Q2 2022 PowerSchool Holdings Inc Earnings Call

The highest margin we have achieved in a full quarter since our IPO.

<unk> increased 10% year over year.

And 4% sequentially.

We continue to deliver a compelling combination of high visibility growth with strong profit margins.

On slide five you will see a tremendous customer momentum in the quarter.

We reached our highest ever cross sell they are all in a quarter given higher than the levels. We saw at the onset of COVID-19 with demand for classroom technology spiked.

This growth was driven by success across the product portfolio.

For example, one of the largest K 12 districts in Canada Peel District School Board with 151000 students in Ontario.

Is an existing customer that chose to expand with us by adding six additional products, including our student information system.

Another good example of a customer recognizing the value of our platform is Clarksville Montgomery County School system in Tennessee.

Already a customer of our.

Talent assessment and <unk> products.

Replaced a competing classroom LMS with technology.

And also added a new behavior support solution to take advantage of the full integrated suite.

On the customer expansion front, we had another great quarter with over 40% year over year growth in new logo wins.

This helped increase our customer base to over 15000.

As we increasingly fifth call district embraced.

Integrated platform of technologies.

That drive operational efficiency advanced teacher, and student success and provide powerful data insights to administrators teachers and families.

We are seeing large new customers like Evansville vendor burst School Corporation in Indiana.

Nine products, including SaaS talent and Navient for the 'twenty 1000 students.

Additionally, our growing international team had another large win with.

With the new customer in Saudi Arabia.

<unk>.

Who purchase of a comprehensive platform, including our sits administration and full unified classroom suite.

A key reason behind the decision was that power still the only provider even internationally, bringing all these best in class capabilities in one sweep.

This customer success showed in the sequential growth of our IRR and an IRR.

<unk> growth of 10% year over year, and 4% sequentially was the best organic sequential growth we have seen since the COVID-19 driven mid 2020 timeframe.

Our improvement in cross selling combined with strong customer retention grew over INR 207, 3%.

A 60 basis point improvement from Q1 of this year.

As we enter the second half, we see a significantly larger pipeline of opportunities that we have ever seen including some large deals.

With a strong funding environment boosted by a stimulus funding.

Districts are accelerating their digital transformation plans.

In operations talent management, and classroom and getting better insights into help address learning gap for better and get students and empowering teachers.

As you will see in slide six since the end of Q1, we have continued the expansion of our industry, leading unified platform by introducing new organic products and completing a highly strategic tuck in acquisition to help districts solve for the ever evolving challenges.

Last month at the annual <unk> or International Society for Technology in Education Conference. We introduced an innovative new product that offers multi tiered system support known as empty assets.

To boost student success and support educators.

And TSS connects all the data to create actionable all child view and aligned cross linked intervention plans across all levels and types of support required for students.

We are seeing greater traction with this product, which was built organically on top of our unified insights analytics engine.

That continues to see strong demand and has become a clear market leader.

In Q2, we secured a multimillion.

Statewide contract.

From the Maryland Department of Education for unified insight that will benefit 850000 students with rich analytics across the state.

We are continuing to further differentiate our analytics offering by launching last week at our council of Education Innovation Conference.

Our new connected intelligence solution powered by Snowflake.

First fully managed data as a service solution for K 12 schools.

Having the ability to unify all data under one secure comprehensive platform.

And education agencies will be able to connect data from early childhood to adulthood, as well as internal and external data to position all students or lifelong success and positive social and economic creatures.

We further invested in our <unk> college career liked readiness solution with the acquisition of headed to.

Small, but very complementary tuck in acquisition that expands our <unk> capabilities for students of all ages, including elementary schools.

This solution also supports state level cc.

Sure it providing state specific carrier Mercury and technical education exploration.

And part of it planning portals for all 50 states and initial shaped by contract with California, Nevada and Pennsylvania.

This customer and platform expansion has resulted in record breaking profitability and success in Q2, helping.

Helping us exceed our financial guidance for the fourth consecutive quarter.

And setting us up well for a strong second half.

In fact July marked the one year anniversary of the public school IPO.

Going public was a major step in possible journey in support of our near and long term growth opportunity to redefine how the word education K through 12 students.

I would like to take the opportunity to summarize our progress on the four key unique differentiators, we highlighted during our IPO.

On slide seven I'll start with our unmatched unified platform.

Since the IPO, we have expanded the platform from 14 to 19 products.

Our continued progression towards a personalized learning vision.

Our innovation engine and investment strategies and complementary solutions of behavior support.

Unified communication curriculum management MTS.

And connected intelligence have further strengthened our differentiation and accelerated adoption of our platform to address the holistic needs for district to drive automation efficiency and personalization.

Our second key differentiator is our scale customer base.

We have amassed 15000 customers having added nearly 3000 since the IPO.

Through effective go to market operations and high return technology investment.

Tremendous market opportunities still ahead of us, particularly with $1 2 billion K 12 students that live outside of North America.

We are beginning to build capacity with feet on the ground and strategic channel partnerships outside of the U S and will be accelerating those investments further over the next six to 12 months.

We already are seeing strong early successes and middle East, India, Southeast Asia, and Latin American markets.

For example, our Q2 channel partner in India selected quality with plans for deployment across 250 schools, representing 160000, new students in India by mid next year.

Our business model is the third key differentiator. The model's foundation is entrenched with deep enterprise level relationships with districts and Education agency.

We are providing mission critical and efficiency, enabling solution that are core to our customers' operations instruction and supporting their students and educators.

Cross selling to our existing customer is central talent to our business model.

With our 15000 customers utilizing on average only two of our products, we have a unique and sizable runway for cross selling.

In fact since the IPO our cross sell strategy resulted in the number of multi product customers growing nearly 30% a great example of how we can dive deeper into our customers' digital transformation needs.

And lastly on the Differentiators, our financial profile is durable and has a long history of profitability and cash generation.

This profile is built on a high mix of predictable recurring revenue, coupled with strong margins and operating leverage.

We have expanded our profitability since the IPO with our adjusted EBITDA growing 22% and adjusted EBITDA margins, gaining over 400 basis points.

Sustained execution around these four differentiator has been a cornerstone of our success.

Strength of our sticky and resilient business model.

As the last of our solid financial profile.

Especially in an uncertain economic environment, such as we see today is enviable.

And we expect heightened investment in mission critical cloud solutions.

And data insights at school system modernized grid.

Creating a tailwind for this business.

I am more excited than ever about the various growth opportunities ahead of us and look forward to the coming quarters to showcase our continued momentum.

Let me pass the call over to Eric to cover our Q2 financials Eric.

Thank you Jorge we delivered a great second quarter, continuing the business momentum from the first quarter.

Our teams continued to execute on our strategy demonstrating the power of our unified platform through our cross sell momentum as well as adding many new customers.

Our focus remains on investing in and delivering the innovation that our customers value and expect from power scope.

The business is performing very well from a financial perspective.

So now let me get into the details of the quarter on page eight.

We ended the quarter with total revenue of $157 $6 million exceeding the high end of our guidance range as we saw balanced growth across the product portfolio.

Ascription and support revenue, which is our most strategic recurring revenue streams continued to grow at a double digit rate coming in at $135 million for the quarter, representing an 11% increase over the same time period last year and was 85, 7% of total revenue for the quarter.

Our services business continued to execute well generating $19 $1 million of revenue in the quarter, which was 19% higher than the same time period last year as we experienced continued demand from our customers for our services and training to deploy and adopt our mission critical solutions.

Similar to the trend we saw in the first quarter, we had more onsite engagements, resulting in an accelerated closure rate for several projects.

Our last and least strategic revenue stream as our license and other revenue, which came in at $3 $5 million for the quarter, representing two 2% of total revenue for the quarter and was down 54% from the same time period last year.

This decline was primarily driven by a few products within the <unk> portfolio, which we have determined should have been recognized as point in time revenue versus their historical ratable treatment prior to us acquiring them.

This contributed to an approximate $3 8 million onetime benefit to <unk> revenue in the second quarter of 2021.

Normalizing for this adjustment would have resulted in <unk> revenue being relatively flat year over year.

As I've mentioned before this is and will continue to be a small and variable component of our revenue streams.

We finished the second quarter with an annual recurring revenue balance of $583 million, representing a 10% increase over the same time period last year.

As a reminder of our business seasonality the second quarter is typically the strongest quarter due to the nature of school districts budgets and buying patterns.

Our cross sell momentum continued as demonstrated by the number of customers that use four or more of our 19 products increasing from 880 at the end of 2021 to over 200 at the end of this quarter, representing more than 50% of our annual recurring revenue.

Our net revenue retention or <unk> came in at 107, 3%, representing a 60 basis point sequential quarterly increase.

The positive trending of this metric highlights our cross sell as well as the retention and stability of the mission critical solutions that we're providing to our customers.

As a reminder of our business seasonality a significant portion of our renewals occur in the third quarter. So while we expect this metric to continue to trend favorably for the year the level of increase for the third quarter may moderate.

Adjusted gross profit for the quarter came in at $107 $2 million with a 68, 1% margin representing a 200 basis points sequential quarterly increase and a slight decline of 40 basis points from the same period last year.

This year over year decline was driven primarily by the mix of revenue components, whereby last year, we had a higher proportion of our non strategic license and other revenue, which carries a higher gross profit contribution.

Now turning to operating expenses in the second quarter, our adjusted research and development expense came in at $22 2 million, representing 14, 1% of revenue, which compares to 14, 7% in the same period last year.

Including capitalized R&D expenses, our total invested in R&D was 21, 7% of revenue highlighting the investments we are making to deliver market differentiating innovations.

As mentioned earlier, we've announced our organic development projects on connected intelligence and unified insights MTS, which aligns with our continued focus on delivering towards our long term personalized learning strategy.

Adjusted SG&A expense in the second quarter was $36 8 million, representing 23, 3% of revenue, which compares to 19, 5% in the same time period last year, which was related primarily to the various public company costs that we've taken on since our IPO.

Second quarter, adjusted EBITDA was $48 $7 million or 39% margin exceeding the high end of our guidance range for the quarter.

The second quarter margin was outstanding and reflects the continued focus we have on driving both top line growth as well as profitability.

As I've mentioned in the past, we will drive operational leverage within the business as well as continue to invest in our innovation engine and go to market teams to achieve our long term financial objectives.

While we do not guide to it as a reference non-GAAP net income was 22 per fully diluted share.

Now moving to the balance sheet, we ended the quarter with $15 4 million in cash and equivalents, reflecting the seasonality of our business as a reminder, a substantial portion of our customers operate on a July fiscal year. Therefore, we typically see the second quarter as a period of elevated new and cross sell.

<unk> combined with lower collections on our annual invoicing in the quarter, while the third quarter represents a higher renewal period, and an increased level of cash collections.

Given the seasonality, we drew an additional $40 million from our revolving credit facility during the quarter, which we have already repaid and we expect to pay down the remaining $30 million balance of the revolver by the end of the third quarter.

The result of this cash and revolver activity was a three times increase to our net leverage ratio from the end of the first quarter.

This was expected due to our business seasonality in the second quarter is the high point for this metric.

We remain well ahead of our pre IPO Delevering plan and given the stability of the K through 12 education funding environment. We are confident in our ability to service this debt over the long term.

non-GAAP free cash flow was a negative $28 2 million for the quarter driven by our seasonality of cash collections.

Also as interest rates continue to increase we had an approximate $1 $8 million impact to cash for interest paid in the quarter.

Now turning to our third quarter and full year outlook on page nine for.

For the third quarter, we expect to deliver total revenue in the range of $162 million to $164 million, representing a nine 4% year over year growth rate at the midpoint and.

And adjusted EBITDA of $49 million to $51 million representing.

Representing a 37% margin at the midpoint.

For the full year, we are raising the top end bottom end guidance ranges for both revenue and adjusted EBITDA, reflecting the continued business momentum stability and resiliency in the business.

We now expect total revenue in the range of $630 million to $634 million with the midpoint, representing a 13, 1% year over year growth rate and adjusted EBITDA of $188 million to $191 million.

Representing a 30% adjusted margin at the midpoint.

This guidance is inclusive of our recent tuck in acquisitions, which collectively are not expected to materially contribute to revenue or profitability in 2022.

For modeling purposes, we expect capital expenditures, excluding capitalized software of approximately $7 million and share based compensation expense of approximately $55 million to $60 million for the full year fully diluted shares by the end of the year are expected to be in the range of 200 to 205 million shares over.

We delivered a great second quarter demand for our solutions remains strong and our unified platform approach continues to drive meaningful value for our customers. Our team has demonstrated consistent execution and we will continue to focus on the key strategic differentiators to generate growth and compelling profit.

We're excited about the long term growth opportunities there in front of us as we leverage our operational scale and create long term value for our customers shareholders and employees.

With that we're now happy to open the call for questions. Operator will you. Please open the line for Q&A.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.

You May press star two if he would like to remove your question from the queue.

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Your first question comes from sake calia with Barclays.

Okay, Great Hey, her the pay Erik and team how are you doing.

Is that accurate.

Hey, Thanks for taking my questions here and a.

Nice quarter.

Maybe just to start with you.

To see the cross sell I think you said best quarter ever on cross sell activity. So I was just wondering if you could just dig a little bit deeper into what parts of the business you are having the most success with cross selling and what do you think is driving it.

Sure.

First I guess.

We had a very stable end market right and one of those three things. We are seeing is we are seeing strong tailwind pretty much in every area of our business as districts are looking at transformation for not just classroom, but also operations talent management.

And when you look at from a demand.

Give some example, its pretty much cross sell demand is assumed to be across all of our product categories. Now one of the reasons why you're seeing cross sell growth to exit rate is what we've always talked about the platform strategy is really key.

Districts are looking for the solutions that theyre looking for areas, whether it's post pandemic trying to address loaning gaps or trying to address their talent management B theyre looking for any great system. They don't want to put another point to somewhat niche system and having to deal with providing multiple environments strategic that students and parents. So that continues to differentiate.

That's why I mentioned, our number of customers, who have more than one product as have increased by 30% and shared that.

Customers, who have more than four plus product again like increasing by 50% to 60%. So we're seeing cross sell pretty much really very robust now, let's give an example of chew like I mentioned about the unified insights with Merrill Lynch one of our biggest deal of the quarter, but also for our insight insight that's definitely an area, we're seeing tremendous growth as.

You can imagine a lot of districts are kind of realizing that they need better understanding of where the students are.

And how they can help them. So that definitely has a huge growth area for cross sell we're also seeing strong growth sale of talent management products due to the teacher shortage with recruitment with retention, but professional development. That's a big area for investment for lot of school districts, we are seeing tremendous demand that.

But we're also thinking about the core modules of student information system special and they are also seeing a lot of growth. Some of the projects were initially kind of during the pandemic were put on hold but now we are seeing drilling.

Projects coming in <unk>, we talked about peal under my prepared remarks. We're also got just a vendor of choice for our entire U S territory.

We are definitely seeing some very strong demand on these core modules as well.

Got it got it that's great Eric maybe maybe for you you touched a little bit on the seasonality of some metrics like like NR and I know, we don't guide to net new <unk>, but clearly some different seasonality here just given the K through 12 budget cycle can you just remind us how that play.

Into this quarter and Directionally again understanding you don't guide to net anywhere, but directionally. How do you think about that net new <unk> as we look at the back half of the year.

Yes, that's great question and I appreciate the opportunity to build to continue to just remind everybody that the seasonality of the business and you know I had it in my prepared remarks.

As <unk> said this was the best cross sell quarter, we've had adding a net $23 6 million to our.

They should typically we'll see Q2 as your biggest net add in terms of IRR and then as you go from Q2 to Q3, just as a reminder for everybody Q3 is our highest renewals period. So to the extent you see that we may see any kind of churn is going to happen in Q3, So typically what we.

We would.

Kind of for modeling purposes encourage all of you to think about and you can look at last years I would assume the net new <unk> to really essentially be flat from Q2 to Q3, and then again once we got from Q3 to Q4, you will see a pick back up as you see the bookings continue to build so.

Hopefully that's certainly some some helpful context around that I would also say since you brought up.

We're really really thrilled with a 60 basis point improvement sequentially from first quarter into second quarter, and then again as you think about the impact on that metric. When you go from Q2 to Q3 again I would assume.

We're going to be relatively flat and then youll see it again pickup and we're we're in a really good trend.

And the year ahead of where we thought we'd be so hope.

Hopefully that's helpful for everybody.

Yeah Super helpful I'll get back in queue. Thanks, guys.

Thank you.

Next question, Brent Thill with Jefferies. Please.

Good afternoon.

You mentioned the record pipeline I'm just curious.

If you could kind of unpack, what you're seeing and what the drivers are with with funding Thats out there is there.

As it relates to.

Tools that you've seen that in helping night.

As the macro headwinds and everyone's worried about as well.

Just kind of frame up what you're seeing overall on the pipeline and what you're anticipating in the back half.

Sure Brent happy to.

But first I guess one of the things we have emphasized and shared is that when you look at K 12 funding environment, that's largely insulated from what youre seeing the broader macroeconomic factor, but thats inflation recession.

We shared on the last earnings call about a 30 year data of K 12 funding and except for the housing crisis is pretty much has increased every year.

And when you look at from a perspective of.

The tailwind, especially around the fact that it's a very large market $700 billion get spent in K 12, and just U S alone and you've got a very strong tailwind as districts coming out of the pandemic and during the pandemic realize that.

There are more than 50% of the systems are either manuel or lack of automation or legacy.

A huge demand opportunity that what we are seeing and thats, what youre seeing in the pipeline, we're not only seeing some of the largest pipeline. We've ever had we're also seeing that the large deals really.

Coming to mature as well.

Mentioned.

Not just.

Our whole territories, where we have got vendor of choice on a student information system. We're seeing some of the demand of <unk> international as well, including entire countries, who are kind of excited about kind of looking at forward two to improve their internal Quechua infrastructure. So we could not be more excited about the pipeline is largely very balanced.

As I was mentioning to careful here.

There's a lot of <unk> analytics.

That is our highest growth area as you can imagine we are also seeing demand in talent management product our classroom products continue to do exceptionally well take example, learning management system, we are bringing in new Trinity of Guam onto our platform.

Very exciting project there, but we're also seeing demand across the not just large customers a lot of small and mid size on learning management assessment product or special Ed our behavior management all of those really playing to the critical leap. The districts are dealing with right now which is how do you engage students how do you retain teachers and pretty much everything.

<unk> really comes in as one of the most important pieces to help them.

Manage their entire operations.

And I would just add obviously, we took the guidance up for the year, which just is another reinforcement of that.

Just the activity that we see in the second half and just how positive we are in terms of entering the.

The busiest renewal period that we have.

And then thereof.

Just a quick follow up hardee's anything long term to believe that you under internationally you can have a split that looks and feels like other enterprise software companies over time on the international front.

Anything prohibiting you from.

From generating 30, 40, plus percent drain from those markets or do you feel like that that's going to sell it.

No I definitely think we would be in that position and in fact within the next couple of years I expect this to any special to become a material I think we've always talked about our focus has been in North America.

But we have still seen tremendous proof points like country of Paraguay, because there were insurance quality platform and Philippines with 600000 students. We have started putting a lot of attention, but actually boots on the ground in middle East and India. So we are already seeing some very good success as I shared that on this call a bottom RF and last call about lever we have a partner in India was putting about.

150000, plus students Turner Scotia platform, we are definitely going to see demand not just on the again up one or two of these product, but we're actually seeing in trust across the entire platform as you can imagine a lot of the international with $1 2 billion kids with a lot of no other vendor who actually offers them. This full integrated suite, which is best.

<unk> costs were getting a lot of excitement about as theyre looking at transformation. They want to look at a holistic transformation of older systems and you would not imagine.

State or any country or any new districts, putting in multiple fragmented environment, they're going to want to put in more integrated aspects. So they can have one experience for a student one experience for their teachers and one experience or the parent and that's where we differentiate so we are expecting international demand.

We are definitely going to be increasing over investment on channel there as well as boots on ground. So I do expect in a matter of next few years. This will become a material contribution to revenue.

Thank you.

Next question Koji Aikido with Bank of America.

Hey, guys. Thanks for taking the questions.

Just kind of wanted to follow up the prior question on the record pipeline and thinking about sales cycles. Some of the other software vendors are calling out elongated sales cycles, and just thinking about the seasonality of our business are you seeing any sort of elongated cycles at all and if you are.

What could that potentially mean from an eventual bookings perspective do deals get pushed out by a month or a quarter or something gets pushed does it get pushed out for a whole year.

Hi, Koji I think great question, we actually are seeing the reverse of that we actually think the sales cycles.

Extra related.

Coming out of the pandemic.

As <unk> shared during the pandemic, we saw huge demand and adoption for learning management and classroom products almost added four to 5 million students on there.

The district that come out of pandemic and Theyre trying to look at more of a holistic transformation. We have seen a further exploration across the areas like talent management.

You've written a lot about some of the future shortage, which is definitely driving a lot of.

Solution buys around how districts can recoup features help them onboard efficiently managed structure teachers Alpha less professional development of those teachers, which is very critical top of the mind. So we are seeing a lot of interest there, but as well as I mentioned in the when you look at the holistic aspects of connecting the data and understanding what kind of support the chart.

<unk> lot of our both our core platform and some of the innovation, we have talked about like PSS and intelligence as well as some of the add on tuck ins, we have done around communication and attendance intervention curriculum social emotional these are top of mind for our districts and were able to meet their key demand.

That's actually helping us drive our sales cycles to be even more efficient and more faster and we've seen that not just in small customers. We are seeing that even with our larger customers. So.

Some of the state the opportunity I mentioned like Maryland, which is one of our biggest unified insights deal and literally developed in <unk>.

Closed in a matter of few months.

Got it thanks, and just one follow up here, if I may for Eric Sorry, you guys acquired headed to headed to during the quarter and it sounds like it's going to help to drive better outcomes Post high school. So that's really great to hear just a couple of questions.

There is any revenue contribution from attitude added to this year.

And what is the pricing model for that business. Thanks, guys.

Yes, so I'll take the revenue revenue is well under $1 million.

Insignificant this year.

Again exciting technology. This is what we've been saying are part of our technical tuck.

Tuck ins that we acquire the technology.

At a time as these companies have very little revenue to them, but good technology base that we can not only build off of but then just investing further into and then bolted into the platform. So.

No material revenue.

<unk> contributed.

Contributed in 2022.

And if I can add <unk> <unk> to your point about what are some of the street strategic drivers as you know Navios. It's already the number one college career library in that solution almost 40% of the North American students have access to it and we've seen huge amount a 15% increase in USA just last year on the whole college applications, but one of the things which really.

Prompted us for head winds, we are actually seeing a lot of strategic interest not just from the districts, but actually entire states around Korea.

Exploration and how to provide that given earlier not just in high school, but in Middle School and all the way into elementary school headed to has been an exceptional platform, which has done that.

It already has 50 plus state portals with elementary access as well and Thats something addressing a key need we were hearing from our customers both of the district and state level. So we're very excited about this area and we believe this can really add to the overall student success not just from the College Park space, but also in the Korea, then different training options they have.

Excellent. Thanks Hardy thanks, Eric Thanks, so much.

Thank you.

Next question, Stephen Sheldon with William Blair.

Hey, Thanks, and really nice work in the quarter first firstly I wanted to see if you could provide some more context with a strong pipeline commentary and in the quarter.

Roughly how much of the pipeline up relative to last year, and then could be the stimulus funding actually shift purchasing behavior at all from a timing perspective, with maybe more potential purchasing the normal happening during the actual school year are you seeing any signs of that.

Thanks, Stephen Great. Good questions I think on the pipeline.

Again, I would just a trip that it's not only highest pipeline what we have seen.

So far but it's actually also.

The mix of large deals is tremendous and that so we have some of the largest deals we've ever worked on in the pipeline. So we are definitely excited about that I mentioned, a little bit about Cherokee vendor of choice. Similarly, we had a very strong.

Interest internationally as well so that kind of gives you enough context about the pipeline that we'd be happy to share more about these opportunities as it progresses in the next quarter or so when the.

Second part of the question.

As stimulus linger all in is that kind of changing some of the buying pattern I think stimulus has definitely been a big positive for the broader kitchell industry. Given when we are not directly supporting a deal through a similar it's actually providing additional funding which is helping free up dollars for it spend so again.

Virtually we.

We could not be in a better funding environment and thats going to continue for the next three to four years as we look through the funding.

Our ability.

Lot of times as we have talked about that.

Where we do see the buying patterns are largely based on a lot of back to school readiness right. So that's why you see Q2 always to be our biggest quarter, but there is also as we go into the.

Q4.

Yes.

In Q1 that a lot of district, especially if they're larger district. They will prepare for that so we definitely see Q4 also to get a shot to be pretty good and healthy Q3 is the one quarter, which always is a little bit because districts are busy with back to school. So that historically, we always expect that to be.

Somewhat of a quarter, where districts are not looking at buying membership they want to kind of get go live and then implement.

But I think to your point with some of the large deals that could change as well. So we definitely are looking to again, the second half to be strong, but I would still put Q2 Q4 to be able to largest quarter that seasonality potentially is not going to change in the short term.

Got it that's really helpful.

Follow up lots of it seems like Theres lots of encouraging product announcements here so on the unified insights MTS as it.

It seems like there could be high demand for this given the need for more personalized learning and a big focus on interventions when students are falling behind from.

From a from a school district sophistication standpoint, how sophisticated do they need to be to find these solutions useful or is there a lot of automation on year and help them actually act on these insights.

For each student.

Great questions. So first in terms of sophistication actually one of the beauties of how we have it.

Implemented MTS is that irrespective of whatever system. They are using they can use our MTS as a layer on top of it and really take advantage of providing more coordinated intervention plan irrespective of what technologies, whether they are manual or stuff. So.

You go to what where we just.

Sure.

We also shared with our console of education innovation.

The presentations of Berkshire is available on our best site and you will see as we talk about MTS us in some of the customers story there.

You almost have more than doubled.

Doesn't the customers, who actually already selected of MTS doesn't no matter of philosophy.

A month or so, including a customer like wind and solar moves of our SaaS customer, but use is actually a third party LMS and kept bogey, but still leveraging around TSS to help them kind of manage that entire intervention client. So it's really automating that entire process of coordination the meetings the tracking of the interventions in analytics around.

And the underlying intervention could still be manual, but it would still give them an ability to have better. This is even more important as the districts are required even by our sort of funding to shoal, 20% of that spend to be going in areas as to how they are actually improving and providing the support for the kids who were impacted.

So this we see demand for this area already to be very high and we are already seeing some great early successes.

Good to hear thanks, guys.

Thank you.

Question, Joe <unk> with Baird.

Great Hi, everyone.

Just stepping back and kind of digesting everything that's been said on the call. It seems at least sounds very plausible that.

Our growth in FY 'twenty three is faster than FY 'twenty, two does that seem reasonable just given some of the input assumptions. So it's kind of been discussing tonight.

Vice versa, what might be some of the risk to consider that function as sort of an offset to that.

The strong bookings currently and then the better pipeline going forward.

Yes, let me just start I mean, obviously, we don't we don't guide to it but I think everything youre hearing from us in terms of the strength of the pipeline.

Business momentum as we exited Q1 continued into Q2, obviously you guys are seeing in the results. So.

Yes, I mean, as we get through the end of this year and then start setting up next year I mean, we certainly could especially as we've seen some of these technical tuck ins that we have and those capabilities really come to market and provide additional.

Products to our customers.

We could be in a situation where for sure as we've said in the past all of these things we're doing.

It de risks, our double digit low double digit organic growth and Thats, what were really pushing for us. So we're super Super positive.

Obviously, we're focused on finishing this this year really strong and going to focus on executing the second half and then certainly as we start to set up the following year in the fourth quarter. I think you guys will have a better view as we will as well, but certainly very optimistic and positive for sure.

Okay, that's great and then.

Similar question just thinking.

Of things that have changed from the initial communications with the IPO.

We're now at a point, where execution is driving kind of sequential gains and profitability.

Sitting here a year later any any different framework for just how you think about the business.

Annual basis, maybe driving margin expansion or just any more clarity.

Why do you need to invest in different areas of investment that might change the trajectory of margin improvement.

Yes, so what we've been saying Joe is on an annual basis expecting a 50 to 100 basis points of growth.

I think thats still a good construct as you noted we are well ahead of the IPO plans, we had and the team is executing quite well, but that's not at the cost of us.

Investing in some of these strategic areas as Hari mentioned international over the next 18 months to 36 months is an area that we're going to continue to strategically invest in as well as as we look opportunistically for additional capabilities that gets us along the personalized learning mission that we're on we're going to continue those opt.

<unk> as well so yes, I think theres a lot of exciting things out there in terms of growth opportunities.

So, but having said that we're still going to drive the operational leverage and.

The annual framework of 50 to 100 basis points of expansion is.

Still is still valid.

Okay. Thank you very much.

Next question, Fred Hey, Meyer with Macquarie.

Okay. Thank you and I just want to say congratulations on a strong quarter.

I wanted to.

Really hit again on key topics I think you've discussed <unk> been asked about throughout but it seems like throughout your discussions and responses to questions Youre emphasizing.

<unk>, certainly cross sell quarter record deals in the pipeline potentially there.

It sounds like Youre using the word record question I'd just like to ask what's driving this is there something going on in the market with fiscal stimulus, which is generally with digital transformation trends, which when consumption trends leading to such a constructive backdrop for power score and these.

Setting cross sell results that Youre seeing.

Two credits, it's actually all of the above right I think we're in a very stable market right, which has got good similar to back up the funding even further the tailwind that's been pretty strong right both from coming out of the Covid as well as even prior to Covid. The digital transformation is required and then our platform strategy is very different Shannon, which is working through an advantage that we have.

Such a diversified portfolio that we're able to address all the different varying needs. They have irrespective of what areas of their priorities are and we are able to be their partner and that's why you see cross sell to be good new logos to be good as well as the pipeline to be good so it's pretty much.

As we've always talked about we have a great business and a very differentiated offering and a market, which is very stable. So we couldnt be more excited about all of our performance and execution towards that.

Thank you Hursey and then Eric perhaps for you.

As we're in a rising interest rate environment I wanted to just circle back around about power schools thought about both leverage and consider it positioning in a rising interest rate environment. So could you provide any sort of updated view about how were schools preferred leverage profile and generally any commentary that would be helpful. Also for understanding.

The impact of rising rates. Thank you.

Even with the rates as they have risen this quarter. The rate. We paid was $4 62, which is still relatively cheap cost of capital. So I think as you all know our debt instrument is variable. So for every one 101 full point if you will of interest rate increase it's about $7 5 million.

Interest expense for a full year. So we haven't changed our view in terms of the capital structure of the company. Obviously, we're going to continue to watch interest rates, but even as we've factored in some of the expected increases for the balance of the year. We still think it's extremely attractive to us to have this debt instrument out there.

Thank you.

Next question, Matt Hedberg with RBC capital markets.

Great. Thanks for taking my question guys. Congrats from me as well on strong results and guidance are deep on the record cross sell I'm curious how much of that do you suspect is from consolidation.

Maybe other vendors or is this largely sort of new.

New business opportunity within these districts.

Thanks, Matt Good question when you look at the majority of what we do business is actually a replacement of.

Either <unk> or legacy so whether it's the analytic feel they probably don't have any environment, which is.

Our module that whether that's ticked example, appeal, where we are putting up a new science system.

A very legacy platform and Theyre moving along with that they bought like almost six months to have another product. So half of those properties were done manually.

Custom code right, so whether it's the large deals or your small deals.

Majority of that is actually replacing paper pencil a legacy environment. There is very few replacements, but we do see replacement like cluster is a good example, but largely it is.

A white space.

Got it that's helpful. And then I wanted to go back to the analytics side I think we all see that as a huge opportunity is it's great to hear the success that you're having.

I'm curious since you've owned who knew it.

Are there some maybe some of the more interesting data points, you've gotten from districts when they maybe had funding or they said, yes, and they turned it on and the lights went on and they just sort of like saw those benefits are there anything tangible that like some of these districts are saying that you are using.

Sort of your new sales initiatives to convince other districts.

Great question, we in fact.

Had.

A lot of interest on this area.

Encourage you to check out somewhat for presentation at the council of education innovation on the website.

District, like Modesto that presented with me on the keynote along with Ela unified in mobile County in Alabama State and.

But just sort of talked about how the analytics was a core part of their.

Our ability to engage students, but also look at the holistic view of where their talent operations and how they kind of have really helped drive the entire.

So.

District, So theres a lot of exciting we have concrete measurable kpis in terms of attendance improvements in terms of reducing disagree actions in terms of better engagement as well as the improving of graduation rates and you've got tons of case studies on our website related to the analytics benefits. So we're seeing the interest.

Ross The board that's why on the analytics on all of these different strategic metrics.

Thanks, So Dave Congrats again.

Thank you.

Next question Gabriela Borges with Goldman Sachs.

Hi, This is Kelly on for Gabriela Congrats on the quarter.

I'll start with the opportunity with connected intelligence can you talk about that for a second it seems super valuable on how his initial initial customer willingness to engage in conversations about adoption, then and how do you view this product as a game changer for schools.

Great Kelly.

We as you know we talked about we just actually launched this product last week at our conference and we had snowflake present with us about the opportunity and how the entire connected intelligence not only leverages. Some of the analytics, we are talking with our unified insights product, we were able to open up the connection to the other data whether that's.

Coming from systems outright power school or even outside that our organization I would say the district, but social services or Julian all crimes or other areas of pollo really bring all that data together, including almost kept through 'twenty view about the students who have a much more longitudinal view.

We have.

A lot of exciting interest on that from not just states, but districts as well and including some counties, who have implemented our analytics platform at the four county level as well.

We expect we're going to have at least.

50 to 100 customers, who are leveraging our unified insights to take advantage of our connected intelligence by the year end based on the demand we're seeing.

Great. Thank you and then just as a follow up on law school budgets tend to be fairly insulated from these macro <unk> I wanted to see if you've seen any impact from hiring, especially as you build out internationally.

In terms of hiring too for our own.

The company does that answer your question, yes, exactly. Thank you, yes, I think we're seeing that broader talent market. The way we have seen it.

As you can imagine with all of the companies, though I would say that we have lately seen the environment should be much better, especially given our strategy is one we're kind of multiple center of excellence and remote working across the U S. We had also a lot of times, we are bringing folks from education industry, who are actually very excited about the.

Joining because this allows them to have a bigger impact and we're seeing that to be international if you look at India hiring where we have a big center of excellence, we have actually grown that by almost.

100 people just in the last year itself. So we continue to see actually an attractive given where we are mission driven and that really helps us attract the right talent.

Okay. Thank you so much congrats on the quarter again.

Sure.

We've come to the end of our Q&A session I would like to turn the floor over to hard deep galotti for closing remarks.

Thank you operator, and thank you to everyone, who joined our earnings call.

I'd like to transfer to again impact the 3000, plus employees, we have globally as well as over 15000 customers and partners, who team up pretty much every day to drive these education improvements and impact soon outcomes in closing what I would again highlight some of the key things I talked about we had an exceptional second quarter.

We highlighted by some of the highest ever to cross sell a R. R.

We have a strong customer momentum across the board on.

The entire products our platform expansion continues to even create the depreciated and further with new and innovative solutions balanced by a very strong profitability profile as well. So our products are very mission critical they're very sticky to the school operations and as well as your end markets is very stable and non cyclical which allows us to continue the performance even in this macroeconomic <unk>.

<unk>.

Rick mentioned, we are very optimistic about the massive runway ahead of us and we.

We would love to share more about it in the coming quarters. Thanks, again for everyone and we look forward to talking to you again in the next quarter.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

Okay.