PowerSchool(PWSC) - 2023 Q2 - Quarterly Report

Part I - Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations and comprehensive loss, statements of stockholders' equity, and statements of cash flows, along with detailed notes for the periods ended June 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheets The balance sheets show a decrease in total assets and current assets from December 31, 2022, to June 30, 2023, primarily driven by a significant reduction in cash and cash equivalents and deferred revenue | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | | :--------------------------------- | :----------------------------- | :------------------------------- | :-------------------- | | Total Assets | $3,461,163 | $3,583,395 | $(122,232) | | Total Liabilities | $1,715,133 | $1,849,451 | $(134,318) | | Total Stockholders' Equity | $1,746,030 | $1,733,944 | $12,086 | | Cash and cash equivalents | $28,394 | $137,471 | $(109,077) | | Deferred revenue, current | $185,781 | $310,536 | $(124,755) | Condensed Consolidated Statements of Operations and Comprehensive Loss The company reported increased total revenue and gross profit for both the three and six months ended June 30, 2023, compared to the prior year, transitioning from an operating loss to an operating income. However, net loss attributable to PowerSchool Holdings, Inc. decreased for both periods | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | Change (in thousands) | % Change | | :------------------------------------ | :------------------------------------ | :------------------------------------ | :-------------------- | :------- | | Total Revenue | $173,897 | $157,591 | $16,306 | 10% | | Gross Profit | $104,868 | $89,606 | $15,262 | 17% | | Income (loss) from operations | $10,113 | $(1,146) | $11,259 | N/A | | Net loss attributable to PowerSchool Holdings, Inc. | $(3,195) | $(4,525) | $1,330 | (29)% | | Basic EPS | $(0.02) | $(0.03) | $0.01 | (33)% | | Diluted EPS | $(0.02) | $(0.03) | $0.01 | (33)% | | Metric | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | Change (in thousands) | % Change | | :------------------------------------ | :------------------------------------ | :------------------------------------ | :-------------------- | :------- | | Total Revenue | $333,350 | $307,184 | $26,166 | 9% | | Gross Profit | $194,832 | $171,223 | $23,609 | 14% | | Income (loss) from operations | $9,327 | $(3,783) | $13,110 | N/A | | Net loss attributable to PowerSchool Holdings, Inc. | $(15,048) | $(16,637) | $1,589 | (10)% | | Basic EPS | $(0.09) | $(0.11) | $0.02 | (18)% | | Diluted EPS | $(0.09) | $(0.11) | $0.02 | (18)% | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity increased from December 31, 2022, to June 30, 2023, primarily due to increases in additional paid-in capital from share-based compensation and a net loss that was less than the increase in other equity components | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | | :------------------------------------ | :----------------------------- | :------------------------------- | :-------------------- | | Class A common stock (shares) | 163,456 | 159,596 | 3,860 | | Class B common stock (shares) | 37,654 | 39,928 | (2,274) | | Additional paid-in capital | $1,493,586 | $1,438,019 | $55,567 | | Accumulated deficit | $(202,298) | $(187,250) | $(15,048) | | Total stockholders' equity | $1,746,030 | $1,733,944 | $12,086 | Condensed Consolidated Statements of Cash Flows The company experienced increased net cash used in operating activities and a reduced net cash used in investing activities for the six months ended June 30, 2023, compared to the prior year, while net cash provided by financing activities significantly decreased | Cash Flow Activity | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | Change (in thousands) | | :------------------------------------ | :------------------------------------ | :------------------------------------ | :-------------------- | | Net cash used in operating activities | $(92,741) | $(80,319) | $(12,422) | | Net cash used in investing activities | $(20,886) | $(55,675) | $34,789 | | Net cash provided by financing activities | $4,700 | $65,830 | $(61,130) | | Net decrease in cash, cash equivalents, and restricted cash | $(109,088) | $(71,036) | $(38,052) | | Cash, cash equivalents, and restricted cash—End of period | $28,894 | $15,955 | $12,939 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed disclosures and explanations for the figures presented in the condensed consolidated financial statements, covering business operations, accounting policies, acquisitions, revenue breakdown, asset details, debt, equity, and subsequent events 1. Business PowerSchool Holdings, Inc. operates a comprehensive cloud platform for the K-12 education market, offering solutions for managing various school operations and improving educational outcomes, with operations in the U.S., Canada, India, and UAE - PowerSchool's core business is a cloud platform providing an integrated suite of solutions for the K-12 education market, managing state reporting, special education, finance, HR, learning, and assessments[28] - The company was formed in November 2020 for an IPO and organizational transactions, with Onex Partners Managers LP and Vista Equity Partners as principal stockholders[26][27] 2. Summary of Significant Accounting Policies The interim financial statements are prepared in accordance with GAAP and SEC rules, with certain footnotes condensed. The company, an Emerging Growth Company, has elected an extended transition period for new accounting standards but will become a large accelerated filer by December 31, 2023, losing this benefit - Financial statements are unaudited and prepared in accordance with GAAP and SEC rules, with certain footnotes condensed or omitted[30][31] - The company is an Emerging Growth Company but will be deemed a large accelerated filer as of December 31, 2023, and will no longer qualify for the extended transition period for new accounting standards[34][35] - Adoption of ASU No. 2016-13 on January 1, 2023, regarding credit losses, did not have a material impact on the company's financial instruments[41] 3. Business Combinations The company did not complete any acquisitions during the first six months of 2023. In fiscal year 2022, it acquired Kinvolved, Chalk, and Headed2 to enhance its product offerings, resulting in significant goodwill recognition - No acquisitions were made during the six months ended June 30, 2023[44] - In fiscal year 2022, the company acquired Kinvolved, Chalk, and Headed2 to enhance and expand its product offerings, recognizing goodwill of $18.6 million, $10.0 million, and $3.3 million, respectively[46][47][48][49][50][51] 4. Revenue Total revenue increased by 10% for the three months and 9% for the six months ended June 30, 2023, driven by subscriptions and support, and a significant increase in license and other revenue. The majority of revenue is from the United States, and deferred revenue decreased significantly | Revenue Stream | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | % Change | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | % Change | | :--------------------- | :------------------------------------ | :------------------------------------ | :------- | :------------------------------------ | :------------------------------------ | :------- | | Subscriptions and support | $146,503 | $135,010 | 9% | $287,576 | $264,775 | 9% | | Service | $20,197 | $19,119 | 6% | $36,429 | $35,182 | 4% | | License and other | $7,197 | $3,462 | 108% | $9,345 | $7,227 | 29% | | Total Revenue | $173,897 | $157,591 | 10% | $333,350 | $307,184 | 9% | | Geographic Area | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :-------------- | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | | United States | $162,579 | $145,106 | $311,385 | $283,568 | | Canada | $8,475 | $9,239 | $16,653 | $17,983 | | Other | $2,843 | $3,246 | $5,312 | $5,633 | | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | | :------------------------------------ | :----------------------------- | :------------------------------- | :-------------------- | | Deferred Revenue Balance at end of period | $191,877 | $315,839 | $(123,962) | 5. Property and Equipment - Net The net value of property and equipment decreased from December 31, 2022, to June 30, 2023, with a corresponding decrease in depreciation expense | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | | :------------------------------------ | :----------------------------- | :------------------------------- | :-------------------- | | Property and equipment—net | $5,286 | $6,173 | $(887) | | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | | Depreciation expense | $800 | $1,300 | $1,700 | $2,600 | 6. Capitalized Product Development Costs - Net Net capitalized product development costs increased from December 31, 2022, to June 30, 2023, with amortization expense also rising for both the three and six-month periods | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | | :------------------------------------ | :----------------------------- | :------------------------------- | :-------------------- | | Capitalized product development costs—net | $107,930 | $100,861 | $7,069 | | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | | Amortization expense | $7,400 | $5,500 | $14,600 | $10,800 | 7. Goodwill The carrying amount of goodwill saw a minor increase due to other adjustments, maintaining a substantial balance as of June 30, 2023 | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | | :------------------------------------ | :----------------------------- | :------------------------------- | :-------------------- | | Goodwill balance | $2,487,235 | $2,487,007 | $228 | 8. Other Intangible Assets - Net Net intangible assets decreased from December 31, 2022, to June 30, 2023, primarily due to amortization, with estimated future amortization indicating a significant remaining balance | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | | :------------------------------------ | :----------------------------- | :------------------------------- | :-------------------- | | Intangible Assets—Net | $674,843 | $722,147 | $(47,304) | | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | | Total amortization of acquired intangible assets | $23,684 | $23,537 | $47,363 | $46,884 | | Year Ending December 31, | Estimated Future Amortization (in thousands) | | :----------------------- | :------------------------------------------- | | 2023 (remaining six months) | $47,362 | | 2024 | $94,082 | | 2025 | $93,893 | | 2026 | $82,826 | | 2027 | $66,544 | | Thereafter | $290,136 | | Total | $674,843 | 9. Accrued Expenses Total accrued expenses increased from December 31, 2022, to June 30, 2023, primarily due to a significant rise in the current portion of the Tax Receivable Agreement liability, while the contingent consideration liability decreased | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | | :------------------------------------ | :----------------------------- | :------------------------------- | :-------------------- | | Total accrued expenses | $98,399 | $84,270 | $14,129 | | Tax Receivable Agreement liability, current | $28,640 | $1,862 | $26,778 | | Contingent consideration liability | $3,166 | $3,801 | $(635) | 10. Long-Term Debt and Revolving Credit Agreement The company's long-term debt, net, slightly decreased, but the interest rate on the First Lien increased significantly. A $10.0 million balance was outstanding on the Revolving Credit Agreement as of June 30, 2023, which was repaid in August 2023 | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | | :------------------------------------ | :----------------------------- | :------------------------------- | :-------------------- | | Total long-term debt—net | $726,211 | $728,624 | $(2,413) | | Revolving credit facility outstanding | $10,000 | $0 | $10,000 | - The interest rate for the First Lien increased from 7.09% as of December 31, 2022, to 8.05% as of June 30, 2023[66] | Year Ending December 31, | Maturities on long-term debt (in thousands) | | :----------------------- | :------------------------------------------ | | 2023 (remaining six months) | $3,875 | | 2024 | $7,750 | | 2025 | $728,500 | | Total | $740,125 | 11. Leases Total lease costs significantly decreased for both the three and six months ended June 30, 2023, compared to the prior year, with future minimum lease payments extending through 2027 | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | | Total lease cost | $1,145 | $12,083 | $2,489 | $17,981 | | Year Ending December 31, | Future Minimum Lease Payments (in thousands) | | :----------------------- | :------------------------------------------- | | 2023 (remaining six months) | $2,509 | | 2024 | $4,216 | | 2025 | $1,698 | | 2026 | $1,020 | | 2027 | $748 | | Total undiscounted cash flows | $10,191 | 12. Commitments and Contingencies The company has remaining aggregate minimum purchase commitments of approximately $221.8 million through 2027 for data centers, cloud hosting, and other services. It is self-insured for health benefits and has standard indemnification agreements, with no material exposure from legal proceedings currently - Remaining aggregate minimum purchase commitment of approximately $221.8 million through 2027 for data centers, cloud hosting, and other services[76] - Estimated liability for incurred but not reported medical claims was $2.2 million as of June 30, 2023, and December 31, 2022[77] - The company has determined it does not have material exposure on an aggregate basis from legal proceedings at this time[80] 13. Stockholders' Equity and Non-Controlling Interest As of June 30, 2023, Class A common stock holders held approximately 81.3% of economic interest and voting power, while Class B common stock holders held 18.7%. The weighted average non-controlling interest percentage was 18.8% for the six months ended June 30, 2023 - As of June 30, 2023, Class A common stock holders held approximately 81.3% of economic interest and voting power, and Class B common stock holders held approximately 18.7%[82] - The weighted average non-controlling interest percentage was 18.8% for the six months ended June 30, 2023, compared to 20.1% for the same period in 2022[83] 14. Share-Based Compensation The company granted Market-share Units (MSUs) to executives in Q1 2023 and continues to issue Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs). Total share-based compensation expense increased for both the three and six-month periods ended June 30, 2023, with $176.1 million in future compensation cost remaining | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | | Total stock-based compensation | $17,494 | $14,060 | $32,043 | $25,610 | - As of June 30, 2023, the total future compensation cost related to unvested share awards is $176.1 million, expected to be recognized over a weighted-average period of 2.8 years[91] - In Q1 2023, the company granted 474,846 MSUs to executives with a grant-date fair value of $26.64 per unit[85][88] 15. Earnings (Loss) Per Share Attributable to Common Stockholders (EPS) Basic and diluted net loss per share for Class A common stock improved for both the three and six months ended June 30, 2023, compared to the prior year | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net loss attributable to PowerSchool Holdings, Inc. per share of Class A common stock, basic | $(0.02) | $(0.03) | $(0.09) | $(0.11) | | Net loss attributable to PowerSchool Holdings, Inc. per share of Class A common stock, diluted | $(0.02) | $(0.03) | $(0.09) | $(0.11) | | Excluded Securities from Diluted EPS | June 30, 2023 | June 30, 2022 | | :----------------------------------- | :------------ | :------------ | | Unvested RSAs and RSUs | 8,839,703 | 10,113,893 | | LLC Units | 0 | 39,928,472 | | Unvested MSUs | 474,846 | 0 | | Total excluded from diluted EPS calculation | 9,314,549 | 50,042,365 | 16. Income Taxes The company recorded an income tax benefit for both the three and six months ended June 30, 2023, with effective tax rates of 28.4% and 8.5% respectively. The Tax Receivable Agreement (TRA) liability increased by $8.7 million due to a secondary offering | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | | Income tax (benefit) expense | $(1,724) | $(2,933) | $(1,769) | $1,605 | | Effective tax rate | 28.4% | 31.2% | 8.5% | (8.4)% | - The Tax Receivable Agreement (TRA) liability increased by $8.7 million during the six months ended June 30, 2023, due to a secondary offering, with a total liability of $421.3 million ($28.6 million current, $392.7 million non-current)[98][99] 17. Related-Party Transactions The company engaged in de minimis related-party services with Vista and Onex, purchased $7.4 million in services from entities with common ownership for the six months ended June 30, 2023, and has a strategic reseller agreement with EAB Global, Inc., a Vista portfolio company - Total costs for related-party services from Vista and Onex were de minimis for all periods presented[100] | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | | Costs for services purchased from entities with common ownership | $2,600 | $700 | $7,400 | $2,400 | - The company has a strategic reseller agreement with EAB Global, Inc. (a Vista portfolio company) for the Intersect product, with annual minimum revenue commitments and fees paid to EAB[103] 18. Employee Benefit Plans The company offers a 401(k) Plan and made matching contributions of $5.4 million for the six months ended June 30, 2023 | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | | Company matching contributions to 401(k) Plan | $2,700 | $2,600 | $5,400 | $5,100 | 19. Subsequent Events On July 11, 2023, the company announced the definitive agreement to acquire SchoolMessenger for approximately $300 million, to be funded by cash on hand, revolving credit, and $100 million in incremental term loans under the First Lien - On July 11, 2023, the company agreed to acquire SchoolMessenger for approximately $300 million cash[107] - The acquisition will be funded by cash on hand, borrowings under the Revolving Credit Facility, and $100 million in incremental term loans under the First Lien, increasing the First Lien balance to $840.1 million as of July 31, 2023[107][108] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, results of operations, key business drivers, and future outlook, including a detailed discussion of revenues, expenses, liquidity, and critical accounting estimates Overview PowerSchool is a leading provider of comprehensive, integrated cloud solutions for the K-12 education market, serving over 15,000 customers globally, including 90 of the top 100 U.S. districts. Its platform streamlines operations, aggregates data, and uses predictive modeling to improve educational outcomes - PowerSchool serves over 15,000 customers, including over 90 of the top 100 U.S. districts and 30+ state/province-wide contracts in North America, with solutions sold in over 90 countries[112] - The company's cloud platform is an integrated, enterprise-scale suite for K-12 education, managing state reporting, special education, finance, HR, learning, and assessments, leveraging predictive modeling and machine learning[113] - PowerSchool has built a strong competitive moat through over 20 years of investment in K-12 regulatory compliance reporting capabilities[114] Our Business Model PowerSchool operates primarily on a cloud-based SaaS model with recurring revenue, which accounted for over 86% of total revenue for the six months ended June 30, 2023. Contracts typically have annual price escalators and are often three-year terms with one-year rolling renewals - The company offers its software platform through a cloud-based SaaS business model with recurring revenue[119] - Recurring revenue accounted for over 84.2% and 86.3% of total revenue for the three and six months ended June 30, 2023, respectively[120] - SaaS and license agreements are typically sold on a three-year basis with one-year rolling renewals and annual price escalators, with annual invoicing[121] Key Factors Affecting Our Performance Key performance drivers include cross-selling to existing customers (evidenced by a Net Revenue Retention Rate of 109.5%), attracting new customers in North America, expanding into complementary adjacencies through M&A, sustaining innovation, and international expansion. Macroeconomic factors like high interest rates and inflation also impact performance - Future revenue growth is dependent on cross-selling new solutions to existing customers, with a Net Revenue Retention Rate of 109.5% as of June 30, 2023[124] - The company plans to attract new customers in North America and expand into complementary adjacencies through targeted acquisitions (16 since 2015, with SchoolMessenger pending) and organic development[125][126] - High interest rates increased net interest expense from $15.8 million to $30.1 million for the six months ended June 30, 2022, and 2023, respectively[131] - While inflation's impact has not been significant, adverse macroeconomic conditions could affect business and customer spending[132] Key Business Metrics The company uses Annualized Recurring Revenue (ARR) and Net Revenue Retention Rate to evaluate business performance. ARR reached $635.8 million as of June 30, 2023, and the Net Revenue Retention Rate was 109.5% for the twelve months ended June 30, 2023 Annualized Recurring Revenue ("ARR") ARR, representing the annualized value of all recurring contracts, increased to $635.8 million as of June 30, 2023, from $580.3 million in the prior year | Metric | June 30, 2023 (in millions) | June 30, 2022 (in millions) | Change (in millions) | % Change | | :----- | :-------------------------- | :-------------------------- | :------------------- | :------- | | ARR | $635.8 | $580.3 | $55.5 | 9.6% | Net Revenue Retention Rate The Net Revenue Retention Rate, which measures recurring revenue growth from existing customers (excluding Intersect), improved to 109.5% for the twelve months ended June 30, 2023, up from 107.3% in the prior year | Metric | 12 Months Ended June 30, 2023 | 12 Months Ended June 30, 2022 | Change (percentage points) | | :-------------------------- | :---------------------------- | :---------------------------- | :------------------------- | | Net Revenue Retention Rate | 109.5% | 107.3% | 2.2% | Components of Results of Operations This section defines the company's revenue streams (subscriptions and support, service, license and other), cost of revenue components (employee compensation, third-party expenses), and operating expenses (R&D, SG&A, acquisition costs, interest expense, other expense), providing context for financial analysis - Revenue streams include Subscriptions and support (recognized ratably), Service (recognized at point in time), and License and other (recognized at point in time)[141][142] - Cost of revenue primarily consists of employee compensation, third-party contractors, cloud infrastructure, and third-party licensing costs[143][144] - Operating expenses include Research and development (personnel, contractors, equipment), Selling, general, and administrative (corporate personnel, professional fees, principal stockholder costs), and Acquisition costs (third-party professional fees)[145][146][147] Discussion of Results of Operations This section provides a detailed analysis of the company's financial performance for the three and six months ended June 30, 2023, compared to the same periods in 2022, highlighting revenue growth, cost efficiencies, and increased interest expenses Revenues Total revenue increased by 10% for the three months and 9% for the six months ended June 30, 2023, driven by increased sales to new and existing customers, and a significant rise in license and other revenue | Revenue Category | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | % Change | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | % Change | | :--------------------- | :------------------------------------ | :------------------------------------ | :------- | :------------------------------------ | :------------------------------------ | :------- | | Subscriptions and support | $146,503 | $135,010 | 9% | $287,576 | $264,775 | 9% | | Service | $20,197 | $19,119 | 6% | $36,429 | $35,182 | 4% | | License and other | $7,197 | $3,462 | 108% | $9,345 | $7,227 | 29% | | Total revenue | $173,897 | $157,591 | 10% | $333,350 | $307,184 | 9% | - The increase in subscriptions and support and service revenue was driven by increased sales to new customers and cross-selling/upselling to existing customers[155] Total Cost of Revenue Total cost of revenue increased slightly by 2% for both the three and six months ended June 30, 2023. Subscriptions and support cost decreased due to lower royalty costs and hosting fees, while service cost decreased due to non-recurring restructuring expenses. Depreciation and amortization costs increased due to higher capitalized projects | Cost of Revenue Category | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | % Change | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | % Change | | :----------------------------- | :------------------------------------ | :------------------------------------ | :------- | :------------------------------------ | :------------------------------------ | :------- | | Subscriptions and support | $36,781 | $37,260 | (1)% | $74,975 | $75,294 | 0% | | Service | $15,123 | $15,737 | (4)% | $29,446 | $30,734 | (4)% | | Depreciation and amortization | $16,108 | $14,271 | 13% | $32,129 | $28,230 | 14% | | Total cost of revenue | $69,029 | $67,985 | 2% | $138,518 | $135,961 | 2% | - Subscriptions and support cost of revenue decreased due to lower royalty costs ($1.1 million) and hosting fees ($3.0 million), partially offset by increased compensation costs ($2.3 million)[156] - Service cost of revenue decreased due to non-recurring restructuring expenses from the prior period ($1.0 million for 3 months, $1.9 million for 6 months)[156] Operating Expenses Total operating expenses increased by 4% for the three months and 6% for the six months ended June 30, 2023. Research and development expenses decreased due to efficiency efforts, while selling, general, and administrative expenses increased due to higher compensation and headcount in sales. Acquisition costs decreased significantly due to no completed acquisitions in the current period | Operating Expense Category | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | % Change | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | % Change | | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------- | :------------------------------------ | :------------------------------------ | :------- | | Research and development | $25,862 | $26,088 | (1)% | $51,283 | $52,706 | (3)% | | Selling, general, and administrative | $53,129 | $47,484 | 12% | $102,687 | $87,587 | 17% | | Acquisition costs | $0 | $1,043 | (100)% | $0 | $2,618 | (100)% | | Total operating expenses | $94,755 | $90,752 | 4% | $185,505 | $175,006 | 6% | - R&D expense decreased due to efficiency efforts on contractor and third-party spend, partially offset by increased stock-based awards[159] - SG&A expense increased due to $7.8 million (3 months) and $12.6 million (6 months) higher compensation costs from increased sales headcount and stock-based awards, and $1.4 million in secondary offering expenses (6 months)[160] Interest Expense Net interest expense significantly increased by 84% for the three months and 91% for the six months ended June 30, 2023, primarily due to higher interest rates on the First Lien term loan | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | % Change | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | % Change | | :----------------------- | :------------------------------------ | :------------------------------------ | :------- | :------------------------------------ | :------------------------------------ | :------- | | Interest expense - net | $16,101 | $8,743 | 84% | $30,130 | $15,765 | 91% | Other Expenses (Income) - Net Fluctuations in other expenses (income) were primarily attributable to foreign currency exchange rate changes during the periods | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | % Change | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | % Change | | :----------------------------- | :------------------------------------ | :------------------------------------ | :------- | :------------------------------------ | :------------------------------------ | :------- | | Other expenses (income) - net | $31 | $(498) | (106)% | $74 | $(576) | (113)% | Income Tax Expense (Benefit) The company recorded an income tax benefit of $(1.7) million for the six months ended June 30, 2023, a significant change from an expense of $1.6 million in the prior year, primarily due to differences in pre-tax book income/loss and deferred tax expense | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | % Change | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | % Change | | :----------------------------- | :------------------------------------ | :------------------------------------ | :------- | :------------------------------------ | :------------------------------------ | :------- | | Income tax (benefit) expense | $(1,724) | $(2,933) | (41)% | $(1,769) | $1,605 | (210)% | Liquidity and Capital Resources PowerSchool, a holding company, relies on subsidiary distributions for cash. Its liquidity sources include $28.4 million in cash and cash equivalents and an available Revolving Credit Agreement. The company anticipates sufficient liquidity for the next 12 months, with future capital needs dependent on growth and strategic investments General PowerSchool Holdings, Inc. is a holding company dependent on distributions from its subsidiaries for cash. As of June 30, 2023, it had $28.4 million in cash and cash equivalents and an available Revolving Credit Agreement, which are expected to be sufficient for working capital and capital expenditures for the next twelve months - PowerSchool Holdings, Inc. is a holding company dependent on distributions from its subsidiaries for cash to fund operations[167] - As of June 30, 2023, principal liquidity sources were $28.4 million in cash and cash equivalents and the available balance of the Revolving Credit Agreement[168] - Deferred revenue of $191.9 million as of June 30, 2023 ($185.8 million current), is expected to be recognized as revenue in the next twelve months[172] Credit Facilities The company has a First Lien Credit Agreement ($775.0 million) and a Revolving Credit Agreement ($289.0 million). In July 2023, the First Lien was amended to include an additional $100.0 million in term loans to finance the SchoolMessenger acquisition, increasing the outstanding principal to $840.1 million - The company has a First Lien Credit Agreement (initially $775.0 million) and a Revolving Credit Agreement (up to $289.0 million)[173] - On July 11, 2023, the First Lien was amended to permit an additional $100.0 million in term loans to finance the SchoolMessenger acquisition, increasing the outstanding principal to $840.1 million as of July 31, 2023[174] Other Contractual Obligations Material cash requirements include contractual obligations under operating leases for office and data center facilities, cloud hosting arrangements, and other services - Material cash requirements include contractual obligations for operating leases, data facilities, cloud hosting, and other services[176] Cash Flows For the six months ended June 30, 2023, net cash used in operating activities increased to $(92.7) million, driven by net loss and changes in operating assets/liabilities. Net cash used in investing activities decreased to $(20.9) million due to fewer acquisitions, while net cash provided by financing activities significantly decreased to $4.7 million | Cash Flow Activity | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | Change (in thousands) | | :------------------------------------ | :------------------------------------ | :------------------------------------ | :-------------------- | | Net cash used in operating activities | $(92,741) | $(80,319) | $(12,422) | | Net cash used in investing activities | $(20,886) | $(55,675) | $34,789 | | Net cash provided by financing activities | $4,700 | $65,830 | $(61,130) | - Net cash used in operating activities was $(92.7) million, driven by a net loss of $(19.1) million and net cash outflows of $(173.5) million from changes in operating assets and liabilities (e.g., deferred revenue, accounts receivable)[178][179] - Net cash used in investing activities was $(20.9) million, primarily for capitalized product development costs ($19.9 million) and property/equipment purchases ($0.9 million), with no acquisitions in the period[181] Indemnification Agreements The company enters into indemnification agreements with customers and its directors/officers for various liabilities, including intellectual property infringement. No material demands for indemnification have been made to date - The company enters into indemnification arrangements with customers for intellectual property infringement claims and with directors/officers[185] - No demands for indemnification have been made, and there are no claims that could have a material effect on financial statements[185] JOBS Act PowerSchool currently qualifies as an "Emerging Growth Company" but will transition to a "large accelerated filer" as of December 31, 2023, requiring compliance with Section 404(b) of the Sarbanes-Oxley Act for auditor attestation on internal controls - The company currently qualifies as an "Emerging Growth Company" and has elected the extended transition period for new accounting standards[186][187] - As of December 31, 2023, the company will become a "large accelerated filer" and will be required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act for the Annual Report for the year ending December 31, 2023[188] Critical Accounting Estimates This section highlights critical accounting policies and estimates that significantly impact the financial statements, including revenue recognition, accounts receivable, capitalized product development costs, goodwill, intangible assets, business combinations, share-based compensation, tax receivable agreement, and income taxes Goodwill assets The company tests goodwill for impairment annually or when circumstances indicate potential impairment, using either a qualitative or quantitative assessment. No goodwill impairment was recognized in fiscal years 2021 or 2022, as the fair value of the reporting unit exceeded its carrying value - Goodwill is tested for impairment annually (December 31) or when circumstances indicate carrying values may not be recoverable, using qualitative or quantitative assessments[192][193] - No goodwill impairment was recognized in fiscal years ended December 31, 2022, and 2021, as the fair value of the reporting unit exceeded its carrying value by 166% and 106%, respectively[196] Recent Accounting Pronouncements There are no recently issued accounting pronouncements expected to have a material impact on the company's condensed consolidated financial statements - No recently issued accounting pronouncements are expected to have a material impact on the condensed consolidated financial statements[40] Non-GAAP Financial Measures The company uses non-GAAP measures like Adjusted Gross Profit, Adjusted EBITDA, and Free Cash Flow to evaluate operating performance and liquidity, providing consistency and comparability with past financial performance Adjusted Gross Profit Adjusted Gross Profit, a non-GAAP measure, increased to $124.2 million (71.4% margin) for the three months and $232.7 million (69.8% margin) for the six months ended June 30, 2023, reflecting core operating performance by excluding certain non-cash and acquisition-related expenses - Adjusted Gross Profit is a non-GAAP measure used to evaluate core operating performance, excluding depreciation, share-based compensation, restructuring, acquisition-related expenses, and amortization of acquired intangibles and capitalized product development costs[202][203] | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :-------------------------- | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | | Adjusted Gross Profit | $124,201 | $107,242 | $232,745 | $206,159 | | % Adjusted Gross Profit Margin | 71.4% | 68.1% | 69.8% | 67.1% | Adjusted EBITDA Adjusted EBITDA, a non-GAAP measure, increased to $61.2 million (35.2% margin) for the three months and $110.6 million (33.2% margin) for the six months ended June 30, 2023, indicating improved operating performance after adjustments for non-cash and non-recurring items - Adjusted EBITDA is a non-GAAP measure that adjusts net loss for interest, depreciation, amortization, income tax, share-based compensation, management fees, restructuring, and acquisition-related expenses to evaluate core operating performance[204] | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :-------------------------- | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | | Adjusted EBITDA | $61,190 | $48,739 | $110,598 | $91,347 | | Adjusted EBITDA margin | 35.2% | 30.9% | 33.2% | 29.7% | Free Cash Flow Free Cash Flow, a non-GAAP liquidity measure, was $(43.6) million for the three months and $(113.6) million for the six months ended June 30, 2023, reflecting cash used in operations less capital expenditures and capitalized product development costs - Free Cash Flow is a non-GAAP liquidity measure defined as net cash used in operating activities less purchases of property and equipment and capitalized product development costs[205] | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :-------------------------- | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | | Free Cash Flow | $(43,565) | $(28,224) | $(113,627) | $(103,447) | FORWARD-LOOKING STATEMENTS This section contains cautionary statements regarding forward-looking statements, emphasizing that actual results may differ materially due to various risks and uncertainties, including economic conditions, growth rates, competition, acquisitions, personnel, innovation, and regulatory changes - Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from expectations[213] - Key risks include economic uncertainty (inflation, interest rates, recession), ability to sustain growth, market competitiveness, potential acquisitions, talent retention, innovation, and government spending policies for K-12 schools[215][218] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposures are foreign currency exchange risk and interest rate risk, though foreign currency fluctuations have not had a material impact in the first half of 2023 Foreign Currency Exchange Risk The company's operating expenses are subject to foreign currency fluctuations (primarily in Canada and India), but most sales are in U.S. dollars, and foreign currency changes did not materially impact results in the first half of 2023 - Operating expenses are denominated in local currencies (U.S., Canada, India), while most sales are in U.S. dollars, creating foreign currency exchange risk[221] - Foreign currency exchange rate changes did not have a material impact on consolidated financial statements during the six months ended June 30, 2023[221] Interest Rate Risk The company is exposed to interest rate risk primarily through its variable-rate First Lien and Revolving Credit Agreement. A hypothetical 100-basis point increase in market interest rates would result in an approximate $7.5 million change in annual interest expense - Primary market risk exposure is changing interest rates, particularly on the First Lien and Revolving Credit Agreement, which carry interest at SOFR plus an applicable margin[222] - A hypothetical 100-basis point increase or decrease in market interest rates would change interest expense by approximately $7.4 million for the First Lien and $0.1 million for the Revolving Credit Facility annually[223] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, and reported no material changes to internal controls over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures Management, with CEO and CFO participation, evaluated and concluded that the company's disclosure controls and procedures were effective as of June 30, 2023 - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of June 30, 2023[224] Changes to our Internal Controls over Financial Reporting There were no changes in internal control over financial reporting during the quarter ended June 30, 2023, that materially affected or are reasonably likely to materially affect the company's internal control over financial reporting - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023[225] Part II - Other Information Item 1. Legal Proceedings The company is involved in various legal disputes but has determined it does not have material exposure on an aggregate basis at this time - The company is involved in disputes and litigation but has determined it does not have material exposure on an aggregate basis at this time[227] Item 1A. Risk Factors A material change in risk factors is the company's upcoming transition from an "Emerging Growth Company" to a "large accelerated filer" as of December 31, 2023, which will require compliance with Section 404(b) auditor attestation - The company will cease to qualify as an "Emerging Growth Company" and become a "large accelerated filer" as of December 31, 2023[229] - This change requires compliance with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act for the Annual Report for the year ending December 31, 2023[229] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds during the reporting period - No unregistered sales of equity securities or use of proceeds[232] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - No defaults upon senior securities[233] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[235] Item 5. Other Information This section discloses recent corporate events, including an insider trading plan adopted by the Chief Product Officer and the resignation of the Chief Accounting Officer Insider Trading Arrangements Marcy Daniel, Chief Product Officer, adopted a 10b5-1 Plan on May 26, 2023, to sell 17,000 shares of Class A common stock by March 28, 2024 - Marcy Daniel, Chief Product Officer, adopted a 10b5-1 Plan on May 26, 2023, to sell 17,000 shares of Class A common stock[236] Chief Accounting Officer Departure Angelina Hendraka resigned as Chief Accounting Officer, effective August 11, 2023, to pursue other opportunities. Eric R. Shander, President and CFO, will serve as the principal accounting officer - Angelina Hendraka resigned as Chief Accounting Officer, effective August 11, 2023[237] - Eric R. Shander, President and Chief Financial Officer, will serve as the principal accounting officer following Ms. Hendraka's departure[238] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including corporate documents, credit agreement amendments, and certifications - The report includes exhibits such as the Amended and Restated Certificate of Incorporation, Bylaws, Incremental Term Facility Amendment No. 5, and various certifications[240] SIGNATURES The Form 10-Q was duly signed on August 8, 2023, by Eric Shander, President & Chief Financial Officer (Principal Financial Officer) of PowerSchool Holdings, Inc - The report was signed by Eric Shander, President & Chief Financial Officer, on August 8, 2023[245]