Chit Chat Stocks - BONUS Interview - Procore (PCOR) CEO Tooey Courtemanche

Episode Date: May 18, 2022

Tooey Courtemanche joins us this week for a bonus interview. Mr. Courtemanche is the CEO of Procore Technologies (PCOR) a company that provides a cloud-based construction management platform. Listen in to hear Brett, Ryan, and Tooey discuss Procore and the construction industry as a whole. Enjoy the show! We will conduct Bonus Interviews periodically whenever Brett and Ryan are eager to speak with a certain guest but know that the discussion wouldn't fit our traditional show format. Sign-up to 7investing with code "MONEY" and get $100 off your annual subscription: https://7investing.com/subscribe/ Want more of Tooey Courtemanche. Follow him on Twitter here: https://twitter.com/tooeyprocore?s=20&t=SWyDUhaXPt9W38RldGDpIw Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Contact us: [e-mail] Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

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Book your stay at LQ.com. Welcome to Chit Chat Money. This is our bonus interview. We do these occasionally and we release them on Wednesdays. And today we have on the CEO of Procore, his name is Thuy Korda-Manch. He has been on the show once before. And Procore is a company that I've followed for a really long time. I guess we get into it pretty quick, so I should maybe give a little background on the company. It came public a little over a year ago and they are a construction management software platform. I've talked to a few people that work in the construction management business and they say they spend all day on Procore. So it's really trying to make a otherwise not very digital

business a little more efficient. And they've had a really good year results-wise since they came public. Did you have any highlights from our discussion? Yeah, I think the two big ones, actually three. So we first talked about the construction industry in general because they have a lot of data points with that i know that's a big hot topic for everyone it's driving a little inflation um supply chains whatever i think first one he said that is that demand is still off the charts or it's demand still outstripping supply within the construction industry and then two we talked about the shanghai lockdowns and unlike maybe a retailer or something i don't know that's making products in china he said it wouldn't it would have some effects but given how large the

industry is giving how diversified it is across the world and the United States, it likely wouldn't have as big an impact as maybe some people might think, which as an investor, I was worried about that. So we're not an investor in Procore, but just as an investor in general, I've been worried about what the impact of that will be. So maybe that's some good news. And he has the data to kind of, you know, historically look through that. And then third is, oh man, I'm forgetting now. Third is the deflationary aspect of the Procore software. So they can help by making things more efficient within the construction site by not needing as many laborers when there aren't that many available. They can counteract the inflationary stuff that's going on right now

and be a deflationary force like a lot of other software programs are. Yeah, I think you hit on pretty much everything. I'll just give a few resources. Go ahead, check out their investor relations page. They give pretty good detail on there. And then their conference calls are good reads as well. And then the S1 is not that out of date either. It's one year behind. And so there's obviously a lot of comprehensive information on there if you want to get up to speed on the company. But without further ado, let's get to the interview. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and

Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. all right today we are welcomed by tui cordomanchi is the ceo of procore this is actually your second time on the show um and but we might have some first-time listeners i'm sure we do and so for any of them that are hearing about procore for the first time or aren't familiar with the business can you kind of just give sort of the one-liner on what procore is and the value that you guys provide to customers?

Sure. So Procore is a global platform that enables construction to be done more efficiently. It brings everyone together into a single place and drives the complexity of construction into something that's manageable. All right. That's a good, that's a great one, Leonard.

I'm sure you know better than us. So I want to hand the big questions here because you're at the heart of the construction industry. And at this point, it's pretty chaotic with all the supply chains and all that stuff. So what are you seeing as the overall state of the construction market in 2022? What are, and maybe more specifically, what are customers' pain points and how is Procore with your software able to help address that? Yeah, by the way, lots of good questions in there.

First and foremost, I live in two different worlds. When I think about our customers and the industry that we serve, a lot of the information that I'm getting from them, including customers' backlogs, which is basically their agreed-upon projects moving forward, and their inability to staff those jobs, frankly, shows that there's a tremendous amount of demand that far outstrips the supply in the industry. So the industry is doing very, very well. they would be doing a lot better if they had access to more labor so they could actually take on more of the projects that are needed but um you know but then the other world i live in is people coming at me with all the questions around macro um and the one thing people need to understand about construction is the construction industry and the folks that work in it they're tough and they're resilient so they've they've learned how to work through these these challenges

long ago in fact you know you think about supply chain challenges have been in place now for 18 months. The construction industry is still thriving, has figured out how to work with less and work around that complexity of supply chain challenges. So yeah, can't underestimate the resiliency of the industry. And I remember you talked a little bit more about it on the Q4 conference call about the labor trends. And you actually said that it could be a long-term tailwind for Procore. Can you kind of dig more into that? How do you see it playing out? Well, one of the reasons why Procore is successful is that we drive a ton of efficiency into construction. One of the stats that we love to point out is the fact that Procore can help our customers do about 50 percent more work per person.

And that's that allows them to do more with less labor. So we have a labor shortage. You look for leverage and you look for systems that help you do more with less. And I think that's a big piece of how the labor shortage impacts the ability for us to drive efficiency. Procore is a efficiency-driving machine. We make project teams more efficient, but we also allow companies to manage risk by holding other people accountable, by ensuring everybody's working off the same set of music, as we say, all the same information, the same drawings. And so we're effectively allowing them to run more with less and actually let them run better businesses. Okay. And I have one quick follow up on that. So we're seeing a lot of inflation right now.

Everyone knows it's the biggest thing in the news. Do you think software products like Procore can help counteract that and be a deflationary force? Because like you mentioned that thing there, it kind of made me think that the efficiencies that you drive, maybe saving on supply costs, whatever. Is that going to help counteract, do you think, these software products counteract the inflationary forces and be deflationary? And is that why Procore has been able to be growing so quickly over the last few quarters? Yeah, we absolutely believe this. The kind of common wisdom is that about 50% of construction dollars go into labor. And so if you can help companies drive down their labor costs, the overall cost of everything comes down.

So, by the way, one of the stats that I'd like to point out is that, you know, going into COVID, we had about a 95% gross retention rate. And then in COVID, we dropped to 94. And now we're back at 95. Our customers don't leave us in difficult times. In fact, they hang on to us. And by the way, we're not the low-priced leader. We're a premium product. But we drive so much value into businesses that we become mission critical to the organizations we serve.

Okay. And I want to switch back more to the macro environment, because I think a lot of people are interested in maybe any data points you're seeing and how the certain supply chain things are impacting us over the last few months, because we've seen, you know, the recent swings in energy prices. I know lumber was a little farther back, but how do you see that in the data, how the commodity prices could affect the construction industry? And specifically recently, sorry, I want to add on the Shanghai lockdown too, as that could possibly throw a wrench into things. Yeah. So let me tell you the way I look at the data that we have access to. I kind of think of it as a as a as a dashboard and an airplane, lots of dials and gauges. So we don't over index to any one particular data point. But I'll tell you that on aggregate, they're all very positive. Like, for instance, the internal metrics that we have around, you know, I mentioned in the earnings call record pipeline.

Right. So that to me, that that's a great indicator. The customers that are reporting their backlog, like how much business that they have already online. The fact that we are able to have broad-based performance across all of our sectors, from owners, GC, to subs, to enterprise, mid-market, SMB, U.S., international. We don't have one area that's really struggling or really thriving. It's broad-based. and that the the the the stat that came out the other day which i thought was interesting is since we're back to the pre-covid employment numbers that doesn't mean that we have enough but that the construction industry is back to the number of folks working in construction

that the construction companies are running relatively low margin businesses they wouldn't hire people if they didn't understand that they had one two three years worth of backlog sitting there for them to go build. So that's, that's the, that's one of those things that we look at. I also think about the external ones. So you have the architectural billing index, which is an esoteric index that you can track. There's the Dodge momentum index, which you can track. You could look at, you know, all of the government stimulus that's going in because of the government stimulus bill. You know, all of those are all pointing in a very positive direction as well. So in aggregate, when you zoom out, I think it's all looking very, very positive. Now,

you mentioned the lockdown. The thing that you have to understand about construction is it's a $10 to $14 trillion industry, depending on how you measure it. It's big, right? One particular sector or one particular shutdown will have a butterfly effect, but it will not slow the industry down. The industry, again, is very resilient and knows how to work around these things, it makes their lives harder and it may slow down the progress of a job, but it's not going to put the projects in jeopardy. I think Paul calls it the oil tanker. I think that's a great analogy. In terms of new customer acquisition, last time we spoke, you mentioned that about 50% of the customers your sales team reaches out to are still relying on manual

processes. So whether that's pen and paper, whiteboards, stuff like that, I'm curious if that has changed at all, uh, throughout COVID has that kind of accelerated the digital adoption, or are you still seeing a lot of low hanging fruit? It's, it's still pretty much the same. And you know, what's kind of eerie about this is I've been doing this for 20 years. It's always been the same. Uh, there's just, it's, it's an under digitized industry that is, um, you know, it's the digitization transformation is happening. Um, but, uh, but yeah, there's just, it's just still so greenfield, you know, and, you know, as we, so we've done very well in the U S very mature market. Um, and, uh,

and, you know, very proud of what we've done here, but, you know, the real opportunity for us is international. Um, and so what we need to do is build, build the organization and the rigor as we take the show on the road, um, in order for us to, you know, kind of succeed on a global basis. is something I'm really excited about. This episode is brought to you by KPMG. As a business leader, how can you innovate, build trust, and move forward in a digital era? KPMG can help by bringing together the right talent and technologies, generating insights

that spark opportunities. To explore their thinking, visit reed.kpmg.us slash opportunities. You talked about on the conference call, you talked about adding one big customer. And I can't remember. I think it was a public utility or something like that. And they had been a collaborator on the platform before. So they were well accustomed to what Procore offers. Are you finding that more and more people are familiar with the Procore platform? And is it easier to integrate it from an integration point when they are already familiar with it? Definitely easier. In fact, I mentioned two different customers. One was an international telco and the other was a very large u.s general contractor um the interesting thing about the

international telco is uh you know you would know them very much by name because their commercials are on every minute on tv um what's interesting about them was they'd actually been a collaborator on the platform for 10 years so their construction management firm had been running all of their well a vast majority of their their infrastructure projects on procore and then this company which is really hard not to say. This company decided that they wanted the benefits of Procore. They wanted to be able to run insights. They wanted to be able to control that. They want data that they can actually use in order to run a better business. So that is exciting. So yes, to answer your question, look, there's a principle about network effects. The more people on a network

just increases the value of the network. We see that. 60% of our users are collaborators. These are folks that are not paying customers, but they're engaged on the platform. They're getting value. And we have a lot of opportunities, especially down market in the SMB, to get those folks, the subcontractors, to be, you know, convert to be customers. And, you know, the opportunities are kind of endless. How does Levelset enhance Procore's offering? What's adoption of that been like? Yeah. Well, by the way, I don't know if you can tell by if you listen to the earnings call, the tone of my voice. But when I was able to talk about the fact that I got to see a demo of the lean waiver integration to our invoice management

tool, which by the way, is a bunch of jargon to anybody that isn't in the industry, but it's one of the more complex processes and a very long, complex workflow that goes from contract management to change management, to invoicing, lean waiver management, and then finally payments come after that. For us to be able to have integrated that product into our offering in a way that I could actually see it live on production, though it's not live for anybody right now, they're still building it. It's just thrilling because I see us getting closer and closer to getting to the point where we can complete these really complicated workflows. And I'll tell you, the industry is really excited about it as well. We have a lot of beta users signed up just chomping at the bit to

get to use it. You know, so that has been a tremendous success. And I want to say that as an organization, they're just a tremendous group of people. Just been nothing but a pleasure to work with. When I heard about the acquisition initially, it's a big acquisition. So I was thinking, all right, I got to dig into this. And it took me a while, but it sounds like they really serve something, a mission critical niche and also complex. I'm curious, what are the benefits from a customer standpoint to having an offering or a service owned by Procore versus just a marketplace partner? Yeah, because as I mentioned, doing lean waiver management is not a point solution. It can't be a point solution. It is a very, very complex step and a very, very

multi-stepped process workflow. So we believed it was mission critical for us to complete these workflows of managing money on projects. And so for us, it just became a no-brainer that we had to, we had to acquire them. And I do want to point out that, you know, lots of other reasons that we acquire them great people, as I mentioned, but also they have this amazing complimentary data asset that helps us on our data strategy, which is something that's very important to me because the data asset that Procore has generated over 20 years of helping customers manage risk is something that's very interesting for us to build future businesses off of. You just signed, or you just hired the new, your first chief data officer as well,

if i'm not mistaken yeah joy derling uh she did an amazing job at adobe and then she went on to vivint and uh fortunately we have a mutual friend who uh introduced us and uh got a great reference and we we convinced her to join us and she's she couldn't be more passionate around data keep in mind she's the cio so she manages systems and security as well but i mean her her superpower is in data and uh yeah she and i have uh have big plans i do want to stress though that we're not starting from scratch. We've, we've been building a data strategy for a long time. We've been you know, we have, we have a plan, but she's just going to bring it all together for us. And it's exciting. Okay. And I know you're I know you, you've got a busy schedule, so we've got a few

more questions left. I didn't see you mentioned the Procore Construction Network this quarter. I'm curious, what is, have there been any, has there been any progress on that? And then what's your long-term ambition there? Yeah. So there has been progress. We don't really announce things if there's nothing really new to announce. So they're building like crazy. Our teams are building like crazy and it's coming along very, very nicely, very much on plan. But looking at it on a quarter by quarter basis, there wasn't really anything that we wanted to shine a light on because we're building so much infrastructure to make it work. But ultimately what this means is that it creates an opportunity for anybody in the construction industry to be on a network where they can be

discovered. So imagine if you're a subcontractor in your hometown and you want to get more business. The best way you can do that in today's world is go play golf with your general contractor buddy down the street and see if they'll give you jobs. That's not a very efficient way to get your word out. So to be in a network where you can promote your brand and promote your abilities and capabilities and be discovered by people that would not normally discover you adds a ton of value to the industry. But then that also gets all of our collaborators, you know, onto the system so that they can engage with our, you know, our paid accounts. And then we have the opportunity at their time of need to offer them offerings like, would you like our project management tool

now that you've been awarded a job on the network? Would you like to look at our estimating? Because Now you have to do an estimate because you have to put a bid in. These types of time of need become very important for us to transition those folks from collaborators that are getting a lot of value out of the platform into paying customers. And we think it's going to be a lot of opportunity for Procore. Okay. And focusing to another or switching to another part of your business, it seems like you guys have a lot of focus on the financial aspect of your software suite.

Why the focus there? And does that give you any sort of differentiator from, say, those other lower cost competitors that you were talking about earlier? We think that our approach to financials is very unique and unprecedented. And so but I'll tell you why the focus, if you think about the what's important in construction is time and money. So schedule project management is one side and budgets the other side. If you're going to make an impact in the construction industry, you have to help your customers manage their funds. So that goes all the way from estimating to bidding to contract management to change orders to invoicing to lien waivers to budgets to budget snaps, all the things that we do, and then connections to the ERP systems. So it's all seamless for our end users.

Construction is very project-based. So having a tool set in the job site trailer that connects the accounting system with all of the project budget adds so much value, it's ridiculous. And without Procore, you're working in two different systems. usually Excel and your ERP and nothing's synced. So lots of value. Okay. And is, I guess maybe a bigger question is one of your long-term goals. And I don't know, this might be one that's hard to answer, but as one of your long-term goals for your customers to basically replace Excel and just having them solely need Procore for their document and I don't know, data needs. Maybe it was not exactly about replacing Excel. To me, what it is,

is optimizing the processes that are slowing down are the industry. You know, the biggest compliment Procore can get paid is somebody who said, you enabled me to do what I joined this industry to do, which is to build, not wrestle with data and software. And I think the more success we can have getting people back out, you know, into the field and doing what they love, which is building the kind of more I'll feel as if we've, we've been successful. Okay, I think that's all the questions we have. Is there anything that we're, any big trends, I guess, that we are missing that you think are important for listeners or investors? I would just say that you have to remember that we are in the early days of a digital, of an industry going through a digital transformation.

And so, you know, it's very, very early, very, very greenfield. But the opportunity is big, and I think that's why we're so excited. Yeah. Maybe, I don't know if you have any data in front of you, but you said the US is the most mature market for this digital penetration. Do you have any numbers of what is that? Is it 30%, 20% or 50%? What is it? I would say the best way you can measure that, and by the way, it's very difficult to measure because not all construction projects are registered anywhere. The best way to look at it is if you look at our 2 million active users on our platform, which is the latest number we released, and you look at the fact that 15%

of our business is overseas. That leaves you a rough kind of number of the number of U.S. folks that are on the platform. This is very rough math. And then if you think about the construction industry in the U.S. has six or seven million folks on it, you can get a sense of how many people are out there on the Procore platform. But remember, 60% of the people on the platform are not customers yet. So, you know, the penetration is still early days, but we have a big presence. Okay. That's all the questions we have. Tui, thank you for your time. Yay, thank you. It's always great to see you both.