PROCORE(PCOR) - 2022 Q3 - Quarterly Report

Special Note Regarding Forward-Looking Statements This section provides disclaimers regarding forward-looking statements, cautioning investors about inherent risks and uncertainties Forward-Looking Statements Disclosure This section discloses the presence of forward-looking statements concerning future financial performance and business strategy, advising against undue reliance due to inherent risks - The report contains forward-looking statements regarding future operating results, financial position, business strategy, market growth, and the impact of the COVID-19 pandemic[7] - Investors should not rely on forward-looking statements as predictions of future events, as outcomes are subject to substantial risks and uncertainties detailed in the 'Risk Factors' section[8] - The company does not undertake any obligation to update forward-looking statements to reflect events or circumstances after the report date, except as required by law[10] Risk Factors Summary This section summarizes the principal risks associated with investing in the company's common stock Key Risks Overview This section outlines key material risks for common stock investors, including growth management, profitability, industry sensitivity, and operational challenges - Investing in the company's common stock involves a high degree of risk, and this summary highlights key material factors[13] - Rapid growth may not be indicative of future growth, and failure to manage it could adversely affect the business[14] - The company has a history of losses and may not achieve or sustain profitability[14] - Business is significantly impacted by changes in the economy and reductions in construction industry spending[14] - The construction management software industry is evolving and may not develop as expected[14] - Current and future products may not be widely accepted, and the company may not respond to technological changes or customer demands[14] - International expansion exposes the company to increased business, regulatory, and economic risks[14] - Maintaining and enhancing a strong brand is crucial for customer base expansion[14] - Ability to increase customer base depends on developing and expanding sales and marketing capabilities[14] - The company operates in a competitive market and must continue to compete effectively[14] - Results of operations may fluctuate significantly, making future results difficult to predict[14] - Loss of key management or inability to retain/hire qualified personnel could hinder strategic objectives[14] - Stringent and changing data privacy and security obligations pose risks of investigations, litigation, fines, and reputational harm[14] - Compromised IT systems or data could lead to adverse consequences[14] - Failure to offer high-quality customer support may harm customer relationships[14] - Failure to maintain effective disclosure controls and internal control over financial reporting could impair financial statements and compliance[14] - The COVID-19 pandemic has had and could continue to have an adverse impact on business and operations[14] Part I. Financial Information This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements (Unaudited) This section provides the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows, with accompanying notes Condensed Consolidated Balance Sheets This section presents the company's condensed consolidated balance sheets as of September 30, 2022, and December 31, 2021 Condensed Consolidated Balance Sheets (in thousands) | Item | September 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------------- | :------------------ | | Assets | | | | Cash and cash equivalents | $264,622 | $586,108 | | Marketable securities | $293,430 | $- | | Total current assets | $735,372 | $752,288 | | Total assets | $1,677,304 | $1,690,657 | | Liabilities & Equity | | | | Total current liabilities | $458,903 | $403,704 | | Total liabilities | $553,003 | $501,368 | | Total stockholders' equity | $1,124,301 | $1,189,289 | | Total liabilities, redeemable convertible preferred stock and stockholders' equity | $1,677,304 | $1,690,657 | - Cash and cash equivalents decreased significantly from $586.1 million at December 31, 2021, to $264.6 million at September 30, 2022. However, marketable securities increased from $0 to $293.4 million[17] - Total assets slightly decreased from $1,690.7 million to $1,677.3 million, while total liabilities increased from $501.4 million to $553.0 million[17] Condensed Consolidated Statements of Operations and Comprehensive Loss This section presents the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2022 and 2021 Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands) | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $186,429 | $131,990 | $518,150 | $368,718 | | Gross profit | $148,650 | $109,297 | $410,304 | $300,173 | | Loss from operations | $(71,813) | $(49,557) | $(215,252) | $(211,477) | | Net loss | $(71,205) | $(50,742) | $(215,747) | $(214,193) | | Net loss per share (basic and diluted) | $(0.52) | $(0.39) | $(1.59) | $(2.71) | - Revenue increased by 41% YoY for the three months ended September 30, 2022, and by 41% YoY for the nine months ended September 30, 2022[18] - Net loss increased for the three months ended September 30, 2022, to $(71.2) million from $(50.7) million in the prior year, and slightly increased for the nine months ended September 30, 2022, to $(215.7) million from $(214.2) million[18] Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) This section details changes in redeemable convertible preferred stock and stockholders' equity (deficit) for the periods presented Changes in Stockholders' Equity (in thousands) | Item | September 30, 2022 | December 31, 2021 | | :------------------------------------ | :------------------- | :------------------ | | Common Stock | $14 | $13 | | Additional Paid-in Capital | $2,004,995 | $1,852,071 | | Accumulated Other Comprehensive Loss | $(2,749) | $(583) | | Accumulated Deficit | $(877,959) | $(662,212) | | Total Stockholders' Equity | $1,124,301 | $1,189,289 | - Total stockholders' equity decreased from $1,189.3 million at December 31, 2021, to $1,124.3 million at September 30, 2022, primarily due to an increase in accumulated deficit[17][23] - Additional paid-in capital increased by $152.9 million during the nine months ended September 30, 2022, driven by stock option exercises, stock-based compensation, and employee stock purchase plan proceeds[23] Condensed Consolidated Statements of Cash Flows This section presents the condensed consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021 Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net cash (used in) provided by operating activities | $(10,084) | $40,305 | | Net cash used in investing activities | $(338,646) | $(42,020) | | Net cash provided by financing activities | $29,258 | $694,946 | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(319,472) | $693,231 | | Cash, cash equivalents and restricted cash, end of period | $267,726 | $1,075,444 | - Operating activities shifted from providing $40.3 million in cash in 2021 to using $10.1 million in 2022[25] - Investing activities used significantly more cash in 2022 ($338.6 million) compared to 2021 ($42.0 million), primarily due to purchases of marketable securities ($293.1 million) and increased capitalized software development costs[25][174] - Financing activities provided substantially less cash in 2022 ($29.3 million) compared to 2021 ($694.9 million), as 2021 included significant proceeds from the initial public offering[25][176][177] Notes to Condensed Consolidated Financial Statements This section provides detailed explanatory notes accompanying the condensed consolidated financial statements 1. Organization and Description of Business This note describes Procore Technologies, Inc.'s cloud-based construction management platform and its global operations - Procore Technologies, Inc. provides a cloud-based construction management platform and related software products, enabling collaboration among key stakeholders in the construction industry[30] - The company was incorporated in California in 2002, re-incorporated in Delaware in 2014, and is headquartered in Carpinteria, California, with global operations[31] 2. Summary of Significant Accounting Policies This note outlines the significant accounting policies and estimates used in preparing the unaudited financial statements - The financial statements are unaudited and prepared in accordance with U.S. GAAP, with certain information condensed or omitted[32] - Management's estimates and assumptions, particularly regarding revenue recognition, business combinations, stock-based compensation, and goodwill, are periodically evaluated[33] - The company operates as a single operating segment, with the CEO evaluating financial information on a consolidated basis[36] - Deferred revenue from contractual rights to invoice in advance of service transfer was $329.1 million (current) and $5.0 million (non-current) as of September 30, 2022[17][44] - Remaining performance obligations totaled $714.9 million as of September 30, 2022, with approximately 70% expected to be recognized as revenue in the next 12 months[45] - In January 2022, the company began partially self-funding its health insurance plan, with a net self-insurance accrual of $1.7 million as of September 30, 2022[47] - The materials financing program, assumed via the Levelset acquisition, generates revenue from origination fees and finance charges, with receivables of $13.6 million as of September 30, 2022[48][49] - The company adopted ASU 2020-06, 'Simplifying the Accounting for Convertible Instruments,' on January 1, 2022, with an immaterial impact on financial statements[54] 3. Investments This note details the company's marketable securities and strategic investment activities Marketable Securities as of September 30, 2022 (in thousands) | Item | Amortized Cost | Fair Value | | :-------------------------- | :------------- | :--------- | | U.S. treasury securities | $104,756 | $104,516 | | Commercial paper | $65,295 | $65,295 | | Corporate notes and obligations | $61,993 | $61,659 | | Time deposits | $61,959 | $61,960 | | Total marketable securities | $294,003 | $293,430 | - All marketable securities held as of September 30, 2022, had a contractual maturity of less than one year, and there were no sales, maturities, or impairments during the nine months ended September 30, 2022[57] Strategic Investment Activity (in thousands) | Item | Equity Securities | Limited Partnerships | Available-for-Sale Debt Securities | Total | | :------------------------------------------ | :---------------- | :------------------- | :--------------------------------- | :------ | | Balance as of December 31, 2021 | $3,882 | $- | $3,450 | $7,332 | | Purchases of strategic investments | $- | $3,303 | $350 | $3,653 | | Conversion of available-for-sale debt securities into equity securities | $3,680 | $- | $(3,680) | $- | | Balance as of September 30, 2022 | $7,748 | $3,153 | $353 | $11,254 | - As of September 30, 2022, the company had a contractual obligation to provide additional investment funding of up to $6.7 million for limited partnerships[58] 4. Fair Value of Financial Instruments This note provides information on the fair value measurements of the company's financial instruments Financial Assets Measured at Fair Value (in thousands) | Item | Level 1 | Level 2 | Level 3 | Total | | :---------------------------------------- | :-------- | :-------- | :-------- | :-------- | | September 30, 2022 | | | | | | Cash equivalents: Money market funds | $14,977 | $- | $- | $14,977 | | Cash equivalents: Commercial paper | $7 | $3,991 | $- | $3,998 | | Marketable securities: U.S. treasury securities | $104,516 | $- | $- | $104,516 | | Marketable securities: Commercial paper | $- | $65,295 | $- | $65,295 | | Marketable securities: Corporate notes and obligations | $- | $61,659 | $- | $61,659 | | Marketable securities: Time deposits | $- | $61,960 | $- | $61,960 | | Strategic investments: Available-for-sale debt securities | $- | $- | $353 | $353 | | Total (Sep 30, 2022) | $119,500 | $192,905 | $353 | $312,758 | | December 31, 2021 | | | | | | Cash equivalents: Money market funds | $514,907 | $- | $- | $514,907 | | Strategic investments: Available-for-sale debt securities | $- | $- | $3,450 | $3,450 | | Total (Dec 31, 2021) | $514,907 | $- | $3,450 | $518,357 | - The company's financial instruments in current assets and liabilities approximate fair value due to their short-term nature[42] - Investments in available-for-sale debt securities in private companies are classified as Level 3 due to significant unobservable inputs in fair value estimation[42] 5. Leases This note describes the company's lease arrangements, primarily for office space and equipment - The company primarily leases office space and miscellaneous equipment, with initial non-cancelable terms ranging from one to ten years[61] - Operating lease commencements and modifications resulted in a net increase of $11.5 million in right-of-use assets and corresponding liabilities during the nine months ended September 30, 2022, mainly for new office spaces in Sydney, New York, and Dublin[62] 6. Intangible Assets and Goodwill This note provides details on the company's finite-lived intangible assets and goodwill Finite-Lived Intangible Assets (in thousands) | Item | September 30, 2022 (Net Carrying Amount) | December 31, 2021 (Net Carrying Amount) | | :---------------------- | :--------------------------------------- | :-------------------------------------- | | Developed technology | $121,406 | $141,760 | | Customer relationships | $50,897 | $60,217 | | Total | $172,303 | $201,977 | Intangible Assets Amortization Expense (in thousands) | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Cost of revenue | $5,627 | $1,086 | $16,935 | $3,258 | | Sales and marketing | $3,106 | $404 | $9,318 | $1,349 | | Research and development | $877 | $907 | $2,674 | $1,770 | | Total amortization of acquired intangible assets | $9,610 | $2,397 | $28,927 | $6,377 | - Goodwill was $539.0 million as of September 30, 2022, decreasing by $1.9 million during the nine months ended September 30, 2022, due to post-close working capital adjustments from business combinations and foreign currency translation[64] 7. Accrued Expenses This note details the components of the company's accrued expenses Components of Accrued Expenses (in thousands) | Item | September 30, 2022 | December 31, 2021 | | :------------------------------------ | :------------------- | :------------------ | | Accrued commissions and bonuses | $34,002 | $29,676 | | Accrued salary, payroll tax, and employee benefit liabilities | $35,763 | $25,997 | | Other accrued expenses | $13,314 | $10,234 | | Total accrued expenses | $83,079 | $65,907 | - Total accrued expenses increased by $17.2 million from December 31, 2021, to September 30, 2022, primarily driven by increases in accrued commissions and bonuses, and accrued salary, payroll tax, and employee benefit liabilities[66] 8. Contingencies This note addresses potential legal matters, claims, and indemnification obligations - The company is not aware of any currently pending legal matters or claims that could have a material adverse effect on its financial position, results of operations, or cash flows[67] - In the ordinary course of business, the company provides indemnification of varying scope to customers, vendors, investors, directors, and officers, but has never paid a material claim and has not accrued a liability for these guarantees[68][69] 9. Credit Facility This note describes the termination of the company's Credit Facility and remaining outstanding letters of credit - The company terminated its Credit Facility with Silicon Valley Bank on April 29, 2022, prior to its May 7, 2022 maturity date[70] - As of December 31, 2021, no amounts had been drawn under the Credit Facility, and the company was in compliance with all financial covenants[71] - Outstanding letters of credit totaling $6.5 million, securing leased office facilities, remain outstanding on an unsecured basis after the Credit Facility termination[72] 10. Common Stock This note outlines the authorized shares of common and preferred stock following the company's IPO - Upon IPO closing, the company's Amended and Restated Certificate of Incorporation authorized 1,000,000,000 shares of common stock and 100,000,000 shares of undesignated preferred stock, each with a par value of $0.0001[73] 11. Stock-Based Compensation This note details the company's stock-based compensation plans, including stock options, RSUs, and ESPP, and related expenses - The 2021 Equity Incentive Plan authorized 30,962,615 shares in May 2021, with an automatic annual increase. On January 1, 2022, an additional 6,702,346 shares were added, leaving 29,353,552 shares available as of September 30, 2022[75] Stock Option Activity (Nine Months Ended Sep 30, 2022) | Item | Number of Shares | Weighted Average Exercise Price | | :-------------------------- | :--------------- | :------------------------------ | | Outstanding at Dec 31, 2021 | 7,642,690 | $12.98 | | Exercised | (1,498,783) | $12.84 | | Canceled/Forfeited | (198,272) | $21.96 | | Outstanding at Sep 30, 2022 | 5,945,635 | $12.72 | | Exercisable at Sep 30, 2022 | 5,514,332 | $11.98 | - Total unrecognized stock-based compensation cost for unvested stock options was $3.4 million, expected to be recognized over 0.6 years[76] RSU Activity (Nine Months Ended Sep 30, 2022) | Item | Number of Shares | Weighted Average Grant Date Fair Value | | :-------------------------- | :--------------- | :------------------------------------- | | Outstanding at Dec 31, 2021 | 6,622,684 | $59.72 | | Granted | 5,283,117 | $55.91 | | Vested | (2,136,203) | $56.78 | | Canceled/Forfeited | (1,012,085) | $57.75 | | Outstanding at Sep 30, 2022 | 8,757,513 | $58.36 | - Total unrecognized stock-based compensation cost for RSUs was $419.0 million, expected to be recognized over a weighted-average vesting period of 2.6 years[80] - In November 2021, 199,670 RSAs were issued for the Levelset acquisition, with a fair value of $95.05 per share, resulting in $7.1 million stock-based compensation expense during the nine months ended September 30, 2022[81] - The 2021 Employee Stock Purchase Plan (ESPP) reserved 2,600,000 shares initially, increasing by 1,340,469 shares on January 1, 2022. Employees can purchase shares at 85% of the lower of the fair market value on the offering period start or purchase period end[84][87] - During the nine months ended September 30, 2022, $11.6 million in stock-based compensation was recorded for the ESPP, and 286,997 shares were purchased[90] Total Stock-Based Compensation Expense (in thousands) | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Cost of revenue | $1,835 | $679 | $5,339 | $6,758 | | Sales and marketing | $15,483 | $11,178 | $38,351 | $57,285 | | Research and development | $17,758 | $15,064 | $43,910 | $69,627 | | General and administrative | $9,701 | $11,262 | $28,281 | $52,259 | | Total stock-based compensation expense | $44,777 | $38,183 | $115,881 | $185,929 | 12. Income Taxes This note outlines income tax expenses and the company's valuation allowance on deferred tax assets - Income tax expenses were $0.3 million and less than $0.1 million for the three months ended September 30, 2022 and 2021, respectively. For the nine months, expenses were $0.7 million and $0.2 million[95] - As of September 30, 2022, the company maintained a full valuation allowance on its U.S. federal, state, and certain foreign net deferred tax assets, expecting them not to be realized[95] 13. Net Loss Per Share This note provides details on the calculation of basic and diluted net loss per share - Basic and diluted net loss per share attributable to common stockholders were $(0.52) and $(0.39) for the three months ended September 30, 2022 and 2021, respectively, and $(1.59) and $(2.71) for the nine months[18] - All potentially dilutive securities were anti-dilutive for all periods presented due to net losses, meaning basic and diluted net loss per share were equal[99] Anti-Dilutive Shares Excluded from EPS Calculation | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Restricted stock units and restricted stock awards subject to future vesting | 8,759,518 | 5,834,027 | 7,998,571 | 6,057,965 | | Shares issuable pursuant to the ESPP | 849,109 | 598,844 | 716,860 | 261,035 | | Shares of common stock issuable from stock options | 6,142,312 | 8,818,741 | 6,652,983 | 10,132,359 | | Total | 15,750,939 | 15,251,612 | 15,368,414 | 61,148,695 | 14. Geographic Information This note presents the company's revenue breakdown by geographic region Revenue by Geographic Region (in thousands) | Region | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | U.S. | $159,585 | $111,774 | $442,963 | $315,711 | | Rest of the world | $26,844 | $20,216 | $75,187 | $53,007 | | Total revenue | $186,429 | $131,990 | $518,150 | $368,718 | | Percentage of revenue: | | | | | | U.S. | 86% | 85% | 85% | 86% | | Rest of the world | 14% | 15% | 15% | 14% | - U.S. revenue increased by 42.8% for the three months and 40.3% for the nine months ended September 30, 2022, while Rest of the World revenue increased by 32.8% and 41.8% respectively[102] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section offers management's perspective on the company's financial condition, operating results, revenue drivers, cost structures, and liquidity Overview This section provides an overview of Procore's mission to connect the construction industry through its cloud-based management platform - Procore's mission is to connect everyone in construction on a global platform, transforming the industry with cloud-based construction management software[105][106] - The platform enables real-time access to project information, simplifies workflows, and facilitates communication, aiming to be the system of record for the construction industry[106] - Revenue is primarily generated from subscriptions based on the number and mix of products and the annual construction volume contracted, with an unlimited user model to maximize platform usage[110] Certain Factors Affecting Our Performance This section discusses key factors influencing the company's performance, including customer growth, technology innovation, international expansion, and the COVID-19 pandemic - Customer growth: Added 683 net new customers in Q3 2022, including 189 from LaborChart. Total customers increased 21% YoY to 14,086 as of September 30, 2022 (excluding Levelset and Esticom customers). Levelset has over 3,000 customers - Technology innovation: Continued investment in R&D and product development, including through acquisitions like Levelset and LaborChart, to expand platform capabilities and financial offerings (e.g., materials financing program) - International growth: Expanding global presence with new offices in Singapore, Paris, Dublin, and Dubai in 2022, supporting multiple languages and currencies. International investments are expected to impact near-term operating results but contribute to long-term growth - COVID-19 impact: The pandemic highlighted the need for digitization in construction, but its full impact on business, operations, and financial condition remains uncertain, potentially affecting demand, sales cycles, and costs Customer Growth | Metric | September 30, 2022 | September 30, 2021 | YoY Growth | | :-------------------------------- | :------------------- | :------------------- | :--------- | | Total customers (excluding Levelset & Esticom) | 14,086 | 11,605 | 21% | | Net new customers (Q3 2022) | 683 | N/A | N/A | | Levelset customers (as of Sep 30, 2022) | >3,000 | N/A | N/A | - The materials financing program, assumed from Levelset, facilitates material purchases for customers on deferred payment terms, charging origination fees and weekly finance charges. The company uses internal capital for this program, potentially up to 10% of its current cash position, and plans to partner with a capital provider to scale it[116] Components of Results of Operations This section defines the key components of the company's results of operations, including revenue, cost of revenue, and operating expenses - Revenue: Primarily from non-cancelable subscriptions recognized ratably over annual or multi-year terms. Deferred revenue is recorded for advance invoicing - Cost of Revenue: Includes customer support personnel, hosting, software license fees, amortization of acquired technology, and capitalized software development costs. Expected to increase with revenue and acquisitions - Operating Expenses: Comprise sales and marketing, research and development, and general and administrative expenses. Personnel-related costs are the most significant component. Expected to increase due to growth investments and post-IPO stock-based compensation - Interest Income: Primarily from money market funds, cash savings, and marketable securities - Interest Expense: Associated with finance leases and the former Credit Facility - Other Expense, Net: Mainly foreign currency transaction losses and miscellaneous items - Provision for Income Taxes: Primarily U.S. state franchise taxes and foreign jurisdiction taxes. A full valuation allowance is maintained on U.S. federal, state, and certain foreign net deferred tax assets - Post-IPO, the company has incurred higher cost of revenue and operating expenses due to stock-based compensation from RSU vesting and increased employer payroll taxes on employee stock transactions[128][130][131] - Significant amortization of acquired developed technology intangible assets from Levelset and LaborChart acquisitions in Q4 2021 is contributing to increased cost of revenue[128] Results of Operations This section provides a detailed analysis of the company's consolidated financial performance for the reported periods Consolidated Statements of Operations Data (in thousands, as a percentage of revenue) | Item | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $186,429 (100%) | $131,990 (100%) | $518,150 (100%) | $368,718 (100%) | | Cost of revenue | $37,779 (20%) | $22,693 (17%) | $107,846 (21%) | $68,545 (19%) | | Gross profit | $148,650 (80%) | $109,297 (83%) | $410,304 (79%) | $300,173 (81%) | | Sales and marketing | $109,608 (59%) | $70,356 (53%) | $306,806 (59%) | $224,226 (61%) | | Research and development | $71,493 (38%) | $53,447 (40%) | $195,569 (38%) | $176,619 (48%) | | General and administrative | $39,362 (21%) | $35,051 (27%) | $123,181 (24%) | $110,805 (30%) | | Total operating expenses | $220,463 (118%) | $158,854 (120%) | $625,556 (121%) | $511,650 (139%) | | Loss from operations | $(71,813) (39%) | $(49,557) (38%) | $(215,252) (42%) | $(211,477) (57%) | | Net loss | $(71,205) (38%) | $(50,742) (38%) | $(215,747) (42%) | $(214,193) (58%) | Comparison of the Three Months Ended September 30, 2022 and 2021 This section compares the company's financial results for the three months ended September 30, 2022, against the same period in 2021 Revenue (Three Months Ended Sep 30, in thousands) | Item | 2022 | 2021 | Change (Dollar) | Change (Percent) | | :----- | :--- | :--- | :-------------- | :--------------- | | Revenue | $186,429 | $131,990 | $54,439 | 41% | - Revenue growth was driven by expansion within existing customers and new customer additions, with Levelset contributing $8.5 million in Q3 2022[145] Cost of Revenue, Gross Profit, and Gross Margin (Three Months Ended Sep 30, in thousands) | Item | 2022 | 2021 | Change (Dollar) | Change (Percent) | | :-------------- | :--- | :--- | :-------------- | :--------------- | | Cost of revenue | $37,779 | $22,693 | $15,086 | 66% | | Gross profit | $148,650 | $109,297 | $39,353 | 36% | | Gross margin | 80% | 83% | -3% | - | - Cost of revenue increased due to $6.3 million in personnel-related expenses (including $5.1 million in salaries and $1.2 million in stock-based compensation), $4.5 million in amortization of acquired technology, and $2.3 million in cloud hosting costs. Headcount in cost of revenue increased by 49% YoY[146] Operating Expenses (Three Months Ended Sep 30, in thousands) | Item | 2022 | 2021 | Change (Dollar) | Change (Percent) | | :------------------------ | :--- | :--- | :-------------- | :--------------- | | Sales and marketing | $109,608 | $70,356 | $39,252 | 56% | | Research and development | $71,493 | $53,447 | $18,046 | 34% | | General and administrative | $39,362 | $35,051 | $4,311 | 12% | - Sales and marketing expenses rose by $31.1 million in personnel-related costs (including $20.4 million in salaries, $6.2 million in commissions, $4.3 million in stock-based compensation), $2.7 million in amortization of customer relationships, $2.0 million in marketing events, and $1.4 million in travel. Sales and marketing headcount increased by 51% YoY[147] - R&D expenses increased by $15.5 million in personnel-related costs (including $12.5 million in salaries and $2.7 million in stock-based compensation), $1.5 million in software expenses, and $0.8 million in professional fees. R&D headcount increased by 35% YoY[149] - G&A expenses increased by $4.5 million in personnel-related costs (including $6.0 million in salaries, partially offset by $1.6 million decrease in stock-based compensation). G&A headcount increased by 40% YoY[150] - Interest income increased significantly due to higher interest from money market funds, cash savings, and marketable securities[151] Comparison of the Nine Months Ended September 30, 2022 and 2021 This section compares the company's financial results for the nine months ended September 30, 2022, against the same period in 2021 Revenue (Nine Months Ended Sep 30, in thousands) | Item | 2022 | 2021 | Change (Dollar) | Change (Percent) | | :----- | :--- | :--- | :-------------- | :--------------- | | Revenue | $518,150 | $368,718 | $149,432 | 41% | - Revenue growth was primarily from existing customer expansion and new customer additions, with Levelset contributing $22.7 million in the first nine months of 2022[152] Cost of Revenue, Gross Profit, and Gross Margin (Nine Months Ended Sep 30, in thousands) | Item | 2022 | 2021 | Change (Dollar) | Change (Percent) | | :-------------- | :--- | :--- | :-------------- | :--------------- | | Cost of revenue | $107,846 | $68,545 | $39,301 | 57% | | Gross profit | $410,304 | $300,173 | $110,131 | 37% | | Gross margin | 79% | 81% | -2% | - | - Cost of revenue increased due to $13.7 million in amortization of acquired technology, $12.4 million in personnel-related expenses (including $14.0 million in salaries, offset by $1.4 million decrease in stock-based compensation), and $7.7 million in cloud hosting costs. Headcount in cost of revenue increased by 49% YoY[153] Operating Expenses (Nine Months Ended Sep 30, in thousands) | Item | 2022 | 2021 | Change (Dollar) | Change (Percent) | | :------------------------ | :--- | :--- | :-------------- | :--------------- | | Sales and marketing | $306,806 | $224,226 | $82,580 | 37% | | Research and development | $195,569 | $176,619 | $18,950 | 11% | | General and administrative | $123,181 | $110,805 | $12,376 | 11% | - Sales and marketing expenses rose by $50.1 million in personnel-related costs (including $53.7 million in salaries, $15.5 million in commissions, offset by $18.9 million decrease in stock-based compensation), $8.0 million in amortization of customer relationships, $6.9 million in marketing events, $6.4 million in travel, and $2.1 million in professional fees. Sales and marketing headcount increased by 51% YoY[154] - R&D expenses increased by $8.9 million in personnel-related costs (including $34.6 million in salaries, offset by $25.7 million decrease in stock-based compensation), $3.1 million in professional fees, and $3.1 million in computer software expenses. R&D headcount increased by 35% YoY[155] - G&A expenses increased due to $3.9 million in professional fees, $2.6 million in computer software, $1.7 million in travel, and $1.2 million in insurance. Personnel-related expenses had a net decrease of $1.1 million (including $22.7 million increase in salaries, offset by $24.0 million decrease in stock-based compensation). G&A headcount increased by 40% YoY[156] - Interest income increased significantly due to higher interest from money market funds and marketable securities[157] Non-GAAP Financial Measures This section reconciles GAAP financial measures to non-GAAP measures, excluding certain non-cash and acquisition-related expenses - The company uses non-GAAP measures (Gross Profit, Gross Margin, Operating Expenses, Loss from Operations, Operating Margin) to evaluate operating performance, excluding stock-based compensation, amortization of acquired intangibles, employer payroll tax on employee stock transactions, and acquisition-related expenses[159][161] Reconciliation of GAAP to Non-GAAP Gross Profit and Margin (in thousands) | Item | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | GAAP Gross profit | $148,650 | $109,297 | $410,304 | $300,173 | | Stock-based compensation expense | $1,835 | $679 | $5,339 | $6,758 | | Amortization of acquired technology intangible assets | $5,627 | $1,086 | $16,935 | $3,258 | | Employer payroll tax on employee stock transactions | $99 | $66 | $248 | $400 | | Non-GAAP gross profit | $156,211 | $111,128 | $432,826 | $310,589 | | GAAP Gross margin | 80% | 83% | 79% | 81% | | Non-GAAP gross margin | 84% | 84% | 84% | 84% | Reconciliation of GAAP to Non-GAAP Operating Expenses (in thousands) | Item | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | GAAP sales and marketing | $109,608 | $70,356 | $306,806 | $224,226 | | Non-GAAP sales and marketing | $89,682 | $58,301 | $256,460 | $163,652 | | GAAP research and development | $71,493 | $53,447 | $195,569 | $176,619 | | Non-GAAP research and development | $50,541 | $36,839 | $142,927 | $102,572 | | GAAP general and administrative | $39,362 | $35,051 | $123,181 | $110,805 | | Non-GAAP general and administrative | $29,354 | $21,147 | $91,747 | $54,747 | Reconciliation of GAAP to Non-GAAP Loss from Operations and Margin (in thousands) | Item | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | GAAP Loss from operations | $(71,813) | $(49,557) | $(215,252) | $(211,477) | | Non-GAAP loss from operations | $(13,366) | $(5,159) | $(58,308) | $(10,382) | | GAAP Operating margin | (39%) | (38%) | (42%) | (57%) | | Non-GAAP operating margin | (7%) | (4%) | (11%) | (3%) | Liquidity and Capital Resources This section assesses the company's liquidity position, capital resources, and cash flow activities - As of September 30, 2022, principal liquidity sources were cash, cash equivalents, and marketable securities totaling $558.1 million[166] - The company terminated its Credit Facility on April 29, 2022. Outstanding letters of credit ($6.5 million) remain unsecured[166] - The materials financing program had $13.6 million in customer receivables as of September 30, 2022. This program is expected to grow and may impact liquidity[167] - Management believes existing liquidity is sufficient for at least the next 12 months, but future capital requirements depend on growth rate, acquisitions, strategic investments, and market conditions[168][169] Cash Flows (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2022 | 2021 | | :------------------------------------ | :----- | :----- | | Net cash (used in) provided by operating activities | $(10,084) | $40,305 | | Net cash used in investing activities | $(338,646) | $(42,020) | | Net cash provided by financing activities | $29,258 | $694,946 | - Operating activities used $10.1 million cash in 2022 (vs. $40.3 million provided in 2021), driven by net loss offset by non-cash charges and changes in operating assets/liabilities[173] - Investing activities used $338.7 million cash in 2022 (vs. $42.0 million in 2021), primarily due to $293.1 million in marketable securities purchases and $24.8 million in capitalized software development costs[174] - Financing activities provided $29.3 million cash in 2022 (vs. $694.9 million in 2021), mainly from stock option exercises and ESPP proceeds, significantly lower than 2021 due to IPO proceeds[176][177] - Remaining performance obligations totaled $714.9 million as of September 30, 2022, with 70% expected to be recognized as revenue in the next 12 months[182] Critical Accounting Policies and Estimates This section identifies critical accounting policies and estimates requiring significant management judgment in financial reporting - Critical accounting policies and estimates involve significant judgment and are crucial for financial reporting, including revenue recognition, contract cost assets, business combination valuations, stock-based compensation, goodwill recoverability, software development costs, and income taxes[33][184] - There have been no significant changes to these policies for the nine months ended September 30, 2022, compared to those disclosed in the 2021 Annual Report on Form 10-K[185] JOBS Act Accounting Election and Emerging Growth Company Status This section discusses the company's status as an emerging growth company under the JOBS Act and its accounting election - The company is an 'emerging growth company' under the JOBS Act but has irrevocably elected not to use the extended transition period for complying with new or revised financial accounting standards[187] - The company will cease to be an emerging growth company as of December 31, 2022, based on the market value of its common stock held by non-affiliates as of June 30, 2022[188] Recent Accounting Pronouncements This section refers to Note 2 for details on recently issued accounting pronouncements - Refer to Note 2, 'Summary of Significant Accounting Policies,' for a description of recently issued accounting pronouncements[190] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, including foreign currency, interest rate, and inflation, and their potential financial impact - Foreign Currency and Exchange Risk: The majority of revenue is in U.S. dollars, while expenses are in various foreign currencies. A hypothetical 10% change in exchange rates would not materially impact financial statements. The company does not currently hedge foreign currency exposure - Interest Rate Risk: Cash, cash equivalents, restricted cash, and marketable securities totaled $561.2 million as of September 30, 2022. Due to the short-term nature of investments, a hypothetical 100 bps change in interest rates would not materially impact the fair market value of the portfolio - Inflation Risk: Inflation could positively impact pricing (due to increased construction costs affecting construction volume) but negatively impact project starts and personnel costs. Inflation has not had a material effect on the business to date, but significant future pressures could be adverse - The company's exposure to foreign currency exchange rates is not material, and it does not currently use derivative or hedging transactions[191] - The company's investment activities prioritize principal preservation and liquidity, with a diversified portfolio of investment-grade securities[192] Item 4. Controls and Procedures This section evaluates the effectiveness of the company's disclosure controls and internal control over financial reporting, noting ongoing integration efforts - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2022, providing reasonable assurance for timely and accurate reporting[195][197] - The company is integrating policies, processes, people, technology, and operations related to the Levelset acquisition and will continue to evaluate the impact on internal control over financial reporting[198] - No material changes in internal control over financial reporting occurred during the most recently completed fiscal quarter[198] - Management acknowledges that control systems provide only reasonable, not absolute, assurance and can be circumvented[199] Part II. Other Information This section contains additional information not covered in the financial statements, including legal proceedings and risk factors Item 1. Legal Proceedings This section confirms the absence of material pending legal proceedings, noting that claims may arise in the ordinary course of business - The company is not a party to any material pending legal proceedings[201] - Legal proceedings and claims may arise in the ordinary course of business[201] Item 1A. Risk Factors This section comprehensively discusses significant risks and uncertainties that could materially affect the company's business, financial condition, and common stock ownership Risks Related to Our Business and Industry This section details risks inherent to the company's business operations and the broader industry environment - Rapid growth may not be sustainable, and failure to manage it could adversely affect the business - History of losses and uncertainty of future profitability - Business is highly sensitive to economic changes and reductions in construction industry spending - The construction management software industry is evolving, and market development may be slower than expected - New products and features may not be widely accepted, and the company may struggle to adapt to technological changes - International expansion exposes the company to increased business, regulatory, and economic risks, including compliance with diverse laws and geopolitical conflicts - Dependence on a strong brand; failure to maintain and enhance it could impair customer acquisition and retention - Ability to grow customer base relies on expanding sales and marketing capabilities, which are costly and may not yield proportional revenue increases - Operating in a highly competitive market, facing established competitors with greater resources and potential new entrants - Results of operations may fluctuate significantly due to various factors, making future results difficult to predict - Reliance on key management and ability to attract/retain qualified personnel is critical for strategic objectives - Subject to stringent and evolving data privacy and security obligations globally; non-compliance could lead to investigations, fines, litigation, and reputational harm - Information technology systems or data, or those of third parties, being compromised could result in adverse consequences, including security incidents, data loss, and operational disruptions - Failure to offer high-quality customer support could harm customer relationships and business reputation - Inability to maintain effective disclosure controls and internal control over financial reporting, especially with acquired companies, could impair financial statements and compliance - The COVID-19 pandemic has had and could continue to have an adverse impact on business, operations, and markets - Reliance on third-party technology licenses; inability to maintain them could adversely affect product development and sales - Failure to protect intellectual property rights and proprietary information could diminish brand and intangible assets - Potential involvement in costly and time-consuming litigation, including intellectual property claims - Challenges in maintaining company culture during growth, especially with a hybrid workforce - Risks associated with making, integrating, and maintaining acquisitions, joint ventures, and strategic investments - Materials financing program introduces new credit, performance, and liquidity risks, as well as additional regulatory and compliance requirements - Reliance on third-party data centers (e.g., AWS); disruptions could negatively affect platform performance and reliability - Dependence on interoperability of platform across devices, operating systems, and third-party applications - Interruptions or performance issues with products and platform could harm business and reputation - Failures in internet infrastructure or Wi-Fi access could lead to perceptions of unreliability - Increased government scrutiny of the technology industry could negatively affect business, including potential changes to Section 230 of the Communications Decency Act - Subject to governmental export and import controls, FCPA, and other anti-corruption laws; non-compliance could lead to penalties and reputational harm - Use of third-party open source software could lead to litigation or require public release of proprietary code - Customer misuse of the platform (e.g., spam, scams) could damage reputation and lead to liability - Revenue recognition over subscription terms means downturns/upturns are not immediately reflected in results - Business is subject to risks from natural catastrophic events - Excessive fraudulent activity or failure to meet credit card merchant standards could incur substantial costs and loss of payment acceptance - Currency exchange rate fluctuations could adversely affect results of operations - Marketable securities portfolio is subject to credit, liquidity, market, and interest risks - Tax authorities may assert additional sales and use, value-added, or similar taxes, leading to substantial liabilities - Corporate structure and intercompany arrangements subject to complex tax laws; potential for additional taxes - Future changes to tax laws could adversely affect the business - Ability to use net operating loss carryforwards and other tax attributes may be limited by ownership changes or legislative restrictions Risks Related to Ownership of Our Common Stock This section outlines risks specifically related to the ownership and trading of the company's common stock - Market price of common stock may be volatile, leading to potential loss of investment - Lack of sustained active trading market could impair liquidity and ability to raise capital - Risk of securities class action litigation due to stock price volatility - Market price and trading volume could decline if analysts do not publish research or publish unfavorable research - Concentration of ownership among executive officers, directors, and principal stockholders may limit influence of new investors - Issuance of additional capital stock will dilute other stockholders - No intention to pay dividends for the foreseeable future; return on investment depends on stock price appreciation - As an 'emerging growth company,' reduced reporting requirements may make common stock less attractive to investors - Increased costs and management time required for public company compliance and corporate governance - Failure to maintain proper and effective internal controls over financial reporting could adversely affect investor confidence - Certain provisions in charter documents and Delaware law could make company acquisition more difficult or limit stockholder influence Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the use of proceeds from the company's Initial Public Offering, confirming no material change in the planned allocation - The company completed its IPO on May 24, 2021, selling 10,410,000 shares of common stock at $67.00 per share, generating $665.1 million in net proceeds[344][165] - There has been no material change in the planned use of proceeds from the IPO as described in the Final Prospectus[345] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including organizational documents and certifications - The exhibit index includes the Amended and Restated Certificate of Incorporation and Bylaws, an offer letter, Section 302 and 906 certifications, and Inline XBRL documents[348] - Section 906 certifications are furnished pursuant to 18 U.S.C. Section 1350 and are not deemed 'filed' for purposes of Section 18 of the Exchange Act[348] Signatures This section contains the official signatures of the company's authorized executive officers for the report Report Signatures This section provides the signatures of the President and CEO, and the CFO and Treasurer, certifying the report's filing on November 4, 2022 - The report is signed by Craig F. Courtemanche, Jr., President and Chief Executive Officer (Principal Executive Officer), and Paul Lyandres, Chief Financial Officer and Treasurer (Principal Financial Officer)[352] - The report was signed on November 4, 2022[352]