Construction management software maker Procore Technologies (NYSE:PCOR) reported Q1 FY2023 results that beat analyst expectations, with revenue up 33.9% year on year to $213.5 million. The company expects that next quarter's revenue would be around $217 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. Procore Technologies made a GAAP loss of $63.4 million, improving on its loss of $71.4 million, in the same quarter last year.
Procore Technologies (PCOR) Q1 FY2023 Highlights:
- Revenue: $213.5 million vs analyst estimates of $203.2 million (5.07% beat)
- EPS (non-GAAP): $0.01 vs analyst estimates of -$0.12 ($0.13 beat)
- Revenue guidance for Q2 2023 is $217 million at the midpoint, roughly in line with what analysts were expecting
- The company lifted revenue guidance for the full year, from $897.5 million to $910 million at the midpoint, a 1.39% increase
- Free cash flow of $19.2 million, up 63.5% from previous quarter
- Customers: 15,089, up from 14,488 in previous quarter
- Gross Margin (GAAP): 81.2%, up from 79.2% same quarter last year
Used to manage the multi-year expansion of the Panama Canal that began in 2007, Procore Technologies (NYSE:PCOR) offers a software-as-service project, finance and quality management platform for the construction industry.
Construction projects tend to be complex, featuring numerous architects, engineers, contractors, and subcontractors as well as stakeholders with different goals and objectives. Construction delays and hiccups make plenty of sense given this. Furthermore, project delays, rework, or safety issues can mean wasted time and money.
Procore's key product is a cloud-based platform that centralizes project workflows by providing tools for project management, scheduling, budgeting, and communication/collaboration. This digitizes what has historically been a very paper-based, disparate approach and also facilitates information flow to keep all parties abreast of responsibilities, progress, bottlenecks, and other issues related to a construction project. The platform can be accessed through desktop or mobile devices, and it integrates with a range of other popular construction software tools.
Procore’s key customers are construction companies, contractors, architects, and engineers. The company generates revenue through a subscription-based model, with pricing based on the number of users and the level of functionality required. The company also offers add-on products and services, such as analytics and training.
The demand for rich, interactive 2D, 3D, VR and AR experiences is growing, and while the ubiquitous metaverse might still be more of a buzzword than a real thing, what is real is the demand for the tools to create these experiences, whether they are games, 3D tours or interactive movies.Competitors in engineering and design software include Autodesk (NASDAQ:ADSK), Oracle (NYSE:ORCL), and Trimble (NASDAQ:TRMB).
As you can see below, Procore Technologies's revenue growth has been very strong over the last two years, growing from quarterly revenue of $113.9 million in Q1 FY2021, to $213.5 million.
And unsurprisingly, this was another great quarter for Procore Technologies with revenue up 33.9% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $11.5 million in Q1, compared to $15.6 million in Q4 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Guidance for the next quarter indicates Procore Technologies is expecting revenue to grow 26% year on year to $217 million, slowing down from the 40.2% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 22.5% over the next twelve months.
You can see below that Procore Technologies reported 15,089 customers at the end of the quarter, an increase of 601 on last quarter. That is a little better customer growth than last quarter and in line with what we have seen in previous quarters, demonstrating the company has the sales momentum required to drive continued growth. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is running smoothly.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Procore Technologies's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 81.2% in Q1.
That means that for every $1 in revenue the company had $0.81 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is a great gross margin, that allows companies like Procore Technologies to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.
Cash Is King
If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Procore Technologies's free cash flow came in at $19.2 million in Q1, turning positive year on year.
Procore Technologies has burned through $12.8 million in cash over the last twelve months, resulting in a negative 1.65% free cash flow margin. This below average FCF margin is a result of Procore Technologies's need to invest in the business to continue penetrating its market.
Key Takeaways from Procore Technologies's Q1 Results
With a market capitalization of $7.6 billion Procore Technologies is among smaller companies, but its more than $329 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.
We were very impressed by Procore Technologies’s very strong acceleration in customer growth this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company is up 5.53% on the results and currently trades at $56.11 per share.
Is Now The Time?
Procore Technologies may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although we have other favorites, we understand the arguments that Procore Technologies is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been strong, over the last two years. And while its customer acquisition costs are higher than we like to see, the good news is its impressive gross margins are indicative of excellent business economics.
The market is certainly expecting long term growth from Procore Technologies given its price to sales ratio based on the next twelve months is 7.8x. There are things to like about Procore Technologies and there's no doubt it is a bit of a market darling, at least for some. But we are wondering whether there might be better opportunities elsewhere right now.
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