Houghton Mifflin Harcourt Company

Thank you for standing by, and welcome to the HMH third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker 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. Please be advised that today's conference may be recorded. Should you require any further assistance, please press star 0. I would now like to hand the conference over to your host, Vice President of Investor Relations, Chris Semenovsky.

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 November 14, 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 third 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 third quarter 2021 results. Now I'll turn the call over to Jack. Jack?

Thanks, Chris, and good morning, everyone. Thank you for joining today. Our business momentum continues into the third quarter as students return to classrooms and teacher confidence in using education technology to advance student learning is at an all-time high. We're beginning to see the promise of digital learning take hold and the willingness to invest in digital solutions increase, especially as the spending environment for K-12 instructional materials continues to improve. Our results position HMH for a strong finish to the year and set the stage for continued success next year. In the third quarter of 2021, we delivered an impressive 22% year-over-year increase in billings. Our margins continue to expand, helping us achieve $137 million in trailing 12-month free cash flow, a $36 million improvement compared to Q2 of this year. Annual recurring revenue, or ARR, from our expanding subscriber base grew 123% as our digital-first connected strategy continues to deliver impressive results. And the increase in our net retention rate or NRR to 153% was a key driver in our ARR growth, reflecting the depth of our relationships with subscribers and successful cross-selling capabilities and putting us on track to finish 2021 with ARR in a range of 12 to 15% of billings. Furthermore, we remain committed to maintaining an efficient capital structure to closely align with our digital-first connected strategy. In the third quarter, our gross leverage ratio remained low at 1.4 times, significantly better than our near-term goal of two times adjusted EBITDA. Our strong balance sheet, combined with improvements in profitability and the dramatic rise in our free cash flows, further enhances our financial position and ability to invest in growth and efficiency and create shareholder value. As a result of our strong third quarter results and the confidence we have in our digital first connected strategy, we are increasing our full year billings and unlevered free cash flow guidance for the second time this year. And as good as our performance has been this year, We will continue to capitalize on the growth opportunities that lie ahead from cross-selling solutions within our connected business and increasing our share of the $200 per student spend on instructional materials. Billings growth coupled with the operating leverage in our business will generate higher free cash flow in the years to come. Underpinning these growth opportunities is a large and growing market for instructional materials, a market with 54 million students, 4 million teachers, 115,000 schools, and $740 billion in annual spending, with more than $10 billion spent on instructional materials and services. At the same time, we believe there is a shift to digital occurring that was accelerated by the pandemic and driven in part by growing teacher confidence in EdTech. This positions HMH incredibly well, especially given our broad presence in over 90% of K-12 schools. Although schools and school districts are still recovering from the pandemic, we are seeing encouraging signs of recovery in spending. Our solution and strategic advantage can be summed up by the phrase, one platform, all students. HMH possesses two major advantages that are difficult for others to replicate. First, few if any companies can offer teachers all of the resources they need to advance learning for all of their students, wherever those students may be on the achievement spectrum. From core curriculum to supplemental intervention and services, The breadth of our portfolio is extensive, and each solution is steeped in learning science. In fact, learning science is one of the major drivers of the overall efficacy of our solutions. Yet this is only part of our advantage. HMH also alleviates a critical pain point in the industry today. The fragmented nature of the point solutions found in many of today's classrooms are inefficient and require an exhausting level of work by teachers. By contrast, HMH solutions, powered by artificial intelligence and learning science, work in concert with one another on our digital platform. The platform provides educators with easy access to these solutions, as well as insights from our computer adaptive assessment, the growth measure, to make instructional decisions that help each student achieve their goals. Demand for our comprehensive offerings continues to grow because HMH solutions are proven to work. They combine the power of evidence-based resources, learning analytics, services, and world-class user experience. They are supported by our extensive capabilities in lean agile software development, as well as by our skilled team of customer success managers, learning scientists, and nearly 2,300 employees working together in a purpose-driven culture. Our authentically purpose-driven culture is a key competitive differentiator underpinning our success. Building and reinforcing this culture is important because it attracts great talent, drives superior performance, fosters alignment and digital maturity in support of our digital-first connected vision. In our annual Gallup survey of employee engagement, we rank very high among peers, as well as among Gallup's larger universe of companies. This year, we are pleased to rank in the 89th percentile benchmarked against our information services peers for employee engagement overall, and higher in several engagement dimensions that are important to our culture. And we will continue to work with our managers and employees on initiatives to further our success in building a strong culture with high employee engagement and satisfaction. The bottom line is we have incredibly talented people who are drawn to HMH, not only because of our stated values, but because of what we do. We improve student outcomes. We help the communities we serve. And we strive to do these things in an environmentally sustainable fashion. I want to take this opportunity to thank our amazing employees because they have worked incredibly hard over the last few quarters to fulfill our mission, especially during a time of unprecedented change. Thank you for making great contributions every day. HMH has a long history of service to teachers, students, and the communities in which we live and work. In fact, just this week, we launched our 10th annual volunteer week. In the past two years alone, our employees logged over 11,700 hours of community service, positively impacting more than 10,500 students. Our mission to drive positive student outcomes is strongly aligned with the United Nations Sustainable Development Goal 4 for quality education. Our board of directors provides oversight on ESG matters, and the board's diversity exceeds NASDAQ's new listing standards. Furthermore, we believe our education and training programs for employees are best in class, and we surpassed relevant benchmarks on employee engagement according to our most recent Gallup survey. Importantly, HMH also has several company-wide diversity, equity, and inclusion initiatives underway, including several employee resource groups. These are voluntary, employee-led groups whose members join together based on common interests, backgrounds, or demographic factors such as gender, race, or ethnicity. At HMH, our ERGs foster a diverse culture of belonging that is aligned with our mission. And on matters of sustainability, our paper sourcing and usage policy, waste management and recycling programs, and the development of digital learning solutions means we use fewer natural resources and reduce our reliance on transportation to deliver materials which benefits the environment. One of the first things I noticed after joining in 2017 was that HMH employees are deeply committed to advancing student outcomes and to building an equitable, sustainable, and brighter future. I highly encourage these efforts and want us to build on that passion. This enthusiasm for building a better future is a key factor in creating our purpose-driven culture in support of our digital-first connected strategy. As you have heard me say before, there are three key priorities that guide our team's execution. First, grow digital-first connected business. This pillar represents our to digital, which accelerated in the third quarter after being down slightly in the second quarter due to districts restocking print materials as catch-up for students returning to the classroom. Last quarter, we said that we expect to finish the year with connected sales above 50%. I'm pleased to report our connected sales for the trailing 12 months accounted for 51% of our billings, and digital accounted for 41% in the third quarter. Number two, deepen customer engagement, increase outcomes. This pillar illustrates a mixed shift to recurring revenues which again grew rapidly in the third quarter, increased demand for our highly effective learning solutions, and deep customer engagement drove an acceleration in our ARR growth rate to 123% in the third quarter, with a net retention rate of 153%. Number three, optimize our digital transformation. This pillar describes our focus on improving operating margin and free cash flow over time. For the trailing 12 months ended September 30th, 2021, our adjusted variable costs were 31% of billings compared to 34% in the same period last year. And adjusted fixed costs were $446 million compared to $481 million in the same period last year. Number three, optimize our digital transformation. This pillar describes our focus on improving operating margins and free cash flow over time. For the trailing 12 months ended September 30th, 2021, our adjusted variable costs were 31% of billings compared to 34% in the same period last year. And adjusted fixed costs were $446 million compared to $481 million in the same period last year. Let's look at our margin story in a broader context on the next slide. The margin expansion we are now experiencing is largely a result of permanent changes we made to our cost structure in 2019 and 2020 when we restructured to align our cost structure with our digital-first connected strategy. These efforts, along with the divestitures of our non-core businesses, lowered our fixed costs by an incredible 34% since 2016. The other driver is that we have a great deal of operating leverage in the business. We believe that the gross margin on our digital buildings is considerably higher than for our print business, a high rate in line with what you would observe in other ARR SaaS businesses. Thus, growing revenue in billings is going to be a driver of growing EBITDA and free cash flow, respectively. Going forward, as our business shifts to more digital, we expect to see margin uplift in the form of lower variable costs as a percentage of billings and even some opportunity to remove fixed costs that still support the print volume in our business. Last year, We also significantly strengthen our balance sheet by paying down debt with the proceeds from the divestiture of HMH books and media. A stronger balance sheet and higher free cash flow gives us the flexibility to invest in organic and inorganic growth while maintaining a healthy growth leverage ratio. Our digital and business transformation has set the stage for a dramatic increase in our annual recurring revenue. In the third quarter, ARR increased year-over-year by 123% to $120 million, or 11% of trailing 12-month billings. And ARR was $43 million higher than just last quarter. Not to mention that our net retention rate was 153% in the third quarter, well above our stated outlook of more than 100%. The size and growth of ARR positions HMH among the largest and fastest growing digital businesses in the EdTech market. Furthermore, our digital solutions and platform together create tremendous customer loyalty or stickiness. This is because one, HMH digital solutions are continually updated and are based on the latest in learning science. Two, our solutions are highly effective and provide measurable increases in student outcomes. And three, all the resources teachers need are delivered on a platform designed to make life easier for them, allowing them more time with students and providing them with actionable insights that advance the learning of all students, wherever they may be on the achievement spectrum. combined with an engaging and fun learning experience for students, creates enthusiastic and loyal customers. And again, because of the tremendous amount of operating leverage in our business model, we estimate that every dollar of incremental billings flows through to free cash flow at approximately 65% on average. As we grow our business and as billings continue to recover after the pandemic, We anticipate an increase in free cash flow margin as well. On both slides 14 and 15, you can see in more dramatic fashion why we are so excited about the financial performance of our transformed business. Now, before I provide final remarks, I would like to turn the call over to our CFO, Joe Abbott, who will walk you through our third quarter results and full year guidance in more detail.