Procore (PCOR)

Construction management software maker Procore (NYSE:PCOR) reported Q1 CY2025 results beating Wall Street’s revenue expectations, with sales up 15.3% year on year to $310.6 million. On the other hand, next quarter’s revenue guidance of $311 million was less impressive, coming in 1.4% below analysts’ estimates. Its non-GAAP profit of $0.23 per share was 24.4% above analysts’ consensus estimates.

Company Overview

Used to manage the multi-year expansion of the Panama Canal that began in 2007, Procore (NYSE:PCOR) offers a software-as-service project, finance, and quality management platform for the construction industry.

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).

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, Procore’s sales grew at an impressive 28.6% compounded annual growth rate over the last three years. Its growth beat the average software company and shows its offerings resonate with customers, a helpful starting point for our analysis.

This quarter, Procore reported year-on-year revenue growth of 15.3%, and its $310.6 million of revenue exceeded Wall Street’s estimates by 2.6%. Company management is currently guiding for a 9.4% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 11.1% over the next 12 months, a deceleration versus the last three years. Still, this projection is above average for the sector and indicates the market is baking in some success for its newer products and services.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Procore’s ARR punched in at $1.24 billion in Q1, and over the last four quarters, its growth was impressive as it averaged 18.8% year-on-year increases. This performance aligned with its total sales growth and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes Procore a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue.

Procore reported 17,306 customers at the end of the quarter, a sequential increase of 218. That’s a little better than last quarter and quite a bit above the typical growth we’ve seen over the previous year. Shareholders should take this as an indication that Procore’s go-to-market strategy is working well.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

It’s relatively expensive for Procore to acquire new customers as its CAC payback period checked in at 56.1 months this quarter. The company’s slow recovery of its sales and marketing expenses indicates it operates in a competitive market. A silver lining is that once it acquires its customers, they typically don’t leave and increase their spending - a sign of high switching costs.

What makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

Procore’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an excellent 81.2% gross margin over the last year. That means Procore only paid its providers $18.81 for every $100 in revenue.

This quarter, Procore’s gross profit margin was 79.1%, down 4.1 percentage points year on year. Procore’s full-year margin has also been trending down over the past 12 months, decreasing by 1 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Procore’s expensive cost structure has contributed to an average operating margin of negative 12.9% over the last year. This happened because the company spent loads of money to capture market share. As seen in its fast revenue growth, the aggressive strategy has paid off so far, and Wall Street’s estimates suggest the party will continue. We tend to agree and believe the business has a good chance of reaching profitability upon scale.

Over the last year, Procore’s expanding sales gave it operating leverage as its margin rose by 3.5 percentage points. Still, it will take much more for the company to reach long-term profitability.

This quarter, Procore generated a negative 11.7% operating margin.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Procore has shown mediocre cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 9.8%, subpar for a software business.

Procore’s free cash flow clocked in at $46.66 million in Q1, equivalent to a 15% margin. The company’s cash profitability regressed as it was 6.3 percentage points lower than in the same quarter last year, but it’s still above its one-year average. We wouldn’t put too much weight on this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends carry greater meaning.

Over the next year, analysts predict Procore’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 9.8% for the last 12 months will increase to 16.5%, it options for capital deployment (investments, share buybacks, etc.).

Companies with more cash than debt have lower bankruptcy risk.

Procore is a well-capitalized company with $566.7 million of cash and $64.5 million of debt on its balance sheet. This $502.2 million net cash position is 5.2% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by Procore’s strong growth in customers this quarter. We were also happy its revenue outperformed Wall Street’s estimates. On the other hand, its revenue guidance for next quarter slightly missed. Zooming out, we think this was a decent quarter featuring some areas of strength but also some blemishes. The stock remained flat at $63 immediately after reporting.

Updated: May 22, 2025 at 10:21 PM EDT

Are you wondering whether to buy Procore or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Procore has some positive attributes, but it isn’t one of our picks. To kick things off, its revenue growth was strong over the last three years. And while Procore’s operating margins are low compared to other software companies, its admirable gross margin indicates excellent unit economics.

Procore’s price-to-sales ratio based on the next 12 months is 7.7x. Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $77.58 on the company (compared to the current share price of $67.67).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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