Houghton Mifflin Harcourt Company

Good day and thank you for standing by. Welcome to the HMH first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker today, Senior Vice President of Investor Relations, Brian Shipman. Please go ahead.

Thank you, and good morning, everyone. Before we begin, I would like to point out that the slides referred to on today's call can be found on the Investor Relations section of our website at hmhco.com. A replay of today's call will be available until May 15, 2021. And the webcast will be available on our website for one year. Our 10Q was also filed earlier this morning, along with our first quarter 2021 earnings press release. Before we discuss our results, I encourage you to review the cautionary statement on slide two for our customary disclosures. Further information can be found in our regular SEC filings. In addition, please refer to the appendix in our slide presentation for a reconciliation of our non-GAAP measures to the most directly comparable gap measures, which is also posted to the HMH Investor Relations website. This morning, Jack Lynch, HMH's President and Chief Executive Officer, and Joe Abbott, HMH's Chief Financial Officer, will provide a company update as well as an overview of the company's first quarter 2021 results. After our prepared remarks, we will open the call to questions. During the Q&A, please limit yourself to one question plus one follow-up. You may get back into the queue if you have additional questions. Now, I'll turn the call over to Jack.

Thanks, Brian, and good morning, everyone. Today, I'd like to briefly walk you through the results for our first quarter. Then, in the wake of our divestment of HMH books and media, I would like to devote a good portion of our time this morning to our strategy as a K-12 learning technology peer play and how we believe HMH is uniquely positioned for growth. And then Joe will discuss our financial strategy and cover our financial performance for the quarter. Starting with Q1, the headline is we're off to a very solid start. We delivered billings growth of 11%. We achieved trailing 12 months free cash flow of $72 million, an improvement of $77 million over Q1 2020. We advanced our digital-first connected strategy and achieved 80% growth in annual recurring revenue year over year, as well as 142% net retention for our subscription business in the trailing 12 months. During the quarter, we're also pleased to have strengthened our platform and technology leadership bench with fantastic new appointments. Greg Collins, a software veteran who comes to us from Rapid7 and Intuit, will lead product management and strategy for our ed platform. And Selva Mahimadis has been promoted to Chief Information Security Officer. These enhancements to our leadership team reinforce our commitment to building innovative solutions that deliver successful outcomes for students and teachers in all learning environments. At the end of Q1, we announced a definitive agreement to sell HMH Books and Media to HarperCollins for $349 million. We expect to complete the transaction in the second quarter and we'll use the net proceeds to further pay down our debt. As you'll hear from Joe, we're in an incredibly strong financial position with an enhanced credit profile and balance sheet. Given the materiality of the federal funding of K-12 schools for COVID recovery, I want to spend a few minutes outlining how the funding will impact the market we serve and HMH. First, in total, there is one-time federal stimulus funding for K-12 education of $200 billion, $127 billion of which came in the recently approved American Rescue Plan. This will be spent over three years. For context, annual spending on K-12 education in a normal year is $740 billion. So, equally spread over the next three years, the $200 billion is about $67 billion a year, or 9.1 percent of the total K-12 spend. Allowable uses of federal funds are flexible, open-ended, education technology, health and safety measures, physical improvements, addressing learning loss, and other activities necessary to maintain school operations. At least 25 percent of the American Rescue Plan funds, that's the $127 billion recently approved, must be used to address learning loss and provide opportunities for extended learning, including summer enrichment, as well as before and after school programs. For HMH, our emphasis in supporting schools in COVID recovery will be intervention programs to help educators close the gap created by the most challenging year in education. Importantly, our leading intervention solutions can help students gain up to two years of growth in one year. Here is just one example of a school district making great progress with our intervention solutions during an incredibly challenging year. At Paulding School District, halfway through this year, 25% of students achieved double their expected annual growth in reading. 49% have already met their year-end growth goals. And 31% improved their expected college and career readiness performance levels. We believe we have a great set of intervention solutions to address the extraordinary challenges educators face as a result of the interrupted learning caused by COVID. In the guidance we provided back in February of this year, we considered the impact of the funding that was being proposed and ultimately passed in the American Rescue Plan in March. That's our first quarter results, and Joe will take you through the financials in a bit. But before he does, I want to pivot and share more with you about how we're thinking about our digital-first connected strategy, particularly given the HMH books and media divestiture, which is a transformative transaction for HMH. We're now singularly focused on K-12 learning technology. There are three key messages I'd like you to take away from this strategy discussion. HMH is the learning technology leader in a large growing market. Second, we are highly differentiated from our competitions by our platform, our organizational capabilities, and our purpose-driven culture. Third, we have a clear strategy in place to intercept a growing share of this expanding market. These are the key messages. Now let's get into it. First, we'll start with the market, then show you how we differentiate ourselves in this large market, what is our growth strategy, and what is our financial strategy, beginning with our market. I don't need to remind any of you how massive an opportunity the U.S. K-12 market is. Fifty-four million students in the U.S., 115,000 schools, $740 billion spent in the sector annually. greater than $10 billion spent on instructional materials and student enrollment in K-12 schools is projected to increase by 1.6% from 2016 to 2028. Of the large market for instructional materials, here you can see that digital is growing at a CAGR of 6.6% and in 2020 grew 4% while print declined 13%. Why? Digital saves teachers time. It helps teachers easily assess grade and track student achievement. And finally, it helps to personalize instruction. And within that large growing market, HMH is the largest learning technology company in the sector with a presence in 90% of the schools, 179% growth in our digital platform ed, 250 software engines. over 80% growth in subscription annual recurring revenue, and numerous awards, recognizing our role as an innovator in the K-12 market. But being the learning technology leader is not just about technology. It's creating and implementing programs to improve student achievement. Here are just a few examples of how we bring about customer success. In the Ann Arbor School District, students using System 44 in grades three through eight averaged a significant gain of three points in total fluency on the phonics inventory. In New York State, a four-month study showed that diverse populations of students in grades three through six made statistically significant gains using Lucy Calkins' units of study. In Savannah Chatham, over a three-month period, students read over 75,000 minutes with Amira and have doubled their reading fluency, achieving double the progress of those not using the program. And we have scores of these customer success stories because of the premium we place on evidence-based programs that are proven to work. Finally, one last comment on market attractiveness. Each of the market segments we serve is large, and while we are the largest company in K-12 by far, we have a lot of room to grow with only 10% of the total addressable market. That is exciting potential. The opportunity for growth is exciting, but as you know, there are a lot of companies in the K-12 industry vying for customers. So what sets us apart from our competition? What are our key differentiators? Three things. when taken together, create a highly differentiated company, a platform supporting a comprehensive portfolio, organizational capabilities designed to achieve customer success, and finally, a purpose-driven culture. First differentiator, HMH is the market's most comprehensive solution. Only HMH, provides a full portfolio of integrated solutions purpose-built for the teaching and learning of all students, core, supplemental, intervention, services, and assessment. Most of our competitors provide a piece or two of the puzzle, but not the entire solution. That's okay in the print world, but in digital, it's chaos. with a need to exchange data and a user experience that makes it simple to go from a core to a supplemental solution without feeling like you're driving down a superhighway until you reach a patch of dirt road. Increasingly, as the demand for digital grows, the need for one platform to serve all students will become clear. That's the first differentiator that sets HMH apart from our competition. the only comprehensive one-stop solution. The second differentiator is simply our emphasis on customer success, which in K-12 is all about improving student achievement. For HMH, it's the combination of proven-to-work programs with the teacher training and customer support and learning analytics, all designed to help teachers use our solutions to produce great outcomes. The third major differentiator is our purpose-driven culture. We do work that matters. We have incredibly talented people who are drawn to HMH, not only because of what we say our values are, but because of what we do. We are authentically purpose-driven, and you can see that in the time we volunteer to give back to our communities and schools. You can see that in employee research resource group participation. You can see that in our care for the environment. You can see that in our culturally responsive content. Good people who care about the social impact they have on the education of our nation's children. So to summarize our differentiators, HMH has a comprehensive solution, evidence-based programs centered on customer success, and a purpose-driven culture taken together This is what sets us apart from our competitors in the K-12 market. So how do we execute a strategy to grow our share of the market and thereby increase our social impact, increase the double bottom line? That's our digital-first connected vision, which has three pillars. First, growing our digital-first connected business. Second, deepening customer engagement and increasing customer outcomes And third, optimizing our digital transformation. Let's take these one at a time. Digital first. This is recognition that the value proposition of digital products and platforms is gaining broad acceptance. And you can see that in our numbers. 179% growth in edge usage. 80% growth in ARR. It's important for us to shift our revenue mix to digital, not merely because we need to support growing demand from educators, but because of the tangible benefits in saving teachers time, assessing and monitoring student achievement, and personalizing instruction. Today, 42% of our portfolio is now digital. Part two of Digital First Connected is connected. leveraging our scale to benefit both our customers and our shareholders. For our customers, teachers, they have kids in their class that range across the achievement spectrum and ability. Having one platform to go to with one way to assign work and one way to measure student mastery and one platform through which intervention products exchange data with core products and vice versa, that's what teachers want. less time managing the software and the data, and more time with their students. And for our shareholders, when we use one Salesforce to sell the entire product portfolio, we can cross-sell and up-sell to get a larger share of the $200 per year per student instructional spend. Now, whereas we will see a shift in our mix of print to digital and grow our digital-first connected pillar of our strategy, we're driving a shift in the mix of our non-recurring revenue to recurring revenue as more and more of our customers rent our products versus buy our products in the deepened customer engagement pillar of our strategy. We want more renters, also known as subscribers, giving us less top-line volatility and more valuable recurring SaaS business. To grow in recurring revenue, we deliver great user experiences and great outcomes for our customers and ultimately deepen customer engagement with HMH. That is our second strategic pillar. The third pillar of our strategy is optimizing our digital transformation. Key to that is decreasing our variable cost as we deliver more and more of our product digitally and reducing our fixed costs as we automate our internal operations, becoming even more agile and responsive to the needs of our customers. So that's the strategy. And what's incredibly powerful about it is that we have multiple paths to grow our share within a more than $10 billion market and simultaneously extend the impact we can have on student achievement. With that, I'd like to turn it over to Joe to discuss our financial priorities supporting our strategy, and then he'll run through the numbers for Q1. Joe?