Procore Technologies, Inc. Q2 FY2023 Earnings Call

Good afternoon. Thank you for joining the Procore Technologies 2023 Q2 Earnings Call. My name is Matt, and I will be your moderator today. I would now like to hand the conference over to our host, Matthew Puljiz, VP of Finance.

Alright. Thanks. Good afternoon, everyone. Welcome to Procore’s 2023 Second Quarter Earnings Call. I am Matthew Puljiz, VP of Finance. With me today are Tooey Courtemanche, Founder, President and CEO; and Howard Fu, CFO. Further disclosure of our results can be found in our press release issued today, which is available on the Investor Relations section of our website and our periodic reports filed with the SEC. Today’s call is being recorded, and a replay will be available following the conclusion of the call. Comments made on this call may 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 views as of today, August 2, 2023. Procore undertakes no obligation to update any forward-looking statements to reflect new information or unanticipated events, except as required by law. And if this call is replayed reviewed after today, the information presented during the call may not contain current or accurate information. Therefore, these statements should not be relied upon as representing our views as of any subsequent date. We’ll 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. And with that, here is Tooey.

Thanks, Matt, and thank you, everyone, for joining us today. I am proud of the results that we delivered this quarter despite the challenges we continue to see in the demand environment. Let me start by sharing a few highlights from the quarter. In Q2, we grew revenue 33% year-over-year and added over 600 net new customers, reaching a total of over 15,700 customers by the end of the quarter. We continue to make progress on our journey of efficient growth by improving operating leverage in the business while sustaining revenue growth. Procore was once again ranked number one across 11 construction categories in G2’s 2023 summer report. I’ve had the opportunity to spend a lot of time on the road this past quarter, and I want to share something that is top of mind from my travels. At Procore, we have a vision to improve the lives of everyone in construction. The only way to further this vision is to protect the industry’s most precious asset, its people. Over the last century, we have made tremendous progress to improve the physical health and safety of workers in construction. What’s becoming increasingly clear is that we must prioritize mental health alongside physical health. In the U.S., the rate of suicide for men in construction is about four times higher than the general population. That’s why this quarter, we came together with the B1M, a leading construction video channel, to officially launch Get Construction Talking, a global initiative to improve mental health in construction. By combining the B1M’s reach of over 2.9 million YouTube subscribers with Procore’s network of over 2 million users across more than 150 countries, we can bring awareness to mental health in construction and raise money to amplify the efforts of charities working in the space. I’m honored to work alongside construction industry leaders to destigmatize mental health in the industry and provide resources to workers and organizations in need. During my travels, I had an amazing opportunity to tour the international Thermonuclear Experimental Reactor, also known as ITER. As an alternative energy and construction enthusiast, this was a real career highlight for me. The complexities and the scale of this project cannot be overstated. It’s one of the largest construction projects on the planet, and it’s a collaborative effort between 35 countries and over 700 contracts. I’m incredibly proud that Procore’s customer for Peruvial is one of the prime contractors on this project and is contributing to building this game-changing technology. Examples like ITER that illustrate the sheer complexity of construction are an important reminder why the industry continues to seek ways to optimize their efficiency and position themselves for continued growth. This is only becoming more important given the current demand environment. In the past, we’ve talked about the many puts and takes in construction and how the aggregate construction volume and overall demand is what really matters most. As the demand environment continues to evolve, a tale of two stories has emerged. While some sectors in construction remain muted, other sub-sectors are experiencing unprecedented growth. The dichotomy we’re seeing in the broader industry is not unlike the behavior we’re seeing within our customer base. On our last earnings call, we shared a new dynamic that has surfaced in Q1, in which a portion of customers began demonstrating cautiousness and construction volume commitments, while at the very same time a greater portion expanded their volumes. In Q2, this dynamic became more pronounced. Relative to Q1, a greater portion of the industry showed incremental conservatism, while at the same time a greater portion grew their construction volumes with Procore. Similar to last quarter, both the incremental cautiousness and expansion activity was not concentrated in any particular facet of the business, but rather span multiple stakeholders, customer sizes and geographies. Given this is the second quarter of seeing this dynamic, it’s no longer just a data point, but rather a trend that we’re paying close attention to, and Howard is going to elaborate on this further. Speaking of strong expansion momentum, we continue to build upon our partnership with the industry with a number of notable customer wins in the quarter. I’d like to share a few examples, starting with P.J. Hegarty and SUNS, a leading general contractor with over 95 years of experience, undertaking projects across the UK and Ireland. They manage a diverse portfolio across commercial, office, healthcare, education, industrial and civil sectors with a particular focus on large-scale complex projects. P.J. Hegarty initially bought Procore displacing competitive solutions in order to consolidate their field and desktop solutions onto one connected platform and enable easier adoption for their project teams. They particularly valued our mobile accessibility, which allowed them to have better visibility into what was happening on site. They had previously been using Procore for their data center projects but expanded this quarter and now we’ll be using our platform across all of their projects. As part of this expansion, they’re adding Procore BIM and analytics to their product suite to enable collaboration on BI models and enhance their analytical capabilities. During my travels, I had the pleasure of meeting the P.J. Hegarty team in person in their offices in Dublin. This is a great example of the relationships we continue to foster with our customers around the world. I’d like to share another example. Guilford County School District is the third largest school district in North Carolina, serving nearly 70,000 students across 126 schools. They originally purchased Procore for our intuitive collaborative platform, particularly the real-time insights, analytics and data ownership we provide. Guilford County recently passed two major public bonds totaling approximately $2 billion to support much-needed construction expansion and improvements across 12.5 million square feet of school facilities. As a result of these bonds, Guilford County is partnering with Procore to build several new schools, ultimately expanding their commitment with Procore by four times. Our expanded partnership will benefit students, teachers and the surrounding community and the long-term educational goals for all of Greensboro, North Carolina. Procore is contributing to building the schools, hospitals, and homes that we desperately need, and the infrastructure that powers them and brings them to life. This is just one great example of why I am proud to support the industry that builds the world around us. Another great example is Pomerleau, one of Canada’s leading construction companies with nearly 200 active project sites. They have been involved in building incredible projects across Canada, including the Grand Theater de Quebec, the University of Toronto Student residences, and the Burgoyne Bridge. Since becoming a Procore customer in 2019, Pomerleau has focused on standardizing on the Procore platform, reducing the need for multiple other software solutions. This quarter, Pomerleau increased our investment with Procore, expanding construction volume on the platform. As part of this expansion, Pomerleau has started this journey, bringing BIM models onto Procore for easier viewing and collaboration. Pomerleau will also be leveraging the Procore extracts application as part of their data strategy to more easily digest data and enable flexible reporting. It’s been fascinating to see how quickly our customers have evolved from talking about data to talking about how they can leverage AI to get as much value out of that data as possible. In fact, AI now comes up in most of my customer conversations. We’re going to share more on our perspective on this at our upcoming Groundbreak conference. But I want to take a moment to share how I’m thinking about the AI opportunity for Procore. It’s becoming abundantly clear that we are on the cusp of a transformational shift in generative AI. This powerful technology has the potential to transform how we work, how we think, how we operate as a business, and how we serve our customers. We have been expanding our AI and machine learning capabilities for years. From our acquisitions of Avata Intelligence and INDUS.AI, to reporting enhancements in Procore analytics, to new product features like search functionality, submittals, automated area takeoff, and voice-enabled capture. Now with the advent of large language models, we have yet another tool in our toolbox to unlock the value of the project data and drive greater efficiencies for our customers. By being built on a single platform, generating a massive amount of data, Procore is well positioned to leverage this technology to deliver even greater value to our customers and further our vision of improving the lives of everyone in construction. To achieve this vision, we must begin thinking of ourselves not just as tech providers or partners, but as trusted copilots for all of our users. The future of our business is to be there for them to guide them, to assist them, and help them increase their productivity. I’ve heard this referred to as customer intimacy, which makes sense. When you think about what conversational AI will mean for our end-users, connecting users across workflows on our platform has been the key to our success. We’re evolving to provide intelligence to all of the work done in Procore every single day. We ultimately want our users to instinctively turn to Procore to help them do their jobs. Generative AI is one of the tools that will enable us to do this, allowing us to create solutions that are not just reactive but proactive: solutions that understand our users’ needs even before they do; solutions that can adapt, learn, and improve over time. We are not just building products. We are building partnerships. We’re not just solving problems; we’re anticipating them. And we’re not just reacting to the industry; we are shaping it. So to wrap up, I want to invite all of you to our 2023 Investor Day, which will be held alongside our annual user conference, Groundbreak, on September 19 and 20 in Chicago. This is shaping up to be our largest Groundbreak ever with thousands of construction leaders from dozens of countries expected to join us. We planned a jam-packed couple of days, including over 80 breakout sessions, an expo hall showcasing the latest advancements in construction technology, and an exciting lineup of keynote speakers, including renowned athletes like Michael Phelps and Laila Ali, and the Founder and former Executive Director of Stanford’s Disruptive Technology Program, Michael Steep. I couldn’t be more thrilled to get together with our customers, our partners, and our shareholders, and I hope to see you all there. With that, let me hand it over to Howard.

Thanks, Tooey, and thank you to everyone for joining us today. We are pleased with the results we delivered against a challenging demand environment. Today, I’ll quickly recap our financial results, share some color on the quarter, and conclude with our outlook. Let’s jump into our Q2 results. Total revenue in Q2 was $229 million, up 33% year-over-year, and international revenue grew 29% year-over-year. Similar to prior quarters, our Q2 international results were impacted by currency headwinds. On a year-over-year basis, FX contributed approximately 7 points of headwind to international revenue growth. Therefore, on a constant currency basis, international revenue grew 36% year-over-year. Our non-GAAP operating loss was $3 million, representing an operating margin of negative 1%, and our key backlog metrics, specifically current RPO and current deferred revenue grew 33% and 32% year-over-year, respectively. I’d like to take a step back and share some additional color on our Q2 performance. As Tooey mentioned, the dichotomy and customer behavior we saw in Q1 became more pronounced in Q2. This quarter, we saw a greater share of customers demonstrate strong expansion activity both in the form of additional construction volume as well as the addition of new products. This expansion momentum was well rounded across multiple facets of the business, and we believe is a positive reflection of the continued optimism within cohorts of the construction industry. Conversely, we also saw an increase in customers demonstrating cautiousness in construction volume commitments, which we continue to believe reflects a heightened sense of conservatism within other cohorts of the industry. This has translated to longer sales cycles and smaller initial deal sizes. While we managed to be resilient in Q2 through these headwinds, should this cautious sentiment persist, it may further impact us in future quarters. And similar to the expansion activity we saw, this cautiousness was not concentrated in any particular part of the business, but rather spanned multiple stakeholders, customer sizes, and geographies. The elevated expansion and cautiousness as compared to historical norms had partially offsetting impacts and therefore, isn’t obvious when reviewing our financial results. Nonetheless, it represents an unusual occurrence that has persisted, and we wanted to share to help illustrate why the current demand environment remains dynamic and challenging. Moving further down the P&L, given this is our second quarter of stronger margin performance, I want to share some context on how we view our margin trajectory as a whole. At last year’s Investor Day, we provided a framework of approximately 350 basis points on average of non-GAAP operating margin expansion per year with our current revenue growth rate. We continue to believe this is the right balance of improving our margin profile, sustaining top-line growth, and allowing the flexibility to react to our business landscape. This year, we set a plan for 2023 that includes meaningful margin expansion, incremental to this framework. We recognize the need for our margin profile to catch up relative to our revenue scale and set a plan to accelerate that path of improvement without compromising our business needs. Additionally, you’ve heard us refer to efficient growth previously. Internally, leaders and teams have leaned into this concept, evaluating every expense and investment opportunity to identify ways to improve operational efficiency and scale the business. This has resulted in an accumulation of smaller savings across multiple areas of the business that has allowed us to meaningfully outperform our margin expectations over the past two quarters, while giving us the flexibility to continue investing in future growth opportunities. Ultimately, the combination of these dynamics has translated to faster margin expansion this year, and investors should not expect the same magnitude of margin expansion in future years. Going forward, we continue to believe the framework we provided at last year’s Investor Day is what investors should expect. At our upcoming Investor Day, we plan to share more about our philosophical approach to managing our financial profile at various revenue trajectories. With that, let me move on to our outlook. We continue to operate in a challenging demand environment. As a reminder, our guidance philosophy takes into account this uncertainty and factors in the potential for incremental weakness in the market. We have taken a similar approach over the last several quarters to set guidance at a level we have very high conviction we can deliver on in almost any environment. Additionally, when reviewing our future results, investors should note that the second half of 2022 serves as a challenging compare period. As we noted on our Q3 earnings call last year, our backlog metrics benefited from large deal activity that was anticipated to close in Q4 of 2022 but instead closed in Q3 of 2022. As a result, current RPO in Q3 of 2022 accelerated to 38% growth year-over-year on an organic basis, approximately 4 points higher than any other quarter in 2022. With that, here is our guidance for Q3 and full year 2023. For the third quarter of 2023, we expect revenue between $232 million and $234 million, representing year-over-year growth between 24% and 26%. Q3 non-GAAP operating margin is expected to be between negative 6% and negative 5%. For the full year of fiscal 2023, we expect revenue between $921 million and $924 million, representing total year-over-year growth of 28%, which is an increase of $12 million from our previous full year guidance. Non-GAAP operating margin for the year is expected to be between negative 4.5% and negative 4%, which represents an improvement of 150 basis points from our previously issued guidance last quarter and implies year-over-year margin expansion of 600 basis points. Finally, although we do not guide free cash flow, you may recall that we provided a framework at last year’s Investor Day that free cash flow margin should expand in line or slightly faster than non-GAAP operating margin. With our updated guidance this quarter, I am pleased to share that we are on track to reach positive and sustainable free cash flow in 2023. We expect this to be the first of many years of generating free cash flow as we continue our pursuit of efficient growth. Looking ahead, we remain focused on delivering growth at scale in a disciplined manner, which allows us to both invest in extending our market leadership as well as drive operating leverage, ultimately improving free cash flow per share. Before I wrap up, I’d like to build on Tooey’s comments and invite you all to join us at our 2023 Investor Day taking place on September 20 in conjunction with Groundbreak in Chicago. Please reach out to our Investor Relations team if you would like to attend. I’d like to close by thanking our customers, partners, employees, shareholders, and the industry, as well as the communities we serve for giving us this opportunity. With that, let’s turn it over to the operator for Q&A.

The first question is from DJ Hynes with Canaccord. Your line is now open.

Hey, guys. Thanks for taking the question. So I want to follow up on the dynamics that you talked about with some pockets of conservatism, some pockets of faster expansion. It wasn’t totally clear to me if that’s a net positive or a net negative in terms of growth for Procore? I mean it’s hard to discern in your numbers. And then maybe the second part of that question that I’ve been asked a couple of times from investors is just with the customers that are opting for smaller commitments, if they were to exceed those commitments, remind us how the business model works? Like how common is that? And how do you guys – are there overcharges? Or how do you handle that?

Yes. Thanks, DJ. This is Howard. So the first thing is in terms of the net impact. The net impact is actually positive, so we’re seeing greater amounts of expansion versus downgrades and that’s why it’s not apparent in our financial results. The dichotomy has continued to get more pronounced, but the net impact is positive. In terms of the lower volume commits, one of the things that we do when customers exceed those volume commits is they actually have to pay a higher basis point typically when they exceed the volume commits that they have. It’s an incentive for customers typically to commit to higher volume upfront. So, we don’t see a ton of that. Typically, we get more volume commits upfront.

Yes, makes sense. And then Howard, I want to ask you on margins. You did a good job laying out that this year was kind of a catch-up year. I mean, they’ve obviously been really strong in the first half. Guidance seems consistent with your under promise, over deliver mantra. But are there any kind of notable planned investments in the back half of the year that would drive margins materially lower than what we’ve seen in the first half?

There really isn’t. Keep in mind that our margin guide is something that we believe leaves us enough room to continue to make investments as those opportunities arise while we evaluate our environment and what’s available to us towards the back part of the year. If those investments become available and if we don’t see a great opportunity to do that, there could be potential upside to that margin profile.

Yes, makes sense. Okay, thank you, guys, for the color.

Thanks, DJ.

Thank you for your question. Next question is from the line of Saket Kalia with Barclays. Your line is now open.

Okay. Great. Hey, guys. Thanks for taking my questions here. Howard, maybe for you, just zooming out a little bit from the quarter. I was wondering if you could just talk a little bit about the international business right now. Clearly, a lot of investment there for the future, I think we reviewed that at last year’s Analyst Day. How do you sort of think about that business growing and eventually contributing to this operating leverage in an even bigger way?

Yes. Thanks, Saket. So we continue to remain focused on that investment on the international side, and it is something that we view as growth investments. Remember that our framework that we have provided on an ongoing basis of that 350 basis points average expansion that actually does not contemplate any additional upside that we would see from the international investments and the leverage there. That’s how I’m thinking about the components of our margin profile going forward relative to international. We still remain focused on that investment, particularly in the back part of this year. We still expect improvements to come about in the international business towards the back part of this year, and we’ll provide an update later on in the year.

Got it. Very clear. Tooey, maybe for my follow-up for you. I realize it’s still very early, but any early observations from your payments product here in beta testing? I mean, just high level, anything just in terms of customer preferences or comments on pricing? Anything you want to say about payments?

Saket, you know I love talking about payments; I won’t talk about a product. So you know what I would say is we have learned a lot; we have partnered very, very closely with the industry to deliver this solution. I’m constantly gratified by the enthusiasm that I see in the market and the customers that I’m talking to about us solving this problem of getting people paid faster. I would encourage you all to come to Groundbreak Investor Day because you may learn a little bit more at that moment.

Got it. Looking forward to it. Thanks, guys.

Thank you.

Thank you for your question. The next question is from the line of Adam Borg with Stifel. Your line is now open.

Great. And thanks so much for taking the question. Maybe just for you, Tooey. In the past, you’ve talked a little bit about adopting more of a product-led growth strategy. I was just curious kind of where are we with this in terms of better refining product and packaging to serve the lower end of the market.

Yes. Well, so the product-led growth is definitely not an event; it’s a journey, right? And so this has been something we’ve been working on for quite some time. But if I were to characterize where we are in the process, I would say we’re still in the early days. We talked a little bit about PCN in the past. Things like PCN, our connected strategy, is going to help support expanding our customer base across our collaborators as that becomes more prevalent and adopted. So early innings yet, but it’s a journey.

Just to add on a little bit there. Remember not to think about PLG as specifically for the lower end of the market. It is a broader strategy around how we go to market across the board, as Tooey mentioned, including things like PCN, so just keep that in mind in terms of when we’re talking about PLG. And it is very early innings.

Adam. And I’m going to drill on top of this that we know so much about our customers, and we have so much of their data that we have the opportunity to present them with the next best offering or next best action for them to take in expanding their relationship with Procore. Those are areas that it’s not dependent upon the size of the customer; everybody benefits from learning about how they can use Procore to run better businesses.

That’s super helpful. And maybe just as a super fast follow-up, just on the insurance front, again, I’m sure we’ll hear more at Groundbreak, but just on Proper Risk Advisors. Again, I know it’s super early, but any interesting customer feedback or any initial earnings there you’re willing to share? Thanks so much.

Yes, sure. So still, again, very early days. I would encourage you to definitely come to Investor Day. Our friend, Paul will be there, and he will have a lot to talk about. But yes, I would say stay tuned; there’s going to be more to come. It’s an area where I think there’s a lot of opportunity. We’re a trusted partner to the industry, and that trust goes a long way.

Great. Thanks again.

Thanks, Adam.

Thank you for your question. The next question is from the line of Sterling Auty with Moffett Nathanson. Your line is now open.

Yes. Thanks. Hi, guys. I appreciate the commentary on the macro. But bringing this home to Procore specifically, can you talk to us a little bit about how you view your current sales pipeline and your pipeline coverage ratios in light of those dynamics? In other words, is it getting stronger? Is it getting weaker? And are you doing anything specific to manage that pipeline coverage in light of the trends that you mentioned?

Cautious outlook.

Got it, thank you, guys.

Yes. Thanks, Sterling.

Thank you for your question. The next question is from the line of Brent Thill with Jefferies. Your line is now open.

Hi, Tooey. Hi, Howard. This is Luv Sodha on for Brent Thill. Thank you again for taking the question. I wanted to ask one on the expansion activity that you saw this quarter; one of the comments you made was it’s not just volume-based expansion, but it’s also adoption of additional products. Could you just give us some insight into – are you working with the go-to-market team to incentivize them to sell additional products? And then what additional products have been adopted?

Great question, Luv. The good news is that our products are in demand from our customers. A great example is that with folks that are coming on board, and they’re buying project management, they’re quickly seeing the need for Procore to help them manage their financials. I think that’s been one of the reasons why we’ve been successful, and really what sets us apart is the fact that project management and financials aren’t disjointed separate pieces of software. We acknowledge the integration that is required between project management and financial management on a platform. It’s kind of a natural progression, and it really depends on the type of customers. Owners are going to purchase different products than GCs in the beginning, and the specialty contractors are going to choose more workforce management or BIM tools that they need for the field. So it really depends on the person that we’re talking to as to how they progress through purchasing our different products.

Yes. From an incentive standpoint, we don’t have anything that’s overly specific or direct in terms of product incentives at this point. There is a lot of opportunity to continue to cross-sell as most of our expansion is still from a volume perspective.

Got it. That’s helpful. And then just one quick one, Howard, if I may, on the gross retention side. Could you just elaborate, was there anything that led to the moderation to 94% or any additional color you could share there? Thank you.

Sure. The 94%, likely there was some of the cautiousness that made its way into that 94% gross retention. But keep in mind that 94% is still within our historical range of 94% to 95%, and so we still feel good about that gross retention number.

Thank you for your question. The next question is from the line of Matt Broome with Mizuho. Your line is now open.

Thanks very much. Hi, Tooey, and Howard. Congrats on another strong and consistent quarter. I guess in terms of the increased polarization of customer behavior, I just be interested to understand a little bit more about what’s really causing that behavior? And did those trends sort of become more pronounced as the quarter progressed and indeed sort of carry on into July?

Yes. So we mentioned this earlier, but I’m going to say it again, which is I wish I could tell you, Matt, that we have data that points to one particular area, one segment, one geo, or one stakeholder where this was happening more than others. It was generalized across the entire portfolio, which gives us a little bit more interest in looking deeper into this. But it’s really interesting, if you asked my personal opinion, Matt, what I think is happening is if I look over the last few quarters, and forget about construction, when you read the news, things haven’t gotten rosier; things seem to have continued to get a little bit more scary about the overall macro environment. So I think sentiment goes a long way in that. But also, there’s a lot of optimism because you hear about the infrastructure bills, mega projects coming online, data centers, manufacturing, and warehousing. There are things to be very optimistic about and then things that can concern you. A customer I spoke to this quarter said, we are increasingly optimistic that we may dodge a bullet about the economy. He said we’re increasingly worried that we may not be right in that optimism. This illustrates how you can hold two thoughts in your head that are counter to each other and articulates it well.

Alright. No, that’s helpful. And then I guess, just in terms of the incremental cautiousness from some of your customers and those volume commitments, are there any signs that this is ultimately translating into lower usage? What is the effect on usage there, if any?

Yes. No. So we do not believe there’s any correlation at all. We track usage very closely, and there has been no – in fact, usage is on the increase. It’s not on the decrease.

Alright. Perfect. Thanks so much.

Thanks, Matt.

Thank you.

Thank you for your question. The next question is from the line of Josh Tilton with Wolfe Research. Your line is now open.

Hey, thanks for taking my questions. I kind of want to go back to that last one and maybe go back to some of these customer conversations that you’re having. I get that there’s no data points or trends in the customers spending more versus customers spending less. But I guess when you talk to customers who are choosing to expand, what exactly are they pointing to that’s giving them the confidence in spending more? What are you hearing from those customers who are spending less?

Yes. I can just tell you my anecdotal stories and conversations. By the way, I’ve been on the road a lot, so a lot of these are deep in-person conversations, not just quick phone calls. In some cases, these businesses were running more volume because they were newer to Procore; they may have only been running their data center business with us, not the rest, or they had been awarded a larger project or two that they hadn’t anticipated leading them to want to increase their volume to Procore. Customers start with project management, but there’s an opportunity for us to expand those accounts, across financials, invoice management, and quality and safety. The optimism comes from those who are betting on the future. I’d say I have a biased sample; I’m talking to our biggest and best customers. I haven’t spoken to many customers who are pessimistic.

Yes, Josh. On the downgrade side, it’s about sentiment in those customers and what they’re seeing for themselves. It may not be because their backlogs aren’t there; it’s purely about the sentiment. Keep in mind when they downgrade and if they do overachieve or overuse on the volume, they do have to pay a higher basis point. The good news is, when you look at that in relation to our gross retention, it still remains relatively stable.

Totally makes sense. And I guess just my follow-up sticking with this topic is, it sounds like it was an offset in the quarter, but a net positive, but I think in the prepared remarks, you warned us that if this continues, it could have a negative effect. So, outside of the obvious answer, which is you need more cautious customers than expanding customers, what would have to change for this trend to flip?

What would have to change? Let me answer it in a couple of different ways. First, in terms of the cautiousness we are calling out, when I look at the proportion of customers that are expanding, renewing, or downgrading, a smaller proportion of customers renewing and either going expansion or downgrading causes the predictability of the business to be a little less accurate. From that standpoint, for that cautiousness to materialize, we would need to see the sentiment on the downside outpace the expansion side. But the profile we are seeing really causes predictability to be less accurate and increases volatility potential.

Helpful guys. Thank you so much.

Thanks, Josh.

Thank you for your question. The next question is from the line of Brent Bracelin with Piper Sandler. Your line is now open.

Thank you. Good afternoon. Tooey, maybe starting with you, the volume of net new customers on a year-over-year basis had declined for two quarters, which really makes sense given the challenges out there. I guess I was a little surprised in net new adds that were strong in the quarter, 615 million back to year-over-year growth there, a little stronger than seasoning we have seen in the last couple of years. So what’s driving the net adds? Is there a profile either specialty or owner or a unique cohort that’s driving some of that? Just wanted to get a little more color on the net new customers that looks a little healthier than I would have thought given the environment. Thanks.

So Brent, I would not over-index on customer count. The thing is because we have a large SMB business, that creates a lot of variability in those numbers. We don’t see it as something we track closely. It’s much more about the construction volume our customers bring on the platform, and that remains strong.

Yes, I will just jump in. Look, we are happy with the customer adds. Historically, we have been in that 500 million to 600 million range in terms of quarter-on-quarter increase, which still remains consistent in Q2. To Tooey’s point, we are really managing to the dollars those customers bring in versus the actual count of the customers. So we feel good about the customer count.

Great. And then, Howard, one quick follow-up on the renewal discussions and dollar volumes you are seeing on expansion versus contractions? I think we heard from Avata Exchange earlier today; they had a call out around a commercial building being a sub-segment for them where they are seeing softness. As you think about the contracts that are up for renewal, are they tied to commercial building erosion? Is it hard to predict? Just trying to get a little more color on those contracts that are downgrading. Is it tied to commercial office building weaknesses?

So Brent, I’m going to jump in over Howard and then Howard can jump in on this one. But the answer is simply no, that doesn’t come up in the conversations. Our success is driven primarily by sentiment. The customers run diversified portfolios; the ones in heavy into commercial office buildings two years ago have shifted their portfolio mix dramatically away from that to data centers and manufacturing and warehousing and areas where they can actually see some success. It’s important to note that there are 70 sub-segments in the construction industry, and that’s just one; it’s in the single-digit percentage of the overall industry. Sorry, Howard. You got anything else?

No. You covered everything too.

70 sub-segments certainly helps explain the diversification that some don’t appreciate. Really helpful color there. Thanks.

Sure. Thank you.

Thank you.

Thank you for your question. The next question is from the line of Nick Altmann with Deutsche Bank. Your line is now open.

Awesome. Thanks, guys. Just with some of the pockets of weakness on the volume commitments, I’m wondering how you guys are combating that from a go-to-market perspective? I think you had mentioned earlier that financials is an area or a SKU that you guys continue gaining traction with. But I guess what is the remedy, or how are you combating some of the weakness in volume commitments? Is it incentives in place to drive expansion through new SKUs? Is it a shift in focus to other product categories or areas? Just any sort of color on sort of how you plan on combating that weakness in volume commitments, I think would be really helpful.

Yes. Sure, Nick. Thanks. Similar to what I mentioned before, it’s a regular part of our evaluating and determining where we put our resources on a quarter-by-quarter basis and takes those things into account. We will look at where to double down on things like driving pipeline or specific geos or teams, and we continuously make those adjustments as we execute throughout the quarter and the year. Those adjustments are a normal part of our decisions in any particular quarter, so they are definitely happening as we move throughout the year.

Great. And then just a quick follow-up on the margins. It’s great to see that the outlook on the margins and some comments around free cash flow. Just given you’re cleaning up the expense line a bit, can you maybe just talk about the areas where you are adding incremental dollars and where you guys want to double down on the expense line? And maybe on the flip side of the equation, where are areas you are cleaning up a little bit more? If you could talk about product categories, international, etcetera, I think that would be interesting. Thanks.

Yes. The margin improvement was planned in terms of being above that framework we’ve been given about the 350 basis points on average. It has come from a diverse and wide range of areas from go-to-market R&D to G&A. The second thing is we continue to invest in the business, largely in the front office because of the demand that we see and that we’re reacting to. We are still investing in the go-to-market and the products side. Keep in mind that in terms of headcount and capacity investments, we came into fiscal ’23 saying we’d add less resources in fiscal ’23 than we did in fiscal ’22. That has certainly contributed to the margin expansion we saw and are seeing this year.

Thanks guys.

Thanks, Nick.

Thank you for your question. The next question is from the line of Dylan Becker with William Blair. Your line is now open.

Hey guys. It’s Faith on for Dylan and thanks for taking our questions. I wanted to touch on the evolution of the business outside of the pure macro dynamics. Now that there is more of a platform approach versus a point solution tool when you started. Wondering how we should think about resiliency in your durable growth framework, now that the equation shifts more to a balanced mix of both product and volume to support business efficiency versus solely relying on volume growth as it has been historically, which I understand still has a lot of white space in itself.

Yes. Well, thank you. Procore has been a multiproduct platform since 2017. I wouldn’t characterize us as having just shifted. What we have done is matured the products we have had that a company—our project management flagship product. That’s given us the opportunity to provide value by giving more products. By the fact that we are helping our customers run their entire business, we think we can grab more of their volume; it doesn’t make sense to run your business on a platform that not all your projects are on.

Right. No, that’s helpful. And then just quickly, if I can ask a follow-up, I wanted to touch on the Procore Construction Network and how this can drive efficiency to the sales process by enabling more self-serve optionality. How are you guys thinking about this?

Yes. The way we think about PCN is our mission to connect everybody in construction on a global platform. The PCN is just one tool we use to acknowledge the collaborators on our platform deserve an experience that keeps them engaged with our products. It’s an enabler, just one of many ways we provide value, and it helps the sales process.

Yes. Just to add on, specifically for example with PCN, our intent is to increase the volume of customer participation in that PCN and engagement. With that, comes the ability to meet the customer at the point of need. When we have that opportunity, it starts to impact the efficiencies we have further up the chain in terms of pipeline and how we generate and ultimately close that pipeline into a dollar of ARR.

Thanks for the color. Thank you, guys.

Thanks, Faith.

Thank you.

Thank you for your question. The next question is from the line of Kash Rangan with Goldman Sachs. Your line is now open.

Thank you very much, Tooey and Howard. I have a slightly different take. We are always waiting for this macro recovery, but at the same time, in the 2 years that you have been public, you have been putting up the numbers and your growth rate has in fact accelerated from when you went up. I think the first quarter, you went public was 27%, 32%. Your margins are better, free cash flow is better, number of customers added just keeps growing. Revenue per customer is growing; your yield is getting better. So, what are we waiting for? What if we don’t get a 'recovery'? What if this is a new normal? How does it leave the company? Are you still keeping the same optimism with respect to the TAM, the growth opportunity of the company? Would you need to set aside a notion of a commercial or whatever recovery because you have had enough strength in your end markets and your business model seems to be doing nothing but just performing and outperforming? Tell us more about why we are all worried about something we should not be worried about.

Well, Kash, good to hear from you. You are now hired onto our Investor Relations team officially. That is probably the nicest thing anybody has ever said. So yes, if the macro demand environment continues to be a challenge, I am personally convinced that the overall need for construction is going to be there. It may shift from one segment to another, and that’s the beauty of Procore; we serve all sectors. That really helps when customers shift their portfolio; they don’t have to shift products, they just shift their portfolio. I am a firm believer the overall demand for construction is going to remain. Look, we have seen the 2009 downturn, we saw the COVID downturn, and we also saw demand didn’t wane dramatically during those timeframes. We have to use the oil tanker analogy; these things, even if it slow, this industry and the way works, it’s like an oil tanker. It doesn’t speed up fast and doesn’t slow down fast and certainly doesn’t turn very agile. We believe we will be more of a steady Eddie when it comes to riding the ups and downs of the overall macro economy just because of the nature of construction.

Yes. Just to add, you won’t see any particular period where we’ll have an outsized uptick or downtick in the growth because of that dynamic. What we have always talked about is our steady-state growth in that high-20s to low-30s range, which still is consistent, and we maintain that perspective going forward.

Got it. Thanks so much. Tooey, appreciate the nice words; you would make a great analyst in case you decide to pursue that line of work.

Got it. Thanks all.

Thank you, guys.

Thank you for your question. The next question is from the line of Jason Celino with KeyBanc. Your line is now open.

Hi Tooey and Howard. I’m just trying to gain a perspective here. It sounds like your customers are expanding more than they are decreasing. This is kind of a like extreme comparison, but I am just trying to gain perspective. If we go back to 2020, there were really only one or two quarters where you saw sequential CRP grow minimally. To what extent at that time did those renewals on the downsizing exceed the ones that were upsizing?

Yes, Jason. I want to make sure that folks understand how severe the situation was in 2020. When you think about 2020, job sites were literally empty, and that is a very different situation than we are in right now because backlogs are still there, construction is still happening, and there is still business being done.

Okay. Yes. No, that’s fair. And then just competitively, given these changing market dynamics, wondering if you have seen any changes to the competitive landscape, competitive tactics.

Jason, no changes whatsoever really as far as we are concerned. Again, it’s always shocking to me, but the vast majority of the people we are talking to every day joining the Procore platform are coming from more analog solutions, Microsoft Office, those types of things as opposed to competitors. We don’t really look at it that way. If anything, just to put a bow on it, there are no changes to report.

Perfect. Thank you.

Thank you, Jason.

Thank you for your question. The next question is from the line of Tim Grieves with Loop Capital Markets. Your line is now open.

Hi. This is Tim Grieves on for Mark. One for me is last quarter, you guys noted that employee attrition came in lower than anticipated. Did that trend continue over Q2?

Yes. Attrition remains at low levels, and we are really happy with where we are from a hiring perspective.

If I could just add another one and expand that to the international side, can you provide us an update on these new sales reps that you hired? If I recall correctly, you mentioned a few quarters ago that with changes in the international business and particularly around onboarding new sales reps. Are these new sales reps fully productive yet? If not, where do they stand?

So, the way I would characterize it is we are always evolving the kind of maturation of how we enable our sellers. We’ve been working on this not only internationally but domestically as well. Some folks are ramped, the newer ones are not. It’s a never-ending process of enabling and ramping up. I would say the process is getting better. When we think about international as an entity, we really don’t think we’ll see significant changes until later this year. I hope that helps.

Thank you.

Yes. Thank you.

Thank you.

Thank you for your participation. That concludes the conference call. You may now disconnect your lines.