PowerSchool Holdings, Inc.

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.

Thank you, Operator. Welcome, everyone, to PowerSchool's earnings conference call for the fourth quarter and full year end of December 31st, 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 PowerSchools 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 risk 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 Arti.

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 support revenue grew 16%. ARR increased 18% to $701 million. Adjusted EBITDA of $59 million was ahead of the high end of our guidance. Out of our investor day in September, we laid out four key components of growth strategy. Cross-selling and growing of a 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 Schools, 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. Wiley 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 multi-million 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. Data-driven solutions that provide valuable insights into student, school, and district performance and operations continue to meet a large and growing market need. 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 closed 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 districts 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 All of You, 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 up. We have partnered with all of you over the last few years as a strategic add on to our K-12 ERP systems. All of you 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 all of you 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 Marif Education in Saudi Arabia, which is a great case study on how PowerSchool can land and expand with our platform in international markets. Marif already uses nine PowerSchool solutions for the international schools, and in the quarter, they added two of our recent innovations, Connected Intelligence and MyPowerSchool. Marif 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 gold market for us, given our highly successful nationwide Schoology rollout in Uruguay during the pandemic. With these four, we finished 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 to 2024 will be to onboard our resale partners, sign on new ones, continue expansion with a 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 over time to 100 billion, is providing a personalized education for every student journey. With the advancement of GenerateAVI, we now have the ability to personalize education at scale and provide conversational, adaptive, and tailored engagement for everyone 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 curriculum, 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 Content Map, 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 power school 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 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-time 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 our 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?

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 School Messenger and Never Skip, 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 and services growth was expected and is due to us accelerating our implementations and driving more efficient deployment cycles, which deliver quicker value to our customers and ensure retention over the long term. Revenue from License Another, which relates mainly to our third party in 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&R 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 School Messenger, new logo ARR growth, which was over 50%, continued cross-sell and up-sell, 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-month 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 a 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 17 cents per fully diluted share compared with 27 cents 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 82 cents compared with 85 cents 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 $39M in cash and equivalents impacted by the acquisition of School Messenger. Net debt leverage at the end of the year was 3.4 times. We expect our net debt leverage to be in the 2.5 times to 3.0 times range by the end of 2024. This debt level provides us ample opportunity to 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?

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask your question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 key. Our first question comes from the line of Steven Sheldon with William Blair. Please proceed with your question.

Hey, thanks. Nice, really nice work here. Wanted to start on the AI initiative and just kind of 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 are going to be rolling 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? 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?

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 you know certain schools certain regions or internal within the it itself and we're 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 tools as well what we are seeing especially with the the broader need there's a risk districts are very concerned about where if they try to experiment or they're trying to roll out AI in limited capacity, how do they make sure that their data AI is protected and also the responses are getting you secure? Well, 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 by that is with our data lake platform, with our AI tools, We're actually allowing them to bring the all the open and other 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 the privacy and security. So that's 1 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 platform itself. Second, what we're seeing is a lot of interesting is that they want to roll out of one holistic AI platform. You can imagine there's a lot of interest on chatbots and 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 as a platform which can have the full context and allows them to really roll it out in a comprehensive way. And the 3rd, which, you know, the fact that we have such a strong presence of our products across the base, we're able to embed the eye 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 experiment experience. And that really is driving a lot of interest, whether that's within our Schoology, whether it's in our assessment. or whether it's in our parent portal or 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 a couple of million dollars of revenue around AI products and almost doubling up from there on.

Understood. It seems like, yeah, 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, you know, I know you're gonna be 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?

That's a fair question. So when you look at it from a 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, but we almost grew over internationally by 50%. What's also exciting is these 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 profitable way. With that said, to your point, we're also looking at direct field investments in countries like India, as well as Middle East, where we're already seeing good traction. We might expand that to other regions as we see those regions kind of 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.

All right, great, thank you. Thanks, Evan.

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

Hey, thanks so much. This is David Musgrove calling for Brent. I wanted to ask around, you know, the guidance that you guys gave, and is there any way that you guys can, you know, quantify or give some color around how much of the guidance, organic versus inorganic, you know, mostly pointed towards the acquisition school messenger? Thank you.

Yep. Hey, David, it's Eric. So, you know, so I think it's important as you think about the guidance, we're super excited around the full year, you know, double-digit growth that we're seeing certainly on the revenue side. You know, what I prepared in my, you know, remarks, you know, hopefully it's helpful for everybody to understand as you think about, you know, L&O kind of moderating back to the 2022 levels. So, you know, as you all know, 2023, we had some big strategic items in there. And then certainly the services business, you know, being in the low single digit range from a growth perspective. So you can kind of back into, you know, the revenue piece, which will, which is very much in line with our double digit growth. So, you know, we're super excited around, you know, kind of how we finished the year, how we're, how we're set up for 2024. And then obviously, you know, as we, as we mentioned back in our investor day in September, You know, we're going to do all of this growth, but we're going to do it, you know, with the mind of, you know, continuing to expand margins, which is why we're offering up, you know, 100 basis points of expansion. So, I think both top line and bottom line, you know, should really see the momentum that, you know, that we have been articulating. And there is a good, you know, component of that, you know, continuing to come from the core business, which is very much intact and continuing to drive a lot of the business.

And then maybe as a follow-up, I also want to ask on international, you know, obviously I think last year maybe could be best described as, you know, the ramp up year with you guys adding a lot of partners. I guess as you think of this year, you know, I know you guys talk high to international growth, but if you just think about the opportunity this year and, you know, how those channel partners that you got last year have ramped, we'd just be curious to think, to get your views on how you guys are thinking about, you know, how international can look this year and specifically, you know, the timing of the ramp of new channel partners would be helpful. Thank you so much, guys.

Sure. So, David, two things. One, I guess, just being off back from Eric's point about it, just to make sure you also notice, I think as Eric was talking about retrading from our investment, we're talking about, even if we take school messenger 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 as we had some large license deals so we are still feeling very strong on the core growth even outside that acquisition Now, the piece, I guess, on the international, as I mentioned, we saw 50% growth in area. Are we expecting the growth rates to continue in that? In fact, probably the next rate 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 courses and Schoology but also bringing our data products so this is where we would you would start seeing international ultra x-ray on that our next question comes from the line of rich

Hilliker with UBS, please proceed with your question.

Hi, guys. Can you hear me okay? Yes. Awesome. Thanks for taking my question and for all the helpful color today. I was wondering, to hit on School Messenger 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, you know, in that disclosure period.

Yep. So, Rich, I think, you know, look, similar to all of the other acquisitions that we've made, we really, you know, our strategy is as soon as we acquire these strategic, you know, assets and capabilities, we integrate them into the platform, you know, rather immediately. For us to start breaking it apart and kind of looking at a piecemeal, it's not the 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 kind of given some color around to kind of think about the ARR and call it the $40 million range around there. you know, that probably should be good enough to, you know, for you guys to kind of model through what the impact is. And then, you know, as we mentioned last year as well, we did make some investments and we are making some investments into the school messenger platform as we're integrating it in with my power school. So he saw a little bit of that last quarter. And then obviously as we get into this quarter, you'll note that the margins were, you know, a down a little bit, but again, that's very much seasonal with what we expect because we do, you know, we do expect some continued investments in the, School Messenger platform in Q1 as well as some of our onsite 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.

Yeah. And Rich, just to give you some other data points to Eric's point, we almost did 100 plus transactions just on School Messenger 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're 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.

Got it. Okay, 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 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.

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 without 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. 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 account the whole student success cloud for the accountability and similarly educator effectiveness and you know finance cloud So what has allowed us 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 for 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.

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 focus 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.

Got it. Okay. Thanks.

Our next question comes from the line of Sakit Kalia with Barclays. Please proceed with your question.

Okay, great. Hey, guys. Thanks for taking my questions here. Appreciate it. Thanks. Hey, Hardeep, maybe 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?

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 9 or 10 quarters, We've got significant state opportunities pretty much in every quarter and we, even our pipeline actually looks pretty exciting. You actually took from a perspective. We see this as a broad range. We, this was a special ideal Florida. What we did last quarter was around the talent recruitment. We've seen a lot of analytics interest. We've also done this 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 with the state but large districts and other value in fact one of our big focus is to as we focus 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 uh close to three deals which are 10 million plus 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 implications which move it on. But ARR is going to come in Q1.

Got it. Got it. That's super helpful. Eric, maybe for you, I was wondering if you could just dig a little bit deeper into the services delivery aspect that you touched on in your prepared remarks. And 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, you know, kind of longer term? Does that make sense? Yeah.

It does, it does. So, and so I think many of, you know, I've, I've actually taken responsibility for the services business for about a year. Now, 1 of the things that we did was, we actually restructured a lot of the work packages and the, and the teams that we're 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, 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. I'm super proud of the work that the team's doing. And, you know, 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, you know, a big part of the value proposition. And we're going to continue to focus on how fast we can, you know, get a lot of the products in. And, you know, I think a good example of this was, you know, when we did Puerto Rico. I mean, we did one of the largest sys implementation across 270 plus thousand students in like six and a half months, which is never been done before. And the team did it with a, you know, huge amount of quality in there too. So, so stay tuned. So yes, you'll see less, you know, you won't see the revenue growth as high, but again, you'll see continued, you know, strong margins as well as, you know, we'll get the revenue recognition quicker. And that obviously helps in the subscription side as well.

Seems like a nice trade-off. Thanks very much. Appreciate it.

Yep. Thanks. Okay.

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

Hi, gentlemen. Thanks for taking the question. So I just want to hit on the SIFT 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 SIFT deals look as we head into 2024?

Sure, Brian again, I think, as you said, this is very strategic, right? We have not only its biggest part of our business. It's also the most strategic when it comes to school district. Allows us to cross sells, especially as we are talking about the AI platform 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 the 2024 as well. Their pipeline looks pretty healthy, both in the U.S. as well as international.

That's great to hear. And just maybe a separate question on the families' monetization. I know you have an embedded opportunity, given your presence in all the school districts.

but 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 excellent question brian so as we've talked about with the power buddy right so imagine property 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 close to $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.

Good to hear. Thanks, Hardeep. Thank you.

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

Thanks for taking my questions. Hardeep, maybe 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.

Sure. When you look at it from a perspective, the products we've already launched, as I shared in my prepared remark, was like our data lake with the AI platform, our PowerBuddy for assessments 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 a 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 dollars, depending on 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 chance is that even though it's the same platform, it has the full context of the entire student. But we are allowing districts to be able to adopt these things in a, in a chunk. So that they don't feel a big having to have a big security, big budget compared that to economy go 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 using adopted 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.

Super helpful color there. Maybe just piggybacking off that, you mentioned sort of the tutoring opportunity inherent with it. As you look at going to market in 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.

Yeah, I think there's a mix of everything what you're saying, but as from our perspective, as we, you know, 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, but with that said, as we have said, sometimes if on an implementation, they might use the 1 time element. So we're not seeing that to be any major change in our buying patterns. Uh, we do see that there is a behavior change within districts around what they need to spend on on from a perspective those elements to be prioritizing another. You're actually right. Some of the pieces we are selling on our data and property does allow us to be more allowed 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 as a dollar better. And especially with all of your 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.

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

Yeah. Hey, guys. Thanks so much for taking the questions. I wanted to ask you a question, you know, kind of in the commentary in the prepared remarks. You talked about consistency in the results of the IPO, you know, 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 in NRR can be volatile, which can put a damper on upside potential. You know, 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, you know, 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?

Yep, so I think, you know, and we've had several large deals, whether it's whether Puerto Rico and now in Indiana as an example. Right? 1 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 a natural pricing. in discounting, et cetera. 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 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 was just a matter of timing. So what I would just say is, you know, as we've said in the past, really kind of focus from our standpoint on the full year and, you know, 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 actually 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, you know, what HeartDeep and I have committed to is being very transparent around, you know, 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 just not good for, you know, it's not good for the business in terms of trying to trying to do that from a discounting standpoint.

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 is there some way to think about maybe a stretch goal for partners or or the number of partners that could be available for PowerSchool to partner with over the next several years?

It's a fair question, Koji, and we're not putting an artificial number to it. It's more actually driven by how good our coverage in the markets where we have already product solutions and targeted, 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 with 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 can continue to providing the guidance as we've given it that this should become a material business in the next few years.

Got it. Thank you so much.

Thanks, Oji.

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

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 in a prior answer. So just to be clear, in FY24 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 FY23 finished. Is that all an accurate statement?

Yes, that's absolutely accurate. And Joe, the thing that I think is also important is, you know, we've kind of talked about, you know, being a big strategic deal, right? If you were to look at the, you know, 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.

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 power school, that could approach maybe 100 million or so in the midterm horizon. Today, you're talking about a $2 billion TAM associated with these products. Um, obviously when I think about your product suites, they operate at very high market share, you know, much higher than the simple math here would be maybe a 5% share of, of the TAM as it's being defined. Uh, 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 through 12 settings you're trying to factor in?

Yeah, I think you're right. We are trying to be pragmatic, make sure that we are able to get the early, you know, what we're seeing early interest, don't let it kind of get us ahead of ourselves. We do want to kind of launch all these power buddies, being able to start showing the value, which we believe is tremendous in our, as I mentioned, my prepared marks. The in K, twelve, especially think about student time, teachers time, principal times, parents time. It's so valuable in these 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 are integrated and how they are actually communicating and that's why you see such a phenomenal big opportunity here and we our districts see this our persona see it and we do expect this to be a big this is the whole reason why we are you know 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 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.

That's great. Thank you very much.

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

Hi, this is Callie Valenti on for Gabriella. First one for me is I wanted to follow up on what you said before and kind of 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?

Hi, Kelly, you're absolutely right. It's both from just kind of think about a Netflix model or a prime or HBO model. It's both about having a partnerships 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.

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 are you seeing some of the data products via common land? And then also just any trends you would call out in new logos in international markets versus in the core North America market.

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, you know, we're selling data products even when they're not our customers. We're also seeing, again, student cloud continues to do very well. Talent products are 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 our market share, but Nipton and Asheville being a little higher on the new logos as well.

Thank you.

Great. Thanks, Haley.

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

Thank you everyone. I appreciate everybody saying for the, 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 platform 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 the 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 the 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.

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.