Houghton Mifflin Harcourt Company
Q1 2016 Earnings Call Transcript

Published: 4 May 2016

[Operator:]

Good morning and welcome to Houghton Mifflin Harcourt's First Quarter 2016 Earnings Call. I would like to inform you that this call is being recorded for broadcast and that all participants are in listen-only mode. I would now like to introduce Rima Hyder, Vice President, Investor Relations for Houghton Mifflin Harcourt. Ms. Hyder, you may begin.

[Rima Hyder:]

Thank you, operator, and good morning, everyone. Before we begin, I would like to point out that the slides we will reference during the course of this presentation can be accessed via the Investor Relations section of the Houghton Mifflin Harcourt website at www.hmhco.com. A replay of today's call will be available via phone until May 11, 2016, and the webcast will be available on our website for one year. We filed our financial statements and our quarterly report on Form 10-Q with the U.S. Securities and Exchange Commission earlier this morning, along with our First Quarter 2016 earnings release. After our prepared remarks, we will open the call to questions from investors. To be fair to everyone, please limit your questions to one plus a follow-up. You may get back into the queue if you have additional questions. Before we discuss our results, I encourage all listeners to review the legal notice on slide two, which explains the risks of forward-looking statements and the use of non-GAAP financial measures. Additionally, please refer to our form 10-K and 10-Q for a discussion of risk factors that could cause actual results to differ materially from these forward-looking statements. Our slide presentation and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measures are in the appendix to the presentation. This non-GAAP information should be considered supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly entitled measures reported by other companies. This morning, Linda Zecher, Houghton Mifflin Harcourt's President and Chief Executive Officer, and Joe Abbott, HMH's Chief Financial Officer, will provide an overview of the company's first quarter 2016 results. I will now turn the call over to Chief Executive Officer of Houghton Mifflin Harcourt, Linda Zecher.

[Linda Kay Zecher:]

Thank you, Rima, and good morning everyone and thank you for joining us today as we discuss our first quarter results. We began 2016 with a strong and productive first quarter, executing against our strategic priorities for the year as we continue to demonstrate our transformation into a leading educational media company. In 2015, we captured 40% share of our core domestic education market. In 2016, we believe we continue to maintain a leading share, further demonstrating the power of our content in target markets. We believe that HMH has never been better positioned to achieve our mission of changing people's lives by fostering passionate, curious learners. You've heard me talk about the importance of extending educational experiences beyond the classroom and making meaningful connections between school and the home. HMH is the only content provider uniquely positioned to make this link by leveraging the strength of our core K-12 content to succeed and grow in strategic adjacent markets. This quarter, we demonstrated some key examples of this differentiator, which I'll talk through shortly. In our Education segment, we saw a strong start to the year with billings of $136 million. The first quarter historically represents our seasonally low period of the year, but we saw an increase of 19% in billings year-over-year due to a solid contribution from the Educational Technology and Services or EdTech business. The addition of EdTech billing supports our strategy of advancing into markets that we believe will eventually smooth the cyclicality of the HMH legacy business experiences from the K-12 adoption. An example of this is the newly integrated HMH Professional Services organization, one of the largest and most diverse professional learning organizations operating in the pre-K-12 space. We believe HMH has one of the deepest and broadest pre-K content and services portfolio and capabilities within the industry, and these and other expanded offerings continue to position us well for growth in the Education segment. In the first quarter, we continue to leverage the strength of our content, services, relationships and reputation in the K-12 market to increase wins in key states. In the first quarter, we had important wins in Florida and Tennessee, and we continue to see opportunities in other major new adoptions in 2016, such as Oklahoma and Georgia Reading, as well as South Carolina and Alabama Science. We continue to pursue English Language Arts wins in some of the largest districts in California, leveraging one of the largest sales force operations in the state. During California's 2014 Math adoption, HMH secured wins in the top five school districts. While we originally expected that 2014 adoption to span two years, we have found that schools in the state have extended their Math purchases in a third year, representing a continued selling opportunity for us. We are seeing early signs that a similar third year extension for some schools may be occurring in the reading adoption in California as well. However, we don't anticipate that this will affect our billings outlook for the year. Demonstrating the unique abilities we have to extend and leverage content across our core lines of business as promised, in the first quarter, we launched HMH Marketplace. This new online platform offers a gateway for educators to easily locate and purchase educational apps, digital learning tools, games, teacher-created content and other resources to supplement classroom learning. At launch, HMH Marketplace had over 3,000 educational resources available, with more being added daily. In a short time, we have seen a solid conversion rate from visitors to sign-ups with positive user engagement. The number of sellers has increased 65% from launch to-date. These sellers include many successful teachers and large institutions, like Microsoft and Highlights. We look forward to the continued evolution and expansion of HMH Marketplace as it allows us to go deeper with the existing customers and form new partnerships. This continued momentum lays a strong foundation for what we see as a long-term growth strategy. In the Intervention space earlier this year, we launched Read 180 Universal, the next generation of our highly successful Read 180 program, which is the undisputed leader in intensive reading intervention. Read 180 Universal builds upon the program's successful foundation and incorporates the latest brain research to create an even faster, more innovative platform that targets areas of the brain that control cognitive function. This new offering, coupled with HMH's core classroom reading curriculum, now makes us the only content provider with an end-to-end capacity for returning formerly struggling readers seamlessly into mainstream classrooms. This is another example of how we plan to grow into adjacent markets with tight linkages to our core market. Further underscoring our unique ability to leverage assets between and across our business segments, we also recently announced a partnership with Randall Munroe, New York Times best selling author and former NASA roboticist. Our next generation high school Science programs will now include exclusive content from Munroe. Our upcoming HMH Science Dimensions program will contain exclusive new pieces of artwork from Munroe, as well as animated versions of drawings from his best selling title, Thing Explainer, a book that provides clear and engaging explanations of complicated scientific principles using only the thousand most common words in the English language. HMH Chemistry, HMH Biology and HMH Physics will also feature content from the Thing Explainer. Munroe's wildly popular titles have been top performers in HMH's Trade Publishing segment. If you don't already know of Randall, he's a real rock star in the field of Science and Mathematics. He began his career in Physics working with robotics at NASA's Langley Research Center. He is most famous, however, for engineering a creation of a different kind, the iconic blog, xkcd. National media have already praised this collaboration with Monroe for his ability to make textbook content more engaging and entertaining. We are extremely excited to continue the relationship in a way that will surely benefit high school students across the country. Another example of crossover and integration between our Trade and Education segments is a contest we've just announced called Spark a Story. This creative writing competition was formed as a collaboration with high school English Language Arts educators to find and publish the best original short stories written by the nation's high school students. The winning submissions will then appear in a collection published by our Trade segment. Shifting to our strategy for international growth, we continue to evaluate and look for pockets of opportunity to take our leading content abroad. We recently won three individual 10-year contracts from the Department of Defense to provide DoD schools in the U.S. and internationally with some of our core curriculum programs. Our English Language Arts program Collections will be used in DoD schools in grades 6-12 while GO Math! will be used in kindergarten through 5th grade. This is another example of leveraging our existing K-12 content in adjacent markets. We continue to see direct-to-consumer and early learning as key adjacent growth markets, and we are encouraged by the positive reception of products, like Curious World, our interactive online early learning platform. This is another great example of how we are expanding our core customer base and taking it to the pre-K market. This platform represents our first subscription-based app that has already been downloaded over 700,000 times in its first six months. In February, we announced the first ever original video series for Curious World, with six short-form series, three live action and three animated, they include stories that bring new characters and intellectual properties to life. The platform continues to grow and gain popularity with millennial parents as its features tap into values most important to this cohort, such as authenticity and a balanced approach for their children's digital exposure. Moving on to Trade Publishing, we saw billings of $32 million in the first quarter of 2016. One of the best performing titles this quarter was Dream Home by the Property Brothers, Jonathan and Drew Scott. This long anticipated book by the popular HGTV personalities was an instant bestseller on both The New York Times and Wall Street Journal list. The well-known brothers have appeared on many TV shows sharing their expertise and fun advice on home renovation. We continue to expand our pipeline of inspiring critically acclaimed new titles this quarter, and we continue to see strong results from our top performing 2015 titles. On the young readers side, we published the instant New York Times bestseller book by 2015 Newbery Award winning author Kwame Alexander, with whom we recently signed a new four-book deal. Looking forward, we see several upcoming titles we are excited about. Paul Tough, author of the best selling book, How Children Succeed, has signed on to release two new books through HMH. As we look to the future and our growth opportunities, we are taking important steps to upgrade and standardize our platforms and technology infrastructure, including HMH One and SAP. While these changes represent a large undertaking, we see this as an important investment in HMH's technology ecosystem. New unified systems will bring additional capabilities and efficiencies and allow our operation to scale with the company as it continues to grow. These benefits include better interaction with our customers, the ability to support more new product offerings and adapt to new ideas quicker, and a more efficient platform for content development. This extends to our leadership in technology standards where we have set the bar for interoperability. HMH has the highest number of products compliant with IMS's Global Common Cartridge standard, which schools across the country are using to ensure technology integration and flexibility. This makes HMH's programs more attractive to customers by making them simpler to implement in classrooms. We are seeing increased demand for Common Cartridge solutions and have three times the number of compliant programs as our nearest competitor. We continue to make progress on the EdTech integration, which is exceeding our expectation. The product development and sales force team, including HMH Professional Services, are largely integrated. We are on track to complete back office systems integration by the end of the second quarter of 2016, allowing us to realize additional synergies in this acquisition. Through this acquisition, HMH has enhanced its strategic positioning in key growth areas, including intervention, early learning and professional services. In summary, we had a strong start to 2016, reaching key milestones for HMH Marketplace and other product offerings, delivering positive results in our Education sector and seeing continued success in Trade Publishing and growth markets. We maintain the optimistic outlook that we shared on our full year earnings call and continue to believe that we're well-positioned to further deepen our core business and advance in key growth areas this year. At this point, I would like to introduce Joe Abbott who is here with us on today's call. Joe joined HMH as our new Chief Financial Officer. He comes from Morgan Stanley, where he was an investment banker in the Global Media and Communications Group. He led the firm's advisory of clients in the education content and information sectors and has a wealth of strategic, financial and investor relations expertise. Joe, we're thrilled to have you on board. And on that note, I'll turn the call over to you to discuss our first quarter financial results.

[Joseph P. Abbott:]

Thank you for that introduction, Linda, and good morning to all of you on the call today. Before we turn to the numbers for the first quarter, I want to take a moment to introduce myself. I've spent nearly a decade in the education sector and have a long history with HMH that dates back to before the company's IPO. Previously, with Morgan Stanley, I was part of the team that took HMH public in 2013 and have advised Linda and her team on a number of strategic opportunities. What I quickly realized during the time I spent as an advisor was the unique position HMH is in to have a positive, meaningful impact on the learning process by combining cutting-edge technology with a world-class portfolio of pre-K-12 educational and trade content. HMH has several characteristics that made my decision to join the company an easy one. A team led by a world-class visionary, an iconic brand with a strong track record of success, a vast portfolio of best-in-class content, and a leading distribution network. I believe the team here has the required combination of technological expertise and industry relationships to capitalize on the current shift from print to digital in the marketplace and to be a leader in improving pre-K-12 education across schools, nationwide and internationally. I also believe that the investment in technology and digital content that the company has made is paying off in big ways, as evident by our continued leading market share of the domestic education market and our strengthening position in Intervention, Services and Early Learning solutions. HMH has a solid foundation and a great reputation within the industry for producing high-quality curriculum. But we are also continually raising the bar on innovation, finding new ways to reach students, parents, educators and lifelong learners by leveraging our best-in-class core content and offering a full suite of educational products and services in core and adjacent markets. Another thing that I find attractive about this business is something I think is underappreciated, is its tremendous operating leverage and opportunity to drive free cash flow. In the two months that I've been at HMH, I've observed a few areas where I plan to focus my attention. These include

[Operator:]

Thank you. Our first question comes from the line of Trace Urdan from Credit Suisse. Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Hey, good morning. Thanks very much. I was hoping that you might be able to give us a little bit more color on what you're seeing with open territory. And I'm also interested in California specifically. I think you expressed some confidence, but I'm wondering if you're seeing any dynamic with respect to share shift, either positive or negative that's worth mentioning?

[Joseph P. Abbott:]

Hey, Trace. Good morning. It's Joe. So I think your questions were color around open territory and California. So I'll start with the open territory point. Look, it's the first quarter, early days right now. So it's difficult for us to give you any color that will portend any sort of trend for the full year. I think what I can tell you as of right now in some of the anecdotal data we're seeing there, it's encouraging. But, again, it's so – it's early enough in the year that we'd hesitate to give you a view on the full year as it relates to that. As it relates to California, as Linda mentioned in her remarks, there is – there is a similar shift in the English Language Arts adoption in that state that we saw in Math, relative to what we were expecting when we started the year and gave you the original guidance. So the puts and takes of that at this stage, difficult for us to actually measure, but we like what we're seeing so far in terms of our performance in California, as well as the rest of the country and some of the adoptions that we mentioned. And so, as of right now, we think all signs are positive. Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Okay. Just a follow-up to that, Joe. So when Linda says extending to three years, what that means is I gather they're not intending to purchase in the first year and they're intending to make the purchases in the second and third year?

[Joseph P. Abbott:]

No. Look, we'll continue to see purchases in the first year. I think what you're seeing here is a few districts that have decided to postpone their purchases in the first year. Remember, last quarter we had said as we were thinking about that market, we were thinking about roughly two years where that spend would be split about 50/50, okay? What that means is – what we're telling you right now is that we don't expect 50% of the overall adoption opportunity to occur in the first year, that we expect that to shift out. Whether that's two years or three years like we saw in the Math adoption, still TBD, but we are expecting a slightly smaller – or smaller opportunity in California relative to what we expected. Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Okay. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Andre Benjamin from Goldman Sachs.

[Andre Benjamin:]

Thanks. Good morning. I was hoping you could provide some color on how you're thinking about the direction of cash cost and SG&A year-over-year as we try to model that? And how we should think about the major puts and takes as you move through the year?

[Joseph P. Abbott:]

Hey, Andre. How are you doing? You know, we are not going to provide any guidance as it relates to costs directly. What I can tell you though directionally is that clearly we're looking a number of opportunities, as I said in my opening remarks, around operational efficiencies. We've got an ongoing integration for the EdTech business today, where we expect certainly by the end of the second quarter that our back office integration will complete and we will start to see the fruits of that in terms of our expenses. So as a general matter, remember also though that we've added the EdTech business and we'll have that in our financials for the full year. So I think as you think about that, we're going to see some puts and takes, both adding the new infrastructure, as well as finding the efficiencies over time.

[Andre Benjamin:]

And then my follow-up, about a year ago at the Analyst Day you laid out some pretty healthy growth opportunities in adjacent markets, and that included big opportunities in Consumer and Early Childhood. I was wondering if you could maybe update us on how much of the business is currently coming from those two buckets and how you're thinking about growth for either revenue or billing in those markets over the next couple of years?

[Linda Kay Zecher:]

I think a couple of things, Andre. This is Linda. A couple things that we are not going to break out Consumer and/or Early Childhood and/or the adjacent markets just yet. But I can tell you that we are on target with what we had talked about at the Investor Day, and nothing's really changed. We're very optimistic. One of the things I talked about in my part of the earlier discussion was around the Marketplace; and that's something we think is going to provide a lot of upside opportunity, a lot of stickiness in the accounts, and we feel pretty good about that. Our Consumer products, primarily in the pre-K space, is led by Curious World. It is also doing very well. We've had a lot of downloads and we're starting to see an uptick in conversions. And then we also have some other things that we're working on in the area of Consumer above and beyond those. So pretty confident in what we said. And at some point we'll give you more color, but we're not ready to quite do that yet.

[Andre Benjamin:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Peter Appert from Piper Jaffray.

[Peter P. Appert:]

Thanks. Good morning. So I guess, Joe, your commentary would imply that you would expect the overall adoption market to be perhaps smaller than was originally anticipated for this year. So can you just sort of extend on your expectations for the overall market?

[Joseph P. Abbott:]

Sure. Hey, Peter. Thanks for the question. There are puts and takes here. So I think one of the things that Linda mentioned was the ELA opportunity in California being a little different than we pictured at the outset. But the other thing you should keep in mind is that the Math opportunity looks bigger in the third year of that. So there are puts and takes in California. And, frankly, there are puts and takes across the country. When we sit here in the first quarter today, it's difficult to size up the sum of all of those puts and takes. So what I'll tell you is as we sit here today, we really have no change to our overall expectation for the market opportunity that we had expressed to you in the fourth quarter.

[Peter P. Appert:]

Okay, great. That's helpful. Thanks. And then, Joe, I might be just missing this, but I don't see in the press release any commentary on guidance. I haven't seen the slides. Are you guys not providing any guidance anymore?

[Linda Kay Zecher:]

Well, our guidance hasn't changed.

[Joseph P. Abbott:]

No, it hasn't. So, again, back in the fourth quarter, the company put forth a guidance range on billings, net sales and plate spend.

[Peter P. Appert:]

Okay. (31

[Joseph P. Abbott:]

Yeah. We can catch up with you offline to make sure you have that.

[Peter P. Appert:]

No, no. I know the numbers. I just didn't see it published, so I assumed it was no longer operative. But my mistake. And then counting that...

[Joseph P. Abbott:]

Okay. Absolutely. Yeah. Our outlook remains unchanged and those ranges are absolutely operative.

[Peter P. Appert:]

Okay. That doesn't count as a real question therefore. So therefore I get one more, which is on the READ 180 Universal product, is the way the product works, does that give you an opportunity to go back to existing users and resell? So is there a significant new revenue opportunity specifically associated with this rollout?

[Linda Kay Zecher:]

Yes. The way that product was always licensed, there were opportunities to go back in to current customers with the new product. I think the bigger opportunity here though is if you look across all the different places that READ 180 was implemented, it was a small percentage based on all the places that HMH has already has strong relationships. So we think the bigger opportunity is not only going back, but being able to take READ 180 into new schools, into new opportunities with our sales force.

[Peter P. Appert:]

Got it. Thanks, Linda.

[Operator:]

Thank you. And our next question comes from the line of Jeff Silber from BMO Capital Markets.

[Jeffrey Marc Silber:]

Thanks so much. I just wanted to shift gears to the HMH Marketplace. I know you just launched it. But can you just refresh our memories how you plan on monetizing that business and what progress you've made so far? Thanks.

[Linda Kay Zecher:]

Well, there's a couple of ways that we plan on monetizing it. Number one is that we're opening up the Marketplace and the platform to a variety of edtech companies to teachers that sell content online, along with some of our own content that we'll provide online. And if you think about, for example, like the Apple App Store where you buy an app and Apple takes a percentage of that, that's really how we're monetizing this too. So any content that's on there that is acquired through the Marketplace, we will take a percentage of the revenues on that.

[Jeffrey Marc Silber:]

Okay.

[Linda Kay Zecher:]

We have – right now we have over 3,000 educational resources on there. Our sellers have increased about 65% launch-to-date. So we feel really good about the projection of where it's heading. And we are continuing to add new companies to the Marketplace. And in fact, recently at the GSB Conference there was a lot of discussion with small companies about being able to participate on the Marketplace. So we're very excited about that.

[Jeffrey Marc Silber:]

All right.

[Linda Kay Zecher:]

It's a long-term – it's a long-term initiative for us.

[Jeffrey Marc Silber:]

I understand. I appreciate the color. And, Joe, first of all, welcome aboard. Second, you mentioned potentially providing I think what you called more consistent metrics for us to analyze. Are there new metrics you're thinking about, or would it be focusing on maybe billings and adjusted cash EBITDA and post plate adjusted cash EBITDA? Those seem to be the three that you stressed a bit in your opening remarks. Thanks.

[Joseph P. Abbott:]

Yeah, thanks for the welcome, Jeff. We're working through what that set of metrics actually will look like. So I don't want to reveal too much at this stage because we're working through it right now. But the point, and I think the framework that you need to think about and certainly that we're thinking about, is something that both gives you better clarity into how our business is performing certainly in a way that allows you to follow along with us. It could be financial. It would be operational. But the point here is we want to give you something that's trackable, that's repeatable and that's really meaningful at the end of the day as it relates to those metrics. So, more to follow on that. But good question. Thanks.

[Jeffrey Marc Silber:]

Okay. Appreciate it. Thanks.

[Operator:]

Thank you. And our next question comes from the line of Jason Bazinet from Citi.

[Jason Boisvert Bazinet:]

Thanks. I just have another question on the, going back to the Analyst Day a year ago. I think at that time our back of the envelope was those three adjacencies that you're going to go after, Intervention, Professional Development and Consumer, you were targeting something in the order of a $400 million or $500 million top-line opportunity across all three of those. And I guess my question is, when you qualitatively talk about HMH Marketplace or READ 180 Universal or Curious World, should we think of that as the product set that will ultimately engender these top-line results, or is there going to be sort of a (35

[Linda Kay Zecher:]

So, yeah, no, I got your question. I think the way to think about this is that the adjacent markets are primarily in the Professional Services that we talked about. It's in Consumer. And when I say Consumer, I sort of put the Marketplace in that category also. And then in Intervention. And so those are the areas that we thought are going to be large growth areas. The things that we are putting a lot of emphasis on right now as far as product and growth is really in the Consumer space. Professional Development we were able to enhance a lot with the acquisition of ISG, because by acquiring that group, we acquire a pretty substantial group of services components, and they were probably a lot stronger in services than we are. That combined with our Services area is going to be fairly substantial and give us a lot of support within the schools that we're working in.

[Jason Boisvert Bazinet:]

Okay. Thank you.

[Linda Kay Zecher:]

Does that answer your question?

[Jason Boisvert Bazinet:]

Yeah. I think so. I think so.

[Linda Kay Zecher:]

Okay. Okay. Okay. I just want to make sure.

[Operator:]

Thank you. And our next question comes from the line of Drew Crum from Stifel.

[Drew Crum:]

Okay, thanks. Good morning, everyone, and welcome, Joe. So want to go back to the California Reading adoption. You mentioned that you're expecting that to extend to three years. Why does that – or how does it impact billings for 2016 if you're anticipating some pushout there? And then my other question pertains to free cash flow. I think you explained this is an investment year for the company. You're $50 million in the hole relative to a year ago, would you expect to make that up as the year progresses? Is there any updated guidance on CapEx in pre-pub spend. Thanks.

[Joseph P. Abbott:]

Yeah. Thanks, Drew. Well, look, from a California billings perspective, and sort of the color that we provided to you today, that opportunity in and of itself, the ELA opportunity, has shifted. The overall opportunity for that adoption, whether it's two years, whether it's three years, what we think today is that the opportunity in 2016 is smaller in and around the English Language Arts piece of that. But at the same time, there's the countervailing effect around Math and the fact that we're seeing districts in California purchase more there. So it's difficult for us today to sort of say as a state, what do we expect the overall impact of those sets of opportunities. Remember, we're strong in both Reading and Math. And so we like our odds, we like our chances as it relates to those things. When we are talking about some of the color that we provided from a free cash flow perspective, I'm not yet prepared to provide any guidance on that front. You'd pointed out specifically the fact that we use cash. We do use cash, but remember also, we're a bigger business now. This is the first full year that we're going to have the EdTech business as part of our – on our platform, where our sales force is going to be selling that set of products, where we've got a big integrated professional services organization. All of that, we think, is going to show benefit in free cash flow for the year. So we will update you as we are developing our metrics. But as it stands right now, we don't – we're not going to provide specific guidance how we see free cash flow developing for the year.

[Drew Crum:]

Okay. Thank you.

[Linda Kay Zecher:]

I think, Drew, one thing I would add to that and really the only thing I would add is that we're also seeing some increased adoptions outside of California, an increase in what we had anticipated. So overall, we think things are still pretty much within the guidelines that we gave as far as the overall adoption and market sizing. And I think that is consistent with what we said about our guidance that we were not changing our guidance for the year.

[Drew Crum:]

Okay. Thanks, guys.

[Operator:]

Thank you. And our next question comes from the line of Denny Galindo from Morgan Stanley.

[Denny L. Galindo:]

Hi, there. Thanks for taking my question. I wanted to ask about the first quarter organic growth. You were down, I think, 3%, ex the EdTech acquisition. And then if we look at the AAP year-to-date sales through February, they were up around 9%. So I know that the first quarter is not very important generally, but I was wondering if you could give some color on why – what was going on in this particular quarter that kind of made you underperform the AAP numbers to that extent and maybe a little color there.

[Joseph P. Abbott:]

Yeah. Hey, Denny. It's Joe. Good question. Look, it's a small quarter, I think is the important thing. And taking and tying that versus the AAP market, especially at this stage, I don't think there's much that you can read into the performance as part of what you're seeing from the external vendor on that front. So it's probably too early to really draw comparisons, I would say, especially if you're trying to focus on just the AAP marketplace.

[Denny L. Galindo:]

Okay. And then just one on cost. The cost of services is coming down versus billings and net sales. And I was wondering if you could maybe give a little bit more color on the drivers here. I was thinking maybe some of this is a mix shift from the acquisition, some might be cost cuts, or maybe even some of it is related to a bigger percentage of digital content, which is actually helping on the cost of services line. Any color there?

[Joseph P. Abbott:]

Yeah. I'd love to be able to provide you more color on it. I mean I can tell you, and as I mentioned in my remarks, some of the cost drivers that you're seeing there relate to both bringing the new business on to our platform, but as well as realizing the synergies that will come and will flow from that. So there are puts and takes. But again, it's early in the year. I think given the size of the quarter relative to the other ones, really nothing I can point to that I would say would be a sustainable trend that I would say you should look at as an indicator for the full year performance. More to follow on that, Denny, as we get into the bigger quarters later in the year.

[Denny L. Galindo:]

All right. Great. I'll hop back in the queue.

[Operator:]

Thank you. Our next question comes from the line of Bill Warmington from Wells Fargo.

[William A. Warmington:]

Good morning, everyone.

[Linda Kay Zecher:]

Good morning.

[Joseph P. Abbott:]

Good morning, Bill.

[William A. Warmington:]

So congratulations to Joe on the new job and also welcome to Boston.

[Joseph P. Abbott:]

Thank you.

[William A. Warmington:]

So I just wanted to ask about the announcement you had on the three international contracts and just to ask if you would talk a little bit more about your international strategy? And then also to ask whether that might include acquisitions outside the United States?

[Linda Kay Zecher:]

Well, our international strategy is pretty consistent with what we've talked about in the past; in that we are leveraging a lot of our U.S. content. We're leveraging it through partners and we're looking for great opportunities internationally where we can leverage U.S.-based content, English language content. And that's really what we have done with DoD and we've done that with a lot of other organizations also. Our intent was never to build up a large international sales force, but to do it through partnerships and leverage. We're very excited about DoD, because that's going to allow us to have a presence in some countries that we did not have a presence before; and that can always and potentially breed other opportunities. So that's really positive. As far as international acquisitions, as part of our acquisition strategy, we're always looking at things that can help us grow markets and help us expand. So we look at international opportunities like we do anything else.

[William A. Warmington:]

Thank you very much.

[Operator:]

Thank you. And our next question is a follow-up from the line of Trace Urdan from Credit Suisse. Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Thanks. Linda, I want to ask about Marketplace and how can we gauge the success of this rollout? I think you threw up (44

[Linda Kay Zecher:]

Well, it's not 3,000 partners right now. It's 3,000 pieces of content that are out there. But right now, we're foundation building. I mean we just rolled it out recently and it's very early, but we are incredibly encouraged by the number of people that are interested in it, by the names that we are seeing; and we'll have other names that we'll be announcing soon, large companies. We are pretty excited about the early buzz that we're getting on this. As far as monetizing, and I talked about that a little earlier, that as we increase content and as we increase partners, we expect that monetization to be happening and ramping up. But right now it's foundation building. But in my opinion, it was a solid launch of something brand new in this market, and we're getting a lot of good excitement about it. I think the way you'll be able to gauge it, Trace, is that as we kind of move forward, we'll be talking about it more and more. And at some point in the future, again, Joe will look at how we want to leverage our metrics to be able to talk about this in a bigger way. Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Okay. And then just another follow-up for Joe on the metrics. So I hear you saying to us stay tuned. Can you give us any kind of indication of what the timing of the unveiling of new metrics might be and what the format might be?

[Joseph P. Abbott:]

At this stage, look, we're going to have a few more opportunities in terms of quarterly calls, I think, as it relates to a strategy for rollout for these things. A lot of this is going to have to do with when are we ready, when are we – and, of course, we're constantly taking feedback and evaluating what we think works and what's going to be repeatable. So we're going to have opportunities in the form of calls; we're going to have opportunities in the form of an Investor Day that we hope to have towards the latter part of this year. That will give us a little bit of a level setting opportunity as it relates to metrics and how we kind of see the operating leverage in the business. All of those things – and again, we haven't scheduled that. But that's something we're in the process of working and we'll be making an announcement around that, we hope, soon. So I don't know the precise phasing there, Trace, in terms of how we're going to roll it out, but I do think that we are – it's a high priority of mine. Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Okay. Thank you.

[Operator:]

Thank you. And our final question for today comes from the line of Denny Galindo from Morgan Stanley.

[Jeffrey D. Goldstein:]

Okay. This is actually Jeff Goldstein on for Denny now. I just had a question on market share. We heard some confusion from investors on how you exactly calculated this figure. Could you explain a little bit more specifically your methodology for calculating market share and addressable market as a whole?

[Joseph P. Abbott:]

Yeah. Hey, Jeff, listen, that's one we can go through some of the real specifics off line of how we actually do that. But again, we take a – what we're assessing as our performance in the market and compare that to what our view of is of the addressable market opportunity. It's going to be of most use, I think, as a backward-looking metric towards the end of the year. But we have our estimates that we're thinking about as we track the business, but again, the very specifics of that, I think, is something that's probably best that we talk about off line.

[Jeffrey D. Goldstein:]

Okay. That's fair. And then, lastly, what percent of your guidance roughly comes from the basal market for the full year, would you say?

[Joseph P. Abbott:]

No, we're not breaking up the specifics of the components of guidance at this point, Jeff. The thing – and just to reiterate, of course, we've got the basal market, we've also got our first full year of the EdTech business that's incorporated there, where it's on our platform, where we expect to receive synergies. And then we've got good growth, we think, in the adjacencies that Linda's been talking about. All of that is baked into the range that we provided on billings and the rest of the metrics that we provided for guidance here for the full year.

[Jeffrey D. Goldstein:]

Okay. Thank you.

[Operator:]

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Linda Zecher for any closing comments.

[Linda Kay Zecher:]

Thank you, everyone, and we really appreciate everyone taking the time to join us on the call today. If you need any additional information, please contact Rima in our Investor Relations department. So with that, operator, end today's call. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.