Q2 2023 PowerSchool Holdings Inc Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the power School second quarter 2023 earnings call. If anyone should require operator assistance. During this conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

I'd now like to turn the call over to Shane Harrison Senior Vice President Investor Relations. Thank you Sir Please go ahead.

Thank you operator, welcome everyone to power schools, earning conference call for the second quarter ended June 30th 2023.

I wanted to first let you know that we posted a slide deck to the Investor Relations section of our website that accompanies our remarks here on the call today, we have power school CEO of her deep Gulati and CFO Eric Sander.

We apologize for the schedule change today, but how do you put a scheduling conflict due to him attending an education summit at the White house that overlapped our original timing.

As such hardships portion of these prepared remarks have been recorded but we expect them to be available for the live Q&A to follow these prepared remarks I'd like to emphasize that this call, including the Q&A portion 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 <unk>.

Sections due to a number of risks and uncertainties the risks and uncertainties that forward looking statements are subject to are described in our earnings release and other SEC filings. Today's remarks will also include references to non-GAAP financial measures additional information, including definitions and reconciliations between non-GAAP to GAAP financial information to the GAAP financial.

[noise] formation is provided in the corresponding press release and results presentation, which are both posted on power schools Investor Relations website at investors Power School dotcom.

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

Thanks, Sharon Thanks to everyone for joining us for power schools second quarter earnings call.

We had a great second quarter, where we increased the adoption of our expanded platform with large districts and states saw continued strength in nobody nobody can beat our solutions and drove outstanding financial results. The second quarter results are summarized on slide four you will see we delivered another quarter of double digit growth and net.

Revenue retention rate expansion.

<unk> grew 10% year over year to $174 million at the top end of our previously communicated guidance.

EBITDA grew 26% year over year to 61 million exceeding our previously communicated guidance range and was the continued expansion of our profitability profile coming in at 35% margin.

Net revenue retention grew another 40 basis point to 109, 5% on a record quarterly sales to existing customers.

Given the continued strength and the strong momentum in our business. We are reiterating our commitment to double digit revenue growth and increasing our margin guidance for the full year.

Its success is the result of significant momentum we are seeing in many facets of our business, including momentum in bookings solution innovation and platform and international expansion I'll start on slide five with a a customer bookings momentum.

In our seasonally strongest quarter, we saw record results for new and cross sell into our business.

We continue to see a trend in bidding very large deals.

Which we define as deals that are over $1 million in combined Iraq and nonrecurring revenue.

We booked a record five such deals in the second quarter.

Which brings our year to date large gene combined Iraq and nonrecurring value of $31 billion.

This compares to $11 million in value in the first half of last year.

Our pipeline remains strong with a wide array of opportunities that we will continue to work through in the second half.

We are excited to announce another new state level contract a new logo win with the state of Montana office of public construction Monte.

Montana selected unified insights and connected intelligence just supercharged the use of longitudinal data to improve the outcomes of nearly 150000 public kits with 12 students.

Dominating our byproduct perspective, the growth drivers in the quarter were diverse with particular strength in our student information cloud.

Student's success cloud educator recruitment and workforce development clouds.

And as with the prior quarter, our Ddos solutions continue to exceed expectations, but there are growth of nearly hundred person versus last year, demonstrating the value and the leadership of our differentiated and comprehensive platform of cloud solutions and our unique comprehensive analytics capabilities.

This brings me to the momentum and innovation that we are seeing in the business as summarized on slide six.

In Q2, we doubled down on innovation, ensuring we are anticipating the needs of our customers, particularly regarding the data analytics and AI.

Adam recent edge user conference in Orlando, We announced three major innovations first the expansion of our connected intelligence data as a service platform second our new my power school unified user experience for students and families and third of an expanded generally kept the bookies and roadmap.

The strong customer demand for effective data analytics is why we develop connected intelligence. The industry's first turnkey fully manage data as a service platform for education and government agencies on Salt Lake did o'clock.

In June Snowflake awarded power School, there Twenty-twenty T powered by Snowflake growth partner of the ear to walk for connected intelligence.

Combining connected intelligence bit of a powerful unified insights analytics layer, we are supporting districts and states with caito 'twenty longitudinal data systems across our school and any other data sources, providing our customers with limitless kept book these to understand the trends.

Factors details and gaps to improve education outcome.

In the second quarter seven of our top 10 deals included either unified insights or connected intelligence and four of these deal including both solutions.

Notably we are very excited to further our partnership with the Los Angeles Unified School District.

Our second largest school district in the U S with nearly 500000 students.

Ranking among one of the largest deals for us and most comprehensive deployment of our full analytics capabilities in the country.

L. A U S D, but chances of an entire unified insights and connected intelligence solutions.

Our whole child view and drive insights across their data sources for us throughout the district needs.

These data products are also supporting broader cross sell off of other products.

As an example in the second quarter, the New walk Board of Education purchased both connected intelligence and unified insights MTS solution.

Along with adding assessment and curriculum planning on top of their existing use off over S. I S. Equally.

E click farms and unified insights product.

Additionally, the Dallas Independent School district, but she is unified insights and M. P. S. S to overlay their existing use of possible S. I S enrolment and special education solutions.

These wins show cause somewhat of bulky to launched timely products organically and inorganically that are differentiated and address critical market needs supported by ever access and deep understanding of the challenges and opportunities in our 15000 plus customers.

We recently published a 'twenty 'twenty cheat education focus report that highlighted many trends in the industry based on a survey of over 17 50 educators.

And one highlight at finding was that only two intent educators say that they have the data they need to evaluate teaching intervention success with.

It supports the demand we're seeing is that our data products.

And I would urge conference. We also announced my power school, a new cohesive user experience that consolidates, all relevant information and applications into a single streamlined platform that is tailored to specific user personas.

My past school simplifies haul families and track their children's schools, our teachers and tracked with the students and families and high school technology leaders manage their possible solutions by providing a central point of access based on if the user at the student family member educate or administrator.

From assignments and grades to attendance and also includes a new payments module my pascua consolidate all the information families and children need in a single user interface.

This will help support additional cross sell and improve our existing customer experience.

Finally, we are excited about the tremendous opportunity for AI to accelerate about product roadmap and business model.

We're already leveraging AI in several of our existing products, including M. T. S S and learning navigation to deliver personalized intervention and learnings based on individual student needs of learning goals.

At the edge event, we demonstrated our latest gen ready way I functionality that will save educators, a significant amount of time in their day to day first we have embedded within our performance matters assessment solution and automated generator that creates assessment questions that are aligned to a design learning objective.

Great level subject and standard.

The teacher can use to deliver more frequent formative assessments at scale.

Second we previewed one of the agenda to be I kept both these that is coming to connected intelligence.

Talk to data functionality that will help non technical users offer solutions get powerful data insights easily.

We have been able to exploit these generally are out roadmaps throughout our recently announced collaboration with Microsoft Azure Wars Open AI service and the usage of their open large language models.

These product innovations are stepping stones towards a very significant opportunity for our school given our unique position to monetize generally value in our solutions entrenched with our customer base and opens up a $100 billion person nice time.

Moving to slide seven we are continually investing to expand our business in highly strategic and capital efficient basis.

This expansion includes growing over platform as well as expanding or a geography footprint.

As a reminder, in July we announced a significant advancement in our home communication solutions with the planned acquisition of school Messenger.

A leading provider of K through 12 communication tool in North America.

The unified communication solution for that expands our product offerings and has been a top focus for our customers given the need to consolidate fragmented school to family interaction technologies.

The synergies we see with the addition of DS communication capabilities span several of our clubs, including within our student information cloud for deep integration of students in class data into my power school for a centralized experience with Richard communication content and automation.

Within our personalized learning cloud for integrated to Wechat, and notification embedded into school Agee and other classroom solutions.

And within our students' success cloud for improve engagement with families to improve attendance.

And actress interventions.

We are also laser focused on our continued international growth and momentum.

In July we announced our latest international channel partner, Santa Monica, Telecoms, who will help us to support expansion in Thailand, and the neighboring regions with plans to so more than 100000 students in Thailand in next year.

This continuous effort very focused partnership strategy to have strong commitments from our partners in key regions globally.

We continue to see growth in other international pipeline.

To summarize this was a great quarter with record sales and a record adjusted EBITDA that beat our guidance.

Our pipeline continues to grow supported by several large deals.

Our investments in innovation and platform expansion are driving continued demand offer depreciate, it cloud and analytic solutions, enabling us to consistently deliver long term durable growth and margin expansion.

Let me now turn the call over to Eric to cover the second quarter financial results.

Thank you Heidi we delivered a great second quarter highlighted by continued execution on our topline growth and margin expansion driven by consistent strong demand across our product portfolio and strengthen our market, leading data and analytics offerings as summarized on slide eight we delivered second quarter total revenue of one.

$174 million, representing a 10% year over year increase coming in at the top end of our guidance range. We provided in the last earnings call.

Subscription and support revenue grew 9% year over year to $147 million and accounted for 84% of total revenue in the quarter.

Subscription and support revenue from the Puerto Rico Department of Education deal was minimal in the quarter as our teams continue to work diligently to implement our best in class Cisler shouldn't or the entire territory as.

As a reminder, subscription revenue may lag are are in these larger deals given the complex implementation deliverables whereby subscription revenue typically does not start until the solution is delivered to the customer.

Revenue from our services business totaled $20 million in the quarter, representing 6% growth over the same time period last year.

We continue to drive the efficiency and velocity of our implementations, which increases the time to value for our customers.

Revenue from license and other totaled $7 million for the quarter more than doubling over the prior period year. The main driver was the exciting connected intelligence L. A USDA deal, which is $14 million and total value over the three year contract with approximately $4 million in upfront license fees.

As I've mentioned previously our Illinois revenue can fluctuate significantly on a quarterly basis.

We ended the quarter with an annual recurring revenue balance of $636 million, representing a 10% year over year increase as we continue to cross sell successfully.

New logos and maintained strong retention rates, our net revenue retention rate came in at 109, 5% up 220 basis points year over year, and improving 40 basis points versus our first quarter of this year.

This is a record net revenue retention performance.

Adjusted gross profit for the quarter came in at $124 million with a 71, 4% margin representing a 340 basis point year over year improvement driven by greater operational scale reduce third party costs and the flow through benefit from the exciting L. A U S D deal.

Moving to the second quarter operating expenses non-GAAP research and development expense came in at $21 million, representing 12, 1% of revenue compared with 14, 1% in the same time period last year.

This 200 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 we continue to invest and game changing innovation to drive long term growth.

Including capitalized R&D expenses.

Total invested in R&D was 18% of revenue compared with 21, 7% last year.

Presenting a 370 basis point improvement.

non-GAAP SG&A expense totaled $42 million in the second quarter, representing 24, 1% of revenue compared with $37 million or 23, 3% of revenue in the second quarter of last year.

The increase reflects investments we are making in our sales organization and go to market activities that will fuel our future top line growth second quarter adjusted EBITDA exceeded the high end of our guidance range coming in at $61 million, representing a 35, 2% margin, which was 430 basis.

<unk> better than last year.

non-GAAP net income in the second quarter was 23 cents per fully diluted share up one penny or 5% from the 22 cents per diluted share we had them at the same time period last year.

Second quarter free cash flow, which is seasonally a negative cash flow quarter, given a significant amount of our renewals happen in the third quarter was negative $44 million compared with negative $28 million in the same time period last year.

This is driven primarily by the change in net working capital and higher interest expense versus last year.

Moving to the balance sheet, we ended the quarter with $28 million in cash and equivalents an increase of 84% over the same time period last year.

The corner, we drew $10 million on our revolver compared with $8 $40 million at the same time period last year, which reflects our strong and improving cash generation profile.

We have since paid off the $10 million revolver draw on July <unk>.

Our net debt leverage at the end of the quarter was three three times compared with $4 eight times a year earlier.

As her deep mentioned, we're excited about the prospect of adding school Messenger tour platform.

We expect the transaction to close in September and will fund the $300 million purchase price with an approximate even split between cash on hand, and our existing debt facilities.

Now turning to our third quarter and full year 2023 financial outlook on slide nine.

Given that the acquisition has not yet closed our guidance today does not include any expected contribution from school messenger <unk>.

During our upcoming Investor day in mid September we plan to provide updated guidance for the full year, including school messenger. If the transaction is close by that.

For the third quarter, we expect total revenue in the range of $178 million to $181 million consistent with our financial model going into 2023.

We expect third quarter adjusted EBITDA to be in the range of 55 million to $57 million, representing a 31.2% margin at the midpoint.

This incorporates the return of our in person market, leading edge user conference as well as the delivery of the scanner component of our Puerto Rico contract, which customarily carries a lower margin profile.

For the full year 2023, we are increasing our guidance for adjusted EBITDA to a range of 226 million to $230 million, representing a 33% margin at the midpoint.

System with our stated goal of delivering low double digit annual revenue growth. We are reiterating our full year 2023 guidance of $688 million.

$694 million with the midpoint, representing a 10% year over year growth rate.

For modeling purposes, we expect full year capital expenditures, including capitalized software of approximately 42 million to $46 million and share based compensation expense of approximately 65 million to $69 million.

Fully diluted shares by the end of the year are expected to be in the range of $203 million to 207 million shares.

As a reminder, we'll be hosting our inaugural Investor day on Thursday September 14th in New York City.

We're excited to share updates on our product roadmap and go to market strategy International playbook long term financial targets and much more.

In summary, this was a fantastic quarter, we're growing the footprint of our platform of software and data solutions across our customer base as well as demonstrating that this platform will continue to attract new customers and state level deals. We're also committed to driving margins higher as demonstrated by our guidance raise for the full year, which.

Is 200 basis points above full year 2022, and ahead of our initial outlook that we provided in February .

We will continue to execute in the second half on our strategies around innovation go to market and customer success, when they focus on growth and profitability.

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

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May press star two to remove a question from the queue for participants using speaker equipment, it may be necessary to pick up your hair.

That before pressing the star keys.

One moment, please while we poll for questions.

Okay.

And the first question comes from the line of Joe Brewing with Baird. Please proceed with your question.

Great Hi, everyone I guess I wanted to start on the data products can you maybe just speak to how the progress here compares to your internal expectation so far and it is the early success actually maybe causing a rebalancing of resources or a change in product.

Maps towards this direction of power school and.

As a quick follow up just from a financial standpoint does growth and the data products come through at any different margin framework than has been the case for the rest of the unified platform. So far.

Yes.

Great. Thanks, Joe This is habib thanks for the question.

You know when you look at from a roadmap even at the time of IPO, we actually highlighted data products is going to be one of our big differentiators in the market because we have access to all the different systems in variety of data and as we were seeing post COVID-19. There is a lot of focus far districts and state.

Understanding of where the student and engagements are where the learning gap SAR. How do you provide the right interventions and then also there's a big focus now which shows around not just college path, but even career pathway is for students. So the states are looking for a better visibility. So we have actually been focused on the data products. It is actually beating our.

Patients are as you know in terms of both the unified insights as well as our connected intelligence product, which is our data as a service platform. One of the key highlights is that we are very unique in the be able to provide the unified insights, which have the breadth as well as data as a service platform, which is also unique that's creating the extra demand.

And for US in terms of both from a large districts as well as state. We do expect this to continue because we are seeing the interest in the pipeline to be exceptionally strong and we are putting a fair amount of free sources into our roadmap already to continue so one of the as I mentioned at the conference we highlighted over investment in now almost a kick through.

Monty dashboards through our connected intelligence and that allows even states like Montana and others to be able to really have a better longer term view across all the different elements. So they can find better on career pathway for students. So it adds a lot of exciting work here.

And Joe This is Eric just to follow up on the question around the margin profile. So you know it's.

It is hard Dave mentioned, we are investing and we are reallocating resources to to this to this exciting area. So as with any new products that go out I mean, the margins are slightly lower than some of our more mature products, but you know as that continues to scale and as we continue to see revenue pick up in that era.

You know the margin profile starts to kind of rebalance out, but you know given the investments, we're making there and there the margins are a little bit lower but again I think the value and the beauty of having a platform as we have other products that are more established that are generating a much higher margin. So in aggregate, we don't see any kind of dilution to the margin profile.

That's great. Thank you very much.

Thanks, Joe.

And the next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.

Oh, Thanks, just on the revenue guide for the year. You know you brought the bottom lineup. Many investors asking you know what you're seeing on a top line why.

Why maintain given the strength of some of these large wins that you highlighted.

Can you just give us some color in terms of what you're seeing on that side.

Sure, Brian I can start and I'll ask Eric to jump in as well, but when you look at from a you know what we've always said that we are you know a low double digit grower and that's the really strength of our businesses that are predictable and sustainable growth, but we've also said that we have a huge opportunity here to continue margin expansion and that's why you see not only give a margin coming better.

We have increased our guidance as well now you will see some amount of seasonality around the quarters as well as large deals which create some level of quarter beat so having the Q1 beat and now Q2 beat definitely gives you an expectations that hey, what why are we not increasing so we do have a very strong deal you know largely profiled for the last few quarters, which is <unk>.

Currently creating that'd be we don't think there is more upside, but we don't want to get ahead of herself again, we want the market to continue to you know.

Trust of a predictable double digit low double digit guidance and that's what we're trying to not get ahead now we do have an opportunity with the school messenger around the Investor Day, we of course would be actually give you the full perspective for the year as well as how we predict the next year to be.

Yeah, I mean I think.

Some some of the larger wins that you use you've landed or are those are those tracking the implementation times that are on time or any delay in those larger deals that you've won that that'd be going a little slower.

Yeah.

Sure I can guess all of you and I think I'll, let Kirk jump in as well we are progressing well in fact, when you look at all of our implementations for Puerto Rico, We actually and almost go live right now so that's actually a record time to bring almost 275000 multi district, a whole territory deployment.

You know go lives. So we are you know those.

Those go lives actually are tracking exceptionally well.

L. A we actually did start some of the work with them last year. That's about up there are you know.

Whole childhood, Lytic said, which was a small portion and now they're actually look looking at the full entitle element of unified insight. So you.

You know we are very much already have laid the foundation. So we do expect that they actually come in the coming school year theyre going to be able to take advantage of that in a matter of few weeks and months. So.

Most of the large deals that are actually tracking very well and there's no concerns on any any go lives of implementation delays, but as you mentioned there are a little bit of a you know a.

A couple of months of <unk>.

Compared to a weeks for a smaller districts. So there's definitely that revenue actual revenue aspects, but that's why we're also still committing to the full year guidance I think you want to jump in.

Yeah, Yeah, I think yeah, you you answered it quite well I think the only thing I would just say in addition to that Brent is as I had in my prepared remarks, the minimal revenue in the quarter for Puerto Rico in Q2, we obviously as we hand the system over to to them here. Shortly then the revenue will start kicking in so you'll start to see more contribution in Q.

Three and for the rest of the year I think the important thing is we've been really focused on is just continuing to reiterate the full year guidance. You know there is going to be you know from quarter to quarter. There can be some lumpiness in terms of when the revenue kicks in from some of these larger deals, but the important part is and from a full year basis, we're very much on track with the low double digit.

Growth that we're seeing.

And the next question comes from the line of Matt Hedberg with RBC capital markets. Please proceed with your question.

Great. Thanks for taking my questions guys. Her deep you continue to call out a good growth in international markets. Good good progress on that front.

Just sort of curious you know how do you think about allocating resources internationally, you know what sort of what sort of you know we know we all know it's a huge opportunity, but maybe just kind of walk us through sort of the steps that you're taking beyond some of the initial investments youre, making to sort of.

Plant those seeds and also obviously continue to focus on what is a large domestic opportunity together.

Yeah, Great question Matt.

I think I'll reiterate the point I made on fewer needs back about our international strategy. The key element there as we you know it's a huge opportunity. It's almost seven times the size of the U S and Canada opportunity right. So we have a big a big Tam there is nobody else internationally who's got the full breadth and depth of the scheme.

Gil to implement and tackle large states countries and even large private schools.

Who need these systems and we are seeing demand really increase after COVID-19 because most of the countries and schools have to deal with the disruption we are seeing that demand, but we also wanted to be careful as you pointed out that there's a huge opportunity in U S. For a strike we have a almost a $3 5 billion plus cross sell time, just in our U S market. So we don't want to.

No completely lean in and we wanted to focus on very sustainable growth International with that said, we still believe over the next three to five years. This is gonna be a material almost.

10% of our overall revenue.

We've got approaching this with a very concerted effort with our target markets, where we are going to have very exclusive strong partnerships are going to commit to revenue and student growth in those regions, what that allows us to do it rather than our own boots on the ground in each region for every aspect. We go to have partners, who are going to co invest with us and build.

Those markets and actually growing them as well, but these are hot commits they are committing both in terms of dollars as well as in terms of number of students they could actually bring over or our stuff and as well we have updated over the year. We've already had another half a dozen partners with that commitment and are in fact, we are you know I mentioned some of them are small.

And and Thailand, We in fact, just signed another partner Ccs, which is actually in Egypt, Egypt actually has 23 million kids in cancer trials and she says one of the largest technology infrastructure provider and they are also committed almost a half million students over the next 18 months to bring in that region to a two on parcel. So that's a win for.

Us to be able to invest sustainably and with partnerships to really grow that business. So you know so far.

Our goal for this year, it's about having these 12 strategic partnerships when a different in regions, where we see the highest amount and we are on track on that.

That's great aircrafts, you just a quick follow up.

You had a lot of good things to say in your prepared remarks, but record an IRR in your slide deck. It continues to tick.

To move up into the right I'm sort of curious you know where could that go and does your full year guidance assume that that kind of continues to tick up or kind of stay consistent with what you've seen though but it's been an impressive trend.

Thanks for the question, Matt So yeah we.

We're certainly thrilled with it coming in at 109, 5%, what I would just encourage everybody to keep in.

Mind is Q3 is our largest renewal season, so 60 plus percent of our book of business is renewed in Q3, so and.

The level of churn that you're going to have is typically going to happen and be more pronounced in Q3. So.

From a metric standpoint, you know I think sequentially you could see it flat maybe slightly down for the full year, we believe and expect it to be in the 109 plus percent range.

Look in terms of where it can go we've got.

Some of the industry, leading renewal rates really good sticky products, we're seeing a lot of cross sell momentum. So we are gonna be refreshing. This for our Investor day in terms of our outlook, there, but suffice to say I think being in the 1% to 10% range and perhaps a little bit beyond that as we go forward in there.

Coming years is certainly what we're gonna be working towards.

And the next question comes from the line of Stephen Sheldon with William Blair William Blair. Please proceed with your question.

Hey, Thanks for taking my questions wanted to ask about kind of how you're thinking about the sequential trend in a or are heading into the third quarter.

Given what you're seeing on the renewal side I think that you just kind of talk about a little bit and then the trend in bookings should we be kind of expecting the same seasonal pattern that you normally see where <unk> is pretty flat sequentially or could there be any support from bookings.

That happened.

So far in <unk>, especially around the edge user conference that there was.

In the third quarter.

Yeah, sure and I'll, let Eric comment around the seasonality in the numbers, but you're absolutely right Q3 years from a renewal perspective.

Does create that effect from an IRR, but I think it's been good again, we're looking at the full year, we are tracking to double digit growth on the Iraq and are we you know if we if we see a tremendous amount of pipeline and confidence in achieving that Eric I'll, let you expand that more.

Yeah sure. So I think Steven as you rightly noticed typically we will see from Q2 to Q3, we'll see a are pretty much flat.

Although the last couple of years, we've seen a tick up a little bit.

As <unk> mentioned in a really strong pipeline, we see a lot of business momentum in Q3. So.

I actually would not be surprised if we see a tick tick up in Q3 on a sequential basis.

It'll be at least flat if not up from our expectations.

Got it very helpful and then.

Got a question you know what's the what's kind of the early feedback you've received on the my power School dashboard for parents I know, it's still really early but has there been any potential improvement in the user experience for them I know parents of them wanting more visibility into other kids are progressing maybe wasn't that easy for them and their parents that have access to that visibility before.

So and then also how quickly do you plan to roll out My power School father, and user types things about teachers administrators et cetera.

Great question, Stephen I think you remember from the user conference. We actually are when we unveiled literally had a.

Phenomenal excitement from our customer base universally I think this is a pretty much any parent right who have got kids are in school would depreciate that right now it's pretty much in majority of the school districts you have to go check your report cards or greater than one system. Your you know any assignments you might be looking at a different system.

So you have to go to a different systems for paying for enrolling the students or forms you'll have to somebody that's a whole different systems and message and communication on phone lines. Another it's a very fragmented aspects and also experience for opinion, which really frustrates parents and they've actually prevents them to engage in their students and as we have seen that.

The parents are more engaged you clearly have a better student outcomes. So this has been one of the requirements and now we are in a position given all the broader elements, we have in our ecosystem and our solution our platform, especially with the acquisition announcement after school messenger with the communication as well of where payments are new product launch.

We are able to really provide that full experience for parents to be have one stop shop, where they're coming in and having that end to end experience and that is something which we haven't been worsley seemed as a requirement from lot of four of our customers are.

Some of the solutions will try to tackle that don't really have the depth of attendance or grades or report cards. So the only kind of focus on communication part of it where we are able to really provide them full end to end up all elements of different things that parents, who need to access in one place we already have signed up actually almost a close 200 plus customers on simple.

For beta as well as the early control of a multi launch.

And our goal as a you know by in the next six months. So we would have actually a lot of them already go live with the full with the as we integrate school messenger. After the acquisition is closed then we would actually be able to really.

Have a more of a full experience on a whole lot of that detail a timeline.

Timeline when the acquisition is closed we will announce that so stay tuned on that and you will update you on the more detailed road map on it.

Yeah.

And the next question comes from the line of Gabriela Borges with Goldman Sachs. Please proceed with your question.

Hi, This is Kelly relented on for Gabriela first one for me is just any initial comments on the growth or profitability profile at school messenger and kind of what is pricing going to look like for customers, who want to add that functionality to their existing products.

So Kelly you all are well Eric comment on little bit on the stuff I don't think we are in a position given that we are not close to represent anything on the pricing.

I just want to reiterate it's a very strategic acquisition in fact, it's one of the top demand areas. We have seen from our customers that they want a whole comps capability integrated into their S. I S. The two which are integrated into our school Agee and have one place for a unified communications up if you don't have to deal with all these fragmented so it's a very strategic.

Acquisition for Us, it's a high demand area from a customer perspective, and actually the profit the both the growth and the EBITDA profile for school Messenger is actually a very similar to power school and you know, we we actually it's going to be actually both the growth.

Growth and EBITDA accretive I think you want to comment a little bit more on the numbers.

Yes. So I think you just hit the last part of what I would just say is I think it's important that not only that a strategic asset.

But it does come.

As a profitable company scaled out profitable company, so think of the growth.

And the profit profile of power school will be very similar for school messenger and it will not it will not be dilutive to our financials.

Alright, great. Thank you and then second one for me just around the Microsoft as your opening I announcements and it.

It would be great to get any early feedback from customers and kind of what your longer term vision is for that partnership.

Great Great question, Kelly, So, we actually announced just for everybody's benefit at the S. T. A.

Conference Microsoft partnership around the open the eye and one of the key elements there as we have announced and we previewed this setup of edge conference, where we are leveraging our you know.

We already have been using AI for the last couple of years in our systems on our at risk interventions predictability as well as another learning navigation around how we create personalized learning path space with the generative AI partnership now we are actually adding <unk> and and our capabilities right into our performance matter assessments, so lesson plans and items could be Craig.

Through generative AI. So it saves a lot of time for teachers to create those personal personalize the questions and let the lesson planning and the second element of that also as we are integrating that into our data as a service platform of connected intelligence. So we can actually use that to allow even any administrator or even a normal user to be able to more easily.

<unk> get those insights with almost like generative I kind of questions on the data so that will make up of analytics product given most differentiate us where we are really taking this even further is our real differentiator around the fact that we are in the heart of the classroom with all day to day activities around the homework and the lesson plans by actually bringing.

Personalized learning pathways and personalized home work, which we have a very unique opportunity to really allow now generate anyway to AI to be leverage right in the context to support Charles on their homework and being able to really have personalized homework, which actually is the.

Game changer in terms of really.

Kids to be able to have learned better right within the context of the classroom. So they don't you're not asking them to spend more time on supplemental and other areas you would actually making their.

Teachers like more easier and you're making a student for right onto their data their homework. So that's a very unique opportunity and we expect again, the you don't love being able to really have a huge market advantage of this by as we roll out these systems.

And the next question comes from the line of socket clear with Barclays. Please proceed with your question.

Okay, Great Hey, guys. Thanks for fitting me in here Hey, her deep a quick maybe maybe quick question for you here, especially.

Especially if you're in D C at the moment I think.

But what are you hearing from customers.

On their willingness to spend Essar funds and do you see any changes from either the government or a school districts or any other sort of constituents.

As I think we have about another year to sort of earmarked some of those funds does that makes sense.

Yeah, No. Thanks Circuit, then Oh I get it.

I appreciate everybody's flexibility, but they were delayed timing are we have a very exciting work. We are doing actually with the department of education, but secretary Cardona as well as the homeland security around the whole focus on cyber security and thanks to our you know first Lady.

And the White house to kind of give a forum for us to share some of the work we've already done to be able to show even additional thing, which we actually have the offering now what we call free security as a service, which will make it available for all not just of our customers, but I need you as school districts are state and supporting training and education, how we'd only protect them against all.

The different cyber security pets, I think one of the big advantages. We have is theres a lot of legacy systems out there manual touch points and not only we provide tools on digital transformation by improving those but we also help districts be more secure in that process of actually managing those transformation. So a lot of exciting opportunity in fact, we will be speaking.

At the conference Tomorrow.

Now to your point about the S or you know what we see is that sort of continues to be a one of the sources of funding for school districts, but a lot of time as we had mentioned that there is not the be all and all right. There is a lot of opportunity for funding around digital transformation typically the Ottawa for it.

Our solution space for it by itself because youre saving.

No paper cost of men will cost and as well as in terms of.

Just the having to deal.

I'm trying to do that without automation so.

Our systems kind of pay for it by you know even with the normal funding in terms of actually improving the funding a spec.

What we do see is again as it continues to provide that cushion. So when you're looking at some of our large deals as well as a lot of for mid size deals. They would be you know sometimes districts would take advantage of some of this or elements are in there by but we most of the districts would comment to US is that diesel systems. They will do it.

Specter of Essar, because these are technology system, it's unlike content or other areas, where they might be leveraging shocked them spin around are related to that now definitely one of the reasons youre seeing analytics as well as because most of districts want who makes their spend much more at a you know surgical so it's robin.

That brought our spread on making chew training or content of able to address lending gaps. They can have more surgical intervention strategies. So we are seeing more demand for M. P. S S and things like that so that their overall their spending is being more effective now we do see that to be a even film conjuring factor because theres districts always have these funding and.

You know our data in a more intervention strategies, which are more surgical are going to be the norm going forward.

So until that cushion.

That does that does that's super helpful and it sounds like a really interesting and great initiatives that you're working on there as well.

Eric maybe for my follow up for you.

Great to see the services line accelerate as get again, there's there's just some of those bigger implementations I think get rolling how do you. Maybe the question is zooming out a little bit how do you kind of think about services revenue in and just non subscription revenue in general this year I mean, clearly the subscription machine is is working based on <unk>.

What we've seen with with with air or how do you think about some of the non subscription stuff this year.

So it's a great question <unk>, so I as we look at the trend for this year first the services revenue I would anticipate that trend line to be very similar to the way it behaved last year.

So we will see typically when third quarter, peaking in terms of the level of revenue and then it will trail down in Q4, just given that not as many implementations are done at the end of the year and then pick back up in Q1, and then build in Q2 et cetera. So we expect that trend to continue.

The margins in this business will remain in the low 20% range.

Because again this revenue is really geared towards enabling our customers to leverage the technology and the training et cetera, so that they get the most value out of it and then I think the the license and other as you all have seen continues to be the smallest piece of our overall revenue, but it's going to be the most variable piece and <unk>.

<unk>.

Onetime items coming in there in partnership agreement so.

I think service is pretty consistent and then the Illinois, we'll try and give as much color as we have it and as we go into each quarter going forward.

And our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.

Hey, Thanks for taking my question. This is Jonathan to carry on for Brian and they'll just be one from Us Tonight.

So I had a question kind of on the envelope. So it's great to see the school Messenger acquisition I'm, just kind of curious how that could influence your appetite for additional M&A.

What's the latest on private market valuations. Thank you.

Yeah. So you know.

We look at these acquisitions in a way that how one there you know how they are accretive to our growth and our EBITDA profile, how they strategically fit into our portfolio based on where we see the top demand for our customers' needs are which helps our portfolio to be even more differentiated and comprehensive and also how it actually helps us X rate go up to in the long.

So when you look at all of our acquisitions and whether they are small tuck ins like in the curriculum space or behavior space or in terms of career pathway as you see that each one of them are addressing some of the key demand areas. We are seeing the market. That's the messaging was one of the critical elements, we see out a mission critical component for a lot of school districts. So this has been a where are we.

Actually partner, what's called Messenger, and we saw clearly that the man and the value of having that more in our platform. So that's why we kind of went ahead with acquisition will continue to be the main acquisition, but at the same time, we are going to make sure that it fits with our as I said of our growth profile as well as all of our our strategic rationale and then at the same time.

We are also making sure that or you know the leftovers averaged continues to improve as well so I'll, let Eric comment on the second part as well.

Yeah, I mean look it's always as you are looking at any of these acquisitions given the rate the interest rates are at any yet we have to look at the capital structure, we are being very mindful around our overall debt that we have which is why we've funded school messenger with half of our cash on hand, the other you know with our existing debt facility. So.

We expect to be around three and a half to three six times net levered by the end of the year and we will continue to work on that but you know look it's hard to have said, we're going to continue to look for really good assets out there.

That makes sense and then to your last question around the private markets. We are starting to see them come back a little bit more in line with the public company valuations. So we are seeing some.

Some of the.

Expectations come down a little bit.

Thank you.

And the next question comes from the line of Koji Ikeda with Bank of America. Please proceed with your question.

Hey, this is Natalie how long for Koji quick one from me I wanted to ask about the Sandler Telecoms partnership is 100000 student Oh come that or is that an opportunity that can be addressed over the next few years.

Now as I was mentioning a little bit earlier that these are hot commit in terms of over the next 12 months 12 to 18 months with these partners.

And typically that allows us to wrap up our these regions with the schools and stuff. So we already have a presence in actually in Thailand, but.

Almost a few tens of thousands of student and now we can actually really grow this to be a little bit with the broader market. So but these are good wrap up for us to be able to take that region as well as some of the neighboring.

Countries in that area.

Got it okay. Thank you.

Okay.

And the next question comes from the line of Claire <unk> with UBS. Please proceed with your question.

Great. Thanks for taking the question somebody had a second question earlier, so for Eric you mentioned the trends for non subscription revenue segments, but are there any updated color you can give us on growth and our subscription segment. I think previously you had mentioned a reversion to low double digits and the <unk>.

Second half just as those larger deals kick in and then also on the.

License and other line I know that's at that hard to model.

There is so much but I think previously you had mentioned that shrink he would be the peak, but wonder if maybe that's changed I think so.

M D.

4 million benefit came from that L. A deal.

Yeah, great great questions. So let me just first start with the subs and support.

So we still are.

As I mentioned in Q2, we had minimal revenue attributed from Puerto Rico that will start kicking in into the queue.

Q3, and Q4, so we do expect that to be in the low double digit range I think the other thing thats.

<unk> two for everybody that as you kind of look at the disaggregation of revenue for substance support.

The most critical piece of that.

We're seeing really starting if you look at the SaaS part of that <unk> revenue and that's about 80% of the overall revenue that's growing 10%, 11%, it's really the maintenance part of the <unk> revenue that's growing in the low single digits, which is the lesser strategic component of the SNS revenue. So I think that's also important so I would just.

Call out if youre looking at the 10-Q and look at the disaggregation of revenue because you can kind of see that trend as well in.

In terms of the Illinois. So we are you know I I still think that you'll see a pretty decent we're not going to give a specific number for <unk> for Q3, because it's embedded in the overall revenue number.

Because it is somewhat variable and again the timing of some of these items can be somewhat.

From one quarter to the next but I think it's a piece.

Piece, that's important and it was in my prepared remarks is there is as we modernize the Puerto Rico classroom of the future right. There is this a scanner component of that.

Deal with Puerto Rico, and we do expect a good part of that scanner revenue, which can be onetime in nature to come into the Q3. So.

The the Illinois, I still think that's going to be a relatively decent number.

In the third quarter and a lot of that is can be attributed to the revenue coming from our Puerto Rico.

Ken or component, so hopefully that colors, a little helpful. In terms of giving you an idea of where we're expecting it to trend.

Yeah I appreciate it thank you.

And the next question comes from the line of Brett Knoblauch with Cantor Fitzgerald. Please proceed with your question.

Hi, guys. Thanks for taking my question I guess on the the acquisition of School Messenger you guys bought a another messaging solution called beginning last year and Bob can you just help elaborate on what this acquisition gives you about Moody's acquisition acquisition did not give you warehouse I think about the combined call community.

The solution that you now have.

With these two products.

Sure Brett this sudden if I can take that so when you look at some of the kin vaults when we acquired it.

You look at that it's actually a more of a tender intervention and messaging component what a lot of districts have taken advantage of that as where you are doing a very targeted communication from school about delinquencies as well, let's wait and see in terms of where the kids are.

It may not be attending so you will get a.

As a reminder, this is just gets towards attendance medicine. If you missed the next month. This is a progression strike and so you were able to track individual Louise on understanding how to drive better attendance a lot of the school districts are we're struggling a post pandemic in terms of our kids not coming to the school or losing that engaged.

Men and it's one of the very strategic areas. We are seeing a tremendous amount of demand even with districts like San Diego, which actually roll this out and saw very strong feedback.

From parents and teachers about the value of such a solution, where when you look at from a overall communication needs. There's also emergency notification broader messaging from the district messaging from our schools as well as teacher and student and parent bidirectional two way communication as well, what we're trying to bring with Ken ball the tender.

Our messaging and intervention along with called Messenger and of a truly attractive bull piece around alignment with in under one unified communication umbrella and what that does it gives a one stop shop for our parents district teachers students to be able to understand all the different element of communication because right now you will get phone calls you'll get mess.

<unk> you will get some in Napa notifications and it's like a very chaotic all over the place and this gives us a unique opportunity to bring the most comprehensive communication system under one umbrella and all integrated into their my power school experience. So they don't have to go anywhere else forget that.

Understood and then maybe just as a follow up.

Now all I guess it kind of enterprises right now is trying to figure out how they can use AI internally kind of become more efficient, but that's in our go to market teams or R&D.

I just was curious to see your view, how schools or thinking about AI and tenor of AI are you seeing a pickup in conversations surrounding AI, especially given your recent announcements.

With Gen AI and kind of like yourself as yours open AI capabilities.

And what do you expect that to translate into for maybe pricing power, maybe increased pricing up with them in the future how should we think about those conversations.

Breakfast is a very exciting question and in fact, we will be planning to shed a lot about this in our analyst day, but I'll try to give a try to cover such a exciting topic in a minute. What I'll say is that look we are seeing is a lot of interest in education I should have presented one of the biggest opportunities for generative AI a lot of the school districts actually see it.

Clear need because if they don't adopt it they're going to be there anybody needs to rethink their student engagement with these kind of technology because students are going to start using a lot of that what we'd also thing is that for us given we are the system of engagement and we have the system of intelligence for their product. We are in a unique position to be the platform for all of these school districts.

Fixed and state to leverage and monetize that effectively so we have a very exciting opportunity in fact, we're going to share some of that how we the monetization of the generative I was going to happen over the next few years for us, but we see this definitely is a game changer.

And the next question comes from the line of spread have Meyer from Macquarie. Please proceed with your question.

Hi, Thank you very much.

I wanted to ask as power supposed to have gone through the major purchasing cycle.

I wanted to really just take a high level of person asked what is the biggest pain points that schools are now looking out here can you just help walk me through where in the power School portfolio. In addition to data you're just finding the most traction at this point in time and then since you're in D C and you're with the White House.

Tastic, you'll see that some tests to see the leadership position you're in just what are the conversations there like what is the Whitehouse focused on right now in terms of education. Thank you.

Great Great. Fred in fact, you know I'll I'll share it with a little bit more about this thing over the next few days as we walk to the White house, but I'll also encourage you guys to look at the Ed Tech report, we put education and of course, we put which we launched at at double Edge Conference, which is actually feedback from a lot of our customers and I think if you look at the some of the key trends.

I highlighted one in the prepared remarks, which was around data I think lot of the districts are still kind of flying fine. There are a lot of different systems that a lot of different initiatives, but how do you see the auto I of it how do you make sure that they're able to get all that data real time and be able to really have the surgical support so their budgets are more.

Reaching the kids, who need the most help that is the big thing I know about Mts's skeptical piece, our connected intelligence, we clearly see that that leadership is really driving a lot of the growth in the market and because of the unique position and the unique solutions. We have in the market on that the second area. We still see is in terms of.

You know the area around the you know.

In terms of the teacher are borne out and teach an apartment. So we're tools around how we are helping but generally we are supposed to make teachers more efficient support them as well as with the how big can easily engaged through our comps tools with my parcel. So their communication, which is a big drag on teachers assigned all of that said as improved that's what you'll see over that because.

Of innovation as well as inorganic stuff all around to improve and reduce the trip on out and improve their environment. The third area is the cyber security. This is where the white house's there is lot of legacy system I shared in our press release today, just public school alone we are able to successfully defend.

Or 1 billion cyber attacks photo of districts across of our solutions. So imagine we are you know.

About 10% of the market. So the actual number of taxes, probably 10 times and district since they don't have those kind of resources and this is where we have a huge opportunity for the digital transformation as well as getting districts to be able to stop using more modern cloud solutions and get that safety. So we have still a lot of upside in terms of the transformation.

It's had a firsthand whitehouse and private sectors are putting in investments actually to help districts with those modernization as well so good to see a very concerted effort around those area.

Thank you.

And the next question comes from the line of Rich Hilliker with Credit Suisse. Please proceed with your question.

Hi, Thanks for taking my question.

I wanted to touch on the persona based cloud bundles, obviously knew this spring and there was an emphasis at the edge user conference Wonder.

I'm wondering if you can give us a sense of how much that contributed to the strong bookings performance specifically in Q2, I know that was a first half number that you guys disclosed today and then I was also wondering how you think of that as a lever as you enter into your largest renewal quarter here. Thanks.

<unk>.

Yeah, Great you know Richard as you mentioned with our cloud launches what that does is allows districts to kind of more easily adopt multiple solutions rather than individual products. So we're seeing a tremendous amount of interest actually on the student's success part, which is around EM TSS with behavior and attendants interventions being able to really bring up that.

Altogether. So we saw a strong demand there or sooner in cloud as we've been sharing the full years of a certain information cloud continues to actually really be strong. So we're seeing a lot of school districts, who are sitting legacy. Great example, is Jackson, Mississippi bottom of an entire suite and cloud to really roll out it's actually the third largest districts in Mississippi. So these are the cultural.

And then the third area is a workforce spanning cloud. This includes our whole K through 'twenty view for states to be able to better have view and support the career in college pathway. So these are some of the bright spots in other clouds, which we're seeing we continue to see healthy demand in our personnel.

Learning cloud with LMS and assessments, which continue to be.

Driving.

Millions of students plus adoption in a year. So we do expect the clouds are going to really help us in all elements around that you know it.

In terms of our growth and will help us improve the cross sell wheelchair some of this more data out of the analyst day. So you guys can see how these are coming to fruition.

Yeah.

There are no further questions at this time and I would like to turn the floor back over to her deep for any closing comments great.

Great. Thank you operator, we'd really appreciate everyone joining and thank you for flexibility with a chance to get a chain schedule as we can.

Our remarks, you saw that we are very happy with our first half 2023 performance and we're also excited about the opportunity ahead of us.

The strength of our business to have a predictable growth and continue to have a better margin profile really gives us confidence to continue to be a you know a.

I have a very attractive financial profile I think what we're most excited the strategic deals. We are doing chose the leadership we have in the industry of innovation will continue to differentiate us even further and over our ability to do strategic acquisitions continue to allow us to even further add to our growth with the.

In terms of being able to have a more comprehensive platform.

We are very excited to share more about our broader roadmap and at the Investor day I'm looking forward to interacting with all of you out there. So thank you everyone for joining and looking forward to sharing more.

Ladies and gentlemen, this does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.

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