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Unpacking Procore’s S-1 filing

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Worker wearing hard hat looking over plans and a construction site.
Image Credits: Kwangmoozaa (opens in a new window) / Getty Images

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

Today we’re in for a treat, as we get to dig into Procore’s S-1 filing. In case you aren’t familiar, Procore sells software that helps manage construction projects, but it offers more than a single app: Procore’s service allows other apps to plug into it, making it a platform of sorts. The company filed to go public last Friday, meaning that we have endless new numbers to delve into.

Even better for us, Procore is a SaaS company, which means we can understand its numbers.

Procore lists $100 million as its IPO placeholder raise, intends to list on the NYSE as PCOR and its debut is being underwritten by Goldman, J.P. Morgan, Barclays and Jefferies.

Why do we care about this particular IPO? A few reasons. First, Procore filed to go public after the worst week in the stock market since the 2008 crash. That’s either calculated bravery, unbridled hubris or accidental folly. We’ll see. And second, the company’s backers are well-known: Bessemer, Greater Pacific Capital, ICONIQ, Dragoneer and Tiger, according to Crunchbase.

As those investors have put hundreds of millions of dollars into the company, valuing Procore at a hair under $3 billion in its Series H, the IPO will impact venture returns. While unicorn exits remain sparse, each one takes on greater-than-normal importance. So let’s get into the numbers and see what Procore has built.

The big metrics

Procore is a big SaaS company, wrapping 2019 with $289.2 million in revenue, up 55% from its 2018 result of $186.4 million.

That healthy growth rate came with improving gross margins. The company’s gross profit as a percent of revenue grew from 77% in 2017 to 80% in 2018 to 82% in 2019. Those results put Procore’s revenue on the stronger end of SaaS, at least when it comes to keeping its costs of revenue low.

However, despite good growth and strong revenue quality, Procore is deeply unprofitable, increasingly so in 2019. After posting a net loss of $55.5 million in 2017, the company’s profitability only worsened slightly in 2018, slipping to negative $56.7 million. In 2019, Procore’s net loss yawned to $83.1 million.

Those figures are slightly less bad on an adjusted basis, but not as bad in cash terms as you might reckon. While Procore’s free cash flow reached what is at least a three-year record low (i.e. the worst result of the three years for which we have data), its makeup was not quite what we expected.

Procore’s operating cash flow in 2019 was just -$7.0 million. That was better than the -$20+ million results it posted in the preceding two years. The firm’s investing cash flow did worsen in 2019 from -$24.0 million to -$66.7 million, bringing its aggregate (free cash flow) result down, but its operating cash burn will likely make some investors less worried about its GAAP (an accounting term meaning inclusive of all costs) net losses.

Procore could buy fewer companies in the future, which would improve its free cash flow dramatically. In short, it has a lever it can pull to limit its cash burn. But with more than $100 million in cash at the moment, Procore is hardly poor. The company notes in its S-1 that it has at least 12 months of self-financing aboard as of the end of Q4.

Back to IPO timing, Procore is betting that now is good. SaaS multiples are still high, even given recent market chop. Is that gamble reasonable? Let’s focus our look into its numbers to find out.

Quarterly growth

Since Q1 2018, at least, Procore has never failed to grow sequentially in quarterly terms. As with effectively all SaaS companies, Procore adds new revenue quarterly. This is partially predicated on the company’s listed 117% net retention rate in 2019 (down from 121% in 2018 and 125% in 2017), which, if we are reading the S-1 correctly, is inclusive of “expansion, contraction, or churn.” That figure (built off gross retention of 95% in 2019 and 94% in 2018 and 2017), helps the firm grow.

But so too does the company spending nearly 60% of its revenue on sales and marketing costs. That figure dipped to 58% in Q4 2019, the company’s lowest result detailed. However, as its highest known result is 61%, the company has yet to make material headway on lowering the largest piece of operating costs. Indeed, partially on the back of that spend, Procore’s net losses have risen from the $13 million to $14 million range each quarter in 2018, to the lower-twenties million dollars in 2019.

But all of that retention and spend is adding revenue quickly. The firm grew from $76.2 million in Q3 2019 to $84.9 million in Q4 2019, 11.4% growth in three months. That’s head-turning.

Gamble

So, Procore is a SaaS business with good growth, middle-tier losses, limited operating cash burn, good SaaS metrics and plenty of cash (and credit) available.

It’s going public, therefore, from a position of relative strength. This S-1 would look better if the company’s losses were heading down, instead of up. The market has made noises in recent months that it wants to see profits, or at least a path thereof. Procore is betting that investors will be more stoked about its future size than its current unprofitability.

When the company prices, we’ll know lots more about today’s market sentiment. This morning, however, we’re taking bets on whether Procore will price above or below $4 billion. Why that figure? It’s between a 13x and a 14x multiple on the company’s 2019 revenue. And it’s probably about the lowest good valuation the company could achieve, relative to its final private round. If that sounds expensive, it is, but not impossibly so in today’s market.

More when we have it.

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