Procore Technologies cautious, operating losses remain high (NYSE: PCOR )

Quickly learn about Procore technology

ProCore Technologies (NYSE: PCOR) provides construction management software to companies around the world.

I previously wrote about PCOR in November 2022 with a Hold outlook.

As sales cycles lengthen and contracts shrink, I’m cautious Regarding PCOR’s short-term prospects.

My opinion on Procore Technologies, Inc. is Neutral [Hold] at this time.

Procore Technology Overview and Market

California-based Procore has developed a construction management SaaS platform for the entire lifecycle, from pre-construction to ongoing management.

The company is led by founder and CEO Craig Courtemanche, Jr., who was previously the founder and CEO of software consulting firm Webcage.

The company’s main products include:

• prequalification

• Bid management

• project management

• Quality and safety

• design coordination

• building information modeling

• site productivity

• Financial management and services.

PCOR seeks large and medium-sized customers through direct sales and marketing efforts.

The company is also actively working on brand building through participation in various construction industry events.

According to Technavio’s 2019 market research report, the construction management software market is expected to grow by $7.986 billion from 2022 to 2027.

A report commissioned by the company and prepared by Frost & Sullivan estimated the market size for the company’s various products at $9.4 billion.

Consulting firm Deloitte estimates that 1.5% of global construction spending will be on IT products and services, equivalent to about $15 billion.

The main drivers of the forecast growth are the increasing urbanization trend in major countries around the world and the continued need to upgrade or add new infrastructure.

Major competing manufacturers include:

• Oracle (ORCL)

• Autodesk (ADSK)

• Trimble (TRMB)

• computer easy

• Base

• Jonas Software.

Management said its suite of software tools, combined with the growing application market, is expected to deliver greater value to customers.

Recent Financial Trends for Procore Technologies

Total revenue on a quarterly basis continues to trend upward; operating income on a quarterly basis remains heavily negative, as shown in the chart below:

Quarterly gross margin has increased slightly in recent quarters; quarterly selling and administrative expenses as a percentage of total revenue have trended downward, indicating greater efficiency in generating incremental revenue:

Earnings per share (diluted) have improved slightly recently, but are still heavily negative, as shown in the chart below:

(All data in the charts above are GAAP.)

Shares of PCOR have gained 31.32% over the past 12 months, while shares of the iShares Expanded Technology-Software ETF (IGV) have gained 35.23%:

In terms of balance sheet results, the company ended the quarter with $603.0 million in cash, equivalents, and short-term investments and no debt.

Free cash flow was $35.9 million over the last 12 months, including $11.0 million in capital expenditures. The company paid up to $179.2 million in stock-based compensation (“SBC”) over the past four quarters.

Procore Technologies’ Valuation and Other Metrics

The following table is the company’s relevant capital and valuation data:

Click to enlarge

(Source – Seeking Alpha.)

PCOR’s most recent unadjusted Rule 40 calculation was 8.8% as of Q2 2023 results, so while the company’s performance has improved, it still needs material improvement, as shown in the table below:

Click to enlarge

(Source – Seeking Alpha.)

sentiment analysis

The chart below shows the frequency of certain keywords in management’s recent earnings calls with analysts:

The frequency of negative terms suggests the company and its customers are facing growing macroeconomic headwinds that are creating challenges.

Analysts asked leadership about their sales pipeline, international prospects and beta testing of their payments capabilities.

Management responded that aside from some caution, its pipeline remains strong.

International revenue grew 36% year over year on a constant currency basis, so management remains focused on investing in this area of ​​the business for growth.

On the payments front, the company is still in its early stages, with plans to first focus on the general contractor-to-subcontractor payment process, helping general contractors reduce the cost and complexity of a historically laborious process while shortening subcontractor payment cycles.

Procore Technology Review

In the last earnings call covering Q2 2023 results (Source – Seeking Alpha), management’s prepared remarks highlighted a net addition of 600 new customers, bringing the number of customers to more than 15,700 by the end of the quarter.

The leadership noted that “some sectors of the construction industry remain silent; [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.

Gross retention rate was 94%, which is within the company’s historical range of 94% to 95%.

In the second quarter of 2023, total revenue increased by 32.7% year-on-year, and gross profit margin increased by 2.9%.

Selling and general administrative expenses as a percentage of revenue fell significantly by 8.1% year-on-year, and operating losses decreased by 17%.

However, operating losses for the quarter were still a jaw-dropping $58 million.

The company’s financial position is quite solid, with ample liquidity, no debt, and positive free cash flow.

PCOR’s Rule 40 performance has improved year over year, but is still nowhere near where it should be.

Looking ahead, full-year revenue in 2023 is expected to increase 28.3% compared to 2022.

If realized, this would mean revenue growth would be down from 2021’s 2022 growth rate of 39.9%.

The company’s EV/sales valuation multiple has barely budged over the last twelve months, as shown in the chart below:

Potential upside catalysts for the stock could include improving activity in the construction market.

However, the company’s sales cycle continues to lengthen and new contract deals are smaller, resulting in slower revenue growth for the foreseeable future.

This reality, coupled with its continued heavy operating losses, makes me cautious about the prospect of significant organic catalysts for the stock.

Therefore, I remain neutral [Hold] Keep an eye on Procore Technologies, Inc. in the near future.