2023-07-07 13:15:01 ET
Summary
- PowerSchool Holdings provides student information systems and related software capabilities to K-12 school districts in the United States and internationally.
- Management has guided to an estimated 10% YoY revenue growth rate in 2023, below its 2022 growth rate.
- The company has also generated operating losses again, so along with its slowing revenue growth, I remain Neutral [Hold] on PWSC in the near term.
A Quick Take On PowerSchool Holdings
PowerSchool ( PWSC ) provides cloud-based software and data solutions for K-12 education schools and districts in North America and internationally.
I previously wrote about PWSC with a Hold outlook in August 2022.
With management guiding forward revenue growth to be less than 2022’s YoY growth rate and a turn to an operating loss in the most recent quarter, I remain cautious on the stock with a Neutral [Hold] rating.
PowerSchool Holdings Overview
Folsom, California-based PowerSchool was founded to create a unified platform of software technology spanning all administrative functions for K-12 school use cases.
Management is headed by Chief Executive Officer Hardeep Gulati, who has been with the firm since August 2015 and was previously general manager of SumTotal Systems, a talent management system.
The company’s primary software module offerings include:
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Administrative
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Classroom
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Talent
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Communications
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Home
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Portals
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Absence management
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Finance | HR | Payroll
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Insights & analytics
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Predictive early warning
The firm pursues new school clients via direct sales and marketing efforts in its core geographic areas as well as through resellers in other areas.
PWSC also licenses APIs to vendor partners for them to create 'plug-ins' to enable data flows and embedded capabilities within their software offerings.
PowerSchool’s Market & Competition
According to a 2022 market research report by Custom Market Insights, the global K-12 education market was an estimated $107 billion in 2022 and is forecasted to reach $324 billion by 2030.
This represents a CAGR (Compound Annual Growth Rate) of approximately 20% from 2022 to 2030.
The COVID-19 pandemic increased the need and usage for cloud-based systems that can operate whether a school employee is at the office or remote, or whether students are in-person or remote.
Major competitive or other industry participants include:
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Microsoft
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Blackboard
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Blackbaud
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Follett School Solutions
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Oracle
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SAP
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Frontline Education
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Capita Software
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Instructure
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Tyler Technologies
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Others
PowerSchool’s Recent Financial Trends
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Total revenue by quarter has plateaued in recent quarters; Operating income by quarter has dropped more recently.
Total Revenue and Operating Income (Seeking Alpha)
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Gross profit margin by quarter has risen slightly in recent quarters; Selling, G&A expenses as a percentage of total revenue by quarter grew markedly in the most recent quarter.
Gross Profit Margin and Selling, G&A % Of Revenue (Seeking Alpha)
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Earnings per share (Diluted) have dropped further into negative territory.
Earnings Per Share (Seeking Alpha)
(All data in the above charts is GAAP)
In the past 12 months, PWSC’s stock price has risen 48.58% vs. that of Blackbaud’s ( BLKB ) rise of 23.58%, as the chart indicates below.
52-Week Stock Price Comparison (Seeking Alpha)
For the balance sheet, the firm ended the quarter with $64.3 million in cash and equivalents and $735.2 million in total debt, of which $7.8 million was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash flow was an impressive $151.3 million, during which capital expenditures were only $2.2 million. The company paid $53.3 million in stock-based compensation in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.
Valuation And Other Metrics For PowerSchool
Below is a table of relevant capitalization and valuation figures for the company.
Measure [TTM] | Amount |
Enterprise Value / Sales | 6.7 |
Enterprise Value / EBITDA | 39.5 |
Price / Sales | 4.8 |
Revenue Growth Rate | 8.6% |
Net Income Margin | -3.2% |
EBITDA % | 17.0% |
Net Debt To Annual EBITDA | 6.1 |
Market Capitalization | $3,920,000,000 |
Enterprise Value | $4,310,000,000 |
Operating Cash Flow | $153,520,000 |
Earnings Per Share (Fully Diluted) | -$0.16 |
(Source - Seeking Alpha)
As a reference, a relevant partial public comparable would be Blackbaud ((BLKB)); shown below is a comparison of their primary valuation metrics.
Metric [TTM] | Blackbaud | PowerSchool Holdings | Variance |
Enterprise Value / Sales | 3.5 | 6.7 | 93.9% |
Enterprise Value / EBITDA | 41.7 | 39.5 | -5.3% |
Revenue Growth Rate | 10.1% | 8.6% | -14.8% |
Net Income Margin | -4.7% | -3.2% | -31.6% |
Operating Cash Flow | $201,200,000 | $153,520,000 | -23.7% |
(Source - Seeking Alpha)
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
PWSC’s most recent Rule of 40 calculation was 25.6% as of Q1 2023’s results, materially lower than in Q2 2022, so the firm needs further improvement, per the table below.
Rule of 40 Performance | Q2 2022 | Q1 2023 |
Revenue Growth % | 21.6% | 8.6% |
EBITDA % | 9.5% | 17.0% |
Total | 31.1% | 25.6% |
(Source - Seeking Alpha)
Commentary On PowerSchool
In its last earnings call (Source - Seeking Alpha), covering Q1 2023’s results, management highlighted the nature of its customer base as being ‘insulated from macroeconomic conditions’ as a positive factor in the resilience of its revenue potential.
Leadership also noted that the company's pipeline of opportunities increased by 40% year-over-year, buttressing its previous forward guidance confidence.
Notably, its data-centric solutions ‘grew ARR [Annual Recurring Revenue] by more than 70% year-over-year.
Management has also already implemented a number of embedded AI initiatives to support teachers, personalize student instruction and ‘help efficiently scale school operations.’
The company’s net retention rate rose to 109.1%, indicating improving product/market fit and sales & marketing efficiency.
Total revenue for Q1 2023 rose 6.6% from the prior-year quarter, while gross profit rose 1.9% year-over-year.
Selling, G&A expenses as a percentage of revenue increased 4.7% YoY, a negative sign, and operating income turned negative.
Looking ahead, management reiterated previous revenue guidance of 10% year-over-year growth and 32.5% adjusted EBITDA at the midpoint of the guidance range.
If the revenue growth rate guidance is achieved, it would represent a deceleration in growth from the previous year’s 12.91% growth rate.
The company's financial position is reasonably strong, with moderate liquidity, fairly substantial long-term debt but impressive free cash flow.
PWSC’s Rule of 40 performance has been only mediocre and has worsened since Q2 2022’s results.
From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below.
Earnings Transcript Key Terms Frequency (Seeking Alpha)
I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited ‘Challeng[es][ing]’ once and ‘Macro’ once, a relatively small number of instances compared to other software company earnings calls.
Analysts questioned company leadership about its personalization strategy. The company is interested in its ‘home personalized learning stations’, which will enable it to get its ‘foot in the door with the broader personalized learning’ market as a potential growth opportunity.
Regarding valuation, the market is valuing PWSC at an EV/Sales multiple of around 6.7x.
The Meritech Capital Index of publicly held SaaS application software companies showed an average forward EV/Revenue multiple of around 8.8x on July 2, 2023, as the chart shows here:
EV/Next 12 Months Revenue Multiple Index (Seeking Alpha)
So, by comparison, PWSC is currently valued by the market at a discount to the broader Meritech Capital SaaS Index, at least as of July 2, 2023.
In the past twelve months, the firm's EV/Sales valuation multiple has risen approximately 25%, as the chart from Seeking Alpha shows below.
EV/Sales Multiple History (Seeking Alpha)
In the past year, the stock has outperformed the S&P 500 Index and that of its competitor, Blackbaud.
Valuation multiples for technology companies have risen in recent quarters as the market continues to price in the potential for a tapering off of higher cost-of-capital assumptions.
Whether these assumptions will continue to be changed in tech stocks’ favor is unknown at this time.
My previous Neutral stance on PWSC in August 2022 was a bit conservative, but not by much.
With management guiding forward revenue growth to be less than 2022’s YoY growth rate and a turn to an operating loss in the most recent quarter, I remain cautious on the stock with a Neutral [Hold] outlook in the near term.
For further details see:
PowerSchool Expects Slower But Resilient Growth In 2023