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Good afternoon. Thank you for attending the Procore Technologies 2023 Q2 Earnings Call. My name is Matt, and I’ll be your moderator for today’s call. [Operator Instructions] I would now like to pass the conference over to our host, Matthew Puljiz, VP of Finance.

Alright. Thanks. Good afternoon, everyone. Welcome to Procore’s 2023 Second Quarter Earnings Call. I am Matthew Puljiz, VP of Finance. With me today are Tooey Courtemanche, Founder, President and CEO; and Howard Fu, CFO. Further disclosure of our results can be found in our press release issued today, which is available on the Investor Relations section of our website. and our periodic reports filed with the SEC. Today’s call is being recorded, and a replay will be available following the conclusion of the call. Comments made on this call may include forward-looking statements regarding our financial results, products, customer demand, operations and macroeconomic and geopolitical conditions. You should not rely on forward-looking statements as predictions of future events. All forward-looking statements are subject to risks, uncertainties and assumptions and are based on management’s current expectations and views as of today, August 2, 2023. Procore undertakes no obligation to update any forward-looking statements to reflect new information or unanticipated events, except as required by law. And if this call is replayed reviewed after today, the information presented during the call may not contain current or accurate information. Therefore, these statements should not be relied upon as representing our views as of any subsequent date. We’ll also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of non-GAAP to GAAP measures is provided in our press release. And with that, here is Tooey.

Thanks, Matt and thank you, everyone, for joining us today. I am proud of the results that we delivered this quarter despite the challenges we continue to see in the demand environment. Let me start by sharing a few highlights from the quarter. In Q2, we grew revenue 33% year-over-year and added over 600 net new customers, reaching a total of over 15,700 customers by the end of the quarter. We continue to make progress on our journey of efficient growth by improving operating leverage in the business while sustaining revenue growth. And Procore was once again ranked number one across 11 construction categories in G2’s 2023 summer report. I’ve had the opportunity to spend a lot of time on the road this past quarter, and I want to share something that is top of mind from my travelers. At Procore, we have a vision to improve the lives of everyone in construction. The only way to further this vision is to protect the industry’s most precious asset, its people. Over the last century, we have made tremendous progress to improve the physical health and safety of workers and construction. What’s becoming increasingly clear is that we must prioritize mental health alongside physical health. In the U.S., the rate of suicide for men in construction is about 4x higher than the general population. That’s why this quarter, we came together with the B1M, a leading construction video channel to officially launch Get Construction Talking, a global initiative to improve mental health and construction. By combining the B1M’s reach of over 2.9 million YouTube subscribers with Procore’s network of over 2 million users across more than 150 countries, we can bring awareness to mental health and construction and raise money to amplify the efforts of charities working in the space. I’m honored to work alongside construction industry leaders to destigmatize mental health in the industry and provide resources to workers and organizations in need. During my travels, I had an amazing opportunity to tour the international Thermonuclear Experimental Reactor, also known as ITER. As an alternative energy and construction enthusiast, this was a real career highlight for me. The complexities and the scale of this project cannot be overstated. It’s one of the largest construction projects on the planet, and it’s a collaborative effort between 35 countries and over 700 contracts. I’m incredibly proud that Procore’s customer for Peruvial is one of the prime contractors on this project and is contributing to building this game-changing technology. Examples like ITER that illustrate the sheer complexity of construction are an important reminder why the industry continues to seek ways to optimize their efficiency and position themselves for continued growth. And this is only becoming more important given the current demand environment. In the past, we’ve talked about the many puts and takes in construction and how the aggregate construction volume and overall demand is what really matters most. As the demand environment continues to evolve, a tale of two stories has emerged. While some sectors in construction remain muted, other sub-sectors are experiencing unprecedented growth. The dichotomy we’re seeing in the broader industry is not unlike the behavior we’re seeing within our customer base. On our last earnings call, we shared a new dynamic that has surfaced in Q1, in which a portion of customers began demonstrating cautiousness and construction volume commitments, while at the very same time a greater portion expanded their volumes. In Q2, this dynamic became more pronounced. Relative to Q1, a greater portion of the industry showed incremental conservatism, while at the same time a greater portion grew their construction volumes with Procore. Similar to last quarter, both the incremental cautiousness and expansion activity was not concentrated in any particular facet of the business, but rather span multiple stakeholders, customer sizes and geographies. And given this is the second quarter of seeing this dynamic, it’s no longer just a data point, but it’s becoming a trend that we’re paying close attention to, and Howard is going to elaborate on this further. Speaking of strong expansion momentum, we continue to build upon our partnership with the industry with a number of notable customer wins in the quarter. I’d like to share a few examples, starting with P.J. Hegarty and SUNS, a leading general contractor with over 95 years experience, undertaking projects across the UK and Ireland. They manage a diverse portfolio across commercial, office, healthcare education, industrial and civil with a particular focus on large-scale complex projects. P.J. Hegarty initially bought Procore displacing competitive solutions in order to consolidate their field and desktop solutions onto one connected platform and enable easier adoption for their project teams. They particularly valued our mobile accessibility, which allowed them to have better visibility into what was happening on site. They had previously been using Procore for their data center projects, but expanded this quarter and now we’ll be using our platform across all of their projects. As part of this expansion, they’re adding Procore BIM and analytics to their product suite to enable collaboration on BI models and enhance their analytical capabilities. During my travels, I had the pleasure of meeting the P.J. Hegarty team in person in their offices in Doublet. This is a great example of the relationships we continue to foster with our customers around the world. I’d like to share another example. Guilford County School District is the third largest school district in North Carolina, serving nearly 70,000 students across 126 schools. They originally purchased Procore for our intuitive collaborative platform, particularly the real-time insights, analytics and data ownership we provide. Guilford County for recently passed two major public bonds totaling approximately $2 billion to support much-needed construction expansion and improvements across 12.5 million square feet of school facilities. As a result of these bonds, Guilford County is partnering with Procore to build several new schools, ultimately expanding their commitment with Procore by 4x. Our expanded partnership will benefit students, teachers the surrounding community and the long-term educational goals for all of Greensboro, North Carolina. Procore is contributing to build the schools, hospitals and homes that we desperately need and the infrastructure that powers them and brings them to life. This is just one great example of why I am proud to support the industry that builds the world around us. Another great example is Pomerleau, one of Canada’s leading construction companies with nearly 200 active project sites. They have been involved in building incredible projects across Canada, including the grand theater De Quebec, the University of Toronto Student residences and the Burgoyne Bridge. Since becoming a Procore customer in 2019; Pomerleau is focused on standardizing on the Procore platform, reducing the need for multiple other software solutions. This quarter, Pomerleau increased our investment with Procore, expanding construction volume on the platform. As part of this expansion, Pomerleau has started this journey, bringing BIM models onto Procore for easier viewing and collaboration. Pomerleau will also be leveraging the Procore extracts application as part of their data strategy to more easily digest data and enable flexible reporting. It’s been fascinating to see how quickly our customers have evolved from talking about data to talking about how they can leverage AI to get as much value out of that data is possible. In fact, AI now comes up in most of my customer conversations. And we’re going to share more on our perspective on this at our upcoming groundbreak conference, but I want to take a moment to share how I’m thinking about the AI opportunity for Procore. It’s becoming abundantly clear that we are on the cusp of a transformational shift in generative AI. This powerful technology has the potential to transform how we work, how we think, how we operate as a business and how we serve our customers. We have been expanding our AI and machine learning capabilities for years. From our acquisitions of Avata Intelligence and INDUS.AI, to reporting enhancements in Procore analytics, to new product features like search functionality, submittals, automated area takeoff and voice-enabled capture. Now with the advent of large language models, we have yet another tool in our toolbox to unlock the value of the project data and drive greater efficiencies for our customers. By nature of being built on a single platform, generating a massive amount of data, Procore is well positioned to leverage this technology to deliver even greater value to our customers and further our vision of improving the lives of everyone in construction. To achieve this vision, we must begin thinking of ourselves not just as tech providers or partners but as trusted copilots for all of our users. The future of our business is to be there for them to guide them, to assist them and help them increase their productivity. I’ve heard this referred to as customer intimacy, which makes sense. When you think about what conversational AI will mean for our end users. Connecting users across workflows on our platform has been the key to our success. We’re evolving to provide intelligence to all of the work that is done in Procore every single day. We ultimately want our users to instinctively turn to Procore to help them do their jobs. Generative AI is one of the tools that will enable us to do this, allowing us to create solutions that are not just reactive but proactive, solutions to understand our users’ needs even before they do. Solutions that can adapt, learn and improve over time. We are not just building products. We are building partnerships. We’re not just solving problems. We’re anticipating that. And we’re not just reacting to the industry. We are shaping it. So to wrap up, I want to invite all of you to our 2023 Investor Day, which will be held alongside our annual user conference, ground break on September 19 and 20 in Chicago. This is shaping up to be our largest ground break ever with thousands of construction leaders from dozens of countries expected to join us. We planned a jampacked couple of days, including over 80 breakout sessions an expo hall showcasing the latest advancements in construction technology and an exciting lineup of keynote speakers, including renowned athletes like Michael Phelps and Laila Ali and the Founder and former Executive Director of Stamford’s Disruptive Technology Program, Michael Steep. I couldn’t be more thrilled to get together with our customers, our partners and our shareholders, and I hope to see you all there. With that, let me hand it over to Howard.

Thanks, Tooey, and thank you to everyone for joining us today. We are pleased with the results we delivered against a challenging demand environment. Today, I’ll quickly recap our financial results share some color on the quarter and conclude with our outlook. Let’s jump into our Q2 results. Total revenue in Q2 was $229 million, up 33% year-over-year, and international revenue grew 29% year-over-year. Similar to prior quarters, our Q2 international results were impacted by currency headwinds. On a year-over-year basis, FX contributed approximately 7 points of headwind to international revenue growth. Therefore, on a constant currency basis, international revenue grew 36% year-over-year. Our non-GAAP operating loss was $3 million, representing an operating margin of negative 1% and our key backlog metrics, specifically current RPO and current deferred revenue grew 33% and 32% year-over-year, respectively. I’d like to take a step back and share some additional color on our Q2 performance. As Tooey mentioned, the dichotomy and customer behavior we saw in Q1 became more pronounced in Q2. This quarter, we saw a greater share of customers demonstrate strong expansion activity both in the form of additional construction volume as well as the addition of new products. This expansion momentum was well rounded across multiple facets of the business, and we believe is a positive reflection of the continued optimism within cohorts of the construction industry. Conversely, we also saw an increase in customers demonstrating cautiousness in construction volume commitments, which we continue to believe, reflects a heightened sense of conservatism within other coolants of the industry. This has translated to longer sales cycles and smaller initial deal sizes. While we managed to be resilient in Q2 through these headwinds, should this cautious sentiment persist and may further impact us in future quarters. And similar to the expansion activity we saw, this cautiousness was not concentrated in any particular part of the business, but rather span multiple stakeholders, customer sizes and geographies. The elevated expansion and cautiousness as compared to historical norms had partially offsetting impacts and therefore, isn’t obvious when reviewing our financial results. Nonetheless, it represents an unusual occurrence that has persisted and that we wanted to share to help illustrate why the current demand environment remains dynamic and challenging. Moving further down the P&L. Given this is our second quarter of stronger margin performance I want to share some context on how we view our margin trajectory as a whole. At last year’s Investor Day, we provided a framework of approximately 350 basis points on average of non-GAAP operating margin expansion per year with our current revenue growth rate. We continue to believe this is the right balance of improving our margin profile, sustaining top line growth and allowing the flexibility to react to our business landscape. This year, we set a plan for 2023 that included meaningful margin expansion, incremental to this framework. We recognize the need for our margin profile to catch up relative to our revenue scale and set a plan to accelerate that path of improvement without compromising our business needs. Additionally, you’ve heard us refer to efficient growth previously. Internally, leaders and teams have leaned into this concept, evaluating every expense and investment opportunity to identify ways to improve operational efficiency and scale the business. This has resulted in an accumulation of smaller savings across multiple areas of the business that has allowed us to meaningfully outperform our margin expectations over the past two quarters, while giving us the flexibility to continue investing in future growth opportunities. Ultimately, the combination of these dynamics has translated to faster margin expansion this year, and investors should not expect the same magnitude of margin expansion in future years. Going forward, we continue to believe the framework we provided at last year’s Investor Day is what investors should expect. At our upcoming Investor Day, we plan to share more about our philosophical approach to managing our financial profile at various revenue trajectories. With that, let me move on to our outlook. We continue to operate in a challenging demand environment. As a reminder, our guidance philosophy takes into account this uncertainty and factors in the potential for incremental weakness in the market. We have taken a similar approach over the last several quarters to set guidance at a level we have very high conviction we can deliver on in almost any environment. Additionally, when reviewing our future results, investors should note that the second half of 2022 serves as a challenging compare period. As we noted on our Q3 earnings call last year, our backlog metrics benefited from large deal activity that was anticipated to close in Q4 of 2022 and but instead closed in Q3 of 2022. As a result, current RPO in Q3 of 2022 accelerated to 38% growth year-over-year on an organic basis, approximately 4 points higher than any other quarters in 2022. With that, here is our guidance for Q3 and full year 2023. For the third quarter of 2023, we expect revenue between $232 million and $234 million, representing year-over-year growth between 24% and 26%. Q3 non-GAAP operating margin is expected to be between negative 6% and negative 5%. For the full year of fiscal 2023, we expect revenue between $921 million and $924 million, representing total year-over-year growth of 28%, which is an increase of $12 million from our previous full year guide. Non-GAAP operating margin for the year is expected to be between negative 4.5% and negative 4%, which represents an improvement of 150 basis points from our previously issued guidance last quarter and implies year-over-year margin expansion of 600 basis points. And finally, although we do not guide free cash flow, you may recall that we provided a framework at last year’s Investor Day that free cash flow margin should expand in line or slightly faster than non-GAAP operating margin. With our updated guidance this quarter, I am pleased to share that we are on track to reach positive and sustainable free cash flow in 2023. We expect this to be the first of many years of generating free cash flow as we continue our pursuit of efficient growth. Looking ahead, we remain focused on delivering growth at scale in a disciplined manner, which allows us to both invest in extending our market leadership as well as drive operating leverage, ultimately improving free cash flow per share. Before I wrap up, I’d like to build on Tooey’s comments and invite you all to join us at our 2023 Investor Day taking place on September 20 in conjunction with ground break in Chicago. Please reach out to our Investor Relations team if you would like to attend. I’d like to close by thanking our customers, partners, employees, shareholders and the industry as well as the communities we serve for giving us this opportunity. With that, let’s turn it over to the operator for Q&A.

[Operator Instructions] The first question is from the line of DJ Hynes with Canaccord. Your line is now open.

Hey, guys. Thanks for taking the question. So I want to follow-up on the dynamics that you talked about with some pockets of some conservatism, some pockets of faster expansion. It wasn’t totally clear to me if that’s a net positive or a net negative in terms of growth for Procore? I mean it’s hard to discern in your numbers. And then maybe the second part of that question that I’ve been asked a couple of times from investors is just with the customers that are opting for smaller commitments, if they were to exceed those commitments, remind us how the business model works? Like how common is that? And how do you guys – are there over charges? Or how do you handle that?

Yes. Thanks, DJ. This is Howard. So the first thing is in terms of the net impact. The net impact is actually positive, so we’re seeing greater amounts of expansion versus downgrades and that’s why it’s not apparent in our financial results. The dichotomy has continued to get more pronounced, but the net impact is positive. In terms of the lower volume commits, One of the things that we do when customers exceed those volume commits is they actually have to pay a higher basis point typically they exceed the volume commits that they have. And it’s an incentive for customers typically to commit to higher volume upfront. And so as they do that, then they have to pay higher basis points. And we typically – so we don’t see a ton of that. And so we typically get more volume commits upfront.

Yes, makes sense. And then Howard, I want to ask you on margins. You did a good job laying out that this year was kind of a catch-up year. I mean, they’ve obviously been really strong in the first half. Guidance seems consistent with your under promise, over deliver mantra. But are there any kind of notable planned investments in the back half of the year that would drive margins materially lower than what we’ve seen in the first half?

There really isn’t. Keep in mind that our margin guide, it’s something that we believe leaves us enough room to continue to make investments as those opportunities have risen as we evaluate our environment and what’s available to us towards the back part of the year. If those investments in that flexibility and we don’t see a great opportunity to do that, there could be potential upside to that margin profile.

Yes. Makes sense. Okay, thank you, guys for the color.

Thanks, DJ.

Thank you for your question. Next question is from the line Saket Kalia with Barclays. Your line is now open.

Okay. Great. Hey, guys. Thanks for taking my questions, here. Howard, maybe for you, just zooming out a little bit from the quarter. I was wondering if you could just talk a little bit about the international business right now. Clearly, a lot of investment there for the future, I think we reviewed that at last year’s Analyst Day. How do you sort of think about that business growing and eventually contributing to this operating leverage in an even bigger way?

Yes. Thanks, Saket. So we continue to remain focused on that investment on the international side, and it is something that we view as growth investments. Remember that our framework that we have provided on an ongoing basis of that 350 basis points average expansion that actually does not contemplate any additional upside that we would see from the international investments and the leverage there. And so that’s how I’m thinking about the components of our margin profile going forward relative to international. We still remain focused on that investment particularly in the back part of this year. We still expect improvements to come about in the international business towards the back part of this year, we’ll provide an update later on in the year.

Got it. Very clear. Tooey, maybe for my follow-up for you. I realize it’s still very early, but any early observations from your payments product here in beta testing? I mean, just high level, anything just in terms of customer preferences or comments on pricing? Anything you want to say about payments?

Saket, you know I love talking about payments, I won’t talk about a product. So you know what I would say is we have learned a lot we have partnered very, very close with the industry to deliver this solution. And I’m constantly gratified by the enthusiasm that I see in the market and the customers that I’m talking to about us solving this problem of getting people paid faster. And so I would encourage you all to come to a groundbreaking Investor Day because you may learn a little bit more at that moment.

Got it. Looking forward to it. Thanks, guys.

Thank you.

Thank you for your question. The next question is from the line of Adam Borg with Stifel. Your line is now open.

Great. And thanks so much for taking question. Maybe just for you, Tooey. In the past, you’ve talked a little bit about adopting more of a product-led growth strategy. I was just curious kind of where are we with this in terms of better refining product and packaging to serve the lower end of the market.

Yes. Well, so the product line growth is definitely not an event. It’s a journey, right? And so this has been something we’ve been working on for quite some time. But if I was to characterize where we are in the process, I would say we’re still in early days. We talked a little bit about PCN in the past. Things like PCN, our connected strategy is going to help support expanding our customer base across our collaborators as that becomes more prevalent and adopted. So early innings yet, but a journey.

Just to add on a little bit there. Remember, not to think about PLG as specifically for the lower end of the market. It is a broader strategy around how we go to market across the board, as Tooey mentioned, including things like PCN, so just keep that in mind in terms of when we’re talking about PLG. And it is very early innings.

Adam. And I’m going to drill on top of this that the – we know so much about our customers, and we have so much of their data that we have the opportunity to present them with the next best offering or next best action for them to take in expanding their relationship with Procore. And those are areas that it’s not dependent upon size of customer, everybody benefits from learning about how they can use Procore to run better businesses.

That’s super helpful. And maybe just as a super fast follow-up, just on the insurance front, again, I’m sure we’ll hear more ground break, but just on proper risk advisers. Again, I know it’s super early, but any interesting customer feedback or any initial earnings there you’re willing to share? Thanks so much.

Yes, sure. So still, again, very early days. And I would encourage you to definitely come to Investor Day. Our friend, Paul will be there, and he will have a lot to talk about. But yes, I would say stay tuned, there’s going to be more to come. I will say that it’s an area where I think there’s a lot of opportunity. We’re a trusted partner to the industry, and that trust goes a long way.

Great. Thanks again.

Thanks, Adam.

Thank you for your question. The next question is from the line of Sterling Auty with Moffett Nathanson. Your line is now open.

Yes. Thanks. Hi, guys. I appreciate the commentary on the macro. But bringing this home to Procore specifically, can you talk to us a little bit about how you view your current sales pipeline and your pipeline coverage ratios in light of those dynamics? In other words, is it gotten stronger? Is it getting weaker? And are you doing anything specific to manage that pipeline coverage in light of the trends that you mentioned?

Gotc it, thank you, guys.

Yes. Thanks, Sterling.

Thank you for your question. The next question is from the line of Brent Thill with Jefferies. Your line is now open.

Hi, Tooey. Hi, Howard. This is Luv Sodha on for Brent Thill. Thank you again for taking the question. I wanted to ask one on the expansion activity that you saw this quarter, one of the comments you made was it’s not just volume-based expansion, but it’s also adoption of additional products. Could you just give us some insight into – are you working with the go-to-market team to incentivize them to sell additional products? And then what additional products have been adopted?

Great question, Luv. The good news is that our products are in demand from our customers. Great example is that with folks that are coming on board and they’re buying project management, they’re quickly seeing the need for Procore to help them manage their financials. And I think that’s been one of the reasons why we’ve been successful, and really what sets us apart is the fact that project management and financials aren’t disjointed separate pieces of software. We acknowledge the integration that is required between project management, financial management on a platform. So it’s kind of a natural progression, and then it really depends on the type of customers, owners are going to purchase different products than GCs in the beginning. And the specialty contractors are going to choose more workforce management, BIM tools that they need for the field. So it really depends on the person that we’re talking to as to how they progress through purchasing our different products.

Yes. From an incentive standpoint, we don’t have anything that’s overly specific or direct in terms of product incentives at this point. There is a lot of opportunity to continue to cross-sell as most of our expansion is still from a volume perspective.

Got it. That’s helpful. And then just one quick one, Howard, if I may, on the gross retention side. Could you just elaborate, was there anything that led to the moderation to 94% or any additional color you could share there? Thank you.

Sure. The 94%, likely there was some of the cautiousness that made its way into that 94% gross retention. But keep in mind that, that 94% is still within our historical range of 94% to 95%, and so we still feel good about that gross retention number.

Thank you for your question. The next question is from the line of Matt Broome with Mizuho. Your line is now open.

Thanks very much. Hi, Tooey, and Howard. Congrats on another strong and consistent quarter. I guess in terms of the increased polarization of customer behavior, I just be interested to understand a little bit more about what’s really causing that behavior? And did those trends sort of become more pronounced as the quarter progressed and indeed sort of carry on into July?

Yes. So we mentioned this earlier, but I’m going to say it again, which is I wish I could tell you, Matt, that we have data that points to one particular area, one segment, one geo, one stakeholder where this was happening more than others. It was generalized across the entire portfolio, which is a little bit gives us a little bit more interest in looking deeper into this. But it’s really interesting, if you were going to ask my personal opinion, Matt, what I think is happening is if I look over the last few quarters, and forget about construction, but anybody, when you read the news, things haven’t gotten more rosy, things seem to have continued to get a little bit more scary about the overall macro environment. So I think sentiment goes a long way in that. But also, there’s a lot of optimism because you hear about the infrastructure bills. You hear about all these big mega projects coming online. You hear about data centers, you hear about all the manufacturing. So there’s this kind of world where there’s things to be very optimistic about and then things that can concern you. And it’s really interesting. I was talking to a customer this quarter and he said to me, he goes, we are increasingly optimistic that we may dodge a bullet, right, about the economy. He goes but we’re increasingly worried that we may not be right in that optimism. So that, to me, is like it shows how you can hold two thoughts in your head that are countered to each other and actually articulate it, which I think illustrates it well.

Alright. No, that’s helpful. And then I guess, just in terms of the incremental cautiousness from some of your customers and those volume commitments, are there any sort of value signs that this is sort of ultimately translating into lower usage? What is the effect on usage there, if any?

Yes. No. So we do not believe there’s any correlation at all. We track usage very closely, and there has been no – in fact, usage is on the increase. It’s not on the decrease.

Alright. Prefect. Thanks so much.

Thanks, Matt.

Thank you.

Thank you for your question. Next question is from the line of Josh Tilton with Wolfe Research. Your line is now open.

Hey, thanks for taking my questions. I kind of want to go back to that last one actually and maybe go back to some of these customer conversations that you’re having. I get that there’s no like data points or trend in the customers who are spending more versus customers who are spending less. But I guess when you go out and talk to customers who are choosing to expand like what exactly is it that they’re pointing to that’s giving them the confidence in spending more? And kind of how does that compare to what you’re hearing from those customers who are spending less what are they pointing to and being like this is why we’re spending less. Is it obvious is macro? Is it more than that? But maybe go back to some of those conversations.

Yes. So I can just tell you my anecdotal stories and the conversations that I’ve been having. And by the way, as I mentioned, I’ve been on the road a lot. So a lot of these conversations were deep in person conversations and not just quick phone calls. What I found in some cases were these businesses were running more volume because they were newer to Procore, but they may have only been running their data center business with us, but not the rest of their business and/or they had been awarded a large project or two that they hadn’t anticipated and not led them to want to increase their volume to Procore. The other piece is that the – though customers will start off with project management, as I mentioned earlier, there’s an opportunity for us to expand those accounts. for the people that are betting on the future around things like quality and safety, around things like financials, around things like invoice management. And so I think there’s – on that side, the optimism side, that’s kind of how we see it. And by the way, I would say, I have a biased sample though, to be honest with you, Josh, I talk to our biggest and best customers. And so I don’t want to overgeneralize here. But clearly, with 15,700 plus customers, you’re going to get all into the spectrum in terms of optimism. I have not spoken to many customers who are pessimistic, but – so I can’t really speak to that. But obviously, in the numbers, there is some. And Howard, do you want to?

Yes, Josh, on the downgrade side of things, I think it’s have to come back to really, it’s about the sentiment in those customers and what they’re feeling in terms of what they’re seeing for themselves. And so it may not be necessarily because their backlogs aren’t there or anything like that. It’s purely about the sentiment that they’re feeling and they decide to downgrade. Keep in mind, when they downgrade and if they do overachieve or overuse on the volume, they do have to pay a higher basis point at that point. But the good news is when you look at that in relation to our gross retention, it still remains relatively stable.

Totally makes sense. And I guess just my follow-up, sticking with this topic is, it sounds like it was an offset in the quarter, but a net positive but I think in the prepared remarks, you also very appropriately warned us that it discontinues, it could be a negative in the future. So I guess outside of the obvious answer, which is you need more cautious customers than expanding customers, like what, from your perspective, would have to change for this to kind of flip from still being a net positive to go into being in that negative?

What have to change? Let me answer it in a couple of different ways. First, in terms of that cautiousness that we are calling out. From my seat, when I look at the proportion of customers that are expanding, that are renewing or that are downgrading, when you see a smaller proportion of customers that are renewing and either going expansion or downgrading, that profile in and of itself actually causes the predictability of the business to be a little bit less accurate. And so from that standpoint, where I said I have to prudently make sure that we call out that cautiousness. And so what will we have to see for that cautiousness to materialize. We would have to see the sentiment on the downside really start to get to a place that outpaces the expansion side. But just the profile of what we are seeing really causes that predictability to be a little bit less accurate and the volatility potential to increase.

Helpful guys. Thank you so much.

Thanks Josh.

Thank you for your question. The next question is from the line of Brent Bracelin with Piper Sandler. Your line is now open.

Thank you. Good afternoon. Tooey, maybe starting with you, the volume of net new customers on a year-over-year basis had declined for two quarters, which really makes sense given the challenges out there. I guess I was a little surprised in net new adds that were strong in the quarter, 615 million back to year-over-year growth there, little stronger than seasoning we have seen in the last couple of years. So, what’s driving the net adds? Is there a profile either specialty or owner or a unique cohort that’s driving some of that? Just wanted to get a little more color on the net new customers that looks a little healthier than I would have thought given the environment. Thanks.

So Brent, I would not over-index on customer count. The thing is because we have so much – such a large SMB business, that really creates a lot of variability in those numbers. So, we don’t really see it as being something that we track really closely. It’s much more about the construction volume our customers bring on the platform, and that remains strong.

Yes, I will just jump in. Look, we are happy with the customer adds. Historically, we have been in that 500 million to 600 million range in terms of quarter-on-quarter increase, and that still remains consistent in Q2. To Tooey’s point, we are really managing to the dollars that those customers bring in versus the actual count of the customer. And so we feel good about the customer count.

Great. And then, Howard, one quick follow-up on the renewal discussions and dollar volumes you are seeing on expansion versus contractions? I think we heard from Avata exchange earlier today, they had a call out around a commercial building being a sub-segment for them where they are seeing softness. As you think about the contracts that are up for renewal, that are shrinking. Is it tied to commercial building erosion? Is it hard to predict? Just trying to get a little more color on those contracts that are downgrading, is it tied to commercial office building where we are clearly seeing weakness?

So Brent, I am going to jump in over Howard and then Howard can jump in on this one. But the answer is simply no, that’s not – that doesn’t come up in the conversations. I think what Howard said is something that I have been trying to say for a long time, which is our success is driven primarily by sentiment. And so it’s more about how do these executives feel about the opportunity ahead than it is about any particular segment that’s on the downturn. As we mentioned before, I will say it again that the – our customers run these diversified portfolios and they don’t – the ones that were in heavy into commercial office buildings 2 years ago, they have shifted their portfolio mix dramatically away from that to data centers and manufacturing and warehousing in areas where they can actually see some success. So no, it really is not, and remember there are 70 sub-segments in the construction industry. So – and that’s just one and it’s in the single-digit percentage of the overall industry. Sorry, Howard. You got anything else?

No. You covered everything too.

70 sub-segments certainly helps explain maybe the diversification that some don’t appreciate. Really helpful color there. Thanks.

Sure. Thank you.

Thank you.

Thank you for your question. The next question is from the line of Nick Altmann with Deutsche Bank. Your line is now open.

Awesome. Thanks guys. Just with some of the pockets of weakness on the volume commitments, I am wondering how you guys are sort of combating that from a go-to-market perspective? I think you had mentioned earlier that financials is an area or a SKU that you guys continue gaining traction with. But I guess – what is sort of the remedy, or how are you guys sort of combating some of the weakness in volume equipment? Is it incentives in place to drive expansion through new SKUs? Is it a shift in focus to other product categories or areas? Just any sort of color you can give around sort of how you plan on combating some of that weakness in volume commitments, I think would be really helpful.

Yes. Sure, Nick. Thanks. So, similar to what I mentioned before, a regular part of what we do in evaluating and determining where we put our resources on a quarter-on-quarter basis takes these things into account and not necessarily specifically around products, although that could be part of the equation. We will look at things like where do we want to double down on things like driving pipeline or specific geos or specific teams and we continuously make those adjustments as we execute throughout the quarter and throughout the year. And those are things that are a normal part of the decisions that we make in any particular quarter. So, those adjustments are definitely happening as we move throughout the year.

Great. And then just a quick follow-up on the margins. It’s great to see that the outlook on the margins and some of the comments around free cash flow. Just given you are cleaning up the expense line a bit, can you maybe just talk about the areas where you are maybe adding the incremental dollar and where you guys want to sort of double down on the expense line? And maybe on the flip side of the equation, where are sort of the areas you are maybe cleaning up a little bit more. If you could talk about product categories, international, etcetera, I think that would be interesting. Thanks.

Yes. The margin improvement really was planned in terms of being above that framework that we have been given about the 350 basis points on average. And it really has come from a diverse and wide range of areas from go-to-market R&D to G&A. So, that’s the first thing. The second thing is we continue to invest in the business, largely in the front office because of the demand that we see and that we are reacting to there. And so we still invest in the go-to-market. We are still investing in the products side. Keep in mind, in terms of the headcount investments and the capacity investments, we have come into fiscal ‘23, and we have said before that we are going to add less resources in fiscal ‘23 than we have in fiscal ‘22. And that has certainly contributed also to the margin expansion that we saw and are seeing this year, and we will continue to see this year.

Thanks guys.

Thanks Nick.

Thank you for your question. The next question is from the line of Dylan Becker with William Blair. Your line is now open.

Hey guys. It’s Faith on for Dylan and thanks for taking our questions. I wanted to touch on the evolution of the business outside of the pure macro dynamics. So, now that there is more of a platform approach versus a point solution tool when you guys started. Wondering how we should think about resiliency in your durable growth framework, maybe now that the equation shifts more to a balanced mix of both product and volume to support business efficiency versus solely relying on the volume growth as it’s done historically, which I understand, I believe still has a lot of white space in itself.

Yes. Well, thank you. So, Procore has been a multiproduct platform since 2017. So, I wouldn’t characterize us as having just shifted to being more of a platform play. What we have done is we have matured the products that we have had that a company our project management kind of flagship product. And so that’s giving us the opportunity to now provide obviously, additional value by providing more products. And by virtue of the fact that we are helping our customers run their entire business. We think we can grab more of their volume because it doesn’t make a ton of sense to run your business on a platform that not all of your projects are on.

Right. No, that’s helpful. And then just quickly, if I can ask a follow-up, I wanted to touch on Procore construction network and how this can drive efficiency to the sales process by enabling more self-serve optionality or that collaborator conversion efforts to open up new scopes of work to the different stakeholders? How are you guys thinking about this?

Yes. So, the way we think about PCN is our mission is to connect everybody in construction on a global platform, and the PCN is just one tool that we use to acknowledge that the collaborators that are on our platform every single day are entitled to an experience that will get them and keep them engaged on our platform. So, it’s an enabler, but it’s just one of many different ways that we are increasing our customer count just by virtually the fact that we have more people on our platform that are actually engaged and using our products. And so that’s just one example though. But we have lots of different examples of how we provide value and get people interested and it helps the sales process.

Yes. And I will just add on top of that, Faith. Specifically, for example on PCN, our intent is to increase the volume of customers’ participation in that PCN and also engagement. And with that participation and engagement comes an ability and increased opportunity to meet the customer at the point of need. And when we have that opportunity, it starts to then play into the efficiencies that we have further up the chain in terms of the pipeline and how we generate that pipeline and how we ultimately close that pipeline into a $1 of ARR.

Thanks for the color. Thank you, guys.

Thanks Faith.

Thank you.

Thank you for your question. The next question is from the line of Kash Rangan with Goldman Sachs. Your line is now open.

Thank you very much Tooey and Howard. I have a slightly different take, I mean we are always waiting for this macro recovery, and we are not getting what we want. But at the same time, in the 2 years that you have been public, you have been putting up the numbers and your growth rate in fact has accelerated from when you went up. I think the first quarter, you went public was 27%, 32%. Your margins are better, free cash flow is better, number of customers added just keeps growing. I think it’s about 15%, 17% growth in your customer base, the revenue per customer is growing. Your yield is getting better. So, what are we waiting for? What if we don’t do? I mean what if we don’t get a “recovery” right? But this is a new normal. How does it leave the company? Are you still keeping the same optimism with respect to the TAM, the growth opportunity of the company? Maybe would you need to set aside a notion of a commercial or whatever recovery because you have had enough strength in your end markets and your business model seems to be doing nothing but just performing and outperforming. So, tell us more about why we are all worried about something we should not be worried about?

Well, Kash, good to hear from you. And you are now hired onto our Investor Relations team officially. That’s probably the nice thing anybody has ever said. So yes, so if the macro demand environment continues to be a challenge, I am personally convinced that the overall need for construction is going to be there. It just may shift from one segment to another, and that’s the beauty of Procore, so we serve all sectors. And that really helps when our customers shift their portfolio, they don’t have to shift products or anything, they just shift their portfolio. So, I am a firm believer that the overall demand for construction is going to remain. Look, we have seen the 2009 downturn, we saw COVID downturn, we also saw demand didn’t wane dramatically during those timeframes. And you got to remember, we – I am going to say this for our friend, Paul. So, Paul, we use to always use the oil tanker analogy, which these things, even if it does slow, this industry and the way that this works, it’s like an oil tanker. And it doesn’t speed up fast and it doesn’t slow down fast, and it certainly doesn’t turn very agile. So, we believe that over time, we will be more of a steady Eddie when it comes to riding the ups and downs of the overall macro economy just because of that nature of construction.

Yes. Just to add on a little bit more there, Kash. Doubling down on the oil tanker analogy, you won’t see any particular period where we will have an outsized uptick or downtick in the growth because of that dynamic. And what we have always talked about our steady-state growth rate in that high-20s to low-30s range, and that still is consistent, and we still maintain that perspective going forward.

Got it. Thanks so much. Tooey, appreciate the nice words, you would make a great analyst to in case you decide to pursue that line of work.

Got it. Thanks all.

Thank you, guys.

Thank you for your question. The next question is from the line of Jason Celino with KeyBanc. Your line is now open.

Hi Tooey and Howard. I am just trying to gain a perspective here. It sounds like your customers are expanding more than they are decreasing. This is kind of like extreme comparison, but I am just trying to gain perspective. If we go back to 2020, there were really only one or two quarters where you saw the sequential CRP grow minimally. To what extent at that time did those renewals on the downsizing exceed the ones that were upsizing? Thanks.

Yes, Jason. So, I want to make sure that folks understand how severe the situation was in 2020. When you think about 2020, job sites were literally empty, and so that is a very different situation than we are in right now because backlogs are still there, construction is still going on, and there is still business out there being done. And so I wouldn’t necessarily look at that as a fair compare because literally, job sites were empty. And that’s the only scenario where you would see something that severe happen.

Okay. Yes. No, that’s fair. And then just competitively, given these changing market dynamics, wondering if you have seen any changes to the competitive landscape, competitive tactics. Thanks.

Jason, no changes whatsoever really as far as we are concerned. Again, it’s always shocking to me, but the vast majority of the people that we are talking to every day to join the Procore platform are coming from more analog solutions, Microsoft Office, those type of things as opposed to competitors. And so we don’t really look at it that way. And – but if anything, just to kind of put a bow on it, no changes to report.

Perfect. Thank you.

Thank you, Jason.

Thank you for your question. The next question is from the line of Mark Schappel with Loop Capital Markets. Your line is now open.

Hi. This is Tim Grieves on for Mark. One for me is last quarter, you guys noted that employee attrition came in lower than anticipated. I want to know, did that trend continue over Q2?

Yes. Attrition remains at low levels, and we are really happy with where we are from a hiring perspective.

And if I could just add another one and expand that to the international side, can you provide us an update on these new sales reps that you hired? If I recall correctly, you mentioned a few quarters ago that with the changes in the international business and particularly around the onboarding of new sales reps, are these new sales reps fully productive yet, or if not, where do they stand?

So, the way I would characterize it is we are always evolving the kind of maturation of how we enable our sellers. And we have been working on this not only internationally, but domestically as well. And so I would say some folks are ramped, the newer ones are not. And it’s a never-ending process of enabling and ramping. But I would say the process is getting better. But when we think about international kind of as an entity, we really don’t think we are going to see significant changes that we would even talk about until later this year. I hope that helps.

Thank you.

Yes. Thank you.

Thank you.