Procore Technologies, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Procore Technologies, Inc. provides a cloud-based construction management software, connecting and empowering various stakeholders in the industry globally.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Procore Technologies, Inc. (PCOR) operates in a competitive landscape within the construction software industry, facing established players and new entrants vying for market share. Despite the competition, PCOR has cultivated a niche, primarily due to its industry-specific expertise and a platform that prioritizes customer collaboration and efficiency. However, as a subscription model SaaS company it faces significant risk of churn by customers not utilizing the platform. Therefore, PCOR is best described as a narrow moat company. The firm relies heavily on product development and technology innovation to maintain its relevance and competitive position, but has a fairly sticky business once a customer has invested time and resources in its platform.

Business Explanation

Procore Technologies, Inc. (PCOR) provides a cloud-based construction management software platform. The platform is designed to help construction companies manage their projects, including financial, legal, and collaboration-based aspects, from anywhere in the world.

  • Target Customer: PCOR caters to a diverse group of stakeholders, including general contractors, specialty contractors, architects, engineers, and project owners.
  • Product Categories:
    • Preconstruction: Supports bidding, project planning, bid management, and drawing management.
    • Project Management: Includes document control, submittal review, scheduling, and daily reporting.
    • Resource Management: Covers field productivity, workforce planning, and financials.
    • Project Financials: Tools for budgeting, forecasting, costing, and cash flow.
    • Accounting Integrations: Seamlessly integrates with popular accounting systems, like QuickBooks and Xero.
  • Revenue Model: The company relies on a subscription-based model, with pricing tied to specific features offered in each module. The platform also provides a marketplace (Procore App Marketplace) where customers can access third-party applications that integrate with Procore’s platform.
  • Competitive Landscape: The construction software industry has a wide range of competing software products from giants like Oracle, Autodesk and Trimble. These competitors may also integrate construction management software into existing offerings, or through add on solutions on various platforms.
  • What Makes Procore Different:
  • Focus on Construction: PCOR is exclusively dedicated to construction, providing industry-specific features.
  • Collaborative Approach: Its platform connects diverse project stakeholders and promotes communication.
  • Mobile-First Design: PCOR has emphasized mobile apps, recognizing that much work occurs away from a desk.
  • Open APIs: These allow for greater integrations with existing business systems, and also allow developers to create additional value and applications on top of the existing infrastructure.
  • Scale: The more users and project data they have, the more valuable the overall platform for the rest of the customer base, creating a network effect.
  • Geographic Presence: PCOR has a growing international business. Outside of the U.S., the company serves various markets, most prominently Canada, and the UK and they see the most growth potential in the APAC region.

A major trend in the construction software industry is increased adoption, both by large and small business, thanks to a growing number of new market entrants, advancements in technology, cloud-based models, and integrations of various technologies to the platform. PCOR is also pushing its expansion into international markets.

Financials

For the quarter ended September 30, 2024, Procore’s revenue increased 19%, with a non-GAAP gross margin of 86%, and non-GAAP operating margin of 15%. While this growth is commendable, it’s slightly below analyst’s expectations. This highlights the growing competitive forces and challenges faced by Procore in a maturing market, putting pressure on top-line growth. Procore, however, continues to invest heavily in Research and Development (R&D) to build competitive moats, which may affect profitability short-term.

  • Revenue: PCOR has demonstrated consistent revenue growth, though recent figures indicate a slight slowdown compared to prior quarters.
  • Operating Expenses: Research & development, sales & marketing, and general & administrative expenses are the core operating costs.
  • Profitability: PCOR has a positive gross margin and their operating margins are also positive. A major weakness here is their net loss, as they are still undergoing a period of growth, and the operating expenses associated with this growth are high, which is reflected in their net income margin.
  • Guidance: For the year 2024, PCOR has guided for roughly $1.1B to $1.105B in revenues and a non-GAAP operating margin of 9% to 10%. This suggests sustained growth and profitability improvements in the future.
  • Stock-based Compensation: Stock-based compensation, particularly to its executives, is large and is reducing the earnings per share (EPS). This large stock-based compensation is a continued area of concern from analysts and investors, as it is diluting stock and can signal high operational costs.

Moat Analysis

  • Intangible Assets: PCOR has intangible assets due to proprietary software, intellectual property, and contracts with its customers. These are important for the company in maintaining a competitive advantage. However, some other companies do have similar intangible assets, which means this isn’t necessarily a wide moat.
  • Switching Costs: A company’s main moat, if they have one at all, comes from having customers so deeply embedded in its ecosystem, which makes switching extremely difficult. The company’s sticky customers have high switching costs, which are also reinforced by a high focus on customer service and making software usable and practical.
  • Network Effect: The network effect plays a limited role in PCOR’s moat creation. Although it has many stakeholders on its platform (for example, general contractors, specialty contractors, engineers, and project owners) there are similar platforms where these players can work, therefore its moat based on the network effect alone isn’t that large.
  • Cost Advantages: Although the company may be able to create better margins through scaling, it does not have any cost advantages that will keep competitors away from the market. Its main way to increase profits in the long run is to increase its pricing power through the development of competitive moats, which it is focusing on.

Moat Rating: 2 / 5: PCOR has been successful in creating barriers to competition through customer switching costs and intangible assets. However, PCOR faces competition and is not in a position where it has a wide and sustainable moat. As of now, their moat is at best, narrow, and can quickly erode.

Risks

The following risks could negatively impact PCOR and its moat:

  1. Competition: The industry is becoming increasingly competitive with both existing rivals and new entrants. That increased competition may put downward pressure on prices and margins. Furthermore, some rivals may develop a similar product offering, which would lead to a more commoditized market and less profit potential for the company.
  2. Macroeconomic Downturn: As PCOR caters to the construction industry, downturns in that market can negatively affect PCOR.
  3. Data Security and Privacy: A breach or compromise of their security systems can negatively impact the company’s competitive position and reputation.
  4. Inability to Innovate: Companies need to constantly evolve their product offerings to stay relevant, and a lack of innovation and development can quickly lead to declining market share and brand image.
  5. Poor integration of new acquisitions: Acquisitions are important for sustained growth, but if not properly integrated may lead to higher costs, decreased profits, and ultimately value-destruction.
  6. Reliance on Third-Party Providers: PCOR depends on cloud computing services from companies like Amazon Web Services (AWS). A major disruption with these third-party vendors could seriously affect the business’s ability to operate smoothly.
  7. Financial Stress: An economic downturn, an acquisition failure, or mismanagement could put financial stress on the company which could force it to be less competitive, or even bankrupt.
  8. Employee retention and hiring challenges - Since management is always a core factor in any business, the company might face challenges if they don’t have highly skilled, intelligent, and experienced employees, which will harm their research and development and other areas.
  9. Regulatory and compliance issues. These can be complex, ever-changing and can disrupt the business if there are significant shifts.

Business Resilience

PCOR has some resilience due to its:

  • Recurring Subscription Model: This helps the company generate a continuous and relatively reliable revenue stream. This makes the company resilient to some adverse conditions in the short-term, as they already have customers and revenue locked in for a certain amount of time.
  • Switching Costs and the time/energy it takes to fully implement and learn how to use another platform. This is a major moat for any company.
  • Customer-Centric Philosophy: This has helped with improving retention and brand loyalty.
  • Growing International Business: An ever-increasing international customer base should reduce reliance on domestic markets.
  • Strong balance sheet: High cash holdings combined with a fairly low amount of debt provide further resilience.

Understandability Rating: 3 / 5 The business model is not overly complex but requires knowledge about the construction industry and a basic understanding of SaaS models. Some accounting concepts, especially deferred taxes, need careful review as they affect cashflows. Although the main drivers of the business are easy to understand (number of users, subscription models, etc.) a deep understanding of the moat requires knowledge of the industry in question, so an individual investor should be wary before investing in the company unless they have experience within construction. Balance Sheet Health Rating: 4 / 5 PCOR has a strong cash balance and has a very low amount of debt. The financial risk score, calculated by combining credit ratings, debt/equity ratios, and debt-to-capital ratios, is moderate, which is a good indicator of a company’s long-term viability.

Recent Concerns / Controversies and Management’s Response:

In the most recent earnings call, there were questions about the slower growth rate of revenue. While the company is still growing significantly, at a pace above the long-term median for most companies in the U.S., the recent results showed a slowdown in growth. Management stated that this was related to difficult macroeconomic conditions and also a slower adoption of newer products. Despite the concerns they believe the company is still well-positioned for long-term growth. The continued high stock-based compensation and large acquisitions were also a point of contention from analysts. Management addressed these by mentioning that they are using these items to incentivize employees in a highly competitive talent market, and to accelerate growth through acquiring relevant businesses in the market. They emphasized that long-term shareholder value creation is their primary goal, and these short-term issues will not affect long-term strategies. Some analysts have also flagged concerns related to the company’s high levels of churn and customer dissatisfaction. Management has not directly touched upon these concerns, instead choosing to focus on the long-term goals and the value they deliver to customers.