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PH

POWERSCHOOL HOLDINGS, INC. (PWSC)·Q3 2023 Earnings Summary

Executive Summary

  • Revenue rose 12% year over year to $182.2M, exceeding the high end of company guidance; Adjusted EBITDA grew 19% to $62.0M, also above guidance, while GAAP diluted EPS improved to $0.00 and non-GAAP diluted EPS reached $0.24 .
  • ARR increased 9% to $640.4M, but NRR declined to 107.2%, down 150 bps YoY and 230 bps sequentially, signaling slower expansion within existing customers vs recent quarters .
  • FY23 guidance was raised: revenue to $697.5–$700.5M and Adjusted EBITDA to $229–$231M; Q4 guidance set at revenue $182–$185M and Adjusted EBITDA $56–$58M .
  • Strategic catalysts in the quarter included the completion of the SchoolMessenger acquisition and India expansion with Neverskip, broadening the platform and international reach; management emphasized data-centric AI innovation and expanding TAM .

What Went Well and What Went Wrong

What Went Well

  • Revenue and Adjusted EBITDA both exceeded the high end of quarterly guidance; gross margins expanded with Adjusted Gross Margin at 71.0% vs 68.4% last year, highlighting operating efficiency improvements .
  • Strong cash generation: cash flow from operations of $220.4M and free cash flow of $211.2M for Q3, reflecting seasonal billing and disciplined cost structure .
  • Platform expansion: completion of SchoolMessenger and acquisition of Neverskip in India; CEO: “Our ongoing innovations in data-centric AI solutions…are increasing our total addressable market by a factor of ten” .

What Went Wrong

  • NRR fell to 107.2%, down 150 bps YoY and 230 bps vs Q2, indicating slower net expansion among existing customers and potential upsell timing challenges .
  • Interest expense increased materially YoY (Q3: $16.4M vs $11.2M), constraining GAAP profitability despite operational gains .
  • Services cost pressures: while Services revenue was up modestly, Services gross costs remained elevated vs prior year, limiting mix benefits from higher-margin subscription growth .

Financial Results

MetricQ3 2022Q1 2023Q2 2023Q3 2023
Revenue ($USD Millions)$162.4 $159.5 $173.9 $182.2
GAAP Diluted EPS ($)$(0.02) $(0.07) $(0.02) $0.00
Non-GAAP Diluted EPS ($)$0.21 $0.18 $0.23 $0.24
Gross Profit ($USD Millions)$92.6 $90.0 $104.9 $110.3
Gross Profit Margin (%)57.0% 56.4% 60.3% 60.6%
Adjusted Gross Profit ($USD Millions)$111.1 $108.5 $124.2 $129.3
Adjusted Gross Margin (%)68.4% 68.1% 71.4% 71.0%
Adjusted EBITDA ($USD Millions)$52.2 $49.4 $61.2 $62.0
Adjusted EBITDA Margin (%)32.2% 31.0% 35.2% 34.0%

Segment revenue breakdown ($USD Millions):

SegmentQ3 2022Q2 2023Q3 2023
Subscriptions & Support$137.1 $146.5 $149.0
Services$19.9 $20.2 $20.7
License & Other$5.4 $7.2 $12.5
Total Revenue$162.4 $173.9 $182.2

Key KPIs and cash flow:

KPI / Cash MetricQ1 2023Q2 2023Q3 2023
ARR ($USD Millions)$612.3 $635.8 $640.4
NRR (%)109.1% 109.5% 107.2%
Cash from Operations ($USD Millions)$(60.0) $(32.7) $220.4
Free Cash Flow ($USD Millions)$(70.1) $(43.6) $211.2

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Total Revenue ($USD Millions)FY 2023$688–$694 $697.5–$700.5 Raised
Adjusted EBITDA ($USD Millions)FY 2023$226–$230 $229–$231 Raised
Total Revenue ($USD Millions)Q4 2023N/A$182–$185 New
Adjusted EBITDA ($USD Millions)Q4 2023N/A$56–$58 New
Modeling: Capex incl. capitalized software ($USD Millions)FY 2023N/A~$40–$42 Provided on call
Modeling: Share-based compensation ($USD Millions)FY 2023N/A~$64–$67 Provided on call
Modeling: Fully diluted shares (Millions)FY 2023 YEN/A~202–205 Provided on call

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2)Current Period (Q3)Trend
AI/data-centric solutionsQ1/Q2 highlighted Unified Insights, Connected Intelligence DaaS; Azure OpenAI collaboration; Snowflake partnership awards Management emphasized “data-centric AI solutions” driving TAM expansion and diversified double-digit cloud solution growth Strengthening
International expansionQ1: Middle East partnership (BME) ; Q2: Thailand (Samart Telcoms) Added channel partners across MEA, Asia, Europe, South America, NZ; acquired Neverskip in India Accelerating
Communications platformQ2: Announced intent to acquire SchoolMessenger Completed SchoolMessenger acquisition (parent West completed sale; BusinessWire/K12 Dive) Completed and integrating
Retention and upsell (NRR)Q1: 109.1%; Q2: 109.5% NRR 107.2% with sequential decline; focus on multi-product adoption cohorts Softening
Cash flow disciplineQ1/Q2: negative seasonal CFFO/FCF Record CFFO/FCF in Q3; management highlighted progress and confidence Seasonal rebound; improving YTD trajectory

Management Commentary

  • CEO Hardeep Gulati: “Our ongoing innovations in data-centric AI solutions, our investments in adjacent products, and the build out of our global footprint are increasing our total addressable market by a factor of ten… we are uniquely positioned to deliver the future of personalized education.” .
  • CFO/President Eric Shander: “Consistent execution… as we balance our revenue growth objectives with our goals around profitability and cash flow… innovating our next-generation products” .
  • Call highlights: diversified product-level growth with double-digit gains across many clouds; Adjusted EBITDA margin at 34%; focus on finishing 2023 strong with low double-digit ARR growth and margin expansion .

Q&A Highlights

  • Guidance drivers: majority of the ~$8M increase to FY revenue guidance tied to acquisitions (SchoolMessenger/Neverskip), per management clarification .
  • Multi-product adoption strategy: emphasis on moving customers into cohorts with 1–2+ products to drive exploration and upsell over time .
  • Modeling parameters: capex including capitalized software ~$40–$42M; SBC ~$64–$67M; fully diluted shares YE ~202–205M .

Estimates Context

  • S&P Global consensus estimates were unavailable due to mapping limitations in the SPGI CIQ dataset for PWSC; therefore, comparisons to Wall Street consensus could not be provided. We default to S&P Global for estimates and note unavailability in this instance.
  • In lieu of consensus, the company beat its own Q3 guidance on both revenue ($182.2M vs $178–$181M) and Adjusted EBITDA ($62.0M vs $55–$57M), demonstrating outperformance vs internal targets .

Key Takeaways for Investors

  • Quality print: revenue and Adjusted EBITDA beats vs guidance, margin expansion, and strong Q3 CFFO/FCF underpin improving operating leverage; consider near-term positive sentiment on execution .
  • Watch NRR: sequential decline to 107.2% suggests upsell cadence normalization; monitor multi-product adoption traction and cohort expansion in Q4/Q1 seasonally stronger periods .
  • M&A enhances platform: SchoolMessenger and Neverskip broaden communications and ERP capabilities, support international growth, and can aid ARR scaling into 2024 .
  • Interest expense remains a headwind: higher net interest expense affects GAAP profitability; balance sheet metrics and rate environment are relevant for FY24 EPS sensitivity .
  • FY23 raised: revenue to $697.5–$700.5M and Adjusted EBITDA to $229–$231M indicates confidence; Q4 guide ($182–$185M revenue; $56–$58M EBITDA) sets expectations into year-end .
  • AI/data narrative strengthening: partnerships and product enhancements (Azure OpenAI, Snowflake) support differentiation; track tangible monetization via ARR/NRR trends .
  • Near-term trade: potential for continued rerating on beat-and-raise plus cash flow strength; risk is retention softness and macro/education funding cadence; assess Q4 execution and FY24 outlook .