PowerSchool Holdings Inc. Q1 2023 Earnings Call

Okay.

Good afternoon, ladies and gentlemen, and welcome to the power School first quarter 2023 earnings call. During the presentation. All participants will be in a listen only mode. Afterwards, we will conduct a question answer session at that time. If you have a question. Please press the one followed by the four on your telephone.

If at any time during the conference you need to reach an operator, Please press star and zero as a reminder, this conference is being recorded I would now like to turn the call over to Shane Harrison Senior Vice President Investor Relations. Please go ahead.

Thank you operator welcome everyone. The pallet pools earnings conference call for the first quarter ended March 31 2023.

I wanted to first of all let you know that we posted a slide deck to the Investor Relations section of our website that accompanies our remarks here on the call today, we have powered school CEO , <unk>, <unk> and CFO Eric <unk>.

Before getting started I'd like to emphasize that this call, including the Q&A portion. We will include statements related to the expected future results of our company, which are therefore forward looking statements. Our actual results may differ materially from our projections due to a number of risks and <unk>.

Certainties, the risks and uncertainties that forward looking statements are subject to are described in our earnings release and other SEC filings.

Today's remarks will also include references to non-GAAP financial measures additional information, including definitions and reconciliations between non-GAAP financial information to the GAAP financial information is provided in the corresponding press release and results presentation, which are both posted on power schools Investor website at investors Power School Dot com.

A replay of this call will also be posted to the same website. Let me now turn the call over to Hardy.

Thank you Shane and thank you everyone for joining us today.

2023 is off to a great start in Q1, we continue to grow where are our 10 person year over year.

<unk> expanded our adjusted EBITDA margins.

We also won a record amount of new logo bookings saw continued large deal demand from districts and state level opportunity and made progress on our international expansion.

Q1 results are summarized on slide four first quarter revenue reached $159 billion.

With subscription and support revenue growing 9% to $141 million.

Our adjusted EBITDA grew 16% to $49 million, representing a 31% margin and expansion of nearly three percentage points year over year.

Net revenue retention remains strong at 109, 1%, increasing 240 basis points year over year, helping drive the IRR to $612 million.

As we have shared in our previous earning calls there are four key foundation for continued success.

Our business resilience.

Our differentiated platform.

Growth upside from further expansion and about financial durability.

I'd like to share our Q1 progress in these four key foundations.

Starting with slide five posters of our business resiliency.

This resiliency is grounded and sticky mission critical products that are demanded by a durable market that features robust multi source budget that are largely insulated from macroeconomic conditions.

This market durability, what's prudent again in the first quarter. When we saw increased demand and strong funding of our technology with record new logo bookings.

One of our exciting win was our largest ever deals and $11 billion plus bookings from Puerto Rico Department of education for digitizing the entire K 12 infrastructure, leveraging nobody science and enrollment solutions across the territory supporting over 250000 plus students.

We continue to see strong demand for our core student information system product.

Further expanding our clear market leadership.

On a trailing 12 month basis sets represent approximately 33% of our total new and cross sell bookings.

While these deals do have longer implementation cycles. They are very strategic as the increase of our cross sell success and time significantly.

The market tailwind that we have shared in the past which include the increased need for digital transformation enhanced data security audit.

<unk> efficiency and data insights continue could drive demand for our solutions.

In Q1 in addition to the strong new logo activity. We also saw the number of cross sell deals increased 15% year over year.

As the rollout of <unk>.

But the multi product bundles that will further support the cross sell momentum we are seeing.

Additionally, our deal velocity continues to be strong.

We saw more than 50 transactions about $10000 for at least one product within each of our six cloud.

Additionally, our pipeline grew over 40% year over year, which gives us confidence about our business outlook. We are reiterating our full year 2023 guidance, which Eric will discuss in more detail.

Moving to slide six our differentiated platform of K 12 vertical specific solution is the second key foundation of our strategy and success.

There are three elements of our differentiation.

We have the most comprehensive and diverse platform in the market to be able to meet the evolving needs of the entire <unk> ecosystem.

Second we have the most unified platform to provide an integrated experience for our key persona students teachers parents and administrators.

It is our ability to deliver a holistic insights across all data aspects to.

Education outcomes.

In Q1, we continued to see broad demand across our diversified platform with fifth talent and our data centric products experiencing the highest growth in our portfolio.

Our data centric solutions, Iraq grew over 70% year over year.

One of our data products was purchased in six of the top 10 cross sell deals in Q1.

Showing the growing importance of district, harnessing and leveraging their data to improve their outcomes.

One. Good example is the better school district in Utah, which added <unk> unified insights and communication products to the longtime usage of our ERP and talent solutions.

We are also very excited by the success, we are seeing with our connected intelligence solution.

The first fully manage data as a service platform for K through 12 schools and government agencies.

That provide.

Centralized data Lake with real time access and insights of education data across all systems power school or third party within or outside the district. So they can uncover deep insights and improve their decision, making and enhancing their operations and their student outcomes.

In the quarter, we saw several connected intelligence cross sell wins in all segments of the market like public school districts, such as Demoing Public School District, and Fairfax County Public School District.

Private charter school organizations like epic charter schools, and even private schools like challenges <unk> Foundation.

<unk> holds the evaluate the support they are implemented to address learning loss, the teacher shortage and student life and workforce netting that data analytics is driving priority for schools and government leaders to break data silos and leveraged the whole child insights for surgical intervention strategies and supporting improve education outcomes for them.

Every child.

We recently announced a partnership with dilution the leading higher education operation software provider that would provide a very unique opportunity to bring K through 12 data together with higher education data to enable state and local education.

To build powerful longitudinal data system across the student lifecycle.

To optimize educational and career success.

These new data solution successes demonstrate our ability to grow our $3 billion cross sell Tam that exists within our existing 15000 customers and opens up new markets for our solutions.

As shown in slide seven hour per key foundation is our growth opportunity with further expansion of our platform in markets.

Each providing support and upside to long term double digit growth runway, we see in our core markets today.

Starting with platform expansion, you've all heard the growing conversation on the <unk>.

The inflection point in many industries.

We are very excited about for whiting embedded AI capabilities into our solutions.

Which leverage in an integrated and contextual way will provide enormous opportunities to support features and save them valuable time.

We appreciate and personalized instruction for students and help efficiently scale <unk> operation.

As we've shared previously.

Already implemented AI into several of our solution already being leveraged by many of our customers today.

Our student success cloud Mts's solution uses AI to help teachers more efficiently predict and identify students who may require additional support so the appropriate interventions can be implemented.

He is also a key element of connected intelligence offering providing customer as a data as a service platform to create their own and machine learning models.

With an estimated 80% of data scientists time spent gathering and prepping data our connected intelligence platform brings together data securely in a near real time way, eliminating the biggest burden off of that project and providing AI tools as well as build and deploy functionality.

We are very excited about the launch in the last quarter.

Ill cover new products learning map and content that both part of our <unk> cloud.

These products you'd like AI to assess student mastery of subjects and automatically recommend content specific to their needs, creating a personalized learning journey.

These products are a key milestone in the push towards a holistic integrated and highly contextual personalized learning solution a market opportunity, we estimate to be over $100 billion.

We had also embedding generating AI models to support educators across the solutions.

For example, we are launching automatic content creation bids.

Based on individualized student meet later this year.

Other use cases like supporting administrators and curriculum planning and the launch of horsepower per slides one box solution next year will be further supported by generally be on.

While other industry and services may see disruption from January to May I.

We believe embedding generative AI into our solution creates additional tam and market expansion opportunities to enhance our growth.

We plan to showcase the progress on these capabilities and our edge conference and Investor Day in July .

Additionally, we would like to share with progress on the market expansion as we continue to make strides in our international go to market.

We announced late last year, our first sales and support office outside of North America and debate.

Which will open this summer, we just announced a new channel partner <unk> Middle East <unk>.

That will strengthen our middle east presence, but reselling and supporting our platform with the local and established team of education technology specialists.

<unk> will augment our reach to millions of additional students in strategic markets of Saudi Arabia, Kuwait and Qatar.

And <unk> has committed to delivering parcel solution to 750000 plus students in the first year.

We also recently announced our proprietary innovative localization framework, which is a tool that enables our partners and customers to localize and Taylor powerful solution for their specific country and region.

This localization framework enabled key user experience features such as right to left field multilingual translation and localized extensions and reporting.

The extensibility of our Tech stack is a very strong differentiator and uniquely supports over the ability to quickly expand outside of North America leveraging different local partners.

The steady nature of our customer base and our differentiated platform combined with our operational execution capabilities to create highly durable financial model, which is about <unk> Foundation.

On slide eight you will see that we have created an enviable business model with meaningful operating leverage as demonstrated by the increasing profitability.

You move down the P&L from adjusted gross profit to adjusted EPS.

We feel this operating leverage is sustainable and will create further margin improvement as showcased by our outperformance on adjusted EBITDA This quarter.

I'll, let Eric speak to the financials for the quarter and the beauty about <unk> of our financial model Eric.

Thank you Hardy, we kicked off 2023 with a strong quarter of continued execution, reflecting balanced growth across our platform as our mission critical products deliver on the key market needs across the K through 12 ecosystem.

As summarized on slide nine first quarter total revenue came in at $159 million.

Representing a 7% year over year increase and in line with the guidance range, we provided on our last earnings call.

<unk> support revenue grew 9% year over year to $141 million and accounted for 88% of total revenue in the quarter.

As our business grows we expect to see an increase in larger strategic deals, which may impact the variability of our financials from one quarter to the next.

As we announced in an 8-K filing earlier this quarter. We are thrilled to have won the Puerto Rico Department of Education deal, which was signed on February 27.

This large deal represents $11 million and total value consisting of $3 million of subscription and support revenue approximately $3 million of services revenue and $5 million of license and other revenue.

We are anticipating customer acceptance of this large strategic implementation to occur over the summer months, which is when the subscription and support revenue will start in the majority of the services activities to occur revenue from our services business totaled $16 million in the quarter, representing a slight increase over the prior year.

As we mentioned previously services revenue growth rates will fluctuate quarter to quarter due to the variability that comes with large deal wins, such as Puerto Rico, Alabama L. A unified and strike. We also continued to drive the efficiency and velocity of our implementations, which increases the time to value for our customers.

Revenue from license and other which relates mainly to our third party revenue totaled $2 million for the quarter and as mentioned in previous earnings calls. This is our smallest and least strategic revenue stream that is highly variable on a quarterly basis.

We ended the quarter with an annual recurring revenue balance of $612 million, representing a 10% increase over the same time period last year.

This strong performance was driven primarily by continued strength in cross selling activity and higher new logo bookings.

Our net revenue retention rate came in at 109, 1% up 240 basis points year over year and consistent on a sequential quarterly basis.

Our strong <unk> performance was driven by higher trailing 12 month cross sell momentum coupled with our typical contractual price increases.

Adjusted gross profit for the quarter came in at $109 million with a 68, 1% margin representing a 200 basis points year over year improvement driven by improved operational scale responsible hiring and a continued focus on process efficiencies.

Moving to the first quarter operating expenses non-GAAP research and development expense came in at $20 million, representing 12, 5% of revenue compared with 15, 7% in the same time period last year.

320 basis point reduction in adjusted R&D expense as a percentage of revenue reflects the efficiency and improved cost profile of our R&D model, while still investing in our key strategic innovation priorities.

Including capitalized R&D expenses. The total invested in R&D was 18, 5% of revenue compared with 21, 7% last year, representing a 310 basis point improvement.

non-GAAP SG&A expense totaled $39 million in the first quarter, representing 24, 6% of revenue compared with $33 million or 22% of revenue in the same time period last year. The increase reflects the expenses from our Q1 in person sales activities as.

Well as our continued investments that we're making in our sales function as well as our go to market activities, which we expect will continue to fuel our future growth.

Our first quarter, adjusted EBITDA was $49.4 million or 31% margin exceeding the high end of our guidance range and reflects our continued commitment to margin expansion.

non-GAAP net income in the first quarter was 18.

Per fully diluted share up <unk>, <unk> or 13% from the 16 cents per diluted share. We had at the same time period last year increased interest expense was a headwind of approximately <unk> <unk> to our non-GAAP earnings per share.

First quarter free cash flow, which is seasonally our lowest cash flow quarter, given the timing of our renewals and bonus payouts was negative $70 million, an improvement of $5 million or 7% from the same time period last year and was driven by improved use of working capital and reduced capex spending.

Moving to the balance sheet.

We ended the quarter was $64 million in cash and equivalents an increase of 173% over the same time period last year.

It should be noted that typically in the first quarter, we need to utilize our cash revolver and this year, we did not need to use it due to the strength of our cash collections.

Net debt leverage as of the end of the quarter was three three times, a meaningful improvement compared with a four five times a year earlier.

Now turning to our 2023 full year and second quarter financial outlook on slide 10 for the full year 2023, we are reiterating our guidance with total revenue expected to be in the range of $688 million to $694 million with the midpoint, representing a 10% year over year.

Year growth rate.

And adjusted EBITDA of $222 million to $227 million, representing a 32, 5% adjusted EBITDA margin at the midpoint for the second quarter, we expect to deliver total revenue in the range of $169 million to $174 million.

Second quarter outlook factors, the timing variability for the go live of the large Puerto Rico implementation, which is expected to take place this summer.

Our second quarter adjusted EBITDA, we expect a range of $55 million to $57 million, representing a 32, 7% margin at the midpoint.

For modeling purposes, we expect full year capital expenditures, including capitalized software of approximately $45 million to $52 million.

Share based compensation expense of approximately 68 million to $70 million.

Fully diluted shares by the end of the year are expected to be in the range of 200 million to 205 million shares overall, we're pleased with progress in the first quarter, we remain focused on growing our topline by executing on our go to market strategy driving innovation in our products and exceeding our 15th.

Plus customers expectations. Our 2023 margin plans are on track, while we continue to invest in our operations product innovation and international expansion.

Finally, as a reminder, we will be hosting our first investor day on Tuesday July 11th in Orlando, Florida in conjunction with our flagship customer event edge 2023, we're excited to share updates on our product roadmap go to market strategy International playbook long term financial targets and much more.

With the opportunity to meet top customers and learn about their journey with power School. This will be our first edge event since the pandemic began in 2020 and our inaugural Investor day. So we're very excited to share our latest thinking with all of you.

This concludes our prepared remarks, operator will you. Please open the line for Q&A.

Certainly if you would like to register a question you can pass the one followed by the four on your telephone keypad.

You will hear a three tell them prompts to acknowledge your request.

Your question has been answered and you would like with the trial registration. Please press the one followed by the three.

And as a reminder for everyone on the phone line <unk> one floor to register your question.

And our first question is from the line of Gabriella.

Or just with Goldman Sachs. Please go ahead.

Hi, This is <unk> on for Gabriela.

First question for me is you have a few new product enhancements around kind of the personalized learning space and recommending the student specific content and lesson plans can you talk a bit about what kind of type of ecosystem.

System, you are looking to create over the medium term.

Hi, Kelly how are you doing.

Great question as I mentioned, we are very excited about the whole personal lending space and especially the two products. We have launched really gets put in the door with the broader personalized learning the components. We talked about there are two parts to that one is the actual content, but it seems clear where we have almost a 4 million open education resources as well as partnership at all.

All the major content providers, where we are able to provide learning object upholstery. So we can bring into content one of the components I talked about in the prepared remark is that we would actually also leveraging generally behind now to create additional content. So that allows us to even create personalized content just specific to a child. So take for example, if they need help more than a question about ratios it will take the setup.

It's already there and create a personalized the another.

Another question for that child, the second piece of it is the learning navigation the beauty of that loading obligation as it actually lets us monitor the different masri levels. So if every student and being able to create a personalized learning path paper every child, depending upon their learning pathway. So every kid would actually have a different learning pop in flow of content in the assessment.

Help them master their subjects. The beauty of that is as we are taking this into the next level as I mentioned next year, we're launching or possible personalized homework now we're able to we wouldn't take that and embeds that integrated into the classroom lessons plan for the future. So teacher doesn't even have to scrape that homework the port.

<unk> navigation would provide the personalized homework for that every child. So this really changes the game in terms of amount of time teachers can statements supporting teachers and being able to personalize the lending aspects for every child. So we're very excited about some luxury innovation and hopefully we get to see you at the Investor day and get to show this slide.

Okay. Thank you and then quick follow up if I can recognize there is some concern around the impact of generative AI in education. How are you navigating using the technology, just given the sensitivity around content and K 12 space.

Great Great question.

We had when you look it from a perspective of what we do as a software provider right. What we are providing is a software doesn't it's kind of more of the mission critical for widened environments for the students teachers and parents and administer to be able to manage the school from an operations perspective from a collaboration perspective from teachers support and Onboarding of substrate.

Management, so generally where it doesn't.

Really impact any of our <unk>.

Software capabilities, but what it does is actually as we embed that and contextualize it into the different operations and lower software, we actually cannot provide a whole lot of additional content services and actually value out of our software for district. So for US. It's a really exciting time, because they've actually now allows us to broaden our capabilities to be able to provide.

More turnkey XP.

Experience for school districts and music persona. So we are really embracing it as I mentioned the <unk> has been part of our strategy long before that with the things we've already launched an opportunity where it helps us to continue to in hospital products, even more faster.

Hey, Thank you congrats on the quarter and look forward to seeing you in July .

Thank you.

Yeah.

And our next question is from the line of Stephen Sheldon with William Blair. Please go ahead.

Hey, thanks.

Firstly I wanted to ask about maintaining the 2023 guidance you outperformed profit expectations in the first quarter and I think if I heard you correctly talked about the pipeline up 40%. So I guess what kept you from increasing the full year guide is that mainly just being conservative as we progressed through the key selling season here in <unk> maybe.

Maybe maybe the pace of implementation. So I guess, just anything else to call out on maintaining the guidance.

Sure Hi, Steven.

Why don't I kick it off and then I'll ask Eric to jump in so as you saw we had a pretty good quarter ranked in terms of the not just the record new logo new business bookings, but also in terms of our cross sell traction. So we're very excited about the results of the quarter and I suppose the traction we're seeing in the market, but as we did mentioned that we had also some exciting part of this is actually.

We're getting a lot of large deals not just Puerto Rico, which is one of the largest deals we've seen in the recent history, but even last year implementation of stride implementation not Peel at two major system implementation, we signed up two major state deals last year in Maryland, as well as Alabama under unified insights.

Some of the go lives on that as you can imagine is going to go into the back end of this year as the current school year go live. So it's kind of like from a revenue perspective. It is going to be backend loaded. So that's what we are kind of being cautious about from the guide book in Q2 as well as the rest of the year, but from the momentum we see we are absolutely comfortable with the current guidance.

Holly are seeing great momentum for our core businesses like <unk> and our new investments like you have had any types of that gets us very excited about the opportunities going forward.

Yes, I mean, so you had said it really well so I think Stephen that the key here is as you think about the larger deals even the larger deals that we have in the pipeline, we feel very confident that we will get them, but the reality is.

Don't really start seeing the revenue on those until latter part of this year most likely first part of next year. So.

Yes, I think it was appointed as you kind of look at the skewing of the revenue.

You'll see especially for the deals that we signed late last year early this year. That's when the subscription revenue will really start to pick up in the back half of this year. So.

I think its the funnel is great. The pipeline is strong it's just.

We are reverting back to some of these more the assistant limitations, which are as you all know extremely strategic to us.

It does certainly take a little bit longer to implement these given the complexity and size of them. So the revenue will lag a little bit of the of the booking.

Got it it makes a lot of sense.

The follow up I wanted to ask another question I guess about the on the.

AI side with learning that in content.

Curious.

How I guess teacher reception has been to those products for those that have tried it.

It sounds like you can make teachers lives a lot easier I think we all know teachers are spread too thin.

And how big of an opportunity could that be.

It's a great question. So one of the key things that we are launching all of our <unk> initiative is that this is meant to augment a teacher not at a place of pizza and as you can imagine you just mentioned about the teachers live right. They have a lot of monotonous Chas.

The whole process of finding homework collecting homework grading homework, and then being able to really understand where the child is one of the major type things in terms of how to just basically understand where each Charlotte.

The kind of flows we're augmenting also being able to pour slides to provide that individual healthy child needs and one of the beauty of this is when you look at our ability of integrating our MTS theft.

We have a lot of.

Alabama and lot of districts, leveraging we're able to surgically provide the interventions of the Charles need who are either on the cabinet side or on the tender side on the behavior side. So it's really helping just not on the learning navigation in Maastricht, but actually you also helping identify the kid, which need help and then being able to provide the surgical intervention each help.

Kidneys. So the opportunity is tremendous in terms of really augmenting and supporting teachers and educators.

Great to hear thank you.

And our next question is from the line of Brian Peterson with Raymond James. Please go ahead.

Hi, gentlemen, thanks for taking my question. So I wanted to one of the really strong results for Sis I'd be curious whats driving that and I know you mentioned, some really strong pipeline figures, but curious how does the pipeline specifically look for assistance.

Any thoughts on kind of the future either.

Great Brian .

Absolutely I think that many factors, which are playing into the first one is I think as you know in the pandemic. There was a lot of focus on classroom assessments as well as understanding where the kids are and some of the projects around when they realize that if they were also having antiquated systems, but they didn't wanted to move up.

In the middle of a pandemic what we have seen is now the demand actually is even higher than what we saw even pre pandemic on the fifth and what's happening is multiple factor one realization that you need to call. The core operating system right off the school district, if they wanted to take advantage of all the technology and really not have to deal with any major disruption. So that's number one it is.

Really modernizing your core infrastructure platform number two the security is actually playing at the banks of these districts a lot. Both in terms of right now the ddos attacks in the ransomware attack and the fact that insurance companies have not increased the insurance for all of these districts. If they do not have the right security system that they are still using flat files.

No data, but grown one system and everything so that's another thing from a CIO and superior perspective, it's almost a cost of doing business and they got to upgrade that third it actually also what's helping is our CIS differentiator in terms of really bringing the full platform together now giving them an abbvie with that its not just putting another system, they're putting in top platform and gives them the opex should grow it so all those things.

We are really driving the additional demand we are seeing in <unk>.

And we actually have actually have a very healthy pipe both in U S and international are understood not just from the large districts.

In terms of <unk>, but also a lot of mid sized and small schools as well, which are taking advantage of the platform in the wholesome steward cloud solution, we have launch.

That's great to hear and Eric maybe a follow up for you just on the renewal seasonality can you just remind us how that kind of close to <unk> for the year or any early insight you guys may have as you kind of go into the big renewal period in summer. Thanks, guys. Yeah, Yeah, absolutely, Brian So now that I own it I can definitely give you.

And a lot of good visibility into it.

So we had an extremely extremely strong.

Operational success in Q1.

The retention is extremely high and in fact, a little bit ahead of our expectations.

As we go into Q2 and the Q3 just as a reminder for everybody Q3 is our busiest period, we've got about 65% of our renewals happened in Q3.

So the team is focused on two things one executing flawlessly on the Q2 renewals that we're working through and then certainly the same thing in getting ahead of the Q3 volume as you think about what that does from an IRR perspective, I think it is important that I appreciate the question.

Just as you look at <unk> for modeling purposes, you know typically Q2 to Q3, essentially it's around flat because obviously any of the net new in Q3 will get offset with any amount of attrition we have given the fact that we've got.

65% of our renewals happen in Q3, that's when any kind of attrition is going to happen if it's material.

But you will see from an IRR perspective exiting out of this quarter into Q2, right Youll continue to build that up in Q2 to Q3.

Certainly kind of level off if you will not go down but at a level off from quarter to quarter sequentially and then it'll go back to a growth pattern from Q3 to Q4.

Great. Thanks, Eric.

Got it.

And our next question is from the line of Fred <unk> with Macquarie. Please go ahead.

Hi, Thank you very much.

Great to be speaking with you all again.

I am going to do probably would have done in other quarters and just check in on what we're seeing when essar because I think it's been notable seeing more contracts, including some of those <unk> come across for power School.

Been supported in part by asset funding.

Im curious it seems that many of them are focusing the extra funding towards services.

Services charges, while making room for software is kind of part of a more ongoing basis I'm just as I'm thinking about this summer I'm thinking about this year's budgeting cycle do you think that as your funding might be something that can help schools more of these deals across the board get that services, one time costs out of the way and just <unk>.

I'll take more of the cross selling upsell motion that you've been executing so well with.

Great question actually I got a chance to speak.

Last week at ASU, GSV, where I was on the panel for the appropriate titled half time to Essar and <unk>.

<unk> talked about with the panelists members about when you look at the initial <unk> spend there was a little bit more about some critical things that need it and as we go into the tail end of the second half of the answer it's a lot more strategic it's lot more transformational aspect lot more innovative aspects. So we are seeing definitely.

18 months more to spend and where the talk that a lot of these districts can even spend for that for a couple of more years in terms of the spend categories. I think there is still district have good funding to support these transformation objectives as you mentioned.

And you're absolutely right definitely one of the beauties of <unk> is that you can actually use it for the initial implementation stuff right for the one time. So that allows you to really help you with that Puerto Rico is a great example of that which leveraging some of that as their money to help with the implementation, but we also sell the same time. So it is not the only opportunity at the Alabama deal the multimillion dollar type attitude.

We talked about last quarter, we unified insights that actually got two legislative approval of the special budget. So there is a lot of recognition overall not just from a.

Esther support in the district support but also on the legislative to support in terms of making sure that these digital transformation initiatives critical for education are going through and <unk>. These are tremendous so thats why we continue to see the pipeline and the demand to be very strong.

Thank you <unk> and I think I'd like to ask another question here just on international as we've been seeing more and more international deals coming through here of course, you were highlighting in the quarter more deals or other deals in the middle East I'm curious as you are.

<unk> more of a footprint overseas getting more experienced with doing these international deals are.

Are you finding that there are learnings here at.

That you can just take and further scale your international go to market with and worked with partners to further.

Scale in international regions.

Absolutely I think one of the strengths of the power school capability, especially when it comes to where <unk> is that we already do business in 90 countries, but not just American education schools, but a lot of the international like private schools in different parts of the world.

What gives us that opportunity and the strength is the fact that even within the U S as to be able to meet the requirements of all of the 50 states given into Canada meeting the requirements of all the different provinces. Our system was built with an extensibility to be able to support the experiences reporting the localization acquired.

Meeting all the local laws and the reporting requirements and different attribute that strength is giving us an ability along with an already established proven points and a lot of the regions. We are already entering with the brand presence, which is known so if you are in debate you one of the best performing school as American Education School of debate, so far or if Youre in Thailand International School Bangkok.

A district or state or even a private school looks for an opportunity to look at to these calls and say what system. They are using so they can kind of really replicate that same technology and we already have strong viewpoint and this is the reason what you see is the strong partnership commitments. We are getting is because of where we are already proven in these regions and we already have a very.

<unk> brand appeal and what we are doing it rather than going after the individual schools, we are going with the strategic partnerships that helps us make sure that we can scale.

More quickly international and we are getting the localized help for the support the boots on the ground. The services that we can make sure that the experience for the end customer is going to be very exciting so rather than having 50 or 100 partners. This is very surgical very strategic exclusive partnerships in these regions with partners who.

Really committing and putting their skin in the game of helping us really scaling to these regions. So we're very excited about the path we are on.

Thank you very much.

Thanks, Brett.

And our next question is from the line of <unk> Kalia with Barclays. Please go ahead.

Okay, Great Hey, guys. Thanks for taking my questions here.

Maybe just to start with you I thought your commentary on SaaS earlier was just really interesting and some of the drivers there maybe just to level set can you just talk about roughly how much share.

Power School has an S.

And maybe just broad brush, who or what types of systems Youre displacing some of these SaaS modernization projects.

Sure.

When you look at it from a market share right. We have almost 20 million students on over a science platform.

So in North America from a $60 million with respect to be able to put roughly one third of the market, which actually leverages. The rsi solution we.

We are by far the market leader the next three vendors combined.

Really touch that kind of in terms of that person paid so we definitely.

I have a huge lead over any of our competitors in the market.

What you do see is that 40% of the market is actually still very legacy or custom built solution. So even things like Puerto Rico has a very small legacy vendor.

Highly customized and maintain they are still not only large school districts, but also there are a lot of Phil.

Gold districts and weather and even in California, or in other which are leveraging vendors, which I only have one to 2 million students on the entire platform. So as you can imagine the innovation required the security upgrade is required.

The ability to be able to set a platform, which can modernize to the needs of being able to leverage data as well as even the <unk> into the school district. They don't have that permit us to do that and that's what's driving a lot of the change that the 40% bottom legacy solutions, which is converting to our SaaS platform.

That's great that's great to hear certainly still still plenty of room for growth. There then.

Eric maybe for you for my follow up first of all congrats on the Puerto Rico deal.

Great win.

Can you just maybe talk about how how is that contract maybe plays into the seasonality for services and license revenue understanding the vast majority of the business here is SaaS, but just given the Rev. Rec on those two lines could you just maybe help us think through those.

We kind of model the rest of the year on revenue.

Second nationally.

If I may let me just talk about breakup.

Break our revenue into the most strategic down through the least strategic components, because I think it will help all of you as you're kind of looking at the revenue and how to model it.

From an SNS standpoint, certainly our subscriptions and support most strategic we are in the high single digits now as we see these larger deals and the subs and support really start to kick in in the second half youll see that revert back into the low double digits ending the full year in the low double digit revenue growth standpoint, as you can.

Look at our services.

Similar to what I said last quarter I do expect our overall services business for the full year to be in the mid to high single digits and the full year to year growth.

Now why is that.

Certainly we've gotten a lot more efficient in terms of our services business.

Velocity of time to value for our customers has increased and we're getting a lot of utilization a lot more increased utilization out of the team now what that means from a sequential standpoint, you will see sequentially Q1 to Q2 Youll see the revenue and services increase and then Youll see a further increase in Q3 as we have all the back to school.

<unk> implementations et cetera, and then youll see it slightly taper down in the fourth quarter as projects start to taper off in schools head out for year, ending holidays et cetera. So sequentially you will see the revenue on the services pick up.

Second quarter peak in the third quarter, and then trail down a little bit in the fourth quarter ending the full year mid mid to high single digit year over year growth.

<unk> same thing, you'll see from a quarter to quarter perspective, Youll see it pick up in Q2 than peak in Q3, and then again come down slightly in Q4, just recognizing allo, Illinois being are leased.

Our smallest and least strategic revenue segment, there is a little bit more variability from one quarter to the next.

I would say on a full year basis, we expect that to be around flat and the majority of the growth. If you will for the company will be in our SNS. Our most strategic revenue component. So hopefully I know, it's a little bit more than you asked for but hopefully that helps everybody kind of think about that.

Overall revenue profile and how we're looking at it not only for this quarter, but expectations into next quarter and certainly for the full year.

Absolutely very helpful. We appreciate Eric Thanks.

Welcome.

Yes.

And our next question is from the line of Brent Thill with Jefferies. Please go ahead.

Our deep on AI can you speak to when you think that actually.

Turns to a monetization event.

Is this a year out is it is it few months out I mean, how do you how do you judge the timing and how fast you can infuse the suite with with with AI.

And I had a quick follow up for air counter.

Sure Brent pleasure again.

When I mentioned in my prepared remark, we already do have AI based actress components, which we're selling to customers and we have dozens of customers who would use over actress can mps's solution leveraging those AI component. So that's something we already monetize it's couple of million dollars or Spotify unified insights.

<unk>. So something we are continuing to see is more unified in sites continue to grow 70% more deployments. We are able to continue to grow that piece as well. So that's already we're already monetizing that piece. The second piece of the company as I mentioned in terms of.

The learning map and content now this is based on some of the IP, we bought which has already been down for almost a decade.

And we actually have now embedded that fully into our <unk> product that these launch of these additional component and we are in the pilot phase with a couple of customers and we plan to have it fully.

Fully showcase in about edge conference. So we can start selling them. We already have a couple of large customers actually were very interested so we will start seeing some amount of these deals into the second half.

But the real monetization as you know this is almost a $100 billion Tam that we are monetizing. It these will be add on products. So we're kind of clouds.

This year. The next year, we will launch additional solutions like coarse particle precise solutions that can open up a huge opportunity. Then you have the opportunity to actually do things like additional tutoring held to that as well as in terms of helping on the areas of what we call the full London.

London pocket support leveraging of our <unk> workforce spanning to help kids with the supplemental learning and then you can kind of start looking at some blogger picture of it and moving that to be even outside the classroom helps so it's a much it's like a three to four year plan to launch these components, but you already have monetization that we'll see more monetization happening over the later part of it.

Next year.

Okay great.

Eric.

On the guide I just.

This is kind of the first quarter, we haven't seen the cadence of you raising and then you kind of go back to big deals.

We can only go back to is it can take Steph Curry take 50 to close this out or is it going it takes the bonus a bunch of lay ups and I guess you go back to.

<unk> is this is this riding on the big shots and can you just address that concern of I'm trying to get the full year over the goal line on ongoing after the bigger elephants versus versus the analogs.

No I mean look I think it's a great question, what I would say, though is the big elephants have already been bagged. It's just a matter of us doing the services work and getting the projects implemented so.

It's a matter of timing and the teams as you can appreciate Puerto Rico the size of the deal which is why we included it in the prepared remarks as one of our largest deals that we've had in the last several years. So as you can appreciate there's a tremendous amount of executive oversight management focus and given the fact that it's a core system.

Clemente Shin in Puerto Rico that then creates a flywheel for a huge amount of cross sell opportunities in the future right. So.

What I would say is the team is laser focused on.

Unified on Alabama on Puerto Rico, which are the big deals that we're confident we will start to see the revenue pickup in the second half so.

I guess I would just say is there isn't it's hard he talks about the pipeline, which we're super excited about especially in the bigger deal side. There those items from a revenue standpoint, you really won't see those start to contribute anything meaningfully until maybe later part of this year most likely for first part of next year, which is again everything we've <unk>.

And so.

We're just.

While there is a little bit of noise I think it's important and candidly is hard deepen I talk about it.

We're excited because the deals get bigger it's a demonstration of just how strategic we are becoming with our customers. So we are going to have bigger deals they are going to continue.

But just rest assure that we're very confident in the second half of the year in terms of the revenue that's going to roll off of these once the implementations go live.

Great. Thanks.

And our next question is from the line of Matt Hedberg with RBC capital markets. Please go ahead.

Great guys, thanks very much.

I'll keep it to one for the sake of time.

I guess for either of you.

Refresh our memory again about how we should think about U S. Fed funding flowing into this year I know, there's been a bunch of moving parts coming out of Covid.

And then maybe specifically for Eric.

How do you think about that.

Relative to sort of the midpoint of your kind of full year guidance range.

Great.

So from a funding perspective I can quickly address that Matt. So I think the funding is largely when you look at the <unk> funding that has continued to be stable given throughout the last couple of years. So there is no change to the core funding federal piece component goes to about 20, 30% federal state and the local and we've seen that across states and.

Pretty much that could be very stable. The ester money is on top of that Thats, a 200 billion.

So three tranches of.

The plus two tranches.

Have been some part of them had been spent in the third tranche is still making books. So total you can as I mentioned, you can put roughly 40, 50% being spend and then the rest are still available to the districts or spend so from that perspective, that's still flows another.

18 months for decision, making and then even spend can be liberated or so the funding environment seems to be very stable and also with US are further supported by that.

And specifically on the guidance, we have not assumed any dependency on the essar funding to deliver the rest of this year.

We do have visibility to deals that may use as their funding.

It's usually a pretty small percentage so there is.

Little risk there of <unk>.

Things not getting funded because that didn't get spent et cetera. So.

The guide I think is fairly balanced what I would say and we haven't put any dependency on us here for the second half.

Thank you very much.

Okay.

And our next question is from the line of Rick <unk> with Credit Suisse. Please go ahead.

Okay.

Hi, guys. Thanks for taking my question just wanted to have.

Another go here at International one quick one on my end.

Exciting to see to be any partnership the one connect partnership and I know these have minimum commitments.

What I'm wondering is how much freedom to these partners have.

As you mentioned your 90 plus countries.

You've rolled out this localization framework are you able to sell whatever they want is it kind of that one more product rally cry are they are they put are you pushing them with bundles.

What does it look like how much freedom to happen.

Thanks, Rich Yeah fair question, so the copper.

International right now is the non our core products the size the learning management systems. The enrollment things are unique protocol school operations should be able to run those coal operation communicate and managed learning and collaboration with the parents students. So.

And we also see demand drop actually insights and analytics, which is.

Coming up international even outside.

People, who are buying your assistant Allomap. So those are the core area of focus for us, but for the international we're not really launching over all of our 20 plus products International. So these are the core products, which is a phase one and that's what these partners that enable trained and thats. What the experience is actually most of the partner already have in some respect, but working with the local schools.

Sure.

Excellent that's really helpful and then last one on that topic.

<unk>.

Can you can you kind of help us think through you talked about these are exclusive partnerships. So it's not like we're going to see 50 of them can you give us a sense is this going to be like a handful is this going to be double digits and over what period of time are you thinking of rolling in the majority of these out.

<unk>.

Yes.

Question. So when you look at it we are not trying to go cover every country every region covering the biggest.

Regions, we actually have brought in a management consulting firm to actually do the analysis for us in terms of looking at the local buying patterns and empathy.

<unk> then the budgets in different scenarios and we prioritize about 12 regions, where we are establishing these different exclusive partnerships to really go after which actually opens up to almost.

Almost $100 million plus substitute and Pam.

Within those private schools and very focused strategies in these 12 regions. So that's a very it's a very targeted approach.

I expect that probably another half a dozen partnerships throughout this year and then going into the next year to almost 12% to 15 exclusive partnerships.

Excellent. Thanks, so much.

Thank you and our last.

And our last question is from the line of Brett Knoblauch with Cantor Fitzgerald. Please proceed with your question.

Hi, guys. Thanks for taking my question I'll be quick here.

Yes.

I wanted to touch base now that you guys have.

Second the six core clouds.

The efficiency gains on the go to market strategy with that.

Hi, Brett So when you look at it.

<unk> launching these clauses.

This quarter in one of the things I mentioned in my prepared remark be almost pretty much.

Really.

Have seen each of the products depending on each of the clouds, we've almost been 50 plus transactions in each of the clouds, So thats, helping us, but that's a student cloud or it so.

Or are you going to effectiveness storage going to recruitment cloud or workforce spanning cloud. So we kind of really launching these things into our customer base to make sure that they can understand the benefit of really buying the based on that persona buying all the products rather than buying the individual products. So we're getting we're not trying to.

Discourage any of our customers or by individual product, we still selling majority of that but we are able to help them start educating them than when they are buying the product. They actually have an avenue to really be able to take advantage of the full cloud for their persona and what we did see is actually we are almost a 60 plus deals in the quarter, where the customer either bought the whole.

Cloud one of the whole cloud or the top of their existing products to be able to have the full cloud. So that's a very encouraging sign even with early on that we are actually able to get customers to start thinking about this in the perspective, we really are going to be doing a full launch of this at the edge conference to expect that by the second half for our customer base to be able to really have a fuller.

And then we really are going to start seeing the benefit of this coming into the later half of the next year in terms of the new bookings.

And there are no further questions at this time I will now turn the call back to you for closing remarks.

Great well, thank you operator.

Let me just take a minute to thank everyone for joining us today as well as thanking over employees and of our customers for really the continued dedication and belief in our vision to be able to improve education outcomes globally.

To summarize this was a great start to 2023, and we had not only a record new logo bookings, but also very exciting growth in our cross sell we have phenomenal traction of our data centric products are unified insights and connected intelligence also as we mentioned the <unk>, which is a very strategic core part, but which expands over cross sell time, having a wins like Puerto Rico, where it really game changing.

Changing in terms of the the ability and then international expansion for the tops it off in terms of our future supporting our future growth. The success is really driven by where the fact that we have the most differentiated mission critical platform in the industry, serving a very large and stable vertical market and we operate on a very durable financial model that has a strong operating leverage.

And coupled with a a tremendous growth opportunity, especially through international and even the personalized learning and innovation.

We are really positioned well for the growth. We are excited about the opportunity that presents us and look forward to executing on this strategy throughout 2023 and beyond so thank you again.

That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.