Yahoo Finance PowerSchool Holdings, Inc. (NYSE:PWSC) Q1 2024 Earnings Call Transcript
PowerSchool Holdings, Inc. (NYSE:PWSC) Q1 2024 Earnings Call Transcript May 7, 2024
PowerSchool Holdings, Inc. misses on earnings expectations. Reported EPS is $-0.11272 EPS, expectations were $0.22. PowerSchool Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the PowerSchool First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would like now to turn the conference over to Shane Harrison, Senior Vice President of Investor Relations. Please go ahead.
Shane Harrison: Welcome, everyone, to PowerSchool's earnings conference call for the first quarter ended March 31, 2024. 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 Power Schools CEO, Hardeep Gulati; and President and CFO, Eric Shander. Before getting started, I'd like to emphasize that this call, including the Q&A portion, will include statements related to the expected future results for our company which are, therefore, forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings.
Today's remarks will also include references to non-GAAP financial measures. Additional information, including definitions and reconciliations between non-GAAP financial information 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. With that, let me now turn the call over to Hardeep.
Hardeep Gulati: Thank you, Shane, and thank you, everyone, for joining us today. We are starting 2024 with continued strong momentum, beating the midpoint of our revenue outlook and exceeding the high end of our outlook for adjusted EBITDA. ARR grew 18% year-over-year, while NRR improved 30 basis points sequentially to 107%. First quarter revenue totaled $185 million, up 16% year-over-year, and subscription and support revenue growing 18% to $167 million. Adjusted EBITDA improved 24% year-over-year to $61 million, representing a 33% margin, an expansion of over 2 percentage points year-over-year. These first quarter results showcase the robustness of software spend in K2 market and the continued demand and stickiness of our market-leading mission-critical solutions that drive better education outcomes in power educators and help districts run more efficiently.
These results are driven by the strength of our multiple growth vectors, which create the diversity and sustainability of our business model and enabled us to deliver consistent results quarter after quarter. Now 11 consecutive quarters since our IPO of meeting or beating guidance. I will highlight the updates in the quarter based on each of the four key growth vectors we have shared in the past. First, significant cross-sell and net new opportunity across North America for our comprehensive and broad 20-plus products meeting a variety of district and strategic initiatives. Second, our expansion and successes in the untapped large international market; third, continued strategic M&A that expands over TAM and add solutions that address the most important growth areas such as our recent Allovue budgeting and planning acquisition; fourth, launching new disruptive high-growth innovations like PowerBuddy, a K-12 industry first AI assistant for everyone.
Let's start with our first growth vectors and share with you some of the highlights of customer momentum in cross-sell and new logos with our key wins in Q1. As we briefly previewed in our last earning calls, we are thrilled and honored to have signed in Q1, one of our largest deals in recent history to serve the Indiana Department of Education to provide special program solution to the state and all its districts to modernize systems, processes and improved special education program needs for every student at every school in Indiana. Our solution replaced their existing vendor as we provide a more modern interoperable platform with enhanced compliance for federal and state reporting requirements. We also saw several other notable cross-sell wins during the lead of public schools who selected our SIS and ERP solutions, Visalia Unified School District who chose our communication and our new My PowerSchool product, then Bernardino Study Unified School District who selected our analytics and talent modules.
LEAP Social Enterprise in Puerto Rico who brought their presence with us on multiple products, including SIS, Schoology, Enrollment & Naviance. The volume and the types of deals across these broad solutions show our ability to meet the varying needs and priorities or districts of different sizes and across regions. During the quarter, we also added great new logos, including Manitoba First Nations Education Resource Center, who purchased our student information system to power their district operations and reporting. In fact, one of the reasons for our ongoing cross-sell and new logo successes is our key differentiator of strong unparalleled leadership of our student information system, or SIS, along with many of our other solutions. The SIS is the hard beat, the source of its stores and manages all student data within a school district or charter school system.
School use SIS for compliance reporting to Department of Education and to provide reports to key stakeholders to inform decision-making to help students succeed. PowerSchool SIS is a premium solution and a clear market leader with gross retention rates in the high 90s and strong customer satisfaction scores. We continue to win new accounts in SIS and have brought in over 1 million new students over the past two years. We're now reaching over 20 million K-12 students globally and roughly 1/3 of North American students. The SIS is one of the keys to cross-selling additional products and we have much stronger win rates with customers who already use our SIS. During the first quarter, we made great progress in our second growth vector of international expansion, particularly in the high-growth target markets in the Middle East, Latin America and India.
In the Middle East, through our Board Middle East, BME partnership, we signed a new logo Knights of Knowledge International Schools in Saudi Arabia who purchased SIS, Schoology, and other modules to benefit all their students and teachers. We also continue to cross-sell into our international customer base with customers like Arabian Education Development, who expanded their deployment from student cloud to personalized learning cloud, talent cloud and now our analytics cloud. Another example of international cross-sell is in Latin America, where we broadened our presence with the International School of Tegucigalpa in Honduras in an existing Schoology customer who expanded to a broader platform, including SIS, Enrollment, Ecollect and other modules.
In India, we won new business with Kalgidhar Education and EDUFICE, among many others. We are very excited about the international prospects this year as our full year international pipeline has grown over 200% year-over-year. This includes large deals and pipeline to our partner channels. Before we move to our third growth driver, I want to touch on funding and the key priorities in front of our customers. As you know, K-12 is one of the largest spend categories globally with over $700 billion in U.S. alone and over $5 trillion globally. The core budgets are resilient and are relatively insulated from inflationary and other macroeconomic events. Budgets are funded through multiple sources, federal, state and local and education is a bipartisan priority.
ESSER injected an additional 5% to 10% per year to the overall budget targeted towards onetime purchases and managing additional staffing, supplemental content and services needs during the past few years. While in some cases, District use ESSER to fund their initial implementation and rollout of K-12 technologies, districts are largely required to allocate their ongoing software contract spend from their regular core ongoing budgets. The broader tailwinds driving the software growth in K-12 has been the need for digital transformation to support more automation of their back office, eliminate costly manual task, reduced teacher at this rate of time, modernize the classroom to drive more engagement with students and also get better insight that districts can optimize their investments to create better student outcomes.
That is why education software spending is forecasted to remain one of the highest growth areas in K-12 education. In March, we conducted a survey of our annual education focus report, where we received nearly 2,000 educated responses from across the U.S. from every state and U.S. Territory on a wide range of questions, including top K-12 technology priorities, budgets and much more. I'd like to share some of the preliminary results from our market research which will be formally released in July. The top five technology priorities districts identified are integrating technology solutions, connecting data across systems, implementing attendance solutions to address chronic absenteeism, providing AI guidance in infrastructure, cybersecurity and protecting student data.
Conversely, the top areas of budget management that district identified were limiting additional staffing budget hardware spend and reducing tutoring spend. These survey results directly aligned with our solutions and platform strategy to provide secure, modern, integrated systems and data with mission-critical needs like MTSS, attendance intervention and data insights to provide the right health efficiently and surgically, based on individual student needs and drive better attendance and engagement to help keep students and school. In fact, helping districts with budgeting and spending efficiency and efficacy was a key rationale behind our recent strategic acquisition of Allovue. As we discussed during our last earnings call, we acquired Allovue in January of this year, and we are already seeing very strong demands for its capabilities.
Results from the second annual Allovue Education financial survey found that roughly half of the educator surveys said that their budget tools are out of date and our need of modernization. By adding Allovue, PowerSchool can now provide schools, districts and state education leaders with most comprehensive suite of K-12 data and analytics tools available to accurately planned budgets and provide clear visibility for their communities into district lending and the impact on student outcomes. This showcases how we are leveraging our third growth vector of strategic M&A expansion to drive additional growth on current district priorities. Now turning to our fourth growth factor of differentiated innovation. In January, we announced our generic AI platform, PowerSchool PowerBuddy a K-12 industry-first AI-powered assistant for everyone.
PowerBuddy is designed to deliver conversational, personalized, contextual and embedded experiences for educators, students, administrators and parents. We recently announced general availability of two new AI-powered solutions. PowerBuddy for Learning and PowerBuddy for Assessment. These two solutions are targeted for teachers to save them countless hours spent generating student assignments, lesson plans and assessments, personalized to different reading levels, subjects, languages and state standards. They seamlessly integrate within Schoology and performance matters and are built on Microsoft Azure Open AI, but designed and fine-tuned by power school specifically for K-12 with controls for responsible AI principles and compliant with district and state standards and content.
Demand for property has been very strong, and we already have signed dozens of customers, including Epic Charter Schools and Duval County Public Schools. We have several other PowerBuddy solutions under beta with districts representing approximately 2 million students and have built roughly 10 million of opportunity pipeline for these solutions. Additionally, we have received impactful testimonials from teachers saying they have reduced the amount of time needed to create a standard aligned assessment item by more than 2/3. We are excited to launch additional PowerBuddy products, including PowerBuddy four data analysis, custom AI, college and career engagement and coaching inventory, which will be available for 2024 and 2025 school year. Given our leadership in reach, scale, breadth and impact, we are uniquely positioned to provide generative AI solutions that personalize experiences leveraging whole child information and are embedded into existing solutions that students, parents, teachers and administrators use every day and provide a contextualized health and assist us for all their needs.
We are also helping districts formalize their data platform for AI with our differentiated connected intelligence data lake solution that enables district to ensure their data severity and empower their educators and students to leverage GenAI by bringing AI to their data. When it comes to data, PowerSchool leads the K-12 industry in student data privacy and data security. A responsibility we take very seriously. To that end, we are certified by industry leaders such as TrustArc and PRIVO, and we probably had her to all applicable federal and state loss pertaining to student data. including federal laws, such as Family Education Rights and Privacy Act, FERPA; and the Child Online Privacy Protection ACT, COPPA as well as state regulations including California’s Student Online Personal Information Protection Act, SOPIPA and its variants in many other states.
We are also proud signatories of the Student Privacy Pledge and the White House’s Secure by Design initiative of voluntary pledge developed by the Cybersecurity and Infrastructure Security Agency CISA and the U.S. Department of Education. We also pledged our commitment to further secure the education technology ecosystem by offering free and subsidized security resources to all U.S. schools and districts. For more information on our student privacy compliance, security investments and our responsible AI guidelines, please refer to the accompanying earnings presentation for links to our data security policies, and our chief compliance officer privacy blog. PowerSchool today is the vastly larger and fundamentally different company than it was just five years ago.
Since 2019 and based on the midpoint of our 2024 outlook, we will have more than doubled our revenue and nearly tripled our adjusted EBITDA while expanding our adjusted EBITDA margin by nearly 10 percentage points. Over the same period, we have acquired 11 companies and nearly doubled the number of our products in our portfolio. We have started to put boots on the ground in international markets and build out a channel partner network of 14 partners across all of our targeted international markets, delivering this kind of growth requires exemplary executive talent and high-performance culture. I'm proud to have been able to attract and retain the world class executive leaders and team needed for PowerSchool of today, many of them drawn to the Company's powerful mission.
Highlighted by these strong first quarter results, we remain focused and confident about our continued success and ability to execute in line with the strategy and targets we shared at our Investor Day last year to reach $1 billion plus in revenue in the next three years. Now, I will turn over to Eric to discuss the financial results and outlook. Eric?
Eric Shander: Thank you, Hardeep. We kicked off 2024 with a strong first quarter that demonstrated continued execution in line with our strategy. We delivered double-digit top line growth, expanded our adjusted EBITDA margin by more than 2 points over the prior year and continue to invest in product innovation and international initiatives that will drive long-term value to our customers and to the Company. First quarter total revenue came in at $185 million representing 16% year-over-year increase, in line with the guidance range we provided on our last earnings call. Subscription and support revenue came in at 18% year-over-year to $167 million and accounted for 90% of total revenue in the quarter. As Hardeep mentioned, we are thrilled and honored by the opportunity to serve the Indiana Department of Education with our special program solution reaching the entire special education population of the state.
This large deal represents approximately $5 million in subscription and support revenue and approximately $9 million in services revenue that will span into 2025 given the significant scope of this opportunity. Revenue from our Services business totaled $17 million in the quarter, representing a slight increase over the prior year. We continue to see more efficient deployment cycles from our implementations, which drives quicker time to value for our customers using our platform. Revenue from license and other, which relates mainly to our third-party revenue and is the smallest revenue stream totaled $1 million for the quarter. This came in slightly below our expectations based on the mix of third-party partner activity in the quarter. We ended the quarter with an annualized recurring revenue balance of $720 million, representing an 18% increase over the same time period last year.
This strong performance was driven largely by the strongest cross-sell activity we have ever seen in the first quarter as well as the addition of our recent acquisitions. Our net revenue retention rate came in at 107% up 30 basis points on a sequential quarterly basis. Adjusted gross profit for the quarter came in at $128 million with a 69.2% margin, representing a 110-basis point year-over-year improvement driven by our continued focus on cost management and operational scale. Moving to the first for operating expenses. Non-GAAP research and development expense came in at $25 million representing a 13.6% of revenue compared with 12.5% in the same time period last year. This 110-basis point increase in adjusted R&D expense as a percentage of revenue reflects our continued focus on investing in the data and AI products that will shape the future of education.
Including capitalized R&D expenditures, our total investment in R&D was 18.4% of revenue compared with 18.5% in the prior year. Non-GAAP SG&A expense totaled $42 million in the first quarter, representing 22.5% of revenue compared with $39 million or 24.6% of revenue in the same time period last year. This 210-basis point improvement was largely due to lower G&A expense driven by our operational scale, which was partially offset by the investments we are making in sales and marketing focused on go-to-market activities and our continued international build-out. First quarter adjusted EBITDA was $61 million, representing a 33.1% margin, exceeding the high end of our guidance range and reflecting our continued commitment to margin expansion. Non-GAAP net income in the first quarter was $0.17 per fully diluted share, down $0.01 from the $0.18 per fully diluted share we reported in the same time period last year.
Higher interest expense was a headwind of approximately $0.03 to our non-GAAP earnings per share and we had a non-cash tax expense related to the acquisition of Allovue, which had an impact of approximately $0.04. First quarter free cash flow, which typically reaches a seasonal low point in Q1 due to the timing of renewals and bonus payouts was a negative $103 million compared with negative $70 million in the same time period last year. This reduction is driven by the increase in interest expense, acquisition-related costs and the changes in working capital, which we believe to be timing related. Moving to the balance sheet. We ended the quarter with $17 million in cash and equivalents, a decrease of 73% over the same time period last year.
This was due largely to the seasonality of Q1 cash flow and cash payments related to the SchoolMessenger and Allovue acquisitions, partially offset by a $125 million draw on our revolving credit facility. Net debt leverage as of the end of the quarter was 3.8x compared with 3.3x a year earlier. As a reminder, our net leverage decreases in the second half of the year given the collection seasonality. Now turning to our 2024 2nd quarter and full year financial outlook. For the second quarter, we expect to deliver total revenue in the range of $192 million to $197 million and adjusted EBITDA in the range of $67 million to $69 million, representing a 35% margin at the midpoint. For the full year 2024, we are reiterating our guidance with total revenue expected to be in the range of $786 million to $792 million, with the midpoint representing a 13% year-over-year growth rate.
We are raising our full year adjusted EBITDA guide to a range of $68 million to $73 million, representing a 34.3% adjusted EBITDA margin at the midpoint. For modeling purposes, we expect full year 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. Overall, we're very pleased with the progress in the first quarter. We demonstrated continued execution against our strategy by delivering double-digit top line growth and margin expansion. We are intensely focused on delivering market-leading innovation and value to our customers through a comprehensive and differentiated platform.
This concludes our prepared remarks. Alan, will you please open the call for Q&A.
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