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?