PowerSchool Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

Key Takeaways

  • First quarter revenue rose 7% year-over-year to $159 million with subscription and support up 9% to $141 million, while adjusted EBITDA grew 16% to $49.4 million for a 31% margin.
  • Annual recurring revenue increased 10% to $612 million and net revenue retention improved 240 basis points to 109.1%, reflecting strong upsell and renewal performance.
  • PowerSchool achieved record new-logo bookings including an $11 million deal with the Puerto Rico Department of Education, saw cross-sell deals climb 15% year-over-year, and grew its sales pipeline over 20%.
  • Data-centric solutions ARR surged over 70% year-over-year with key wins for Unified Insights and Connected Intelligence, and a new partnership with Ellucian to build longitudinal K-12 to higher-ed data systems.
  • Management reiterated full-year 2023 guidance of $688 million to $694 million in total revenue and a 32.5% adjusted EBITDA margin, noting that large implementations may shift subscription revenue to the second half.
AI Generated. May Contain Errors.
Earnings Conference Call
PowerSchool Q1 2023
00:00 / 00:00

There are 11 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and welcome to the PowerSchool First Quarter 2023 Earnings Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded. I would now like to turn the call over to Shane Harrison, Senior Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Welcome everyone to PowerSchool's Earnings Conference Call for the Q1 ended March 31, 2023. I wanted to first let you know that we posted a slide deck to the Investor Relations section of our website that accompanies our remarks here. On the call today, we have PowerSchool's CEO, Hardeep Gulati and CFO, Eric Shander. Before getting started, I'd like to emphasize that this call, including the Q and A portion, will May differ materially from our projections due to a number of risks and uncertainties.

Speaker 1

The risks and uncertainties that forward looking statements are subject are described in our earnings release and other SEC filings. Today's remarks will also include references to non GAAP financial measures. Additional information, including definitions and reconciliations between non GAAP financial information to the GAAP financial information is provided in the corresponding press release And results presentation, which are both posted on PowerSchool's investor website at investors. Powerschool.com. A replay of this call will also be posted to

Speaker 2

the same website. Let me now turn the call over to Hardeep. Thank you, Shane, and thank you, everyone, for joining us today. Our 2023 is off to a great start. In Q1, we continued to grow our ARR 10% year over year And significantly expanded our adjusted EBITDA margins.

Speaker 2

We also won a record amount of new logo bookings, saw continued large Deal demand from districts and state level opportunities and made progress in our international expansion. Q1 results are summarized on Slide 4. 1st quarter revenue reached $159,000,000 with subscription and support revenue growing 9% to $141,000,000 Our adjusted EBITDA grew 16 percent to $49,000,000 representing a 31% margin, an expansion of nearly 3 percentage points year over year. Net revenue retention remains strong at 109.1 percent, increasing 2 40 basis points year over year, Helping drive ARR to $612,000,000 As we have shared in our previous earnings calls, there are 4 key foundations to our continued success: Our business resilience, our differentiated platform, our growth upside from further expansion and our financial durability. I'd like to share our Q1 progress in these four key foundations.

Speaker 2

Starting with Slide 5, first is our business resiliency. This resiliency is grounded in sticky mission critical products that are demanded by a durable market that features robust Multi source budgets that are largely insulated from macroeconomic conditions. This market durability was proven again in the Q1 Where we saw increased demand and strong funding of our technology with record new logo bookings. One of our exciting win was our largest Ever deals an $11,000,000 plus bookings from Puerto Rico Department of Education for digitizing their entire K-twelve infrastructure, Leveraging our science and enrollment solutions across the territory, supporting over 250,000 plus students. We continue to see strong demand for our core student information system product, further expanding our clear market leadership.

Speaker 2

On a trailing 12 month basis, Sys represents approximately 33% of our total new and cross sell bookings. While these deals do have longer implementation cycles, they are very strategic as they increase our cross sell success and TAM significantly. The market tailwinds that we have shared in the past, which include the increased need for digital transformation, enhanced data security, Operational efficiency and data insights continue to drive demand for our solutions. In Q1, In addition to the strong new logo activity, we also saw the number of cross sell deals increased 15% year over year. As we rollout our persona specific multi product cloud bundles that will further support the cross sell momentum we are seeing.

Speaker 2

Additionally, our deal velocity continues to be strong. We saw more than 50 transactions above $10,000 for at least one product within each of our 6 cloud bundles. Additionally, Our pipeline grew over 20% year over year, which gives us confidence about our business outlook. We are reiterating Our full year 2023 guidance, which Eric will discuss in more detail. Moving to Slide 6, our differentiated platform of K-twelve vertical specific solution It's the 2nd key foundation of our strategy and success.

Speaker 2

There are 3 elements of our differentiation. 1st, We have the most comprehensive and diverse platform in the market to be able to meet the evolving needs of the entire K-two twelve ecosystem. 2nd, we have the most unified platform to provide an integrated experience for our key personas, Students, teachers, parents and administrators. 3rd is our ability to deliver holistic insights across all data aspects to improve education outcomes. In Q1, we continue to see broad demand Across our diversified platform with Sys, Talent and our data centric products experiencing the highest growth in our portfolio.

Speaker 2

Our data centric solutions, ARR, grew over 70% year over year. 1 of our data products was purchased in 6 Of the top 10 cross sell deals in Q1, showing the growing importance of districts harnessing and leveraging their data to improve their outcomes. One good example is the Weber School District in Utah, which added SIS, Unified insights and communication products to their long time usage of our ERP and talent solutions. We're also very excited with the success we are seeing with our connected intelligence solution. The first fully managed data as a service platform For K through 12 schools and government agencies that provide a centralized data lake with real time access and insights of education data across all systems, PowerSchool or 3rd party, within or outside the district, so they can uncover Deep insights and improve their decision making in enhancing their operations and their student outcomes.

Speaker 2

In the quarter, We saw several connected intelligence cross sell wins in all segments of the market, like public school districts, such as Des Moines Public School District and Fairfax County Public School District, private charter school organizations like Epic Charter Schools and even private schools Like challenges school foundation. As schools evaluate the support they have implemented to address learning loss, the teacher shortage And student life and workforce readiness, data analytics is rising priority for schools and government leaders to break data silos And leverage the whole child insights for surgical intervention strategies and supporting improved education outcomes for every child. We recently announced a partnership with Delucian, the leading higher education operations software provider that will provide a very unique opportunity To bring K-twelve data together with higher education data to enable states and local education agencies To build powerful longitudinal data systems across the student lifecycle to optimize educational and career success. These new data solutions' successes demonstrate our ability to grow our $3,000,000,000 cross sell TAM that exists within our existing 15,000 customers and opens up new markets for our solutions. As shown in Slide 7, our 3rd key foundation is our growth opportunity with further expansion of our platform in markets, Each providing support and upside to long term double digit growth runway we see in our core markets today.

Speaker 2

Starting with platform expansion, you've all heard the growing conversation on the AI inflection point in many industries. We are very excited about providing embedded AI capabilities into our solutions, which leverage In an integrated and contextual way, we'll provide enormous opportunities to support teachers and save them valuable time, Differentiate and personalize instruction for students and help efficiently scale school operations. As we have shared previously, we have already implemented AI into several of our solutions, already being leveraged by many of our customers today. Our Student Success Cloud MTSS solution uses AI to help teachers more efficiently predict and identify students who may require additional support so the appropriate interventions can be implemented. AI is also a key element of connected intelligence offering, providing customer as a data as a service platform to create their own AI and machine learning models.

Speaker 2

With an estimated 80% of data scientists' time spent gathering and prepping data, Our connected intelligence platform brings together data securely in a near real time way, eliminating the biggest burden of AI projects and providing AI tools as well as build and deploy functionality. We are very excited about the launch in the last quarter Of our new products, Learning Map and Content Map, both part of our personalized learning cloud, these products Utilize AI to assess student mastery of subjects and automatically recommend content specific to their needs, creating a personalized learning journey. These products are key milestones in the push towards a holistic, integrated and highly contextualized personalized learning solution, A market opportunity we estimate to be over $100,000,000,000 We are also embedding generative AI models to support educators across our solutions. For example, we are launching automatic content creation Based on individualized student needs later this year, other use cases like supporting administrators in curriculum planning And the launch of our PowerSchool personalized homework solution next year will be further supported by generative AI. While other industries and services may see disruption from generative AI, we believe embedding generative AI Intuor's solution creates additional TAM and market expansion opportunities to enhance our growth.

Speaker 2

We plan to showcase our progress on these capabilities at our Edge Conference and Investor Day in July. Additionally, we would like to share our progress on the market expansion as we continue to make strides in our international go to market. We announced late last year our 1st sales and support office outside of North America and Dubai, which will open this summer. We just announced a new channel partner, Port Middle East BME, that will strengthen our Middle East presence by reselling And supporting our platform with their local and established team of education technology specialists, BME will augment Our reach to millions of additional students in strategic markets of Saudi Arabia, Kuwait and Qatar. And BME has committed to delivering PowerSchool solution to 750,000 plus students in the 1st year.

Speaker 2

We also recently announced our proprietary innovative localization framework, which is a tool that enables our partners and customers to localize and tailor PowerSchool solution for their specific country and region. This localization framework enables key user experience features such as right to left views, multilingual translation And localized extensions and reporting. The extensibility of our tech stack is a very strong differentiator and uniquely supports our ability to quickly expand outside of North America leveraging different local partners. The steady nature of our customer base and our differentiated platform combined with our operational execution capabilities To create a highly durable financial model, which is our 4th key foundation. On Slide 8, you will see That we have created an enviable business model with meaningful operating leverage as demonstrated by the increasing profitability As you move down the P and L from adjusted gross profit to adjusted EPS, we feel This operating leverage is sustainable and will create further margin improvement as showcased by our outperformance on adjusted EBITDA this quarter.

Speaker 2

I will let Eric speak to the financials for the quarter and the durability of our financial model. Eric?

Speaker 3

Thank you, Hardeep. We kicked off 2023 with a strong quarter of continued execution, reflecting balanced growth across our platform as our mission critical products deliver on the key market needs across the K-twelve ecosystem. As summarized on Slide 9, 1st quarter total revenue came in at $159,000,000 representing a 7% year over year increase and in line with the guidance range we provided on our last earnings call. Subscription and support revenue grew 9% year over year to $141,000,000 and accounted for 88% of total revenue in the quarter. As our business grows, We expect to see an increase in larger strategic deals, which may impact the variability of our financials from 1 quarter to the next.

Speaker 3

As we announced in an 8 ks filing earlier this quarter, we are thrilled to have won the Puerto Rico Department of Education deal, which was signed on February 27. This large deal represents $11,000,000 in total value consisting of $3,000,000 of subscription and support revenue, approximately $3,000,000 of services revenue and $5,000,000 of license and other revenue. We are anticipating customer acceptance of this large strategic implementation to occur over the summer months, which is when the subscription and support revenue will start and the majority of the services activities to occur. Revenue from our services business totaled $16,000,000 in the quarter, representing a slight increase over the prior year. As we mentioned previously, services revenue growth rates will fluctuate quarter to quarter due to the variability that comes with large deal wins, such as Puerto Rico, Alabama, L.

Speaker 3

A. Unified and Stride. We also continue to drive the efficiency and velocity of our implementations, which increases the time to value for our customers. Revenue from license and other, which relates mainly to our 3rd party revenue, totaled $2,000,000 for the quarter. And as mentioned in previous earnings calls, this is our smallest and least strategic revenue stream that is highly variable on a quarterly basis.

Speaker 3

We ended the quarter with an annual recurring revenue balance of $612,000,000 representing a 10% increase over the same time period last year. This strong performance was driven primarily by continued strength in cross selling activity and higher new logo bookings. Our net revenue retention rate came in at 109.1%, up 240 basis points year over year and consistent on a sequential quarterly basis. Our strong NRR performance was driven by higher trailing 12 month cross sell momentum coupled with our typical contractual price increases. Adjusted gross profit for the quarter came in at $109,000,000 with a 68.1% margin, representing a 200 basis point year over year improvement, driven by improved operational scale, Responsible hiring and a continued focus on process efficiencies.

Speaker 3

Moving to the Q1 operating expenses. Non GAAP research and development expense came in at $20,000,000 representing 12.5 percent of revenue compared with 15.7% in the same time period last year. This 320 basis point reduction in adjusted R and D expense As a percentage of revenue, reflects the efficiency and improved cost profile of our R and D model, while still investing in our key strategic innovation priorities. Including capitalized R and D expenses, the total invested in R and D was 18.5 percent of revenue compared with 21.7 percent last year, representing a 310 basis point improvement. Non GAAP SG and A expense totaled $39,000,000 in the Q1, representing 24.6 percent of revenue compared with $33,000,000 or 22 percent of revenue in the same time period last year.

Speaker 3

Reflects the expenses from our Q1 in person sales activities as well as our continued investments that we are making in our sales function as well as our go to market activities, which we expect will continue to fuel our future growth. Our first quarter adjusted EBITDA was $49,400,000 or 31% margin, exceeding the high end of our guidance range and reflects our continued commitment to margin expansion. Non GAAP net income in the Q1 was $0.18 Per fully diluted share, up $0.02 or 13% from the $0.16 per diluted share we had in the same time period last year. Increased interest expense was a headwind of approximately $0.03 to our non GAAP earnings per share. 1st quarter free cash flow, which is seasonally our lowest Cash flow quarter, given the timing of our renewals and bonus payouts, was negative $70,000,000 an improvement of $5,000,000 or 7% from the same time period last year and was driven by improved use of working capital and reduced CapEx spending.

Speaker 3

Moving to the balance sheet. We ended the quarter with $64,000,000 in cash and equivalents, an increase of 100 and 73% over the same time period last year. It should be noted that typically in the Q1, we need to utilize our cash revolver, And this year, we do not need to use it due to the strength of our cash collections. Net debt leverage as of the end of the quarter was 3.3 times, a meaningful improvement compared with the 4.5 times a year earlier. Now turning to our 2023 Full year and second quarter financial outlook on Slide 10.

Speaker 3

For the full year 2023, we are reiterating Our guidance with total revenue expected to be in the range of $688,000,000 to $694,000,000 with the midpoint representing a 10% year over year growth rate and adjusted EBITDA of $222,000,000 to $227,000,000 representing a 32.5 percent adjusted EBITDA margin at the midpoint. For the Q2, we expect to deliver total revenue in the range of $169,000,000 to $174,000,000 This 2nd quarter outlook factors the timing variability for the go live of the large Puerto Rico implementation, which is expected to take place this summer. For 2nd quarter adjusted EBITDA, we expect a range of $55,000,000 to $57,000,000 representing a 32.7% margin at the midpoint. For modeling purposes, we expect full year capital expenditures, including capitalized software of approximately $45,000,000 to $52,000,000 And share based compensation expense of approximately $68,000,000 to $70,000,000 Fully diluted shares By the end of the year, are expected to be in the range of 200,000,000 to 205,000,000 shares. Overall, we're pleased with the progress in the Q1.

Speaker 3

We remain focused on growing our top line by executing on our go to market strategies, driving innovation in our products and exceeding our 15,000 plus customers' expectations. Our 2023 margin plans are on track while we continue to invest in our operations, product innovation and international expansion. Finally, as a reminder, we will be hosting our 1st Investor Day on Tuesday, July 11, in Orlando, Florida, in conjunction with our flagship customer event, Edge 2023. We're excited to share updates on our product road map, go to market strategy, international playbook, long term financial targets And much more with the opportunity to meet top customers and learn about their journey with PowerSchool. This will be our 1st Edge event Since the pandemic began in 2020 and our inaugural Investor Day, so we're very excited to share our latest thinking with all of you.

Speaker 3

This concludes our prepared remarks. Operator, will you please open the line for Q and A?

Speaker 4

Certainly. You will hear a 3 tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. And our first question is from the line of Gabriela Gorgias with Goldman Sachs. Please go ahead.

Speaker 5

Hi. This is Callie Valente on for Gabriela. First question for me is, you have a few new product enhancements around kind of the personalized learning space and recommending student specific content and lesson plans. Can you talk a bit about what kind of type of ecosystem you're looking to create over the medium term?

Speaker 2

Hi, Kelly. How are you doing? Great question. As I mentioned, we are very excited about the whole personalized learning space and especially the products we have launched really gets our foot in the door With the broader personalized learning, the components we talked about, there are 2 parts to that. 1 is the actual content, basically where we have almost a 4,000,000 open resources as well as partnership with all the major content providers where we are able to provide learning object repository, so we can bring in the content.

Speaker 2

One of the components I talked about in the prepared remarks is that we're actually also leveraging generative AI now to create additional content. So that allows us to even create personalized content just specific So take an example, if they need help more in a question about ratios, it will take the set of questions already there and create a personalized another question for the child. The second piece of it is the learning navigation. The beauty of that learning navigation is it actually lets us monitor the different mastery levels of every student And being able to create a personalized learning pathway for every child depending upon their learning pathway. So every kid would actually have a different learning pathway and flow of content and the assessment to help them master the concept.

Speaker 2

The beauty of that is that as we are taking this into the next level, as I mentioned, next year we're launching our PowerSchool personalized homework. Now we are able to even take that and embed that integrated into the classroom lesson plan for the teacher. So teacher doesn't even have to scrape that homework. The learning navigation will provide the personalized homework for that every child. So this really changes the game in terms of amount of time teachers can save and supporting teachers And be able to personalize the learning aspect for every child.

Speaker 2

So we're very excited about some military innovation and hopefully we get to see you at the Investor Day and get to share this slide.

Speaker 5

Thank you. And quick follow-up if I can. Recognize there's some concern around the impact of generative AI in education. And how are you navigating using the technology just given the sensitivity around content in the K-twelve space?

Speaker 2

That's a great question. We had when you look at from a perspective of what we do as a software provider, right, what we are providing as a software It's kind of more the mission critical of providing the environment for the student, teachers, and the parents and the administrator To manage the school from an operations perspective, from a collaboration perspective, from teacher support and onboarding and substitute teacher management. So, generic area doesn't necessarily really impact any of our software capabilities. But what it does actually is as we embed that And contextualize it into the different operations in our software. We actually can now provide a whole lot of additional content services and actually value out of our software for District.

Speaker 2

So for us, it's a really exciting time because it actually now allows us to broaden our capabilities to be able to provide more turnkey Good experience for our school districts and user personas. So we are really embracing it. As I mentioned, AI has been part of our strategy long before that With the things we've already launched and now generative AI helps us to continue to enhance our products even more faster.

Speaker 5

Okay. Thank you. Congrats on the quarter and look forward to seeing you in July.

Speaker 6

Thank you.

Speaker 4

And our next question is from the line of Stephen Sheldon with William Blair. Please go ahead.

Speaker 6

Hey, thanks. First one here, I wanted to ask about maintaining the 2023 guidance. You outperformed profit expectations in the Q1. And I think if I heard you correctly, you talked about the pipeline up 40%. So I guess what kept you from increasing the full year guide?

Speaker 6

Is that mainly Just being conservative as we progress through the key selling season here in 2Q, maybe the pace of implementations or I guess just anything else to call out on maintaining the guidance.

Speaker 2

Sure. Hi, Stephen. Why don't I kick it off and then I'll ask Eric to jump in. So as you saw, we had a pretty good quarter, right, in terms of the Not just the record new logo, new business bookings, but also in terms of cross sell traction. So we're very excited about the results of the quarter and as well as the traction we're seeing in the market.

Speaker 2

But as we did mention that we are also some exciting part of this is actually we're getting a lot of large deals, not just Puerto Rico, which is one of the largest deals we have seen in the recent history, Even last year implementation of STRIDE, implementation of PEEL at 2 major Sys implementations, we signed 2 major state deals last year in Maryland as well as Alabama on Unified Insights. Some of the go lives on that, as you can imagine, is going to go into the back end of this year As the current school year go live. So it's kind of like from a revenue perspective, it is going to be back end loaded. So that's what we are Kind of being cautious about from the guide and both in Q3 as well as the rest of the year. But from the momentum we see, we are absolutely comfortable with the current guide and definitely Are seeing great momentum for our core businesses like this and our new investments like Unified Insight.

Speaker 2

So that gets us very excited about the opportunities going forward.

Speaker 3

Yes, I mean, so you answered really well, Hardeep. So I think, Stephen, the key here is, as you think about the larger deals, even the larger deals that we have In the pipeline, we feel very confident that we will get them, but the reality is you won't really start seeing the revenue on those Until latter part of this year, most likely 1st part of next year. So, I think it's important you just kind of look at the skewing of the revenue. You'll see, especially for the deals that we signed late last year and early this year, that's when the subscription revenue will really start to pick up in the back Half of this year, so I think it's the funnel is great, the pipeline is strong. It's just as we are reverting back to Some of these more the Sys implementation, which are, as you all know, extremely strategic to us, it does Certainly take a little bit longer to implement these given the complexity and size of them.

Speaker 3

So the revenue will lag a little bit of the booking.

Speaker 6

Got it. It makes a lot of sense. To follow-up, I wanted to ask another question, I guess, about the On the AI side with Learning Nav and Content Nav, curious how, I guess, teacher reception has been to those products for those that have tried it. Sounds like it can make teachers' lives a lot easier. I think we all know teachers are spread far too thin.

Speaker 6

And how big of an opportunity could that be?

Speaker 2

It's a great question. So one of the key things the way we are launching all of our these initiatives is that this is meant to augment a teacher, not to replace And as you can imagine, you just mentioned about the teacher's life, right? They have a lot of monotonous tasks. Just the whole process of assigning homework, collecting homework, grading homework, And then being able to really understand where each child is one of the major time sinks in terms of how to just basically understand where each child is. That's the kind of flows we are augmenting, also being able to personalize to provide that individual healthy child needs.

Speaker 2

And one of the beauties of this is when you look From our ability of integrating our MTSS, which we have a lot of like Alabama and a lot of districts leveraging, We're able to surgically provide the interventions of the child's need who are either on the CATVIC side or on the attendance side or on the behavior side. So AI is really helping Just not on the learning navigation and mastery, but actually also helping identify the kids which need help and then be able to provide the surgical intervention each health Kidney. So the opportunity here is tremendous in terms of really augmenting and supporting teachers and the educators.

Speaker 6

Great to hear. Thank you.

Speaker 4

And our next Question is from the line of Brian Peterson with Raymond James. Please go ahead.

Speaker 7

So I wanted to know on the really strong results for Sys. I'd be curious what's driving that. And I know you mentioned some really strong pipeline figures, But curious, how does the pipeline specifically look for Sys and any thoughts on kind of the future of your activity there?

Speaker 2

Great, Brian. Absolutely, I think there are many factors which are playing into this. One is, I think, as you know, in the pandemic, There was a lot of focus on classroom assessments as well as understanding where the kids are. And some of the projects around when they realized that They were also having antiquated systems, but they didn't want it to move a Sysp in the middle of a pandemic. What we have seen is now The demand actually is even higher than what we saw in pre pandemic on the SIF.

Speaker 2

And what's happening is multiple factors. One's realization that you need to call Core operating system, right, of a school district if they want to take advantage of all the technology and really not have to deal with any major disruption. So that's number 1. It's really modernizing your core infrastructure and platform. Number 2, the security is actually playing in the minds of these districts a lot, Both in terms of right now the DDoS attacks and the ransomware attacks and the fact that insurance companies have now increased the insurance for all of these districts, If they do not have the right security systems, if they are still using flat files to load data of a Chromium 1 system and everything.

Speaker 2

So that's another thing from a CIOs and superior It's almost the cost of doing business and they got to upgrade that. 3rd is actually also what's helping is our Sys differentiator In terms of really bringing the full platform together is now giving them an avenue that it's not just putting another system, they're putting entire platform and gives them opportunity growth. So all those things are really driving the Additional demand we are seeing in Ziff and we actually have a very healthy pipe both in U. S. And international on the Ziff, Not just from the large districts in terms of things, but also a lot of mid size and small schools as well, which are taking advantage of the platform and the whole student cloud solution we have launched.

Speaker 7

That's great to hear. And Eric, maybe a follow-up for you. Just on the renewal seasonality, can you just remind us how that kind of flows through ARR For the year and any early insight you guys may have as you kind of go into the big renewal period this summer. Thanks guys.

Speaker 3

Yes. Yes, absolutely, Brian. So now that I own it, I can definitely give you guys a lot of good visibility into it. So we had extremely, extremely strong operational success in Q1. The retention is extremely high, In fact, a little bit ahead of our expectations.

Speaker 3

As we go into Q2 and Q3, just as a reminder for everybody, Q3 is our busiest period. We've got about 65% of our renewals happen in Q3. So the team is focused on 2 things. 1, Executing flawlessly on the Q2 renewals that we're working through and then certainly same thing in getting ahead of the Q3 volume. As you think about what that does from an ARR perspective, I think it is important and I appreciate the question.

Speaker 3

Just as you look at ARR for modeling purposes, typically Q2 Q3 essentially is around flat because obviously any of the net new in Q3 will get offset with any amount of Attrition we have given the fact that we've got 65% of our renewals happen in Q3, that's when any kind of attrition is going to happen if it's material. But you will see from an ARR perspective, exiting out of this quarter into Q2, right, you'll continue to build that up. In Q2 to Q3, ARR will certainly kind of level off, if you will, not go down, but it will level off from quarter to quarter sequentially, And then we'll go back to a growth pattern from Q3 to Q4.

Speaker 6

Great. Thanks, Eric. Got it.

Speaker 4

And our next question is from the line of Fred Havermeyer with Macquarie. Please go ahead.

Speaker 8

And supported in part by ESSER funding. And I'm curious, it seems that many of them are focusing the ESSER funding towards

Speaker 3

Services charges while making room for software is kind

Speaker 8

of part of a more ongoing basis. I'm just As I'm thinking about the summers, I'm thinking about this year's budgeting cycle. Do you think that ESSER funding might be something that can help schools More of these deals across the board, get that services, one time costs out of the way and just facilitate more of the cross sell and up sell motion that you've been executing so well with?

Speaker 2

Hey, Fred. Great question. Actually, I got a chance to speak just last week at ASU GSV, Where I was on the panel for the appropriate title, Half Time TO Esser. And we talked about with the panelist members about When you look at the initial Esser spend, there was a little bit more about some critical things that needed. And as we're going to the tail end of the second half of the Esser, It's a lot more strategic.

Speaker 2

It's a lot more transformational aspect, a lot more innovative aspect. So we are seeing definitely with 18 months more to spend and with the Talked that a lot of these districts can even spend for that for a couple of more years in terms of the spend categories. I think there is still districts have good funding To support these transformation objectives, as you mentioned, and you're absolutely right. Definitely one of the beauties of SIR is that you can actually use it for the initial implementation stuff, Right, for the one time, so that allows you to really help with that. Puerto Rico is a great example of that, which leveraging some of that Esser money to help with the implementation.

Speaker 2

But we also same time, Essent is not the only opportunity. At the Alabama deal, the multimillion dollar Alabama deal we talked about last quarter, Unified Insights, That actually got to legislative approval as a special budget. So there is a lot of recognition overall, not just from ESSER support, but overall from the legislative support in terms of making sure that these digital transformation initiatives critical for education are going through And the ROI of these are tremendous, so that's why we continue to see the pipeline and the demand to be very strong.

Speaker 8

Thank you, Hardeep. And I think I'd like to ask another question here just on international. As we've been seeing more and more Just international deals coming through here. Of course, you were highlighting in the quarter more deals or rather deals in the Middle East. I'm curious as you're Establishing more of a footprint overseas and getting more experience with doing these international deals, are you finding that there are learnings here and That you can just take and further scale your international go to market with and work with partners to further just get scale in international regions?

Speaker 2

Absolutely, Fred. I think one of the strengths of the PowerSchool capability, especially when it comes to where SIS and Schoology is that we already do business in 90 countries, But not just American educational schools, but a lot of the international and private schools in different parts of the world. And what gave us that opportunity and the strength is the fact that Even within U. S, as to be able to meet the requirements of all these 50 states, even in the Canada meeting the requirements of all the different provinces, Our system was built with an extensibility to be able to support the experiences reporting the localization required for meeting all the local laws and the reporting requirements and different attributes. That strength is giving us an ability along with an already established proven points in a lot of the regions we are already entering with the brand presence which is known.

Speaker 2

So if you are in Dubai, one of the best performing school is American Education School of Dubai. So if or if you're in Thailand, International School of Bangkok. So when A district or state or even a private school looks for an opportunity, they look at to these schools and say what systems they are using so they can kind of really replicate that same technology And we already have strong viewpoints. And this is the reason what you see is the strong partnership commitments we are carrying is because of our We are already proven in these regions and we already have a very strong brand appeal. And what we're doing it rather than going after the individual schools, we're going with these strategic partnerships That helps us make sure that we can scale more quickly international, and we are getting the localized help for The support, the boots on the ground, the services, that way we can make sure that the experience for the end customer is going to be very exciting.

Speaker 2

So it's rather than having 50, 100 partners, this is very surgical, very strategic, exclusive partnerships in these regions with partners who are really committing and putting their skin in the game of helping us really scale into these regions. So we are very excited about the path we are on.

Speaker 8

Thank you very much.

Speaker 2

Thanks, Fred.

Speaker 4

And our next question is from the line of Saket Kalia with Barclays. Please go ahead.

Speaker 9

Okay, great. Hey, guys. Thanks for taking my questions here. Hardeep, maybe just to start with you. I thought your commentary on SIS earlier was just really interesting and some of the drivers there.

Speaker 9

Maybe just to level set, Can you just talk about roughly how much share PowerSchool has in SIS? And maybe just broad brush, Who or what types of systems you're displacing in some of these FIS modernization projects?

Speaker 2

Sure. Hi, Saket. When you look at it from a market share, right, we have almost 20,000,000 students on our SIS platform. So in North America, from a 60,000,000 churn perspective, you will put roughly 1 third of the market, which actually leverages the Verasai solution. We are by far the market leader.

Speaker 2

The next 3 vendors combined probably touched that kind of in terms of that percentage. So we definitely Have a huge lead over any of our competitors in the market. What you do see is that 40% of the market is actually still Very legacy or custom built solution. So even things like for Ricoh, you know, has a very small legacy vendor where they're both highly customized And being maintained. There are still not only large school districts, but also there are a lot of still, school districts in whether even in California Or in others, which are leveraging vendors, which only have 1 to 2,000,000 students on their entire platform.

Speaker 2

So as you can imagine, the innovation required, the security operators required, The ability to be able to set a platform which can modernize to the needs of being able to leverage data as well as even AI into these school districts, They don't have that operators to do that and that's what's driving a lot of the change that with the 40% bottom legacy solutions, which is converting to our SaaS platform. That's

Speaker 9

great. That's great to hear. Certainly still plenty of room for growth there then. Eric, maybe for you for my follow-up. Of all, congrats on the Puerto Rico deal, great win.

Speaker 9

Can you just maybe talk about how that contract maybe plays into the seasonality For services and license revenue, understanding the vast majority of the business here is SaaS, but just given the rev rec on those two lines, could you just maybe help us Think through those as we kind of model the rest of the year on revenue?

Speaker 3

Sure, Saket. And actually, if I may, let me just talk about Break our revenue into the most strategic down to the least strategic components because I think it will help all of you as Kind of looking at the revenue and how to model it. From an S and S standpoint, certainly our subscriptions and support most strategic. We're in the high single digits now. As we see these larger deals and the subs and support really start to kick in, in the second half, You'll see that revert back into the low double digits ending the full year in the low double digit revenue growth standpoint.

Speaker 3

As you look at our services, Similar to what I said last quarter, I do expect our overall services business for the full year To be in the mid to high single digits and the full year to year growth. Now why is that? Certainly, we've gotten a lot more efficient in terms of our services business. The velocity of time to value for our customers has increased. And we're getting a lot of utilization, a lot more increased utilization out of the team.

Speaker 3

Now, What that means from a sequential standpoint, you will see sequentially Q1 to Q2, you'll see the revenue And services increase and then you'll see a further increase in Q3 as we have all the back to school implementations, etcetera. And then you'll see it slightly taper down in the Q4 as Projects start to taper off and schools head out for year ending holidays, etcetera. So sequentially, you'll see the revenue on services pick up In the Q2, peak in the Q3 and then trail down a little bit in the Q4, ending the full year mid to high single digit year over year growth. L and O, same thing. You'll see

Speaker 10

from a

Speaker 3

quarter to quarter perspective. You'll see it pick up in Q2, then peak in Q3 and then again come down slightly in Q4. Just recognizing LNO being our least Our smallest and least strategic revenue segment, there's a little bit more variability from 1 quarter to the next. What I would say on a full year basis, we expect that to be around flat. And the majority of the growth, If you will, for the company will be in our SNS, our most strategic revenue component.

Speaker 3

So hopefully, I know it's a little bit more than you asked for, but hopefully that Helps everybody kind of think about the overall revenue profile and how we're looking at it, not only for this quarter, but expectations into next quarter and certainly for the full year.

Speaker 9

Absolutely. Very helpful. We appreciate it, Eric. Thanks.

Speaker 2

You're welcome. Thanks, Duncan.

Speaker 4

And our next question is from the line of Brent Thill with Jefferies. Please go ahead.

Speaker 6

Hardeep, on AI, can you speak to when you think that actually turns to a monetization event? Is this a year out? Is it few months out? I mean, how do you judge the timing and how fast you can Infuse the suite with AI. And I had a quick follow-up for Eric after.

Speaker 2

Sure, Brent. Pleasure again. Vinay mentioned in my prepared remarks, we already do have AI based Atris components, which we're selling to customers And we have dozens of customers who will use our At risk and MPSS solution leveraging those AI components. So that's something we already monetized. It's a couple of $1,000,000 as Our Unified Insights solutions, so something we are continuing to see as more Unified Insights continue to grow 70% and more deployments, We are able to continue to grow that piece as well.

Speaker 2

So that's already we are already monetizing that piece. The second piece of the company, as I mentioned in terms of The LearningNav and ContentNav, this is based on some of the IP we have bought, which has already been around for almost a decade, and we Actually have now embedded that fully into our Schoology and product with these launch of these additional components. And we are in the pilot phase with couple of customers And we plan to have it fully showcased in our Edge conference, so we can start selling them. We already have couple of large customers actually who are Very interested. So we will start seeing some amount of these deals into the second half.

Speaker 2

But the real monetization, as you know, this is almost $100,000,000,000 TAM. The way we are monetizing it, these will be add on products to work on in clouds into this year. The next year, we will launch additional solutions like PowerSchool personalized homework solutions That can open up a huge opportunity. Then you have the opportunity to actually do things like additional tutoring help to that As well as in terms of helping on the areas of what we call the full learning pathway support, leveraging our Naviance and workforce spanning to help kids with the supplemental learning. Then you can kind of start looking at the longer picture of even moving that to be even outside the classroom help.

Speaker 2

So it's a much it's like a 3 to 4 year plan To launch these components, but you already have monetization and we'll see more monetization happening over the later part in the next year.

Speaker 3

Okay, great. Eric,

Speaker 6

on the guide, I just this is kind of the Q1 we haven't seen the cadence of you raising. And then you kind of go back to big deals. We can only go back to is it going to take Seth Curti to take 50 to close this out or Is it going to take Sabonis with a bunch of layups? And I guess you go back to everyone's fearing, is this riding on the big shots? And can you just address that concern of trying to get the full year over the goal line on going after the bigger elephants versus the antelopes?

Speaker 3

I think it's a great question. What I would say though is the big elephants have already been bagged. It's just a matter of us doing the Services work in getting the projects implemented. So, it's a matter of timing and the teams as you can appreciate, Puerto Rico, the size of the deal, which is why we included in the prepared remarks, is one of our largest deals that we've had in the last several years. So as you can appreciate, there's a tremendous amount of executive oversight, management focus.

Speaker 3

And given the fact that it's a core SIS implementation in Puerto Rico, That then creates a flywheel for a huge amount of cross sell opportunities in the future, right? So What I would say is the team is laser focused on L. A. Unified, on Alabama, on Puerto Rico, which are the big deals that we're confident We will start to see the revenue pick up in the second half. So, I guess I would just say is there isn't as Hardeep talks about the pipeline, which We're super excited about, especially in the bigger deal side there, those items from a revenue standpoint, you really won't see those start Contribute anything meaningfully until maybe latter part of this year, most likely 1st part of next year, which is again everything we've modeled in.

Speaker 3

So I would just while there's a little bit of noise, I think it's important and candidly, as Hardeep and I talk about it, We're excited because as the deals get bigger, it's a demonstration of just how strategic we are becoming with our customers. So we are going to have bigger deals. They are going to continue, but just rest assured that we're very confident in the second half of the year in terms of the revenue that's going to roll

Speaker 4

And our next question is from the line of Matt Hedberg with RBC Capital Markets. Please go ahead.

Speaker 3

Great, guys. Thanks for my I'll just I'll keep it to 1 for the sake of time. I guess for either of you, refresh our memory again about how we should think about U. S. Fed funding flowing into this year.

Speaker 3

I know there's been a bunch of moving parts coming out of COVID. And then maybe specifically for Eric, how do you think about that Relative to sort of the midpoint of your kind of full year guidance range? Yes. Sure. So from

Speaker 2

a funding perspective, I can quickly address that, Matt. So I think the funding is largely when you look at the 1st year funding. That has continued to be stable even throughout the last couple of years. So there is no change to the core funding. Federal piece component goes to about 20%, 30% of it, we have And we have seen that across states and pretty much that could be very stable.

Speaker 2

The ESSER money is on top of that. That's a $200,000,000,000 ESSER Three tranches, professor. The first two tranches have been some part of them have been spent and the third tranche is still making it work. So total, you can as I mentioned, You can put roughly 40%, 50% being spent and then the rest still available to the districts to spend. So from that perspective, that still flows another for 18 months For decision making and then even spend can be a little bit better.

Speaker 2

So the funding environment seems to be very stable and also with ESSER supported by that.

Speaker 3

Yes. And Matt, specifically on the guidance, we have not assumed any dependency on the ESSER funding to deliver the rest of this year. When we do have visibility to deals that may use ESSER funding, it's usually a pretty small percentage. So there's Very little risk there of things not getting funded because ESSER didn't get spent, etcetera. So We've the guide I think is fairly balanced, what I would say, and we haven't put any dependency on ESSER for the second half.

Speaker 8

Thank you very much.

Speaker 2

Thanks, Ben.

Speaker 4

And our next question is from the line of Rick Hillacre with Credit Suisse, please go ahead.

Speaker 10

Hi, guys. Thanks for taking my question. Just wanted to have another Go here at international. One quick one on my end. Exciting to see the BME partnership, the OneConnect partnership, and I know these have minimum commitments.

Speaker 10

What I'm wondering is, how much freedom do these partners have? As you mentioned, you're 90 plus countries. You've rolled out this localization framework. Are they able to sell whatever they want? Is it kind of that one more product rally Are they are you pushing them with bundles?

Speaker 10

What does it look like? How much freedom do they have? Thanks.

Speaker 2

Rich, yes, very fair question. So the core focus international right now is on our core products, the SIAS, the learning management systems, the enrollment, Things where you need for a course school operations to be able to run the school operation, communicate and manage learning and collaboration with the parent students. So And we also see demand of actually insights and analytics, which is coming up international, even outside people who are buying our system LMS. So Those are the core area of focus for us for the international. We're not really launching our all of our 20 plus products international.

Speaker 2

So these are the core products which are the Phase 1. And, that's what these partners are enabled, trained, and that's what the experience is actually most of the partner already have in some respect with working with the local schools there.

Speaker 10

Excellent. That's really helpful. And then last one on that topic. Can you kind of help us Think through you talked about these are exclusive partnerships, so it's not like we're going to see 50 of them. Can you give us a sense, is this going to be like A handful, is this going to be double digits?

Speaker 10

And over what period of time are you thinking of rolling the majority of these out? Thanks.

Speaker 2

Yes, it's a great question. So when you look at it, we're not trying to go cover every country in every region. We're covering the biggest Regions, we actually have brought in a management consulting firm to actually do the analysis for us in terms of looking at the local buying patterns and Competition and budgets and different scenarios. And we prioritize about 12 regions where we are establishing these different exclusive partnerships to kind of really go after, which actually opens up to almost 100,000,000 plus of student TAM in just Within those private schools and very focused strategies in these twelve regions. So that's a very it's a very targeted approach and expect that Probably another half a dozen partnerships throughout this year and then going into the next year to almost 12 to 15 exclusive partnerships.

Speaker 2

Excellent. Thanks so much.

Speaker 3

Thank you.

Speaker 4

And our last question is from the line of Brett Knoblauch with Cantor Fitzgerald. Please proceed with your question.

Speaker 6

Hi, guys. Thanks for taking my question. I'll be quick here. Just

Speaker 3

kind of want to touch base, now that you guys have

Speaker 6

Back into the 6 core clouds, have you seen any efficiency gains on the go to market strategy with that?

Speaker 2

Hi, Brett. So when you look at it, we started launching these clouds this quarter. And one of the things I mentioned in my prepared remarks, We almost pretty much really have seen each of the products depending on each The cloud, we've almost seen 50 plus transactions in each of the cloud. So that's helping us, whether it's a student cloud or it's Our educator effectiveness tower, educator recruitment cloud or workforce planning cloud. So we're kind of really launching these things into our customer base to make sure that they Can understand the benefit of really buying based on that persona, buying all the products rather than buying the individual products.

Speaker 2

So we are getting we're not trying to discourage any of our customers to buy individual product. We're still selling majority of that, but we are able to have Start educating them then when they're buying the product, they actually have an avenue to really be able to take advantage of the full cloud for their persona. And what we did see is actually we almost saw 60 plus deals in the quarter where the customer either bought the whole cloud, one of the whole clouds Or they topped off their existing products to be able to have the full cloud. So that's a very encouraging sign even with early on that we are actually able to get Customers will start thinking about this in perspective. We're really going to be doing a full launch of this at the Edge Conference, so expect that by the second half For our customer base to be able to really have a full alignment and then we really are going to start seeing the benefit of this coming into the later half of the next year

Speaker 4

And there are no further questions at this time. Hardeep, I will now turn the call back to you for closing remarks.

Speaker 2

Great. Well, thank you, operator. Let me just take a minute to thank everyone for joining us today as well as thanking our employees and our customers for Really the continued dedication and belief in our vision to be able to improve education outcomes globally. To summarize, right, this was a great start to 2023 We had not only a record new logo bookings, but also very exciting growth on our cross sell. We have phenomenal traction of our data centric products, the Unified Insights and Connected Intelligence.

Speaker 2

Also, as we mentioned, the Sys, which is a very strategic core part, but which expands over cross sell TAM, having the wins like Puerto Rico were really game changing in terms of The ability and then international expansion further tops it off in terms of our future supporting our future growth. This success is really driven by where The fact that we are the most differentiated mission critical platform in the industry, serving a very large and stable vertical market and We operate on a very durable financial model that has a strong operating leverage and coupled with our tremendous growth opportunity, especially through international and even the personalized learning innovation, We are really positioned well for the growth. We are excited about the opportunities that presents us and look forward to executing on the strategies throughout 2023 and beyond. So thank you again.

Speaker 4

That does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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