D2L Inc.
(DTOL-T) C$12.51
PowerSchool Q4/21 Read-Through
Event
PowerSchool reported Q4/F21 results yesterday, after markets closed.
Impact: SLIGHTLY POSITIVE read-through for D2L
Solid finish to end 2021. PowerSchool grew Q4 revenue by 25.8% y/y, resulting in revenue beating consensus by 3.4% and exceeding the high end of guidance. Its EBITDA grew 3.8% y/y, which represented a strong beat of 9.8% above consensus, and was also above the high end of guidance.
Strong and stable spending environment. K-12 still underserved by LMS with flush budgets. PowerSchool estimates half of the North American market is still unserved by a paid LMS, leaving significant opportunity according to management. It also reaffirmed the potential tailwind from U.S. government stimulus that will likely support further growth. Consistent with our view from Instructure's Q4 results, this stimulus could be a catalyst as activities are approved by 2024. Despite the stimulus, management feels that the LMS has become essential to school districts' operations. They do not see churn rising post-stimulus due to the essential nature of the LMS. LMS expenses are part of the core budget and stimulus is believed to be used to help with initial implementation costs. We see these elements supporting continued investment in EdTech infrastructure, despite significant macro uncertainty - a positive read-through for D2L.
Outlook. PowerSchool's 2022 guidance came in slightly ahead of consensus with revenue guidance of $623mm and Adj. EBITDA guidance of $182mm at the midpoint, implying 11.5% and 12.9% y/y growth (mostly organic), respectively. They also expect EBITDA margin to expand to 29.2% at the midpoint, up from 28.9% in 2021. Recall that PowerSchool generates more than 3x the revenue of D2L. We believe PowerSchool's ability to maintain a rule of 40 performance is a positive read-through for the potential financial profile for D2L as it scales. PowerSchool expects much of its growth to come from cross-selling its platform of over 18 products into its well- established customer base, which PowerSchool claims to represent over 70% of the K-12 population in the U.S. and Canada. Although D2L may not have as broad a platform as PowerSchool, it does demonstrate the industry's willingness to grow wallet share with technology partners