PowerSchool Holdings, Inc. (NYSE:PWSC) Q1 2023 Earnings Call Transcript

PowerSchool Holdings, Inc. (NYSE:PWSC) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good afternoon, ladies and gentlemen, and welcome to the PowerSchool First Quarter 2023 Earnings Call. 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. Please go ahead.

Shane Harrison: Thank you, operator. Welcome, everyone, to PowerSchool’s earnings conference call for the first quarter 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&A portion, will include statements related to the expected future results of our company, which are therefore forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to 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 the same website. Let me now turn the call over to Hardeep.

Hardeep Gulati: 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. We also won a record amount of new logo bookings, saw continued large deal demand from districts and state level opportunities, and made progress on our international expansion. Q1 results are summarized on Slide 4. First quarter revenue reached $159 million with subscription and support revenue growing 9% to $141 million. Our adjusted EBITDA grew 16% to $49 million, representing a 31% margin, an expansion of nearly three percentage points year-over-year. Net revenue retention remained strong at 109.1%, increasing 240 basis points year-over-year, helping drive ARR to $612 million.

As we have shared in our previous earning calls, there are four 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. 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-sourced budgets that are largely insulated from macroeconomic conditions. This market durability was proven again in the first quarter, where we saw increased demand and strong funding of our technology with record new logo bookings. One of our exciting wins was our largest ever deal, an $11 million plus bookings from Puerto Rico Department of Education for digitizing their entire K-12 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. On a trailing 12-month basis, SIS 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, enhance 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 increase 15% year-over-year. As we roll out our persona-specific multiproduct cloud bundles that will further support the cost and momentum we are seeing.

Additionally, our deal velocity continues to be strong. We saw more than 50 transactions above $10,000 or at least one product within each of our six cloud bundles. Additionally, our pipeline grew over 40% 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-12 vertical-specific solutions is the second key foundation of our strategy and success. There are three elements of our differentiation. First, we have the most comprehensive and diverse platform in the market to be able to meet the evolving needs of the entire K-12 ecosystem. Second, we have the most unified platform to provide an integrated experience for our key personas, students, teachers, parents and administrators.

Third is our ability to deliver holistic insights across all data aspects to improve education outcomes. In Q1, we continued to see broad demand across our diversified platform with SIS, talent and our data-centric products experiencing the highest growth in our portfolio. Our data-centric solutions ARR grew over 70% year-over-year. One of our data products was purchased in six 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 by the success we are seeing with our Connected Intelligence solution, the first fully managed data as a service platform for K-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 third 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.

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 Challenger 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 a 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 Ellucian, the leading higher education operation software provider that would provide a very unique opportunity to bring K-12 data together with higher education data to enable state and local education agencies to build powerful longitudinal data systems across the student life cycle to optimize educational and career success.

These new data solutions successes demonstrate our ability to grow our $3 billion 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 third 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. 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 leveraged in an integrated and contextual way, will provide enormous opportunities to support teachers and save them valuable time.

To appreciate 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 customers as a data-as-a-service platform to create their own AI and machine learning models. 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, LearningNAV and ContentNAV, 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 billion. We are also embedding generative AI models to support educators across our solutions. For example, we are launching automated 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 into our solution creates additional TAM and market expansion opportunities to enhance our growth. 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 first sales and support office outside of North America in Dubai, which will open this summer. We just announced a new channel partner Board 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 first year. We’ve also recently announced our proprietary, innovative localization framework, which is a tool that enables our partners and customers to localize and tailor PowerSchool solutions for their specific country and region. This localization framework enables key user experience features such as right to left views, multilingual translation and localized extension 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 fourth 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&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. I will let Eric speak to the financials for the quarter and the durability of our financial model. Eric?

Eric Shander: 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-12 ecosystem. As summarized on Slide 9, first quarter total revenue came in at $159 million 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 million 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 one quarter to the next. As we announced in an 8-K 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 million in total value, consisting of $3 million of subscription and support revenue, approximately $3 million of services revenue, and $5 million 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 million 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, LA 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 third-party revenue, totaled $2 million 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. We ended the quarter with an annual recurring revenue balance of $612 million, 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 million 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. Moving to the first quarter operating expenses. Non-GAAP research and development expense came in at $20 million, representing 12.5% of revenue compared with 15.7% in the same time period last year. This 320 basis point reduction in adjusted R&D expense as a percentage of revenue reflects the efficiency and improved cost profile of our R&D model, while still investing in our key strategic innovation priorities.

Including capitalized R&D expenses, the total invested in R&D was 18.5% of revenue compared with 21.7% last year, representing a 310 basis point improvement. Non-GAAP SG&A expense totaled $39 million in the first quarter, representing 24.6% of revenue compared with $33 million or 22% of revenue in the same time period last year. The increase 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 $49.4 million 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 first quarter 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. First quarter free cash flow, which is seasonally our lowest cash flow quarter given the timing of our renewals and bonus payouts, was negative $70 million, an improvement of $5 million or 7% from the same time period last year, and was driven by improved use of working capital and reduced CapEx spending. Moving to the balance sheet. We ended the quarter with $64 million in cash and equivalents, an increase of 173% over the same time period last year. It should be noted that typically in the first quarter, we need to utilize our cash revolver and this year, we did 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 4.5x a year earlier. Now turning to our 2023 full year and second quarter financial outlook on Slide 10. For the full year 2023, we are reiterating our guidance with total revenue expected to be in the range of $688 million to $694 million with the midpoint representing a 10% year-over-year growth rate and adjusted EBITDA of $222 million to $227 million representing a 32.5% adjusted EBITDA margin at the midpoint. For the second quarter, we expect to deliver total revenue in the range of $169 million to $174 million. This second 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 second quarter adjusted EBITDA, we expect a range of $55 million to $57 million, representing a 32.7% margin at the midpoint. For modeling purposes, we expect full year capital expenditures, including capitalized software, of approximately $45 million to $52 million and share-based compensation expense of approximately $68 million to $70 million. Fully diluted shares by the end of the year are expected to be in the range of 200 million to 205 million shares. Overall, we’re pleased with the progress in the first quarter. 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 first 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 first 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. This concludes our prepared remarks. Operator, will you please open the line for Q&A.

Q&A Session

Operator: And our first question is from the line of Gabriela Borges with Goldman Sachs. Please go ahead.

Unidentified Analyst: This is Kelly Valenti 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?

Hardeep Gulati: Hi Kelly, how are you doing? A great question. As I mentioned, we are very excited about the home personalized learning stations especially the products we have launched, really gets of our foot in the door with the broader personalized learning. The components we talked about, there are two parts on to that. One is the actual content, basically, where we have almost a four million open education 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. 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 to a child.

So to take an example. If they need help more in a question about ratios, it’ll take the set of questions already there and create a personalized content and another question for the child. The second piece of it is the learning navigation. The beauty of that learning navigation is that it actually lets 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 their content subject. The beauty of that is, 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 and embed that integrated into the classroom lesson planned 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 in supporting teachers, and being able to personalize the learning aspects for every child. So we’re very excited about the next innovation. And hopefully, we get to see you at the Investor Day and get to share this slide.

Unidentified Analyst: Thank you. And a quick follow-up, if I can. I recognize there’s some concern around the impact of generative AI in education. How are you navigating using the technology just given the sensitivity around content in the K-12 space?

Hardeep Gulati: 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 doesn’t – it’s kind of more the mission-critical of providing the environment for the student, teachers and the parents and the administrator to be able to manage the school from an operations perspective, from a collaboration perspective, from teacher support and onboarding, and substitute teacher management. So generative AI 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 districts.

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 experience for our school districts and use 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.

Unidentified Analyst: Congrats on the quarter and look forward to seeing you in July.

Hardeep Gulati: Thank you.

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

Stephen Sheldon: Hey thanks. First one, I just wanted to ask about maintaining the 2023 guidance. You outperformed profit expectations in the first quarter. 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? Is that mainly just being conservative as you 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?

Hardeep Gulati: 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 of new business bookings, but also in terms of a cross-sell traction. So, we’re very excited about the results of the quarter and as well as the traction we are seeing in the market. But as we did mention that we’re 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, but even last year, implementation of Stride, implementation of to major SIS implementations. We signed up two major state deals last year in Maryland as well as Alabama on Unified Insight.

Some of the go-lives on that, as you can imagine, is going to go into the back end of this year and did the current school year go-live. So – it is 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 Q2 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 SIS and our new investments like Unified Insight, so that gets us very excited about the opportunities going forward.

Eric Shander: Yes. I mean, so you answered it 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 first part of next year. So, I think it’s important as you 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 that – the funnel is great, the pipeline is strong. it’s just as we are reverting back to some of these more – the system limitations, 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.

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

Stephen Sheldon: Got it. Makes a lot of sense. A follow-up I wanted to ask another question, I guess, about the – on the AI side with LearningNAV and ContentNAV. Curious how, I guess, teacher reception has been to those products for those that have tried it? It sounds like it could make teacher lives a lot easier. I think we all know teachers are spread far too thin. And how big of an opportunity could that be?

Hardeep Gulati: It’s a great question. So one of the key things the way we are launching all of our initiatives is that, this is meant to augment a teacher, not to replace a teacher. And as you can imagine, you just mentioned about the teachers’ 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 things in terms of how to basically understand where each child is. That’s the kind of flows we are augmenting. We’re also being able to personalize to provide that individual healthy child needs. And one of the beauties of this is when you look at 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 academic 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 healthy kid needs. So the opportunity is tremendous in terms of really augmenting and supporting teachers and educators.

Stephen Sheldon: Great to hear. Thank you.

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

Brian Peterson: Hi, gentlemen. Thanks for taking my question. So I wanted to know on the really strong results for SIS. I’d be curious what’s driving that? And I know you mentioned some really strong pipeline figures. I’m curious, how does the pipeline specifically look for SIS? And any thoughts on kind of the future deal activity there?

Hardeep Gulati: Great, Brian. Absolutely, I think there are many factors which are playing into the SIS. One is, I think, as you know, in the pandemic, there was a lot of focus on classroom assessment as well as understanding where the kids are. And some of the projects are on, they were also having integrated systems, but they didn’t want it to move to SIS in the middle of a pandemic. What we have seen is now that demand actually is even higher than what we saw in pre-pandemic on the SIS. And what’s happening is multiple factors. One is realization that you need to core the 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 one. It’s really modernizing your core infrastructure and platform. Number two, 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 that they are still using flat files to load data for chrome system and everything. So that’s another thing from a CIOs and superior perspective, it is almost the cost of doing business, and they got to upgrade that. Third is actually also what’s helping is our SIS differentiator in terms of really bringing the full platform together is now giving them a NAV view that it’s not just putting another system, they’re putting in our platform, gives an operation growth.

So all these three are really driving the additional demand we are seeing in SIS. And we actually have a very healthy pipe source in U.S. and international on the SIS, not just from the large districts in terms of things, but also a lot of midsized and small schools as well, which are taking advantage of the platform and the wholesome student cloud solution we have launched.

Brian Peterson: 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 in any early insight you guys may have as you kind of go into the big renewal period in the summer? Thanks guys.

Eric Shander: 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 strong operational success in Q1. The retention is extremely high, and in fact, a little bit ahead of our expectations. 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 two things: one, executing flawlessly on the Q2 renewals that we’re working through; and then certainly, same thing and 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. Just as you look at ARR for modeling purposes, typically Q2 to 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 it’ll go back to a growth pattern from Q3 to Q4.

Brian Peterson: Great. Thanks, Eric.

Eric Shander: Got it.

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

Fred Havemeyer: Hi, thank you very much and great to speaking with you all again. And I am going to do probably what I’ve done in other quarters and just check in on in part, what we’re seeing with ESSER, because I think it’s been notable seeing more contracts, including some of those have seen come across for PowerSchool that have been supported in part by ESSER funding. And I’m curious, it seems that many of them are focusing the ESSER funding towards services – services charges while making room for software is kind of part of a ongoing more basis. I’m just – as I’m thinking about the summer, I’m thinking about this year’s budgeting cycle. Do you think that ESSER funding might be something that can help the schools get more of these deals across the board, get that services, onetime costs out of the way and just facilitate more of the cross-sell and upsell motion that you’ve been executing so well with?

Hardeep Gulati: 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, Halftime for ESSER. And we talked about the panelist members about when you look at the initial ESSER spend, there was a little bit more about some critical things they needed. And as we go into the tail end of the second half of the ESSER, it’s a lot more strategic. It’s a lot more transformational aspect, lot more innovative aspects. So we are seeing definitely with 18 months more to spend and with the thought 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 ESSER is that you can actually use it for the initial implementation staff, right, for the onetime that allows you to put really help with that. Puerto Rico is a great example of that, with leveraging some of that ESSER money to help with the implementation. But we also felt, at the same time, ESSER is not the only opportunity. The Alabama deal, the multimillion dollar Alabama deal we talked about last quarter Unified Insights, that actually got through legislative approval as a special budget. So there is a lot of recognition overall, not just from ESSER support and the district 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.

Fred Havemeyer: 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 to get scale in international regions?

Hardeep Gulati: Absolutely, Fred. I think one of the strengths of the PowerSchool capability, especially when it comes to our SIS Schoology, is that we already do business in 90 countries with not just American educational schools, but a lot of the international and private schools in different parts of the world. And what gives us that opportunity and the strength is the fact that even within U.S. as to be able to meet the requirements of all the 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. So if you are in Dubai, one of the best performing school is the American Education School of Dubai. So if you’re in Thailand, International School of Bangkok. So when the district or state or even a private school looks for an opportunity, they look at to these schools and say, what system they are using, so they can kind of really replicate that same technology, and we already have strong viewpoint. And this is the reason what you see is the strong partnership commitments we are getting 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 of our – more quickly international, and we are getting the localized help for the support, the boots on the ground, the services that way when we can make sure that the experience for the end customer is going to be very exciting. So it’s rather than having 50 or 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.

Fred Havemeyer: Thank you very much.

Hardeep Gulati: Thanks, Fred.

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

Saket Kalia: 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. 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 SIS modernization projects?

Hardeep Gulati: Sure. Hi, Saket, when you look at it from a market share, right, we have almost 20 million students on our SIS platform. So in North America, from a 60 million in perspective, we will put roughly one-third of the market, which actually leverages our SIS solution. We are by far the market leader. The next three vendors combined probably touch 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 Puerto Rico had a very small legacy vendor where it was 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 million to 2 million students on their entire platform.

So as you can imagine, the innovation required, the security apparatus 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 apparatus to do that, and that’s what’s driving a lot of the change that the 40% bottom legacy solutions, which is converting to our SIS platform.

Saket Kalia: That’s great. That’s great to hear. Certainly still put plenty of room for growth there. Then Eric, maybe for you for my follow-up. First of all, congrats on the Puerto Rico deal, a great win. 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 ones, could you just maybe help us think through those as we kind of model the rest of the year on revenue?

Eric Shander: Sure Saket. And actually, if I may, let me just talk about breakout revenue into the most strategic down to the least strategic components, because I think it will help all of you, as you’re kind of looking at the revenue and how to model it. From an S&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 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. 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 in 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 the 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. 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, et cetera. And then you’ll see it slightly taper down in the fourth quarter as projects start to taper off and schools head out for year ending holidays, et cetera. So sequentially, you’ll see the revenue on Services pick up in the second quarter, peak in the third quarter and then trail down a little bit in the fourth quarter, ending the full year mid- to high single digit year-over-year growth.

L&O, same thing, you’ll see from a quarter-to-quarter perspective, you’ll see a pickup in Q2, then peak in Q3 and then again come down slightly in Q4. Just recognizing L&O being our least – our smallest and least strategic revenue segment. There’s a little bit more variability from one quarter to the next. But 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 S&S, our most strategic revenue component. 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 are looking at it, not only for this quarter but expectations into next quarter and certainly for the full year.

Saket Kalia: Absolutely. Very helpful. We appreciate it, Eric. Thanks.

Eric Shander: Welcome. Thanks, Saket.

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

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

Hardeep Gulati: Sure, Brent. It’s a pleasure again. When I mentioned in my prepared remarks, we already do have AI-based access components, which we’re selling to customers, and we have dozens of customers who use our access and MTSS solution, leveraging those AI components. So that’s something we already monetized. It’s a couple of million dollars as part of our Unified Insights solution. 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. So that’s already – we are already monetizing the piece. So the second piece of the component, as we mentioned in terms of the LearningNAV and ContentNAV. This is based on some of the IT 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 at these launch of these additional components.

And we are in the pilot phase with a couple of customers and we plan to have it fully showcased in our EDGE conference, so we can start selling them. We already have a couple of large customers actually who are very interested. So we will start seeing some amount of these deals into the second half. But the real monetization, as you know, this is almost $100 billion TAM. The way we are monetizing it, these will be add-on products to our current 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 through that as well as in terms of helping on the areas of what we call the full learning pathways support, leveraging our Naviance and Workforce planning to help kids with the supplemental learning.

And then you can kind of start looking at the longer picture of even moving that to be even outside the classroom help. So it’s a much – it’s like a three to four year plan to launch these components, but you already have monetization and you’ll see more monetization happening over the later half in the next year.

Brent Thill: Okay. Great. Eric, on the guide, I just – this is kind of the first quarter, 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 step – take 50 to close this out? Or is it going to – thanks to bonus with a bunch of layups. But I guess you go back to everyone’s hearing, 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?

Eric Shander: I mean, look, Brent, 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 and 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. And given the fact that it’s a core system 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 LA 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 on the bigger deal side there, those items from a revenue standpoint, you really won’t see those start to contribute anything meaningfully until maybe latter part of this year, most likely for first part of next year, which is, again, everything we’ve modeled in. 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 off of these once the implementations go-live.

Brent Thill: Great. Thanks.

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

Matt Hedberg: Great. Hi guys. Thanks. I’ll keep it to one 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. 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?

Hardeep Gulati: Sure. So from a funding perspective, I can quickly address that, Matt. So I think the funding is largely when you look at the 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 stayed in the local. And we have seen that across states and pretty much back to be very stable. The ESSER money is on top of that. That’s a $200 billion ESSER, three tranches of ESSER. The first two tranches have been – some part of them have been spent and the third tranche is still make 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 for 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. So the funding environment seems to be very stable and also with ESSER further supported by that.

Eric Shander: 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 that didn’t get spent, et cetera. 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.

Matt Hedberg: Thank you very much.

Hardeep Gulati: Thanks, Matt.

Operator: And our next question is from the line of Rich Hilliker with Credit Suisse. Please go ahead.

Rich Hilliker: 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. 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 cry? Are they – are you pushing them with bundles? What does it look like? How much freedom do they have? Thanks.

Hardeep Gulati: Rich, yes, very fair question. So the core focus on international right now is the non-novel core products, SIS, the learning management systems, the enrollment, things where you need core 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. So these are the core products, which are the Phase I. And that’s where these partners are enabled, trained and that’s what the experience is actually most of the partner already have in some respects with working with the local school there.

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

Hardeep Gulati: 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 the 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 prioritized about 12 regions where we are establishing these different exclusive partnerships to kind of really go after, which actually opens up to almost $100 million plus of student TAM in just within those private schools and very focused strategies in these 12 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.

Rich Hilliker: Excellent. Thanks so much.

Hardeep Gulati: Thank you.

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

Brett Knoblauch: Hi, guys. Thanks for taking my question. I’ll be quick here. Just kind of want to touch base now that you guys have the six core cloud. Have you seen any efficiency gains on the go-to-market strategy with that?

Hardeep Gulati: Hi, Brett, so when you look at it, we started launching these cloud 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 of the clouds. 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 overage, educator recruitment cloud or a 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. So we are getting – we’re not trying to discourage any of our customers to buy individual products.

We’re still selling majority of that. But we are able to have them 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 that 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 cloud or they topped up 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 to start thinking about this in a 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 in terms of the new bookings.

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

Hardeep Gulati: 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 and we had not only a record new logo bookings, but also very exciting growth in our cross-sell. We are from a traction of our data-centric products and Unified Insights and Connected Intelligence. Also, as we mentioned, the SIS, which is a very strategic core part, 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 and innovation, we are really positioned well for the growth. We are excited about the opportunities that present us and look forward to executing on the strategies throughout 2023 and beyond. So thank you again.

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