Q3 2022 PowerSchool Holdings Inc Earnings Call
Thank you for standing by this is the conference operator welcome to the powered school third quarter 2022 earnings Conference call.
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I would now like to turn the conference over to Shane Harrison Senior Vice President of Investor Relations. Please go ahead.
Operator, welcome everyone to power schools earnings conference call for the third quarter ended September 32022.
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 today's call. We have power schools CEO of Hardie, Gulati and CFO Eric Sander.
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 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 the results presentation, which are both posted a power schools Investor Relations web site at.
And investors about our school Dot com.
Replay of this call will also be posted to the website.
Let me now turn the call over to Ari.
Thank you Shannon and thank you everyone for taking the time to join us today.
Our third quarter was a testament to how well our teams executed on about market differentiated strategy and business model.
We continue to drive strong revenue and they are our growth.
But the power and the breadth of our comprehensive platform.
That provides mission critical solutions for K 12 organizations to help effectively manage their ongoing demands and challenges.
As demonstrative this quarter the significant cross sell opportunity all forward diverse portfolio of market leading solutions.
Our captive large installed base.
Allows us to continue to deliver on the top line growth.
While our operating leverage is providing a meaningful ramp in profitability.
Let me begin our review of Q3 on slide four.
The summary of our financial results total revenue reached 162 million for the quarter.
In line with the guidance, we provided last quarter.
We continue to see record pipeline that gives us confidence to reaffirm our increased full year revenue guidance from the last quarter.
In Q3, we grew our adjusted EBITDA 30 person year over year and drove meaningful margin expansion, reaching 32%.
This represents our highest margin since our IPO.
And exceeds our guidance from the last quarter.
Additionally, we are raising further our full year guidance for profitability.
Subscription and support revenue grew double digit euro what are your 237 million.
Our E R. R increased 11% year over year with strength in our retention cross sell and new business.
Our consistent performance to market expectations and metrics showcase of our compelling differentiated business model.
In a highly stable and Youre able K 12 market.
Largely insulated from the broader macro inflationary and recessionary factors.
And also it's a testament of our diverse highly predictable revenue streams that are growing materially and the decreased profitability.
Let me share with you more details on each of our growth vectors that will help us deliver this consistent performance.
Slide five shows some of the customer successes in the quarter for these different vectors.
The third quarter is generally the busiest time for us as it does not only back to school, but it also the time their administrative and back office staff are starting the new fiscal year.
For us that means the heavy few months of product renewals and might as well system implementation.
Our renewals team had a record quarter and our sales and customer success teams drove higher incremental new bookings from existing customer when you compare it to the prior year.
Our net revenue retention rate for the 12 months ended September 30th.
Increased 140 basis points to 187%.
Our best sequential improvement since Q2 of 2020.
During the quarter, we saw great growth in all aspects of Iraq.
With particular improvement in retention and cross sell increases year over year.
Speaking of cross sell and continued market expansion, we saw broad based customer booking activities that spanned our entire product platform.
We grew our wallet share with existing customers and continue to add new logos to our customer base.
A great example of that is of a large deal at one of the largest online K 12 learning provider striding.
They selected public school for the global student information system and involvement needs for their online public and private schools.
And well over 100000 enrollments.
Already used it off of a knob young and student assessment solution for a small store in population strike wanted to modernize their homegrown back office system for the entire kitchen, well online infrastructure.
With the expected long term growth in virtual schooling globally.
In the coming years with a very large Tam we are excited to partner with global online companies like strike growth. This space further.
The other G growth factor for US is we have the most comprehensive and diverse portfolio of solutions that provide mission critical capabilities required for the kitchen education ecosystem.
There is no shortage of headlines about the stress this enough of an education system.
Teacher shortage learning gaps attendance shortfalls, social emotional support equity and data security.
Our differentiated platform with 19, plus products is becoming even more essential to help district deal with these challenges and initiatives that span across operations talent and classroom.
We are seeing continued high demand and.
Growth in our student solution or.
Insights and MTS just kept the bogeys.
Talent management and behaviors and clock curriculum management solutions.
That's most of all sizes continue to flex our platform as powerful as the only broad vendor that checks all of these boxes.
Great example of this is our platform win at plan or check the independent School district with over 50000 students.
They were looking to replace their existing S. I S.
Integrated platform solution.
Adding over S Hyatt enrollment ERP did.
Insights products to already they are existing implementation of several of our talent products will improve not only the internal operational efficiency, but also drive better outcomes for teachers and their students.
We are continuing to see balanced demand across our product portfolio. We recorded nearly 500, new logo and cross sell transaction in the quarter.
Including several sizeable wins for S. I S unified insights talent, navi honest and classroom products.
Building on our proven success in providing classroom solutions at logistics like L. A U S. D. Mammy date Fairfax. We are excited about another large district, Baltimore City with 75000, plus students selecting school of Jeep as their LMS solution this quarter.
With the addition of oncology to the possible talent and Navios products at the district.
We look forward to exceeding Baltimore cities expectation and furthering our solutions footprint within their district.
As we shared one of our newest growth vectors is though in international expansion.
We are seeing similar level, a critical need of platform like ours to provide unified comprehensive capabilities to help international private and even local schools in various geographies around the world.
Our dedicated sales initiative in the Middle East started earlier this year and has already shown strong success and proves the opportunity we have been able to extend that model to other regions.
And decided to share another very strategic platform do you win in the U a E.
At Aldar education.
And although dobie paint education system that manages several charter and public schools in the region.
Aldars Blueprint public school purchased multiple solutions, including his Fiat and school of Chi from Power School.
To provide an integrated view of their systems students an operation.
Holly we gained a new logo for our platform and in Egypt.
International School of elite education, or I S E E.
One of the key aspect that is driving our growth is our scale.
But when track record and box experience, which allows us to quickly meet and support the most critical urgent needs the districts might have.
We had our most successful back to school in terms of customer experience.
And impact across different aspects of the school operations.
3 billion plus professional development courses taken.
750000 substitute teacher position filled.
One 3 million jobs posted.
46 million plus formative assessment is delivered and 900000 plus college and career assignments completed in the quarter leveraging of our platform.
Our top line momentum is very compelling.
Given we continue to do it while also increasing our profitability.
In the third quarter, we exceeded the high end of our guidance range of adjusted EBITDA and continue to expand our adjusted EBITDA margins to levels well ahead of our 2022 targets, we communicated at the beginning of the year.
I will let Eric go into the more details, but the operational rigor we have applied coupled with the growing scale. We are experiencing we expect continued expansion in profitability going forward.
Let me also share some very exciting news today, we announced Eric's promotion to president and CFO .
In this new expanded role Eric will assume responsibility for our customer renewals operations.
Having.
Successfully built our public company reporting and G&A infrastructure I'm excited to have Eric bring his scale and growth experience to this critical part of our business.
We had also announced the addition of 20 tender as of a new Chief revenue Officer.
Tony has 30 plus years of expertise in building scaling and optimizing global sales organization. Most recently at Seattle Etch financial horse.
And prior to that as an SVP and GM at Oracle.
We are excited to add him to our exec team and want to tank or current C. R O. Greg Green site for his meaningful contribution to power school ambition the best as he moves to his new endeavors.
We are very happy with the continued business momentum we are seeing heading into the fourth quarter and look forward to finishing the year strong.
Our sales pipeline continues to be very strong.
8% growth year over year.
And sales velocity continues to improve at all.
In the funnel, we are seeing a great mix of new customer logos.
Very large opportunities and a bundle cross sell prospects many of which we are in the pole position to win.
Our confidence is further reinforced by a continued strong funding environment.
Further supported by our three fourths of after funding still being available for district to spend over the next few years.
It is clear that over value proposition.
<unk> differentiated comprehensive platform are resonating in the market, which puts us in a better position than the niche providers.
Let me pass the call over to Eric and detail the financial performance for the quarter.
Eric Thank you Hardy our third quarter performance was outstanding highlighted by the strong sequential improvement in our annual recurring revenue net revenue retention and profitability.
Our teams continue to execute on the growth strategy by increasing sales to both new and existing customers, while delivering best in class customer support and service.
We continue to see strong demand across our product portfolio with strength in our CIS analytics and behavior offerings.
At the same time, we've been focused on our internal functions by streamlining processes and controlling cost while continuing to invest in new product development. Our international expansion continued product integration and other key growth initiatives.
The financial health of the business has never been better and we remain confident in the resilience of our end market.
Our ability of our financial model and the tremendous long term opportunities ahead of us through international expansion and personalized learning.
Now, let me dive into the quarterly results with more detail, which you will see on slide six.
Third quarter revenue was $162 $4 million in line with the guidance range. We provided in our second quarter earnings call and overall revenue was up 9% year over year.
Subscription and support revenue, which is our most strategic recurring revenue stream grew at 10% on a year over year basis and accounted for 84, 4% of total revenue in the quarter, a 100 basis point improvement over the same time period a year ago.
Our services business, which generates revenue through fees related to new product implementations customization and customer training delivered revenue of $19 $9 million, representing an increase of 8% year over year, driven by higher implementation customization and our in person power School University.
Mining events.
Our services revenue came in slightly below our internal expectations driven by a few services projects and they were a few subscription renewals that were also impacted by hurricane and at the end of the quarter.
All of which have already been closed in the fourth quarter.
The team helped to drive a successful back to school season with over 1700, and 50, new product go lives that prepared schools and districts for the 2022 'twenty 'twenty three school year.
We also hosted several powerful University onsite training events that had great attendance.
Our consistent dedication to customer success is translating to better retention and higher customer satisfaction and continued cross sell momentum.
Revenue from licensing other our least strategic and most variable revenue stream, representing 3% of total revenue came in at $5 $4 million for the quarter, representing a slight decline of $800000 from the same time period last year as we continue to place more focus on subscription based partner relate.
In shifts.
We ended the third quarter with an annual recurring revenue balance of $585 $4 million, representing an 11% increase over the same time period last year.
The strong performance was driven by higher cross sell coupled with continued strong gross retention.
Our net revenue retention or NR or came in at 108, 7%, representing a sequential improvement of 140 basis points a year over year improvement of 310 basis points.
The significant sequential improvement in this key metric was driven primarily by our higher LTM cross sell as well as strong gross retention coupled with our annual contractual price increases.
As a reminder of our business seasonality the third quarter is typically the quarter in which a significant level of our renewals take place so seeing such a strong improvement in our or in the quarter was exciting we expect this metric to slightly moderate in the fourth quarter. However, we anticipate ending the year around $108.
<unk>, which is ahead of our expectations and a validation of the value our customers place on the power of our platform.
Adjusted gross profit for the quarter came in at $111 $1 million with a 68, 4% margin representing a 30 basis point sequential quarterly increase and a 50 basis point year over year improvement.
This strong performance was driven by our continued focus on cost efficiencies.
Now turning to operating expenses in the third quarter, our non-GAAP research and development expense came in at $22 $6 million, representing a 13, 9% of revenue compared with 15% in the same time period last year.
Including capitalized R&D expenses total invested in R&D was 21, 5% of revenue compared with 21, 1% in the same time period last year, highlighting our continued commitment to making investments in market differentiating innovation for our customers.
non-GAAP SG&A expense in the third quarter totaled $37 million, representing 22, 8% revenue compared with 26, 3% in Q3 of last year.
350 basis point improvement in our non-GAAP SG&A margin reflects savings from our facilities consolidation lower D&O insurance premiums and savings from our various G&A cost efficiencies driven in the quarter.
Third quarter, adjusted EBITDA was $52.2 million or 32.2% margin exceeding the high end of our guidance range for the quarter, representing an increase of 530 basis points from the same time period last year.
Third quarter margin was strong and reflects the continued focus we have on driving profitable growth.
The margin improvement was driven by the gross margin and operating expense improvements. We will continue to identify additional areas for cost rationalization, while still investing in innovation that will fuel our topline growth.
non-GAAP net income was 21 cents per fully diluted share, which is 40% higher compared to 15 cents last year.
Now moving to the balance sheet.
We ended the quarter with $108 $9 million in cash and equivalents an increase of 20% over the same time period last year.
Cash collections during the seasonally busiest third quarter were strong and our aged accounts receivable profile is the best ever.
In the third quarter, we paid off the $70 million revolver that we drew in the first half of the year.
Net debt leverage at the end of the third quarter was three six times, a meaningful improvement over the $4 one times a year earlier and four eight times at the end of Q2.
Third quarter free cash flow, a non-GAAP measure was $174 $1 million up 6% from the same time period a year earlier.
As I mentioned, we had a very successful renewal season, and our collections team did a fantastic job now turning to our fourth quarter and full year financial outlook on slide six.
For the fourth quarter, we expect to deliver total revenue in the range of 161 million to $164 million, representing an 11, 2% year over year growth at the midpoint.
As a reminder of the seasonality of our implementations and training activity, we expect a sequential decline in services revenue in the fourth quarter.
For adjusted EBITDA, We expect fourth quarter to finish at 48 million to $51 million, representing a 35% margin at the midpoint.
For the full year, we're raising the bottom end of our revenue guidance range, while raising the top and bottom of our adjusted EBITDA range.
We expect total revenue in the range of $631 million to $634 million for the full year with the midpoint, representing a 13, 2% year over year growth rate.
And adjusted EBITDA of $192 million to $195 million, representing a 36% adjusted EBITDA margin at the midpoint.
For modeling purposes, we expect capital expenditures, excluding capitalized software of approximately $5 million and share based compensation expense of approximately $55 million for the full year.
Diluted shares by the end of the year are expected to be in the range of 200 million to 205 million shares.
Overall, we delivered a fantastic third quarter as hard each state. It we are very pleased with the continued business momentum in our performance, which is ahead of our targets and demonstrating the value that our customers are placing on our mission critical platform.
Our teams performed extremely well and driving growth and operational efficiencies.
Look forward to finishing the year strong and continued focus on executing our go to market operational and investment strategies.
This concludes our prepared remarks, operator will you. Please open the line for Q&A.
Certainly.
We'll now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request if you're using a speaker phone. Please pick up your handset before pressing any case to withdraw your question. Please press Star then two.
Our first question is from Stephen Sheldon with William Blair. Please go ahead.
Hey, Thanks, guys and congrats on the promotion and the new responsibilities are you Eric.
First wanted to ask you know I know.
Yeah.
On the sales cycles, I guess you know you.
Curious what you guys have seen in sales cycles with their K 12 customers and knowing that you're coming out of kind of peak selling season, but I think there's been some talk of elongation there in school districts being distracted with other issues right now such as.
And the teacher shortage in a variety of other issues. So have you seen that at all.
And do you think that could have a bigger impact on sales activity as we think about the next few quarters.
Sterling. This is again. Thank you for the question, we actually not seeing any sales cycle are you know slowness in fact to the contrary, we continue to see sales cycles improving.
And almost to the level of 25% to 30% improvement over last year and I think a lot of it is based on the differentiation we have in the market because we are a much more broader platform at almost 19 close to diversified products. If you think about a lot of the challenges. These districts are facing today when it comes to talent management and keep it according teachers keeping teachers.
Well they need about talent management solution to help with that if it's about learning loss they need separate analytics, who understand that and address it if theres about social emotional they need of her behavior in classroom tools to help us engage with our students. So a lot of what we are selling is actually mission critical so it's actually been being more beneficial to help them address the needs they are having.
Today.
That's great to hear.
That and then as a follow up you know.
Would love to just get some more detail on recent acquisitions and how they've been performing you know thinking about kickboard Ken involved from the others.
These solutions have been plugged into your existing sales motions and.
You know I guess when a financial contribution look like now that you have on both for close to a year are you seeing a ramp in uptake and monetization there on your platform.
We actually do I think we mentioned that in the prepared remarks like behavior, which is the kickboard actually we're seeing record growth Theres a large deal at Gallup Mckinley school districts are wherever you're actually right.
Tens of thousands of students wherever we are actually implementing over kickboard solution, where almost think are in every quarter about 15 to 20 deals on these products as we are integrating them into our products and bringing them to our sales motion. Similarly on curriculum. You know that's another lost a deal out of Hudson County in <unk>.
Few others almost again on about a dozen plus customers have already bought that and we had a pretty successful communication starting off the year and even into this quarter or even just the district like San Diego just are.
We're gonna start adopting of a unified communications. So you can see the momentum is pretty strong, but they were installed base with each of them. There are still a small contribution to our overall numbers, but we do expect them to start becoming more material down the road in the next few years, Yeah, and Stephen It's Eric I would just add on.
Suggests financially while we don't provide any specifics as we've spoken to a lot of you. We do have pretty aggressive business cases that we put together in terms of what we want out of these acquisitions and I can tell you every single one that we've done this year, while smaller and it's hard you mentioned you know their contribution is a little bit less every single one of them is well ahead.
The financial business cases that we originally put together you know and we really do look for accretion in a pretty short period of time. So we couldn't be more pleased with the the financial benefits. We see this year and then obviously as we really get them to be you know integrate it more into the platform you know some of the benefits, we'll see into next year and beyond.
Got it thanks for all the color and congrats on the strong results.
Thank you Steven.
The next question is from Brent Thill with Jefferies. Please go ahead.
Hey, guys. This is David on for Brian . Thanks, So much for taking the questions maybe to kick off you know on the issues facing K through 12 schools. Obviously, you know the big ones being teacher shortages and learning loss I'm. Just curious are you seeing customers flocked more of your products that help to address some of these issues.
And maybe are they driving outsized growth, you're seeing higher adoption, there maybe as like adoption and in Allomap starts to fade just any color there would be helpful.
Yeah sure David I think we kind of had been talking about last few quarters, the or one of our best selling product has been up a unified insights product.
Primarily it to your point about the learning lost one of the biggest challenges most of the districts are facing is how do we even know where is the learning loss how much was the learning loss, which strategies and interventions would actually work in fact, we talked about launching of our new innovation of multi tiered system will support M. T. S. S. We're already seeing not only a unified <unk>.
<unk> growth throughout the year would actually now seeing strong adoption of our M. T. S. S. A weird one state deals are in end of this year, we have continued to see extremely well, including large districts like ER panel, which bottom of an entire platform, including unified insights Corpus Christi is another great example of these districts would actually.
Adopting this unified insights to help them address these learning loss and I already mentioned about the talent as well I think when you look at our you know almost so working with the districts to help address milligan jobs of teacher and not just on the recruiting new teachers, but managing almost 750000 plus substitute teacher over the quarter.
We're kind of right in the middle of helping these restrict deal with all these challenges and it's actually creating more level of trust and partnership with these districts. So they're adopting more and more of a platform components, including some of the add ons, we talked about.
Got it that's super helpful. Thanks for that and maybe just a quick follow up on international I know you guys provide a little color in the opening remarks, and it sounds like things are going well and it may be expanding that a little bit further I guess, you know high level, how your conviction on what international can be for you guys has that has it you can the training.
Kris that you've kind of put some of the processes in place and.
What is a good timeline to think about went international can start to become a material driver of revenue. Thanks.
Yeah.
We're already a market leader when it comes to international or our schools are American education score across the globe. We have presence in 90 countries pretty much every major American education skill across the globe uses us what we are seeing especially over the last few years with the bringing school of G and other platforms, we wouldn't have country level of deployments like country like irrigate our Philippines, we have 300 or 400000.
Instruments as well.
One of the key motions, what we have been as let's bring the entire platform to international and we started with actually boots on ground in middle East and what we're seeing is a lot of now not just international private schools were seeing government schools charter schools. In these countries actually now asking for us not just one product, but they are actually buying entire platform what.
It's proving to us is that even internationally there is nobody else who's providing this comprehensive platform and the need by these private in local schools is equally strong, especially coming out of Covid that these are different countries are prioritizing.
The requirement to actually move to a platform. So we are actually seeing fairly good demand I think trip follow up as we do think that over the next few years international is going to become a material part of our growth and we are definitely seeing some very good early signs, especially because there is no strong competition, we are seeing either at the private schools or public schools.
Even at country level of deployment. So we're really excited about what it's going to bring to our growth over the next few years.
Yeah, David It's Eric I would just add that you know as we've said before we have good news for US is we've got the opportunity to continue to drive low double digit organic growth with our international so.
So it is hard each set I mean, we're extremely extremely bullish around what we see and we're going to take a very I think thoughtful approach in terms of how we expand internationally, but.
I do believe over the next few years it will be a fairly material part of the business and you know the good news is we're going to we're going to do it and I think very metered fashion, but what we see in the early indications are extremely positive for us So I'm super excited about it.
Awesome. Thanks, guys really appreciate it.
Thank you.
The next question is from Gabriela Borges with Goldman Sachs. Please go ahead.
Hi, This is Kelly on for Gabriela. Thank you for taking my question on first one is just we're at school and continuing to gain share or are you seeing any changes in the competitive landscape any noticeable trends in the types of deals you're seeing.
Yeah, we actually are still are.
Looking at where win rates they have been pretty consistent net par with over our competitors, especially we have one large competitor we are kind of similar to both in terms of win rates as well as market share. When you look at in terms of number of students. Tick example, somewhat for large deployments of L. A and Miami that's millions torn between those two itself. So when you factor.
The number of students we are at par Baltimore a city been assured is actually a great Testament of our a large district going through an RFP process and actually selecting those they don't even use over that size, but they do use platform components like navi honest and talent, which actually came into a important part of their decision, making so we're really continuing to.
See the fact that not only ourselves, but our market share in other areas like talent like professional learning like Clos from broadly is going to further help our competitive win rates in this but right now we are continuing to win.
But at par with the market.
As we've shared in the past you know during the Covid. We almost saw four to 5 million students are almost getting per year now we're kind of back to you on what we have seen pre COVID-19 levels about one to 2 million insurance is what we are expecting a weird weird at par with that.
Great. Thank you and then just as a follow up what are customers, telling you where the biggest gaps in our portfolio and you know how can you share with us the discussions are informing your organic product roadmap and your M&A parity.
You know the lot of the stuff what we are seeing a it has been the things, which we are aggressive with other products I think if you'll see over both of our tuck in acquisitions around curricula, Martin messaging and attendants intervention around social and emotional that had been directly based on the feedback from our customers or some of the innovation on M. T. S. S.
Which helps them manage interventions across all these different areas of our connected intelligence, which lets them not just connect their data sitting in parcels, but bring data from external system, including partnering with their communities to bring almost a full longitudinal view, we're actually seeing very strong demand on that and that's directly based on what we're seeing market.
There is a broader again, a more adoption of platform rather than looking at individual products and that's why you'll see tons of for innovation and what youre seeing a demand is across not just one product, but actually looking at how the platform. So they're not having to connect all of this data and they're not having to deal with data security issues around that and where.
That's fair where innovations are very differentiated.
Great. Thank you congrats on the quarter.
Thank you.
The next question is from Matt Hedberg with RBC capital markets. Please go ahead.
Oh, great guys. Thanks for taking my questions and congrats Eric as well from us are well deserved.
You know Eric I know you don't guide to <unk>, but.
But I know you provided a little bit of context historically the last few years, you've added I think maybe $10 million to $15 million of net we are into Q4 is there anything different about this year seasonality seasonality wise from from an air our perspective.
Yeah, I mean, Matt I'd say, it's a good question and I always appreciate the opportunity to address the seasonality you know I think as everybody you know hopefully knows I mean Q3 is our largest renewal period. So certainly a lot of activity that happens from a renewals perspective, which you know are a R. R and a Q3 basis, we were really really.
Pleased with you know, adding you know about $5 million of net new <unk> this quarter.
What I would say is while we don't guide on it you know one of the things that we're seeing from a power school perspective is that as our deals are getting larger as we're becoming much more strategic with our customers. You know deals are getting larger and you can have the opportunity from any one deal a large deal getting closed in any one particular quarter, which certainly can cause a little bit of variability from an IRR.
Perspective, so what I would just offer up in Q4, I think similar trending if you were to kind of look at where we finished and you know.
I'll say modestly assume around it let's say eight to 10 million dollar increase of net new <unk> from this quarter I think that's probably a pretty good assumption yeah. Like I said, obviously any one any one big deal can can certainly sway that but what I would tell you is you know as we look at the pipelines we look yet.
The amount of larger deals that we have you know over the next several quarters, we couldn't be more optimistic in terms of just seeing that momentum continue now whether they all happen in fourth quarter, probably not but over the next several quarters.
We do see you know line of sight to a lot of larger deals. So you know just look look for us to continue to kind of update in terms of the the large deal volume, but I would just say you know assuming eight to 10 is probably a decent assumption as we go from where we ended into a into the fourth quarter.
Super helpful. Eric That's actually isn't really don't tell her question for her deep.
I think it really builds on the strength of the quarter, but the 20% pipeline growth I mean that was that certainly stood out to us as well.
I know you cited new logos cross sell a number of things that are driving that that pipeline build that.
Was there one thing that stood out to you this year versus next year I mean is it I don't know.
Is it the funding is it just better appreciation just just maybe what do you think drove that sort of strong pipeline growth this quarter.
A great question, Matt So a couple of things one is the I think the key point here.
Trading is the diversity of our platform right, we have such a broad areas that we support the critical needs to fix out and as you see that all the in the news the district's coming out of Covid up definitely struggling but at the same time, prioritizing and especially with the sound funding environment, they're making these jet transformation across the different aspects of their.
<unk> talent to be a priority and that's definitely the demand is definitely a healthy which is driving our pipeline if.
If I have to call out any additional factors, while there was a balanced growth across most of our products I would say that we do have some very strong large deals in the pipeline, which is also driving the growth percentage are we in fact have line of sight, where we have been either electrophilic 10 or kind of Oh, we're going to lose it almost 20 million plus of business.
Over the next few quarters with some a couple of large deals as well so that definitely is again very refreshing and welcoming that not only are we delivering on strong quarters. We have a good visibility for the next few quarters of some of the large wins, two which adds to the confidence of what we're sharing with you on our guidance.
Thanks, a lot guys congrats again.
Okay. Thanks, Matt.
The next question is from Fred Meyer with Macquarie. Please go ahead.
Hi, Thank you and I think I'd reiterate the sentiment on the call here and say congratulations on a strong third quarter I think on that strength I wanted to ask about.
Firstly, Eric also congratulations on your promotion.
In line with that but it looks like 108.7% net retention rate looks like a new new high watermark for power school as a public company.
I wanted to ask.
It really specifically actually Eric because you assume more customer success and costs more customer renewal roles with your promotion here.
What do you think that power school potentially do here to continue progressing in our or and do you see opportunity for it to continue moving up.
Yeah. So first thanks, Brad I appreciate it yeah. So we do and in fact, we were really pleased with third quarter, where we ended.
Just as I said just to kind of make sure we're all aligned.
Aligned with where we think we'll end the year well end the year in the one Oh wait range, which is ahead of our expectations and really just demonstrates the continued momentum we see within the existing customers.
Specific to the renewal opportunities.
We've got an opportunity to really leverage that team more as we kind of look at you know driving the value of the platform across our existing platform.
Existing platform.
And really make sure that you know our customers see the value of the platform not just a one one or two or three of the products, but really what is the value that we can drive from an overall standpoint, and anytime we touch the customers certainly a renewal opportunity as is as a perfect opportunity to really have that discussion and engagement with the customers around.
Other.
Products, they may make sense for a particular customer so I do see that we've got upward potential you know certainly you know well beyond where we'll finish this year and you know as we kind of get into next year, we'll certainly update everybody in terms of what our future thinking is but clearly we're really thrilled with the third quarter performance.
And.
And the year above our expectations.
Okay. Thank you for that and then perhaps for her teeth I was interested in your description of I think it was Baltimore, adding school of G are expanding some of their purchasing of a platform.
It sounded like I think you said talent and Nabil.
It sounded like it was potentially a win that was leveraging some of your solutions outside of S. I ask and please correct me if I'm wrong, but I wanted to ask more broadly about also just the opportunity to find more areas for power school be pulled into the platforms you've pulled in amongst some of those schools that may have be adopters of some of your.
Essentially smaller air are as a proportion of your total are our products and potentially even some of your recent acquisitions. It sounds like a cross sell was very strong with interested in that one in particular.
Yeah, Fred that's actually you're making a very good point. If you look at most of our large wins I actually sure they're all actually coming from a non says cross sell so take an example, stride we had a relationship on there with fear fear of them on <unk> and some of her assessment, but few of their students and they've made a selection not just to <unk>.
Spans our relationship into their full student information system across few hundred thousand students of which they support online direct.
Part time and full time.
But they also adopted enrollment in some of the other capabilities. Finally is another. Good example, they started from talent and then expanded that relationship into a full a full platform on says CRP classroom and talent.
Baltimore City is another Great example, where not using ourselves, but adopting or school to jail because they are relationship at the point, we I think what we're trying to make here is that the beauty of the platform of how whether you are in the operations or in the classroom with talent. These things need to work together and whether Youre doing a professional learning for training you want to make sure that's in <unk>.
With your classroom learning management, when Youre doing an assessment you'd want to make sure. That's in line with your broader ESI estrogen in special Ed. All these pieces really work together and we are the only vendor, which actually brings all these together and that's what's clearly resonating with our customers.
Okay. Thank you and congratulations on the quarter.
Thanks, Brett.
The next question is from Kelly <unk> with Barclays. Please go ahead.
Okay, Great Hey, guys. Thanks for taking my questions here on the Echo my congrats on the quarter.
Thanks, Rick. Thanks, So are these bucket.
Yeah sure thing, maybe just to start with you I'd actually love to dig into the middle East market a little bit more.
<unk> been an early success and internationally mentioned boots on the ground.
Several deals I think that have been mentioned over over the last couple of few quarters. I guess the question is how do you think about that market opportunity, whether that's from a dollars perspective or or students perspective in and what are you seeing there competitively I know that you said that no. One really has the breadth of the platform, but maybe you could just go one level deeper into that market opportunity and sort of the competitive.
Landscaping.
Sure socket, but you know you mentioned the in the past maybe that we have about 200000 students already in the middle East on a American education schools and as well as some very large private schools as well are the likes of esol and gems and all.
What we have seen is that as we've started taking and putting a little bit more direct we brought in a VP of international sales based out of Dubai and now we are building a team to actually cover the broader call. It greater almost seven countries right. We are seeing that the opportunity to is almost a you know a almost a 52 million.
Plus students that is over time, we can go after and we are not only seeing demand in just one or two areas, where the assurance system or through our learning management, we're seeing the demand for even things like behavior management, our messaging and our.
Analytics actually to be equally strong so the likes of some of the deals we've been sharing with Morris in Saudi Arabia or in.
You you all jar in UAE.
Or in Egypt, the Dioecy E youre seeing that their platform buys and that's the exciting part. So we do expect this to be for us to be able to get a few hundred thousand students Oh, if not a million plus students just into the next year, and then really growing up pretty strong from there, but the time almost 50 million plus students that we think is a.
So before it by us.
Got it that's that's actually that's super helpful and maybe a good dovetail into the next question and you mentioned, having boots on the ground in international VP, There, maybe just to zoom out a little bit it was great to see I think a new CRO.
<unk> today as well.
Again understanding that it's early.
Some of the things that you're hoping for from this position, which I believe is new and correct me there if I'm wrong.
Yes, we absolutely are one of the opportunities. We're looking at really is the international expansion.
And having more not just middle East is one of the things, but actually expanding similarly more international capabilities across other geographies, where we are similarly, seeing some inbounds and good demand and we are definitely we have a very strong sales team.
Let's say that's about the best sales team not just in terms of coverage, but actually in terms of the.
Partnership because we have expertise around different areas and being able to really leverage some of the experience of our new Seattle, which are you know who came from Oracle and has built global HCM brand for Oracle would really excited about how that will help us translate this into a global Brian .
Very helpful. Thanks, guys.
Thank you.
The next question is from Koji Ikeda with Bofa Securities. Please go ahead.
Hey, Hardy pay Eric Eric Congrats on the new the new promotion here for President.
Congratulations on that I wanted to ask you guys. A question thinking about the low double digit organic growth.
Comment that you had earlier and in context too.
The product wheel that you guys have you know think about a unified classroom administration talent.
<unk> and home could you help us maybe understand as we think about the growth algorithm over the next year to year and a half of which one of these five parts of this wheel are you most excited about where maybe it could contribute the most to the growth algorithm over the next call. It 12.
12 months.
Sure.
Let me take that and I'll try to catch the most wrapped something I'll ask him to jump in.
Cause you could think of it but the biggest part of the business of our students solution and.
You know while we are we are.
In the pandemic, we have talked about that if we are recording high single digits growth, but actually seeing it to be almost double digit even post pandemic, but this transformation.
Opportunity fit a very large not just deals like stripe, but territory or country level options as well that exist out there. So that gives us a very strong confidence as we kind of shared bringing one of the fourth larger just Freaking chart, Canada earlier this year with Peel.
These are momentum, which makes us very confident about the entire storage solution I think theres a lot of antiquated systems out there and districts have gone through the COVID-19. They know that they need an upgrade they're dealing with a lot of data security aspects and integration issues as well districts, who have integrated system. Their insurances are going higher because if they're not able to provide.
Right secure and solutions then.
Fix I'm, making a priority to actually upgrade their back backend system. So we're kind of in a very strong position to leverage that a classroom continues to be double digit growth. It has seen good growth over the COVID-19 and pre COVID-19, even post COVID-19 with all of these different components. As you mentioned is just not LMS its assessment its behavior special it.
Navios brought abroad brought in so that we're excited about that combination nobody else offers by breath, and then have a talent management depth.
Definitely post Covid there has been a big demand on that we've seen some state level opportunities. We shared year to date, we have been growing double digit on that as well. So those are good signs that we think we're going to continue to partner with this district insight is one of our biggest growth areas, that's where we're seeing huge growth and we expect that to really continue out, especially with the <unk>.
<unk>, we are bringing in I think we're in a very unique position. There is nobody else, who can really match with providing such a comprehensive analytics to not just districts, but even state level. So we are in a very fortunate position to be partnering with districts on that.
Got it thanks for that and just one follow up for me is so you mentioned, 20% pipeline growth, which is fantastic, but as we head into 2023 into a potential recession, how should we be thinking about it if it becomes harder to close deals.
Managing you know maybe investing more to close deals versus letting the growth moderate and maybe seeing a little bit more margin, how should we be thinking about that growth versus profits.
Equation, and a slowing of potentially a slowing demand environment.
I think one of the things we've been saying as the K 12, the funding environment is largely insulated from the recession aspects as well from the funding is a fairly stable if you've seen the last 30 years of K 12 funding ITE is a very small portion of that and typically even more important as they deal with the broader aspects of our you know.
Of their organization.
That's their money, which is almost a it's still a 140 billion plus which they have a lot of it just needs to tie to al. So proving that that's sort of funding is working so some of the demands on the I T is a healthy part of that equation as well. So we also see that to be so we're not really expecting any of this and I think that's a master bedroom you were mentioning or sales.
Lastly, our sales cycle is actually a decreasing sales last year continues to improve so we're not expecting that but to your point, we're always looking at profitability growth as well.
We don't really.
Really push for our growth as much as to make sure. There's a balanced sustainable growth, which comes with profitability and a lot of time, we're walking away from the deals which have which are not profitable yeah. I mean koji, it's Eric I would just add I mean, you know and we've said this before it kind of given our P heritage right. We want but we want you know top line growth, but we also want it at a profit.
And you know given the fact that we are running mission critical systems. It's not like the you know the lot of the districts have an option to be able to trading trading systems out. So we we feel extremely bullish yeah. It was as we kind of head into next year, and we look forward to in fishing and you're strong and that's certainly demonstrating the.
The guidance that we're going to show a showcase next quarter for full year 'twenty three.
Thanks, guys. Thanks, so much for taking the questions.
Thanks, Ravi Thanks Koji.
The next question is from Brian Peterson with Raymond James. Please go ahead.
Thanks, gentlemen, and congrats on the quarter and Eric Kal, Congrats as well very well deserved since I wanted to follow up on the last question actually.
I think it's pretty clear in this quarter that the cross sell momentum is pretty strong I'd actually love to understand because the sales cycles for some of those and if they come in a little bit quicker than expected because we keep hearing about some of the needs for these districts and the problems. We're solving are they actually coming to you in buying.
And a lot shorter sales cycle than we've seen in the past.
Hey, Brian based on the data we are we look through across all of our products that is to be the case that our sales cycles actually improved not just theater over here by almost 25, 30 person even quarter over quarter, it seems to be improving and healthy, but one of the key things I think just to again call out.
A lot of times I think the difference issue. We have is the diversity of our platform.
And we're not kind of compared to niche vendors. We are dependent on just one particular product and how that sales cycles might change, we're not overly exposed to that and that's what's exciting about us is that there might be times, where one products might have a lesser demand based on the seasonality or what's happening in the market, but the beauty is we don't get exposed like other vendors.
For that there is no other public or private comp for the full platform, what we provide and that's what we're that's what we're going to always maintain a good healthy you know.
Our growth sustainable growth that is unique because we are able to address all the different elements that the districts might be focused on and we're able to provide the right solution, what they need and southern parts of the country are focusing on critical management or assessment. So I don't know the parts of the country are focusing on.
Putting more on communication in order to a digital learning. So we had a book to really support depending upon whatever the key priorities.
Understood and maybe just to follow up on budgets and I know, we don't have a crystal ball for next year, but you know what's interesting with a lot of the spending decisions are being made in kind of a sales cycle that we just went through you know as you're looking ahead to next year are there any things that you think get more emphasis or you know any thoughts.
On how the I T budgets would look overall with we'd love to get any color on that thanks guys.
Sure, Brian I think of that.
I kind of mentioned a few times and I can reiterate analytics definitely is a big focus area for a lot of districts across the nation and even globally because a lot of the understanding of flooding Goss, what do you need to do how youre spending some money in whether it's providing the right recovery on the lawn and garden all of that is <unk>.
Get to understanding where the students are how do you provide the right interventions and how do you address that and we are in a unique position because we're the only analytics provider, which not only brings student data, but assessment data, they're learning data out there their talent data to be able to help them understand vital not just what the lending losses, but actually.
What to do about it what intervention strategies that go to work to help the students so that you're actually making the right effective. So definitely we are seeing good visibility, including multimillion dollar deals at state level logistics levels on analytics, where we are seeing a tremendous growth path.
We see the rest of the pipeline again fairly healthy, but as the other one I called out is that even the student information system. We do see a you know a lot of stronger demand on S. I S. As well as districts are dealing with security issues and then realizing that they're cutting back office systems that how they are integrating all these system to their SaaS is Brooklyn has.
Security holes.
And you've seen some of the logistics come under a lot of scrutiny around that and that's weird where again, we are in a unique position, which was a wakeup call for lot of districts, who are actually getting hit but hot insurances as well unless they upgrade their S environments to handle that so those two areas definitely the high demand and then pretty much the talent management some of the areas we talked about are still.
Seem to be doing well.
Thanks Marty.
Alright, great.
On top of a over a call. So I'll just close it quickly I really appreciate everybody dialing in and two shared you aren't giving us an opportunity to share some of the highlights for this quarter.
Reflected in our results and strong results and guidance.
You all hopefully clearly see the unique position we are in to help address some of the most critical current needs the K 12 market.
How are facing with.
The tanks are a diversified differentiated unified platform and as we continue to see improvements in sales velocity as well as a good pipeline. We do believe that our top line momentum is not only strong but also.
Given our operating leverage we can continue to drive very strong profitability and create more value for our stakeholders I'd want to tack over 3000 employees as well as the almost 15000 plus customers and partners in helping us not only deliver these results, but actually being partnering with us to make a significant positive impact millions of teachers and students. So thank you.
For taking the time to join us today.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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