Houghton Mifflin Harcourt Company
Q2 2015 Earnings Call Transcript
Published:
- Operator:
- Good morning and welcome to the Houghton Mifflin Harcourt Second Quarter 2015 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, Bridget, 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 August 13 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 second quarter 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 2, which explains the risks of forward-looking statements and the use of non-GAAP financial measures. Additionally, please refer to our Forms 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 direct 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, will provide an overview of the company's second quarter 2015 results, followed by the presentation of financial results by Eric Shuman, HMH's Executive Vice President and Chief Financial Officer. I will now turn the call over to the Chief Executive Officer of Houghton Mifflin Harcourt, Linda Zecher.
- Linda Kay Zecher:
- Thanks, Rima, and good morning, everyone. And thank you for joining us today as we discuss our second quarter results. The start of our busy selling season is now underway and our world-class content, comprehensive solutions and cutting-edge digital capabilities continue to drive support for our leading market share. This quarter, we continued to make solid headway on key organic growth initiatives while announcing and completing a major strategic acquisition. We also had the privilege of hosting many of you at our 2015 Investor Day, where we presented the company's strategic initiatives and long-term goals. Also in line with our capital allocation strategy, we increased and executed on our share repurchase program. So, as you can see, we have been very busy since the start of the year and very focused on our core market. I am very pleased that for the first half of the year we captured approximately 41% market share across adoption and open territories. Our Education segment delivered an encouraging performance with key adoption wins including California, Texas and South Carolina. In Texas, our market share through the first half of the year continues to be strong and especially in the Texas social studies adoption market where our market share of approximately 30% has exceeded our expectations. While we are encouraged by this sustained leadership position, the adoption market itself does not tell the full story of our recent successes and future opportunities. We saw impressive growth in our consumer business as our 2015 year-to-date e-commerce revenue increased almost 60% year-over-year thanks to our redesigned flagship website, hmhco.com. We also re-launched cliffnotes.com to leverage the high traffic of 5 million unique visitors per month. The new site has an improved user interface, refreshed branding, mobile responsive design and improved search functionality, which are expected to improve the user experience, drive traffic to the site and optimize ad sales. And in case you missed it, we just announced a co-production agreement with WGBH for the creation of a television series based on the Gossie & Friends book series published by HMH and authored and illustrated by Olivier Dunrea. This cross-media co-production arrangement, a first for HMH, underscores the company's expansion into children's media production. Our position in the marketplace as an award-winning provider of acclaimed children's book, as well as our early learning educational expertise, provides us with a unique advantage in children's media and entertainment. While Eric will walk through our financials in a few minutes, I'll provide a high-level overview of our second quarter results. As expected, our financials this quarter were impacted by the anticipated contraction in the adoption market compared to 2014. For the second quarter of 2015, we reported net sales of $380 million, down 5% year-over-year or 10% on an organic basis excluding the one-month contribution from the recently completed EdTech acquisition. Adjusted EBITDA of $80 million was down 27% for overall HMH. In addition to the expected market contraction, the month of June in 2014 was exceptionally strong as Texas ordered early, making the second quarter of 2014 a comparatively strong one. While Texas continues to order in 2015, we believe the majority of these orders will come in the third quarter, as they normally would along with other state orders. Despite the yearly adoption market volatility, we believe that the overall education market landscape is improving and we are encouraged by recent developments in key states that are increasingly recognizing the need for ongoing investments in education and are taking necessary steps to allocate appropriate budgets. For example, Texas increased its state and structural material funds for the 2016-2017 school year by nearly 25% and recently authorized the release of this entire allocation, providing schools with significantly more flexibility to invest in these materials in the near term. Florida has signed legislation calling for increases in instructional materials as well as a 50% increase in funding for school technology, while California has authorized more than 12% increase in K-14 spending for the 2015-2016 school year plus discretionary funding to further Common Core Standards alignment. Not only do these budgeting and legislative updates create new sales opportunities for us, especially given our positioning within these states, but equally as important we believe they speak to the fact that the law makers and decision makers are recognizing the need for additional investments in education and taking action to bring technology into the classroom. While the transition to digital has begun to escalate, we are still in the early phases and committed state and federal funding will help provide the infrastructure and resources needed to build on this momentum and ultimately drive the learning transformation. This shift to digital was demonstrated in our recently released first annual HMH Educator Confidence Report which surveyed teachers and administrators across the nation. The report, which collects teacher sentiments around a wide range of issues, revealed that 97% of educators use digital tools in some way citing benefits such as improved student engagement, improved access to instructional content and the enhanced ability to deliver differentiated or individualized instructions. Despite this widespread use of technology in the classroom, the frequency and regularity with which digital tools are used is considerably lower. Educators want to change this. Almost 50% said they want to collaborate with colleagues to develop effective instruction for students and over 40% said they want increased access to the latest technology, which we see as a clear signal that there are opportunities to bring digital solutions into the classroom on a broader scale. For those of you who attended or listened to our investor day in May, you heard us talk at length about how today's students learn, how they interact with teachers and how they respond to technology. We know that it's not just about bringing more technology into the classroom. It's crucial to introduce and implement effective digital solutions in a way that actually provides learning outcome. We are constantly thinking about how to fuel innovation and create next-generation solutions that will aid teacher's ability to drive results in the classroom. To that effect, in the second quarter, we launched the HMH Developer Portal, which provides developers and educators with access to our APIs so they can more effectively create interoperable learning applications that connect seamlessly with our platform. The portal was created by HMH Labs and marks a key milestone in our strategic efforts to facilitate interoperability and create more streamlined and tailored solutions for our customers. We have been encouraged by the interest from the developer community, with over 200 signups to the portal to-date and almost 100 developers participating in our recent 24-hour Hackathon Curious Codefest in Boston. We're also looking holistically at the learning paradigm and thinking about how to extend learning beyond the classroom and into the home. We believe our effort and investment in building our consumer business continues to be validated by the compelling trends and this remains a core part of our growth strategy. As we have stated before, the total consumer education market is approximately $13 billion, which includes private tutoring, children's books, home schooling, self-study language learning and educational games A recent report from Simba Information discusses as a segment of this large market noting that educational products for pre-school and school-age children grew 8% in 2014 to $3.3 billion, thanks in part to a nearly 20% increase in sales of digital educational content. This healthy level of spending is forecast to expand to more than $4 billion annually by 2017 as parents look for new ways to support and complement their children's classroom lessons. We believe our existing K-12 business, world-class content and iconic brands give us a distinct advantage for gaining share in a fragmented market. Moving to our Trade business, our quarterly Trade segment revenues were essentially flat year-over-year. The second quarter of 2015 benefited from strong sales of our culinary lines along with backlist titles. The New York Times' best seller The Whole30 has remained on list since April and we are excited to further build out our branded culinary lineup with our new partnership with the Weber Grill Company, beginning in spring of 2016. Following his widely popular title What If?, we're also looking forward to the release of Randall Monroe's new book, the Thing Explainer, in November of this year. Beyond our existing businesses one of the most significant developments during the second quarter was our acquisition of Scholastic's Educational Technology and Services or EdTech division. With this deal now closed, we have solidified a leadership position in the academic intervention space, gained an enhanced portfolio of early childhood and professional development solutions and added to our development technology and sales capability. The EdTech portfolio is highly complementary to ours and we are being strategic and thoughtful about how we approach integration. Since we closed the acquisition in late May, teams across the organization from math to English language Arts to assessment and beyond have gathered to share information and determine the best way forward together. In particular, EdTech possesses a clear strength in employing adaptive technology to effectively engage students and help close achievement gaps. We see clear opportunities to leverage this technology across our portfolio in order to further add to our solutions value proposition. We're also beginning to present our programs in an integrated way to external audiences. At the International Society for Technology and Education Conference, one of our largest customer facing events of the year HMH and the EdTech Group collaborated for a combined presentation. As we explained when we announce this transaction that we believe our combined presence will enhance total revenues and free cash flow for the company and create synergies in 2016 and beyond. Finally, as we executed on the operational front this quarter, we also worked to allocate capital in line with our defined framework. Aside from the investments we made in our existing businesses and the acquisition of Scholastic's EdTech Group, in the second quarter, we raised our total share repurchase program authorization to 500 million and executed on this program. We remain diligently focused on allocating our cash prudently and in a way that we believe will enhance long-term value for our shareholders. So, with that I'll let Eric walk you through the financial results for the quarter. Eric?
- Eric L. Shuman:
- Thanks, Linda, and good morning, everyone. We are pleased to report our second quarter results, which were underpinned by our ongoing leadership position in our core education market as well as efforts to expand in key growth areas. EdTech also added positive contributions in the month of June following the close of this acquisition. Due to the seasonality in our business we believe the first half results are not an indicator, in and of themselves, necessarily, of our full year performance as we expect to generate the majority of our billings and revenues in the second half of the year. As Linda already stated, in the second quarter of 2014, we had significant upfront sales from Texas' large scale adoptions, which led to a typically strong result, whereas this quarter, we had more normalized order volumes. Nevertheless, our results include some impressive wins in key states such as California, Florida, Texas and South Carolina. I would also like to point out that we recorded strong sales with an over 30% market share in Texas even with limited incremental investment in our existing social studies program. Our next new generational social studies program with enhanced features and functionality is currently under development. Billings for the second quarter totaled $436 million which were $80 million of 15% lower compared to $516 million in the second quarter of 2014. Net sales for the quarter declined $22 million or 5% to $380 million from $402 million in the second quarter last year. Within this, our Education segment contributed $342 million in net sales which was $22 million or 6% less than the second quarter of last year and our Trade Publishing segment accounted for $37 million, in line with the second quarter of 2014. Excluding the contribution from EdTech, net sales for HMH's quarter would have been $362 million. Second quarter results reflect the anticipated smaller domestic education market, and in particular, the smaller new adoption market as compared to last year. Domestic education net sales were $29 million lower due to the strength of prior-year Texas math and science adoptions. However, the new adoption market in total is up 15% from our initial estimates at the start of the year and is now forecasted to be $590 million. We also had modest market share gains within the open territories, despite the fact that this market so far has been smaller relative to our initial expectations. Partially offsetting the small domestic education market was solid growth in some of our key focus areas, as consumer sales increased $4 million year-over-year and international sales were also up $3 million for the quarter. We also continued to have strong sales this quarter across our Trade segment, including from titles such as the Whole30, the Real Paleo Diet Cookbook, Cake My Day! and the Crossover, offsetting strong prior-year sales of The Giver. In the second quarter, we reported an operating loss of $11 million, compared to operating income of $18 million in the same quarter of 2014. The $29 million swing was attributable to our lower net sales, increased cost of sales due to a change in our product mix, and increase in technology costs to support our digital products. This was coupled with an $18 million increase in selling and administrative costs which stemmed largely from fees related to the recent secondary offering of our common stock and the EdTech acquisition along with increased head count related to the EdTech business and our ongoing organic growth initiatives. This was partially offset by a nearly $9 million reduction in net amortization related to publishing rights, pre-publication, and other intangible assets due to our use of accelerated amortization methods. For the second quarter of 2015, we recorded a net loss of $8 million compared to net income of $12 million in the same period last year. This change was primarily driven by the same factors impacting operating loss as well as higher interest expense and a loss from the extinguishment of debt related to our previous term loan. Additionally, we had an $11 million income tax benefit this quarter compared to a $2 million income tax expense in the second quarter last year, mainly attributable to the timing of the recognition of our non-cash deferred income tax. Our adjusted EBITDA in the second quarter was $80 million, down $30 million or 27% versus adjusted EBITDA of $109 million in the second quarter of 2014 due to many of the same factors impacting our operating loss. Adjusted cash EBITDA for the second quarter of 2015 was $136 million compared with $223 million in 2014, primarily reflecting the impact of lower billings and lower deferrals. In the second quarter of 2014 we had a very high level of deferred revenue related to our highly digitized math program sold in Texas. As always, a detailed reconciliation of our GAAP results to adjusted EBITDA and adjusted cash EBITDA is included in the appendix to this presentation as well as in our earnings release. We ended the first half of the year with cash and cash equivalents and short-term investments of $319 million compared with $743 million as of December 31, 2014 due to seasonal working capital uses in addition to returning value to our shareholders in the form of share repurchases. Also, we used a portion of our cash to fund the EdTech acquisition. During the second quarter, we repurchased over 8 million of shares for approximately $191 million on the open market and through privately negotiated transaction under our share repurchase program. In the first half of the year, we used $135 million of cash from operating activities, which is consistent with the $132 million utilized in the first half of 2014. As we have explained in the past, we typically use cash in the first two quarters of the year due to the seasonality of our business. Lastly, we are revising our 2015 guidance after completing the acquisition of the EdTech business. In comparison with 2014 billings and revenue, we now expect full year billings to be higher in the range of 2% to 6% with net sales increasing in the range of 9% to 12%. Our content development spend is now expected to be in the range of $130 million to $140 million. Our forecast for the addressable domestic education market in 2015 remains unchanged at approximately $2.7 billion. In closing we are entering the second half of the year on solid footing, and we believe we are well positioned to deliver for the back-to-school season and pursue growth in the adjacent markets. With that, we'll now open the line for Q&A. Operator?
- Operator:
- Thank you. Our first question is from Jeff Silber with BMO Capital Markets. Your line is open.
- Jeff M. Silber:
- Thank you so much.
- Linda Kay Zecher:
- Morning.
- Jeff M. Silber:
- Good morning. You had mentioned a few times about the large adoption in Texas last year. Can you quantify what the impact was so we can compare on a year-over-year basis?
- Eric L. Shuman:
- Yeah. On a billings basis, year-to-date, last year we billed, in Texas, $76 million more than we billed this year. And in Florida, we billed $31 million more than we billed last year. So you can say the impact of just those two states is over $100 million.
- Jeff M. Silber:
- Okay. Great. That's helpful. And when you talk about your addressable market and the 41% share, it's down I think compared to this time last year. I know last year you had a great year, it was about 50% if I remember at this point in time. Is it because of the issues in Texas and then you mentioned Florida as well?
- Linda Kay Zecher:
- Well, it's also because more than 50% of our billings happen in the second half of the year. So it's really not market share, it's really not comparable so much on a six-month period. It's more on an annual basis.
- Jeff M. Silber:
- Okay. And when you define your addressable market now when you mentioned 41% share, does that include the impact of Scholastic?
- Eric L. Shuman:
- Yes.
- Linda Kay Zecher:
- Yes.
- Jeff M. Silber:
- Okay. And one other thing, I'm sorry. You had mentioned the impact of Scholastic on the quarter in terms of net sales. Can you give us the impact in terms of cash EBITDA. Was it positive or negative?
- Eric L. Shuman:
- It was positive.
- Jeff M. Silber:
- Okay, great. And then one final one, I will jump back into the queue. Going forward, can you give us some color how we can model those amortization and interest expense? Thanks.
- Eric L. Shuman:
- Yeah. We've typically given schedules to help out with the modeling, so if you call Rima after the call, she can help you with how to model that.
- Jeff M. Silber:
- Okay, I'll do just that, thanks so much.
- Operator:
- Thank you and our next question is from Denny Galindo with Morgan Stanley. Your line is open.
- Denny L. Galindo:
- Hi, good morning, thanks for taking my questions. I have one on guidance and one on the consumer market. On the guidance, we had actually assumed a 10% increase in billings from Scholastic, we are pretty close in Q2 but does that sound right for the whole year or if that's the case, did you lower your billings guidance for the rest of the business by about 4% or maybe I was just too optimistic on Scholastic in the first place?
- Linda Kay Zecher:
- Well I think – we've revised our guidance within the range of the boundaries of our original guidance that we gave plus we added in the EdTech business. But I think that what we're looking at with EdTech, we expect it to perform at least as well as it has at historical level, however, we just acquired the business. We've only had it really for one month. And so I think it's really prudent on how we think about the business for the remaining months of the year that we don't kind of get ahead of ourselves.
- Denny L. Galindo:
- Okay, so that sounds like the Scholastic was a little bit optimistic, my old Scholastic number?
- Linda Kay Zecher:
- I would say so.
- Denny L. Galindo:
- Okay, and then consumer is interesting, you started disclosing more there, you're up 60%, $4 million in the quarter, can you tell us how much that was for the whole year last year and then it seems like it's on the pace to add, say, 1% or so and it's accelerating. Is this coming in as you expected, a little bit faster, a little bit slower? Maybe some help there.
- Linda Kay Zecher:
- Yeah, we actually don't breakout our consumer numbers but we are starting to talk about a little bit more because it's one of our growth areas that we're excited about, we talked about it at the Investor Day. I think as – we will continue to talk about consumer in the future but we're still not breaking out the numbers specifically.
- Denny L. Galindo:
- Okay. And then on a modeling question, the plate spend for Scholastic it seems like it increased the guidance by about $20 million for around two-thirds of the year. Is this coming in a little higher than you previously thought, I think you had said something around $20 million to $25 million for the year or maybe it's just a timing issue?
- Eric L. Shuman:
- It's a timing issue as to when we acquired them, they're working some new products that should be completed for next year for back-to-school 2016.
- Linda Kay Zecher:
- Primarily the READ 180 program for California, of which both of the Scholastic programs were just adopted in California.
- Denny L. Galindo:
- Okay, I'll hop back in the queue. Thanks.
- Operator:
- Our next question is from Drew Crum with Stifel. Your line is open.
- Drew E. Crum:
- Okay, thanks. Good morning everyone.
- Linda Kay Zecher:
- Good morning.
- Drew E. Crum:
- Just want to go back to the guidance question again. If we compare the 2% to 5% net sales growth that you are previously forecasting versus the now 9% to 12% growth. The range of outcomes would suggest an incremental $56 million to $137 million more. I guess I am curious as to how EdTech is impacting that number understanding that you're only capturing seven months in 2015 but it was $250 million business and maybe there's something else in the guidance that's changed since you provided the original guidance, so I just wonder if you could reconcile that.
- Linda Kay Zecher:
- We feel very confident about our core business and so I think when we look at our guidance, we're still within the range that we gave you...
- Drew E. Crum:
- Okay.
- Linda Kay Zecher:
- ...at last. Nothing has changed on that. I think when we look at the EdTech business, we expect the EdTech business to perform as it has historically for the remainder of this year. But, again, I mean, we're being prudent. We just acquired them. There's always some challenges when you're trying to integrate things in. And we're just trying to be prudent in our guidance. But we don't have any reason to believe that it's not going to perform at historical levels. I just think it's a prudent thing to do when you acquire a new company to think about it that way.
- Drew E. Crum:
- Okay. Fair enough. And then, on the addressable market, Linda, I think you made a comment about Texas appropriating over $1 billion to the instruction materials fund. Our understanding is that some of those monies will be released in September. So, curious as to whether or not you think that could serve as a source of upside to your business in 2015, at the very least the entire el-high market?
- Linda Kay Zecher:
- Yeah. I think the way to look at that – our business between Q2 and Q3, and one of the reasons we don't give quarterly guidance is, it's really hard to determine when they're going to buy in Q2 and Q3, it varies. Last year, for example, there was a much bigger purchase by Texas in Q2. This year, we actually didn't have the Governor appropriating the funds and signing the bill until the end of June, which I think has caused some of the billings to, well, fall into Q3. We're still optimistic where we thought the market would be. We're still optimistic on Texas and we're optimistic on our year. So, again, some years you have a stronger Q2, lesser Q3. Some years, some of those billings fall into July versus June. It's just when we ship.
- Drew E. Crum:
- Got it. Okay. Thanks, guys.
- Operator:
- Our next question is from Peter Appert from Piper Jaffray. Your line is open.
- Linda Kay Zecher:
- Hey, Peter.
- Peter P. Appert:
- Hi. Good morning. Hi, Linda. So Eric, I know you've addressed this partly but think I'm extra thick this morning, can you break out – in terms of the year-to-year declines in revenues and bookings for the third quarter, how much is a function of market shrinkage versus specifically the timing issues relative to Texas?
- Eric L. Shuman:
- In the second quarter, your second quarter not the third quarter.
- Peter P. Appert:
- In the second quarter, I'm sorry, second quarter, sorry.
- Eric L. Shuman:
- Yeah, if you look at our second quarter, the market – well, it depends how you categorize. It's mostly Texas and Florida being lower. So, it's not that there's been any fundamental change in the $2.7 billion, it's just that we built must less this quarter versus last quarter for Texas and Florida.
- Peter P. Appert:
- All right, got it, okay.
- Eric L. Shuman:
- Okay, and that was offset by favorable activity on our part in California.
- Peter P. Appert:
- Right, okay, I guess, one of the challenges for investors is, obviously, understanding the significant seasonality in the business, and I know you don't specifically give quarterly guidance. But can you give us any help in terms of understanding the phasing of revenues and EBITDA between third quarter and fourth quarter this year?
- Linda Kay Zecher:
- Again, we're not going to break it out by quarter, but I think going back to our guidance, we feel confident in the basal business and our core business for the year. I think that's the best way of really saying it. More than 50% of our billings are going to come in the second half of the year.
- Peter P. Appert:
- Okay. Last year, the fourth quarter was particularly weak. Was there anything that was unusual there that we should be thinking about this year?
- Linda Kay Zecher:
- No.
- Peter P. Appert:
- Okay.
- Linda Kay Zecher:
- And again, and I'm not trying to dodge your question but, again, Peter, it's really hard sometimes to determine when you're going to ship between Q2 and Q3 and sometimes it's dependent upon shipments between Q3 and Q4. Some of that is based on appropriations of funding, some of that is just based on how the warehouses can take shipments. But our fundamental feeling about the market and about our year has not changed.
- Peter P. Appert:
- Okay. Understood. And Linda, your comments on the funding environment sounded reasonably upbeat. I'm wondering if now you're thinking that 2016, based on some things you said, could potentially be an up year in terms of total market opportunity versus 2015.
- Linda Kay Zecher:
- Yeah. We haven't given any guidance on 2016 yet. And we'll take a look at that before the end of the year and determine whether we're going to change our guidance.
- Peter P. Appert:
- Got you. I'm just giving you an opportunity to get ahead of the game.
- Linda Kay Zecher:
- I know exactly what you're doing.
- Peter P. Appert:
- The plan. And then, in terms of the Scholastic integration, you already addressed this to some extent. But anything you'd call out in terms of surprises on the upside or downside?
- Linda Kay Zecher:
- No, I think it's going really well. I just think it's – obviously, there's challenges when you're trying to bring a new group in and I think there's challenges with the sales force trying to get everyone settled down. And you're probably not aware of this, but Scholastic had a different sales calendar in the way they compensated their teams. Their actual fiscal year ended the end of Q2, but their calendar for how they compensated their sales teams went through Q3. We do an annual, so there's some challenges there that we have to work through over the course of the next six months. But from the standpoint of the products, it's very strong. I think with the opportunities that we're going to have to leverage some of their products in our consumer business and leverage their adaptive engine, we are very excited about the acquisition. In some cases it's actually better than we thought and we're particularly excited that both our products and the EdTech product all made the adoption calendar in California in all five categories.
- Peter P. Appert:
- And have you guys, I know it's early days but – so the Scholastic product is obviously reading and math. Have you thought about expanding to other disciplines?
- Linda Kay Zecher:
- Right now we're focused on really building up the math discipline. I mean they're very, very strong in reading and we think that there's a lot more opportunity in math. So, I think we're looking at how we can expand that. We're also looking at how we can take some of the reading components and put them into the consumer market and we think there's a lot of opportunity for that. And so we've had quite a few sessions where we've gone through these things and I think the collaboration is really, really strong right now.
- Operator:
- Thank you, and our next question is from Jason Bazinet with Citi. Your line is open.
- Jason B. Bazinet:
- Just had a question on the Texas social studies commentary you gave. I think you said you did a 30% share. Is that of the entire K-12 social studies market or is that some subset?
- Eric L. Shuman:
- No, that's not, we don't participate in the elementary social study. So, that's el-high.
- Jason B. Bazinet:
- Okay, thank you. Thank you.
- Eric L. Shuman:
- It's through high, yes.
- Jason B. Bazinet:
- Thank you.
- Eric L. Shuman:
- Okay. Thank you.
- Operator:
- Thank you. Our next question is from Andre Benjamin with Goldman Sachs, your line is open.
- Andre Benjamin:
- Thanks, good morning.
- Linda Kay Zecher:
- Good morning, Andre.
- Andre Benjamin:
- I guess my first question is hoping you could – can you hear me?
- Linda Kay Zecher:
- Yes.
- Andre Benjamin:
- Yeah, I was hoping you could provide a little more color on how your thoughts are evolving with respect to how you 're going to go about attacking opportunities in the professional development intervention in early childhood markets that you talked about in the Investor Day?
- Linda Kay Zecher:
- We are continuing to feel very good about the opportunities with both our new acquisition of the EdTech business and moving more into intervention. And our consumer business is really starting to show great progress. And consumers as we defined it is parents, teachers, students and lifelong learners. So there is a lot of professional development opportunities from both our Heinemann content and also in our basal business. There is also a lot of opportunities in early childhood in taking some of the properties that we've acquired both from the EdTech business and from our own Trade business in going down market into that area. That's one of the reasons that we're excited about some of the media opportunities that we're looking with assets such as Gossie & Gertie and then some other things that we are exploring with some of our other core assets like Carmen Santiago and Oregon Trail.
- Andre Benjamin:
- Got it. I know you've been investing a lot in technology, both organically and via M&A. Some of your competitors including some private ones are also being pretty aggressive in terms of investing in their tech platforms. Maybe you talk a little bit about innovation that you are currently investing in and what you may be seeing on the competitive landscape or what your customers are asking for you today that you're not currently doing?
- Linda Kay Zecher:
- I think one of the most important things that we invested in was really our player and being able to have the ability to integrate a lot of different content into our content. And we think that as we move more into an adaptive technology environment, we now have the tools to leverage with that better with the tools that we acquired, the adaptive engines that we acquired through the EdTech acquisition. So we feel really, really good about that. We've also always had the platform agnostic and device agnostic strategy and I think that that has been the right strategy and our customers have told us that. The other thing that we've done is our ability to have open APIs and we've exposed our APIs. As I discussed we are working in our marketplace and building a marketplace out. One of the reasons that we did the Hackathon was to give a lot of partners the opportunity to build applications on our platform that could then be utilized in the classroom and I did talk about the marketplace as something that we believe leverage our platforms gives other an opportunity to leverage our relationships with the schools and gives us the opportunity to sharing those revenue stream. So, and then, again, as we highlighted in our Educator Confidence Report, 97% of the educators and now using digital tools and some citing benefit such as improved student engagement, improved access to instructional content and the enhanced ability to deliver differentiated or individualized instruction, so that this is all about. And so as we've had more and more positive comments like that from our customer base, we feel like we're well positioned to really be able to leverage our technology to address their needs.
- Andre Benjamin:
- Thank you.
- Operator:
- Our next question is from Ian Zaffino with Oppenheimer. Your line is open.
- Ian A. Zaffino:
- Hi, great. Just two quick questions, as far as the shift from the second quarter of the shipments that, I guess, should have been in the second quarter, that got shifted to the third quarter, can you quantify the amount for us so we could get a better idea?
- Linda Kay Zecher:
- Before I quantify the amount, let me just say, it's not necessarily a shift from shipments in second quarter to third quarter. There's always timing issues between second and third quarter. Last year as we stated on our earnings call then and as our comparable, we had a lot of early shipments in Texas. This year, we expect it to be as a more historically shipped, which has been more in the third quarter.
- Ian A. Zaffino:
- Okay. And I guess the second question would be, as far as the back half of the year, this is sort of when you get – sort of getting all your working capital back, your cash flow back. How should we be looking at your appetite for buybacks in the second half just given the increase in cash flow, could you become more aggressive or it's already what we already the most aggressive you're going to be?
- Eric L. Shuman:
- Yeah. We've stated how much we've purchased in the first half of the year. We'll continue to be in the market buying shares in the second half of the year. But some of it's opportunistic and some of it's planned. So I can't tell you definitively how much we're going to be in the market purchasing. But it's our expectation we'll continue to be in the market. It's a $500 million program that we'll be executing over the next two years.
- Ian A. Zaffino:
- Okay. So let me just ask it maybe differently. If you look at sort of your cash balance at the end of second quarter, what do you think it's going to look like at the end of the year?
- Linda Kay Zecher:
- We don't give guidance on that actually.
- Ian A. Zaffino:
- Okay. All right. Thank you very much.
- Linda Kay Zecher:
- Good try though. That was good.
- Ian A. Zaffino:
- I do my best.
- Operator:
- Our next question is from Lance Vitanza with CRT Capital. Your line is open.
- Lance Vitanza:
- Hi. A couple of questions.
- Linda Kay Zecher:
- Hey, Lance.
- Lance Vitanza:
- Hi. Couple of questions here. The first just as a point of clarification, so I think you said earlier, Linda, that California had authorized, was it a 14% increase in K-12 textbook spending, was that accurate or?
- Linda Kay Zecher:
- Yes.
- Lance Vitanza:
- And for what period – I think you called out, I think you said was that for 2016-2017 school year or was that for earlier period?
- Linda Kay Zecher:
- Well, we signed it in the 2015-2016 budget.
- Lance Vitanza:
- Okay. That was the comment. Okay. So is there any sort of – what should be the read through in terms – I mean, that's a huge increase. I'm just trying to figure out when I should be expecting that to sort of hit your shipments and billings and so forth.
- Linda Kay Zecher:
- I think primarily 2016.
- Lance Vitanza:
- Okay. Thank you. Okay. So, and then on the market share, the 30% share in the Texas adoptions, I think that's down from what you guys have been done in the past. You mentioned something, however, about making limited investment in social studies. And I'm wondering can you flush that out a bit, why the limited investment and what should we be thinking about there.
- Linda Kay Zecher:
- Well, the major adoption this year was in social studies in Texas. And we really only participate in the 6 through 12 adoption. And we didn't really expect – we've really exceeded our expectations because we had not put a lot of development effort and money in our social studies program.
- Lance Vitanza:
- Right. And I guess what I'm wondering is, that was a conscious decision that you made looking at what the expected returns would be on it and why would that be different just from a subject matter in which you would find more attractive opportunity to put more money to work, to make an investment and then to capture perhaps some additional market share.
- Linda Kay Zecher:
- Well, there's a couple of things. Number one, we are actually developing a brand now social studies program that will be ready in 2016 and 2017. So it didn't make a lot of sense to really put a lot of capital into this Texas adoption. Secondly, we only played in the 6-12. And third, where we've really focused was California reading and so most of our capital dollars for this year went into California reading, which is a much larger market. So we went into Texas knowing and the social studies area that it was not going to be our strongest offering. But having said, we far exceeded our expectations on how well we did.
- Operator:
- Thank you. And our next question is from Denny Galindo with Morgan Stanley. Your line is open.
- Denny L. Galindo:
- Hi, there. I just had a couple of follow-ups.
- Linda Kay Zecher:
- Sure.
- Denny L. Galindo:
- Number one, on the adaptive learning, it's something that we've been hearing about a lot and you mentioned that Scholastic was pretty strong there. Can you give us a little bit more color, are there subjects that you're focusing on more than others? How is your product different than your competition? And then how much of this Scholastic product is truly additive and how much might you say like, well, Scholastic had one product, we had one product, we're just going to go with this one because it's better?
- Linda Kay Zecher:
- Well, there's a couple of things. I mean, first of all, Scholastic and the EdTech business that we acquired is primarily focused on the intervention market. But they have an adaptive engine that we think is very strong and it's something that they've been using in their programs that we think we can leverage in our basal program. And so from that perspective, we think that, that's going to be a great addition. As you know, we have been leveraging the Newton engine and what we would like to look at is how we can take that in-house with our own adaptive engine. So, that's the way we are thinking about this. But it's not – it's additive to our marketplace to increase our adaptive capabilities across all of our basal programs. And the areas that we think that are great opportunities really are in math and reading. And one of the reasons I believe our Go Math! program did so well last year and will continue to do well is because of the adaptive technology that we've incorporated into it.
- Denny L. Galindo:
- Okay. That's helpful. And then, lastly, just turning back to the adoption market overall. I think you had kind of talked about how the adoption market was down year-over-year, then I think you made the comment the new adoptions were up 15% and does this mean open territory is down? Maybe you could just kind of give some color on the various portions of the adoption market, how they're doing?
- Eric L. Shuman:
- The adoption market is continued – it will be down versus last year. What we're talking about is, first, our initial estimate that we gave you for the new adoption market, it's going to be up versus our original estimates by approximately 15%, but the total market will remain about the same $2.7 billion.
- Operator:
- Thank you. And I'm not showing any further questions at this time. I'll now turn the call back over to Linda Zecher for closing comment.
- Linda Kay Zecher:
- Well thank you, all, very much. We appreciate everyone taking the time to join us on our call today, and really look forward to seeing many of you at the investor conferences we plan to attend in the third quarter. If you do need any additional information please contact Rima and our Investor Relations department. So operator this ends call today and thank you, all, for very much.
- Operator:
- Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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