PowerSchool Holdings, Inc. (NYSE:PWSC) Q4 2023 Earnings Call Transcript

PowerSchool Holdings, Inc. (NYSE:PWSC) Q4 2023 Earnings Call Transcript February 26, 2024

PowerSchool Holdings, Inc. misses on earnings expectations. Reported EPS is $0.17 EPS, expectations were $0.2. PowerSchool Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, greetings, and welcome to the PowerSchool Fourth Quarter 2023 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, 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 fourth quarter and full-year ended December 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 CEO, Hardeep Gulati; and President 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 for 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 and the GAAP financial information, is provided in the corresponding press release and results presentation which are both posted on PowerSchool’s Investor Relations website at investors.powerschool.com. A replay of this call will also be posted to the same website. With that, I’ll turn the call over to Hardeep.

Hardeep Gulati: Thank you, Shane, and thank you, everyone, for your time today. PowerSchool finished 2023 with another outstanding quarter of execution, innovation, and profitability. Once again, we delivered double-digit revenue growth that was within our guidance, while exceeding our guidance for adjusted EBITDA. For every quarter since our IPO, now 10th quarter in the row, we have met or exceeded the guidance we provided for both revenue and EBITDA. We crossed $700 million of annual recurring revenue as of December. And for the year, we grew our top line double digits while expanding our adjusted EBITDA margin by 210 basis points to 33.2%. And we continue to translate our success into cash through our durable financial model, reaching a record free cash flow margin in 2023.

Looking at the slide four, of the presentation, you will see our fourth quarter results. Total revenue grew 13%, and subscription and support revenue grew 16%. ARR increased 18% to $701 million. Adjusted EBITDA, of $59 million, was ahead of the high end of our guidance. At our Investor Day, in September, we laid out four key components of growth strategy; cross-selling and growing our large expanding customer base, continued advancement of our platform through innovations and acquisitions, increased our global reach, and investing in building personalized education solutions. This quarter exemplified how we executed across all four. Starting with cross-sell and new logo traction, we saw many customer wins in the fourth quarter that were driven by our differentiated and comprehensive platform of solutions.

And we are seeing continued momentum as we enter 2024. As summarized on slide seven, we saw several cross-sell deals in Q4. Chicago Public School, the third largest school district in the U.S. and user of several of our products, chose to add our professional development solution within our Educator Effectiveness Cloud to support their 20,000 teachers with effective career growth support. Wylie Independent School District, in Texas, expanded from their usage of Naviance by adding four of our solutions, assessments, insights, staff evaluation, and professional development. Similarly, the Atlantic City Board of Education, New Jersey, user of our student information system and enrollment solutions, added insights, behavior, assessment, and curriculum planning to bring their product count to six.

We also had a large multimillion dollar cross-sell expansion with a virtual school organization who uses our SIS that added our Schoology LMS, assessment, Naviance, ContentNav, and Connected Intelligence platform. In the quarter, we also continued our partnership with the Puerto Rico Department of Education by booking further services related to their territory-wide attendance tracking system, on top of our assist and enrollment solutions after our successful go-live last fall. Date-driven solutions that provide valuable insights into student, school, and district performance and operations continue to meet a large and growing market beat. In 2023, we saw a 50% increase in the number of deals for our data products, with the total annualized value of those deals increasing over 60% year-over-year.

In the fourth quarter, we saw this through dozens of customer wins, including cross-sales with Cherry Creek School District, in Colorado, and Toledo School District, in Ohio, who both selected Connected Intelligence. And finally, our statewide vendor-of-choice win with the Indiana Department of Education close just after the end of the year, in January. This is the largest win for our Special Programs product line in double-digit millions, which will enable the Indiana DOE and all of its school and district in the state with advanced special education case management, eligibility, and progress tracking, individual education plan development, and service reporting and documentation. Moving on to the slide six and our platform expansion successes in the quarter, in January, we acquired Allovue, an innovative, advanced budget management, planning, and analytics SaaS startup, specifically focused on the K-12 education market.

We are seeing this as a top-of-the-mind need for many districts as they focus on more effective and efficient use of their ongoing budget as the extra COVID-related federal stimulus funds wind down. We have partnered with Allovue over the last few years as a strategic add-on to our K-12 ERP systems. Allovue also allows us to expand our reach into the broader K-12 finance software market as it integrates with other ERP systems. We are excited to add the Allovue capabilities to the PowerSchool solutions and the analytics platform so we can provide even more comprehensive analytics that include financial planning, as well as enable districts to create more accountability and transparency by seeing the education improvement ROI of their budget investments.

Our international expansion initiative made further strides during the quarter, also shown on slide six, with a great international win with Maarif Education, in Saudi Arabia, which is a great case study on how PowerSchool can land and expand with our platform in international markets. Maarif already uses nine PowerSchool solutions for their international schools and, in the quarter, they added two of our recent innovations; Connected Intelligence and MyPowerSchool. Maarif also expanded the rollout of the PowerSchool platform to 13,000 additional students in their national schools, leveraging the localization framework and the right-to-left translations we have built for the Middle East region. We continue to expand our international reach in Q4 by signing four additional channel partners, all of which are strong technology resellers and integrators focused on the Latin America region, a strategic growth market for us given our highly successful nationwide Schoology rollout in Uruguay during the pandemic.

With these four, we finish 2023 with 14 new international channel partners, ahead of our goal of 12. Also during the quarter, we hired a general manager for our international efforts, who has a strong background in global enterprise sales and operations. Our focus through 2024 will be to onboard our resell partners, sign on new ones, continue expansion with the growing global customer base, and develop sales opportunities and pie as we build towards our goal of having an international business that contributes 10% of our revenue by 2028. Turning now to our innovation momentum, on slide seven, as we shared at our Investor Day, in September, one of the biggest growth opportunities which significantly expands our TAM to $100 billion is providing a personalized education for every student journey.

With the advancement of generative AI, we now have the ability to personalize education at scale, and provide conversational, adaptive, and tailored engagement for every one in the education ecosystem, teachers, administrators, parents, and students, all of whom contribute to the successful education outcome. There is a weakness in the generalized AI technologies and standalone supplemental AI tutors in that they don’t have the details of what the individual student needs are, the context of what’s happening in the classroom, and with the homework nor the access to the daily engagements a student has with all the personas. With us being the most comprehensive K-12 platform in the market, we at PowerSchool have solutions that process and understand all the key elements in education, including the student, classroom, school, teacher, and district operations.

And as the most pervasively deployed education platform in North America, we are interacting with all the personas in education millions of times per day. Combining these unique differentiator has resulted in our very exciting, recently launched comprehensive personalized AI platform for K-12 education, PowerBuddy. PowerBuddy is an AI assistant for everyone in education ecosystem, students, parents, teachers, district administrators, and even counselors. As the conversational AI tool that utilizes K-12 and district data, PowerBuddy changes every element of education engagement, and enables personalized and highly effective support for everyone. For students, PowerBuddy is a personalized digital helper and tutor that knows their curriculums, grades, homework, areas of improvement, learning styles, interests, and more.

For instructor, PowerBuddy is a teacher assistant that can help create lesson plans and assessments. Parents can leverage PowerBuddy to inquire about their child’s performance and receive personalized resources. And district administrators can use PowerBuddy as a virtual data analyst that can efficiently access district performance information by talking to their data. PowerBuddy is an AI that will be integrated to each product across our platform. So, it efficiently and seamlessly brings AI to every customer through the products they already use. On slide seven, you will see a link to a video that showcases PowerBuddy and how it will be used by our platform, various personas and use cases. To make it affordable for every district and enable phased adoption, we will be offering PowerBuddy for individual use cases and products like assessments, learning, insights, communication, content creation, college and career readiness, teacher coaching, and other use cases with the ultimate goal to launch PowerBuddy for personalized homework, that will be available to both districts and individual families to support their child.

We have already started monetizing our AI platform. PowerBuddy for assessment to create test questions and passages using generative AI has been purchased and adopted by districts representing over 50,000 students. And we already have a strong pipeline for future opportunities. Our recent launch of ContentNAV, which utilizes AI to provide a centralized, dynamic, and easy to explore repository of digital instruction content for all grades level and for a wide variety of PowerSchool districts and external sources, is in the market now with deployments with several districts with over 500,000 students and millions of dollars of opportunity in our pipeline. We are further enhancing that solution to leverage generative AI to help build original curriculum, content, class project ideas, explanatory text, and sample stories and passages.

We’re also seeing phenomenal interest in the beta test for other PowerBuddies, including PowerBuddy for learning, which is integrated in Schoology, and PowerBuddy for Insights. Many of these PowerBuddy solutions are scheduled for launch in the summer and the winter of this year. Our data as a service solution of connected intelligence is the foundation of the safe, secure, customizable, and effective usage of our AI. We are generating very strong sales and demand for our connected intelligence data lake platform for AI. K-12 organizations like Epic Charter and Challenger Schools are using Connected Intelligence Platform today to create custom AI models for different use cases. We’re launching a campaign to allow districts to get ready for AI with Connected Intelligence and PowerBuddy for custom AI, which allows customers to create their own chatbots with custom data sets, such as district handbooks, guides, and other resources for parents, communities, and internal staff.

We are seeing this as a pivotal moment in K-12 education and for PowerSchool. PowerBuddy has the potential to completely transform education globally, and how every persona engages and does their daily function in K-12. We are moving to an AI first innovation investment philosophy, leveraging personalization and conversational elements in all of our new innovations. Our platform of 20-plus solutions is unmatched in the industry and provides us a unique and large opportunity to integrate our powerful AI for K-12 education capabilities into each of our products to generate new streams of revenue. It creates many additional monetizable products that add $30 to $50 off TAM per student initially and a lot more as we move into providing integrated content and services to districts and families.

We have a significant competitive advantage to achieve this growth and further expand our overall differentiation and business model. All this customer, product expansion, and innovation momentum I shared sets PowerSchool up very well for 2024. We are confident of a durable financial model to drive double-digit revenue growth, consistent margin expansion, and free cash flow generation. We continue to be the leader in our category and a best-in-class vertical SaaS company with a clear path to a Rule of 50 profile. With that, let me pass the call over to Eric to cover the financial performance and guidance. Eric?

Eric Shander: Thank you, Hardeep. We had a great quarter as Hardeep outlined, and we exceeded almost all of our financial objectives, delivering profitability above guidance with revenue growth of 13%. Both revenue and adjusted EBITDA were significantly ahead of our initial guidance that we provided at the start of the year. This performance gives us confidence in our 2024 guidance of double-digit revenue growth and continued margin expansion. For the full-year 2023, our top line grew 11%, while our adjusted EBITDA margin expanded by 210 basis points to 33.2%. We achieved all of this while expanding our international presence, acquiring and successfully integrating SchoolMessenger and Neverskip and investing in game changing innovations that will help make personalized education a reality.

A summary of our results are shown on slide eight. Fourth quarter total revenue came in at $182 million up 13% year-over-year and in line with our guidance range that we provided on our last earnings call. Full-year 2023 revenue was $698 million representing a growth rate of 11% for the year. Fourth quarter subscription and support revenue grew 16% year-over-year and accounted for 90% of total revenue in the quarter. For the year, subscription and support revenue grew 10% and represented 86% of total revenue. Our services business generated revenue of $15 million in the fourth quarter, flat year-over-year. For the full-year, our services business grew 3% year-over-year. The moderation in services growth was expected and is due to us accelerating our implementation and driving more efficient deployment cycles, which deliver quicker value to our customers and ensure our attention over the long-term.

Revenue from license and other, which relates mainly to our third-party and license revenue was $3 million in Q4 and was down year-over-year due to higher licensing activity in the prior year. Full-year L&O revenue came in at $25 million representing a 48% increase over the same time period last year. This increase was due largely to upfront license fees from Los Angeles Unified School District and hardware revenue associated with our Puerto Rico Department of Education deal. We ended 2023 with an annual recurring revenue balance of $701 million, an increase over the prior year. The strong performance was driven by the contribution from SchoolMessenger, new logo ARR growth, which was over 50%, continued cross sell and upsell and our typical contracted price increases.

Our net revenue retention rate, or NRR came in at 106.7%, representing a sequential decline of 50 basis points from Q3. This decline was due to the timing of large bookings, specifically the Unified Insights win with the state of Alabama in Q4 of 2022, which rolled off of the trailing 12 months calculation and the movement of the Indiana Department of Education deal from Q4 into January. As we’ve discussed in prior quarters, large deals continue to be very strategic and important to us. In my operations capacity, given the variability that these large, complex arrangements can create, I’ve been working with our services team to accelerate our implementations, which improve the time to value for our customers and lead to continued cross sell opportunities as well as quicker revenue recognition.

Adjusted gross profit for the quarter came in at $129 million with a 70.8% margin, representing a 130 basis point year-over-year improvement. For the full-year, adjusted gross profit reached $491 million or 70.4% margin, representing a 230 basis point improvement over 2022. We continue to benefit from greater operational scale and continued process efficiency improvements. Looking at operating expenses, fourth quarter non-GAAP research and development expense came in at $24 million representing 13.2% of revenue compared with 13.8% last year. Including capitalized R&D expenses, the total invested in R&D was 18.6% of revenue compared with 18.9% in the prior year. On a full-year basis, non-GAAP R&D expense declined 3% to $87 million representing 12.5% of revenue compared with 14.4% in the prior year, an improvement of 180 basis points.

Including capitalized expenses, the total invested in R&D was 18.1% of revenue, a 280 basis point improvement over 2022. Non-GAAP SG&A expense increased 22% year-over-year in the fourth quarter to $45 million representing 24.9% of revenue, an increase of 190 basis points year-over-year, in line with our long-term financial framework. The increase was due largely to higher sales and marketing investments around international expansion and increased North America sales coverage across our expanded product portfolio. Non GAAP SG&A expense for the full-year 2023 increased 19% to $171 million. Our fourth quarter adjusted EBITDA increased 12% to $59 million representing a 32.6% margin and exceeded the high end of our guidance range by $1 million.

Full-year adjusted EBITDA was up 18% to $232 million, representing a 33.2% margin, which was 210 basis points over 2022 and 70 basis points higher than the original guidance we provided at the beginning of 2023. Non-GAAP net income in the fourth quarter was $0.17 per fully diluted share, compared with $0.27 per diluted share in the same time period of the prior year, largely due to higher interest expense and non-cash tax expenses. Full-year 2023 non-GAAP EPS was $0.82 compared with $0.85 we earned in 2022. Fourth quarter free cash flow was $32 million representing a margin of 17.7%. Full-year free cash flow grew 25% to $130 million reaching a margin of 18.6%, a 210 basis point year-over-year improvement and a record free cash flow margin for the company, driven by improved working capital and lower capitalized product development costs, which helped offset higher interest expenses.

Moving to the balance sheet, we ended the quarter with $39 million in cash and equivalents impacted by the acquisition of SchoolMessenger. Net debt leverage at the end of the year was 3.4x. We expect our net debt leverage to be in the 2.5x to 3.0x range by the end of 2024. This debt level provides us ample opportunity continue our strategy of acquiring strategic assets that are accretive to our financial profile and help us build an even stronger platform for our customers. As shown on slide nine, for the full-year 2024, we expect total revenue to be in the range of $786 million to $792 million with the midpoint representing a 13% year-over-year growth rate. This guidance assumes stronger S&S growth, the most strategic part of our revenue. License and other revenue will be returning to 2022 levels and our services revenue is expected to be growing in the single-digit range.

For the full-year 2024, adjusted EBITDA we expect to be between $267 million to $272 million representing a 34.2% margin at the midpoint. For the first quarter of 2024, we expect to deliver total revenue in the range of $183 million to $186 million representing a 16% year-over-year growth rate at the midpoint. For the first quarter, adjusted EBITDA, we expect a range of $56.5 million to $58.5 million representing a 31.2% margin at the midpoint. Just as a reminder, a lot of our in-person sales and marketing events occur in the first quarter that are intended to drive top line growth throughout the year. For modeling purposes, we expect full-year 2024 capital expenditures, including capitalized software of approximately $48 million to $52 million and share based compensation expense of approximately $80 million to $84 million.

Fully diluted shares by the end of the year are expected to be in the range of $203 million to $207 million. As we wrap up 2023, we’re excited about the business momentum heading into 2024 as it gives us confidence not only in our 2024 guidance, but our pathway to reaching $1 billion-plus in revenue by the end of 2026. This concludes our prepared remarks. Operator, will you please open up the line for Q&A?

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Q&A Session

Operator: Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Stephen Sheldon with William Blair. Please proceed with your questions.

Stephen Sheldon: Hey, thanks. Nice — really nice work here. Want to start on the AI initiatives, and just digging in a little bit there, how are the school districts you serve thinking about leveraging AI at this point? It seems like you guys can be growing out a lot of tools and capabilities, but are you sensing any hesitancy from customers, at least initially, about these initiatives? Is it hesitancy mixed with excitement? And I know a lot of your AI solutions are in the very early stages of a rollout, but what are you hearing from your school district customers about their comfort levels? And do you think it can take some time here to get some traction?

Hardeep Gulati: Sure. Hi, Stephen, great question. As you can imagine, there is a lot of interest on AI broadly in the market, and K-12 is not immune to that. In fact, we are seeing a lot of interest from K-12 districts about it. In fact, a survey showed that almost 60% to 70% of the districts are already dabbling with it, whether in certain schools, certain regions, or internal within the IT itself. And we are seeing the same interest actually from our customer base. In fact, we have a webinar which has almost had 3,000 attendees who are looking at how to get ready for AI. That includes training, but then adopting truth as well. What we are seeing, especially with the broader need, there is a risk districts are very concerned about, where if they try to experiment or they’re trying to rollout AI in limited capacity, how do they make sure that their data AI is protected and also their responses of getting it secure.

But one of the differentiation we are bringing is that we are allowing them to bring their AI to the data rather than taking their data to the AI. What I mean that is, with our data lake platform, with our AI tools, we’re actually allowing them to bring all the OpenAI and other LL models right within their firewall, right within their control, looking at their data to be able to have a — make sure that it still protects their privacy and security. So, that’s one advantage which districts are really excited about, and that’s why we’re seeing a lot of interest on our data lake, as well as the whole AI platform itself. Second, what we’re seeing, Stephen, is — a lot of interesting is that they want to rollout a one, holistic AI platform. You can imagine there’s a lot of interest on chatbots in multiple areas, from supplemental learning to — from college planning or other areas.

But the problem is that none of those actually have the full context of what’s going on in the classroom. So, rather than putting these multiple tools, they’re looking for us as a platform which can have the full context, and allows them to really roll it out in a comprehensive way. And the third which — the fact that we have such a strong presence of our products across the base, we’re able to embed AI into every element of our product, so they can actually interact with the same products now in a much better way, be able to have a conversational, personalized experience. And that really is driving a lot of interest, whether that’s AI within our Schoology, whether it’s in our assessment, or whether it’s in our parent portal or in MyPowerSchool, and as well as Naviance and other tools, so really exciting to see the traction.

Even though it’s early, we are already seeing customers who have bought it, and also tons of interest on our beta, that we do expect, within this year, we’re going to start seeing couple of million dollars of revenue around AI products, and almost doubling up from thereon.

Stephen Sheldon: Understood. Seems like, yes, you clearly have a very large opportunity there. As a follow-up, great to see the international channel partnership expansion, especially in Latin America, it seems like you have a lot of tips to the spear there now, and a good case study in Uruguay. So, how are you thinking about the potential to add to your — and I know you’ve been relying on channel partners mostly now, but the potential to add to your direct sales resources in Latin America, what would you want to see before making a bigger investment and direct go-to-market? And on the product side, is there much you need to do to have the product ready to cater to those markets?

Hardeep Gulati: Absolutely, fair question. So, when you look at it from our perspective, we want to make sure that we can expand international, but in a profitable way. We already saw great results on our last year effort. We almost grew our ARR by 50%. What’s also exciting is the channels we have established, enabling them, partnering with them so that they can actually help us create the broader distribution angle is what allows us to really scale that, but also in a proper way. But that said, to your point, we’re also looking at direct field investments in countries like India as well Middle East, where we’re already seeing good traction. We might expand that to other regions as we see those regions really driving the demand. But we do expect that this is going to be both a channel effort as well as direct markets where we will have a critical mass.

Stephen Sheldon: All right, fair. Thank you.

Hardeep Gulati: Thanks, Stephen.

Operator: Our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.

David Lustberg: Hey, thanks so much. This is David Lustberg on for Brent. I wanted to ask around the guidance that you guys gave. And is there any way that you guys can quantify or give some color around how much of the guidance, organic versus inorganic mostly pointed towards the acquisition of SchoolMessenger? Thanks.

Eric Shander: Yes, hey, David, it’s Eric. So, I think it’s important as you think about the guidance; we’re super excited around the full-year double-digit growth that we’re seeing, certainly on the revenue side. What I’d compare to my remarks, hopefully it’s helpful for everybody to understand, as you think about L&O kind of moderating back to the 2022 levels. So, as you all know, 2023, we had some big strategic items in there, and then certainly the services business being in the low single-digit range from a growth perspective. So, you can kind of back in kind of the revenue piece, which is very much in line with our double-digit growth. So, we’re super excited around how we finish the year, how we’re set up for 2024. And then obviously, as we mentioned back in our Investor Day, in September, we’re going to do all of this growth, but we’re going to do it with the mind of continuing to expand margins, which is why we’re offering up 100 basis points of expansion.

So, but I think both top line and bottom line should really see the momentum that we have been articulating. And then there is a good component of that continuing to come from the core business, which is very much intact, and continuing to drive a lot of the business.

David Lustberg: Got it. And then maybe as a follow-up, also [Adash] (ph) on international, obviously I think last year maybe could be best described as — as a ramp-up year with you guys adding a lot of partners. I guess as you think of this year, I know you guys look at international growth, but if you just think about the opportunity this year and how those channel partners that you got last year have ramped, would just be curious to get your views on how you guys are thinking about how international can look this year? And specifically, the timing of the ramp of new channel partners would be helpful? Thanks so much, guys.

Hardeep Gulati: Sure. So, David, two things. One, I guess just teeing off back from Eric’s point about it, just to make sure you also know this. I think, as Eric was talking about, reiterating from our Investor Day, we’ve talking about, even if you take SchoolMessenger out, we are expecting double-digit growth into the 2024 as — and what we saw in 2023 as well, factoring the whole software growth, as we shared about both the subscription as well that we had some large license deals. So, we are still feeing very strong on the core growth, even outside the acquisition. Now the fees, I guess, on the international, as I mentioned, we saw 50% growth in our ARR. We’re expecting the growth rate to continue in that — in fact, probably even accelerate as we look at both organic and inorganic part in the international.

The channel partnerships are definitely shaping up well. We have a lot of activity going on in pretty much every part of the region around it. Our goal would be — is to focus on not just large deals, but actually focus on how just we create more into international schools, IB schools, as well as the areas where we can start selling not just our core system, Schoology, but also bringing our data products. So, this is where we would — you would start seeing international just to — all to accelerate on that.

Operator: Our next question comes from the line of Rich Hilliker with UBS. Please proceed with your question.

Rich Hilliker: Hi, guys. Can you hear me okay?

Hardeep Gulati: Yes.

Eric Shander: Yes.

Rich Hilliker: Awesome. Thanks for taking my question, and for all the helpful color today. I was wondering to hit on SchoolMessenger once more. I was wondering if you could maybe disclose, or maybe you did and I missed it, the contribution to either revenue or ARR in Q4, because I saw that nice ARR growth number and I was wondering if you could tease that out a little bit more given we’re still early in that disclosure period?

Eric Shander: Yes. So, Rich, and I think, look, similar to all of the other acquisitions that we’ve made, we really — our strategy is, as soon as we acquire the strategic assets and capabilities, we integrate them into the platform rather immediately. So, for us to start breaking it apart and kind of looking at a piecemeal, that doesn’t — it’s not the way we go to that — way we go to market. And if you think about, just for us, it’s really the value of the platform that our customers get from us. So, last year, we had given some color around the — kind of think about the ARR in the, call it, the $40 million range, around that. That probably should be good enough to — for you guys to model through what the impact is. And then as we mentioned last year as well, we did make some investments, and we are making some investments into the SchoolMessenger platform as we’re integrating it in with MyPowerSchool.

So, and you saw a little bit of that last quarter. And then, obviously, as we get into this quarter, you’ll note that the margins were down a little bit. But again, that’s very much seasonal with what we expect because we do we do expect some continued investments in the SchoolMessenger platform in Q1 as well as some of our on-site and sales and marketing events occurring in the first quarter. But again I think hopefully that’s enough color to give you guys some ways of modeling it.

Hardeep Gulati: Yes. And Rich, just to give you some other data points to Eric’s point, we almost did 100-plus transaction just on SchoolMessenger in Q4, but a lot of them were bundled with either our SIS or with MyPowerSchool or with our attendance intervention. So, that’s why we are seeing a lot of good, exciting stuff. Now we are even more excited about where the second-half is. We are launching that as fully part of MyPowerSchool with two-way chat all integrated along with PowerBuddy to actually personalize the whole interactions itself, that’s where we think that’s going to completely drive an overall consolidated growth of that entire communication platform.

Rich Hilliker: Got it. That’s really helpful. Thanks for that added color there. I also wanted to just quickly touch on the bundle opportunity, the persona-based cloud bundles. I think when we’ve spoken in the past, you’d mentioned that you’ve been sort of using this one more product, Rally Cry, right, as you went to market and customers were increasingly aware of these bundles. So, I’m wondering, are you seeing traction yet, have you tweaked anything in the sales organization or incentives in any way as we think about those potentially contributing more and more in ’24 and beyond? Thanks.

Hardeep Gulati: Great question. As you know, we almost have now 20-plus products, right, best-in-class products satisfying a lot of different mission critical elements of the school district. But one of the things we were trying to figure out is that rather than customer having to think about one-plus product, how do we go after personas and allow them to buy multiple products about them to kind of fully have automation across all their critical elements. So, we launched these Six Clouds plus of a platform components like data as well as comms and AI. And what we’re seeing is now pretty much every element of our GTM, from our collateral to our go-to-market, has been now aligned to these clouds. So, you would actually have student cloud for going with the student services, personalized learning cloud for the instruction.

You’ve got the CCLR for the guidance counselors or MTSS for the whole student success cloud for the accountability, and similarly educator effectiveness and finance cloud. So, what has allowed us is to now is really cross-sell more effectively within clouds, make it simpler for our customers to buy products so they can buy more additional products together, as well as also being able to have better relationship with each of the personas. And that strategy is working well. So, in fact, pretty much now, every element of our sales actually leverages the cloud go-to-market.

Eric Shander: Yes, I think Rich, the one thing I would say, just like Hardeep said, if you think about the cloud bundles, it’s just really kind of focused the team in terms of the way they go-to-market to each persona, right? So it’s a much more effective and efficient go-to-market motion.

Rich Hilliker: Got it. Okay. Thanks.

Operator: Our next question comes from the line of Saket Kalia with Barclays. Please receive your question.

Saket Kalia: Okay, great. Hey guys, thanks for taking my questions here. I appreciate it.

Hardeep Gulati: Thanks.

Saket Kalia: Hey, Hardeep. May be just to start with you, congrats on the state-level contract with Indiana, you’ve actually had several state-level deals or wins like this in recent quarters. And so, maybe a quick question there is, what product families are these deals sort of gravitating towards? And just to clarify, that’s a deal that will contribute to Q1 ARR. That actually did not help here in Q4. Is that right?

Hardeep Gulati: Yes, that is right. That did not help Q4. In fact, I think as we’ve talked about, some of the services elements, so it also had a little bit of impact on our Q4. But even though we have talked about these strategic deals have the phenomenal opportunity here as you mentioned, if you look at the nine or 10 quarters, we’ve got significant state opportunities pretty much in every quarter. And even our pipeline actually looks pretty exciting. You actually, from a perspective, we see this as a broad range. This was a specialized deal at Florida, what we did last quarter was around the talent recruitment. We’ve seen a lot of analytics interest. We’ve also done CIS opportunity in Puerto Rico. We do see these large deals to be very strategic because not only it proves that we are best-in-class, allows us to replicate that not just to the state, but large districts and other value.

In fact, one of our big focuses to — as we have focused on a lot of strategic deals over the last year, we’re going to start really gearing up our sales expansion so we can start bringing that same capabilities to enterprise and inside. In fact, just in the last 12 months, we have done almost close to three deals which are 10 million-plus. It just shows you that kind of traction we have not seen before. So, these are very exciting opportunities, but they do have, to your point, some revenue and the implications which move it on, but ARR and JNI is going to come in Q1.

Saket Kalia: Got it, got it. That’s super helpful. Eric, maybe for you, I was wondering if we could just dig a little bit deeper into the services delivery aspect that you touched on in your prepared remarks. I mean, it sounds like you’re delivering just faster time to value for the customer, And I think that’s coming through in sort of the services revenue guide for next year. Maybe the question is what’s driving maybe that new approach with services, and how do you think about that services business kind of longer term? Does that make sense?

Eric Shander: It does. It does. So, I think many of you know, I’ve actually taken responsibility for the services business for about a year now. One of the things that we did was we actually restructured a lot of the work packages and the teams that were doing the work. So, what you’re seeing is increased productivity, you’re seeing a lot more of the same type activities being done by groups of people versus spread across many teams. So, the result of that is actually quicker operational velocity, right? It’s getting the customer implemented quicker and certainly time to value as well as it’s enabling us to actually recognize the revenue quicker. The implication of that, right, is obviously we’re getting much more efficient, but I would also encourage you to take a look at our margins.

Our margins are up in ’23 versus ’22, and a lot of that really has to do with the efficiency of how we’ve reorganized a lot of these teams. So, I’m super proud of the work that the team’s doing, and look, they’re going to continue to be very strategic to our customers because they are what enables our customers to get the most value out of the technology. So, it’s going to continue to be a big part of the value proposition. And we’re going to continue to focus on how fast we can get a lot of the products in. And I think a good example of this was when we did Puerto Rico — I mean, we did one of the largest SIS implementation across 270-plus thousand students in like six-and-a-half months, which has never been done before. And the team did it with a huge amount of quality in there too.

So, stay tuned. So, yes, you’ll see less you won’t see the revenue growth as high, but again, you’ll see continued strong margins as well as we’ll get the revenue recognition quicker. And that obviously helps on the subscription side as well.

Saket Kalia: Seems like a nice trade-off. Thanks very much. I appreciate it.

Eric Shander: Yes.

Hardeep Gulati: Thanks, Saket.

Operator: Okay. Our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.

Brian Peterson: Hi, gentlemen. Thanks for taking the question. So, I just wanted to hit on the CIS market a little bit. I know that’s a big part of the product portfolio. I’d love to understand maybe how that performed through 2023, and how does the pipeline of CIS deals look as we headed to 2024?

Hardeep Gulati: Sure, Brian, again, I think, as you said, CIS is very strategic, right? We have not only — it’s biggest part of our business, it’s also the most strategic when it comes to school district, allows us to cross-sell, especially as we are talking about the AI platform, the data platform, having those integration definitely gives us even a bigger leadership opportunity to be able to do that. Since actually, when you look at the student cloud, it actually grew double-digit for us in 2023, and we are expecting that to continue to do that in 2024 as well. The pipeline looks pretty healthy both in the U.S. as well as international.

Brian Peterson: That’s great to hear. I just maybe have a separate question on the families’ monetization. I know you have an embedded opportunity given your presence in all the school districts. What kind of sales and marketing effort are you guys thinking about potentially making as you kind of broaden the monetization opportunity, any perspective there? Thanks, guys.

Hardeep Gulati: Excellent question, Brian. So, as we talked about with the PowerBuddy, right? so imagine PowerBuddy having the ability in school districts to be able to roll out for parent engagement, for student engagement and driving any help they need on homework, for teachers to be able to create lesson plans, for counselors and students to be able to understand better on the career and college path. It’s a very pervasive AI system, which allows us to not only support the school districts, but now take that one level right, within the family’s engagement itself, and providing families with additional support that they are interested in. So, there is a strong opportunity for us to even commercialize that into a whole B2C with the families.

Our first focus is again on the districts. That’s where, as we talked about, PowerBuddy is almost adding up close to a $2 billion of TAM just within our base. But as we take it to the B2C opportunity and also being able to think about us like a Netflix of education, where we can provide the right content and services and tools right within our AI system to the families and allows us to kind of go after even $100 to $200 per student TAM in a consumer world. So, that is what really gets us assigned to almost $100 billion TAM.

Brian Peterson: Good to hear. Thanks, Hardeep.

Hardeep Gulati: Thank you.

Operator: Our next question comes from the line of Ryan MacDonald with Needham & Company. Please proceed with your question.

Ryan MacDonald: Thanks for taking my questions. Hardeep, may be first for you. You talked about in your prepared remarks about the AI and K-12 creating this incremental $30 to $50 of TAM per student. Can you talk about today what’s — how much of that $30 to $50 are you going to market with today in terms of driving incremental sales? And then how should we think about what part of the budget that incremental $30 to $50 of TAM per student comes from districts today? Is it sort of new pockets of budget potentially? Or what would you, I guess be replacing to sort of unlock this incremental opportunity over time? Thanks.

Hardeep Gulati: Sure. When you look at from a perspective, the products we’ve already launched, as I shared in my prepared remarks, was like our data lake with the AI platform, our property for assessment. So, your teachers can create quizzes and everything as well as our content map, which we are further enhancing with the ability to even create curriculum and additional content. So, think about that could be somewhere in about range of $8 to $10 is what we are already monetizing and selling to our customers now. By end of this year, we expect this to almost grow to $30 to $50, depending upon the size of the volume of the contracts, the number of students. So, we are trying to monetize all the elements. Now the reason we are trying to do this in a chunk is that even though it’s the same platform, it has the full context of the entire student.

But we are aligning districts to be able to adopt these things in a chunk. So, that way, they don’t feel a big, you’re having to have a big secure a big budget. Compare that to a Conmigo or others where they might have to spend $30, $50 right to be able to take help on that. So, that’s kind of our differentiation that we can easily embed them into the tools they are already using, adopt it in chunks, but still have the benefit of the full platform. And from a budget perspective, we see this both within the IT budget because they’re already providing data elements and everything to enable the different elements, but more so from the fact that this helps take all the investments they are doing on tutoring, on content, on interventions, and make it more surgical so they can actually reach more students and help them on the need, what they have, as well as being able to engage with parents and support teachers better.

Ryan MacDonald: Super, helpful color there. Maybe just piggybacking off of that, you mentioned sort of the tutoring opportunity inherent with it. As you look at going to market and sort of in the early days this year, is there an ability to access some of the remaining pools of the ESSER funding with maybe some of the PowerBuddy applications or use cases this year to maybe pull in some of that sort of last or final spend before it needs to be allocated? And then, just on ESSER funding generally, I know it doesn’t obviously impact the business directly too much, but are you seeing any early days of changes in prioritization within the districts and schools for the upcoming selling season, given the fact that they know that they need to sort of prioritize and allocate that pool of spend first before maybe paying closer attention to sort of the core budget? Thanks.

Hardeep Gulati: Yes. I think there’s a mix of everything what you’re saying. But as from our perspective, that our solutions are basically recurring subscription based. So, they have to secure the dollars for them from their normal budget, right? They typically don’t use the ESSER, but with that said, as we have said, sometimes if on an implementation, they might use a one-time element. So, we’re not seeing that to be any major change in our buying patterns. We do see that there is a behavior change within districts around what, they need to spend on from ESSER perspective, those elements to be prioritized and other. You’re absolutely right. Some of the pieces we are selling on our data and PowerBuddy does allow us to be more — allow them to spend these dollars more surgically.

So, from that perspective, we do see a role to play in and helping these districts spend their asset dollar better. And especially with Allovue acquisition, we are also allowing them to manage their ongoing budgets better and be able to tie that to the ROI as well. So, that’s why we do help these districts on that budgeting and planning.

Ryan MacDonald: Thanks again for the color.

Operator: Our next question comes from the line of Koji Ikeda with Bank of America. Please proceed with your question.

Koji Ikeda: Yes, hey guys. Thanks so much for taking the questions. I wanted to ask you a question. Kind of in the commentary, in the prepared remarks, you talked about consistency in the results of the IPO, meeting and beating your guide. And I do appreciate that consistency, but really thinking more about the beat side on the revenue. It seems at times deal sizes or deal cycles and NRR can be volatile, which can put a damper on upside potential. Just thinking about the EdTech vertical, I was under the assumption that deal cycles could be a bit more predictable and seasonal within this category. But maybe thinking about your expanding product offerings, larger deal sizes and going more international, it should require us to think about the predictability a little bit differently. So, can you help us understand some of the puts and takes there, please?

Eric Shander: Yes, so Koji, it is Eric. So, I think and we’ve had several large deals, whether it’s LAUSD, whether it’s Puerto Rico and now Indiana as an example, right? One of the things we’ve consistently said is what we’re not going to do is we’re not going to try to artificially time a deal, and just to get it into a particular quarter, right, because a lot of times when you do that, it means you’re going to be doing some sort of natural pricing and discounting, etcetera. So, these deals are large. They’re strategic, and when we’ve got line of sight to a large deal, right, it’s just a matter of sometimes there’s a lot of processes on the customer side, especially when you’re talking about some of these state deals. They can have up to 30 different approvals required there, a lot of that which is out of our hands in terms of the timing of it.

Indiana is a perfect one, right? I mean, we were very optimistic that it was going to close in Q4, but then as you kind of see as it progresses through the approval cycle, sometimes the approvals take a little bit longer than anticipated. We knew we had the deal. It’s just a matter of timing. So, what I would just say is, as we’ve said in the past, really kind of focus from our standpoint on the full-year and what we’re committing to from a full-year perspective. And look when there is deal variability, we’re obviously going to articulate it and articulate the impact to it. I think it’s also important to kind of think about, as you think around something like Indiana, the impact of that had that closed in Q4, right, our net revenue retention would have been 100 basis points higher than where it ended up being.

So, it would have shown a 50 basis point sequential improvement versus going down by 50 basis points. So, again, it just kind of gives you the magnitude that it will have on the metrics and what Hardeep and I have committed to is being very transparent around the some of the ins and outs of these deals. But I mean again we don’t want to get into a spot where we’re just trying to force fit a deal into a particular quarter. It’s not good for the business in terms of trying to do that from a discounting standpoint.

Koji Ikeda: Got it, Eric. That’s super helpful. And just one follow-up here, 14 channel partners to finish the year ahead of the goal of 12. Is 14 enough to hit your 2024 revenue targets or should we think about 14 expanding to a certain level to reach the revenue targets? And then there is — is there some way to think about maybe a stretch goal for partners or the number of partners that could be available for PowerSchool to partner with over the next several years?

Eric Shander: It’s a fair question, Koji. And we’re not putting an artificial number to it. So, it’s more actually driven by how good of a coverage in the markets where we have already product solutions, in the target and do they have the right access and ability to be able to sell that. So, it’s more about coverage than the number. There will be more partners absolutely, but at the same time, it’s also the quality of the partners. We are not going to the approach of let’s have 100, 200 partners and then see if anybody sells. We are investing these partners. We are driving them to have the growth. And we believe that we will — we can continue to providing the guidance as we’ve given it in fact this should become a material business in the next few years.

Koji Ikeda: Got it. Thank you so much.

Eric Shander: Thanks, Koji.

Operator: Our next question comes from the line of Joe Vruwink with Robert W. Baird. Please proceed with your question.

Joe Vruwink: Great. Hi, everyone. Thanks for taking my questions. Maybe just one clarification to start and it’s on the core organic performance and subscription and support and something I think Hardeep you actually mentioned at a prior answer. So, just to be clear, in FY ’24 and the guidance you’ve provided, that does entail organic growth in the double-digits and that rate of growth in 2024 is actually going to be stronger than where FY ’23 finished. Is that all an accurate statement?

Hardeep Gulati: Yes. It’s absolutely accurate. And Joe, the thing that I think is also important is as we’ve kind of talked about LAUSD being a big strategic deal, right? If you were to look at the subscription and support and then also kind of account for what we’re calling our strategic software activity, that being a very strategic software transaction, we were also in the low double-digit growth for 2023. So, yes, absolutely, and you see that pick up even a little bit more, as we get into 2024.

Joe Vruwink: Okay. That’s great. Thank you. This next question is maybe going to be guilty of apples and oranges analysis, but I’ll give it a try. So, at your Investor Day, I think the comment was made that AI products in terms of the revenue potential to PowerSchool, that could approach maybe a hundred million or so in the midterm horizon. Today, you’re talking about a $2 billion TAM associated with these products. Obviously, when I think about your product suites, they operate at very high market share, much higher than the simple math here would be, maybe a 5% share of the TAM as it’s being defined. I guess, what’s your reaction to that analysis? And are you maybe just being pragmatic, and you don’t want to get ahead of yourself because it is super early? Or is there some embedded observation about maybe the uptake of AI products and the K-12 setting you’re trying to factor in?

Hardeep Gulati: Yes, I think you’re right. We are trying to be pragmatic, make sure that we are able to get the early — what we’re seeing early interest, don’t let it kind of get us ahead of ourself. We do want to kind of launch all these PowerBuddies, being able to start showing the value, which we believe is tremendous. As I mentioned, we’re prepared marks, that in K-12, especially think about student time, teacher’s time, principal times, parents’ time, it’s so valuable. In these AI tools, the conversational and personalized element, allowing them to engage proactively with the right persona changes everything in education of how these products are built, how all of our products are integrated and how they are actually communicating.

And that’s why you see such a phenomenal big opportunity here and our district see this, our persona see it, and we do expect this to be a big. This is the whole reason why we are, if you think about from a profitability compared to our competitors, we’ve been investing significantly in R&D, almost with our capitalized R&D to almost $40 million to $50 million. And that has been brought around the data and AI platform, which allows us to really invest in kind of transformation element in personalization that we have been counting on. And we now see that actually start getting real and being able to start monetizing that.

Joe Vruwink: That’s great. Thank you very much.

Operator: Our last question comes from the line of Gabriela Borges with Goldman Sachs. Please proceed with your question.

Callie Valenti: Hi, this is Callie Valenti on for Gabriela. First one from me is I wanted to follow up on what you said before, and the idea of being the Netflix of education. If we think about the content side of that, how do you think about partnering with versus acquiring an asset potentially on that content side of things?

Hardeep Gulati: Hi, Callie. You’re absolutely right. It’s both from a just kind of think about a Netflix model or a Prime or a HBO model. It’s both about having a partnership with a lot of strategic content providers, being able to provide the right content and services within the context. So, imagine based on a kid’s need, you’re providing the right content which has the most efficacy to support that child, as well as being able to provide services like tutoring targeted to that child’s need, because we have the system of engagement with them, right? We have the intelligence and context. So, this is both partnership as well as in some cases, acquisitions, which will allow us to kind of have those more targeted content as well.

Callie Valenti: That makes sense. Thank you. And second one for me is you kind of called out a very impressive new logo, like ARR growth number. I’m curious, like what products are you seeing drive new logo growth the most? Is that just SIS or are you seeing some of the data products via CommonLand? And then also just any trends you would call out in new logos in international markets versus in the core North America market?

Hardeep Gulati: Pretty balanced in terms of most of our products. I think the same products we’ve talked about, which are seeing very good growth, data products, of course, the student — we’re selling data products even when they’re not our customers. We’re also seeing, again, student cloud to be continuous to do very well. Talent products are being doing exceptionally well. And even things like our attendance intervention and all that is actually creating new logo opportunities. And then, it’s very reflective of the market share, but definitely [Adash] (ph) will be a little higher on the new logos as well.

Callie Valenti: Okay. Thank you.

Hardeep Gulati: Great. Thanks, Callie.

Operator: That concludes our question-and-answer session. I’d like to hand it back to Hardeep Gulati for closing remarks.

Hardeep Gulati: Thank you, everyone. I appreciate everybody staying for this earnings call. As Eric and I shared, this has been a very exciting quarter as well as an exciting year. Not only we record double-digit growth, we are also guiding to a double-digit growth, which just shows you the robustness of this business model as well as our backbone. And all the differentiations in terms of being the most comprehensive platform, both in terms of being able to sell to different needs of the customer, to be able to have the diversified platform, so it provides us stability, being able to secure larger deals as well as being able to use our innovation to continue performing with the double-digit growth, both within U.S. as well as internationally is what’s exciting about our business. And we appreciate everybody’s support, and looking forward to an exciting 2024. Thank you, everyone.

Operator: Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.