Houghton Mifflin Harcourt Company
Q4 2020 Earnings Call Transcript

Published: 27 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Houghton Mifflin Harcourt Fourth Quarter and Full Year 2020 Earnings Conference Call. I would now like to introduce your host for today’s conference call, Mr. Brian Shipman. You may begin.

[Brian Shipman:]

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 March 7, 2021 and the webcast will be available on our website for 1 year. Our 10-K was also filed earlier this morning, along with our fourth quarter and full year 2020 earnings press release.

[John Lynch:]

Thanks, Brian. Good morning, everyone. Thanks for joining the call today. 2020 was an incredibly challenging year for our nation’s schools and the companies that serve them. But throughout the year, HMH stayed relentlessly focused on executing our digital first strategy, connecting teachers and students in every learning environment, remote and otherwise, and I couldn’t be prouder of our team for their innovation, their commitment and their resilience. Together, we built the foundation for growth momentum in 2021 in Digital sales, recurring subscription revenue and profitability, transforming our business and keeping our customers’ needs front and center. The pandemic pulled the future forward, accelerating demand for HMH’s Digital and Connected solutions. Over the last 10 months, we saw thousands of schools embracing our Digital products and platform. And you see this acceleration in our numbers

[Joe Abbott:]

Thanks, Jack and good morning, everyone. Our total company billings were $1.089 billion. And as we’ve shared throughout the year, the COVID-19 pandemic and leaner adoption opportunities impacted the education market in 2020, while the markets for our Books & Media offerings were areas of relative strength. In our Education segment, we generated billings of $898 million, down 36% from 2019. Core Solutions billings were down 40%, to $453 million, due to the smaller new adoption opportunity in Texas English Language Arts, along with the impacts on customer spending due to the pandemic. Extension billings were down 32%, to $445 million, driven by declines in our Heinemann products as well as reduced face-to-face delivery of Professional Services. Both of these categories were impacted by reduced customer demand due to the pandemic, and billings for Heinemann products also suffered a difficult comparison to strong performance in the large 2019 Texas English Language Arts adoption. Declines in Extensions were offset by strong performance of certain supplemental intervention products, which contributed most of the 142% growth in SaaS billings in 2020.

[John Lynch:]

Thanks, Joe. Before we turn to Q&A, I want to close by again thanking our entire HMH team for their incredible work in 2020. Their actions and focus enabled us to create exceptional value for our customers during a uniquely challenging environment, while executing our strategy. We achieved revised billings guidance and positive free cash flow, grew our adjusted EBITDA margins and strengthened our financial position, all important achievements that set us up for growth in 2021 and beyond. Looking ahead, we are intensely focused on the profitable growth of our Digital First, Connected business through the strategic plan I outlined before, bringing about a mix shift to Digital, generating more recurring revenue and improving our gross margins. Importantly, these are all the outputs of our accelerated move to Digital and Connected as our customers embrace HMH’s Digital products and platform now more than ever. We are confident that we have dramatically improved HMH’s overall profitability today and into the future as we continue to capture the benefits of our digital transformation. And that’s reflected in the positive free cash flow we generated in 2020 and a healthy free cash flow we anticipate in 2021. In summary, in 2020, we transformed our business while keeping our customers’ needs front and center as a trusted partner in education. Together, we at HMH became a stronger company, better positioned to deliver value to our stakeholders. Thank you. And with that, let’s get to your questions.

[Operator:]

Our first question or comment comes from the line of George Tong from Goldman Sachs. Your line is open.

[George Tong:]

Hi, thanks. Good morning. As we head into 2021, can you provide an update on the California and Florida adoption cycles and how Houghton Mifflin is positioned in those cycles?

[John Lynch:]

Yes. Thank you, George. Let me take Florida and then second, I will talk about California and then the other adoptions taking place right now. The first thing to know is that in Florida there are three elements to the Florida adoption. There is a literature element that is 6-12, grades 6-12. There is a reading element that is kindergarten through fifth grade. And then and this is kind of unique to Florida, there is an intervention element to this adoption as well. So, while the adoption is not complete, we are about two-thirds of the way through the adoption. And as it relates to the 6-12 literature adoption, we are performing in line with our expectations in those grades and seeing very strong win rates in the market that has decided. And so as I said, I think we will continue to perform in line with our expectations. However, we are seeing underperformance in the elementary market due to dynamics that we believe are specific to Florida adoption, including some challenges that educators have had evaluating HMH’s program online which are more acute in a COVID environment than they would be otherwise. We’ve addressed these challenges, and it will not impact other markets. Finally, we are overperforming in the intervention opportunity in Florida, a large number of wins. And this is a part of the overall adoption opportunity, as I indicated previously. Intervention right now is especially important in K-12, given the learning loss issues that are related to COVID. So we’re seeing significant funding being allocated by key districts to intervention in this particular adoption in Florida. And we are winning because HMH intervention programs have been proven effective by hundreds of the independent research studies, including thousands of students over the last 20 years. And in fact, the U.S. Department of Education found that our READ 180 intervention program is the only intervention program out of 10 evaluated to have positive effects for adolescent students’ reading achievement. So we are very excited about our success there. And obviously, because of the gravity of learning loss, we’re very excited about what that translates into across the country as more and more teachers are now becoming intervention teachers and more and more students, even students who historically have been on grade level, are now requiring intervention. And if you look at the overall stimulus package of $1.9 trillion, about $200 million to K-12 education, including the previous CARES Act funding, about $30 billion of that funding is allocated to learning loss. So we feel like we have a great solution that’s winning in the marketplace and has won in Florida. As it relates to California, we are seeing continued decision-making. 2020 was impacted by COVID. So it looks like this 3-year adoption will be a 4-year adoption. Some of the delays that we saw in Year 2 should be showing up in 2021, but all this is – our performance in Florida, our performance in California are obviously factored into our guidance for this year. And then the other thing I would say is that there are other adoptions taking place where we are performing incredibly well. Alabama Math, doing very well there; Virginia ELA, very well there; West Virginia, same; Oklahoma, same, so all in all we feel good about our progress thus far this year.

[George Tong:]

Got it. Very helpful. And then on the potential sale of the media business, can you talk a little bit about the process internally, the restructuring process, how that’s coming along?

[A –John Lynch:]

Yes. Two parts to that question, George, the first being the exploration, the HMH Books & Media business and that exploration is ongoing. And as soon as we have news there, we will obviously report what that news is from that exploration. And then secondly, in terms of the restructuring that we did, we had a major cost reduction action back in October and a lot of the performance that we are guiding to this year and in future years is a result of really aligning our cost structure to this Digital First, Connected strategy. So for example, if you look at the amount of work that we are doing virtually right now, more and more of our sales force is selling inside versus face-to-face. More and more of our delivery of professional development is done virtually. In fact, all of it is done virtually right now. And we have proven that we have higher NPS scores for virtual delivery of professional development than we have had historically face-to-face. So, those are two examples of major cost reductions that are aligned to this Digital First, Connected strategy. And across the board, we have become a far more efficient and effective organization.

[George Tong:]

Very helpful. Thank you.

[Operator:]

Thank you. I am showing no additional questions in the queue at this time. I would like to turn the conference back over to management for any closing remarks.

[John Lynch:]

Thank you everyone for joining us on today’s earnings call and we look forward to speaking with you again on the Q1 call in May. So, have a great day. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.