Procore weathers tough construction spending environment

Procore shares are down 4% so far this year. (Photo: Joe Raedle/Getty Images)

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High interest rates and persistent inflation have been weighing on the construction industry, and Procore (PCOR), which offers a cloud-based construction management platform, began facing macroeconomic headwinds for the first time in the first quarter of 2023.

Procore shares fell to a 52-week low of $48.11 in November after management said tough economic conditions were slowing demand and trading. The company is facing slowing new customer acquisition and declining business volume with existing customers.

Still, Procore shares have surged from their November lows, hitting a 52-week high of $83.35 in late March following the release of a better-than-expected Q4 earnings report in mid-February. The company posted healthy Q4 total revenue growth of 29%, but showed signs of an underlying slowdown, with current RPO growth slowing to 24% from 27% last quarter and 33% for Q2 2023. Management's macro commentary remained cautious.

Procore's stock price was already trending lower in early May when the company reported its first-quarter results. Procore reported decent numbers, with total revenue up 26% to $269.4 million, beating consensus estimates by 2.4%. International revenue increased 32%. Gross margin was a healthy 86%, and operating margin was 14%, comfortably beating guidance of 7% to 8%. EPS was 30 cents, beating consensus estimates by 14 cents. Free cash flow margin was 21.5%.

As of the first quarter, Procore's long-term business remained strong, with total RPO of $1.06 billion, up 25%, in line with the growth rate in the fourth quarter. However, current RPO growth is at 20%, representing a 400 basis point slowdown sequentially. Speaking at the Jefferies software conference in late May, Procore CFO Howard Fu said that current RPOs in the second quarter will be particularly challenging compared to the same period last year, with growth rates likely to fall to the mid-teens.

Mizuho recently downgraded Procore to neutral with a $70 price target, citing macroeconomic uncertainty and general weakness in the construction industry. The firm remains bullish on Procore over the long term, citing low TOP market penetration, AI generation opportunities, and the company's continued profitability improvement, but believes investors should remain on the sidelines for the time being due to near-term weakness in construction spending.

Procore shares fell to a low of $62.05 earlier this month. They recently traded at $66.30, down 4% year to date. Procore's business has historically been more seasonal in the second half of the year. Additionally, current RPO comparisons will begin to moderate in the third quarter. Hu predicts Procore will likely finish the year with its current RPO growth rate in the high teens. This potential recovery in the second half of 2024 is not benefiting from interest rate cuts at all.

While the demand picture is somewhat uncertain at present, Procore is well-positioned to benefit from the ongoing (and much-needed) digitization of the construction industry, which has historically lacked investment in innovative technology. Accounting for around 15% of the global economy, the construction industry is too important to allow its operations to remain handicapped by inefficiencies that can be eliminated or mitigated by the implementation of the right technology solutions, Macquarie argues.

The construction industry is prone to value destruction, with more than half of cost inefficiencies stemming from poor communication around tasks, deadlines and contracts, according to Macquarie. Procore's platform is the industry's digital ground control, according to Macquarie, providing a turnkey project management system that connects all the teams on the job. While point solutions exist, none come close to Procore's general contractor-centric platform model, the company said.

The Procores platform provides quick access to information, simplifies workflows, and promotes collaboration among all stakeholders. The platform provides a real-time, consolidated view of the entire construction project and acts as a single source of accurate data. Users can track tasks, manage project workflow, handle schedules, forecast cash flow, and respond to regulatory enforcement. Benefits include reduced miscommunication, fewer errors, and less rework.

Procore expects total revenue of $1.142 billion in 2024, which represents 20% growth. The company has room to expand for a long time, as the construction industry is still in the early stages of digital adoption and market penetration is very under-performed. Despite its leadership position in construction technology, Procore's global penetration is only about 1% of addressable logos and 7% of global annual contract value, Macquarie said.

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