Well, hey, good afternoon, everyone. Welcome to day one of the Barclays Tech Conference. My name is Saket Kalia. I cover software here. Honored to have with us the team from Procore. So we've got Howard Fu, Chief Financial Officer. We've also got a couple key members of the team here. We've got Alexandra Geller, Head of Investor Relations. And then we just had Matt Puljiz here. And where is he? Oh, there he is. There he is. Yep, there he goes. Awesome. So we've got about 30 minutes together. Let's spend maybe the first 20 or 25 minutes doing some fireside chat with Howard, which I know is going to be fun.
Yep.
And then we'd love to make this interactive. So if anyone has a question, just pop up your hand. We've got a mic runner in the back. So maybe with that, Howard. Thanks so much for taking the time here.
Thank you. It's good to be here. Good to see you.
Yeah, yeah, absolutely. So I was telling Howard in the back, I want to take a little bit of a different approach in this Q&A because there are so many fun things to talk about. But actually, I really want to focus on three things in our fireside chat here over the next 30 minutes, which are going to be go-to-market, profitability, and Procore Pay, just to sort of set expectations. And I want to dig into each one of them a little deeper. So let's start with the go-to-market change here, Howard.
Sure.
Just to make sure that we're all on the same page, can you just remind us what these go-to-market changes entail and why was now the right time to make them?
Yeah, sure. There's two primary components of the go-to-market change. One is around the shift from a more distributed model or a more centralized model to a general manager model. And if you think about construction, construction is not just local. It's hyper-local. And so shifting to a general manager model allows our teams to get much more closer to the businesses that they are supporting and looking to build partnerships with. And so that's the first major change. The second change is around this idea of product specialists and technical specialists.
And when you think about how our portfolio of products has evolved, expanded, and the progress that we've made in our platform, these product and technical specialists are really going to allow us to engage the customer in a very different way to really understand the nuances of their business, how they can get the most value out of Procore. And frankly, from a go-to-market standpoint, it allows us to engage the right personas and stakeholders and the buyers in these companies from not just the folks that are in the field, but also the rest of the C-suite, CFOs, CIOs, and so forth. And those are the two major changes that we've made. In terms of why now, when we think about our end industry that we are operating in construction, it is going to be a cyclical market.
When we think about the changes that we're making, we knew that these changes are the ones we wanted to make eventually. Given the environment that we've been in over the last 18-20 months or so, where it's been a challenging demand environment, anytime there's a cyclical type of exposure, you want to make sure that you capture the upswing. We wanted to do this now so that we could get all of the capacity on board, get that capacity productive. Because we are in a challenging demand environment, make sure that there's actually as little disruption as possible, but gearing up for when that eventual upswing comes. That was the calculus that we went through to say, why do this now? It's really so that we could get prepared for the beginning of the year in Fiscal 2025.
Yeah, sure. Listen, I think that's super thoughtful. It makes sense. I want to dig into each of those two major changes individually and maybe start with the general manager additions, which to your point makes a ton of sense because construction is, I wrote it down as a regional business, but I like how you put it. It's a hyper-local business, right? Well, each of, right, and the GMs are sort of based on regions. Will each of these regions sort of run their own P&L and functions? And is that infrastructure largely in place? We've talked about marketing, for example, before, right? How are those functions going to sort of change? And how will that organizational sort of look?
Yeah, I'll answer those backwards. The infrastructure is largely in place. We have all the GMs in place already. They'll have their leadership team in place by the end of the year. Things like marketing, customer success, all those different things, all those folks are largely in place. So in terms of the foundational infrastructure people and so forth, those are progressing extremely well. And then just in terms of what they're going to have purview over, I wouldn't think about this as them managing a P&L in the academic sense. They are going to have direct line control over customer-facing resources. And there's going to be nuances in terms of where that line is drawn depending on the nuances of the business.
As an example, in some of these newer markets that we're in, maybe in EMEA or some of these newer markets that we're in, that line may be drawn to a place where we want more flexibility for the GM to make more calls and more decision-making authority within some of those resources across marketing and so forth. Whereas in the North America market or in the U.S. market, where a lot of the centralization is going to happen, that line might be drawn a little bit differently. The important thing is the level of autonomy is going to be tailored to what's unique and specific to be successful in each one of these markets that we're in. And that's really the idea.
Yeah, yeah. That makes a ton of sense. One of the things that Tooey touched on when these changes were first announced was the idea of starting to build a channel, right? And we've talked about this a little bit in the past. And just to be clear, this doesn't sound like a big part of the strategy. But I'm curious, as you've gone a little deeper into this exercise, how are you sort of feeling about using a reseller channel like some of your competitors, perhaps, to maybe cast a wider net, to maybe get into some regions internationally quicker, if that makes sense?
Yeah, sure. I think today our business, for all practical purposes, is almost 100% direct motion in terms of how we go to market. Over time, a partner type of motion, whether it be reseller or something else, value-added resellers, and so forth, that will eventually build over time as a larger proportion, but we're in very early stages right now. So how this may show up, it may show up in the form of professional services, as an example. Today, professional service is a real small portion of what we do in our business, but we also recognize the importance of professional services in terms of actually delivering value to our customers and actually retaining customers. We may think about partner motion, let's say down market, which today is still a very direct motion. And that's going to have direct impacts on our efficiency.
It's going to have direct impacts on our breadth that we can reach and so forth. So there's a lot of these permutations that can occur. And of course, on the international side, if a GM believes and has the insights that a partner motion is the right motion to actually enter some of these new markets, whether in the markets that we're in today or adjacent to the geographies that we are today, that is absolutely going to be explored, but it's very early stages right now.
Got it. Hadn't thought about the professional services aspect of that.
Yeah, yeah.
That definitely makes sense. Makes sense. I think the other part of this change, I think, is hiring more sales specialists, right? Thinking about sort of the two major changes that were made, particularly in North America. Maybe the first part of the question is, can you just remind us how many more heads are adding to that team, right? We're adding to that team. And secondly, what part of the ecosystem do you see them sort of focusing on more? Are they going to be going after the ENR, the big ENR companies? Are they going to be going after owners, subcontractors, existing, new? Just talk to us about those additional resources. Where do you expect to sort of get the return out of them?
Yeah, look, we're going to add net about a couple hundred resources in the go-to-market organization. And really, there is no overconcentration in any one of those cross-sections that you described because this is about fundamentally evolving the motions that we're running and the orchestration of how we go to market, which will impact all stakeholders, all geos, all segments. Now, we're going to add both folks like generalist AEs, specialist AEs, and also technical specialists. And there's one distinction here that I think it's important to call out. When you think about the quota carriers and the generalist AEs and the overlay AEs, they're going to hold a quota to actually be able to communicate the value and the potential value of Procore to our customers much better.
But I think it's also important part of what we're going to add are the technical specialists that are going to really get at the nuanced detail of a customer-specific situation to say, "This is the best way that we think you can evolve and get more value out of Procore." And that is their sole job. They're not paid on a quota or anything like that. They're showing up to the customer, and the customer is going to say, "Oh, this person from Procore is here to make me successful." And I think that's a important distinction to make. The reason I bring this all up is when I talk about the foundational aspects of the motion that we're running, it's agnostic to what segment you're in in terms of the value. It's agnostic to the stakeholder. It's going to add value. It's agnostic to the geo.
That's why I said it's going to benefit all those cross-sections.
Got it. Got it. So I guess with the additional sales capacity that you get with this investment, what maybe happens to your existing quota-bearing reps now that maybe have a bunch more help to cross-sell? It feels like you're arming them a lot more, actually, right? So I mean, do they get new accounts altogether? Do they get more accounts to sell to? Maybe talk to us about the existing quota-bearing reps, how this impacts them with having more resources come on board.
They love it. Let's think about this just as far as, if I'm an AE, I'm a quota-carrying rep, and the company, and I'm going to go to you, and the company comes to me and says, "Hey, guess what? I'm going to give you a product overlay specialist. I'm going to give you a technical specialist. I'm going to put a focus on professional services. I'm going to give you all these resources." Me as an AE, you know what's in my mind? That's awesome. I'm going to hit my number. I'm going to make some money on this, right? And so there's been a tremendously positive receptiveness to this new model. And that's also true on the customer side. From a customer standpoint, they're saying, "Wait a second. I have an AE.
Now you're going to tell me there's going to be somebody solely focused on making me successful, and you're going to have somebody that's going to educate me on the progression that I should be going through as a partner to Procore to get the most value of Procore? "Sign me up," right? And so I think there's on both sides the benefits of that. And so we're excited both internally and externally about both of this.
Yeah, absolutely. So I mean, lots of opportunity. I think you took a really prudent approach to guide next year. I mean, just right to account for the risk that's associated with all this. Can you just remind us what you said about next year's guide and sort of how that incorporates the risk as we get into 2025?
Yeah. So quick summary. Our early guide, I want to make sure that it's an early guide, is revenue growth of 11% next year. Our margin guide for next year is a 13% non-GAAP operating margin, which is actually a 200 basis points improvement on the high end of our guide for this fiscal year. We've also talked about Fiscal 2025 as being a transition year, obviously, with a lot of the go-to-market changes. And also talking about Fiscal 2026 having a much better P&L than Fiscal 2025. Now, I'm not going to tell you kind of what that means in specifics, but it is going to be a better P&L in Fiscal 2026. I want to be clear, though, this transition, there's disruption. It's largely played out as we anticipated, and this is going to dovetail into the first part of the year.
That's been incorporated into that 11%. The other thing that's been incorporated into the 13% operating margin guide is that, remember, we're going to hire net 200 people. There's a tremendous amount of focus on operating efficiency and efficient growth. The go-to-market organization itself is getting more efficient in other areas to fund portions of this. The entire company is also getting more efficient, which is a continuation of what we've done over the last couple of years to also make sure that this is successful. That's how we're able to actually continue to expand margins even with all these investments. In the short term, Q3, we had a cRPO growth of 16%. We're guiding 11% revenue growth for Fiscal 2025 as an early guide. You can do the math of what that implies for Q4 in terms of cRPO growth.
As we go through this, as we get to the beginning of the year and we report Q4 and guide Q1 and for the full year, we'll provide more information then.
Got it. Got it. Look forward to hearing about that. I want to shift gears to Procore Pay, which is another really fun topic to talk about. What's been the feedback from your beta customers, and what's going to drive scaling of that business in 2025?
Yeah. First of all, the business is not going to scale in 2025, okay? It's not even going to show up as anything meaningful in Fiscal 2025. It'll start to show up in Fiscal 2026 in terms of some financial effects, but even then, it's not going to be overly significant. So please don't, I say this every time, please don't put this in your models or anything like that. The feedback from customers has been tremendously positive. I think several quarters ago, we talked about having more than 100 customers signed up for Procore Pay, and that has continued to grow. In terms of what this looks like at scale, we have to get through this initial phase of the lead time to get customers implemented and then to have that build and waterfall on each other. So what do I mean by that?
So we talk about getting customers not just signed up to pay, but actually using pay, meaning they have to sign up and get stood up on their banking partners. They have to make sure that they can't switch payment rails and payment processing in the middle of a project. So you have to wait for projects to come on board. As those projects come on board, they ramp, and then they have to get their subcontractors on board as well. What we've learned in some of these initial phases is that even when they add new projects and GCs add new projects, they're not adding every single new project because this is something that's quite sensitive to them, right? We're moving money.
And so what they're doing is they might be testing one project or two projects just to make sure it's working before they say, "Hey, let's move every single new project onto Procore Pay." So that's some of the lead time. By the way, that's very prudent. I would do something like that for our company, right?
Makes sense.
For Procore. And so where this scales is when you start to see some of these companies start to stack on top of each other and really waterfall the number of projects, the payment volume that's going through Procore Pay, and then the revenue that starts to show up in a significant way for Procore.
Yeah. Sure. Sure. The incumbent vendor in this construction payment space, of course, is Textura. And a lot of us, I mean, I've certainly thought about Procore Pay maybe aspiring to that type of scale in years to come, right? Understanding, right? That's still a long time away. But is that sort of how you think about where this business could go? And I'm not trying to look for guidance there, but is that how big the opportunity? Maybe it's inherently a TAM question or sort of an opportunity question, but is that what Procore Pay could be someday?
I smile a little bit. The short answer is yes, but I actually think much bigger and broader than that. Okay, so here's how to think about Procore Pay. A lot of people talk about Procore Pay and ask us about Procore Pay as almost a standalone value-add to our customers, and that is absolutely not the case. The value of Procore Pay is in the connection that it has to things like lien waivers, to things like project financials, to things like invoicing, to the entire ecosystem of solutions that Procore offers, and that sits on a platform for all those solutions. That is the value. The actual act of moving payments is actually not that difficult. As an example, getting somebody the comfort to pay is something that's difficult, and that's why it's important to connect to things like lien waivers and so forth.
So I would actually think much broader than that in terms of the value-add to the customers. It's not just that standalone piece. Yes, we are absolutely going to monetize that. But if you think about that in the context of overall how a customer manages their projects and the financial aspects of their projects, that's the way to think about Procore Pay.
It's an interesting segue, right? Because we were at Groundbreak, which is a great conference, user conference as always. And it felt like one of the interesting tidbits that we got from customers was sort of this idea of bundling Procore Pay with the financial management modules, right? Maybe that touches on some of the modules that you called out as well. But what can we do to not just displace Textura, but also sort of provide a whole solution for customers in this function, if you will?
I think that's everything that I kind of just described. If I just step back and even broader, not just for Procore Pay, I've spoken about this quite a bit. One of the major pieces of feedback when I go and talk to customers, regardless of if it's a CFO, CEO, or folks in the field, is the feedback is like, "Can you just build it? I don't want to have to buy another software. I don't want to have to hear my field talk about they need to learn another piece of software. Can you just build it?" And so that's not just applicable to something like pay. It's applicable to our entire portfolio of solutions and the platform that they sit on. But this also definitely applies to Procore Pay as well.
That's what I was talking about in terms of don't think about Procore Pay as a standalone value-add. The value-add is in the fact that it is integrated with everything else.
Everything else. Yeah. Got it. Certainly, we said the business isn't scaling or isn't at scale yet, right? So it's early to talk about the margin implications of Procore Pay. But should we maybe think about revenue here being how should we think about the rubric for Procore Pay? Is this on a gross basis? Is it on a net basis? Since both of those have different sort of margin implications.
It'll be on net. Yeah. I mean, that's a short answer, and really no real impacts in the short, maybe even the medium term on any of gross margins or anything like that. Yeah.
Understood. Understood. You touched on margins a little bit, but I want to make sure we flesh it out. So the Analyst Day at Groundbreak was super helpful. I think we talked about 13% as a floor for margin next year. Right when you talked about sort of adding a couple hundred heads in sales on a net basis, I mean, what are some of the other factors that we should think about as you think about that margin expansion? Because I think when we initially gave the guide, we weren't sure about it. It's going to depend on the pace of hiring, but now it's pretty definitive. That's the floor. We're going to expand margins. What else is happening in the business that's allowing you to see that type of operating leverage?
Yeah. So I'll touch again on the leverage that we're getting elsewhere in sales and marketing as well. We talked about also sales and marketing as a percentage of revenue of Fiscal 2025 being at or below what we saw in Fiscal 2024. And that's going to be reflective of what I talked about in terms of efficiencies on the sales and marketing side as well. On the R&D and product and technology space, we've now added a tremendous amount of capacity in terms of our globalization strategy. Where that's going to, that extra capacity is also operating more efficiently. And it's going to allow us to deliver product at a much faster pace, which I talked about. But when you think about having a global footprint and the globalization of where we put our resources, the higher capacity actually comes at relatively the same cost.
And when you think about it that way, that's a tremendous amount of leverage that we get, not just specifically on expenses, but in terms of our progress towards our product roadmap. And that also is going to have benefits both on the top and bottom line. From a G&A perspective, I think we're constantly, particularly at this stage as we've crossed $1 billion, looking at things like automation and where that can go. But the globalization aspect in terms of where we put our resources is going to be prevalent throughout the entire company. And so I know it's kind of we've said this before, but it comes from basically everywhere. And that's what we continue to push. That's the mentality that we have in the company.
Yeah. For sure. I think an important message that came out of analyst day was really the idea of free cash flow per share being that North Star, right? And around that, I think we talked about sort of midterm and long-term free cash flow targets, respectively of 25% and 40%. Maybe if we just talk about the 25% midterm target first, is there a revenue scale that you think about with that or any other boxes that you feel like would need to be checked in order to achieve that goal?
I actually wouldn't think about this as checking boxes. There's a couple of things. The intent of putting those mid and long-term targets out there is really to communicate to everybody that Tooey, myself, the rest of the leadership, the mentality of the organization is that we are investing with an ROI mindset, is that we are investing for efficient growth, and what we're trying to communicate is we will continuously and progressively make progress towards those goals, and we will make the right decisions in terms of our capital allocation and our opportunities that are presented in front of us to make sure that we continue on that progression, all the while continuing to expand free cash flow per share. There's no timeframe that I'm going to put on that. What I can commit to you is we will continuously and progressively get to those points.
Again, when I talk about the go-to-market transformation, to the extent that, hey, nothing ever goes perfect, let's say it gets to a point where maybe the productivity isn't as good or the growth benefits aren't as good, I'll get to those midterm and long-term targets faster. That's another thing that I can commit to you all. That's the way to think about this.
Yeah. Yeah. Absolutely. I think a fun question is when we're sitting on the stage a year from today, Howard, right? And we're looking back on all the achievements, right? And all the things that you're managing to right now, right? All the things that you're working on here. When we look back, right, at 2025, listen, I think you've made it clear that your guidance metrics are floors. So I think we will at least achieve those. But what other metrics or milestones do you want to hit internally and talking about next year when we're sitting here looking back?
The crux of the changes that we're making on the go-to-market side is that this will ultimately result in higher productivity in our go-to-market organization, and so when I'm sitting here a year from now, I'd like to be able to tell you that that's true, and we believe that it will, and the other reason that's important is I may have talked about this already, but the productivity increases we expect in the back part of the year will need less resources in Fiscal 2026, and then the bow wave of that productivity will then also go into Fiscal 2026, which is going to benefit both top line and leverage in terms of our margins, so that's why I'm looking at that productivity from a go-to-market standpoint as something that's extremely important for us to look at internally. There's a couple of other things.
I'd like to be here sitting a year from now and tell you we are starting to see expansion continue to re-accelerate and a big portion of that coming from cross-sell because of the specialists that we put in place, because of the overlays that we put in place. I'd like to be able to sit here and tell you about that as well. I mean, there's a whole host of these things I can go through internally. Ultimately, though, at the end of the day, I'd be sitting here a year from now, we would have gone through Groundbreak, and I would be sitting here and tell you everything that we told the world and you that we would deliver at Groundbreak, we have now delivered.
And I hope I'm sitting here a year from now to tell you and you all telling me that we had the best Groundbreak ever, even better than last year. And then that's the momentum going into Fiscal 2026. That's what I would love to sit here a year from now.
Absolutely. I think we all would. We've actually got a few minutes left. I mean, before I maybe pivot to some macro questions just to make sure we close that loop, any questions here from the audience? Maybe just to hit on the health of the end market, Howard. I mean, we talked about this as Groundbreak. Construction is one of the largest industries in the world. Procore price is based on construction volume. What are you seeing right now? And how does that maybe differ by project type, if that makes sense?
Not necessarily project type. I think in Q1, Q2, and Q3, we've actually seen the macro and the demand environment be fairly stable. We talk about some of the cohorts from Q1, Q2, and Q3, and the dynamics of those have remained fairly stable. There's no reason for us to think that that's going to change in Q4. Our working assumption right now is that that persists throughout Fiscal 2025, and that's reflected in kind of our guide and our early guide as well. What we are hearing is starting to hear some positive sentiment pickup, particularly in some of our larger customers, which is a great sign. Now, to be clear, that has yet to translate into their buying behavior for Procore and I imagine other solutions as well, and I think that's okay, but it's a good positive sign to hear that sentiment start to pick up.
That is.
And it's just there's a lag between when that happens and when that shows up in the buying behavior. If I step back, one of the things over the last several years that we've learned is not just about the level of the backlog. The sentiment actually is what impacts the buying behavior regardless of whatever the backlog is. And so we're starting to hear that pickup, which is a good sign. But obviously, I'm not going to commit anything to you that says that that's going to have any significant impact, but it is a good sign for us to see.
It absolutely is. Maybe last question here just on capital allocation. I think you and Tooey laid out the strategy well at analyst day, but what would you sort of leave us with on your capital allocation philosophy as we sort of approach 25 and beyond?
If I were to sum it up philosophically, I think we're committed to doing the right thing in terms of capital allocation. The pecking order that I described in terms of investing in efficient growth, organic growth, and then going to M&A, we're not doing large-scale M&A, tuck-ins will absolutely happen. And then if those two are then depleted, then we go into a share buyback that will increase free cash flow per share. That does not change, right? And part of laying that out is to give folks a sense that we're going to use those levers and look at those levers in terms of how we deploy capital. And we're going to do the right thing. And the right thing is ultimately always going to result in increasing free cash flow per share. And that's what we're going to do.
By the way, that's congruent with making our customers successful as well, which is the best part.
Absolutely. I couldn't think of a better way to end there. Howard, thanks so much for the time. Really enjoyed it, huh?
Of course.