Q3 2023 PowerSchool Holdings Inc Earnings Call
Good afternoon, and welcome to the power School third quarter 2023 earnings conference call, all participants will be in listen only mode.
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I would now turn the conference over to Shane Harrison Senior Vice President Investor Relations. Please go ahead.
Thank you operator welcome everyone to power schools earnings Conference call for the third quarter ended September 32023, I wanted to first one 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, Hardy, Gulati, and President and CFO, Eric Sander.
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 for our company, which are therefore forward looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties.
The risks and uncertainties that forward looking statements are subject to are described in our earnings release and other SEC filings.
Today's remarks will also include references to non-GAAP financial measures.
Additional information, including definitions and reconciliations between non-GAAP financial information to the GAAP financial information is provided in the corresponding press release.
And results presentation, which are both posted on power schools Investor Relations website at investors power School Dot com.
A replay of this call will also be closer to the same website I will now turn the call over to Hardy.
Thank you Shane and thank you everyone for joining us today.
Third quarter was a continuation of the momentum we have been building over the past few quarters with meaningful growth in revenue and profitability.
K 12 organizations are accelerating the adoption of our platform to become more efficient and effective and this has been how big of an ability to execute on our strategies for growth.
Our third quarter results are summarized on slide four of the upholstered, earning presentation.
Revenue was up 12% year over year $282 million exceeding the high end of our guidance.
Product level growth was diversified for double digit growth in many of our cloud solutions.
Adjusted EBITDA was well ahead of our guidance, reaching $62 million, representing 19% growth over Q3 of 2022.
And a 34% margin.
We also saw record cash flow in the quarter, while continuing to invest in a game changing product innovations.
Iraq grew over 9% year over year and was up sequentially in Q3, which is seasonally our lowest quarter for new business as districts are focused on back to school logistics.
We continue to see low double digit growth in the Iraq for the full year, excluding school missing just contribution.
These results showcase the momentum we have created in driving sustainable long term growth.
Let me now discuss the customer and product momentum in the third quarter are summarized on slide five.
We had meaningful customer activity that demonstrated many of our go to market strategies.
The biggest notable win in Q3 was the state of Florida Department of Education for several of our talent solutions that will help the state good recruiting and hiring processes as the industry is expanding the shortage of talent.
The Florida consortium drop what they're so all 67 districts.
Special school districts and over 700 charter schools in the state of Florida to source all talent from all over the country in order to fill back in fees for all dropped types in the state.
This is a competitive replacement of an existing solution that speaks to the strength of the innovation and the capabilities of our talent cloud offerings.
Florida is a great new logo win and another key new state level contract.
With the Florida, we have now won a state or territory level deal in nine straight quarters.
Additionally, we have been given vendor of choice for a state level special education solution for another state in the Midwest, which we hope to get to a signature and approvals in Q4 or early Q1.
These deep and large deals are very strategic and provided us an opportunity to further expand our customer footprint and cross sell across all the district, because calling these states.
The scalable nature of our platform.
Worse best in class footprint and depreciate. It innovation are driving the momentum for these state level deals.
Our strong double digit revenue growth in the quarter was across both sort of clubs that strong performance in our student information cloud.
So then success club and talent club.
Mission criticality of our core platform, the organic innovations of beta and insight solutions and more timely add on acquisitions like curriculum planning and attendance intervention.
Dressing the most critical needs of the districts.
Take for example year to date attendance interventions bookings are up 68% year over year.
Curriculum and instruction bookings grew 200% year over year and talent bookings are up 21% year to date versus the same period last year.
As we shared during our last earnings call.
Well as on our Investor day, our data centric solutions are a key part of our long term growth algorithm.
In the third quarter.
Our largest tenant means by ear are included insights all connected intelligence or book.
Including cross sell of book insight and connected intelligence to Modesto City School District.
Colorado Springs School District, 11, and Cherokee County School District.
These are technology minded districts that were already using five to 10 of our platform solutions.
A great example of Hog district of all sizes are seeing the benefit of using of a data centric tools aggregate secure and I like to present, the data for making better decisions for their students and teachers.
A key value proposition of our data product is also that we are enabling these districts with a data as a service platform to power their strategies.
With our connected intelligence data Lake solution, we're enabling more secure and they shouldn't be photo with customers to bring AI to their data rather than their data to the AI tools. We continue to innovate on our extensive multiple product AI Center slides education Road map.
In this quarter, we are doing journal of ability of her books shouldn't really AI based solution for item and pathogen mission tool as an add on for our performance matter assessment product after a very successful beta trial.
Additionally, this month, we are kicking off beta transport to other AI products.
First is the ability for educators to interact with student data sets using natural language to ask questions and uncover key insights.
This functionality will be an add on to our connected intelligence and other products, which will save educators and administrators a tremendous amount of time digging through their massive data sets to find the anomalies focal areas and other insights into student a cutback in behavior of progress.
Also this month, we plan to release, the beta or a first.
Version of personalized homework assistant a journey I chose enforced policy that understands the context of what is being taught in the classroom and provides assistance to the students who may be stuck on a homework concept.
Next I would like to update you on the progress of our recent M&A activity.
As shown on slide six.
Since the end of Q2, we have acquired two companies starting with the completion of the exciting acquisition of school Messenger in October.
I've been all out acquisition, the first stage of integration process centers on people and UI harmonization.
In our particular focus Med school messenger is building the deep integration of their direct communication kept both east into her new my car schools single pane of glass bottle for parents students and teachers.
As most parents can attest the communication process between teachers families and their schools is destroyed it and often confusing.
By adding school messenger to power school, and particularly the my possible portal.
We are uniquely positioned to create the most differentiated and comprehensive portal for centralized and efficient school parent communications.
This will supercharge the parent student teacher communication, and therefore drive meaningfully deeper engagement, a leading driver of store and success.
During the third quarter. We also acquired never skipped an India based K through 12, ERP and administration software provider there.
The addition of never skipped provides us with a localized and high quality ERP and a science product for the large India K through 12 market that is expandable and scalable with possible complementary platform of solutions.
This addition expands our reach in India by 1.2 million students.
Turning now to a broader global international expansion on slide six.
As we discussed at Investor Day, we are approaching targeted regions, but the direct sales model while in others. We are building our go to market with channel partners.
Since our last earnings call in August we are thrilled to have signed up to six additional partners, bringing our total to 11, so far well ahead on our planned to sign 12 by the end of the year.
For the Middle East and Africa regions, we aligned with E. P S Egypt market.
And belonged cyber attack or Oman, and the UAE.
Asia, We signed an agreement with Peanuts, who will resell possible products in Hong Kong, Singapore, and the Philippines, Our first partner in Europe geared education focused on selling in Greece and Cyprus.
For the Brazil market contributed over 37 million primary and secondary school students, we are aligned with loan base.
And finally in the Netherlands, we selected Glencore technologies as the latest channel partner.
We look forward to onboarding each of these and other partners in the coming quarters with the goal of driving meaningful growth off possible outside of North America.
The third quarter successes are driven by the strategy, we presented at our Investor Day in September when we outlined our vision to personalized education as well as our three a cox $2 billion in revenue and adjusted EBITDA margin in the upper thirties.
As summarized on slide seven.
At the event, we showcased our unique and differentiated position as the most comprehensive vertical SaaS platform for a very durable kitchell end market.
We discussed how we remain underpenetrated at roughly 6% of the $10 5 billion dollar addressable U S and Canada K to 12 market and how this Tam expand nearly 10 times to one.
<unk> billion when you consider our opportunities in international expansion and personalized education.
We articulated our go to market strategy review of key growth drivers and details of our playbook for expanding internationally through multiple channels.
We also showed a product roadmap, including many of the exciting journey I and personalized education products that we believe will transform the future of the industry.
Eric wrapped up the b by laying out a clear midterm financial targets, including the detailed leavers, we will employ to generate over 1 billion of revenue by 2026, while expanding EBITDA and free cash flow margins.
For anyone who has not revealed the investor day presentation. We.
But as you to do so via our Investor Relations website.
Q3 was a great quarter for power school.
The teams have built momentum in many facets of our business.
We continue to build scale and execute efficiently deliver meaningful value for our customers and develop our global reach.
I'm confident in driving durable and efficient growth in both our top and bottom lines.
With that let me pass the call over to Eric to cover the financial performance for the quarter.
Thank you hard deep we delivered a strong third quarter highlighted by double digit revenue growth margin expansion and record cash flow generation.
Speaker 1: or even with that investment are you seeing that it be immediately a creative? Thanks.
Speaker 2: Yes, yep, so right great question So as you know one of the things that really got us excited about school messenger is really bringing it into our my my power School, which is the single pane of view for teachers and students, etc. So we are going to take a quarter or two for some Investments that we're making for that integration But post that I would say, you know middle part of next year You will you will start to see you know, it be a creative to the company But there is going to be some upfront implementation and integration work that we're doing so it's going to be a quarter or two that you know, we'll we'll focus in on that and then obviously You know, it was a profitable company prior to the acquisition then, you know we believe that we will get it back to that spot and
Speaker 2: and probably even have some further leverage beyond that.
Speaker 1: Thanks for the color. Congrats again.
Speaker 3: Thank you.
Speaker 4: The next question is from Steven Sheldon with William Blair. Please go ahead.
Speaker 5: Hi team, you got Pat McElwee on for Stephen today. Thanks for taking my questions. So just kind of further on some of these prior questions, you put up really nice profit this quarter with an EBITDA margin of 34% and I know you mentioned there's going to be some expense related to school messenger in the fourth quarter but that guidance for the quarter implies a margin of you know 31% so just wanted to ask how we should think about that that step down if that's all or for the most part school messenger or whether or not there are any other considerations on that front that are worth calling out.
Speaker 6: Yeah, no, it's a great question. And I think the most important way to kind of think about this, there is some timing of activity between Q3 and Q4, as I mentioned in my prepared remarks.
Speaker 6: There was some LNO activity that happened in Q3 that, timing of it could have been Q3, Q4, it could have been either or, but we saw some of that happen in Q3. But what I think is most important is if you think about the full year from an adjusted EBITDA perspective, we are raising, by $2 million, we are investing in this integration work that we have. We're super pleased with the Q3 performance. And what I would say is, as you think about the full year, we'll end the full year around 33% in total. That's gonna be up two points from where we ended full year 2022, which again is a full percentage point above our financial model. So, we're hitting on all cylinders from a profit standpoint.
Speaker 6: So, again, it's just going to be some minor quarter variability, but I think it's most important to kind of think about where we're going to be for the full year.
Speaker 5: Yep, understood. Thanks. Thanks, Eric. And then...
Speaker 5: My second question, you said ARR for data products, I think in the past, maybe last quarter was up almost 100% year over year, and it sounds like traction there is
Speaker 5: continue to be really strong this quarter. Is there any additional color you can give on what exactly customers are using these products for at this point and then how you might expect that to evolve in the coming quarters and years?
Sure, Patrick. You're absolutely right. The goal trick continues to be pretty strong. And the multiple use cases we are actually seeing. We saw a lot of use cases first for understanding student engagement, right, in terms of, hey, where are my students, who's showing it from the class, what kind of performance we have. We saw that use cases further evolve into what we call MTSS, Multi-tier System of Support. We actually launched this a couple, two years back and in fact had full roll out of this event at the state level in Alabama for the coming school year, where every school district in Alabama has a full MTSS support for every student, where they can comprehensively look at interventions and support programs for each student. If a kid is not attending, you have a support.
plans and intervention strategies so that if a kid is behind on the academic side, how do you provide support for them? If a kid has social-emotional, what support or strategies would require for them? And similarly, you can keep going on on career pathways and basically driving a very comprehensive way for supporting every student depending upon their individual need, but scaling it to be able to do that at the district level, at the state level, and bringing all the resources. And that has been one of the huge growth areas over the last 12-18 months.
But we're also seeing a huge amount of interest now on connected intelligence, on the data product element where just bringing one data source, where it actually is your data sandbox, or it kind of thinks about your data lake, where you're bringing data not just from power school systems from your other systems, being able to have all kind of reporting and correlations, things which you may not even understand of where the challenges are, being able to have the data tell you that, and also being able to have that as your data repository for security, being able to have it for your, you know, being able to have a long term audit as well on that.
So, it has become a very strong data along with the insight strategy, and we are seeing interest as we talked about the huge L.A. deal, we have a Montana deal around not just the data strategy, but tying it up to even workforce planning, so you can have a K-20 view on your students and understand where the students are and how you're going to support them. So, these use cases continue to be really expansive. One of the very exciting things in terms of future, what we are seeing is actually interest around AI and how, think about how this connected intelligence is letting districts be able to use a way where they can bring their AI through the data, so they can actually run their AI tools on top of a connected intelligence, rather than taking all the data and putting in the AI tools.
and having not, you know, risk of security and everything with these new technologies. So that has been also a very strong interest. We do expect we're launching a lot of focus on educator analytics as well. That's gonna be a phenomenal growth area for as well, and also in the career in K through 20 broadly. So we do see this to be one of our highest growth area, and you're gonna see continue very exciting opportunities here.
Awesome, that's great. Thanks, Hardeep, and thank you both. Nice quarter.
Thank you. Thanks, Patrick.
The next question is from Gabriella Borges with Goldman Sachs. Please go ahead.
Hi, this is Kali Valente on for Gabriella. Congrats on the quarter. First one for me would be, you know, since the investor day I've seen a few more press releases with deals that include kind of SIS plus some of the recent add-on functionality you've acquired or built out, maybe in the customer space with some of the other modules. They seem very complimentary to the core SIS system though and wanted to ask how important have these add-on modules been such as like special programs or behavioral support to the success you've been seeing in SIS and then just more broadly.
Great question, Kelly, and great to talk to you. I think, Kelly, one of the things that I remember we talked about in the investor day with you was, you know, how we are launching over clouds, right, rather than selling individual products but selling multiple add-on products like forms management, document management, special education. Similarly, in the classroom, not just trying to sell LMS or assessment but also selling curriculum and instruction, selling behavior, as we are looking at the student success, not just MTSS but also sending attendance interventions and behavior elements so you can actually look at the holistic way of providing support. We are seeing a good cross-sell of multiple of these modules happening at the same time. So that's what you're observing in the press release and our traction. We also...
talked about in my prepared remarks that when you look at the growth of some of our add-on acquisitions, this is where our strategy is working very well. The timeliness of our innovation on things like MTSS and Connected Intelligence, but also our add-on acquisition, like attendance interventions and curriculum, these are very timely based on what we are seeing as one of the key demands in the market. So being able to have the pulse of the 80 percent of the U.S. market and being able to quickly have the partnerships as well as add-on and acquisitions to react to quickly the top needs is allowing us to really drive additional growth in the market based on what is the most important thing for our districts. And you're absolutely right. If you think about from a school district's perspective, a lot of urban school districts were worried about how do I get my enrollment and how do I get more attendance. So yes, I didn't
Then just second one for me quickly, wanted to dig into the full year guidance a little bit. I realize people have asked about this in a few different ways, but just to clarify, is there any portion of the $8 million increase in full year guidance that's coming from outside of those two acquisitions you did?
So, as you think about, majority of it is going to be acquisition related. So, you know, and I think while, Kelly, it's a good question, I think what's important too, you know, while I'm addressing this, is you think about, you know, the full year is absolutely in line with our expectations. What's important to understand though, there has been a mixed shift, if you will, between the categories. So, our services business, given the fact that we've gotten more productive and more efficient as a team, you know, services, you know, is coming in lower than our original expectations, that's absolutely good because the team is being more efficient and productive. And obviously, that revenue comes with a bit lower of a margin as well. As you look at the full year though, I think it's important, you know, and Hardeep and I look at...
just the substance support, but then also the LNO because we look at that as the, if you will, the software component of the revenue pie. That's still going to be in the low double digits growth from a full year perspective. So a bit of a mixed shift across some of the components. But again, as you think about the full year, it's very much in line with our expectations.
Makes sense. Thank you.
The next question is from Matt Hedberg with RBC Capital Markets. Please go ahead.
Great, guys. Thanks for taking my question. Hardeev, earlier on in the call, I think you said you talked about some Gen AI SKUs products that were just rolled out this quarter. I'm sort of curious, could you comment on...
you know, any sort of thoughts on like pricing or adoption or just how we should think about the, you know, the eventual, obviously it might be slow at first, but just kind of how do we think about the monetization side of that?
Great point, Matt. We are really excited about some of the innovation reporting on Gen-EI. I think when you look at from what we are seeing as not just the differentiation in the market, but also from our ability to really do this at scale and embed it into the current applications these districts are already used to, we have a very unique proposition for school districts and that's why we're getting a lot of strong interest from multiple of districts and even some state level. And one of the things that you will see is that these are individual areas of one of the products we talked about in Performance Matters. I want to be able to have new items and want to be able to create quiz while we are making a GEO of that product.
I want to be able to create a full lesson plan. I want to have a tutoring help for my kids within Schoology. Well, that's going to be, again, an add-on to a Schoology. We will have an add-on for our connected intelligence, unified insights, because I want to be able to assess quickly the data and have Gen AI help me assess and find the areas rather than me navigating. So that's going to be an add-on to all of our data products.
We are launching similarly on our parent side and within my PowerSchool and School Messenger, having a whole parent communication Gen AI tool, which allows you to engage with the parents in a way that your parents can actually talk to the, be able to use Gen AI to understand how they can support their child and interact with the school. So these are phenomenal opportunities, even with the bigger picture outside of the personalized homework, which is a huge opportunity for coaching for teachers. We are, these all gonna be add on with multi-million dollar product lines over the next couple of years, and you will start seeing monetization of that similar to how we monetize our other products, couple of dollars per student. And on top of that is the data strategy, as I talked about, of a connected intelligence is becoming the choice of platform for districts for data AI strategy.
So, we've been supporting a broader AI marketplace of how any district or who's a PowerSchool district wants to use another AI tool, they will use our platform on data as a way to enable their strategy. So, we'll be able to monetize that whole connected intelligence at these districts as well.
Super exciting, thanks for all the color and well done on the quarter guys.
Excellent. Thank you.
The next question is from Joe Vruink with Baird. Please go ahead.
Great. I wanted to follow up on the big talent management deal in Florida. I think recently PowerSchool and some of your peers have mentioned the back office solutions like Human Capital and ERP. That's maybe been an area put on the back burner in 2023, but you see it in your pipeline that there's pent up demand. Would you say the activity in 3Q is an indication maybe the pent up demand is starting to unlock or is it too soon to make that declaration?
Good question. So I think when sometimes we do club both the talent piece and ERP because that's typically sold to the HR and the CFO . So they kind of, you know, from our buying perspective, that's a common buyer. So when we group them, our solutions and clouds by buyers, you kind of see them grouped up. But when you look at the talent by itself, this is recruiting teachers, onboarding them, professional development of teachers, substitute teachers.
Those product lines actually have been going double digit consistently. In fact, I shared that if you look at year to date of new business, that has grown more than 20%. So, we have been able to see double digit growth on our talent product consistently even prior to pandemic, during pandemic, even in post-pandemic, that continues to be very healthy. Some of the innovation we have put actually is now allowing us to even displace our nearest competitor like in the case of Florida. And we are actually seeing good traction on that, that we are becoming clear leader for talent products in the market in case of 2012. Now, ERP is a market which still has been slow and while we saw good traction pre-pandemic, post-pandemic, it has really gone slow and that continues to track to be in the low single digits.
We do expect that 70 percent of the market being still legacy. As districts come out of their, you know, their overall and get to a normal cadence, we are starting seeing some opportunities. And I think it'll be a couple of years before we start really the growth there. But we do see pockets within there that could be very interesting for us for immediate near future which we are tracking.
Okay, thanks. Thanks for the App.
And then I wanted to ask, it's two big quarters in a row of license strengths. I know this is then really a strategic emphasis, but.
you know, just the sheer magnitude of some of these deals. I mean, with license, you do get follow-on support contracts, typically, so there is a recurring component that comes. I'm just wondering if you're seeing any decided shift in kind of buying preference where licenses might be in vogue for a period of time, and if it gives you a good relationship at a strategic account, we could actually see more license activity, you know, over the next year.
Yeah, so Joe, it's our go, I'll take that. So I think you guys know, obviously in this quarter, there was about four and a half or so, million dollars related to Puerto Rico that we've kind of previously been talking about. But aside from that, there are deals such as LAUSD where it was a strategic discussion with the customer and it was more or less their desire in terms of how they wanted to utilize the software. I think what I would say is I'm not sure it's going to be an emerging trend if you will, but you know, from our standpoint, you know, we always will take the customer's consideration in and, you know, if there's a deal that's most appropriately structured where it's more of a point in time.
type transaction will absolutely do it. But, you know, LNO even internally is probably the hardest number for us to forecast because these items can be from any one quarter can be a little bit higher or lower depending upon, you know, when they actually happen in the quarter. So, we're gonna continue to monitor it, but I wouldn't necessarily, you know, leave the call thinking that, hey, there's gonna be a tremendous amount of LNO next year because I just, we just don't see it. There's gonna be one-off deals from time to time and we absolutely will be very transparent with the street in terms of, you know, what those deals are and why they happen, but we don't necessarily see it as more of a pervasive trend.
Okay, great. Thank you very much.
Thank you.
The next question is from Brett Noblow with Cancer Fitzgerald. Please go ahead.
I got thanks for taking my question. Just.
Curious as to the historical acquisitions you guys have made, how they played out from a growth perspective. I know the main focus is going to be on integrating, but I guess when do you normally begin to turn on the upsell motion to existing customers? Is that something we should expect to happen maybe come 3Q of next year as that's when most renewals occur?
Yes, so, you know, Brett, I think it's a good question. And what I would say is it will depend on the type of acquisition we make. So where we make smaller technical tuck-ins, you know, whether it's like a Kinvog or a kickboard or a chalk, those pretty much happen the next quarter. And you know, putting those into our sales distribution engine, you know, we get an immediate pop on those. When you're talking about, you know, a strategic asset like School Messenger, you know, we're absolutely focused first and foremost on integrating the product and getting the team settled. It's a sizable team that we've acquired as well, making sure that all of the operational elements are in place. Meanwhile, our sales team is certainly building their plans in the pipeline and all of it.
that. So I would say that, you know, the business momentum will continue. You'll start to probably see an uptick in that particular space, most likely in the second half of next year, as you mentioned when we start seeing the renewables activity and a lot of the integration work is behind this. There'll be problems along the linesetics and sort of things. Quite frankly, it is very
Perfect. Thanks, guys.
You're welcome. Thank you, Brent.
The next question is from Fred Havenmeyer
Hey, thank you very much.
I think I wanted to clarify something from a little bit earlier there Eric today. I might have misheard this too Did I hear that the Puerto Rico deal was coming across in the license revenue lines quarter?
So just the scanner, the hardware part of it was. There's obviously a, yeah, so that's the only piece. There's obviously a services component of it, as well as the subscription piece that came into the quarter.
And I wanted to ask, last quarter I think we were talking about how implementation times could lead to some subscription revenues, particularly larger deals, lagging ARR. So I wanted to ask, is that a persistent trend that's tracking this quarter as well?
Not this quarter necessarily. I mean, you know, because typically you'll see that when you have extraordinarily large deals, like a Puerto Rico where it's 250,000 students, large SIS implementation, you know, you'll see the ARR recognized much quicker than the actual system gets turned over to the region and then they start using it. So that was more pronounced, you know, previously as you look at Q2, Q3, but we haven't seen deals of that size which would cause that delay, if you will, between ARR and revenue.
Thank you Eric. And then Hardeeb, you know I spent a while on my own reading through the White House's AI executive order and they spent at least a portion of it talking about their interest in generative AI and foreign policy there which will take place over the next year and change. So just curious if you have any initial thoughts about how the White House and US government might be approaching generative AI. Thank you. Or in generative AI and education specifically. Thank you.
Yeah, sure Fred. And just maybe adding to the last question first, Fred. I think it's very exciting to Eric's point about some of the big implementations that we've already achieved in the last quarter. So something to call out. You know, we went live with Puerto Rico in record time, which is one of the biggest implementation assists in about seven months. And think about the complexity here in Puerto Rico with 270,000 students, every parent using our system for the latest report card. You know, so it's phenomenal. Stride, which is another phenomenal go-live on the multiple of their schools with virtual schools. Marif in Saudi Arabia, you know. So we had some very, and Alabama with our insights and LA with our connected intelligence. So, some very exciting go-lives as well, which actually.
quarter was very, very timely. I think to your point about the generative AI, we are very much plugged into the policy as well as the ethics and the making sure that there is not a bias in the generative AI. In fact, one of the strengths...
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