Houghton Mifflin Harcourt Company
Q4 2015 Earnings Call Transcript

Published: 25 Feb 2016

[Operator:]

Good morning, and welcome to the Houghton Mifflin Harcourt's Fourth Quarter and Full Year 2015 Earnings Call. I would like to inform you that this call is being recorded for broadcast and that all participants are in a 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, Candace, 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 March 3, 2016, and the webcast will be available on our website for one year. We filed our financial statements and our annual report on Form 10-K with the U.S. Securities and Exchange Commission earlier this morning along with our fourth quarter and full year 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 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 2015 results along with the full year 2016 outlook. 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 to all of you. And thank you for joining us today. 2015 was an exciting year for HMH on our transformation to one of the world's leading educational media companies. Our iconic brand, world class content, recognized learning expertise and valued customer relationships provided the foundation to deepen our core business. In 2015, through a thoughtful combination of organic investment, strategic acquisitions and disciplined execution, we further extended the depth, breadth and value of the HMH portfolio. Eric will provide the details of our 2015 financial performance in a few moments. In short, we finished 2015 with solid financial performance in line with our full-year guidance with a 3% increase in net sales year-over-year. We continue to execute on the balanced capital allocation strategy we have communicated in the past which is aimed at increasing shareholder value by facilitating organic growth, pursuing acquisition opportunities and returning capital to shareholders. We used our cash to support key growth initiatives, including direct-to-consumer and early childhood. We have followed a disciplined capital allocation investment plan where we selectively reinvested in core curriculum products and services that allow us to compete in upcoming adoptions and further differentiate our offerings. Our 2015 acquisition of a leading portfolio of intervention products and services is demonstrative of our commitment to quality in critical learning areas that are accretive to our business. We are very pleased with the integration of the Intervention Solutions Group within HMH and customer reactions have been very favorable. Going forward, we will continue to look for acquisitions that contribute to long-term growth and delivers us with content and technology that provides a competitive advantage. Finally, in 2015 we followed through on our commitment to return capital to shareholders. Since we announced our share repurchase program in November of 2014, we have repeatedly increased the overall size of the program, a testament to our belief in our growth potential and in the long-term value that our shares represent. I am pleased to say that as of the close of Q4 2015, we have repurchased $463 million of our common stock. We accomplished this buyback in six months, well in advance of the two-year authorization in the initial announcement, returning 286% of free cash flow to our shareholders. As you may recall, in November we announced an additional $500 million authorization under our existing share repurchase program, bringing our aggregate total authorization to $1 billion. Approximately $537 million remained as of December 31, 2015, which may be executed through the end of 2018. As we look to the future, we believe we are entering 2016 well positioned for success. We are a media company rooted in the understanding of how people learn. We are unique in our ability to provide our customers an integrated portfolio of innovative learning solutions that span core curriculum, intervention, assessment and professional development. And we are the only company that can extend these rich experiences beyond the classroom, making a meaningful connection between school and home. As we continue our transition to a media-centric model, the expansion of iconic HMH brands such as Curious George, Carmen Sandiego, CliffNotes, Gossie and Gertie, Polar Express, The Lord of the Rings and many more offer opportunities to provide value to customers and monetize our content in new ways. Within our education segment, in 2015 we increased net sales by 3.5% to $1.25 billion. The strength of our educational content continues to resonate with our target markets. Last year, we demonstrated the power of our content by capturing a leading market share of 40% of our core domestic education market. We had impressive wins throughout the year with best-in-class products like GO Math!, Journeys and Collections in states including California, West Virginia and Tennessee. In 2015, our customers continued their transition to digital. For the full year, digital content accounted for approximately 48% of billings within our large education programs and 34% of total billings. Our core domestic education market in 2016 is comparable to 2015. Looking ahead, we expect to see growth in this market accelerating in the 2017 to 2019 period with the market approaching over $3 billion in 2018. This year we plan to continue to leverage the strength of our content, services, relationships and reputation in the K-12 market to increase wins in key states such as California. With the California reading adoption later this year, we are pleased that all of our English language programs submitted to the California State Board of Education for the 2016, 2017 reading adoption were approved, positioning us well in this important state. Combined now with our READ 180 intervention solution and our Leveled Literacy Intervention program, we have the most comprehensive and effective intervention programs available. We look forward in 2016 to a full year of competing with this broader and deeper product portfolio. We continue to maintain our focus on high quality content, which we believe is critical to student achievement. To that end, we have recently announced next generation versions of our foundational Collections and Journeys programs, which together we believe represent a complete market leading English Language Arts solution for grades K-12. We are also expanding our suite of offerings designed to meet the next generation science standards based on the framework for K-12 science education developed by the National Research Council. 2015 also brought strong results in our education businesses. For example, professional development and services were up 12% year-over-year as schools continue to focus on teacher training and development. We're taking a new integrated organizational approach to education services relaunching its HMH professional services, one of the largest and most diverse professional learning organizations operating today in the pre-K-12 space as defined by offerings, reach or team size. With our recent Intervention Solutions and related services acquisition, we believe HMH has one of the deepest and broadest pre-K-12 content and services portfolio and capabilities within the industry. To further extend the value we provide educators and students, in the second quarter 2016, we plan to launch the beta version of the HMH Marketplace. This online destination enables educators and independent software vendors to discover, share and sell trusted resources that enhance the teaching and learning experience. We currently have more than 30 companies with over 1000 listings in total expected to launch. Current participants include many well-known and emerging brands in the EdTech space. We see the HMH Marketplace as a great opportunity to build deeper relationships with our customers, while further building upon the company's digital offerings and providing a new revenue stream. Turning to our Trade Publishing segment, we saw strong fourth quarter 2015 net sales and a slight increase for the full year with net sales of $165 million. Frontlist culinary titles drove the increase in net sales. In 2015, we published The Whole 30

[Eric L. Shuman:]

Thank you, Linda, and good morning, everyone. As Linda noted, 2015 was an exciting year for HMH. We completed a significant acquisition, maintained a leading market share, increased net sales and generated solid free cash flow. Looking more closely at our results. Billings in 2015 were $1.5 billion, a 4% decrease from 2014 billings of $1.6 billion in line with our revised guidance. This includes $166 million in billings from the acquired Intervention Solutions and services group, which exceeded our expectation. As you can see in our slide presentation, net sales for the full year of $1.416 billion were up 3% from $1.372 billion in 2014. For the full year, education net sales increased by 3.5% to $1.251 billion from $1.209 billion in 2014. The net sales increase includes $148 million contribution from the acquired intervention solution and services business. This increase was substantially offset by lower net sales of the HMH legacy domestic education business, which decreased by $98 million due to the comparable 2014 large Texas math and science adoption. Net sales in the Trade segment increased 1% for the full year 2015 to $165 million from $163 million in 2014, primarily driven by new culinary titles. We have a strong frontlist for 2016 and remain enthusiastic about the prospects for our Trade business. Looking at our income statement, operating loss for the full year was $116 million, $31 million greater than the $85 million for the same period in 2014. Overall cost of sales were flat at $824 million in 2015 compared with 2014. Cost of sales, excluding publishing rights in print publication amortization, increased $34 million in 2015 to $623 million from $589 million in 2014, primarily due to the increase in net sales along with higher costs related to changes in product and services mix, shorter print runs and higher technology costs to support digital products. Selling and administrative cost increased $69 million. This increase included approximately $85 million in expenses attributed to the acquired intervention and services business and fees and expenses related to the secondary equity offering. These expenses were partially offset by $24 million in lower commissions. Excluding the acquisition and the equity offering, selling and administrative expenses would have been lower by 2.5% compared to the prior year. For the full year 2015, our net loss was $134 million, $22 million higher than the $111 million we reported in 2014. The full year results reflect the same factors affecting operating losses along with increased interest expense from our $800 million term loan, partially offset by an income tax benefit attributed to the release of an accrual for uncertain tax positions. Our adjusted cash EBITDA for the full year was $359 million compared to $495 million in 2014. The decrease is due to lower deferred revenue of $124 million in 2015 compared with $230 million in 2014, primarily due to comparable smaller digital adoption in 2015. For the full year 2015, our adjusted EBITDA was $235 million compared with $265 million in 2014, a decline of $30 million. The decrease is driven by lower net sales from HMH's legacy business, higher cost of sales and increased expense associated with the company's growth initiatives that Linda just spoke about, partially offset by the contribution from the acquired Intervention Solutions and services business. We ended 2015 with cash and cash equivalent and short-term investments of $432 million, down $311 million from the year end 2014 balance of $743 million, primarily due to our share repurchases. Our free cash flow, which is cash used in operating activities less capital expenditures, was $162 million for the full year compared with $308 million for 2014. We believe our cash position remains strong and we continue to actively evaluate accretive capital acquisitions and other strategic investment opportunities to increase shareholder value. Now let's turn to our outlook for 2016. We have provided guidance for net sales, billings and content development spend. As Linda shared with you earlier, our core domestic education market for 2016 is expected to be comparable to 2015. Some of the major new adoptions within this market include California, Oklahoma and Georgia reading and South Carolina and Alabama science, representing a better subject mix for HMH as compared to 2015, where the largest adoption was Texas social studies. With a full year of billings from the Intervention Solutions and services acquisition, as well as key growth in key target markets, we expect full year 2016 billings to be in the range of $1.625 billion to $1.7 billion. Annual net sales are expected to be in the range of $1.5 billion to $1.575 billion. The difference between billings and net sales represents net deferred revenue. Finally, we expect our pre-publication costs, or content development spend, to be approximately $120 million to $140 million in 2016. In closing, we executed on our strategic plan to grow our footprint and increase sales in targeted areas. We look forward to building on the progress we made in 2015. With that, let's open the call to questions.

[Operator:]

Thank you. And our first question comes from the line of Jeff Silber of BMO. Your line is now open.

[Jeffrey Marc Silber:]

Thank you so much. Appreciate the outlook that you gave us for this year. I'm just wondering if you can give us any comments on what you expect for either adjusted cash EBITDA or free cash flow in 2016.

[Eric L. Shuman:]

As you know, Jeff, we don't give guidance on adjusted EBITDA, adjusted cash EBITDA or...

[Linda Kay Zecher:]

Free cash flow.

[Eric L. Shuman:]

...or free cash flow. As the year goes on, we may give some update on where we expect our free cash flow to be. But not right now.

[Jeffrey Marc Silber:]

Okay, fair enough. In terms of the size of your sales force, is that something you made an investment in in 2015 and what do we expect that for 2016?

[Linda Kay Zecher:]

We actually made an investment in our inside sales and we added head count there. And then of course we, by acquiring the ISG Group, that's an increase in sales and we're going through a bit of a re-org with that right now, a very small adjustment on how we're incorporating our ISG product. We feel pretty good about the sales force at this point. I don't think that we're going to be adding any significant increase at all.

[Jeffrey Marc Silber:]

All right. If I could just sneak in one numbers question. In terms of interest expense for 2016, what should we be modeling?

[Eric L. Shuman:]

You should be modeling $800 million at this point at a rate of L plus 3%, with a 1% floor.

[Jeffrey Marc Silber:]

I'm sorry. Can you repeat that?

[Eric L. Shuman:]

With a 1% floor, so effectively L plus 4.5%.

[Jeffrey Marc Silber:]

All right. Great. Thanks so much.

[Eric L. Shuman:]

L plus 3.5% equals 4.5%, I am sorry, Jeff.

[Jeffrey Marc Silber:]

I got it.

[Operator:]

Thank you. And our next question comes from Ian Zaffino of Oppenheimer. Your line is now open.

[Ian A. Zaffino:]

Hi, thank you very much. Would you able to give us maybe in your billings guidance how much of that is organic, how much of that is related to adding additional months of EdTech or may be just what's EdTech doing versus the rest of the business?

[Linda Kay Zecher:]

Yeah, we don't really break that out in our billings number. We don't really break out the EdTech component. At this time.

[Ian A. Zaffino:]

Okay. Could you give us maybe organic versus non-organic?

[Linda Kay Zecher:]

As in organic...

[Eric L. Shuman:]

Organic is – the $1.7 billion – the $1.65 billion and the $1.7 billion assumes no new acquisition. So most of that – all of that will come from products we have.

[Linda Kay Zecher:]

That we have.

[Eric L. Shuman:]

Products that we currently have.

[Ian A. Zaffino:]

Okay. And then as you look at the California adoption coming up, how is that going? What are you kind of expecting from a market share standpoint on that award?

[Linda Kay Zecher:]

Well, right now, we are in our budget planning. We put California reading adoption at 50% first year, 50% second year. And so far, we don't really have any update that would make that – make us change that guidance for our budgeting.

[Ian A. Zaffino:]

So you're saying 50% market share or you're saying 50% of -- okay.

[Linda Kay Zecher:]

No, no, no. The California adoption is a two-year adoption. And right now, we are planning on about 50% of that adoption the first year, 50% of that adoption the second year. We don't really give guidance on the California reading as far as internal – how we're going to do in guidance. But having said that, we have been traditionally strong in reading and so we feel very good about the California reading adoption.

[Ian A. Zaffino:]

Okay. All right. Thank you very much.

[Operator:]

Thank you. And our next question comes from Peter Appert of Piper Jaffray. Your line is now open.

[Linda Kay Zecher:]

Hey, Peter.

[Peter P. Appert:]

Thanks. Good morning. Eric, can you give us any color on trends and operating costs in 2016? I'm noticing that the margins have been trending a little bit lower over the last several years. I'm wondering if in 2016 in the context of the revenue numbers, you're anticipating we could see some operating leverage in the model.

[Eric L. Shuman:]

I'm not sure we're going to give SG&A guidance. But if you look at how we did this year on a legacy basis, our comparable HMH legacy business, our operating expenses were actually down versus this year. The change next year is principally going to be driven by having a full year of operating expenses from ISG.

[Peter P. Appert:]

So that imply that maybe we see a little upside in margins in 2016 versus 2015?

[Eric L. Shuman:]

A little bit, yes.

[Peter P. Appert:]

Okay. And then in terms of the Scholastic product READ 180, MATH 180, are you seeing any need for reinvestment, updating of the READ 180 product in particular?

[Linda Kay Zecher:]

Well, we actually did invest in the READ 180 product this year. And the new READ 180 product is coming out in the June timeframe and that's the product that was bid in the California adoption. The MATH 180 product, we are incorporating some of our math content that comes out of our GO Math! and others going forward. The READ 180 will be refreshed this year and we feel pretty good about it. It actually got a really good review by the Department of Education and it's really considered the top reading intervention program and that was based on the new content that's coming out.

[Eric L. Shuman:]

And the investment is in -- within the context of the $120 million or $140 million of content development we talked about, Peter.

[Peter P. Appert:]

Great. Thank you.

[Operator:]

Thank you. And your next question comes from Andre Benjamin of Goldman Sachs. Your line is open.

[Linda Kay Zecher:]

Hey, Andre.

[Andre Benjamin:]

Thanks. Good morning. I guess my first question, you talked a bit about the HMH Marketplace. I was just wondering if you can maybe – I know you don't give detailed guidance, but just how we should think about the financial impact. Is this additive to the bottom line in terms of the revenue stream or is this just more of a – creating stickiness in brands with your customers?

[Linda Kay Zecher:]

Well, there's going to be – we're looking at it as being additive to the bottom line in revenue but not in 2016 because it's being launched in 2016. But the whole concept here is very much a marketplace similar to what you see within Apple Marketplace where we will take a percentage of content, a percentage of revenue on any content that is placed on the Marketplace. And we are doing that with partners, and then of course, we'll put our own content out there also. So we are looking at this as being a revenue stream for the company, and we are looking at this as being something that, ongoing, is going to give us a lot of stickiness in our current customer base.

[Andre Benjamin:]

Okay. And then I guess similarly I know the HMH ONE is something that you've been pushing increasingly over time and adding content to, could you may be talk a little bit about how you think about the end game there? And how that product should ultimately be positioned versus third party LMS companies like Canvas and Schoology and does it enhance sales? Does it enhance sales that – again, is it just about retaining customers? Or is it actually additive?

[Linda Kay Zecher:]

Well, the HMH ONE product is really our internal platform that we're going to be rolling out all of our content on. And so it really provides an easy option for people to be able to access content, and it gives us a great way to be able to rollout a variety of different digital products and be able, through open APIs and through a Common Cartridge, to be able to incorporate our content into these systems that already exist. I mean we announced a couple of years ago, probably before you were actually an analyst at Goldman, we announced a couple of years ago that we were not going to be doing an LMS product. We thought that, that was a wrong strategy. And our belief all along was that schools have a variety of different LMS platforms and that we need to coexist in those environments and be able to provide an easy way to transport data across those platforms. And so that's what HMH ONE is all about. The neat thing about HMH ONE is that it's also going to tie into the Marketplace. So if you are in HMH customer and you have the Marketplace, content from other third party companies and small EdTech companies that are trying to have a distribution model for their content will be able to leverage the Marketplace. And then through that, our HMH ONE platform to incorporate that – their content into the schools. So, from a teacher's perspective, they'll have a dashboard and that dashboard would allow them to pull up content that comes from other providers. It would allow them to pull up content that comes from our Marketplace partners. And it would allow them to pull up digital content from HMH, giving them sort of one-stop shopping for providing content and then collaborating – or getting that content within classroom.

[Andre Benjamin:]

Thank you.

[Operator:]

Thank you. And our next question comes from Bill Warmington of Wells Fargo. Your line is now open.

[William A. Warmington:]

Good morning, everyone.

[Linda Kay Zecher:]

Good morning, Bill

[William A. Warmington:]

So I was hoping, Eric, you could help me with this question. The -- as you look at free cash flow as a percentage of billings, what's kind of a reasonable range to think of that? And then what would take you to sort of the top or the bottom of that range?

[Eric L. Shuman:]

Isn't that a backdoor way of getting guidance on free cash flow, Bill?

[William A. Warmington:]

That's exactly what it is. But I think that you could talk about, you could talk about just operationally how to think about what a reasonable range on free cash flow is without actually having to commit to a particular number?

[Eric L. Shuman:]

Well, the only thing I'll say in free cash flow is, as I said, we don't provide guidance on it.

[William A. Warmington:]

Right.

[Eric L. Shuman:]

And the expansion of our share buyback program is really an expression of our confidence in our ability to generate sufficient cash to fund it. So we're optimistic about the amount of cash that we can generate over the next year and next couple of years.

[Linda Kay Zecher:]

I mean if you look at – Bill, if you look at what we did on our share repurchase and the percentage of our free cash flow, I think that really does, as Eric said, go to the confidence that we have in being able to generate a lot of free cash flow.

[William A. Warmington:]

Got it. And then if you look at the billings guidance, the $1.625 billion to $1.7 billion, maybe talk a little bit about what factors would potentially influence that in terms of coming in potentially higher, some things that might not break your way that would come in potentially lower. Where is the variability there being driven?

[Linda Kay Zecher:]

Well, I think the biggest variability in that is really California. If California does more in the first year than the second year and then that's going to significantly increase we believe our billings and hit the high end of the guidance we're on. And if California tends to be lesser than what we're expecting and then we – it could impact on the low end. But right now a lot of it is really dependent upon where California is because that's the biggest adoption this year, reading. They also have – there's a little bit of third-year math in California, too. And so that's something that we believe is a positive. But California is the biggest swing this year. We feel very good about ISG. We don't see any big swings in ISG beyond our anticipation that's incorporated in the guidance. Our consumer, as I said, is growing. We feel good about that, but that's not going to be a big swing. And then the third thing is really professional services. And that's an area that we're seeing significant growth. But again, I don't see that as being a swing that could impact our guidance.

[William A. Warmington:]

Got it. Very helpful. Thank you.

[Linda Kay Zecher:]

Welcome

[Operator:]

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

[Jeffrey D. Goldstein:]

Hi, this is actually Jeff Goldstein on for Denny. Just had a quick one on the EdTech business. I wanted to know if you're seeing any overlap or cannibalization of that business and your legacy business. Or is that more of kind of a separate offering where schools could still buy both products?

[Linda Kay Zecher:]

Totally separate offering. There's absolutely no overlap at all as far as deterioration of our legacy business. The positive there is that one of the problems that schools have had and teachers have had is that when children need intervention, you pull them out, you put them into a separate program and it's hard to mainstream them when they come back. As we continue getting closer and closer with our core content and with the intervention product, we're going to make that an easier transition for students to go back into the classroom. So it's really additive to our business and very accretive to how teachers view it in the classroom.

[Jeffrey D. Goldstein:]

Okay. Thank you.

[Operator:]

Thank you. And our next question comes from Trace Urdan of Credit Suisse. Your line is now open.

[Linda Kay Zecher:]

Trace, you're back. That's great to hear from you. Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) I'm back. Thank you very much, Linda. So I was hoping you might talk a little bit about open territory and how you're thinking about what that market's going to do for you in 2016 in the context of your billings guidance.

[Linda Kay Zecher:]

Well, open territory was – the total open territory market was only up about 2.4% this year and we were up about 4.6%. So we felt pretty good about that. Overall though, we had anticipated open territory being up about 6%, so it was up less than we thought, but we were very happy with how we did. I mean we're encouraged by the fact that it's picking up. We're also encouraged about some of what we believe are going to be increases in science there with the new science standards. We think that that's going to add to open territory, so overall feeling pretty good about it. Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Right. But in the – so relative to what you just described your expectations and where it came in in 2015, I'm wondering if you can kind of point at 2016 in the same way. Like how can we gauge how bullish or conservative you are being with respect to open territory in your guidance? Because you kind of given us an indication of what your sense is of the adoption space and I'm wondering if you can kind of give us the same sense of the – in terms of open territory.

[Eric L. Shuman:]

Yeah. Let me handle this one. I think we're – last year, we thought it would grow at 6% as we were sitting here a year ago. We're not quite as bullish as we were last year. We do believe that open territory will grow probably at a comparable rate to its growth this year, which was 2.4%. Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Okay. That's helpful. And then you guys are – you're obviously encouraging us to look at your services business. You gave us some commentary about the growth in the services business. But we don't have a lot of transparency. And I could have this wrong, but it looks like even some of the categorizations that you had reported on an annual basis in the 10-K have gone away. So I'm wondering if you can help us out a little bit with that. Like how are you – because my understanding is that services revenues are kind of scattered around different parts of your business. I don't know what I'm asking for exactly except just maybe a little bit more transparency about how we can think about that services business? How we can think about its growth, think about modeling it, margins all those kinds of things that help us really understand that piece of your business.

[Linda Kay Zecher:]

Yeah, I think there's a couple things that you hit on. One – you're right. Yeah, our services business has been traditionally sort of all over our organization. We made a change in that this year. We now have put it altogether in a professional development organization. And we brought in some real expertise when we acquired ISG on the services side. So we now have a professional services division. It was up 12% for HMH legacy year-over-year. It was up about 62% with the acquisition of the services business from ISG. So, overall, we're feeling pretty good about that. And if you look at what we're doing with our services business, last year, for example, we trained 375,000 teachers and we delivered over 43,000 days of professional services to about one-third of school districts. So our professional services business is growing. We will probably, either later this year or early next year, start talking about that more from a revenue breakout period, but we're not doing that yet in 2016 since we just coordinated this and put it together. But we are feeling very, very good about it. Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Okay. And, Linda, could you just maybe give us a very brief overview of the different pieces that are – the products I guess if you'll that are in that new division.

[Linda Kay Zecher:]

Well, there's a couple of things. There's professional development for teachers. There's – that's one big huge piece. There's also the technical programs and teaching teachers how to use technology and how to leverage technology. There's also professional services around just leveraging content in a technology environment. And there are professional services that will be incorporating as we rollout the Marketplace on how to leverage that and how to incorporate content into the classroom and dashboard perspective. So there's a variety of different things. But a lot of the teacher training right now is really on products, technology and then just overall professional development. There's also a lot of things around how schools – leadership in schools and how to really leverage our leadership training. And so there's a lot involved in that as far as teacher readiness too. Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Okay. So am I correct in assuming that the training that you normally do around your own product and materials is included in that?

[Linda Kay Zecher:]

Yes.

[Operator:]

Thank you.

[Eric L. Shuman:]

Go ahead.

[Operator:]

And our next question comes from line of Jason Bazinet from Citigroup. Your line is now open.

[Jason Boisvert Bazinet:]

I had a bit of an unorthodox question. When you guys came public back in, I think you started trading the fall of 2013, investors were looking at free cash flow that was negative. You put up two strong years of free cash flow growth, I think your guidance I think investors can infer there's free cash flow in the future and yet your stock is sort of flat. So since November of 2013. My question is what do you think is the biggest misunderstood aspect of your story and why are you confident given the accelerated buyback that you did in the fourth quarter that you're right about this and the Street is wrong? Thanks.

[Linda Kay Zecher:]

Well, I think we're a hard company to model. I think we're very – it's challenging to model us. And part of that is because of the adoption cycles and trying to understand year-over-year what's happening in that market. I think the other thing that makes it challenging is that we don't have a lot of comparables in the market. And we're the only pure play K-12 company. And so that makes it, I think that's kind of difficult. I think that as we continue to put up good numbers, as we continue to show that we have dominant market share in the core disciplines of reading, math and science, as we continue to expand in these other areas including consumer and professional services, and we – and our trade business continues to grow, I think we'll take some of the lumpiness out of the modeling and I think that's going to make it a lot easier because then you'll see more consistent growth rather than seeing – looking at it year-over-year. If you looked at our annual numbers over the course of five years and you were not someone that was familiar with the market, you'd be sitting there wondering what the hell happened. And so I think that that's part of the challenge. And so we've only been public for a couple of years. We've spent a lot of time trying to talk to the analysts and get them comfortable with the modeling. And I think that this is something that will help to move the stock over time. And I think that some of the analysts are beginning to really understand it, some that have been in this market for longer than others fully understand it. So it just takes time. But we are confident in the company. We are confident in our future. We are confident in the products that we're delivering. We are extremely confident in our digital direction and what we're doing. We have a really strong management team. We have a really great sales team. And the stock will move when the stock moves. But right now, we feel good about where we are and we're going to continue to buy back our stock because we feel it's of great value.

[Jason Boisvert Bazinet:]

Thank you.

[Operator:]

Thank you. And our last question comes from the line of Trace Urdan of Credit Suisse. Your line is now open.

[Linda Kay Zecher:]

Hey, Trace. Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Thanks, I just had...

[Linda Kay Zecher:]

Go ahead. Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Hey, I just had a follow-up with respect to the services question. So given that a chunk of the services, some unknown chunk is related to the -- your own products and services and training around that. Is it fair to think about that as fluctuating somewhat in terms of the adoption cycle? So big adoption sort of swell in the services revenue related to that and then in a down year that could deflate or am I not thinking about that the right way?

[Linda Kay Zecher:]

No, you're not thinking about it the right way. I mean because a lot of the... Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Okay.

[Linda Kay Zecher:]

...a lot of the teacher training and things that we do, that's incorporated in our – in some of our licensing, but we have so many other things that we're doing around teacher training and leadership development and especially technical training that this is a growth opportunity for us. And it's – you'd be surprised even in a down adoption year, you still have tremendous amount of training that you're doing for all kinds of services that are outside of being specific to that adoption. Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Okay so when you talk about that sort of 12% growth in your legacy services business like it's fair to, a year from now, look at what that number is and think it should be comparable or at least relatable to that number and not swing up and down based on the what's going to in the adoption market?

[Linda Kay Zecher:]

That is correct I would model it to that. Correct. Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Okay. Great. Thank you.

[Operator:]

Thank you. And this concludes our question-and-answer session. I'd like to turn the conference back over to Ms. Zecher for closing remarks.

[Linda Kay Zecher:]

Well, we appreciate everyone taking the time to join us on the call today. If you need any additional information, as always, you can contact Rima in our Investor Relations Department. So, operator, with that, that ends today's call. So thank you very much.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.