PowerSchool Holdings, Inc. (PWSC) Q4 2022 Earnings Call Transcript

PowerSchool Holdings, Inc. (NYSE:PWSC) Q4 2022 Earnings Conference Call February 22, 2023 5:00 PM ET

Company Participants

Shane Harrison - SVP, IR

Hardeep Gulati - CEO

Eric Shander - President and CFO

Conference Call Participants

Saket Kalia - Barclays

Koji Ikeda - Bank of America

Stephen Sheldon - William Blair

Matt Hedberg - RBC

Joe Vruwink - Baird

Fred Havemeyer - Macquarie

Brian Peterson - Raymond James

Rich Hilliker - Credit Suisse

Karl Keirstead - UBS

Ryan MacDonald - Needham

Brett Knoblauch - Cantor Fitzgerald

Operator

Ladies and gentlemen, greetings, and welcome to the PowerSchool Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce you to your host, Shane Harrison, SVP, Investor Relations. Please go ahead.

Shane Harrison

Thank you, operator. Welcome, everyone, to PowerSchool Earnings Conference Call for the fourth quarter ended December 31, 2022. I wanted to first let you know that we posted a slide deck to the Investor Relations section of our website that accompanies our remarks here.

On the call today, we have PowerSchool CEO, Hardeep Gulati; and CFO, Eric Shander. Before getting started, I'd like to emphasize that this call, including the Q&A portion, will include statements related to the expected future results of our company, which are therefore forward-looking statements. Our actual results may differ materially from our 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 and the GAAP financial information is provided in the corresponding press release and results presentation, which are both posted on PowerSchool's investor relations website at investors.powerschool.com, and a replay of this call will also be posted to this same website.

Let me now pass the microphone over to Hardeep.

Hardeep Gulati

Thank you, Shane, and thank you, everyone, for joining us today. We are excited to discuss our performance in Q4 and full year 2022. We had a strong close to a very successful year. We have committed to you that we will continue to deliver annual double-digit top line growth, coupled with margin expansion.

As you see from this quarter results, we delivered this commitment in 2022 by significantly expanding our EBITDA margin and growing revenue double digits for the year. You will also see from our guidance which Eric will discuss in more detail later, we are looking forward to another year of double-digit revenue growth and further margin expansion.

As you see on Slide 4, Fourth quarter revenue reached $161 million, growing 10% over the prior year, and our adjusted EBITDA grew 59% year-over-year to $53 million, representing a 32.8% margin. ARR grew 11% over the prior year to $596 million as we continued our trend of strong net revenue retention.

Now looking at the specific highlights in the quarter and for the full year 2022. On Slide 5, our strong business momentum continued across all product lines with breakout performance from our Unified Insights data analytics product suite.

In this quarter, we won our largest statewide Unified Insights contract with value ramping up to $5 million per year ARR with Alabama State Department of Education to enable their learning acceleration and student support program. This adds to the state's usage of 6 of our other platform products, which work together to benefit all students in the state.

During the quarter, the Unified Insight solution suite also had its biggest Snowflake connected intelligence win for whole child analytics at the second largest school district in the U.S. Los Angeles Unified School District, integrating to numerous systems. Another important cross-sell in the quarter was to Philadelphia School District.

To date, a customer of our college career tool, they are now expanding their use of our platform by implementing two of our talent solutions that will help them more efficiently evaluate train and develop their teachers.

One key new customer win was our sale of our unified home communication solution to one of the top 50 largest school district in U.S. Jefferson County Public School in Louisville, they chose our unified home communication solution to improve their capabilities in family engagement and student attendance. These wins across the platform helped drive a record Q4 cross-sell performance, propelling our NRR rate to a record 109.1% in the quarter.

While we also added over 100 new logos in the same period. I am proud of the tremendous progress we have made as a company in 2022. For the full year, we eclipsed $600 million in revenue, finished with annual revenue growth of 13%, improved our adjusted EBITDA margin by 2.2 percentage points to 31.1%, and generated $104 million of free cash flow.

Our go-to-market teams were very successful during the year, adding almost 600 new customers to our base. And during the year, the number of students benefiting from our solution now exceeds $50 million.

As we look at these 2022 results and our go-forward 2023 plans, I would like to give you a progress update on the 4 key foundations, which we have reinforced with you in the past and are the pillars of our success, strategy and go-forward commitment.

First, the resiliency of our business and the K-12 market. Second, the differentiation of our comprehensive, diversified platform; third, our financial durability that drives predictable double-digit top line growth coupled with consistent margin expansion. Fourth, the opportunity and the further upside through international expansion, innovation and M&A.

The first foundation is our business resiliency, a key factor in the predictability of our success. As shown on Slide 6, this resiliency is built by several factors: strong customer demand of sticky mission-critical products with robust budgets. U.S. education funding continues to be robust.

As we have seen over decades, its ability to remain relatively insulated in the face of the macroeconomic headwinds. In 2022, the U.S. Department of Education received its greatest increase in discretionary spending since the start of the pandemic. Additionally, $100 billion of federal relief after funds still remains to be spent. The robust budgets are supporting the continued increase in strong demand of our products, which are fueled by the urgent and growing need of digital transformation across a variety of K-12 processes.

As shown in our continued strong deal velocity, and we are seeing ARR pipeline growth of nearly 25% year-over-year for the first half of the year. Reinforcing the resiliency of this business, we saw increased demand across our product portfolio. Our largest and most mission-critical product line, student information system, center of all the technology infrastructure of any K-12 organization saw accelerated growth of ARR in the low teens for the full year 2022 from many new customers, large and small.

And 2023 is off to a great start. We are very excited to share that we have been chosen for a tenured SIS deployment for Puerto Rico. The Puerto Rico Department of Education is seeking to modernize and transform their KL education infrastructure by selecting our SIS as the core to power their scheduling, registration, attendance, compliance, reporting, creating and a lot more for their 250,000 students.

We look forward to partnering with them on this critical project and their further technology initiatives to drive improved operational continuity and education outcomes for every student in the territory. Our differentiated platform is the second key foundation of our strategy and success.

On Slide 7, as you know, no other player in the industry has the comprehensive and diversified product platform that cover all the key pillars of SIS and operations, classroom and talent and has market leadership in all these pillars.

We are also continuing to see further adoption of the full breadth of our platform. The number of customers that are using products from each of our pillars is approaching thousand and the amount of our ARR that comes from customers with 7 or more products is now over $100 million.

We continue to differentiate even further with increased leadership and expanded opportunity in data-centric solutions. Unified Insights and Connected Intelligence Data as a Service grew well over 50% in 2022. And we are confident of a strong growth of these products in the coming years.

On Slide 8, we update you on the progress on our third key foundation, our financial durability. The attractiveness of our financial model comes from large, under-penetrated and growing $3 billion cross-sell TAM within U.S. and Canada, and with a significant percentage of the market still using outdated legacy and paper-based solutions.

With over 15,000 existing customers and a growing platform of products, our accelerating cross-sell opportunity provides a meaningful path to a sustained, durable long-term growth when you consider these customers currently only having to offer 19 products on average.

We have demonstrated continued momentum in cross-selling the platform. With the number of customers with four or more of our products growing nearly 30% to over 2,400 as of the end of 2022. We are seeing this cross-sell success being further amplified by the flywheel effect in which products benefit from each other, compounding the value for our customers and increasing the stickiness of our suite.

Our recently announced Six persona-specific multiproduct cloud bundles will further increase our cross-sell velocity and create more operating leverage. We also have several other margin expansion opportunities given our scalable SaaS and operating business model.

In 2022, we grew our international operations in India to now total over 1,200 employees and cover nearly all functions within the company. Our fourth key foundation is the further upside through international expansion, innovation and M&A, as shown on Slide 9. We are delivering double-digit growth in North America and expect this to continue over the long run with additional upside through international expansion.

We announced late in the year that we will be opening our sales and support office in Dubai this spring to support growth in the Middle East with several new logo wins and a strong pipeline for 2023. Today, I am very excited to announce our expansion into Africa through our strategic partnership with OneConnect. Based in Jamesburg, OneConnect is a provider of full-service technology solutions in Africa and is committed to bringing PowerSchool solution to over 0.5 million students this year with a strong long-term opportunity for us to support improving education outcome for over 240 million students across the sub-Saharan Africa.

Innovation is at the heart of our company, and we are investing in product road maps. An example of this innovation is our recent announcement last month of our new learning NAV and content NAV solutions.

Key milestones in the push towards a data-centric automated and highly impactful personalized learning solution. A market opportunity, we estimate to be over $100 billion. These tools utilize artificial intelligence to automate a student's learning pathway and ease the selection of customer approved content resources that support those instructional pathways.

M&A has been an important tool for expanding our technology capabilities and growth opportunities, and we have demonstrated tremendous success with each of our acquisitions. The recent acquisition of Kickboard, Kimball, Chalk and Head 2 have already been integrated and are outperforming our deal models, driving growth in each of the pillars and have expanded our cross-sell TAM by over $500 million.

We intend to continue acquiring best-of-breed technologies to enhance our platform and global presence in 2023 and beyond. As I have outlined in these 4 key takeaways, we have proven our capability to execute on our financial metrics and goals. During our IPO, in the summer of 2021, we communicated several targets for our key metrics, most of which we have surprised in our first 1.5 years of being a public company.

On Slide 10, you will see that our stated long-term target NRR rate of between 105% to 107% was surpassed this year, reaching 109% in this fourth quarter. We also have already met our long-term net debt leverage target of three to four times EBITDA, finishing the year at three times.

Our IPO targets for 2022 revenue and adjusted EBITDA were eclipsed. And on the unlevered free cash flow, we beat our 2022 target of $127 million by $6 million. This speaks to our ability to perform and deliver on our commitments. And you can expect us to increase many of these targets in our 2023 Investor Day that Eric will share.

With these strategies, our team and our resilient market, we expect to deliver another year of low double-digit revenue growth, combined with the meaningful margin expansion, which you will see in our guidance, -- let me now pass the call over to Eric to review the financial details of the fourth quarter and the full year 2022 and provide the details of our guidance for 2023. Eric?

Eric Shander

Thank you, Hardeep. We are pleased to finish 2022 with such a great quarter. Looking back on the year, I'm proud of the performance we delivered. We drove top line growth of 13%, coupled with an adjusted EBITDA margin of 31.1%, which reflects a 220 basis point year-over-year improvement. All of this was achieved while continuing to invest in innovation for long-term durable growth.

Our customer base has expanded to over 15,000 districts and our differentiated Unified platform of mission-critical products drove record cross-sell performance during the year. This resulted in a meaningful improvement in our net revenue retention rate, which has increased each quarter since we IPO-ed in mid-2021. As Hardeep outlined, we are already well ahead of many of the long-term targets we laid out at the time of the IPO, which is a testament to our team's tremendous ability to execute.

Moving to the results and summarized on Slide 11. Fourth quarter total revenue came in at $161 million, up 10% year-over-year and in line with the guidance range we provided on our last earnings call. Full year 2022 revenue was $631 million, representing a growth rate of 13% for the year.

Subscription and support revenue, our most strategic revenue stream grew 10% year-over-year and accounted for 88% of total revenue in the quarter. For the year, SMS grew 14% and represented 86% of total revenue. Our services business generated revenue of $15 million, an increase of 6% year-over-year, which has moderated from prior period growth rates driven by our faster implementations and more efficient deployment cycles.

On a full year basis, our services business grew 14% over 2021. Revenue from license and other, which relates mainly to our third-party revenue came in at $4 million for the quarter, representing a 21% increase over last year. As a reminder, L&O is our least strategic and nonmaterial revenue stream representing only 3% of total revenue. We ended the year with an annual recurring revenue balance of $596 million, an 11% increase over last year.

Our net revenue retention rate or NRR came in at 109.1%, representing a sequential improvement of 40 basis points and our fifth consecutive quarter of sequential improvement. Year-over-year NRR improved 270 basis points. This strong performance was driven primarily by higher cross-sell and our normal contracted price increases. Our net retention success reflects the deep value and ROI we provide to our customers who continue to expand the relationship with PowerSchool.

Adjusted gross profit for the quarter came in at $112 million with a 69.5% margin, representing a 110 basis point sequential increase and a 370 basis point year-over-year improvement. For the full year, adjusted gross profit reached $429 million or a 68.1% margin, representing an 80 basis point improvement over 2021.

Looking at fourth quarter operating expenses, our non-GAAP research and development expense came in at $22 million, representing 13.8% of revenue compared with 16.9% last year. Including capitalized R&D expenses, the total invested in R&D was 19% of revenue compared with 22.1% last year.

Full year non-GAAP R&D expense grew 5% to $90.5 million. Non-GAAP SG&A expense declined 3% year-over-year in the fourth quarter to $37 million, representing 23% of revenue, which is 320 basis points lower than the 26.2% in Q4 of last year. Non-GAAP SG&A expense for the full year 2022 increased 11%.

Our fourth quarter adjusted EBITDA was $53 million or 32.8% margin exceeding the high end of our guidance range by $2 million. Full year adjusted EBITDA was $196 million, representing a 31.1% margin and 22% higher than 2021 and 190 basis points higher than the original guidance we provided at the beginning of 2022.

Non-GAAP net income in the fourth quarter was $0.27 per fully diluted share, which is nearly double the $0.14 per diluted share in the same time period last year. Full year 2022 non-GAAP EPS was $0.85, and 35% higher than the $0.63 we earned in 2021.

On Slide 12, you will see a summary of our 2022 margin improvement driven by multiple levers. The strong adjusted gross profit performance was driven by improved operational scale, responsible hiring and a continued focus on process efficiencies. Non-GAAP R&D expense declined as a percent of revenue as our development is streamlined associated with more cloud bundles and our India Center of Excellence continues to accelerate the pace of our innovation.

On adjusted SG&A, we saw a 40 basis point improvement year-over-year in spend as a percentage of revenue as we realize savings from our 2022 facilities consolidation savings from various G&A process and cost rationalization initiatives and the normalization of fixed public company costs we brought on in 2021.

One of our biggest priorities is to continue improving our already strong margins in 2023 and beyond. We will do this by being laser focused on operational efficiencies and innovation initiatives.

As I have mentioned before, our target is to improve our adjusted EBITDA margin by 50 to 100 basis points each year. In 2023, we expect to exceed the high end of this range, delivering almost 150 basis points of improvement.

Fourth quarter free cash flow, a non-GAAP measure, was $33.2 million, up 182% from the same time period last year and was driven primarily by increased profitability. Full year free cash flow was $104 million or 16.5% of revenue.

Moving to the balance sheet. We ended the quarter with $137 million in cash and equivalents, an increase of 59% over the same period last year, driven by strong free cash flow performance. Net debt leverage at the end of the year was three times a meaningful improvement over the 4.1 time a year earlier.

Now turning to our 2023 full year and first quarter financial outlook on Slide 13. For the full year 2023, we expect total revenue in the range of $688 million to $694 million, with the midpoint representing a 10% year-over-year growth rate and adjusted EBITDA of $222 million to $227 million, representing a 32.5% adjusted margin at the midpoint.

For the first quarter, we expect to deliver total revenue in the range of $158 million to $160 million, representing a 7% year-over-year growth rate at the top end, and we remain committed to our low double-digit full year top line growth expectations. This Q1 growth rate is being impacted by the delay of a very large deal which affected the timing of services and L&O revenue recognition.

For the first quarter, adjusted EBITDA, we expect a range of $47 million to $49 million, representing a 30.2% margin at the midpoint. Our adjusted EBITDA margin for the first quarter is impacted by some seasonal in-person events such as a sales kickoff, which are held early in the year to maximize their impact.

For modeling purposes, we expect capital expenditures, excluding capitalized software of approximately $5 million to $8 million and share-based compensation expense of approximately $70 million for the full year. Fully diluted shares by the end of the year are expected to be in the range of 200 million to 205 million shares.

And we're excited to announce we will host our first Investor Day, which will take place on Wednesday, July 12 and in conjunction with our Edge 2023 event, which is our flagship user group event. Attendees will hear from our executive leadership team, including updated long-term goals and will also have the opportunity to meet with our top customers and product leaders and attend breakout sessions to dive deeper into PowerSchool products. This will be our first edge event since the pandemic began in 2020 and our inaugural Investor Day, so we're very excited to share the latest and greatest with all of you.

In closing, we are proud of our team and the execution in 2022 and look forward to continuing our momentum in 2023. We believe the large and resilient global K-12 market is recognizing the importance and impact of technology in advancing student outcomes, which positions us to deliver long-term durable growth and provide significant value to our customers and shareholders. This concludes our prepared remarks.

Operator, will you please open the line for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Saket Kalia from Barclays. Please go ahead.

Saket Kalia

Hey guys, thanks for taking my questions here. Nice way to end the year. Hardeep, maybe for you; a couple of big wins that you called out in your prepared remarks and the press release, which included Unified Insights, I believe, in one or two of them.

I was wondering if you could just remind us how Unified Insights and maybe that broader data portfolio complements the broader product slate for power school, how that Unified Insights offering is priced and maybe how much room there is inside of your base for further adoption?

Hardeep Gulati

Sure, Saket. You're absolutely right. One of the beauties of our Unified Insights products is not only the most differentiated, given that we have the breadth of the platform, so we are able to offer ultra-analytics, it's also a very large opportunity. We have multiple products within Unified insights around student success, student essential, talent analytics, operational analytics as well as career analytics as well.

So when you look at the breadth of that, right, that's almost $10 to $20 per student. So if just even North America, that's a $1 billion plus TAM. We still only penetrated less than 10% of our base in the market. So there is a significant upside more.

We're already seeing phenomenal growth of almost 50% plus through the Unified Insights. And given our leadership today as well as with some of the investments we have done by adopting Snowflake and AWS as a platform, we're actually opening up a whole stew of opportunities around connected intelligence where we're able to even go beyond the K-12 districts through counties to states to even countries on whole workforce analytics, bringing not just K-12, but K-20 data. So very strong and big opportunity ahead of us.

Saket Kalia

Yes, that's really interesting. Eric, maybe for my follow-up for you. Great to see the margin expansion for next year off of already a year that's expanded margins nicely. Maybe for '23, maybe you could just talk to us about two things within that expansion. First, how you're thinking about services mix, right? Because, of course, that has gross margin -- a gross margin impact? And then also how you're thinking about the investment in international scaling, just as the revenue there grows but also as you continue to invest there?

Eric Shander

So let me just -- as you think about the adjusted gross margins, as mentioned, we've expanded them over 220 basis points year-over-year, 2021 versus 2022. And then in our guide, you're seeing another 150 basis points. Within that, I think it's important that we've been really reiterating this is investments like personalized learning investments like the international, which are key priorities for us.

Those are still folding into that. So while we're able to continue to manage the margin expansion, we're also reinvesting significantly in these key priorities. So I think it's important that international personalized learning. Those are top priors. Those are going to continue to be primary investments.

When you think about the services business, and Hardeep had mentioned one of the large deals in Q1 that we've been chosen for, you'll see some of the impacts that the services business will have in the results. Certainly, the Q1 revenue guide was a bit lower. That's all driven in, as I mentioned in my prepared remarks, by services revenue as well as L&O revenue.

So I think it's important that we are going to see, as we continue to get larger and more strategic. There will be some services variability. And as you mentioned, it does come with a little bit of a lower margin profile. But however, we're still going to manage the overall margin profile to expand.

And then some of the services variability will impact just the revenue that we see from quarter-to-quarter. But I think it's important and we reiterated it very much so in our prepared remarks that we are absolutely committed to driving low double-digit revenue growth. Obviously, the most strategic piece of our revenue is our subs and support, and we remain committed to driving that low double digits.

So I think it's important hit that head on because I know certainly some of the -- as you look at the Q1 guide, we'll note that it's going to be a little bit lower, but obviously, the full year, we're right at the 10%, which is our commitment.

Operator

Our next question comes from the line of Brent Thill from Jefferies. Please go ahead.

Unidentified Analyst

This is David [ph] on for Brent. I wanted to ask about the OneConnect partnership that you guys have in Africa. Just talk to us a little bit about how the economics vary there, but you guys are kind of going in and doing it yourself? And how we should think about you guys deploying the strategy a little bit further in some of the other international regions?

Hardeep Gulati

Sure, David. Thank you. David, as you know that we've already talked about some of our investment in Middle East with our boots on ground, there's offices there. We've also seen expansion in India. We continue to further invest there. This is very exciting with our partnership with OneConnect, which is an exclusive partnership.

We've got a partner who's committing 0.5 million students were going to adopt it with a multimillion dollar commit, and that's the kind of partnership we're looking for. Expect that before year-end, pretty much most of the regions across the globe. We could have very exclusive, tight relationships with dozens of partners who are going to have major commitments around adopting parts for solutions with the local school districts, not just international and private schools, but even with government schools.

So we do expect international to almost double up this year. But over the next 3 to 5 years, we expect this to grow almost $80 million to $100 million, and we're going to be walking through some of that road map with the Investor Day with you guys.

Unidentified Analyst

Got it. That's super helpful. And then maybe as a follow-up, I'm sorry to keep pounding on the international side, but obviously, it's an exciting growth opportunity. I know it's super early. You haven't even opened up all the offices.

But as you guys think about maybe some of the biggest roadblocks you've experienced, maybe it's localization of content or either the product or regulation. Just curious, what are some of the roadblocks that you guys are coming up against?

Hardeep Gulati

Well, the beauty is that when you look at our courses is platform and our Schoology platform. We actually have adoptions already in multiple countries, right, almost 90 countries, not just American Education Schools and International, but even the local and private schools. So the platform does localize. We still do need to point, invest in partnerships and content and curriculum with the local partners.

That's where these exclusive partnerships really come into picture as they invest with us in building those integrations to the local providers and allows us to have full turnkey solutions. So we're already seeing some great success, and these partnerships will help us actuate this pretty quickly.

Operator

Our next question comes from the line of Koji Ikeda from Bank of America. Please go ahead.

Koji Ikeda

I actually wanted to kind of go back to a previous question and thinking about the guidance and really kind of honing in on the subscription and support revenue line. So looking at the guide and the commentary previously on the services and kind of the L&O revenue, I guess the question is, could -- or should subscription revenue for 2023 stay at the double-digit level? Or is there an instance where this could dip into the 9s, kind of like 9% growth range to kind of get to that guidance? .

Eric Shander

Yes. We -- so Koji, thanks for the question. We absolutely do not see any case where on the full year basis that the S&S revenue will dip below 10%. We just don't see that.

Koji Ikeda

Got it. Okay. No, that's super helpful. And then on the net revenue retention, 109.1%, really nice there, 6 straight quarters of expansion to, I mean, where could this metric go? How should we be thinking about this metric? Could it expand into the kind of the 110 plus range here in 2023? And what assumptions do you have for net revenue retention for the guidance for 2020?

Eric Shander

Yes. So what you see when we finished the year is really a reflection of the strong cross-sell that we saw as well as the industry-leading gross retention rates that we see. So that's why we ended as high as we did. And as I mentioned in my prepared remarks, we've seen a nice increase since the beginning of the year.

What I would say, and if you go back to the long-term guidance that we provided when we went public is we said we would be in the 108 to 110 range. What I would tell you is we tighten that up a little bit to the 109 range to 110 range this year. And you'll see a little bit of variability from quarter-to-quarter. But I think this year, what I would tell you is we should be in the high 109% range.

And then as we start to get a little bit further into this year, I think we can provide some further guidance on that in terms of does it go into 110 or some level beyond that in the future. But at this point, I would say remaining within our long-term guide of 108 to 110 and with the current results, I would say that we'll be on the higher end of that range.

Operator

Our next question comes from the line of Stephen Sheldon from William Blair. Please go ahead.

Stephen Sheldon

Congrats on the strong end to the year here. First question, just as we think about the SIS, and I think you talked about revenue acceleration there in 2022. I think you've talked about 40% market share in the U.S. still being held by a variety of smaller fragmented kind of legacy is players.

So I guess would you expect to see a continued pickup in school districts on smaller, more legacy solutions convert to a higher-end solution over the next few years? And what's the holdup from them doing so in this type of environment?

Hardeep Gulati

Sure, Stephen. First, thanks for your comments about the quarter. We're definitely very excited about the success broadly on the platform with a record cross-sell for Q4. But then also, to your point, success is within our products like over the largest product base, which is in SIS, having almost growth in teams. So we do expect that with the wins like what you shared with Puerto Rico choosing us. We definitely see that growth to sustain.

As more and more the 40%, the legacy is space is seeing challenges around being able to cope up with some of the digital transformation needs, whether that's around more automation, more data visibility as well as more data security and all those things are kind of key drivers which are actually driving the legacy customers to ex-rate, and that's why you see a growth actually accelerating post pandemic, and we expect that to continue as most of the districts who are kind of kept themselves -- went through the pain during the pandemic and realizing that they've got to start modifying this.

Stephen Sheldon

Got it. That's helpful. And then as a follow-up, I wanted to ask about the pipeline. And I think I heard that the pipeline is up 25% year-over-year, so I just wanted to confirm that. And as we progress towards the key selling season, is coming up here. Are you seeing anything surprising about the level of interest across different products in your portfolio at this point?

Hardeep Gulati

Yes. First, reiterating my comment. The pipeline is 25% up even for the first half. It's still early for the full year pipeline, and we'll get more visibility throughout the year for you and we'll provide that. Our deal velocity, our deal demand across the product remains consistent. As I mentioned, the bright spot definitely are the analytics, the SIS transformation, talent management continues to go actually very strongly as well as the classroom products. So we're seeing pretty much growth in all of our major product lines.

Operator

Our next question comes from the line of Matt Hedberg from RBC.

Matt Hedberg

Congrats from me as well on the strong end of the year. Hardeep, obviously, one of the standouts was the new wins, but also the cross-sell and NRR that somebody asked about previously. I guess I'm curious, we've sort of been impressed with the true platform play that PowerSchool, we think it is. That said, can you talk about the competitive environment? Have you -- have your win rates improved the last couple of years? Just maybe a little bit more on the competitive dynamic.

Hardeep Gulati

Yes. Thanks again, Matthew for the comments there. And absolutely, our win rates are actually holding up well, in fact, improving, especially when it comes to win rate against the legacy vendors. And to your point, one of the differentiators, which is really playing out is the platform, right? There's a lot of people who call themselves platform, but the platform just within one pillar of a classroom or from an operation. Nobody has the SIS, which is the core, the classroom, the talent and all those pieces.

And one of the data points I shared, when you look at customers who actually have products from each of the pillar, that itself now is in 1,000. And customers who have 7-plus product, almost a full platform that almost is $100 million of ARR. So almost 20% of our business coming from those customers. So -- and that's a flywheel effect.

The more they're buying, they're buying more products from us, and that's what exerting the cross-sell as well as creating more demand outside that in net new, who are realizing that, hey, we have best-in-class products, and they can really start consolidating their platforms. .

Matt Hedberg

Got it. Helpful. And then last quarter, you announced your new CRO, Tony Kender just sort of now you have a chance to work with him a bit longer, any changes that he's making to sort of the sales kickoff or territories or plant quotas or anything like that, that's worth noting?

Hardeep Gulati

We actually had a very phenomenal kickoff with almost 400 people. Our sales team is almost double when you look at from just two years back from here it is. So we're very excited to see all the sales really geared up.

And Tony is bringing a lot of discipline around not just the commitment and the forecasting process but actually is solution selling, which you saw from our press release around bundling and selling more solutions. So we're actually selling more products at the same time. So that actually creates a customer acquisition and cross-sell acquisition even faster.

What's exciting about is with people like Tony who have years of experience at Oracle and NetSuite, with people like Paul, we've brought in as a CCO with a public company experience like HashiCorp and New Relic and Oracle.

Eric, for example, with years of experience at Red Hat, we now have management team who actually not only manage billion dollar-plus businesses, but actually even help them scale up and manage the public company commitment expectations as well. So very excited about the leadership team and where that allows us to almost make us into a $1 billion enterprise.

Operator

Our next question comes from the line of Joe Vruwink from Baird.

Joe Vruwink

I wanted to go back to Unified Insights. And I guess I'm curious on the labeling of this quarter as the breakout quarter since it's been your -- one of your faster-growing products. Certainly, it's not a stranger to statewide deals. Was this maybe more just referring to the absolute size of the orders in the quarter?

Or are you may be starting to see the scope and use cases broaden out and so the potential for this suite becomes something bigger than maybe you thought about when the products like Kudu as started coming together to make Unified Insights.

Hardeep Gulati

That's a great fine point, Joe. So when you look at some -- we already have market leadership in Unified Insights. In fact, we have 10-plus trade contracts. We talked about Maryland earlier last year. What's exciting about the Alabama win is the fact that it's not only the student success analytics, there are actually multiple modules of analytics, including our new product on MTS, multi-tier system or support we launched last year. It's already showing this differentiation.

And as Alabama looked through an RFP process and look through all vendors, they selected us to be that partner who can give that the holistic analytics and MTS support. So that just shows you the strength of our leadership already and the innovation and how we are quickly able to bring those innovations to the district.

And then you take another spectrum of LA Unified, where they're adopting our Snowflake platform for connected intelligence, bringing data even from -- they don't use SIS. They're bringing data from multiple of their system and El Paso is another good one.

So there's a lot more districts we're actually now adopting our Snowflake connected intelligence. And that also shows you the breadth for us to now be able to go with analytics to even a much broader audience. And I think that's why it's a very exciting quarter from the analytics perspective.

Joe Vruwink

Okay. That's great. I guess on new logos, so as I recall, I think last year was a very high rate of growth in new logos. And I think this year tend to hire as well. and yet you're bringing in more new customers and your net retention is still going up.

So I guess the question is the new customers of PowerSchool do not seem to be necessarily smaller where the deals are getting smaller in scope. Is that fair? And then I guess it begs the question, since you do have fairly large coverage of the market already.

We shouldn't really think about as you're moving maybe into a down market or private that, that's a lesser opportunity. It sounds like these new customers are continuing along kind of the same journey as your heritage customers.

Hardeep Gulati

No, it's a great point. And what I would say is that we take example of a district in Rhode Island, [indiscernible] or community unit school District [indiscernible] in Illinois. They're not just buying our sits to the platform. They're actually buying four or five modules in that chart. So to your point, we are seeing more multi-module deals with our new logos as well, including tons of the charter schools and small schools as well, including private schools.

So Epic Charter doubled down with the adoption of a curriculum solution. We've got tons of successes happening at that level as well. Yes, prep in Texas buying our Schoology platform. So we are seeing the demand across the full spectrum.

Operator

Our next question comes from the line of Fred Havemeyer from Macquarie.

Fred Havemeyer

Congrats, Hardeep, Eric and the entire PowerSchool team here. I think just bigger picture on ESSER funding at this point. We're at a place where schools can certainly continue to deploy as funding. And at the same time, we're considering the 2024 time frame ending of the availability of some of those funds.

Hardeep and Eric, can you just give some context about how schools are thinking about continuing their purchasing of PowerSchool in any case where perhaps ESSER funds were applied? .

Hardeep Gulati

Yes. Thanks, Fred. Fred, the first thing is that based on all of our deals reservation, still majority of the deals, in fact, 80% plus of them still are using the core funding. They're not relying on ESSER. We do feel some of the districts would adopt the ESSER fund for the first two years, and then they still are allocating budget for an ongoing basis for those products because business [ph], the products are right, when they adopt it.

It's sticky. They're doing it for multiyear. So they're not necessary using ESSER as the only buying pattern. It does help them. It provides them the cushion. So the initial implementation costs and everything they can extract. A good example of that, how Puerto Rico is doing that. but that's definitely not a restriction.

As you said, there's still about $100 billion to be spent on ESSER. So we still feel that the budget environment, core budget environment remains stable. ESSER continue to provide that additional cushion, but we're not expecting this to change over demand or adoption or growth rate in any shape or form.

Fred Havemeyer

Got it. And so it sounds like it's really just helping getting deals across the line there, especially on some of those nonrecurring items. Is that...

Hardeep Gulati

That's a fair comment. Yes.

Fred Havemeyer

Awesome. And it was really helpful seeing some of the comparison of what you achieved versus your initial IPO time frame targets. Back of the IPO, we were also talking about how a school is penetrated, not just among schools but in terms of the overall wallet share of just IT spend within schools and software spend.

And I wanted to check in on that just at that time, we've seen substantial multiproduct progress here, certainly seeing 30% year-over-year growth in the overall 4-plus product customers you have. Just where do you presently stand? Or where does PowerSchool stand with respect to overall wallet penetration among IT spend to schools? And can you remind us about how to think about where that could go over time?

Hardeep Gulati

Sure. when you look at from a multi-product like the win two products. We've said, on average, our customers have a little more than two products, and that has improved. In fact, now the number of customers who have two-plus products has improved from almost 2021, it was in the low 40s to almost now in the high 40s. So we are already seeing more adoption. But what's interesting is that especially we're focused on strategic and enterprise customers, that multiple option is already three plus.

So our biggest focus in our sales channels are actually showing that we can easily move our customers and now we're translating that to the enterprise and the small inside customers as well. So we do have a lot of opportunity, and it continues to improve. But as we also said, as we are improving that, we also added 5 million new students. So it's kind of -- that's changing the denominator as well.

Operator

Our next question comes from the line of Brian Peterson from Raymond James.

Brian Peterson

I'll echo my congrats on the strong quarter. So maybe two higher-level ones for Hardeep. But first, on the international opportunity, I kind of wanted to hone in on a little bit. I'd be curious what products do you think will be kind of the first to be adopted in that market?

Curious about things like learning loss or compliance orientation, where you guys are really strong here in North America, but like I guess I would be curious if there's a narrative on point of emphasis for the initial adoption there. What would that look like as you guys build up in Africa?

Hardeep Gulati

That's a great question. And the primary initial adoption of $5 million student commitment is actually coming from our student information system and the Schoology products. So those are our two main products where we are basing the commitment on. We do have upsell opportunity as we expand into the data insights and to the talent products as well.

So those would be future kind of a road map. But typically, when we're entering the market, those are the top products we are entering the market with and then having the rest of the products follow through.

Now we have seen and take example in Middle East, where -- we get examples of customers who are buying multiple products as well. So they're almost buying like 9 to 10 products. So we do have opportunities with these products to pretty much apply, but we initially focus on Schoology.

Brian Peterson

Great. Super clear. And a follow-up just on pricing. And I wanted to look at that maybe in some of your analytics offerings. And obviously, you had some large deals that you referenced in the call today. I'm curious, what is the variability on what some districts can pay for that?

Are you able to kind of address maybe the smaller and then the larger because maybe they would have different needs? Or is that how it works? I just I'd love to understand the balance on a pricing perspective, just given that there may be functionally different needs.

Hardeep Gulati

Yes, this is Hardeep. So when you think about it, there are multiple analytics at that we're talking about, right? You've got the core essential analytics and you have the student suspect analytics that allows you to do in modeling around where the students are, what are the students. We've got talent analytics, we have operational analytics and then even broader connected intelligence to bring other data.

So there are multiple -- each of these products are $5 to $10 kind of price points, right, pursuant to typically, we price it. If you're a large district or state, you're paying the lower end, you're smaller suite, you're paying the higher end. But then as you bundle, you get an option to buy these clouds as well, which allows you to kind of take advantage of that. So we can walk through this a little bit more in our Investor Day, as you guys kind of get a clear picture.

Operator

Our next question comes from the line of Rich Hilliker from Credit Suisse.

Rich Hilliker

I wanted to circle back and talk about new persona specific clouds. Hardeep, I think you touched a little bit on this, but I was wondering if you could more fully flesh out how you think about this really playing into your go-to-market strategy, multiproduct expansion efforts, the way the portfolio looks, feels and how customers maybe buy moving forward would love to understand your trajectory and your view there?

Hardeep Gulati

Yes. That's great question, Rich. So when I think about what we were seeing as people are buying multiple of our products, we're also seeing based in persona that likelihood to be buying multiple products at the same time. So we created these bundles on solutions of Student Cloud on personalized learning cloud for classroom for Student Success Cloud around college readiness and the success of our workforce spending.

So we're creating these bundles that allows us to grow with the persona and give them the full turnkey solution for all their key problems rather than one ala carte kind of a product at a time. And that is based on how we are seeing the deals happening. It helps us kind of create more efficiencies on our side with selling and marketing.

And to Eric's point about services, right? It also creates efficiency in our services to implement these things more together. So that does bring our services cost a little bit lower, right? That's why you receive some of the reflection on the services revenue, but it actually is great for the customer and do great for exploration of our velocity of creating more business in our overall subscription growth.

And that's how we've kind of structured this, and we are already seeing some good results. And even though a development and our hosting and all processes are getting optimized around these cloud rollouts.

Rich Hilliker

Excellent. Okay. That's very helpful. And then maybe just as a follow-up, the learning NAV and content NAV, I think you highlighted how this really helps position you even more strongly for the $100 billion personalized learning opportunity.

I was wondering if you can bring to life how this changes the average customer's path towards this vision, which I think a few years ago felt a little lofty, but now it seems like it's coming into focus. So how does this change the game for customers really striving towards personalized learning?

Hardeep Gulati

It's a great point, Rich. As we've been talking about the unique opportunity we have is because we have the biggest platform, we have the biggest, we have the system of record. We have the system of engagement across these personas.

We also have the system of intelligence with the data. We are in a unique position to provide more personalization and automation through AI to really augment the teacher in achieving this. And we've been working towards this and building all the pieces and now we are actually there and launching with this content recommendation and learning path recommendation using AI, we're actually now able to start working with the districts on creating that.

We're still -- it's one to two years before we kind of pretty much harden these models and AI models to be able to really launch it fully across the North American base. But expect that over the next 2, 3 years, we actually would be in a position where we can fully have a personalized learning platform for our customer base.

Operator

Our next question comes from the line of Gabriela Borges from Goldman Sachs.

Unidentified Analyst

This is Kelly Valenti [ph] on for Gabriela. Congrats on the continued business momentum. So what are customers telling you or kind of the biggest gaps in the PowerSchool portfolio that you guys have yet to address? And can you share how these discussions are informing your organic product road map and maybe M&A priorities?

Hardeep Gulati

Look, as we do -- we've been talking about that, we've got all the mission-critical pieces. The most core companies, if you ask a district, we actually have that in the platform. But we do see continued expansion opportunities on other adjacencies as well as international and tuck-in around technology or for the functionality and we've been doing that, things like communication curriculum.

We do have a road map around further expansion, especially around analytics on unified parent experiences and stuff like that, which payments to be another area of expansion. Those things will both coming through organic plus M&A road map that allow us to continue expanding the platform.

Unidentified Analyst

That makes sense. And then as a follow-up, where is Schoology continuing to gain share? Are you seeing any changes in competition or any noticeable trends with the types of deals you're seeing in the space? My impression, it's a little bit more competitive, and the leading management system, so you have to get some color.

Hardeep Gulati

Yes. I think it's basically, I would call it, us and the canvas of the two strong LMS platforms, and then you've got Google Classroom, which district wants to have a low-end kind of collaboration than they have a Google Classroom.

So we typically see Google Classroom customers as well as 25% market which doesn't use anything to be where we get it. We added about 1.5 million students plus in Schoology this year, and we are -- that's what was happening before pandemic. In pandemic, we did add almost 4 million plus students. But we're kind of back to prepandemic levels of about one million to 1.5 million students. .

Operator

Our next question comes from the line of Karl Keirstead from UBS.

Karl Keirstead

Okay. Great. Maybe two for me. Eric, you pinned the Q1 revenues coming in a little bit light on the delay of a very large deal. Am I elaborating how one-off was that and when you expect the deal to close?

Eric Shander

Yes. So the deal should be closing any time now. It's a rather large deal that Hardeep had mentioned in his prepared remarks. And yes. So it's just -- it's a matter of days away from actually getting closed. Now I will tell you, a lot of times when we have these deals that we're very confident we're going to win, we do a lot -- we'll do to the extent we can, we'll do some upfront work to help kind of accelerate that. But I can tell you the majority of the impact that we're seeing in Q1 will start picking that up in the out quarters when this big bill does sign.

Karl Keirstead

Got it. Okay. And then secondly, Eric, as we try to model our cash flow I do notice in 2022, your EBITDA margins were up about 220 bps year-over-year, but your operating cash flow margins were down 190 bps. So there was a big divergence there. So when we're modeling 2023 operating cash flow, should it be a little bit more correlated to the pace of the EBITDA margin expansion? Or is there something funky in 2023 that you would advise, we keep in mind as we model out cash flow?

Eric Shander

Yes. So I mean, we historically do not provide cash flow guidance, but what I would just say, Karl, if you're looking at operating cash flows, what I would encourage you to look at is look at 2022 dynamics as an indicator for 2023. 2021, obviously, we had a couple items in there that would have been a little bit more favorable.

So I would say look at the dynamics in 2022 as you're kind of going through some of your assumptions. And we're happy to work offline with you in terms of some of your modeling assumptions, if that's helpful as well.

Karl Keirstead

Okay. That's helpful. And congrats on the margin performance this past year.

Operator

Our next question comes from the line of Ryan MacDonald from Needham.

Ryan MacDonald

Congrats on a nice quarter. Hardeep, I wanted to get your sense of the funding dynamics that you're seeing within the core budgets across the states. We're seeing more governors budgets now and state of state addresses talk about, obviously, sustained support for K-12, but we're also seeing sort of an increase in tax cuts that are being proposed as well, which could have an impact on state budgets.

So I'm just curious, as you think about the to 2023 to 2024 school year upcoming and what that budget cycle could look like, how you're feeling about the pipeline and potential opportunities there.

Hardeep Gulati

What we think is still the budget situation to be pretty strong and healthy. As you said, the mostly K-12 budgets are protected from most of the federal and the state level stuff and especially with the additional federal discretionary spend with ESSER that's providing some of the cushion or the concern if anybody has about it if there is any pressure on the tax base budget allocation.

And one of the beauties that what we do is mission-critical, right and typically, it actually helps districts save money. So a lot of time actually, even if the budget gets side, they actually do adopt our solution because that's the only way for them to have a sustained execution.

Ryan MacDonald

Super helpful. Maybe just a quick follow-up on that. One of the main priorities that keeps getting cited at the state level is mental health services within K-12. So I'm curious what impact you think this has on the demand for the Kickboard offering and sort of whether or not you think this may be increased focus heading into '23 here creates a potential inflection point in the adoption cycle of that offering.

Hardeep Gulati

Yes, there is a lot of focus on social and emotional support. And in fact, a lot of that is also what's driving some of the analytics as well because part of the analytics is to understand the whole child, not just the academic achievement but also bringing the CL data.

And we definitely see that as to be focused in our data opportunities and our behavior opportunities as well as upgrading their SIS because that also helps them get a better understanding and communication aspects with the parents and the students.

Operator

Our next question comes from the line of Brett Knoblauch from Cantor Fitzgerald.

Brett Knoblauch

Congrats on the quarter. I guess now that you guys have reached your maybe long-term net debt leverage target as 2023 expected probably to be a bigger free cash flow year. Would you consider using some of that incremental cash to pay down debt given kind of interest expense has gone up a bit? Or is M&A your kind of primary focus there?

Eric Shander

Yes, Brett, it's Eric. I appreciate the question. So absolutely, look, as you heard from Hardeep, we are going to continue to be very opportunistic around M&A. And M&A remains a top priority. So -- we feel that that's a more likely use of the cash versus paying down the debt. We're going to continue to work down the debt in its normal schedule terms, but we feel very optimistic around the M&A opportunities and are still very active in the market.

Brett Knoblauch

Perfect. And maybe just one follow-up. In terms of that large deal like a pushback, did you include that in year-end ARR or no?

Eric Shander

No.

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the conference over to Hardeep Gulati, CEO, for closing comments.

Hardeep Gulati

Thank you. Sorry for running a few minutes late. A lot of great questions. As you can see, we had a phenomenal good fourth quarter, but what's exciting is we have poised for another year of double-digit revenue growth and even further margin expansion. We operate in a market that is really large, growing and durable.

And with our sticky mission-critical products, we are kind of really essential to the school operations. So we really feel excited about our ability to continue to perform. And as a player who -- only player who has the most comprehensive platform, we are really poised to meet the evolving needs of K-12 ecosystem.

I want to thank each one of you for joining on our earnings call as well as our employees and customers for their support. We are excited about all the opportunities ahead of expansion as well, and we'll keep you guys updated as we progress on them throughout the year. Thank you again for your time for joining us today.

Operator

Thank you. The conference of PowerSchool has now concluded. Thank you for your participation. You may now disconnect your lines.