PowerSchool Aims For U.S. IPO

Summary

• PowerSchool has filed to raise $100 million in an IPO, although the figure may be as high as $750 million.
• The firm provides an integrate suite of administrative software functionality to K-12 schools worldwide.
• PWSC has grown top line revenue quickly during the COVID-19 pandemic, but that growth rate may be temporary due to the pandemic.
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Quick Take

PowerSchool Holdings (NYSE:PWSC) has filed to raise $100 million in an IPO of its Class A common stock, according to an S-1 registration statement.

The firm provides an integrated suite of administration software to K-12 schools worldwide.

PWSC has grown quickly in part due to the COVID-19 pandemic and future growth may not remain as high.

I’ll provide an update when we learn more about the IPO from management.

Company & Technology

Folsom, California-based PowerSchool was founded to create a unified platform of software technology spanning all administrative functions for K-12 school use cases.

Management is headed by Chief Executive Officer Hardeep Gulati, who has been with the firm since August 2015 and was previously general manager of SumTotal Systems, a talent management system.

Below is a brief overview video of PowerSchool:

(Source)

The company’s primary software module offerings include:

• Administrative

• Classroom

• Talent

• Communications

• Home

• Portals

• Absence management

• Finance | HR | Payroll

• Insights & analytics

• Predictive early warning

PowerSchool has received at least $1.86 billion in equity investment from investors including Vista Funds and Onex Funds.

Customer Acquisition

The firm pursues new school clients via direct sales and marketing efforts in its core geographic areas as well as through resellers in other areas.

PWSC also licenses APIs to vendor partners for them to create 'plug-ins' to enable data flows and embedded capabilities within their software offerings.

As of December 31, 2020, the company claimed over 12,000 customers worldwide.

Management intends to continue to selectively acquire companies that are complementary to its existing capabilities. It has acquired 12 businesses since 2015.

Selling, G&A expenses as a percentage of total revenue have dropped as revenues have increased, as the figures below indicate:

Selling, G&A	Expenses vs. Revenue
Period	Percentage
2020	21.3%
2019	23.8%

Click to enlarge

(Source)

The Selling, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, was 0.8x in the most recent reporting period. (Source)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth trajectory.

PWSC’s most recent calculation was 24% as of December 31, 2020, so the firm needs some improvement per the table below:

Rule of 40	Calculation
Recent Rev. Growth %	19%
EBITDA %	5%
Total	24%

Click to enlarge

(Source)

Average Revenue per Customer/User was $36,241 in 2020. (Source)

Management has disclosed a net revenue retention rate of 108% for the calendar year 2020. A rate of over 100% indicates that the firm is generating additional revenue from the same customer cohort and shows good product/market fit and efficient sales & marketing efforts.

Market & Competition

According to a 2020 market research report by Apps Run The World, the top 10 K-12 software vendors represented 37.5% of the global K12 applications system delivery in 2019.

This represented a 4.5% growth over the previous year, to almost $3.7 billion in total revenue.

The report forecasts the K12 applications market will reach $4.8 billion by 2024, a CAGR of 5.2% from 2019 to 2024.

Also, the COVID-19 pandemic increased the need and usage for cloud-based systems that can operate whether a school employee is at the office or remote.

Major competitive or other industry participants include:

• Microsoft (MSFT)

• Blackboard

• Blackbaud (BLKB)

• Follett School Solutions

• Oracle (ORCL)

• SAP (SAP)

• Frontline Education

• Capita Software

• Instructure (INST)

• Tyler Technologies (TYL)

• Others

Financial Performance

PowerSchool’s recent financial results can be summarized as follows:

• Increasing topline revenue

• Growing gross profit and gross margin

• A swing to operating profit

• Reduced net loss

• Increased cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
2020	$ 434,888,000	19.2%
2019	$ 364,991,000
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
2020	$ 243,086,000	24.7%
2019	$ 195,005,000
Gross Margin
Period	Gross Margin
2020	55.90%
2019	53.43%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
2020	$ 22,463,000	5.2%
2019	$ (7,909,000)	-2.2%
Net Income (Loss)
Period	Net Income (Loss)
2020	$ (46,648,000)
2019	$ (90,729,000)
Cash Flow From Operations
Period	Cash Flow From Operations
2020	$ 89,489,000
2019	$ 54,321,000
(Glossary Of Terms)

Click to enlarge

(Source)

As of December 31, 2020, PowerSchool had $52.7 million in cash and $1.5 billion in total liabilities.

Free cash flow during the twelve months ended December 31, 2020, was $86.8 million.

IPO Details

PowerSchool intends to raise $100 million in gross proceeds from an IPO of its Class A common stock, although the final figure will likely be as high as $750 million.

Class A common stockholders will be entitled to one vote per share as do the Class B shareholders, however, Class B shareholders will not be entitled to dividends or distributions upon the liquidation or winding up of the company.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Management says it will use the net proceeds from the IPO as follows:

[i] repay in full $320.0 million aggregate principal amount of outstanding indebtedness under our Bridge Loan facility;

[ii] repay in full [an as-yet undetermined amount of] outstanding indebtedness under our Second Lien Term Loan;

[iii] repay [an as-yet undetermined amount of] outstanding indebtedness drawn under our Revolving Credit Agreement;

[iv] repay [an as-yet undetermined amount of] outstanding indebtedness under our First Lien Term Loan;

[v] fund $1.0 million of philanthropic initiatives benefiting K-12 educators in North America; and

[vi pay expenses incurred in connection with this offering and the other Organizational Transactions. (Source)

Management’s presentation of the company roadshow is not available.

Listed bookrunners of the IPO are Goldman Sachs, Barclays, Credit Suisse, UBS Investment Bank, BofA Securities, Jefferies, Macquarie Capital, RBC Capital Markets, Baird, Piper Sandler, Raymond James, and William Blair.

Commentary

PowerSchool is seeking to go public to pay down its substantial debt load, likely as a result of its private equity owners paying themselves a hefty dividend and loading the company upon debt to do so.

The firm’s financials show strong topline revenue growth and gross profit growth, a swing to operating profit, and increasing cash flow from operations.

Free cash flow for 2020 was an impressive $86.8 million.

Selling, G&A expenses as a percentage of total revenue have dropped as revenues have increased; its Selling, G&A efficiency rate was 0.8x

The company’s net revenue retention rate was a respectable 108%, which indicates negative subscriber churn in dollar terms and good product/market fit and sales & marketing execution.

The market opportunity for providing administrative software of record to K-12 schools is reasonably large and expected to grow at a mid-single-digit rate of growth for the medium term.

Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 38.8% since their IPO. This is a mid-tier performance for all major underwriters during the period.

The primary risk to the company’s outlook is the waning of the COVID-19 pandemic and a potential reduction in the firm’s revenue growth rate as buying patterns return to its expected long-term trend line of around 5%.

So, the firm’s recent growth rate of 19.2% in 2020 may be a high watermark in topline revenue growth.

Valuation at IPO will be critical; I’ll provide a final opinion when we learn further IPO details from management.

Expected IPO Pricing Date: To be announced.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.