Warchi
A Quick Take On Procore Technologies
Procore Technologies, Inc. (NYSE:PCOR) provides construction management software to companies worldwide.
I previously wrote about PCOR in November 2022 with a Hold outlook.
With lengthening sales cycles and smaller contract wins, I’m cautious on PCOR’s outlook in the short term.
My opinion on Procore Technologies, Inc. is Neutral [Hold] at this time.
Procore Technologies Overview And Market
California-based Procore has developed a construction management SaaS platform for the complete lifecycle, from pre-construction to ongoing management.
The firm is led by founder and CEO Craig Courtemanche, Jr., who was previously founder and CEO of the software consulting firm Webcage.
The company’s primary offerings include:
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Prequalification
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Bid management
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Project management
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Quality & safety
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Design coordination
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BIM
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Field productivity
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Financial management and services.
PCOR seeks medium and large customer accounts via its direct sales and marketing efforts.
The firm is also active in brand-building efforts through participation in various construction industry events.
According to a 2019 market research report by Technavio, the market for construction management software is expected to grow by $7986 million from 2022 to 2027.
A report commissioned by the company and prepared by Frost & Sullivan estimated that the market for the firm’s various products was $9.4 billion.
Consulting firm Deloitte estimated that 1.5% of the global construction expenditure will be spent on IT products and services, which would equate to about $15 billion.
The primary drivers for forecasted growth are a growing urbanization trend in major countries worldwide and the ongoing need to upgrade or add new infrastructure.
Major competitive vendors include:
Management says its suite of software tools, combined with its growing app marketplace, promises to drive greater value for customers.
Procore Technologies’ Recent Financial Trends
Total revenue by quarter has continued its rising trajectory; Operating income by quarter has remained heavily negative, as the chart shows here:
Seeking Alpha
Gross profit margin by quarter has risen slightly in recent quarters; selling and G&A expenses as a percentage of total revenue by quarter have trended lower, indicating higher efficiency in generating incremental revenue:
Seeking Alpha
Earnings per share (diluted) have improved slightly recently, although they remain heavily negative, as shown in the chart below:
Seeking Alpha
(All data in the above charts is GAAP.)
In the past 12 months, PCOR’s stock price has risen 31.32% vs. that of the iShares Expanded Technology-Software ETF’s (IGV) rise of 35.23%:
Seeking Alpha
For balance sheet results, the firm ended the quarter with $603.0 million in cash, equivalents and short-term investments and no debt.
Over the trailing twelve months, free cash flow was $35.9 million, during which capital expenditures were $11.0 million. The company paid a hefty $179.2 million in stock-based compensation (“SBC”) in the last four quarters.
Valuation And Other Metrics For Procore Technologies
Below is a table of relevant capitalization and valuation figures for the company:
|
Measure [TTM] |
Amount |
|
Enterprise Value / Sales |
10.5 |
|
Enterprise Value / EBITDA |
NM |
|
Price / Sales |
10.3 |
|
Revenue Growth Rate |
36.2% |
|
Net Income Margin |
-31.2% |
|
EBITDA % |
-27.5% |
|
Market Capitalization |
$9,250,000,000 |
|
Enterprise Value |
$8,730,000,000 |
|
Operating Cash Flow |
$46,880,000 |
|
Earnings Per Share (Fully Diluted) |
-$1.85 |
|
Free Cash Flow Per Share |
$0.01 |
(Source – Seeking Alpha.)
PCOR’s most recent unadjusted Rule of 40 calculation was 8.8% as of Q2 2023’s results, so while the firm has improved its results, it is still in need of material improvement, per the table below:
|
Rule of 40 Performance (Unadjusted) |
Q2 2022 |
Q2 2023 |
|
Revenue Growth % |
36.1% |
36.2% |
|
EBITDA % |
-36.3% |
-27.5% |
|
Total |
-0.2% |
8.8% |
(Source – Seeking Alpha.)
Sentiment Analysis
The chart below shows the frequency of certain keywords in management’s most recent earnings conference call with analysts:
Seeking Alpha
The frequency of negative terms indicates the company and its clients are seeing increasing macroeconomic headwinds, which are creating challenges.
Analysts asked leadership about their sales pipeline, the international outlook and its payments function beta test.
Management responded that its pipeline remained robust with the exception of some pockets of caution.
International revenue rose 36% YoY on a constant currency basis, so management remains focused on investing in that aspect of business growth.
Regarding payments, the company is still in the early stages and plans to focus first on the general contractor-to-subcontractor payment process, helping GCs reduce the cost and complexity of a historically laborious process while improving payment lead times for subcontractors.
Commentary On Procore Technologies
In its last earnings call (Source – Seeking Alpha), covering Q2 2023’s results, management’s prepared remarks highlighted the addition of 600 net new customers, reaching more than 15,700 customers by the end of the quarter.
Leadership noted that “some sectors in construction remain muted, [while] other sub-sectors are experiencing unprecedented growth.”
This dynamic has become more pronounced over time in recent quarters, and management is paying close attention to it.
The gross retention rate was 94%, within the firm’s historical range of 94% to 95%.
Total revenue for Q2 2023 rose by 32.7% year-over-year, while gross profit margin increased by 2.9%.
Selling and G&A expenses as a percentage of revenue dropped an impressive 8.1% YoY and operating losses were reduced by 17%.
However, operating loss for the quarter was still an eye-popping $58 million.
The company’s financial position is quite strong, with substantial liquidity, no debt and positive free cash flow.
PCOR’s Rule of 40 performance has improved year-over-year but remains far from where it should be.
Looking ahead, full-year 2023 topline revenue is expected to grow at 28.3% over 2022.
If achieved, this would represent a decline in revenue growth rate versus 2022’s growth rate of 39.9% over 2021.
In the past twelve months, the firm’s EV/Sales valuation multiple has been virtually unchanged, net-net, as the chart from Seeking Alpha shows below:
Seeking Alpha
A potential upside catalyst to the stock could include improvement in construction market activities.
However, the firm is seeing increasing sales cycles and smaller new contract value closings, resulting in reduced revenue growth in the foreseeable future.
This reality, combined with its ongoing heavy operating losses, leads me to be cautious about the prospects for a material organic catalyst to the stock.
Accordingly, I remain Neutral [Hold] on Procore Technologies, Inc. for the immediate future.
