saw a greater proportion returned back to flat renewals, which gives me a sense that there is more stability at a lower rate, but keep in mind, it's still more elevated in terms of that dichotomy that what we've seen historically.

Yep got it fair enough and then maybe as a follow up non macro question, maybe tied to procure to pay.

DJ Heinz: Yeah, got it fair enough. And then maybe the follow up a non macro question maybe tied to pro court pay curious what percent of your GC customers today are are using accounting integrations and invoice management. And is that the correct way to kind of think about the serviceable address will opportunity today inside of the base for pro court pay. Yes, well, in order to use Procore Pay, you have to be using at least invoice management on our side.

Curious what percent of your D. C. Customers today are are using accounting integrations and invoice management and it is that the correct way to kind of think about the serviceable addressable opportunity today inside of the base for broker Pat.

Yes, well in order to use broker pay you have to be using at least invoice management on our side.

DJ Heinz: So that is probably a good way to think about it. Keep in mind too, we are still only providing this to a select group of US general contractors who are invoicing customers as we as we launch this program. So it's still super early days. Okay, got it. Thank you. Sure.

So that is probably a good way to think about it but keep in mind too we are.

Still only providing this to a select group of our U S General contractors, who are invoicing customers as we as we launched this program. So it's still Super early days.

Okay got it thank you.

Sure.

Our next question comes from Scott <unk> with Barclays.

Saket Kalia: Our next question comes from Sigit Kalia with Barclays. Please proceed. Okay, great. Hey, Saket Barclays. Thanks, thanks guys for taking my questions here. Two, maybe for you, just to zoom out a little bit.

Please proceed.

Okay, Great Hey, exactly at Barclays. Thanks, Thanks, guys for taking my questions here.

Maybe for you just just just to zoom out a little bit I was wondering if you could just talk a little bit about where pro corps is in its international.

Saket Kalia: I don't know if you could just talk a little bit about where Procore is in its international build out. You know, I think at analysts say that the market share there that we showed was really, I think at a low single digits. The question is, what do you want to do? Clearly a big opportunity. Can you just maybe talk through how you're thinking about building out international and whether you're seeing anything different there, just in terms of the adoption curve versus maybe what you've seen in the US. Does that make sense? Yeah, it makes total sense, Saket. So I'd love to love to answer this.

International Buildout.

At Analyst day, the market share that we showed was really I think in the low single digits. So clearly a big opportunity can you just maybe talk through how you're thinking about building out international one and whether youre seeing anything different there just in terms of the adoption curve versus maybe what you've seen in the U S does that makes sense.

Yes. It makes total sense sockets, so love to love to answer this so first and foremost when we go into a new market.

Matthew Puljiz: So first and foremost, when we go into a new market, I think the most important thing that Procore has to focus on is brand. The industry globally is there cautious when they engage in new partnerships. So having the brand establishes really important and the beauty of our SaaS platform is that when we do enter a new market, we will already have folks that are proper customers likely doing projects there. So we focus heavily on building a brand, getting the referenceable customers, putting in the customer success and support game that is necessary, and then capitalizing on that brand to, you know, to expand those markets.

The most important thing that protocol has to focus on is brand.

The industry globally is.

There are cautious when they engage in new partnerships, so having having the brand established is really important and the beauty of our SaaS platform is that when we do enter a new market. We will already have folks that are appropriate customers likely doing projects. There. So we focus heavily on building the brand getting the references.

Customers, putting in the customer success and support teams that is necessary.

Then capitalizing on that brand.

Two to expand those markets.

Matthew Puljiz: The other thing that's interesting about construction is the way construction is done globally is very much the same. So when we go into a market, a new market, the good news is that the product line that we're carrying with us has a pretty high product market fit. And so though there's some regulatory requirements that are going to be needed to be addressed with the product itself in general, the product is usable from day one.

Other thing Thats interesting about construction is the way construction is done globally is very much. The same so we go into a market a new market. The good news is that the product line that we're carrying with US has a pretty high product market fit.

And so those are some regulatory requirements that are going to be needed to be addressed.

With the product itself in general the product is usable from day one.

Matthew Puljiz: So yeah, definitely start with brand and then we go with expansion focus matters for Procore to. So, you know, when we're in a market, we focus on that and we don't get distracted by adjacent. Got it. That's super helpful.

So yes definitely start with brand and then we go with expansion focus matters for pro forma two so we're in a market we focus on that and we don't get distracted by Adjacencies.

Got it got it that's super helpful. Howard maybe for you to zoom back.

Unknown Executive: How would maybe for you to to zoom back. Yeah. Well, do we lose you? A pod. Yeah, Mr. Clea's line did drop so we will move on to the next question.

But secondly, with lithium in Louisiana.

Apart later why don't we just concluded.

Yes, Mr. <unk> line did drops we will move on to the next question. Our next question comes from Adam Borg with Stifel.

Mike Richards: Our next question comes from Adam Borg with stifle. Please proceed.

Please proceed.

Okay.

Matthew Puljiz: Hi, everyone. This is Mike Richards on for Adam Borg. It's stifle. Thanks for taking the question. I was just hoping if you could comment on the competitive landscape overall and if there's any changes there, whether that be by geography or product area. Thanks. Yeah, I wish I had an exciting answer for you on this, but it's pretty much business as usual. Well, the competitive dynamics have not changed meaningfully in any direction. So no, there's really no update to provide there. Unfortunately. Thank you.

Hi, everyone. This is Mike <unk> on for Adam Borg with Stifel. Thanks for taking my question.

I was just hoping if you could comment on the competitive landscape overall, and if theres any changes there whether that be by geography or product area. Thanks.

Yeah, I wish I had an exciting answer for you on this but it's pretty much.

Business as usual there are competitive dynamics have not changed meaningfully in any direction.

So no theres really no update to provide there unfortunately.

Thank you.

Yes.

Our next question comes from Jason <unk> with Keybanc.

Jason Celino: Our next question comes from Jason Celino with Keybank. Please proceed. Great. Thanks for taking my question. Maybe just first as a follow-up question from the analyst day on Procore Pay. You know, if we think about the opportunity, you know, there's obviously the green field of customers who might not be using an automated payments process, and then there's the share gain opportunity from other legacy payments providers. You know, how should we think about these two opportunities?

Please proceed great.

Hi, Thanks for taking my question, maybe just first as a follow up question from the analyst day I'm broker pay if we think about the opportunity. There is obviously the greenfield of customers who might not be using an automated payments process and then there's the share gain opportunity from other legacy payments providers.

Jason Celino: And maybe what you might focus on over the next near term? You said two opportunities. We're talking about pay. Is there another one that I missed? Yeah, while the customers who might not be using a payments product from anyone, and then legacy providers, you know, therefore share gains. Yeah, so the legacy provider customers have been, you know, rooting for Procore for a while to come to market with this product planning. We're having a lot of success there, but we're also having equal success with folks that have never been on it before.

How should we think about these two opportunities and maybe what you might focus on over.

Over the next near term.

You said two opportunities we're talking about pay is there another one did I Miss.

Yeah.

Customers, who might not be using our payments product from anyone and then legacy providers therefore share gains.

Yes so.

So the legacy provider customers have been rooting for appropriate for a while to come to market with this product line and we're having a lot of success there, but we're also having equal success with folks that have never been honoured before I actually listen to our customer call yesterday with the woman said that when she learned what appropriate pay was going to do for her.

Jason Celino: I actually listened to a customer call yesterday where the woman said that when she learned what Procore Pay was going to do for her by saving her so much time every day that she started to cry. So those kind of stories are kind of fun to listen to, but yeah, so I think that the opportunity is there for everybody. Remember, this is really a, you know, a big pain point for anybody who does construction. And so it's been received well.

By saving here.

So much time everyday that she started to cry.

So.

Those kind of stories.

Our kind of funded listen to but yes. So I think that the opportunity is there for everybody to remember this is really a big.

Big pain point for anybody who does construction and so it's been it's being received.

Well.

Howard Fu: Hey Jason, this is Howard. I just want to follow up on two weeks answered. I want to make sure that everyone understands we are still pretty early in terms of the implementation of the more a lot of this product. And there's no significant contribution at this point to our results, or do we see significant contribution at this point going into the next fiscal year. It's going to take time for us to roll the fact to the customer base and even in our targeted USGC customers. Yep. Okay, that's fair.

Hey, Jason This is Howard I just wanted to follow up on two he's answered I want to I don't want to just make sure that everyone. Understands we are still pretty early in terms of the implementation of the rollout of this product and there is no significant contribution at this point to our results or do we see a significant contribution at this point going into the next fiscal year, it's going to take.

Hard for us to roll this out.

So the customer base and even in our targeted U S. G C customers.

Yes, Okay that's fair.

Howard Fu: And then Howard, maybe just to focus on efficiency, I think it makes a lot of sense. Moving left on the margin framework. As you think about the leverage, help us understand what the near term drivers you have at your disposal. Yeah, so similar to what has happened throughout this year, the efficiency has actually come across all the different parts of Procore from cost of revenue to all the different off-ex lines. And the company has really rallied around this, this efficient growth mantra that we have put forward internally. And so, you know, specifically, I think we're still going to see some of the operating margin benefits from sales marketing, Rd as well as DNA. Great. Thanks, Howard.

And then Howard maybe just to focus on efficiency I think it makes a lot of sense moving left on the margin framework.

Think about the leverage help us understand what.

Near term drivers you have at your disposal.

Yeah, so similar to what has happened throughout this year.

The efficiencies have actually come across.

All the different parts of protocol from cost of revenue to all the different opex slides and the company has really rallied around this that's sufficient growth mantra that we have.

Fourth internally and so specifically I think we're still going to see some of that.

Operating margin benefits from some sales and marketing in R&D as well as G&A.

Great. Thanks Howard.

Okay.

Daniel Jester: Our next question comes from Daniel Jesser with FEMA. Please proceed. Great. Well, thanks for taking my question.

Our next question comes from Daniel Jester with BMO.

Please proceed.

Great well, thanks for taking my question.

Howard Fu: Maybe to start off and not to belabor sort of the macro point, but I'd love to kind of hear like, you know, when did you actually start seeing the softest was it in September or the October? Yeah, the analyst day was six weeks ago, and I'm just wondering, can we kind of dig in there? And then tactically, as you think about the near term macro, is the US and international trends, you expect any divergence, or should we see similar?

Maybe to start off and not to belabor sort of the macro point, but I'd love to kind of hear like.

Yeah.

When did you actually start seeing the softness was it in September or October I'm, just wondering at the analyst day was six weeks ago and I'm. Just wondering can we kind of dig in there and then tactically as you think about the near term macro is the U S and international trends, you expect any divergence or.

Should we see similarities.

Yeah, Hey, Dan This is Howard good to meet you here. The first thing is you know when we issued.

Howard Fu: Yeah, hey, Dan, this is Howard. Good to meet you here. The first thing is, you know, when we issues our framework at Investor Day, we still have about two to three weeks in the quarter, and those two to three weeks at the end of the quarter, typically have a fairly outside impact on how the whole quarter performs. And frankly, we were surprised, I was surprised at the downside in terms of what we expected to close in the last two weeks.

Our framework at Investor Day, we still have about two to three weeks weeks left in the quarter and those two to three weeks at the end of the quarter typically have a fairly outsized impact on how the fourth quarter performance and frankly, we were surprised I was surprised that the downside in terms of what we expect it to close in the last few weeks there were.

Howard Fu: There were a number of deals, some of them fairly large. And frankly, we expected to close in those two to three weeks that didn't close, and that had an impact on on our Q3 performance. With respect to your comment about when did we know and what when did we start to see this trend. Keep in mind that we've always tried to be as transparent as possible in terms of what we've seen as a communicate that to everybody.

A number of deals some of those are fairly large.

Frankly, we expect it to close on those two to three weeks that didn't close.

The impact on our Q3 performance with respect to your comment about when do we know when do we start to see this trend keep in mind that we've always tried to be as transparent as possible in terms of what we've seen is to communicate that to everybody. This starts back all the way back to mid 2022, when we started to take a much more cautious.

Howard Fu: This starts back all the way back to the mid 2022 when we started to take a much more cautious approach in our guidance, just in case something like this happened. And then going back to Q1 in this year, we started to share some insights about the business specifically about the guy's dichotomy and the customer behavior that may not have shown up, that would not have shown up in our financial results. And we've continued to provide updates to that dichotomy and also about the sentiment and the cautiousness in our customer base.

The approach in our guidance adjust in case something like this happens and then going back to Q1 of this year, we started to share some insights about the business specifically about the dichotomy in the customer behavior.

That may not have shown up that would not have shown up in our financial results and we've continued to provide updates to that dichotomy and also about the sentiment in the cautiousness in our customer base. So this wasn't something that was just sprung out west and there is something that we did see progress from Q1 to Q2 and Q3.

Howard Fu: So this wasn't something that kind of was just from on this. And it's something that we did see progress from Q1 to Q2 and Q3. Regarding international versus US, the macroeconomic headwind and the trust in the end environment is not something that's domestically based. It's both US and international and non-US. We don't write us the any type of diversion, but as we get more information and we see more signals, we will communicate what we see to you.

Regarding international versus U S. The macroeconomic headwinds and a tough demand environment is not something that's domestic domestically base, it's both U S and international and non U S. A we don't right now see any type of dispersion, but as we get more information that we see more signals, we will communicate what we see chipsets.

To you.

Great. That's really helpful. Thank you and then just on the expansion opportunity. It sounds like incremental focus there can you kind of share any detail about sort of incrementally what you may be doing differently over the next year to.

Matthew Puljiz: Great. That's really helpful. Thank you. And then just on the expansion opportunity, it sounds like incremental focus there. Can you kind of share any details about sort of incrementally what you may be doing differently over the next year to supplement the opportunity there. Thank you. Yeah, so I think I think as with any any type of opportunities that we look at, we're constantly adjusting to where we see strength and when we see strength most immediately.

To supplement the opportunity there. Thank you.

Yes, so I think I think as with any any type of opportunities that we look at we're constantly adjusting to where we see strength and what we see strength will also immediately so far in terms of what we've seen some of the impacts.

Matthew Puljiz: So far in terms of what we see some of the impacts is we've seen more of the impacts and the lower end of the market in terms of where the macroeconomic environment is having a bigger effect. Now, that's not to say it's only focus there. It's definitely throughout all the different segments and all the different stakeholders. And when we see that, what we've seen is that in the enterprise space and the upward of the market, those customers have been more safe.

We've seen more of the impacts of lower end of the market in terms of where the macro economic environment and get bigger.

Now that's not to say, it's only focus there it's definitely throughout all the different segments of all the different stakeholders and what do we see that what we've seen is that in the enterprise space on the upper end of the market those customers have been more statement they have been more well prepared and more well prepared to be able to weather the macroeconomic conditions now having said that.

Matthew Puljiz: They have been more well prepared and more well prepared to be able to weather the macroeconomic conditions. Now, having said that, those conditions in the tough demand environment is still being felt there, but that's where we believe that we have more stability. Thank you very much.

Those conditions and the tough demand environment is still being felt there, but thats, where we believe that we have more stability.

Thank you very much.

Of course.

Dylan Becker: Our next question comes from Dylan Becker with William Blair. Please proceed. Hey, gentlemen, maybe sticking with what's that same theme around some of the enterprise stability to you to you called out the opportunity for retooling and kind of strengthening around a potential cyclical recovery at some point in time.

Our next question comes from Dawn Becker with William Blair.

These proceeds.

Hey, gentlemen, maybe sticking with that same theme around kind of the enterprise stability to you till you called out the opportunity for retooling and kind of strengthening around a potential cyclical recovery at some point in time as we think about the bifurcation between enterprise and SMB, how you maybe expect that incremental.

Matthew Puljiz: As we think about the bifurcation kind of between enterprise and an SMB, how you may be expect that incremental kind of project shared gain fueling that pro core network of competitive incentive of collaborator conversion where more project stakeholders need to be on the ecosystem around that recovery to gain and capture share of more of that scope of work over time. Yeah, so Dylan, the good news is that the way construction is delivered, everyone benefits from being on the same team.

Project share gain fueling that grow corn network of combat incentive of collaborator conversion, where more project stakeholders need to be on the ecosystem around that recovery to gain and capture share of more of that scope of work overtime.

Yeah. So.

And the good news is that the way constructions delivered everyone benefits from being on the same team.

Matthew Puljiz: So it doesn't matter, small beauty in the large where I would say we're going to be putting some of our focuses on the offerings of the market, the enterprise customers that are more stable and they are more optimistic right now. I'm looking at the projects that they're working on and trying to bring their collaborators on to the Procore platform. The higher up we go in the market, the better the sentiment is.

So it doesn't matter small medium or large where I would say we are.

It's going to be putting some of our focus is on the upper end of the market the enterprise customers that are.

More stable and they are more optimistic right now on looking at the projects that they're working on and trying to bring their collaborators onto the <unk> platform.

The higher up we go into market the better the sentiment is and actually I want to point out one of the reasons why the sentiments better up market and it is down market is simply because they run a much more diversified portfolio. The bigger they are and those diversified portfolio gives them the confidence to make bigger purchasing decisions and to partner with people.

Matthew Puljiz: And actually I want to point out, one of the reasons why the sentiment's better up market than it is down market is simply because they run a much more diversified portfolio, but there they are. And those diversified portfolios give them the confidence to make bigger purchasing decisions and the partner with people and then the inverses to go down market, they have less optionality. So we're going to focus on converting as many collaborators as possible, but we do see a lot of opportunity at the upgrade of the market because of the stability that we're seeing there.

And then the end versus true as you go down market they have less optionality.

So we're going to focus on converting as many collaborators as possible, but we do see a lot of opportunity at the upper end of the market because of the stability that we're seeing there.

Got it okay that makes sense and then Howard to going back to kind of the confidence in that range of scenarios, you called out kind of normalized CRP or momentum there in the high 20 ish type of range I guess I'm wondering to what extent I mean that gives you good visibility.

Matthew Puljiz: Got it. Okay, that makes sense. And then Howard, too, going back to kind of the confidence in that range of scenarios, you called out kind of normalized CRPO momentum there in the high 20s, this type of range. I guess wondering to what extent. And obviously that gives you good visibility in kind of the next 12 month cycle there. But to what extent also does this project duration layer into some of the stability from a volume perspective, if that makes sense.

The next 12 months cycle, there, but to what extent also Jos just project duration layer into some of the stability from a volume perspective, if that makes sense.

Let me come back to the project durations will get more clarity there, but I just wanted to be clear. We do we do not expect the demand environment. The challenges that we're facing right now and the demand environment to improve in fact, we expect it to get more pronounced into Q4 as well as into 2024.

Howard Fu: Let me come back to the project duration, but I just want to be clear, you know, we do, we do not expect the demand environment and challenges that we're facing right now in the management to improve. In fact, we expect it to get more pronounced into Q4 as well as in just 2024. And that likely will get reflected in our financial metrics going forward.

And that likely will get reflected in our financial metrics going forward.

Specifically on a project duration can you clarify that question I'm not quite sure what the question is there.

Howard Fu: Specifically on project duration, can you clarify that question? I'm not quite sure what the question is there. Tied to the volume exposure for multi-year projects in nature. So some of the larger scale mega projects, maybe it ties into the enterprise segment as well, but giving kind of some of the visibility into volumes. I think, let me try to answer to see if this answers your question. You know, this cautiousness in the sentiment has actually caused our customers to be less receptive to committing higher volumes up front, even if they have those projects lined up.

Tied to the volume exposure.

Multi year projects in nature. So some of the larger scale Mega projects, maybe it ties into the enterprise segment as well, but given kind of some of the visibility into into volumes.

I think let me try to answer and see if this answers your question.

Howard Fu: And so if even if they are a longer project durations, that will still impact their overall portfolio in terms of what they're willing to commit based on what they've gotten their portfolio. And so even if that happens, keep in mind when they commit to lower volumes up front, they are paying a higher basis point for it, and they're willing to pay that higher basis point, even if they have that backlog. To the extent that project durations work itself into that equation for customers, it still impacts what they're going to commit.

This cautiousness in the sensor that has actually.

Caused our customers to be less receptive to combating higher volumes of threat, even if they have those projects like that and.

And so if even if there are longer project durations of that will still impact the overall portfolio in terms of what they're willing to commit based on what they've got in their portfolio.

And so so even if that happens keep in mind, when they convinced of lower volumes, but.

They are paying a higher basis point for it and they're willing to pay that higher basis point, even if they have that backlog. So to the extent that project durations work itself into that equation for our customers, it's still impacts what theyre going to come back.

Got it okay. Thanks, guys.

Okay.

Brent Thill: Our next question comes from Brent Till with Jeffries. Please proceed. Thanks, just on the customer count, your six quarter rolling average, or more than 200 customers shy of what your average was. And I know you mentioned the low end bit. Are you seeing the high end tail off as well? We're definitely seeing a more concentrated down market than it is up market, primarily because we think it's driven by just the macro, you know, the overall demand environment that's impacting the, that's the, segment, but, you know, and what we're finding is that the lower you go down in the market, to the smaller, smaller businesses, the less likely they are to want to enter into a new relationship right now, whether trying to figure out the challenges of the business.

Our next question comes from Brent Thill with Jefferies.

Please proceed.

Thanks, just on the customer count, you're you're six quarter rolling average or more than 200 customers shy of what your average ones and I know you mentioned that the low end, but are you seeing the high end tail off as well.

We are definitely seeing it more concentrated down market than it is at market.

Primarily because we think it's driven by just the macro.

The overall demand environment, that's impacting the <unk>.

That segment, but.

And what we're finding is that the lower you go down in the market to the smaller smaller businesses the less likely they are to want to enter into a newer relationship right now whether trying to figure out the challenges of the business.

Yeah, and just to follow up on some of these answers we're not seeing that same level.

Brent Thill: And just to follow up on two weeks answer, we're not seeing that same level of deterioration on the upper of the market. The other thing that I will add is, even though our net ads are down, our growth retention rate is still strong at 95%. So it's not necessarily customers leading the platform or canceling. It's really about that willingness to make new purchase decisions. The other thing to keep in mind is our customer count is heavily skewed towards the down market, towards the towards the SMB space.

Deterioration on the upper end of the market. The other thing I will add as well, even though our net adds are down our gross retention rate is still strong at 95%. So it's not necessarily customers, leaving the platform are canceling, it's really about that willingness to make new purchase decisions. The other thing to keep in mind is.

Our customer count is heavily skewed towards the down market towards the towards the SMB space and so thats, what youre seeing in terms of that that that that split in terms of emerging versus the enterprise space and are most of our <unk> is actually upmarket as well so keep that in mind.

Brent Thill: And so that's what you're seeing in terms of that that that split in terms of emerging versus the enterprise space. And almost of our AR is actually up market as well. So keep that in mind. And to just as a follow up, if you look across all your software peers at a billion dollars of revenue, the average margins 12%. You're getting to one to two.

And two just as a follow up.

If you look across all of your software peers at $1 billion of revenue the average margins, 12% youre guiding to 1% to the.

Howard Fu: The question is why not go into hurry up offense on expense control, try to get the margin moving. It's clearly on investor's minds. What's what's causing the non hurry up offense on the expense, or maybe there is maybe there's a greater sense of urgency that we're we're not hearing out of out of your commentary. Hey, Brad, this is Howard. I'll answer that one. I actually don't think that we need to go into hurry up offense because this is something that we've been doing for a number of quarters down.

The question is why not go into a hurry up offense on expense control trying to get the margins moving it's clearly on investors' minds.

What's causing the non hurry up offense on the expense side or maybe there is maybe there is a greater sense of urgency that we're not hearing out of out of your commentary.

Hey, Brett this is Howard I'll answer that one.

I actually don't think that we need to go into hurry up Opex. Because this is something that we've been doing for a number of quarters now remember so going back where we were coming out of 'twenty, two and going into 2023, we talked about being away more intentional about our hiring and our resources and then also when we talked about at Investor Day was 2020.

Howard Fu: Remember thinking back when we were coming out of 22 and going into 2023, we talked about being way more intentional about our hiring and our resources. And then also we talked about it investor day was 2023 being a catch up here in terms of our margin profile. And so some of what you're seeing is that catch up and that plan to be above the framework this year in terms of our margin expansion.

Howard Fu: And then on top of that, we've been even more intentional and more disappointed in terms of improving our our spending margin profile. So to answer your question more directly, it's not a hurry up offense because we've been doing this work, we're going into a place where I'm living on our basis points improvement year over year. Great.

<unk> being a catch up year in terms of our margin profile and so some of what youre seeing is that catch up in that plan to be above the market. This year in terms of our margin expansion and then on top of that we've been even more intentional and more disciplined in terms of improving our our spend and margin profile so to.

Answer your question more directly it's not.

With lot of hurry up Opex, because we've been doing this a work or guiding to a place where we're at about 100 basis points improvement year over year.

Great. Thank you for the color.

Unknown Executive: Thank you for the color.

Yes.

Okay.

Nick Altman: Our next question comes from Nick Altman with Deutsche Bank. Please proceed. Awesome. Thanks guys. I wanted to circle back to DJ's question just around how you guys made comments as it pertains to the installed base how the install base is actually pretty healthy relative to sort of the new Saturday equation. So I'm wondering if you could comment, you know, what sort of driving the strength there is it more on the volume side or is it more kind of on, you know, cross selling additional modules into the install base.

Our next question comes from Nick Altmann with Deutsche Bank. Please.

Please proceed.

Yeah.

Awesome, Thanks, guys I wanted to.

Circle back to Djs question, just around how you guys made comments.

As it pertains to the installed base, how the installed base is actually pretty healthy relative to sort of the net new side of the equation. So I'm wondering if you could comment.

What's sort of driving the strength there is it more on.

The volume side or is it more kind of on cross selling additional modules into the installed base.

Yeah, Hey, this is Howard Hey, How's it going.

Nick Altman: Yeah, hey, this is Howard Hynes, how's it going? You know, the info that there's two things. One is the proportion and the actions of the install bases aren't bases taking, which is we've called out that a bigger proportion of the install bases are doing flat versus that dichotomy, right? So that makes me feel better about the particular ability and the area of the range of potential outcomes. In terms of the strength, in terms of the strength on expansion, the expansion is still outweighing down grades.

In summary, there is two things one is the proportion and the actions of the installed bases are basically taking which as we've called out a bigger proportion of the installed basis renewals are flat versus that dichotomy right. So that makes me feel better about the predictability and the narrowing of the range of potential outcomes in terms of the strength in terms of the strength.

Expansion of expansion is still outweighing out grades and so on.

Nick Altman: And so on the net, it's still a positive from Procore. And then in terms of further in terms of expansion, it's still marginally going to be more more focused and more strength in terms of that enterprise space versus that in the emergency stuff. Well, also, I think to answer the rest of the question was, most of the increases historically has been volume and that's true today. And as though we're working more and more across them, but it's more like a, yeah, it's more like an 80 20 mix of volume to new products.

It's still a positive for us.

Sure.

And then in terms of further in terms of that expansion is still largely going to be more more focused and more strength in terms of that enterprise space versus 70 electric so well. So I think to answer the rest of the question was most of the increases historically has been volume and if that is true today.

And as though were working more and more on cross sell but it's more like a.

More like an 80 20 mix of volume too.

Two new products.

Okay Super helpful. And then just one more quick one if I may.

Matthew Puljiz: Okay, super helpful. And then just one more quick one if I may. You guys had mentioned that there were a handful of larger deals that sort of slipped out of October, out of September, excuse me, just to clarify, did those deals that did slip out of 3Q? Did they close? Are you still sort of working on them? Just just wondering if you could comment on that. Thanks. Yeah, sure. There's a good portion of those that have closed, not all of them have closed, but I want to be clear, though, even if the remaining of those deals that slip from Q3 into Q4 close, we still anticipate continuing and pronounced deterioration in the demand environment, going into Q4 as well as going into 2024. Okay. Thank you. Sure. Thank you all for your questions.

You guys had mentioned that there were a handful of larger deals that sort of slipped out of October September excuse me.

Just to clarify did those deals that did slip out of <unk> did they close or are you still sort of working on that I'm. Just wondering if you could comment on that.

Yes, sure that there's a good portion of those that have close not all of them have closed, but I want to be clear, though even if the remaining of those deals that slipped from Q3 into Q4 close we still anticipate continuing and pronounced deterioration of the demand environment.

Into Q4, as well as going into 2024.

Yeah.

Okay. Thank you.

Sure.

Thank you all for your questions.

That will conclude the question and answer session for today's call. So I will now pass them to call back to management for any closing remarks.

Unknown Executive: That will conclude the question and answer session for today's call. So I will now pass them to call it back to management for any closing remarks. Thanks for joining us today. Bye, everybody. Thank you. That will conclude today's conference call. Thank you all for your participation.

Unknown Executive: You may now disconnect your line.

Thanks for joining us today bye bye everybody. Thank you.

That will conclude today's conference call. Thank.

Thank you all for your participation you may now disconnect your line.

Q3 2023 Procore Technologies Inc Earnings Call

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