“Wise men aren’t pacifists; they’re just less likely to jump up and fight back against their antagonists. They know that useless antagonists are pretty much insecure enough already.” – Criss Jami
Today we’re doing our first in-depth review look at a mid-cap technology company. Like so many others in the SaaS space in recent months, stocks have suffered a substantial sell-off. The company experiences significant revenue growth and buys from a beneficial owner. A full analysis follows below.
Procore Technologies, Inc. (NYSE: PCOR) is a Carpinteria, CA-based provider of cloud-based construction management software, connecting owners, architects, engineers, general contractors, and more. on one platform. As of December 31, 2021, the company had 12,193 customers to its subscription service, encompassing more than two million users in more than 125 countries. Procore was formed in 2002 and went public in May 2021, generating net proceeds of $665.1 million at $67 per share. The stock is trading at just over $51.00, which translates to a market capitalization of just over $6.8 billion.
Procore is the only company focused solely on the needs of the construction industry, which according to McKinsey & Company is the second least digitized industry in the world, surpassing only agriculture. The industry appears to be in need of a massive efficiency upgrade based on the same consultancy estimating that a typical large non-residential construction project is 80% over budget and 20 months behind schedule. Labor productivity in the construction industry has grown at a CAGR of 1% over the past two decades, compared to a cross-industry average of 3%. With the labor market extremely tight, the need to increase productivity is obvious.
And with construction spending estimated at $14 trillion by 2025, the opportunity for Procore is significant. Based on spending on software applications by construction companies, the company estimates its potential market to exceed $17 billion in 2025. To date, management estimates that it has only achieved a penetration rate of at a figure of its targeted logos. As such, it uses IPO capital and gross profits to rapidly expand its customer base, building on its lead over other potential competitors. That said, many management tools offered by third-party vendors (e.g., scheduling software Oracle (ORCL)) – more than 250 in total – are already integrated on the Procore platform.
The company offers 14 products covering five categories: project, resource and financial management, as well as preconstruction and analysis. These offerings are designed to do away with the enterprise resource planning apps, spreadsheets, and built-in project management tools that have characterized the underdigitized vertical. Procore’s subscription fees are not seat- or user-specific, but are a flat fee that is based on the number and mix of products and the annual build volume performed on its platform. The subscription conditions are annual or multi-annual. At the time of the company’s IPO, 43% of its customers subscribed to four or more products.
Use of IPO proceeds
To bolster its product and customer portfolios, Procore has acquired eight companies since 2018, the most significant of which was its post-IPO (November 2021) purchase of lien management solution provider Levelset. For a total consideration of $484.1 million ($426.1 million in cash), Procore not only increased its financial technology, but added more than 3,000 customers – not counting the number indicated in the paragraph of opening. The company also purchased workplace solutions provider LaborChart in October 2021. For technology that facilitates scheduling, office-to-field communications, certification tracking, management and analytics, the company paid $76.2 million. of dollars.
Although many projects have been considered ‘essential‘ during the pandemic, the construction industry has been significantly impacted, with 78% of domestic general contractors reporting a halted or delayed project in 2020. Despite this headwind contributing to a 9% decline in US housing starts, Procore was able to grow its customer base 20% to 10,166 in 2020, although this improvement was down from 40% in 2019. To some extent, the business was helped by the pandemic as it demonstrated the usefulness of its platform in a very uncertain work environment.
In addition to signing new logos to its platform, Procore is increasing revenue by expanding the number of offerings current customers are using. As of December 31, 2021, 71% of the company’s revenue was generated by customers using four or more products. Additionally, with only 15% of its revenue generated internationally, Procore is growing geographically, recently announcing a move to France (with Germany targeted later in 2022) to further develop its opportunity in Europe.
Share price performance
Seen as a winner with business returning to some semblance of normal as the pandemic emerges, the market pushed Procore shares up from the start, with its opening trade taking place at a $17 premium to its IPO price. The stock has crossed the $100 per share threshold several times – most recently in October 2021 – but with inflation pushing investors to favor companies with strong results, the multiple squeeze has hit the fast risers at the top income statement and SaaS providers have not been spared. . As a result, PCOR shares briefly dipped below $50 per share in mid-March 2022, and are barely trading above that level now.
4Q’21 results and 2022 outlook
Procore itself has not stumbled operationally since entering the public markets, beating the Street consensus on its top and bottom results in 2Q and 3Q21. On February 22, 2022, the company reported a 4Q21 loss of $0.15 per share (non-GAAP) on revenue of $146.1 million versus a loss of $0.94 per share (non-GAAP) on revenue of $109.5 million in fiscal 2020, an increase of 33% (30% organic) and a $7.9 million overrun on its revenue expectations. The benefits are in line with the consensus.
Its marketing efforts resulted in the onboarding of 588 new accounts during the quarter while achieving a gross revenue retention rate of 95% in 2021. Accounts generating more than $100,000 in annual recurring revenue or ARR increased by 32% to 1,111, while those responsible for more than $1 million in ARR increased by 50% to 30.
For FY21, Procore lost $32.6 million from $42.0 million in FY20, while revenue jumped 29% to $514.8 million. Non-GAAP gross margin improved 1% to 84% while non-GAAP operating margin was negative 6%.
Management forecast 1Q22 revenue of $150 million and FY22 revenue of $663.5 million (both based on range midpoints), beating Street estimates of 142.8 million and $631.7 million (respectively), with Levelset accounting for approximately $25 million of its FY22 projection. As the company continues to aggressively expand its customer base, it has projected a margin non-GAAP operating profit in a negative 15% to 16% range for the quarter and year, with Levelset representing a headwind of 400 basis points.
Review and analysts’ comments:
Having used approximately three-quarters of its IPO proceeds for acquisitions, Procore held cash and cash equivalents of $589.2 million, plus $75.0 million of additional cash provided by an unused credit facility as of 31 December 2022. With $36.7 million of cash provided by operating activities in FY21 and $602.6 million of performance obligations remaining (of which 70% to be realized over the next twelve months) , the company is in an excellent financial position to grow its business.
Street analysts are bullish on Procore, with five buy ratings and five outperform ratings against a single take with a 12-month median price target of nearly $90 per share. Consensus estimates call for a non-GAAP loss of $0.75 per share on revenue of $663.8 million in FY22, followed by a loss of $0.58 per share (non-GAAP) on revenues of $822.5 million in FY23. This latest forecast represents a 24% improvement in revenue over FY22.
ICONIQ Strategic Partners, represented on the company’s board by William Griffith, took advantage of weakness in mid-March to acquire more than 1.17 million shares, bringing its total stake north of 45 million, or 33% of the company. It should be noted that several executives used the post-lockdown period as a selling opportunity.
In October 2021, shares of PCOR were trading at a 22nd year price-to-sales ratio above 20. With soaring inflation and risky trading in vogue, this ratio has “decline” to just a little more than 10, which makes 19x FY22E revenue the company paid for Levelset to bolster its aggressive fintech offerings to scratch your head. That said, Procore’s long-term prospects are exceptional, as it develops a somewhat monopolistic ecosystem in an extremely large, underdigitized and underserved vertical. And it’s a good strategy to spend now in an attempt to own a space that no other tech company pays so much attention to. The question is whether revenue growth of 29% this year and 24% in FY23 – while losing money in the bottom line – warrants a price-to-value measure. sales above 10, even with a gross margin in the mid-80s. In other words, will margin compression in the SaaS space continue?
The bet here is that it does, but with a good premium in options, a drop to the mid $40s in this failed IPO would be a solid covered call access point. Until then, we remain on the sidelines given the current dismal market environment.
“Revenge is a monster of appetite, always bloodthirsty and never satiated.” ―Richelle E. Goodrich
Bret Jensen is the founder and author of articles for the Biotech Forum, the Busted IPO Forum and the Insiders Forum