Houghton Mifflin Harcourt Company
Q4 2014 Earnings Call Transcript

Published: 26 Feb 2015

[Operator:]

Welcome to the Houghton Mifflin Harcourt's Fourth Quarter And Full year 2014 Earnings Call. [Operator Instructions]. 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, Shannon 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 in 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 March 5 and the webcast will be available on our website for one year. After our prepared remarks, we will open the call to questions from investors. Before we discuss our results, I encourage all listeners to review the legal notice on slide 2 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, reconciliations 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 Eric Shuman, HMH's Executive Vice President and Chief Financial Officer, will provide an overview of the company's 2014 results, along with the full year 2015 outlook. I will now turn the call over to Chief Executive Officer of Houghton Mifflin Harcourt, Linda Zecher.

[Linda Zecher:]

Good morning, everyone and thank you for joining us today. We rounded out 2014 with solid financial performance, delivering revenues of $1.372 billion, adjusted cash EBITDA of $495 million and adjusted EBITDA of $265 million for the full year. 2014 marked a tipping point in the learning transformation as evidenced by customer demand for digital content. I'm pleased to report that digital sales in 2014 significantly exceeded our expectations and represented more than 50% of our education program billings. This, along with a very robust adoption market, contributed greatly to the 16% year-over-year rise in billings and $230 million in net deferred revenue as we further extended our already leading position in the K-12 space. Overall, we captured 52% of the new adoption market and our total addressable domestic education market share grew from 38% in 2013 to an outstanding 44% in 2014. Importantly, we did not just meet demand; we believe we drove it. Our addressable domestic education market in 2014 totaled approximately $3 billion, an increase of 13% compared to $2.6 billion in 2013. Without HMH's contribution, it would have increased only 2%. We believe that this is a reflection of school districts across the country clearly recognizing the significant role that our content services and digital solutions play in optimizing educational instruction. In 2014, we were awarded contracts in every adoption state and our programs were selected in some of the country's largest districts. In particular, GoMath! was selected by some of the most populous districts in Texas and digital content accounted for over 70% in sales in these areas. We also had strong performance in key states, including California, Florida, Alabama and South Carolina, where we captured greater than 50% of the market share. In addition to success in adoption states, we also had a strong showing in open territories. For example, GoMath! was selected in New York City and Collections performed well in Maryland. Our programs that complemented and aid core curriculum also contributed positively to our 2014 results. We had 8% growth in our supplemental and intervention business and 13% growth in our assessment business, thanks to the success of our new Woodcock-Johnson IV assessment product. Additionally, we continued to see improved performance due to the realignment of our sales force. In 2014, this brought about an almost 90% improvement in our telesales year-over-year results. In 2014, we witnessed and capitalized on the most robust adoption cycle since 2011. Looking ahead, there will be year-over-year fluctuations as the domestic education market modestly ebbs and flows. That said, we currently expect our 2015 addressable domestic education market to be approximately $2.7 billion. Although this represents a 9% decrease from 2014 levels, mainly due to a smaller adoption market, we expect our billings to be flat to down 4% and our net sales to be up 2% to 5% from 2014 net sales. There are several factors to keep in mind. First, while the domestic education market represents a large part of our billing, it is not the only market for HMH. We expect to continue our penetration into adjacent markets, like consumer, early childhood and adult education and grow our trade and professional development and services businesses. We believe that these adjacent markets could add several hundred million dollars of potential sales opportunities to HMH over time. In fact, in 2014, we closed a major deal with the Federal Bureau of Prisons for Adult Education this past year. Second, we believe the momentum we generated in the digital space in 2014 will continue this year and this will provide real opportunity to further build upon our leading position. Third, we believe our status as a trusted provider in school districts across the country, provides a meaningful inroad to sell additional services, including assessment, intervention and training programs which will help further boost our revenues. In 2014, we increased our fee-based professional services bookings by 60%. Fourth, in 2015 and beyond, we will start to recognize the deferred revenue from our increased billings and digital sales in 2014 which will help support our top-line performance. Fifth, although the new adoption market is smaller in 2015 as compared to 2014, we expect growth and open territory states to offset some of the weakness in the adoption market. Finally, regardless of the size of our addressable education market, we're the leaders in the K-12 segment, with more than 40% market share and expect to maintain our market share. Simba Information recently reported that HMH topped all education providers in the adoption market and stated that HMH was nearly untouchable in grades 9 to 12. All of these factors leave us comfortable with our position heading into 2015 and bullish about our long term prospects in the markets we serve. As I've discussed in the past, we believe our strong presence and stellar reputation in the K-12 space serves as a natural launching point for us to pursue opportunities in complementary growth areas. In 2014, we took important steps towards building meaningful direct-to-consumer and early childhood businesses. On the consumer front, we launched GoMath! Academy which is built upon our leading GoMath! content and is designed to seamlessly extend the learning experience from the classroom to the home. We have seen great reception to this product as parents willingly invest in at-home learning support. Within early childhood, our iconic brands have enabled us to effectively engage with and help develop critical skills for the youngest generation of learners. In the fourth quarter, we launched Curious World, a learning destination for parents and their preschool-aged children. That platform is built upon eight key learning areas that match our early-learning curriculum and is available online and through a complementary app for kids available on iPad and iPhone. Curious World rounds out a series of new early childhood offerings that we introduced in 2014, including the latest Curious George app -- Curious About Me -- as well as our acquisitions of Curiosityville. Turning to our trade segment, highlights from 2014 included strong sales from The Giver and other titles by Lois Lowry as well as What If? by Randall Munroe. We continue to deepen our portfolio so that we're well equipped to tap into new audiences and genres in 2015. In December, we acquired rights to the latest novel by Nobel Prize laureate Patrick Modiano, So You Don't Get Lost in the Neighborhood, bringing our total number of Nobel Prize-winning authors to nine. We will always be posting The Whole30, the 30-day guide to total health and food freedom by New York Times best-selling authors Melissa and Dallas Hartwig. And as part of our new line of business books, we signed the much-anticipated Talk this Way! The Official TED Guide to Public Speaking by Chris Anderson, curator of the widely popular TED conferences. Our children and young adult titles continued to perform well. Recently, 11 of HMH's titles made Time Magazine's 100 Best Children's and Young Adult Books list. We've been strategic and thoughtful in our efforts to curate these titles and are confident that they have the potential to garner substantial attention among their targeted audiences. In addition to the efforts we made in both operating divisions in 2014, we also made great strides to foster innovation across our Organization. The fruits of these efforts were evident in the creation of the HMH Player for Google Chrome and iPad; the launch of several new education apps; and the addition of Channel One News, Curiosityville and SchoolChapters through strategic acquisitions. In December, we took digital innovation in HMH to the next level, with the creation of HMH Labs. This incubation hub is designed to support the development of cutting-edge digital solutions for students, teachers and parents and help us to remain at the forefront of the industry in bringing new technologies that enhance learning. We feel great about the momentum we've generated in 2014. At the same time, we understand that we must remain diligent and focused in order to realize our full potential. To do this, we have identified several key priorities for our business in 2015. First, we see our position as market leader in the K-12 space as an incredible opportunity to go deeper with our customers. For example, we recently formed an integrated Education Services group to allow us to deepen our K-12 relationships and provide our customers with meaningful guidance, professional development and leadership in this changing educational landscape. We see opportunities to extend to our reach within our trade businesses by expanding into new key genres, leveraging rights and growing strategic partnerships with Kindle Unlimited, Oyster and other digital subscription models, in order to engage readers and lifelong learners in new ways. As I noted earlier, enhancing our direct-to-consumer and early childhood offerings have already been two areas of focus and I'm extremely proud of the progress we have made thus far. In 2015, we see opportunities to further optimize our content-delivery model by bolstering our direct-to-consumer web presence and enhancing our consumer product portfolio and to build our profile as a thought leader. On the early childhood side this year, we will focus on growing our institutional business and continue the development of our next-generation solution to include comprehensive and holistic content assessment and services resources. Finally, within both our core and growth markets, we're laser-focused on maintaining and further sharpening our customer-first mindset. To facilitate this, we recently launched a cross-functional customer experience initiative across our Organization. We believe that equipping our teams with in-depth intelligence and analytics around the customer mindset will drive actionable insights so that our offerings are thoughtfully aligned with customer demands. To conclude, we believe we're ideally positioned in our core market to target high-potential growth areas and have the right team and strategy in place to elevate our business. With that, Eric will now walk you through our fourth quarter and full year results for 2014 and discuss our current financial outlook for 2015. Eric?

[Eric Shuman:]

Thank you, Linda and good morning, everyone. 2014 was characterized by a strong uptake in billings and digital sales which led to a significant rise in deferred revenue and cash. Overall, we finished the year on solid financial footing that we believe will support our future growth. Looking more closely at our results, billings in 2014 rose 16%, to $1.6 billion, with just under $1.4 billion in 2013. In 2014, we deferred $230 million in revenue which will be recognized over seven years, bringing our total deferred revenue balance to $527 million as of December 31, 2014, an increase of 77% over 2013. As you can see in slide 11, net sales for the full year of $1.372 billion were down slightly from $1.379 billion in 2013. Our 2014 results were largely driven by a strong adoption market and our 44% market share, but offset by the increase in deferred revenue. For the full year, education net sales were relatively flat year over year at $1.2 billion; while we had large adoptions in key states and additionally delivered strong performance in our assessment in intervention businesses, the billings were offset by $230 million in net deferred revenue. Net sales were further offset by lower net sales of our professional development and services business as last year we benefited from the recognition of an $8 million contract within our learning management system sales and services business which is a business we have since exited. Net sales in the trade segment declined 4% for the full year 2014, to $163 million from $171 million in 2013, mainly due to very strong performances from a number of our movie tie-in titles in 2013 that were a tough comparable for 2014 titles. We have a strong front list for 2015, including a new line of business titles and feel enthusiastic about our growth strategy for this segment. Overall, net sales for the fourth quarter were $265 million compared to $299 million in the same quarter in 2013. This decline mainly stems from a large sales transaction that we had in the fourth quarter in 2013 which did not repeat in 2014. Aside from this transaction, both our education and trade segments performed well in the quarter. The education segment had strong basal, international, intervention and assessment sales. And within our trade segment, fourth quarter net sales grew to $48 million from $46 million in the same quarter of 2013. Moving further down our income statement on slide 14, operating loss for the full year decreased from $87 million in 2013 to $85 million in 2014. This was primarily driven by a $32 million or 5%, increase in selling and administrative costs due to higher variable costs associated with the sales commissions and outside labor attributed to increased billings, along with higher technology spending. Offsetting this was a $33 million reduction in the amortization expense related to our pre-publication costs in intangible assets. We reported an operating loss for the fourth quarter of $80 million, compared with an operating loss of $60 million in the same quarter of 2013. This $20 million increase in our operating loss was primarily driven by the lower net sales, coupled with an increase in our cost of sales, excluding amortization as a percentage of net sales. This cost of sales excluding amortization increased to 47% from 42% which primarily reflects a change in our product mix in the fourth quarter. Partially offsetting our quarterly operating loss were lower sales and administrative expenses which decreased $6 million from the fourth quarter of 2013 due to the exclusion of one-time IPO costs that incurred in 2013. For the full year 2014, net loss was $111 million, flat to the $111 million loss we reported in 2013. For the fourth quarter of 2014, we reported a net loss of $84 million, compared to a loss of $65 million in the fourth quarter last year. The drivers for the full year and quarter results are primarily due to the same drivers impacting operating loss. Our adjusted cash EBITDA for the full year was $495 million, 51% or $168 million higher, compared to $327 million in 2013. This was primarily due to the increase in billings, partially offset by higher variable costs, such as commissions associated with the higher billings we attained throughout 2014. For the full year 2014, our adjusted EBITDA was $265 million, compared with $325 million in 2013, a decline of $60 million. This decline is due to the aforementioned increase in variable costs. For the fourth quarter of 2014, adjusted cash EBITDA was a loss of $6 million, down $59 million from a positive $53 million in the fourth quarter of 2013. The decrease was primarily due to lower net deferred revenue recognition. Adjusted EBITDA in the fourth quarter was $9 million as compared with $55 million in the same quarter of 2013. The quarterly loss was primarily impacted by the aforementioned change in our product mix and higher sales commissions. A detailed reconciliation of our GAAP results to adjusted cash EBITDA, adjusted EBITDA and other non-GAAP metrics is included in the appendix to this presentation as well as in our earnings release. We ended 2014 with cash and cash equivalents and short-term investments of $743 million, up 75% from the year-end 2013 balance of $425 million. Our free cash flow which is cash used in operating activities less cash expenditures, was $308 million for the full year, compared to an outflow of $29 million in 2013 -- an improvement of $337 million. Given our strong cash position, we continue to actively evaluate potential acquisitions and other strategic investment opportunities to drive shareholder value. Now let's turn to our outlook for 2015. As was clear throughout 2014, our success in the transition to digital has caused an inherent shift in our product mix and has led to higher deferrals of revenue. Therefore, in addition to net sales in prepublication or content development spend, we also provide an annual guidance in billings. We believe this added metric will help paint a clearer picture around our expectations. As Linda shared with you earlier, our addressable domestic education market for 2015 is expected to be $2.7 billion, a decrease of 9% from the approximately $3-billion market in 2014. For the reasons that Linda previously discussed, we expect 2015 billings to be flat to down 4% compared to 2014 and annual net sales are expected to increase between 2% and 5%, taking into account the deferred revenue we will recognize in 2015 from prior-year billings. Finally, we expect our prepublication costs or content development spend, to be approximately $110 million to $120 million in 2015. In closing, we saw great strength across our businesses in 2014. We're entering 2015 on solid footing and look forward to maintaining our positive momentum. With that, let's open the call to questions. Operator?

[Operator:]

[Operator Instructions]. Your first question is from Peter Appert of Piper Jaffray. You may begin.

[Peter Appert:]

Eric, my brain is not fully operational this early. So I'm hoping you can help me understand the flow-through from your guidance to free cash flow in 2015?

[Eric Shuman:]

Free cash flow was essentially driven by the decrease in our accounts receivable and the increase in our deferred revenue. So if you look at what drove it, it's essentially we had D&A costs of $320 million, working capital positive change of $297 million.

[Peter Appert:]

Right. No, I'm sorry, Eric. I know about the 2014 numbers. I'm just try to think about how the free cash flow looks for next year, in the context of flat billing sales up a little bit, are deferred revenues then a neutral for free cash flow next year or changing deferred revenues rather, neutral for free cash flow next year and therefore, the implication of your guidance would be that free cash flow for 2015 could be relatively equal to what you did in 2014?

[Eric Shuman:]

We believe it will be slightly lower, but we're not giving guidance on free cash flow.

[Peter Appert:]

And then as my follow-up, do you have any preliminary thoughts, Eric, in terms of what the adoption market in 2016 in 2017 might look like?

[Linda Zecher:]

We think that the adoption market overall, Peter, is going to vary somewhere between $2.7 billion and $3.2 billion, so we think that as far as the new adoption market in 2015, we've stated that it's about a $500 million market. For those states that are buying, it's primarily Texas for math and science, California math and Tennessee will be buying math, Georgia will be buying reading, et cetera. So we haven't really given guidance on 2016 or 2017 yet because things can change, but in general we think the market is going to be somewhere between $2.7 billion and $3.2 billion.

[Peter Appert:]

On a continuing basis?

[Linda Zecher:]

On an ongoing basis in the short-term future. Yes.

[Operator:]

Thank you. Our next question is from Andre Benjamin of Goldman Sachs. You may begin.

[Andre Benjamin:]

My first question, on the $2.7 billion market that you're assuming for 2015, I was wondering what level of market share you're assuming that you sustain in that market so we can understand how much of the revenue is from the core sales of the business versus expansion into some of the other adjacent markets.

[Linda Zecher:]

We expect to maintain our market share. We don't expect to lose any of our market share which around 40%, so we're modeling that, that is really not going to change. What I did say though is that the market is going to be down about 9%. We think we're only going to be down flat to 4%, primarily due to growth in our adjacent markets and those adjacent markets being pre-K, early childhood, consumer and then also an additional development of our services business which we think is also going to have significant growth.

[Andre Benjamin:]

I know you don't give formal margin guidance, but as you're getting more comfort and understanding of how the shift to digital is impacting your financials, is there any directional color that you could maybe help us understand how we should be thinking about margin progression as we build on models out over the next 2 to 3 years?

[Linda Zecher:]

Yes in the out years, obviously, we think that digital is going to have margin expansion, but again, when we look at our deferred revenue, a big proportion of that is digital revenue, but there's also still a lot of work text and things like that, that are incorporated into that which still involves printing, cost, shipping, things like that. But this shift to digital, we do think offers much market expansion in the out years and we're rapidly moving to an all-digital environment as quickly as we can, but again it's somewhat dependent upon what our customers can absorb.

[Operator:]

Thank you. Our next question is from Drew Crum of Stifel. You may begin.

[Drew Crum:]

Linda, you termed the performance for the business in open territory states in 2014 as strong. Could you comment on what it looked like relative to the AAP numbers which were down 4% in 2014? And then as you think about 2015, what is implicit in your guidance in terms of performance in the open territory states?

[Linda Zecher:]

We think that open territory will grow about 6% in 2015, so we expect to do quite well there. Tax revenues grew about 8% in 2013 and generally the market follows those tax revenues somewhat over a course of 12 to 24 months, so we're expecting about 6% growth in 2015. As far as open territory in 2014, we feel like we were at or above the market in 2014.

[Operator:]

Thank you. Our next question is from Denny Galindo of Morgan Stanley. Your may begin.

[Denny Galindo:]

Just a quick question on the difference between the market growth and your billings growth. It looks like it was about 700 basis points or about $100 million. Could you provide a little bit more color about how much of this is coming from some of the different adjacent markets you mentioned like the consumer products, the GoMath! Academy, adult education or any of the other categories? And then how much did these groups contribute to revenue in 2014?

[Linda Zecher:]

We actually don't break those out, so we're not breaking out those segments right now. We probably will look to do that over the course of the next couple of years, we will look at breaking out some of that data, but we don't do that right now. But I would tell you that we're pleasantly surprised at how well we're doing in the adjacent markets and we think that those are real growth opportunities for us. Pre-K, in particular, is a market that there's a tremendous amount of government funding going into. It's a fairly fragmented market with no real market leaders. We have products and capabilities that go very well into that market. The other adjacent markets I've talked about was services; that's a natural extension of our business that we think is going to help us drive deeper penetration and also is an additional revenue stream into the schools. We feel good about these markets. We talk about them because we believe that they are growth areas. Consumer, I've talked about consumer many times as going directly to parents, teachers, students and lifelong learners, with the things such as Go! Math Academy and future academies, such as reading academies and things like that, that we will be looking to introduce in the future. So these are areas that we think, because of our move to digital and the robust digital content that we have, that we can purpose that content into multiple markets, but again, we're not going to break that out specifically at this time.

[Denny Galindo:]

Okay. And then one more follow-up. Last year, deferred was about 17% of GAAP revenue and if I look at the difference between your billings and revenue guidance, it looks like you expect to defer around $80 million in revenue in 2015 which would only be 6% or so of revenue. Does this mean that you have a smaller mix of digital sales in 2015, maybe because you don't lap some things like the Texas adoption or is there another interpretation of this difference between your GAAP and billings guidance?

[Eric Shuman:]

No. We will defer less in 2015 than we did in 2014 which is the reason you have the effect of flat to negative 4% billings, yet higher net sales.

[Linda Zecher:]

The basic reason for that is that you don't have a large adoptions like--

[Eric Shuman:]

You're not going have Texas.

[Linda Zecher:]

We're not going to have Texas and in the Texas market, we took about -- of our share, about 70% of it was digital content.

[Denny Galindo:]

So it does sound like it will be less digital content this year?

[Linda Zecher:]

Not in proportion to what we sell, but less digital content overall because if something like Texas will not be in the mix.

[Denny Galindo:]

Okay. So the proportions is the same but it's down because the market is down.

[Linda Zecher:]

Correct. And that's going to ebb and flow based on where there are adoptions, but from an overall standpoint of percentage of sales towards digital, we don't anticipate that decreasing. We anticipate that increasing.

[Operator:]

Thank you. Our next question is from Jeff Silber of BMO Capital Markets. You may begin.

[Jeff Silber:]

Based on the components of your outlook, I'm just wondering what should we be expecting for cash expenses in 2015? Will it be going up, down, flat?

[Eric Shuman:]

I'm not sure I quite understand your question.

[Jeff Silber:]

I'm looking for some guidance on your cash expense line items in 2015. Any color would be appreciated? I'm not talking about amortization and depreciation, but just the true cash expenses. I know you're not giving guidance on free cash flow but we have to model, so any help would be appreciated.

[Eric Shuman:]

We should take that one offline.

[Jeff Silber:]

Okay. Let me ask another question, then. What is the minimum cash balance that you think you need to run your business?

[Eric Shuman:]

We've been pretty public about that, somewhere between $300 million to $360 million of cash we use from peak to trough.

[Jeff Silber:]

Okay so based on that, when might you reconsider some of the aspects of your capital allocation strategy?

[Linda Zecher:]

Our capital allocation strategy has been pretty consistent. It's all about growing shareholder value. You've got several levers that you could pull in order to do that. One of them, obviously, is acquisitions; one of them is organic growth and one of them is returning capital to shareholders. We did announce $100 million share buyback over the course of the next two years and we will continue to look at what those options are for those levers and make decisions down the road, but again our Board and Management are 100% aligned in growing shareholder value.

[Operator:]

Thank you. Our next question is from Jason Bazinet of Citi. You may begin.

[Jason Bazinet:]

I just had a question on Common Core. To what extent is the increases in tax receipts, that transmission mechanism to your revenue, getting gummed up because of the Common Core roll-out?

[Linda Zecher:]

Very little correlation on that. It's really around standards and we've been selling to Common Core standards for a long time, but we really don't get in the middle of that. Schools, advisors, our curriculum advisors, et cetera, really focus more on the standards. Tax revenues just go more to making sure that they are providing materials, but in some states it's around Common Core, other states they're calling it different things. But the basic issue is that there's been a lot of pent-up demand and now that the standards have changed, whether they are Common Core standards are just overall state standards that have been raised, it requires materials and updated materials which we're providing. So I don't think Common Core is really impacting us in any negative way.

[Jason Bazinet:]

But whether it is Common Core are not, is the deliberation on standards delaying the purchase of textbooks or not?

[Linda Zecher:]

No. Not at all. Not at all. And this year, we had a very robust market. This year was really the first year that there's some Common Core testing that is taking place, some of the standards testing, so I don't think it's -- it's been a net positive, but again, it's really more standards than the term Common Core.

[Operator:]

Thank you. Our next question is from Andy Taylor of BlackRock. You may begin.

[Andy Taylor:]

I wanted to just go through if we could get a little bit more color. For a year now, you guys have talked about the priorities in organic investment and M&A opportunities. Everybody understands the organic investment and in support of that, but when I run through your net cash position of over $500 million, your very significant free cash flow which is going to suggest way over $1 billion at year-end if nothing was done, that capacity on your own balance sheet of easily $1.5 billion or more, can you just walk through, seemingly an immense men of dry powder and flexibility to address all of your needs and all of your goals, but actually bucket what you need for each, because it seems like there's a significant opportunity for caliber turn above and beyond, that doesn't exclude any of the other priorities?

[Linda Zecher:]

Actually Andy, I'm not surprised you would ask that. It's hard to really break it down any more than to say we're truly looking at strategic ways that we can grow the company and strategic ways that we can grow shareholder value. We understand that we have a lot of cash on our balance sheet and Management and the Board is actively looking at ways that we can maximize the value of the company. If we find -- and we did the stock buyback -- if we find that we're not able to come up with ways that we can grow through organic and/or acquisitions, we will then look at the other levers of either an increased stock buyback and/or some other form of payment back to investors to return cash. Can't really say much more than that at this time truly.

[Andy Taylor:]

Okay. I thought we were waiting towards to get toward the year-end and get the cash generated at year-end and now I'm -- is there a time frame where we will start to have a little bit more visibility on the outcome and what the resolution from the discussions will be?

[Linda Zecher:]

Andy, we're going to continually update our investors over the course of the next months and quarters and as things come up that we have opportunities to discuss with our investors, we will.

[Operator:]

Thank you. Our next question is from Denny Galindo of Morgan Stanley. You may begin.

[Denny Galindo:]

I just had one more on pricing. When I look at your pricing cards, I see a lot of different models out there, like a classroom set of books with an eight-year digital subscription or sometimes just a one year digital description, sometimes books for everyone in the classroom. As you've had a couple of years of strong digital sales, are you seeing schools gravitate towards one of these models or is it still everyone does something different?

[Linda Zecher:]

It's still pretty -- we haven't really seen any strong directional move, but we're really exploring going into this concept of a licensing price and then an ongoing maintenance fee over the course of a contract. For example, it might be a seven-year contract, they would pay an upfront licensing fee and then they'd have an annual maintenance fee. That way we would still be in a position to collect the cash upfront, but then we'd have an ongoing maintenance fee for updates and things like that on digital content. If you're familiar with an Oracle model, I would call it somewhat like that in the technology world. We're seeing some interest in that, especially around digital content, so that schools can have refreshed content, for example, when Pluto was no longer planet, being able to update that immediately. Our strategy of moving our digital content into the cloud, where we put everything in the Amazon cloud, makes that a very advantageous thing for us to do

[Denny Galindo:]

And then lastly on pricing, I noticed that you generally are successfully at pricing at a premium to a lot of the other players out there, just because of the strength of the product, but I noticed that some of the other competitors are offering more discounts or discounts if you buy multiple subjects from them. Are you seeing any changes in industry pricing that you need to react to or is it pretty much steady as she goes? Maybe then you're getting more -- you expect a premium to go up in a future? Just what's happening with your position in pricing versus the competitors?

[Linda Zecher:]

Honestly, we're seeing little or no pricing pressure. It really, at the end of the day, what they really care about are outcomes and what they really care about is the quality of the content. They really care that they are buying from someone that has a real strong efficacy in our products and so were seeing little or no pricing pressure. That seems to be -- if you think about the three or four things that are on the lists, the checklists, before they buy content, I would put pricing at the very bottom.

[Operator:]

[Operator Instructions]. Our next question is from Lance Vitanza of CRT Capital Group. You may begin.

[Lance Vitanza:]

Thank you for providing the billings guidance. That's going to be very helpful. Could you talk a little bit about the relationship between adjusted cash EBITDA and adjusted EBITDA? What I mean by that is, last year cash EBITDA grew nicely, adjusted EBITDA was down. This year looks at it will be the other way around. Is the idea that ultimately the two numbers converge? And if so, roughly when you expect that to occur? Or should we be expecting some other type of trajectory as we go forward?

[Eric Shuman:]

Mathematically, it should converge at some -- you're right, at some point in the future as we build up our deferred balances. It's not going to happen any time in the near future though. We expect to continue to defer more than we recognize for the foreseeable future.

[Lance Vitanza:]

So in that sense, 2015 is a bit of an anomaly?

[Linda Zecher:]

Not in our build-up of deferred revenue.

[Lance Vitanza:]

I'm sorry. In the terms of the change, though. The billings are down, but your sales are up?

[Eric Shuman:]

Yes, 2015 is a bit of an anomaly, if you look past into 2016 and 2017, but depending upon what we recognize versus what we defer, yes.

[Operator:]

Thank you. I would now like to turn the call back over the Linda Zecher for closing remarks.

[Linda Zecher:]

We really appreciate everyone taking the time to join us on the call today and we really look forward to speaking to you in the future. We will be hosting our annual Investor Day in New York on March 25th and we hope to see some of you or all of you there. If you do need any additional information following the call today, please contact Rima in our Investor Relations department. Operator at this point, that ends the call and thank you very much.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.