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spk01: Good afternoon and evening everyone and welcome to power school second quarter 2022 earnings call. As a reminder today's call is being recorded and your participation implies consent to such recording. At this time all participants are on a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. With that, I would like to turn the call over to Shane Harrison, Senior Vice President of Investor Relations. Please go ahead.
spk11: Thank you, operator. Thank you for joining us for PowerSchool's earnings conference call for the second quarter ended June 30th, 2022. 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 CFO Eric Shander. Before we get started, I'd like to emphasize that this call, including the Q&A portion, may include forward-looking statements related to the expected future results for our company and 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 Relations website at investors.powerschool.com. A replay of this call will also be posted to the same website.
spk04: Let me now turn the call over to Hardik. Thank you, Shane, and thank you, everyone, for joining us this afternoon. PowerSchool's second quarter was a resounding success that showcased the acceleration of the momentum we have been building. It was a record-setting quarter for our cross-sell strategy, and we continue to see growth in our customer base with new logo bins. Our financial performance exceeded our expectations, and we expect this strong momentum to continue for the rest of the year, as reflected in our increased guidance. Our K-12 target market continues to see strong tailwinds, including the ongoing secular shift of digital transformation in education and large stable funding sources that provide insulation from external economic factors. Our continued growth and momentum are testaments to both the strong target market and the value customers see when expanding their footprint of our unified platform. We are excited by the success we saw in Q2. And as I reflect on the results, three key themes come to mind. First, we saw financial momentum in expanding margins and strong growth. Second, we have great customer momentum with our strongest ever cross-sell ARR quarter. And lastly, we continued our platform momentum by capitalizing on the opportunities to further expand our comprehensive product suite. I'll begin on slide four with the financial momentum we saw in Q2. We reached total revenue of $158 million and subscription and support revenue of $135 million, which grew 11% year over year. Profitability also improved on a sequential basis, resulting in adjusted EBITDA of $49 million representing a margin of 31%, the highest margin we have achieved in a full quarter since our IPO. ARR increased 10% year-over-year and 4% sequentially. We continue to deliver a compelling combination of high visibility growth with strong profit margins. On slide five, you will see our tremendous customer momentum in the quarter. we'd reach our highest ever cross-cell ARR in a quarter, even higher than the levels we saw at the onset of COVID when demand for classroom technology spiked. This growth was driven by success across the product portfolio. For example, one of the largest K-12 districts in Canada, Peel District School Board, with 151,000 students in Ontario, is an existing customer that chose to expand with us by adding six additional products, including our student information system. Another good example of a customer recognizing the value of our platform is Clarksville Montgomery County School System in Tennessee. Already a customer of our SIS, Talent, Assessment, and Naviance products, They replaced a competing classroom LMS with Schoology and also added our new behavior support solution to take advantage of the full integrated suite. On the customer expansion front, we had another great quarter with over 20% year-over-year growth in new logo wins. This helped increase our customer base to over 15,000 as we increasingly see school districts Embrace our integrated platform of technologies that drive operational efficiencies, advanced teacher and student success, and provide powerful data insights to administrators, teachers, and families. We are seeing large new customers like Evansville-Wenderburg School Corporation in Indiana, who bought nine products, including SIS, Talent, and Naviance, for the 21,000 students. Additionally, our growing international team had another large win with the new customer in Saudi Arabia, Marif Education, who purchased our comprehensive platform, including our SIS administration and full unified classroom suite. A key reason behind the decision was that PowerSkill is the only provider, even internationally, bringing all these best-in-class capabilities in one suite. This customer success shows in the sequential growth of our ARR and NRR. The ARR growth of 10% year-over-year and 4% sequentially was the best organic sequential growth we have seen since the COVID-driven mid-2020 timeframe. Our improvement in cross-selling combined with strong customer retention grew over NRR 207.3%, a 60 basis point improvement from Q1 of this year. As we enter the second half, we see a significantly larger pipeline of opportunities that we have ever seen, including some large deals. With a strong funding environment boosted by SR stimulus funding, Districts are accelerating their digital transformation plans in operations, talent management, and classroom, and getting better insights in to help address learning gaps for better-engaged students and empowering teachers. As you will see in slide six, since the end of Q1, we have continued the expansion of our industry-leading unified platform by introducing new organic products and completing a highly strategic tuck-in acquisition. to help districts solve for their ever evolving challenges. Last month at the annual ISTE or International Society for Technology and Education Conference, we introduced an innovative new product that offers multi-tiered system of support known as MTSS to boost student success and support educators. MTSS connects all the data to create actionable whole child view and align personalized intervention plans across all levels and types of support required for students. We are seeing great early traction with this product, which was built organically on top of our unified insights analytics engine that continues to see strong demand and has become a clear market leader. In Q2, we secured a multimillion dollar statewide contract from the Maryland Department of Education for unified insights that will benefit eight hundred and fifty thousand students with rich analytics across the state. We are continuing to further differentiate our analytics offering by launching last week at our Council of Education Innovation Conference of a new connected intelligence solution powered by Snowflake, the first fully managed data as a service solution for K-12 schools. Having the ability to unify all data under one secure, comprehensive platform district and education agencies will be able to connect data from early childhood to adulthood as well as internal and external data to position all students for lifelong success and positive social and economic futures. We further invested in our Naviance College Career Life Readiness Solution with the acquisition of HeadED2, a small but very complimentary tuck-in acquisition that expands our CCLR capabilities for students of all ages, including elementary schools. This solution also supports state-level CCLR initiatives, providing state-specific career, military, and technical education exploration and pathway planning portals for all 50 states, and initial statewide contracts with California, Nevada, and Pennsylvania. This customer and platform expansion has resulted in record-breaking profitability and success in Q2, helping us exceed our financial guidance for the fourth consecutive quarter and setting us up well for a strong second half. In fact, July marked the one year anniversary of the PowerSchool IPO. Going public was a major step in PowerSchool journey and supports of a near and long term growth opportunity to redefine how the world educates K through 12 students. I would like to take the opportunity to summarize our progress on the four key unique differentiators we highlighted during our IPO. On slide seven, I'll start with our unmatched unified platform. Since the IPO, we have expanded the platform from 14 to 19 products, a continued progression towards our personalized learning vision. Our innovation engine and investment strategies in complementary solutions of behavior support, unified communication, curriculum management, MTSS, and connected intelligence have further strengthened our differentiation and accelerated the adoption of our platform to address the holistic needs for districts to drive automation, efficiency, and personalization. Our second key differentiator is our scale customer base. We have amassed 15,000 customers, having added nearly 3,000 since the IPO. through effective go-to-market operations and high-return technology investments. Tremendous market opportunity is still ahead of us, particularly with 1.2 billion K-12 students that live outside of North America. We are beginning to build capacity with feet on the ground and strategic channel partnerships outside of the U.S., and we'll be accelerating those investments further over the next six to 12 months. We already are seeing strong early successes in Middle East, India, Southeast Asia, and Latin American markets. For example, a Q2 channel partner in India selected Schoology with plans for deployment across 250 schools representing 160,000 new students in India by mid next year. Our business model is our third key differentiator. The Models Foundation is entrenched with deep enterprise-level relationships with districts and education agencies. We are providing mission-critical and efficiency-enabling solutions that are core to our customers' operations, instruction, and supporting their students and educators. Cross-selling to our existing customer is central talent to our business model. With over 15,000 customers utilizing on average only two of our products, we have a unique and sizable runway for cross-selling. In fact, since the IPO, our cross-sell strategy resulted in the number of multi-product customers growing nearly 30%, a great example of how we can dive deeper into our customers' digital transformation needs. And lastly, on the differentiators, our financial profile is durable and has a long history of profitability and cash generation. This profile is built on a high mix of predictable recurring revenue coupled with strong margins and operating leverage. We have expanded our profitability since the IPO with our adjusted EBITDA growing 22% and adjusted EBITDA margins gaining over 400 basis points. Sustained execution around these four differentiator has been a cornerstone of our success. The strength of our sticky, and resilient business model as well as our solid financial profile especially in uncertain economic environment such as we see today is enviable and we expect heightened investments in mission critical cloud solutions and data insights as school system modernize creating a tailwind for this business I am more excited than ever about the various growth opportunities ahead of us and look forward to the coming quarters to showcase our continued momentum. Let me pass the call over to Eric to cover our future financials. Eric? Thank you, Hardeep.
spk10: We delivered a great second quarter, continuing the business momentum from the first quarter. Our teams continue to execute on the strategy, demonstrating the power of our unified platform through our cross-sell momentum, as well as adding many new customers. Our focus remained on investing in and delivering the innovation that our customers value and expect from PowerSchool. The business is performing very well from a financial perspective. So now, let me get into the details of the quarter on page eight. We ended the quarter with total revenue of $157.6 million, exceeding the high end of our guidance range as we saw balanced growth across the product portfolio. Subscription and support revenue, which is our most strategic recurring revenue stream, continued to grow at a double-digit rate coming in at $135 million for the quarter, representing an 11% increase over the same time period last year, and was 85.7% of total revenue for the quarter. Our services business continued to execute well, generating $19.1 million of revenue in the quarter, which was 19% higher than the same time period last year, as we experienced continued demand from our customers for our services and training to deploy and adopt our mission-critical solutions. Similar to the trend we saw in the first quarter, we had more onsite engagements, resulting in an accelerated closure rate for several projects. Our last and least strategic revenue stream is our license and other revenue, which came in at $3.5 million for the quarter, representing 2.2% of total revenue for the quarter and was down 54% from the same time period last year. This decline was primarily driven by a few products within the Naviance portfolio, which we had determined should have been recognized as point-in-time revenue versus their historical ratable treatment prior to us acquiring them. This contributed to an approximate $3.8 million one-time benefit to L&O revenue in the second quarter of 2021. Normalizing for this adjustment would have resulted in L&O revenue being relatively flat year-over-year. As I've mentioned before, this is and will continue to be a small and variable component of our revenue streams. We finished the second quarter with an annual recurring revenue balance of $580.3 million, representing a 10% increase over the same time period last year. As a reminder of our business seasonality, the second quarter is typically the strongest quarter due to the nature of school districts' budgets and buying patterns. Our cross-sell momentum continued as demonstrated by the number of customers that use four or more of our 19 products increasing from 1,880 at the end of 2021 to over 2,200 at the end of this quarter, representing more than 50% of our annual recurring revenue. Our net revenue retention, or NRR, came in at 107.3%, representing a 60 basis point sequential quarterly increase. The positive trending of this metric highlights our cross-sell as well as the retention and stability of the mission-critical solutions that we're providing to our customers. As a reminder of our business seasonality, a significant portion of our renewals occur in the third quarter. So while we expect this metric to continue to trend favorably for the year, the level of increase for the third quarter may moderate. Adjusted gross profit for the quarter came in at $107.2 million with a 68.1% margin representing a 200 basis point sequential quarterly increase. and a slight decline of 40 basis points from the same period last year. This year-over-year decline was driven primarily by the mix of revenue components, whereby last year we had a higher proportion of our non-strategic license and other revenue, which carries a higher gross profit contribution. Now turning to operating expenses. In the second quarter, our adjusted research and development expense came in at $22.2 million, representing 14.1% of revenue which compares to 14.7% in the same period last year. Including capitalized R&D expenses, our total invested in R&D was 21.7% of revenue, highlighting the investments we are making to deliver market differentiating innovations. As Hardeep mentioned earlier, we've announced our organic development projects on Connected Intelligence and Unified Insights MTSS. which aligns with our continued focus on delivering towards our long-term personalized learning strategy. Adjusted SG&A expense in the second quarter was $36.8 million, representing 23.3% of revenue, which compares to 19.5% in the same time period last year, which is related primarily to the various public company costs that we have taken on since our IPO. Second quarter adjusted EBITDA was $48.7 million, or 30.9% margin, exceeding the high end of our guidance range for the quarter. The second quarter margin was outstanding and reflects the continued focus we have on driving both top line growth as well as profitability. As I've mentioned in the past, we will drive operational leverage within the business as well as continue to invest in our innovation engine and go-to-market teams to achieve our long-term financial objectives. While we do not guide to it, as a reference, non-GAAP net income was 22 cents per fully diluted share. Now moving to the balance sheet. We ended the quarter with $15.4 million in cash and equivalents, reflecting the seasonality of our business. As a reminder, a substantial portion of our customers operate on the July fiscal year. Therefore, we typically see the second quarter as a period of elevated new and cross-sell activity combined with lower collections on our annual invoicing in the quarter, while the third quarter represents a higher renewal period and an increased level of cash collections. Given this seasonality, we drew an additional $40 million from our revolving credit facility during the quarter, which we have already repaid, and we expect to pay down the remaining $30 million balance of the revolver by the end of the third quarter. The result of this cash and revolver activity was a .3 times increase to our net leverage ratio from the end of the first quarter. This is expected due to our business seasonality, and the second quarter is the high point for this metric. We remain well ahead of our pre-IPO delevering plan, and given the stability of the K-12 education funding environment, We are confident in our ability to service this debt over the long term. Non-GAAP free cash flow was a negative $28.2 million for the quarter, driven by our seasonality of cash collections. Also, as interest rates continued to increase, we had an approximate $1.8 million impact to cash for interest paid in the quarter. Now turning to our third quarter and full year outlook on page nine. For the third quarter, we expect to deliver total revenue in the range of $162 million to $164 million, representing a 9.4% year-over-year growth rate at the midpoint, and adjusted EBITDA of $49 million to $51 million, representing a 30.7% margin at the midpoint. For the full year, we are raising the top and bottom end guidance ranges for both revenue and adjusted EBITDA, reflecting the continued business momentum, stability, and resiliency in the business. We now expect total revenue in the range of $630 million to $634 million, with the midpoint representing a 13.1% year-over-year growth rate, an adjusted EBITDA of $188 million to $191 million, representing a 30% adjusted margin at the midpoint. This guidance is inclusive of our recent token acquisitions, which collectively are not expected to materially contribute to revenue or profitability in 2022. For modeling purposes, we expect capital expenditures excluding capitalized software of approximately $7 million and share-based compensation expense of approximately $55 million to $60 million for the full year. 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 delivered a great second quarter. Demand for our solutions remains strong, and our unified platform approach continues to drive meaningful value for our customers. Our team has demonstrated consistent execution, and we will continue to focus on the key strategic differentiators to generate growth and a compelling profit. We're excited about the long-term growth opportunities that are in front of us, as we leverage our operational scale and create long-term value for our customers, shareholders, and employees. With that, we're now happy to open the call for questions. Operator, will you please open the line for Q&A?
spk01: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Your first question comes from Sakeet Kalia with Barclays.
spk09: Okay, great. Hey, Hardeep. Hey, Eric and team. How you doing?
spk04: Hi, Sakeet. Hey, Sakeet.
spk09: Hey, thanks for taking my questions here and a nice quarter. Hardeep, maybe just to start with you, great to see the cross sell. I think you said best quarter ever. on cross-sell activity. So I was just wondering if you could just dig a little bit deeper into what parts of the business you're having the most success with cross-selling and what do you think is driving it?
spk04: Sure, Saket. First, I guess we're in a very stable end market, right? And one of the key things we are seeing is we're seeing strong tailwind pretty much in every area of our business as districts are looking at transformation for not just classroom, but also operations, talent management. And when you look at from our demand, and I can give some examples, pretty much cross-sell demand is assumed to be across all of our product categories. Now, one of the reasons why you're seeing cross-sell growth to accelerate is what we've always talked about. The platform strategy is really key. As districts are looking for these solutions that they're looking for areas, whether it's post-pandemic trying to address learning gaps or trying to address their talent management needs, they're looking for integrated systems. They don't want to put another point system or niche system and having to deal with providing multiple environments to teachers and students and parents. So that continues to differentiate. That's why I mentioned our number of customers who have more than one product is have increased by 30%. Eric shared that, you know, customers who have more than four plus product, that's again increasing by 50 to 60%. So we're seeing cross-sell pretty much really very robust. Now, let's give an example or two, like I mentioned about the Unified Insights with Maryland, one of our biggest deal of the quarter, but also for our Insights. Insights is definitely an area we're seeing tremendous growth. As you can imagine, a lot of districts are kind of realizing that they need better understanding of where their students are and how they can help them. So that definitely is a huge growth area for cross-sell. We're also seeing strong growth sell of talent management products. If there's a teacher shortage with recruitment, with retention, with professional development, that's a big area for investment for a lot of school districts. We're seeing tremendous demand that. But we're also seeing now the core modules of student information system of special ed. They are also seeing a lot of growth. Some of the projects were initially kind of during the pandemic were put on hold, but now we are seeing really those SIS projects coming in full-blown. We talked about peel on my prepared remarks. We also got just a vendor of choice for an entire U.S. territory. So we are definitely seeing some very strong demand on these core modules as well.
spk09: Got it. Got it. That's great. Eric, maybe for you, you touched a little bit on the seasonality of some metrics like NRR. And I know we don't guide to net new ARR, but clearly some different seasonality here, just given the K through 12 budget cycle. Can you just remind us how that played into this quarter? And directionally, again, understanding you don't guide to net new ARR, but directionally, how do you think about that net new ARR as we look at the back half of the year?
spk10: That's a great question. Second, I appreciate the opportunity to be able to continue to just remind everybody just the seasonality of the business. And I had it in my prepared remarks. As Hardeep said, this was the best cross-sell quarter we've had, adding a net $23.6 million to our ARR base. You typically will see Q2 as your biggest net add in terms of ARR. And then as you go from Q2 to Q3, just as a reminder for everybody, Q3 is our highest renewals period. So to the extent you see that we may see any kind of churn, it's going to happen in Q3. So typically what we, you know, we would, you know, kind of for modeling purposes encourage all of you to think about and, you know, can look at last year's. I would assume the net new ARR to really essentially be flat from Q2 to Q3, and then again, you know, once we go from Q3 to Q4, you'll see it pick back up as you see the bookings continue to build. So, you know, hopefully that's, you know, certainly some helpful context around that. I would also say since you brought up NRR, you know, we're really, really thrilled with the 60 basis point improvement sequentially from first quarter into second quarter. And then again, as you think about the impact on that metric when you go from Q2 to Q3, Again, I would assume it's going to be relatively flat, and then you'll see it again pick up. And we're in a really good trend to end the year ahead of where we thought we'd be. So hopefully that's helpful for everybody.
spk09: Yeah, super helpful. I'll get back in queue. Thanks, guys. Thank you.
spk01: Next question, Brent Phil with Jefferies.
spk07: Good afternoon. You mentioned the record pipeline. I'm just curious, you know, if you can kind of unpack what you're seeing and what the drivers are with funding that's out there. Has there been some catalysts as it relates to schools that you've seen that have helped ignite? There's the macro headwinds that everyone's worried about as well. Just kind of frame up what you're seeing overall in the pipeline and what you're anticipating in the back half.
spk04: Sure, Brent. Happy to. Well, first, I guess one of the things we have emphasized and shared is that when you look at K-12 funding environment, that's largely insulated from what you're seeing the broader micro-ignite factor, whether that's inflation or recession. We shared in the last earnings call about a 30-year data of K-12 funding, and except for the housing crisis, it pretty much has increased every year. And when you look at it from a perspective of the tailwinds, especially around the fact that it's a very large market, $700 billion gets spent in K-12 in just U.S. alone. And you've got a very strong tailwind as districts coming out of the pandemic and during the pandemic realized that more than 50% of the systems are either manual or lack of automation or legacy. So, huge demand opportunity that what we are seeing, and that's what you're seeing in the pipeline. We are not only seeing some of the largest pipeline we've ever had. We're also seeing that the large deals really coming to picture as well. I mentioned not just a whole territories where we have got vendor of choice on our student information system. We're seeing some of the demand across international as well, including in our countries who are kind of excited about kind of looking at forward to to improve their infrastructure. So we could not be more excited about the pipeline is largely very balanced as I was mentioning to earlier. There's a lot of interest on analytics. So that is our highest growth area, as you can imagine. We are also seeing demand and talent management product. Our classroom products continue to do exceptionally well. Take example, learning management system. We are bringing in a new territory of Guam onto our platform, a very exciting project there. But we're also seeing demand across not just large customers, but a lot of small and midsize on learning management or assessment product or special ed or behavior management, all those really playing to the critical needs that districts are dealing with right now, which is how do you engage students? How do you retain teachers? And pretty much our entire platform really comes in as one of the most important pieces to help them, you know, manage their entire operations.
spk10: And I would just add, you know, obviously we took the guidance up through the year, which just is another reinforcement of, you know, just the activity that we see in the second half and just how positive we are in terms of, you know, entering the, you know, the busiest renewal period that we have, that we're right in the middle of.
spk07: Just a quick follow-up. Hardeep, anything long-term to believe that you, on international, you can have a split that looks and feels like other enterprise software companies over time on the international front? Is anything prohibiting you from generating 30, 40 plus per stream from those markets? Or do you feel like that's getting too zealous?
spk04: No, I definitely think we would be in that position. And in fact, within the next couple of years, I expect this international to become a material. I think we've always talked about our focus has been in North America, but we have still seen tremendous proof points like country of Uruguay with our entire Schoology platform in Philippines with 600,000 students. We have started paying a lot of attention with actually boots on the ground in Middle East and India. So we are already seeing some very good successes. I shared that on this call about Marif and last call about Lever. We have a partner in India was putting about 150,000 plus students on Schoology platform. we are definitely go see uh demand not just on the uh again of one or two of these products but we're actually seeing interest across the entire platform as you can imagine a lot of the international with 1.2 billion kids with a lot of no other vendor who actually offers them this fully integrated suite which is best in class we're getting a lot of excitement about as they're looking at transformation they want to look at a holistic transformation of all their systems and you would not imagine uh any state or any country or any new districts putting in multiple fragmented environment they're going to want to put in more integrated aspects so they can have one experience for a student one experience for their teachers and one experience for the parents and that's where we differentiate so we are expecting international demand we are definitely going to be increasing our investment on channels there as well as boots and ground so i do expect in a matter of next few years this would become a material contribution to our revenue thank you
spk01: Next question, Koji Aikido with Bank of America.
spk02: Hey, guys. Thanks for taking the questions. Just kind of wanted to follow up to Brent's prior question on the record pipeline. And thinking about sales cycles, some of the other software vendors are calling out elongated sales cycles. And just thinking about the seasonality of your business, are you seeing any sort of elongating cycles at all? And if you are, what could that potentially mean from an eventual bookings perspective? Do deals get pushed out by a month? or a quarter, or if something gets pushed, does it get pushed out for a whole year?
spk04: Hi, Koji. I think great question. We actually are seeing the reverse of that. We're actually seeing our sales cycles have just accelerated coming out of the pandemic. A lot of, you know, as you have shared, during the pandemic, we saw a huge demand of an adoption of our learning management and classroom products, almost added four to five million students on there. As districts have come out of pandemic and they're trying to look at more holistic transformation, we have seen a further exploration across the areas like talent management. You've written a lot about some of the teacher shortage, which is definitely driving a lot of solution buys around how districts can recruit teachers, help them onboard efficiently, manage substitute teachers, as well as professional development of those teachers, which is very critical, top of the mind. So we're seeing a lot of interest there. But as well, as I mentioned, when you look at the holistic aspects of connecting the data and understanding what kind of support each child needs, a lot of both our core platform and some of the innovation we have talked about, like MTSS and intelligence, as well as some of the add-on tuck-ins we have done around communication and attendance intervention, curriculum, social-emotional, these are top of the mind for our districts, and we are able to meet their key demands. That's actually helping us drive our sales cycles to be even more efficient and more faster. And we're seeing that not just in small customers, we're seeing that even with larger customers. So some of the state opportunity I mentioned, like Maryland, which is one of our biggest Unified Insights deal, and literally developed and closed in a matter of a few months.
spk02: Got it. Thanks, Hardeep. And just one follow-up here, if I may, for Eric. I saw you guys acquired Headed2. during the quarter you know sounds like it's going to help to drive better outcomes uh post high school so that's really great to hear um just just a couple questions if there's any revenue contribution from headed to uh added to this year um you know what was it and what is the pricing model for that business thanks guys yeah so i'll take the revenue revenue is well under a million dollars so it's it's it's insignificant this year um we and you know again exciting technology this is you know what we've been saying or part of our technical
spk10: tuck in, that we acquire the technology. A lot of times these companies have very little revenue to them, but good technology base that we can not only build off of, but then just invest further into and then bolt it into the platform. So no material revenue that can contribute in 2022.
spk04: And if I can add to your point about what some of the strategic drivers, as you know, Naviance is already the number one almost 40% of the North American students have access to it. And we've seen huge amount of 15% increase in use that just last year on the whole college applications. But one of the things which really prompted us for headed to is we are actually seeing a lot of strategic interests, not just from the districts, but actually entire states around career and exploration and how to provide that even earlier, not just in high school, but in middle school and all the way into elementary school. HeadHU has been an exceptional platform which has done that. You know, it already has 50 plus state portals with elementary access as well. And that's something addressing the key need we were hearing from our customers, both at the district and state level. So we are very excited about this area, and we believe this can really add to the overall student success, not just through the college pathways, but also in their career and different training options they have.
spk02: Excellent. Thanks, Hardy. Thanks, Eric. Thanks so much. Thank you.
spk01: Next question, Steven Sheldon with William Blair.
spk06: Hey, thanks, and really nice work in the quarter. First year, I wanted to see if you could provide some more context to the strong pipeline commentary ending the quarter. Roughly, how much is the pipeline up relative to last year? And then, could the stimulus funding actually shift purchasing behavior at all from a timing perspective with maybe more potential purchasing than normal happening during the actual school year? Are you seeing any signs of that?
spk04: Thanks, Stephen, and, you know, great questions. I think on the pipeline, you know, again, I would just reiterate that it's not only highest pipeline work we have seen so far, but it's actually also the mix of large deals is tremendous in that. So, you know, we have some of the largest deals we have ever worked So we're definitely excited about that. I mentioned a little bit about a territory vendor of choice. Similarly, we have a very strong interest internationally as well. So that kind of gives you enough context about the pipeline that we'd be happy to share more about these opportunities as it progresses in the next quarter or so. The second part of the question, is stimulus playing a role and is that kind of changing some of the buying pattern? I think stimulus has definitely been a big positive for the broader K-12 industry. Even when we are not directly supporting a deal through a stimulus, it's actually providing additional funding, which is helping free up dollars for IT spend. So universally, we could not be in a better funding environment, and that's going to continue for the next three to four years. as we look through the funding availability. A lot of times as we have talked about that, where we do see the buying patterns are largely based on a lot of back to school readiness, right? So that's where you see Q2 always to be our biggest quarter. But there's also, as we go into the Q4, you know, and Q1, that a lot of districts, especially if they're larger district or midsize, they will prepare for that. So we definitely see Q4 also to start to be pretty good and healthy. Q3 is the one quarter, which always is a little bit because districts are busy with back to school. So that historically, we always expect that to be somewhat of a quarter where districts are not looking at buying more stuff. They want to kind of go live and then they prevent. But I think to your point, with some of the large deals, that could change as well. So we definitely are looking to, again, the second half to be strong. But I would still put Q2, Q4 to be our largest quarter. That seasonality potentially is not going to change in the short term.
spk06: Got it that's really helpful just follow up lots of things like there's lots of encouraging product announcements here so on the unified insights MTSS. seems like there could be high demand for this, given the need for more personalized learning and a big focus on interventions when students are falling behind. From a from a school district sophistication standpoint, how sophisticated do they need to be to find these solutions useful. or is there a lot of automation on your end to help them actually act on these insights for each student?
spk04: Great question, Sivan. So first in terms of sophistication, actually one of the beauties of how we have implemented MTSS is that irrespective of whatever systems they are using, they can use their MTSS as a layer on top of it and really take advantage of providing a more coordinated intervention plan Irrespective what technology is, whether they're manual or stuff. So, you know, if you go to over, we just shared this at and we also shared with our Council of education innovation presentations of that is available on our website and you will see as we talk about and some of the customers stories there. You know, we almost have more than a dozen of customers who actually already selected our MTSS in a matter of last month or so, including a customer like Vincent Salem, who is a size customer but uses actually a third-party LMS and a capability, but still leveraging our MTSS to help them kind of manage that entire intervention plan. So it's really automating that entire process of coordination, the meetings, the tracking of the interventions, and analytics around it. And the underlying interventions could still be manual, but it would still give them an ability to have better. This is even more important as the districts are required, even by us in funding, to show 20% of that spend to be going in areas as to how they are actually improving and providing the support to the kids who are impacted. So we see demand for this area already to be very high, and we have already seen some great early successes.
spk03: Good to hear. Thanks, guys. Thank you.
spk01: Next question, Joe Rewink with Baird.
spk05: Great. Hi, everyone. You know, just stepping back and kind of digesting everything that's been said on the call, it seems or at least sounds very plausible that ARR growth in FY23 is faster than FY22. Does that seem reasonable just given some of the input assumptions we've kind of been discussing tonight or vice versa? What might be some of the risks to consider that function as sort of an offset to, you know, the strong bookings currently and then the better pipeline going forward?
spk10: Yeah, let me just start. I mean, obviously we don't guide to it, but I think everything you're hearing from us in terms of the strength of the pipeline, The business momentum, you know, as we exit at Q1 continued into Q2. Obviously, you guys are seeing it in the results. So, yeah, I mean, as we get through the end of this year and then start setting up next year, I mean, we certainly could, especially as we've seen some of these technical tuck-ins that we have and those capabilities really come to market and provide additional products to our customers. You know, we could be in a situation where, you know, for sure, as we've said in the past, you know, all of these things we're doing, you know, it de-risks our double-digit, low double-digit organic growth. And that's, you know, what we're really pushing for. So, you know, we're super, super positive. But, you know, obviously, we're focused on, you know, finishing this year really strong and going to focus on executing the second half. And then certainly as we start to set up the following year in the fourth quarter, I think you guys will have a better view as we will as well. But certainly very optimistic and positive for sure.
spk05: Okay, that's great. And then I have a similar question, just thinking of things that have changed from the initial communications with the IPO. We're now at a point where execution is driving kind of sequential gains and profitability. Sitting here a year later, any different framework for just how you think about the business on an annual basis, maybe driving margin expansion or just any more clarity, what you need to invest in different areas of investment that might change the trajectory of margin improvements?
spk10: Yeah, so what we've been saying, Joe, is on an annual basis, expecting a 50 to 100 basis points of growth. I think that's still a good construct. As you noted, we are well ahead of the IPO plans we had, and the team's just executing quite well. But that's not at the cost of us not investing in some of these strategic areas. It's hard to mention international over the next 18 months to 36 months is an area that we're going to continue to strategically invest in as well as we look opportunistically for additional capabilities that gets us along the personalized learning mission that we're on. We're going to continue those opportunities as well. Yeah, I think there's a lot of exciting things out there in terms of growth opportunities. So, but, you know, having said that, we're still going to drive the operational leverage and, you know, the annual framework of, you know, 50 to 100 basis points of expansion is still, you know, is still valid.
spk03: Okay. Thank you very much.
spk01: Next question, Fred Haymeier with Macquarie.
spk08: Thank you, and I just want to say congratulations on a strong quarter. I wanted to really hit again on some topics I think you've discussed throughout, you've been asked about throughout, but it seems like throughout your discussions and responses to questions, you're emphasizing record, certainly cross-sell quarter, some record deals in the pipeline potentially there. It sounds like you're using the word record quite a bit. I'd just like to ask What's driving this? Is there something going on in the market with fiscal stimulus, just generally with digital transformation trends, with school consumption trends, that's leading to such a constructive backdrop for power school and these record-setting cross-sell results that you're seeing?
spk04: So, Fred, it's actually all of the bar, right? I think we're in a very stable market, right? Which has got good stimulus to back up the funding even further. The tailwinds have been pretty strong, right? Both from coming out of the COVID as well as even prior to COVID that digital transformation is required. And then our platform strategy is very differentiated, which is working to an advantage that we have such a diversified portfolio that we are able to address all the different varying needs they have in respect to what areas their priorities are. And we are able to be their partner. And that's why you see cross-sell to be good, new logos to be good, as well as the pipeline to be good. So it's pretty much, you know, as we've always talked about, we have a great business. and a very differentiated offering in a market which is very stable. So we couldn't be more excited about all of our performance and execution towards that.
spk08: Thank you, Hirsi. And then, Eric, perhaps for you, as we're in a rising interest rate environment, I wanted to just circle back around about how our schools thought about both leverage and how it would consider its positioning in a rising interest rate environment. Could you provide any sort of updated view about PowerSchool's preferred leverage profile and generally any commentary that would be helpful also for understanding the impact of rising rates? Thank you.
spk10: Even with the rates as they've risen, this quarter the rate we paid was 4.62, which is still a relatively cheap cost of capital. So I think as you all know, our debt instrument is variable. So for every one full point, if you will, of interest rate increase, it's about $7.5 million of interest expense for a full year. So, you know, we haven't changed our view in terms of the capital structure of the company. Obviously, we're going to continue to watch interest rates, but even as we've factored in some of the, you know, expected increases for the balance of the year, we still think it's, you know, extremely attractive to have this debt instrument out there.
spk03: Thank you.
spk01: Next question, Matt Heidberg with RBC Capital Markets.
spk10: Uh, great. Yeah, thanks for taking my question guys. Congrats from me as well. And strong results and guidance on the record cross sell. I'm curious how much of that do you suspect is from consolidation of maybe other vendors or is this largely sort of new new business opportunity within these districts?
spk04: Thanks, Matt. Good question. When you look at a majority of what we do business is actually replacement of, you know, either paper or legacy. So, whether it's the analytic field, they probably don't have any environment which is homogenized that. Whether that's, take example, appeal where they're putting our new system, they're on a very legacy platform and they're, you know, moving to a, along with that, they bought like almost six or seven other products. So, half of those processes were done manually or, you know, with a custom code, right? So whether it's a large deal or your small deals, majority of that is actually replacing paper, pencil, or legacy environment. There's very few replacements, but we do see replacements like Clocks is a good example, but largely it is a white space. Got it. That's helpful.
spk10: And then I wanted to go back to the analytics side. I think we all see that as a huge opportunity. It's great to hear the success that you're having. You know, I guess I'm curious, you know, since you've owned Who Knew It, you know, are there some, what are maybe some of the more interesting data points you've gotten from districts, you know, when they maybe either had funding or they said yes and they turned it on and the lights went on and they just sort of like saw those benefits? Are there anything tangible that like some of these districts are saying that you're using in sort of your new sales initiatives to convince other districts?
spk04: Great question. We, in fact, you know, had a lot of interest on this area. I encourage you to check out some of her presentation with the Council of Education Innovation on the website. Districts like Modesto, they presented with me on the keynote along with LA Unified and Mobile County and Alabama State. And Modesto talked about how the analytics was a core part of their ability to not engage students, but also look at the holistic way of where their talent operations and how they kind of really helped drive the entire say to our district. So there's a lot of exciting. We have concrete, measurable KPIs in terms of attendance improvements, in terms of reducing disagree actions, in terms of better engagement, as well as the improving of graduation rates. And you've got tons of case studies on our website related to the analytics benefits. So we're seeing the interest across the board. That's why on the analytics on all these different strategic metrics.
spk10: Thanks, Hardeep.
spk04: Congrats again. Thank you.
spk01: Next question, Gabriella Borges with Goldman Sachs.
spk00: Hi, this is Callie. I'm for Gabriella. Congrats on the quarter. I'll start with the opportunity with connected intelligence. If you talk about that for a second, it seems super valuable. How is initial customer willingness to engage in conversations about adoption been and how do you view this product as a game changer for schools?
spk04: Great, Kelly. As you know, we talked about, we just actually launched this product last week at our conference, and we had Snowflake present with us about the opportunity and how the entire connected intelligence not only leverages some of the analytics we're talking with our Unified Insights product, we're able to open up the connection to the other data, whether that's coming from systems outside PowerSchool, Or even outside that organization, outside that district, whether it's social services or juvenile crimes or other areas of how to really bring all the data together, including almost K through twenty view about the students. So you have a much more longitudinal view. We have a lot of exciting interest on that from not just states, but districts as well, and including some counties who have implemented our analytics platform at the four county level as well. We expect we're going to have at least 50 to 100 customers who are leveraging our unified insights take advantage of our connected intelligence by the year-end based on the demand we're seeing.
spk00: Great, thank you. And then just as a follow-up, will school budgets tend to be fairly insulated from these macro impacts? I wanted to see if you've seen any impacts in hiring, especially as you build out internationally.
spk04: In terms of hiring to for our own company, is that your question?
spk00: Yeah, exactly. Thank you.
spk04: Yeah, I think we're seeing the broader talent market the way we have seen it, you know, as you can imagine with all of the companies, though, I would say that we have lately seen the environment to be much better, especially given our strategy. is one, we are kind of have multiple, you know, center of excellence and remote working across the US. We're also a lot of times we are bringing folks from education industry who are actually very excited about the joining because this allows them to have a bigger impact. And we are seeing that to be international. If you look at our India hiring where we have a big center of excellence, we have actually grown that by almost, you know, 100 people just in the last year itself. So we continue to see actually an attractive given where we are mission driven, and that really helps us attract the right talent.
spk00: Great. Thank you so much. Congrats on the quarter again.
spk03: Thank you.
spk01: We've come to the end of our Q&A session. I would like to turn the floor over to Hardeep Gulati for closing remarks.
spk04: Thank you operator and thank you to everyone who joined our earnings call. I'd like a chance to again, pack the 3000 plus employees we have globally as well as over fifteen thousand customers and partners who team up pretty much every day to drive these education improvements and impact outcomes. In closing, you know, what I would again highlight some of the key things I talked about. We had an exceptional second quarter. You know, we highlighted by some of the highest ever across LARR. We have a strong customer momentum across the board on our entire products. Our platform expansion continues to even create that differentiator and further with new and innovative solutions balanced by a very strong profitability profile as well. So our products are very mission critical. They're very sticky to the school operations and as well as to our end markets is very stable and non-cyclical, which allows us to continue to perform in this macroeconomic pressures. As Eric mentioned, we're very optimistic about the massive runway ahead of us, and we would love to share more about it in the coming quarters. Thanks again to everyone, and we look forward to talking to you again in the next quarter.
spk01: This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
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