Houghton Mifflin Harcourt Company

Good day, and thank you for standing by. Welcome to the HMH second quarter 2021 earnings 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'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today. Chris Semenovsky, Vice President of Investor Relations, please go ahead.

Thank you, and good morning, everyone. Before we begin, please note that slides referred to on today's call can be found in the Investor Relations section of our website at hmhco.com. A telephone replay of today's call will be available until August 15, 2021, and the webcast will be available on our website for one year. The company's 10Q was filed with the SEC earlier this morning, along with its second quarter 2021 earnings press release. HMH encourages you to review the cautionary statements on slide two of today's presentation. Additional information regarding these and other risk factors can be found in the risk factor section and elsewhere in the company's quarterly and annual filings with the SEC. Furthermore, please refer to today's press release and the appendix of our slide presentation for a reconciliation of our non-GAAP measures to the most directly comparable GAAP measures. This morning, HMH President and Chief Executive Officer Jack Lynch and HMH Chief Financial Officer Joe Abbott will provide an overview of the company's second quarter 2021 results. Now, I'll turn the call over to Jack. Jack?

Thanks, Chris. Good morning, everyone, and thanks for joining the call today. HMH delivered another strong quarter while executing our strategy in a market where demand for teaching and learning solutions is growing. The spending environment is improving, and educators are planning for students to return to classrooms this fall. We are pleased that our Q2 performance is positioning us for a strong 2021. We delivered billings growth of 25%. Our margins continue to expand, helping us achieve $101 million in trailing 12-month free cash flow, a 40% improvement compared to Q1 of this year. Annual recurring revenue, or ARR, from our expanding subscriber base grew 106% as our digital-first connected strategy continues to deliver transformational results. The increase in our net revenue retention rate or NRR to 154% was a key driver in our ARR growth, reflecting the strength of the relationships we are forging with our subscribers and putting us on track to finish 2021 with ARR in a range of 10 to 15% of our total billings. As you read about in our frequent updates last quarter, we continue to make excellent progress in transforming our capital structure to align with our digital-first connected strategy. Notably, we use the net proceeds from our completed divestiture of HMH Books and Media to pay down $337 million in debt, further enhancing our financial position and ability to invest in growth and efficiency and create shareholder value. In addition, our credit ratings were recently upgraded by both Moody's and Fitch, not only because of the debt pay down, but also due to the strong improvement in our profitability and cash flow. The momentum we have in executing our digital-first connected strategy, combined with strong billings growth year-to-date, and the overall strength of our pipeline, gives us the confidence to raise our billings and unlevered free cash flow guidance for the year. Joe will walk you through this in more detail shortly. I want to spend a few minutes discussing what we've seen over the past few months in the K-12 spending environment. As educators plan on returning students to classrooms this fall and school funding begins to stabilize, we're continuing to see growth and demand for teaching and learning solutions. including intervention solutions that address achievement gaps created by interrupted learning last year, arguably the most challenging year in education. Back-to-school purchasing this year also includes some catch-up print purchasing. This is not a surprise. Print was not a very useful medium in a remote learning setting. But as districts are now planning for a resumption of in-person learning this fall, they are restocking some of their print resources. One of HMH's key advantages is that we offer our products in digital and print form, in contrast to many of our competitors, who typically focus on one medium or the other. In terms of state and local funding, we saw continued signs of stabilization in Q2, though not uniformly. There are many districts that are receiving stimulus funds and are beginning to use those funds for instructional materials. Conversely, we saw other districts where budgets have not fully recovered or their stimulus money has not been received. And this is still driving a more conservative level of instructional material purchase planning for the 2021-22 school year, which began last month in July. On a federal level, the outlook remains promising, but the timing of the impact continues to be uncertain. Factors influencing that include the flexibility in uses of funds, such as the ability of districts to use stimulus dollars to fund prior COVID-19 expenditures. There is also a great deal of flexibility in timing, with some stimulus funds available to be committed into 2024. Looking ahead, it's been encouraging to see the continued emphasis on K-12 funding at the federal level. Now, just a few reminders on why we are incredibly excited about the momentum we are achieving today and the growth opportunity that lies ahead in our future. First, HMH operates in an extremely large and growing market with 54 million students, 115,000 schools, and $740 billion and annual spending, with more than $10 billion spent on instructional materials and services. Within this market, HMH is the only company that provides a full portfolio of integrated solutions, purpose-built for the teaching and learning of all students. And competitively, that integrated solution is the most comprehensive in the industry, alleviating a major pain point in the industry today which is the fragmented nature of the point solutions found in many of today's classrooms that require an exhausting level of work by a teacher to extract insight and improve student outcomes. Demand for this comprehensive solution continues to grow because our solutions are proven to work. They combine the power of evidence-based resources, learning analytics, services, and a great user experience. How well do they work? Here's a great example. In Newport News, Virginia, at the end of the 2021 school year, more than 11,000 of their students in grades three through nine used HMH reading inventory, System 44, or Math 180 to address COVID learning challenges during the 2020-21 school year. This resulted in 61% of them achieving gains in their Lexile reading level, 21% achieving double their expected annual growth in reading performance, and more than 120 learners growing between one and four grade levels. Underpinning our success with advancing student outcomes has been an authentically purpose-driven culture, an important differentiator for HMH, Our incredible team continues to find innovative ways to bring learning to students and teachers and to support the communities in which we live and work. Before I turn it over to Joe for a financial review, I'd like to tell you about the increasing confidence educators have in digital solutions and the progress we made this quarter on the three pillars of our Digital First Connected strategy. As a result of our approach, we fully expect our billings mix to continue to shift to digital, especially as confidence in digital solutions continues to grow. The result of HMH's just released 2021 Educator Confidence Report highlighted this point. Seventy-five percent of educators surveyed believe technology solutions that connect instruction and assessment on one platform will transform teaching and learning in the future. From the use of assessments to growing confidence in edtech, trust in digital solutions is on the rise. Seventy-seven percent of teachers surveyed believe technology will help them be better teachers, and 82 percent believe adaptive learning will further transform teaching and learning. Furthermore, districts across the nation remain highly committed to maintaining the one-to-one investments they made to support students through the pandemic, and they're implementing lessons learned about using digital to automate teacher workflows, better track student learning, and personalize learning inside and outside of the classroom. As for our Digital First Connected strategy, remember there are three key priorities that guide our team's execution. growing our digital-first connected business, two, deepening customer engagement and increasing customer outcomes, and three, optimizing our digital transformation. So starting with our digital-first connected business, this is our unique value proposition as the breadth of our portfolio allows us to connect our core solutions with supplemental intervention and professional services to allow teachers to support the needs of all students across the achievement spectrum, regardless of their academic ability, on one engaging and highly effective platform. We continue to see growth in our digital and connected solutions, with our connected sales for the trailing 12 months accounting for 49% of our billings and digital accounting for 40% Our digital billings percent is slightly down, which is directly tied to the catch-up in print purchasing I mentioned earlier on this call. As students return to in-person learning towards the end of the school year and districts restock print materials. As Joe will discuss later, Heinemann's strong rebound this year also contributed. These solutions are predominantly analog in nature. Heinemann's rebound also explains the slight decline in the percentage of our total sales that were connected, we still expect to finish the year with connected sales above 50 percent. Number two, deepen customer engagement and increase outcomes. Usage of our unique proprietary platform, HMH-Ed, continues to grow rapidly with 93 percent growth in trailing 12-month student assignments compared to the same point last year. While the rate of growth is impressive, it did slow a bit in the quarter because in the second quarter of 2020, the entire nation transitioned to a remote learning environment. At that time, the principal way for students and teachers to get their work done was on a digital platform. Towards the end of this school year, we saw many schools returning to in-person learning, which slowed usage a bit relative to earlier in the school year. Importantly, we are seeing increased demand for our highly effective learning solutions while we continue to deepen customer engagement. And this drove an acceleration in our ARR growth rate to 106% in the second quarter, with a net retention rate on our SaaS business of 154%. Our third pillar, optimizing our digital transformation, we continue to make progress decreasing our variable costs as we deliver more and more of our products digitally. For the trailing 12 months, our adjusted variable costs were 32% of billings. Now I'd like to hand it over to Joe.