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K-12 EdTech Provider PowerSchool Files SEC Paperwork for Initial Public Offering

Hot on the heels of Coursera’s successful IPO last week, which saw the company jump to a $5.9 billion market cap, and confirming February rumors, K-12 EdTech solutions provider PowerSchool filed an S-1 prospectus late yesterday with the SEC for its IPO. Like Coursera, PowerSchool is filing as an “emerging growth company”, which reduces the amount of disclosure required to investors. From the S-1:

As a pioneer and the leading provider of cloud-based software to theK-12 education market, we provide a Unified Platform that includes the core system of record used by districts and schools and leverage their rich data to deliver insights and analytics to improve education outcomes. We serve more than 12,000 customers, including 93 of the 100 top districts by student enrollment in the United States, have 30 state-, province-, or territory-wide contracts in North America, and sell solutions in over 90 countries globally. Our software is embedded in school workflows and is used on a daily basis by educators, students, administrators and parents in schools and districts representing over 45 million students globally, over 70% of all K-12 students in the U.S. and Canada. Our cloud-based technology platform helps schools and districts efficiently manage state reporting and related compliance, special education, finance, HR, talent, registration, attendance, funding, learning, instruction, grading, college and career readiness, assessments and analytics in one place. Through our Unified Platform approach, we help our customers streamline operations, aggregate disparate data sets, and develop insights using predictive modelling and machine learning. Our ability to transform information into actionable insights improves the efficiency of school operations, the quality of instruction delivered by teachers, and the pace of student growth, which we believe should have a profound effect on K-12 educational outcomes.

We now have a much better view of PowerSchool’s financial position.

For the year ended December 31, 2019, we generated total revenues of $365.0 million (of which 84.4% are recurring), net loss of $90.7 million, gross profit of $195.0 million, adjusted gross profit of $231.0 million (63.3% margin) and adjusted EBITDA of $92.9 million. For the year ended December 31, 2020, we generated total revenues of $434.9 million (of which 85.3% are recurring), net loss of $46.7 million, gross profit of $243.1 million, adjusted gross profit of $286.5 million (65.9% margin), and adjusted EBITDA of $135.6 million.

This deal is a little complex, based not only on the emerging growth company status but also the resultant usage of LLC partnership ownership. PowerSchool’s ownership currently is through two private equity firms – Vista Equity Partners and Onex Partners. Subsequent to the public offering, PowerSchool will own shares in Severin Holdings (with related entities Severin Topco and Holdings, LLC).

Our corporate structure following the offering, as described above, is referred to as an“Up-C” structure, which is commonly used by partnerships and limited liability companies when they undertake an initial public offering of their business. Our Up-C structure, together with the Tax Receivable Agreement, will allow the existing owners of Holdings LLC to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “pass-through” entity, for income tax purposes following the offering. One of these benefits is that future taxable income of the Holdings LLC that is allocated to such owners will be taxed on a flow-through basis and therefore will not be subject to corporate taxes at the entity level. Additionally, because the LLC Units that the existing owners will continue to hold are exchangeable for shares of our Class A common stock or, at our option, for cash, the Up-C structure also provides the existing owners of Holdings LLC potential liquidity that holders of non-publicly traded limited liability companies are not typically afforded. See “Organizational Structure” and “Description of Capital Stock.”

There’s more to unpack here – good luck figuring out that ownership structure. In the meantime, I’m copying a portion of this February post that had been triggered by Bloomberg’s leak of the potential IPO.

Previous Coverage of PowerSchool and Schoology

Readers of this blog will remember that PowerSchool acquired LMS provider Schoology in late 2019. The K-12 space favors consolidation much more than Higher Ed, and PowerSchool is the largest player. For background reading:

LISTedTECH view of combined SIS and LMS users in K-12 markets
  • LMS Market Acceleration: An initial view in North America, September 2020 – I looked at 2020 data to see how the pandemic is driving accelerated K-12 LMS market activity, with this view of New Implementations (graphic updated end of 2020 from the one in the original post, showing the rapid acceleration of Schoology adoption):

Increased Valuation

Coming back to Bloomberg’s coverage of the planned IPO, we can see the financial expectations’ growth due to this consolidation and rapid adoption in K-12 during the pandemic.

Vista Equity agreed to acquire PowerSchool for $350 million in 2015 from Pearson Plc, after the education giant announced a carve-out plan earlier that year, a statement showed.

The company provides applications that power classrooms serving 45 million students in over 80 countries, according to its website.

A potential $6 billion-plus valuation would be twice the $3 billion it was worth in 2018 when Onex acquired a stake, the people said.