Q2 2023 PowerSchool Holdings Inc Earnings Call

Participants

Eric R. Shander; President & CFO; PowerSchool Holdings, Inc.

Hardeep Singh Gulati; CEO & Director; PowerSchool Holdings, Inc.

Shane Harrison; SVP of IR; PowerSchool Holdings, Inc.

Brent John Thill; Equity Analyst; Jefferies LLC, Research Division

Brett Anthony Knoblauch; Research Analyst; Cantor Fitzgerald & Co., Research Division

Carolyn Valenti; Research Analyst; Goldman Sachs Group, Inc., Research Division

Claire Phoebe Gerdes; Associate Analyst; UBS Investment Bank, Research Division

Frederick Christian Havemeyer; Senior Analyst; Macquarie Research

Johnathan McCary

Joseph D. Vruwink; Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division

Matthew George Hedberg; Analyst; RBC Capital Markets, Research Division

Natalie Elena Howe; Analyst; BofA Securities, Research Division

Richard Myron Hilliker; Research Analyst; Crédit Suisse AG, Research Division

Saket Kalia; Senior Analyst; Barclays Bank PLC, Research Division

Stephen Hardy Sheldon; Analyst; William Blair & Company L.L.C., Research Division

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the PowerSchool Second Quarter 2023 Earnings Call.
(Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the call over to Shane Harrison, Senior Vice President of Investor Relations. Thank you, sir. Please go ahead.

Shane Harrison

Thank you, operator. Welcome, everyone, to PowerSchool's earnings conference call for the second quarter ended June 30, 2023.
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 Power Schools CEO, Hardeep Gulati; and CFO, Eric Shander. We apologize for the schedule change today, but Hardeep had a scheduling conflict due to him attending an education summit at the White House that overlapped our original timing. As such, Hardeep's portion of these prepared remarks have been recorded, but we expect them to be available for the live Q&A to follow these prepared remarks.
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 to 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.
A replay of this call will also be posted to the same website.
I will now turn the call over to Hardeep.

Hardeep Singh Gulati

Thanks, Shane. Thanks to everyone for joining us for PowerSchool's second quarter earnings call. We had a great second quarter where we increased the adoption of our expanded platform with large districts and states, saw continued strength in our innovative data solutions and drove outstanding financial results.
The second quarter results are summarized on Slide 4, where you will see we delivered another quarter of double-digit ARR growth and net revenue retention rate expansion. Revenue grew 10% year-over-year to $174 million at the top end of our previously communicated guidance.
Adjusted EBITDA grew 26% year-over-year to $61 million, exceeding our previously communicated guidance range and was the continued expansion of our profitability profile coming in at a 35% margin.
Net revenue retention grew another 40 basis points to 109.5% on a record quarterly sales to our existing customers. Given the continued strength and the strong momentum in our business, we are reiterating our commitment to double-digit revenue growth and increasing our margin guidance for the full year. This success is the result of significant momentum we are seeing in many facets of our business, including momentum in bookings, solution innovation and platform and international expansion.
I'll start on Slide 5 with our customer bookings momentum. In our seasonally strongest selling quarter, we saw record results for new and cross-sell our business. We continue to see a trend in winning very large deals, which we define as deals that are over $1 million in combined ARR and nonrecurring revenue. We've booked a record 5 such deals in the second quarter, which brings our year-to-date large deal combined ARR and nonrecurring value of $31 million, which compares to $11 million in value in the first half of last year.
Our pipeline remains strong with a wide array of opportunities that we will continue to work through in the second half. We are excited to announce another new state level contract, a new local win with the State of Montana Office of Public Instruction. Montana selected Unified Insights and Connected Intelligence to supercharge their use of longitudinal data to improve the outcomes of nearly 150,000 public K-12 students.
From an ARR by product perspective, the growth drivers in the quarter were diverse with particular strength in our Student Information Cloud, Student Success Cloud, Educator Recruitment and Workforce Development Cloud. And as with the prior quarter, our data solutions continue to exceed expectations with ARR growth of nearly 100% versus last year, demonstrating the value and the leadership of our differentiated and comprehensive platform of cloud solutions and our unique comprehensive analytics capabilities.
This brings me to the momentum and innovation that we are seeing in the business as summarized on Slide 6. In Q2, we doubled down on innovation, ensuring we are anticipating the needs of our customers, particularly regarding the data analytics and AI. At our recent EDGE User Conference in Orlando, we announced 3 major innovations. First, the expansion of our Connected Intelligence Data as a service platform; second, our new My PowerSchool unified user experience for students and families and third of our expanded generative AI capabilities and road map.
The strong customer demand for effective data analytics is why we develop Connected Intelligence, the industry's first turnkey fully managed data as a service platform for education and government agencies on Snowflake Data Cloud. In June, Snowflake awarded PowerSchool, their 2023 Powered by Snowflake Growth Partner of the Year Award for Connected Intelligence.
Combining Connected Intelligence with our powerful Unified Insight analytics layer, we are supporting districts and states with K-20 longitudinal data systems across power school and any other data sources, providing our customers with limitless capabilities to understand the trends, factors, details and gaps to improve education outcome.
In the second quarter, 7 of the top 10 deals included either Unified Insight or Connected Intelligence, and 4 of these deals included both solutions. Notably, we are very excited to further our partnership with the Los Angeles Unified School District, the second largest school district in the U.S. with nearly 500,000 students. Ranking among 1 of the largest deals for us and most comprehensive deployment of a full analytics capabilities in the country. LAUSD purchased our entire Unified Insights and Connected Intelligence solutions to power whole child view and drive insights across their data sources for use throughout their district needs.
These data products are also supporting broader cross-sell of our other products. As an example, in the second quarter, the Newark Board of Education purchased both Connected Intelligence and Unified Insights MTSS solution along with adding assessment and curriculum planning on top of their existing use of over SIS, eCollect Forms and Unified Insights product.
Additionally, the Dallas Independent School District purchase Unified Insights and MTSS to overlay their existing user PowerSchool SIS, enrollment and special education solutions. These wins showcase our ability to launch timely products organically and inorganically that are differentiated and address critical market needs supported by our access and deep understanding of the challenges and opportunities in our 15,000-plus customers.
We recently published a 2023 education focus report that highlighted many trends in the industry based on a survey of over 1,750 educators. And 1 highlighted finding was that only 2 in 10 educators say that they have the data, they need to evaluate teaching intervention success, which supports the demand we are seeing in their own data products.
At our EDGE Conference, we also announced My PowerSchool, a new, cohesive user experience that consolidates all relevant information and applications into a single streamlined platform that is tailored to a specific user personas. My PowerSchool simplifies how families interact with their children's schools, how teachers interact with the students and families and how core technology leaders manage their PowerSchool solutions by providing a central point of access based on if the user is a student, family member, educator or administrator.
From assignments and grades to attendance and also includes a new payments module, My PowerSchool consolidate all the information families and students need in a single user interface. This will help support additional cross-sell and improve our existing customer experience.
Finally, we are excited about the tremendous opportunity for AI to accelerate our product road map and business model. We are already leveraging AI in several of our existing products, including MTSS and Learning Navigation to deliver personalized intervention and learnings based on individual student needs and learning goals.
At the EDGE event, we demonstrated our latest generative AI functionality that will save educators a significant amount of time in their day to day. First, we have embedded within our Performance Matters Assessment solution an automated generator that creates assessment questions that are aligned to a desired learning objective, grade level, subject and standard, which the teacher can use to deliver more frequent formative assessments at scale.
Second, we previewed 1 of the generative AI capabilities that is coming to Connected Intelligence. A top to data functionality that will help nontechnical users offer solutions get powerful data insights easily. We have been able to accelerate these generative AI roadmaps throughout our recent announced collaboration with Microsoft Azure's OpenAI service and the usage of their OpenAI large language models.
These product innovations are stepping stones towards a very significant opportunity for PowerSchool given our unique position to monetize generative AI in our solutions entrenched with our customer base and opens up a $100 billion personalized TAM.
Moving to Slide 7. We are continually investing to expand our business in highly strategic and capital efficient ways. This expansion includes growing our platform as well as expanding our geographical footprint. As a reminder, in July, we announced a significant advancement in our home communication solutions with the planned acquisition of SchoolMessenger, a leading provider of K-12 communication tool in North America. The unified communications solution further expands our product offerings and has been a top focus for our customers given the need to consolidate fragmented school to family interaction technologies.
The synergies we see with the addition of these communication capabilities span several of our clouds, including within our Student Information Cloud for deep integration of student and class data into My PowerSchool for a centralized experience with richer communication content and automation.
Within our Personalized Learning Cloud for integrated 2-way chat and notification embedded into Schoology and other classroom solutions, and within our Student Success Cloud for improved engagement with families to improve attendance and at-risk interventions.
We are also laser-focused on our continued international growth and momentum. In July, we announced our latest international channel partner, Samart Telcoms, who will help us support expansion in Thailand and the neighboring regions with plans to serve more than 100,000 students in Thailand in next year. This continues our very focused partnership strategy to have strong commitments from our partners in key regions globally. We continue to see growth in our international pipeline.
To summarize, this was a great quarter with record sales and record adjusted EBITDA that beat our guidance. Our pipeline continues to grow supported by several large deals. Our investments in innovation and platform expansion are driving continued demand of our differentiated cloud and analytics solutions, enabling us to consistently deliver long-term durable growth and margin expansion.
Let me now turn the call over to Eric to cover the second quarter financial results.

Eric R. Shander

Thank you, Hardeep. We delivered a great second quarter highlighted by continued execution on our top line growth and margin expansion, driven by consistent strong demand across our product portfolio and strength in our market-leading data and analytics offerings.
As summarized on Slide 8, we delivered second quarter total revenue of $174 million representing a 10% year-over-year increase coming in at the top end of our guidance range we provided in the last earnings call. Subscription and support revenue grew 9% year-over-year to $147 million and accounted for 84% of total revenue in the quarter. Subscription and support revenue from the Puerto Rico Department of Education deal was minimal in the quarter as our teams continue to work diligently to implement our best-in-class [SEL] solution for the entire territory.
As a reminder, subscription revenue may lag ARR in these larger deals given the complex implementation deliverables whereby subscription revenue typically does not start until the solution is delivered to the customer.
Revenue from our Services business totaled $20 million in the quarter, representing 6% growth over the same time period last year. We continue to drive the efficiency and velocity of our implementations, which increases the time to value for our customers.
Revenue from license and other totaled $7 million for the quarter, more than doubling over the prior period year. The main driver was the exciting Connected Intelligence LAUSD deal, which is $14 million in total value over the 3-year contract with approximately $4 million in upfront license fees. As I've mentioned previously, our L&O revenue can fluctuate significantly on a quarterly basis.
We ended the quarter with an annual recurring revenue balance of $636 million, representing a 10% year-over-year increase as we continue to cross-sell successfully, attract new logos and maintain strong retention rates. Our net revenue retention rate came in at 109.5%, up 220 basis points year-over-year and improving 40 basis points versus our first quarter of this year. This is a record net revenue retention performance.
Adjusted gross profit for the quarter came in at $124 million with a 71.4% margin representing a 340-basis point year-over-year improvement, driven by greater operational scale, reduced third-party costs and the flow-through benefit from the exciting LAUSD deal.
Moving to the second quarter operating expenses. Non-GAAP research and development expense came in at $21 million representing 12.1% of revenue compared with 14.1% in the same time period last year. This 200-basis point reduction in adjusted R&D expense as a percentage of revenue reflects the efficiency and improved cost profile of our R&D model, while we continue to invest in game-changing innovation to drive long-term growth, including capitalized R&D expenses, the total invested in R&D was 18% of revenue compared with 21.7% last year, representing a 370-basis point improvement.
Non-GAAP SG&A expense totaled $42 million in the second quarter, representing 24.1% of revenue compared with $37 million or 23.3% of revenue in the second quarter of last year. The increase reflects investments we are making in our sales organization and go-to-market activities that will fuel our future top line growth.
Second quarter adjusted EBITDA exceeded the high end of our guidance range, coming in at $61 million, representing a 35.2% margin, which was 430 basis points better than last year.
Non-GAAP net income in the second quarter was $0.23 per fully diluted share, up $0.01 or 5% from the $0.22 per diluted share we had in the same time period last year.
Second quarter free cash flow which is seasonally a negative cash flow quarter given a significant amount of our renewals happened in the third quarter was negative $44 million compared with negative $28 million in the same time period last year. This is driven primarily by the change in net working capital and higher interest expense versus last year.
Moving to the balance sheet. We ended the quarter with $28 million in cash and equivalents an increase of 84% over the same time period last year. During the quarter, we drew $10 million on our revolver compared with a draw of $40 million in the same time period last year, which reflects our strong and improving cash generation profile. We have since paid off the $10 million revolver draw in July. Our net debt leverage at the end of the quarter was 3.3x compared with 4.8x a year earlier.
As Hardeep mentioned, we're excited about the prospect of adding SchoolMessenger to our platform. We expect the transaction to close in September and will fund the $300 million purchase price with an approximate even split between cash on hand and our existing debt facilities.
Now turning to our third quarter and full year 2023 financial outlook on Slide 9. Given that the acquisition has not yet closed, our guidance today does not include any expected contribution from SchoolMessenger. During our upcoming Investor Day in mid-September, we plan to provide updated guidance for the full year, including SchoolMessenger if the transaction is closed by then.
For the third quarter, we expect total revenue in the range of $178 million to $181 million, consistent with our financial model going into 2023. We expect third quarter adjusted EBITDA to be in the range of $55 million to $57 million, representing a 31.2% margin at the midpoint. This incorporates the return of our in-person market-leading EDGE User Conference as well as the delivery of the scanner component of our Puerto Rico contract, which customarily carries a lower margin profile.
For the full year 2023, we are increasing our guidance for adjusted EBITDA to a range of $226 million to $230 million, representing a 33% margin at the midpoint. Consistent with our stated goal of delivering low double-digit annual revenue growth, we are reiterating our full year 2023 guidance of $688 million to $694 million with the midpoint representing a 10% year-over-year growth rate.
For modeling purposes, we expect full year capital expenditures, including capitalized software of approximately $42 million to $46 million and share-based compensation expense of approximately $65 million to $69 million. Fully diluted shares by the end of the year are expected to be in the range of 203 million to 207 million shares.
As a reminder, we will be hosting our inaugural Investor Day on Thursday, September 14 in New York City. We're excited to share updates on our product road map, go-to-market strategy, international playbook, long-term financial targets and much more.
In summary, this was a fantastic quarter. We are growing the footprint of our platform of software and data solutions across our customer base, as well as demonstrating that this platform will continue to attract new customers and state level deals. We're also committed to driving margins higher as demonstrated by our guidance raise for the full year, which is 200 basis points above full year 2022 and ahead of our initial outlook that we provided in February.
We will continue to execute in the second half on our strategies around innovation, go-to-market and customer success with a focus on growth and profitability.
This concludes our prepared remarks. Operator, will you please open the line for Q&A.

Question and Answer Session

Operator

(Operator Instructions) And the first question comes from the line of Joe Vruwink with Baird.

Joseph D. Vruwink

I guess I wanted to start on the data products. Can you maybe just speak to how the progress here compares to your internal expectations so far? And is the early success actually may be causing a rebalancing of resources or a change in product road maps towards this direction of PowerSchool.
And as a quick follow-up, just from a financial standpoint, does growth in the data products come through at any different margin framework than has been the case for the rest of the Unified platform so far?

Hardeep Singh Gulati

Thanks, Joe. This is Hardeep. Thanks for the question. When you look at from our roadmap, even at the time of IPO, we actually highlighted data product is going to be 1 of our big differentiators in the market because have access to all the different systems and a variety of data. And as we were seeing post-COVID, there's a lot of focus for districts and state to have a better understanding of where the student engagements are, where the learning gaps are, how do you provide the right interventions. And then also, there's a big focus now, which is around not just college part, but even career pathways for the students. So the states are looking for better visibility.
So we have actually been focused on the data products. It is actually beating our expectations in terms of both the Unified Insights as well as our Connected Intelligence product, which is our Data as a Service, platform. One of the key highlights is that we are very unique in the -- being able to provide the Unified Insights, which have the breadth as well as this Data as a Service platform, which is also unique, that's creating the extra demand for us in terms of both from large districts as well as state.
We do expect this to continue because we are seeing the interest in the pipeline to be exceptionally strong. And we are putting a fair amount of resources in our roadmap already to continue. So 1 of the -- as I mentioned at the EDGE conference, we highlighted our investment in now almost a K-20 dashboards through our Connected Intelligence, and that allows even states like Montana and others to be able to really have a better longitudinal view across all the different elements so they can plan better on career pathways for students. So it's a lot of exciting work here.

Eric R. Shander

And Joe, this is Eric. Just to follow up on the question around the margin profile. So as Hardeep mentioned, we are investing and we are reallocating resources to this exciting area. So as with any new products that go out, I mean, the margins are slightly lower than some of our more mature products.
But as that continues to scale and as we continue to see revenue pick up in that area, the margin profile starts to kind of rebalance out. But given the investments we're making in there, the margins are a little bit lower, again, I think the value and the beauty of having a platform is we have other products that are more established that are generating a much higher margin. So in aggregate, we don't see any kind of dilution to the margin profile.

Operator

The next question comes from the line of Brent Thill with Jefferies.

Brent John Thill

Just on the revenue guide for the year, you brought the bottom line up many investors asking what you're seeing in the top line. Why maintain given the strength of some of these large wins that you highlighted. Can you just give us some color in terms of what you're seeing on that side?

Hardeep Singh Gulati

Sure, Brent. I can start and I'll ask Eric to jump in as well. When you look at from what we have always said that we are a low double-digit grower. And that's really strength of our business is that predictable and sustainable growth, but we've also said that we have a huge opportunity here to continue margin expansion. And that's why you see not only our margin coming better, we have increased the guidance as well.
Now you will see some amount of seasonality around the quarters as well as large deals, which create some level of quarter beat. So having the Q1 beat and now Q2 beat definitely gives you an expectation that, hey, why are we not increasing? So we do have a very strong deal -- larger profile for the last 2 quarters, which is definitely creating that beat. We do think there is more upside, but we don't want to get ahead of ourselves.
Again, we want the market to continue to trust our predictable double-digit -- low double-digit guidance, and that's what we're trying to not get ahead. Now we do have an opportunity with the SchoolMessenger, around the Investor Day, we would actually give you the full perspective for the year as well as how we predict the next year to be.

Brent John Thill

Some of the larger wins that you've landed, are those tracking to implementation times that are on time or any delay in those larger deals that I think you've won that may be going a little slower.

Hardeep Singh Gulati

Sure. I can guess and I think I'll let Eric jump in here as well. We are progressing well. In fact, when you look at our implementations for Puerto Rico, we actually almost a go live right now. So that's actually a record time to bring almost 275,000 multi-district whole territory deployment go live. So we are -- those go-lives are actually tracking exceptionally well.
With L.A., we actually did start some of the work with them last year as part of their Whole Child Analytics, which was a small portion. And now they're actually looking at the full entire element of Unified Insights. So we are very much already have laid the foundation. So we do expect that they actually -- in the coming school year, they are going to be able to take advantage of that in a matter of few weeks and months. So most of the large deals are actually tracking very well, and there is no concerns on any go lives or implementation delays. But as you mentioned, there are a little bit of -- couple of months of compared to a weeks for a small district. So there's definitely that revenue -- ARR to revenue aspects, but that's why we are also still committing to the full year guidance.
Eric, do you want to jump in?

Eric R. Shander

Yes. I think you answered it quite well, Hardeep. I think the only thing I would just say in addition to that, Brent, is as I had in my prepared remarks, minimal revenue in the quarter for Puerto Rico in Q2, we obviously as we hand the system over to them here shortly, then the revenue will start kicking in. So you'll start to see more contribution in Q3 and for the rest of the year.
I think the important thing is that we've been really focused on is just continuing to reiterate the full year guidance. There is going to be -- from quarter-to-quarter, there can be some lumpiness in terms of when the revenue kicks in from some of these larger deals. But the important part is, from a full year basis, we're very much on track with the low double-digit growth that we're seeing.

Operator

And the next question comes from the line of Matt Hedberg with RBC Capital Markets.

Matthew George Hedberg

Hardeep, you continue to call out good growth in international markets, good progress on that front. Just sort of curious, how do you think about allocating resources internationally? What sort of -- we know -- we all know it's a huge opportunity, but maybe just kind of walk us through sort of the steps that you're taking beyond some of the initial investments you're making to sort of plant those seeds and also obviously continue to focus on what is a large domestic opportunity here.

Hardeep Singh Gulati

Yes. Great question, Matt. I think I want to reiterate the point I made on a few earnings back about our international strategy. The key element there is it's a huge opportunity. It's almost 7x the size of our U.S. and Canada opportunity, right? So we have a big TAM. There is nobody else internationally who's got the full breadth and depth of the scale to implement and tackle large states, countries and even large private schools who can -- who need these systems. And we are seeing demand really increase after COVID because most of the countries and schools have to deal with the disruption.
We are seeing the demand. But we also wanted to be careful, as you pointed out, that there's a huge opportunity in the U.S. for us, right? We have almost a $3.5 billion plus cross-sell TAM just in our U.S. market. So we don't want to completely lean in and we want to focus on very sustainable growth international.
With that said, we still believe over the next 3 to 5 years, this is going to be a material almost 10% of our overall revenue. The way we are approaching this is with a very concerted effort with the target markets where we are going to have very exclusive, strong partnerships who are going commit to revenue and student growth in those regions. What that allows us to do is rather than our own boots on the ground in each region for every aspect, we're going to have partners who are going to co-invest with us in building those markets and actually growing them as well.
But these are hard commits. They are committing both in terms of dollars as well as in terms of number of students they're going to bring over stuff. And as we have updated over the year, we already have now half a dozen partners with that commitment. And in fact, we -- I mentioned Samart in Thailand. We, in fact, just signed another partner CCS, which is actually in Egypt. Egypt actually has 23 million kids in K-12. And CCS is 1 of the large technology infrastructure provider. And they have also committed almost 0.5 million students over the next 18 months to bring in that region to -- on PowerSchool.
So that's a way for us to be able to invest sustainably and with partnerships to really grow that business. So far, our goal for this year is about having these 12 strategic partnerships in the different regions where we see the highest demand, and we are on track on that.

Matthew George Hedberg

That's great. Eric, can I ask you just a quick follow-up. You had a lot of good things to say in your prepared remarks, but record NRR. I mean, in your slide deck, it continues to move up into the right. I'm sort of curious, where could that go? And does your full year guidance assume that, that kind of continues to tick up or kind of stay consistent with what you've seen, but it's been an impressive trend.

Eric R. Shander

Thanks for the question, Matt. So we were certainly thrilled with it coming in at 109.5%. What I would just encourage everybody to keep in mind is Q3 is our largest renewal season. So 60-plus percent of our book of business is renewed in Q3. So any level of churn that you're going to have is typically going to happen and be more pronounced in Q3.
So from a metric standpoint, I think sequentially, you could see it flat, maybe slightly down for the full year, we believe and expect it to be in the 109-plus percent range. Look, in terms of where it can go, we've got some of the industry-leading renewal rates, really good sticky products. We're seeing a lot of cross-sell momentum. So we are going to be refreshing this for our Investor Day in terms of our outlook there. But suffice to say, I think being in the 110% range and perhaps a little bit beyond that as we go forward in the upcoming years is certainly what we're going to be working towards.

Operator

And the next question comes from the line of Stephen Sheldon with William Blair.

Stephen Hardy Sheldon

I wanted to all ask about kind of how you're thinking about the sequential trend in ARR heading into the third quarter given what you're seeing on the renewal side, maybe you just kind of talked about it a little bit and then the trend in bookings. Should we be kind of expecting the same seasonal pattern? Do you normally see where ARR is pretty flat sequentially? Or could there be any support from bookings that happened so far in 3Q, especially around the EDGE User Conference that was in the third quarter?

Hardeep Singh Gulati

Yes. So I'll let Eric comment around the seasonality in the numbers but you're actually right. Q3 is from a renewals perspective, does create that effect from an ARR. But I think again, we are looking at the full year, we are tracking to double-digit growth on the ARR. And we see a tremendous amount of pipeline and confidence in achieving that.
Eric, I'll let you expand that more.

Eric R. Shander

Yes, sure. So I think, Stephen, as you rightly noted, typically, we'll see -- from Q2 to Q3, we'll see ARR pretty much flat. Although the last couple of years, we've seen a tick up a little bit. As Hardeep mentioned, a really strong pipeline. We see a lot of business momentum in Q3. So I actually would not be surprised if we see ARR tick up in Q3 on a sequential basis. It will be at least flat, if not up from our expectations.

Stephen Hardy Sheldon

Got it. Very helpful. And then a product question. What's kind of the early feedback you've received on the My PowerSchool dashboard for parents. I know it's still really early, but -- has there been any potential improvement in the user experience for them? I know parents have been wanting more visibility into how their kids are progressing, maybe wasn't that easy for them -- for parents to have access to that visibility before. And then also, how quickly do you plan to roll out My PowerSchool for other user types, think about teachers, administrators, et cetera?

Hardeep Singh Gulati

Great question, Stephen. I think you remember from the -- our User Conference, we actually -- when we unveiled, we actually literally had phenomenal excitement from our customer base universally. I think this is pretty much any parent, right, who have got kids in school would appreciate that. Right now, pretty much a majority of the school district, you have to go check your report card or grades in 1 system. Your -- any assignments you might be looking at different systems. You have to go to a different systems for paying, for enrolling the students or forms you have to submit that's a whole different systems, your messaging communication on phone lines and other. It's a very fragmented aspect in -- of experience for a parent, which really frustrates parents and it actually prevents them to engage in their students. And as we have seen that if the parents are more engaged, you clearly have a better student outcomes.
So this has been 1 of the requirements. And now we are in a position given all the broader elements we have in our ecosystem in our platform, especially with the acquisition announcement of SchoolMessenger with the communication as well as our payments new product launch, we are able to really provide that full experience for parents to be have one-stop shop where they're coming in and having that end-to-end experience.
And that is something, which we have universally seen as a requirement from a lot of our customers. Some of the solutions we'll try to tackle that don't really have the depth of attendance or grades or report cards. So they only kind of focus on communication part of it, where we are able to really provide them full end-to-end of all elements of different things that parents need to access in 1 place.
We already have signed up actually almost close to 100-plus customers on some of our beta as well as the early control of ability launch. And our goal is by -- in the next 6 months, we would have actually a lot of them already go live with the full with the -- as we integrate SchoolMessenger after the acquisition is closed, then we would actually be able to really have a more -- a full experience and roll out of that detailed time line when the acquisition is closed, we'll announce that. So stay tuned on that, and you will update you on the more detailed roadmap on it.

Operator

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

Carolyn Valenti

This is Kelly Valenti on for Gabriela. First 1 for me is just any initial comments on the growth or profitability profile of SchoolMessenger? And kind of what is pricing going to look like for customers who want to add that functionality to their existing products?

Hardeep Singh Gulati

So Kelly, I'll let Eric comment on a little bit on the stuff. I don't think we are in a position given that we have not closed to represent anything on the pricing. I just want to reiterate, it's a very strategic acquisition. In fact, it's 1 of the top demand areas we have seen from our customers that they want to hold comms capability integrated into their SIS, the two-way chat integrated into Schoology and have 1 place for a unified communication. So parents don't have to be with all these fragmented.
So it's a very strategic acquisition for us. It's a high demand area our customer perspective. And actually, the -- both the growth and the EBITDA profile for SchoolMessenger is actually very similar to PowerSchool. And we actually -- it's going to be actually both growth and EBITDA accretive.
Eric, do you want to comment a little bit more on the numbers?

Eric R. Shander

Yes. So I think you just hit the last part. What I would just say is I think it's important that not only is the strategic asset, but it does come as a profitable company -- scaled out profitable company. So think of the growth and the profit profile of PowerSchool will be very similar for SchoolMessenger, and it will not be dilutive to our financials.

Carolyn Valenti

All right. Great. And then second one for me. Just around the Microsoft Azure OpenAI announcement, just would be great to get any early feedback from customers and kind of what your longer-term vision is for that partnership?

Hardeep Singh Gulati

Great question, Kelly. So we actually announced just for everybody's benefit at the ST conference, the Microsoft partnership around the OpenAI. And one of the key elements there, as we have announced, and we previewed this at our EDGE Conference, where we are leveraging -- we already have been using AI for the last couple of years in our systems on at-risk interventions predictability as well as in our Learning Navigation around how we create personalized learning pathways.
With the generative AI partnership now, we are actually adding capabilities right into our Performance Matters Assessment. So lesson plans and items could be created through generative AI. So it saves a lot of time for teachers to create those personalized questions and lesson planning. And the second element of that also is we are integrating that into our Data as a Service platform or Connected Intelligence. So we can actually use that to allow even any administrator or even a normal user to be able to more easily get those insights with almost like generative AI kind of questions on the data. So that will make our analytics product even more differentiators.
Where we are really taking this a bit further is our real differentiator around the fact that we are in the heart of the classroom with all day-to-day activities around the homeworks and the lesson plans by actually bringing personalized learning pathways and personalized homework, which we have a very unique opportunity to really allow now generative AI to be leveraged right in the context to support child on their homework. And being able to really have personalized homework, which actually is a game changer in terms of really allowing kids to be able to have learned better right within the context of the classroom.
So they don't -- you're not asking them to spend more time on supplemental and other areas. You are actually making their teacher's life more easier and you're making a student help to write on their day-to-day homework. So that's a very unique opportunity, and we expect again being able to really have a huge market advantage of this by -- as we roll out these systems.

Operator

And the next question comes from the line of Saket Kalia with Barclays.

Saket Kalia

Hardeep, a quick -- maybe a quick question for you here. Associating you're in DC at the moment, I think -- what are you hearing from customers? I guess, on their willingness to spend ESSER funds? And do you see any changes from either the government or school districts or any other sort of constituents as I think we have about another year to sort of earmark some of those funds. Does that make sense?

Hardeep Singh Gulati

Yes. Thanks, Saket. And I appreciate everybody's flexibility with our delayed timing. We have a very exciting work we are doing actually with the Department of Education with Secretary Cardona as well as Homeland Security around the whole focus on cybersecurity. And thanks to first lady and the White House to kind of give a forum for us to share some of the work we have already done to be able to show even additional thing, which we actually are offering now what we call free Security as a Service, which will make it available for all -- not just our customers, but any U.S. school districts or state in supporting training and education, how we really protect them against all the different cybersecurity threats.
I think one of the big advantages we have is there's a lot of legacy systems out there manual touch points. And not only we provide tools on digital transformation by improving those, but we also help districts be more secure in that process of actually managing those transformation. So a lot of exciting opportunity. In fact, we'll be speaking at the conference tomorrow.
Now to your point about the ESSER. What we see is ESSER continues to be one of the sources of funding for school districts. But last time, as we have mentioned that ESSER is not the -- in all, right? There is a lot of opportunity for funding around digital transformation. Typically, the ROI for it, our solution pays for it by itself because you're saving paper cost and manual costs and as well as in terms of just having to deal with trying to do that without automation.
So our systems kind of pay for it by even with the normal funding in terms of actually improving the funding spend. What we do see is, again, ESSER continues to provide that cushion. So when you're looking at some of our large deals as well as a lot of our midsized deals, there would be -- sometimes districts would take advantage of some of the ESSER elements in their buy. But we -- most of the districts would comment to us is that these are systems they will do irrespective of ESSER because these are technology systems. It's unlike content or other areas where they might be leveraging short-term spend around -- related to that.
Now definitely, one of the reasons you're seeing analytics as well is because most of districts want to make their spend much more surgical. So rather than peanut butter spread on making tutoring or content available to address learning gaps, they can have more surgical intervention strategies.
So we are seeing more demand for MTSS and things like that so that their overall ESSER spending is being more effective. Now we do see that to be even still a continued factor because these districts always have these funding. And data and more intervention strategies, which are more surgical, are going to be the norm going forward. So I hope I'll answer that question.

Saket Kalia

That does. That does. That's super helpful, and it sounds like a really interesting and great initiative that you're working on there as well. Eric, maybe for my follow-up for you. Great to see the services line accelerate again as just some of those bigger implementations, I think, get rolling. How do you -- maybe the question is zooming out a little bit, how do you kind of think about services revenue and just non-subscription revenue in general this year. I mean, clearly, the subscription machine is working based on what we've seen with ARR. How do you think about some of the nonsubscription stuff this year?

Eric R. Shander

So it's a great question, Saket. So I -- as we look at the trend for this year, first, the services revenue, I would anticipate the trend line to be very similar to the way it behaved last year. So yes, we will see typically when third quarter peaking in terms of the level of revenue, and then it will trail down in Q4, just given the not as many implementations they're done at the end of the year. And then pick back up in Q1 and then build in Q2, et cetera.
So we expect that trend to continue. The margins in this business will remain in the low 20% range because, again, this revenue is really geared towards enabling our customers to leverage the technology and the training, et cetera, so that they get the most value out of it.
And then I think the license and other, as you all have seen, continues to be the smallest piece of our overall revenue, but it's going to be the most variable piece in terms of onetime items coming in there and partnership agreements. So I think service is pretty consistent. And then the L&O, we'll try and give as much color as we have it as we go into each quarter going forward.

Operator

And our next question comes from the line of Brian Peterson with Raymond James.

Johnathan McCary

This is Johnathan McCary on for Brian. It'll just be 1 from us tonight. So I had a question kind of on M&A. So it's great to hear the SchoolMessenger acquisition. I'm just kind of curious how that could influence your appetite for additional M&A? And then what's the latest on private market valuations?

Hardeep Singh Gulati

So we look at these acquisitions in a way that how one they're -- how they are accretive to our growth and EBITDA profile. How they strategically fit into our portfolio based on where we see the top demand for our customers' needs are, which helps our portfolio to be even more differentiated and comprehensive and also how it actually helps us accelerate growth in the long term.
So when you look at all of our acquisitions, whether they are small tuck-ins like in the curriculum space or behavior space or in terms of career pathways you see that each one of them are addressing some of the key demand areas we are seeing in the market. As I said, messaging was one of the critical elements we see at a mission-critical component for a lot of school districts. So this has been where we actually partner with SchoolMessenger and we saw clearly the demand and the value of having that more in our platform. So that's why we kind of went ahead with the acquisition.
We will continue to remain acquisitive. But at the same time, we're going to make sure that it fits with our -- as I said, our growth profile as well as our strategic rationale. And then at the same time, we are also making sure that our net leverage average continues to improve as well.
So I'll let Eric comment on the second part as well.

Eric R. Shander

Yes. I mean, look, it's -- as you're looking at any of these acquisitions, given the rate -- the interest rates are at, we have to look at the capital structure. We are being very mindful around our overall debt that we have, which is why we funded SchoolMessenger with half of our cash on hand with our existing debt facilities. So we expect to be around 3.5x to 3.6x net levered by the end of the year, and we'll continue to work on that.
But look, as Hardeep said, we're going to continue to look for really good assets out there that makes sense. And then to your last question around the private markets, we are starting to see them come back a little bit more in line with the public company valuation. So we are seeing some of the expectations come down a little bit.

Operator

And the next question comes from the line of Koji Ikeda with Bank of America.

Natalie Elena Howe

This is Natalie Howe on for Koji. A quick 1 from me. I wanted to ask about the Samart Telcoms' partnership. Is the 100,000 students commit? Or is that an opportunity that can be addressed over the next few years?

Hardeep Singh Gulati

Natalie, as I was mentioning a little bit earlier that these are hard commits in terms of over the next 12 months -- 12 to 18 months of these partners. And typically, that allows us to ramp up these regions with schools and stuff. So we already have a presence in -- actually in Thailand with almost a few tens of thousands of students. And now we can actually really grow this to be a little bit with the broader market. So -- but these are good ramp-up ways for us to be able to take that region as well as some of the neighboring countries in that area.

Operator

The next question comes from the line of Claire Gerdes with UBS.

Claire Phoebe Gerdes

Similar to Saket question earlier. So for Eric, you mentioned the trends for non-subscription revenue segments, but is there any updated color you can give us on growth in the subscription segment? I think previously, you'd mentioned a reversion to low double digits in the second half just as those larger deals kick in.
And then also on the license and other line, I know that's a bit hard to model since it varies so much. But I think previously you had mentioned that 3Q would be the peak, but wonder if maybe that's changed based on the $4 million benefit in 2Q from that LA deal.

Eric R. Shander

Yes. Great questions, Claire. So let me just first start with the subs and support. So we still -- as I mentioned, in Q2, we had minimal revenue attributed from Puerto Rico, that will start kicking in into the Q3 and Q4. So we do expect that to be in the low double-digit range. I think the other thing that's important, too, for everybody to is you kind of look at the disaggregation of revenue for subs and support, the most critical piece of that, you're seeing really starting. You look at the SaaS part of that S&S revenue, and that's about 80% of the overall revenue, that's growing 10% to 11%. It's really the maintenance part of the S&S revenue that's growing in the low single digits, which is the lesser strategic component of the S&S revenue. So I think that's also important. So I would just call out, if you're looking at the 10-Q to look at the disaggregation of revenue page, you can kind of see that trend as well.
In terms of the L&O, so we -- I still think that you'll see a pretty decent -- we're not going to give a specific number for L&O for Q3 because it's embedded in the overall revenue number. because it is somewhat variable. And again, the timing of some of these items can be somewhat from 1 quarter to the next. But I think the piece that's important and that was in my prepared remarks is there is, as we modernize the Puerto Rico classroom of the future, right? There is scanner component of that deal with Puerto Rico. And we do expect a good part of that scanner revenue, which will be onetime in nature to come into the Q3.
So the L&O, I still think that's going to be a relatively decent number in the third quarter, and a lot of that is going to be attributed to the revenue coming from the Puerto Rico scanner components. So hopefully, that color is a little helpful in terms of giving you an idea of where we're expecting it to trend.

Operator

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

Brett Anthony Knoblauch

I guess on the acquisition of SchoolMessenger, you guys bought another messaging solution called -- beginning of last year, Kinvolved. Can you just help elaborate on what this acquisition gives you that maybe that acquisition did not give you? Or how should I think about the combined call it communication solution that you now have with these 2 products?

Hardeep Singh Gulati

Sure, Brett. This is Hardeep. I can take that. So when you look at some of the Kinvolved when we acquired -- if you look at that, it's actually more of an attendance intervention and messaging component. What a lot of districts have taken advantage of that is where you're doing a very targeted communication from schools about delinquencies as well as truancy in terms of where the kids are -- may not be attending.
So you will get even like a reminder, this is your kids third attendance miss. And if you miss the next one, the repercussion, right? And so you're able to track individual ways on understanding how to drive better attendance. A lot of the school districts were struggling post pandemic in terms of kids not coming to the school or losing that engagement. And it's 1 of the very strategic areas. We are seeing a tremendous amount of demand even with districts like San Diego, which actually rolled this out, and saw very strong feedback from parents and teachers about the value of such a solution.
When you look at from an overall communication needs, there's also emergency notification, broader messaging from the districts, messaging from schools as well as teacher and student and parent bidirectional 2-way communication as well. What we're trying to bring with Kinvolved attendance messaging intervention, along with SchoolMessenger and our 2-way chat capabilities around alignment with in -- under a 1 unified communication umbrella.
And what that does, it gives a one-stop shop for parents districts, teachers, students to be able to understand all the different elements of communication because right now, you will get phone calls, you will get messaging, you will get some in-app notifications and it's like very chaotic all over the place. And this gives us a unique opportunity to bring the most comprehensive communication system under 1 umbrella and all integrated into their My PowerSchool experience. So they don't have to go anywhere else to get that.

Brett Anthony Knoblauch

Understood. And maybe just as a follow-up. All I guess, the kind of enterprises right now is trying to figure out how they can use AI internally to kind of become more efficient, whether that's in a go-to-market teams or R&D, I just was curious to your view of how schools are thinking about AI and generative AI. Are you seeing a pickup in conversations to rounding AI, especially given your recent announcement with Gen AI and kind of Microsoft Azure's OpenAI capabilities? And what do you expect that to translate into from maybe a pricing power, maybe increased pricing uplift in the future? How should we think about those conversations?

Hardeep Singh Gulati

Brett, this is a very exciting question. And in fact, we'll be planning to share a lot about this in our Analyst Day. But I'll try to give -- try to cover such an exciting topping in a minute. What I'll say is that, look, we are seeing a lot of interest in education actually represent 1 of the biggest opportunities for generative AI. A lot of the school districts actually see a clear need because if they don't adopt it, they're going to be anyway -- they anyway need to rethink their student engagement with these kind of technology because students are going to start using a lot of that.
What we're also seeing is that for us, given we are the system of engagement, and we have the system of intelligence with a great product. We are in a unique position to be the platform for all these school districts and state to leverage these and monetize that effectively. So we have a very exciting opportunity. In fact, we're going to share some of that, how we -- the monetization of the generative AI is going to happen over the next few years for us. But we see this definitely as a game changer.

Operator

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

Frederick Christian Havemeyer

Hardeep, I wanted to ask, as PowerSchool has now gone through the major purchasing cycle. I wanted to really just take a high-level approach and ask, what are the biggest pain points that schools are now looking at here? Can you just help walk me through where in the PowerSchool portfolio in addition to data you're just finding the most traction at this point in time. And then since you're in D.C. and you're with the White House, fantastic to see that, fantastic to see the leadership position you're in. Just what are the conversations there like? And what is the White House focused on right now in terms of education.

Hardeep Singh Gulati

Great, Fred. In fact, I'll share a little bit more about this thing over the next few days as we work through the White House, but I also encourage you guys to look at the EdTech report we put -- education report we put which we launched at our EDGE Conference, which is actually feedback from a lot of our customers.
And I think if you look at some of the key trends I highlighted 1 in the prepared remarks, which was around data. I think a lot of the districts are still kind of flying blind. They have a lot of different systems and a lot of different initiatives. But how do you see the ROI of it? How do you make sure that they're able to get all the data real time and be able to really have the surgical support, so their budgets are more reaching the kids who need the most help. That is a big thing and our MTSS capabilities, our Connected Intelligence, we clearly seeing that, that's leadership is really driving a lot of the growth in the market and because of the unique position and the unique solutions we have in the market on that.
The second area we still see is in terms of the area around -- in terms of the teacher burnout and teacher empowerment. So we're tools around how we are helping with generative AI to make teachers more efficient support them as well as with how they can easily engage through our comms tools with My PowerSchool. So their communication, which is a big drag on teachers time, all that said is improved. That's where you see our announcements of innovation as well as inorganic stuff all around to improve and reduce teacher burnout and improve their empowerment.
The third area is the cybersecurity. This is where the White House is -- there is a lot of legacy system. I shared in our press release today, just PowerSchool alone, we are able to successfully defend over 1 billion-cyber attacks for our districts across our solutions. So imagine, we are about 10% of the market. So the actual number of attacks is probably 10x. And districts and states don't have those kind of resources. And this is where we have a huge opportunity with the digital transformation as well as getting districts to be able to start using more modern cloud solutions and get that safety.
So we have still a lot of upside in terms of the transformation that's ahead of us and White House and private sectors are putting in investments actually to help districts with those modernization as well. So good to see a very concerted effort around those areas.

Operator

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

Richard Myron Hilliker

I wanted to touch on the persona-based cloud bundles. Obviously, it's new this spring, and there was an emphasis at the EDGE User Conference. Wondering if you can give us a sense of how much that contributed to the strong bookings performance, specifically in Q2? I know that was a first half number that you guys disclosed today. And then I was also wondering how you think of that as a lever as you enter into your largest renewal quarter here?

Hardeep Singh Gulati

Yes. Great. Rich, as you mentioned, with our cloud launches, what that does is allow districts to kind of more easily adopt multiple solutions rather than individual products. So we're seeing a tremendous amount of interest actually on the Student Success Cloud, which is around MTSS with behavior and attendance interventions being able to really bring that all together. So we saw a strong demand there.
Our Student Cloud, as we've been sharing this whole year, our Student Information Cloud continues to actually really be strong. So we are seeing a lot of school districts who are sitting legacy. Great example is Jackson and Mississippi bought our entire Student Cloud to really roll out. It's actually the third largest district in Mississippi. So these are -- those clouds we are working.
And then the third area is the Workforce spanning cloud. This includes our whole K-20 view for states to be able to better view and support the career and college pathways. So these are some of the bright spots in our clouds, which we are seeing. We continue to see healthy demand in our Personalized Learning Cloud with LMS and assessments, which continue to be driving million students plus adoption in a year.
So we do expect the -- our clouds are going to really help us in all elements around that in terms of growth and will help us improve the cross-sell. We will share some of that more data at our Analyst Day, so you guys can see how these are coming to fruition.

Operator

There are no further questions at this time. And I would like to turn the floor back over to Hardeep for any closing comments.

Hardeep Singh Gulati

Great. Thank you, operator. We really appreciate everyone joining, and thank you for your flexibility with the change schedule. As we can -- with our remarks, you saw that we are very happy with our first half 2023 performance, and we are also excited about the opportunity ahead of us. And the strength of our business to have a predictable growth and continue to have a better margin profile really gives us confidence to continue to be have a very attractive financial profile.
I think what we're most excited, the strategic deals we are doing shows the leadership we have in the industry. Our innovation will continue to differentiate us even further and our ability to do strategic acquisitions continue to allow us to even further add to our growth with the -- in terms of being able to have a more comprehensive platform. We are very excited to ahead to share more about our broader road map at the Investor Day, I'm looking forward to interacting with all of you there.
So thank you, everyone, for joining, and looking forward to sharing more.

Operator

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.