Q4 2020 Houghton Mifflin Harcourt Co Earnings Call
Ladies and gentlemen, please standby your conference call when we give them on materially once again, ladies and gentlemen, Thank you for calling please remain on your minds of your conference call will begin momentarily. Thank you.
[music].
Ladies and gentlemen, thank you for standing by and books for the Houghton Mifflin Harcourt fourth quarter and full year 'twenty and 'twenty earnings Conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask the question during the special and get the press Star one on your telephone if you require any further assistance. Please press Star then zero I would now like to do sales for this conference call Mr. Brian ship and you may begin.
Thank you and good morning, everyone before we begin I would like to point out that the slides referred to on today's call can be found on the Investor Relations section of our website at H M. H C O dot com.
A replay of today's call will be available until March 7th 2021.
And the webcast will be available on our website for one year.
Our 10-K and was also filed earlier this morning, along with our fourth quarter and full year 2000, and 'twenty earnings press release.
Before we discuss our results I encourage you to review of the cautionary statement on slide two for our customary disclosures.
Further information can be found and our regular SEC filings. In addition, please refer to the appendix and our slide presentation for a reconciliation of our non-GAAP measures to the most directly comparable GAAP measures, which is also posted to the HMH Investor Relations website.
This morning, Jack Lynch, Hmh's, President and Chief Executive Officer, and Joe Abbott Hmh's, Chief Financial Officer will provide a company update as well as an overview of the company's fourth quarter and full year 2020 results.
After our prepared remarks, we will open the call to questions.
And the Q&A. Please limit yourself to one question plus one follow up you may get back into the queue. If you have additional questions now I'll turn the call over to Jack.
Thanks, Brian and good morning, everyone.
Thanks for joining the call today.
2020 was an incredibly challenging year for our nation's schools and the companies that serve them.
But throughout the year HMH stayed relentlessly focused on executing our digital first strategy connecting teachers and students and every learning environment.
And otherwise and I couldn't be prouder of our team for their innovation.
And then and our resilience and together, we built the foundation for growth and momentum in 2021, and digital sales and recurring subscription revenue and profitability.
Transforming our business and keeping our customers' needs front and center.
The pandemic pulled the future for accelerating demand for HMH is digital and connected solutions over the last 10 months, we saw thousands of schools embracing our digital products and platform and you see this acceleration in our numbers of 142% growth.
And software and service billings over 300% growth and usage of our digital teaching and learning platform and 50% of our education and sales are now connected.
Remember why connected is so important.
HMH is the leader and the tune of half a billion dollar core curriculum market and as a result, and we have a customer footprint it expense and 90% of the schools, 90% of the teachers and 90% of the students and the United States.
We are also of the leader in the $6 billion extension market, but only have a 10% share with a lot of room to grow.
Leveraging our core footprint and 90 per cent of the schools to cross sell into the extensions market is HMH a unique opportunity to provide critical value to educators and the students they serve nationwide.
No one on any other company.
Has the breath of product coverage the HMH does and the reason we are so focused on integrating our core and extension programs on one platform. One platform. So the teachers can use a common assessment and supports all reading and math programs in both core and extension categories.
One way to measure of student progress.
And one platform. So teachers have one source for reporting on student achievement and one place to create assignments and ultimately one platform that enables a teacher to take advantage of those connections to advance the learning of each and every student regardless of where they are on the achiever.
On the spectrum.
In 2020, we saw a vivid example of connected with a grade 612 and literature program.
We integrated and AI, driven SaaS program Wadable, the automates, writing practice and integrated writing practice with the reading passages and our quarterly and share program in the fact, we collected and extension program to a core program and in the Texas literature adoption, we did that.
And with a 90% attach rate cash.
From a larger share of the $200 per student per year and structural material spend.
I share that with you as an example of what we mean when we say HMH is uniquely positioned to support customers in this accelerated shift to digital.
While the challenges of the past year have been deeply felt teachers are much more fluid and the use of technology than they were a year ago. Many more students have access to computing devices and the internet and they did a year ago.
Hence the conditions for successful execution of our digital first connected strategy are more favorable than they were a year ago and importantly, as we look to 2021, we've built a strong foundation to continue to intercept the surge and digital <unk>.
Man.
And support our customers wherever and however, they are teaching and learning while delivering value to our shareholders.
We finished 2020 with billings of 1.089 billion and upper half of our guidance range and positive free cash flow, which exceeded the guidance we provided in November.
We also grew our adjusted EBITDA margins in Q4 and for the full year, we're entering 2021 with a strong financial position from a capital liquidity and balance sheet perspective.
As I've alluded to and as Youll hear more about today.
And 2020, we sharpen your focus on learning technology.
Providing innovative connected solutions for our customers that deliver more impact and increased successful outcomes and we are well positioned for growth and positive free cash flow and 2021 and beyond which Joe will speak to shortly.
And in 'twenty and 'twenty, one we expect billings to be between $1 1 billion and 1.15 billion and we expect unlevered free cash flow margin to be between nine and 11% of billings.
Now, let's talk about our digital first connected strategy beginning with digital.
On slide six you can see the growth momentum, we continued to experience and SaaS sales and platform usage we.
We eat both metrics because the only represents the portion of our customers' digital experience that is a recurring subscription, whereas nearly all of our solutions have a digital component even when they are not hold as a subscription and our non recurring.
So what is driving the growth momentum co.
And another way why is digital important to Chi-ching and learning.
There are three major value drivers.
And it'll create.
Teacher capacity by automating time consuming lower value activities such as grading.
Creating and tracking assignments in effect automation of the workflow of the teacher. So they can allocate more of their time, the higher value activities seconds.
Use of revealed insight into student learning you cant get feedback out of our book.
But the digital and teaching and learning platform is instrumented.
The make of readily available insights into how students are learning and the progress they are making.
Finally, digital allows a teacher to deliver personalized customized instruction to the needs of each student using AI based adaptive software that use and on what is true hit knows and what they are ready to learn next it's pretty compelling and.
And even the most technologically hesitant teachers, who have had to adapt to using digital platforms, and the Permian and medium through which teaching and learning happened and remote learning even those teachers are seeing firsthand the advantages of digital and they recognize the HMH is a partner with smart software.
That puts the educator at the center.
Now the second feature of our digital first strategy is collected.
I've already touched on why conducted the is important to HMH is commercial success and as you can see from slide eight we closed out the year with the number of additional connected wins.
But why is connected important two of teacher.
On slide nine you can see and average classroom of 25 students, whose performance as of right across and achievement spectrum.
A teacher wants all of their students to get exposure to grade level of content that is our core curriculum.
But there are many kids who are operating below grade level. If you are of year below that requires intermediate intervention.
And if you are two years below.
And that requires intensive intervention nearly all students need the practice, what they've learned to build fluency that is supplemental programs that are increasingly adaptive and can cater to the unique needs of each student regardless of where they are on the achievement spectrum.
This achievement spectrum and meeting the needs of each of the students of rate of cost. It is the reason connected is so important to of teacher.
Now consider that in the context of the digital acceleration catalyzed by Covid.
We are now closing in on a one to one of the ratio of students to devices and in the classroom you just saw on the prior slide the ratio of teachers to students remains constant at 1% to 25.
Teachers use a multitude of solutions for different subjects and different levers.
To do this for almost like human Api's pulling achievement data out of one program to place it and another all and intent to advance the learning of each student.
Is exhausting.
So HMH has unique value proposition given the breadth of our portfolio is the connect the core and supplemental and intervention and the assessment programs to support the needs of all students on one platform with one way to measure of student growth that is why connected.
And is so important to our customers now.
And why it is such a significant value creation opportunity for our shareholders now.
Going forward, we are taking the execution of this strategy to the next level.
Over the last three years, we have built the foundation on which we are realizing the promise of digital first connected.
We built a connected platform of next generation programs and converted our business model to one that is subscription base with an entirely new operating model and way of working.
Over the next three years, we are intensifying our focus on the profitable growth of the digital first connected business first we are bringing about a mix shift and our business from print to digital.
From here on we will breakout for you the percent of billing bind medium.
<unk> digital and services every quarter and we will report out what percent of our education segment billings are connected.
Second more of those billings will be SaaS or recurring as a result of our focus on customer success and ensuring that teachers have a great experience for their programs and create the outcome the aim to achieve.
And then we knew the HMH subscription accordingly.
Beginning in Q1 2021, we will be reporting all of our growth and a R R or annual recurring revenue.
And our net renewal rate on our SaaS business.
Third as we deliver more and more of our product digitally we will decrease our variable costs software has a higher fixed costs, but a much lower marginal costs and our internal operations will continue to mature digitally not only to be more responsive to our customers.
But to support our customers more efficiently.
This is the plan we embarking on now and you can think of these three pillars as our okay ours objectives and key results that I and my team will focus on relentlessly.
Now I'd like to turn it over to gel for the fourth quarter and 2020 financials Joe.
Thanks, Jack and good morning, everyone.
Our total company billings were 1.089 billion.
And as we've shared throughout the year of the COVID-19, pandemic and leaner adoption opportunities impact of the education market in 2020.
While the markets for our books and media offerings for all areas of relative strength and.
And our education segment, we generated billings of $898 million.
Down 36% from 2019.
Core solutions billings were down 40% to $453 million due to the smaller new adoption opportunity in Texas English language arts, along with the impact on customer spending due to the pandemic.
Extension billings were down 32% of order and $45 million driven by declines on our heightened and products as well as reduce face to face of delivery and professional services. Both of these categories were impacted by reduced customer demand due to the pandemic.
And billings for kind of and products also suffered a difficult comparison to strong performance and the large 2019, Texas English language Arts and stuff.
Declines and extensions were offset by strong performance of certain supplemental and intervention products, which contributed most of the 142% growth and SaaS billings in 2020.
Our HMH books <unk> media segment billings grew 7% to $192 million, driven primarily by an increase and licensing revenue from our new production series.
And from our animated Carmen San Diego series on Netflix.
As you've heard and detailed from Jack.
Our team remains focused on executing our digital first connected strategy in 2020.
It's allowed us to successfully implement the restructuring we announced on October.
Aligning our cost structure to capture the benefits of our digital transformation and <unk>.
Thus the outperformer, our revised outlook for positive free cash flow of $3 million.
And for the full year 2020.
The $1.089 billion of billings, we generated was in the upper end of the range, we provided and our Q3 report.
Rounding out the rest of our key financials for the fourth quarter and full year.
Our net sales were $204 million and the fourth quarter.
And 1.0, and three 1 billion for the full year.
With declines largely driven by the same factors that drove the year over year decline and billings.
Net loss for 2020 was $480 million, which includes the $279 million noncash goodwill impairment driven by the decline and our stock price earlier this year.
Net loss for Q4 narrowed to $83 million compared to $125 million in 2019, and this was after and accounting adjustments, we've made and the fourth quarter related to the goodwill impairment that we reported in Q1.
This improvement and profitability was the result of the cost reductions, we implemented and the year, including the partial of your benefit of the October restructuring.
Similarly, adjusted EBITDA improved and the fourth quarter and was positive $16 million up from negative $4 million last year and for the full year, our adjusted EBITDA margin improved compared to 2019, despite the decline in net sales this year.
This remarkable result was also driven by our continued cost reduction and containment actions.
We generated $3 million of positive free cash flow and 2020, just above breakeven at $1.089 billion of buildings and as we noted earlier. This year. We believe our October restructuring actions have lowered the breakeven level of billings, even further for 2021.
And improved our ability to generate free cash flow going forward.
This positive free cash flow result was aided by $14 million of free cash flow on the fourth quarter.
So all in all of the strong set of financial results against the backdrop of the challenging market environment and 2020.
And now more color about our outlook for 2021.
The funding environment for our customers has not yet stabilized, which is an important factor and our billings outlook for 2021.
However, the summary of cautious optimism.
There are several unknowns, but what we're seeing now because of mixed story across state local and federal so of sources.
In terms of state and local budgets, which as a reminder account for around 90% of K 12 funding the.
The outlook remains neutral to negative.
At the state level. Some states are seeing stable, even growing revenue and the current fiscal year, which began July one 2020 and.
And while that's great news and some of the largest states such as Texas, Florida, and New York continued to feel the pressure of difficult revenue loss.
At the local level, it's a mixed story to.
Local budgets that rely more heavily on property taxes are and relatively better condition and those that rely on the sales taxes or state aid.
We believe that as a result, we could see some school districts opting to extend their current contracts with us or postpone purchasing as many did in 2020.
While federal funding should help to mitigate negative impacts of state and local revenue disruption on capital budgets and the uncertainty lies and the timing of distributions. The case for 12 districts and from there the timing for an amount that will flow through the spending on instructional materials. For example, while the K 12 funds from the most recent stimulus bill have all.
Already been distributed in the states sub grants the districts, having on all been distributed.
And districts have the ability to carryover of unspent funds for future years, which makes predicting the specific timing of any benefits difficult.
That said.
The net outlook on the overall budget environment is neutral to potentially positive.
We're cautiously optimistic about potential upside this year and and any of it we see the strong federal response and support the case for 12 education is a big positive for the health of the industry.
And even with that caution.
We're anticipating growth for our business this year.
We expect billings for the full year between $1 1 billion and $1, one 5 billion.
Which is low to mid single digit growth over 2020.
We also expect Unlevered free cash flow margins and a range of 9% to 11%.
This is margin expansion of three to five percentage points compared to 2020 again, resulting from our strategic restructuring and October.
And as a reminder, prior.
Prior to our 2020 of restructuring and before the COVID-19 pandemic, we estimated that of mid cycle adoption opportunity here on.
On impacted by the pandemic will allow us to generate one five to 165 billion and billings with Unlevered free cash flow margins and a range of 9% to 14% here, we're expressing the expectation of our ability to generate a comparable margin, 9% to 11% with billings that are 400 to five.
The $1 million lower.
And as our business grows we expect our unlevered free cash flow margin to expand along with that growth.
So with that I'll now hand, it back the Jack for some closing remarks Jack.
Jack.
Thanks, Joe before we turn to Q&A I want to close by again thanking our entire HMH team for their incredible work and 2020.
Their options and focus enabled us to create exceptional value for our customers during a uniquely challenging environment, while executing our strategy.
We achieved revive billings guidance and positive free cash flow grew.
Grew our adjusted EBITDA margins and strengthen our financial position and.
All important achievements that set us up for growth in 2021 and beyond.
Looking ahead, we are intensely focused on the profitable growth of our digital force connected business through the strategic plan I outlined before.
Bringing about a mix shift to digital and generating more recurring revenue and improving our gross margins. Importantly, these are all of the output of our accelerated move to digital and connected as our customers embrace hmh's digital products and platform now more than ever.
We're confident that we have dramatically improved HMH is overall profitability today and into the future as we continue to capture the benefits of our digital transformation.
And that's reflected in the positive free cash flow, we generated in 2020 and and healthy free cash flow, we anticipate in 2021.
In summary from 'twenty and 'twenty, we transformed our business, while keeping our customers' needs.
And center as a trusted partner and education.
Together, we at HMH became a stronger company better positioned to deliver value to our stakeholders.
Thank you and with that let's get to your questions.
Ladies and gentlemen, if you have a question of comment at this time. Please press Star then one on your telephone keypad.
And for your question has been answered or you wish to remove yourself from the queue simply press the pound key.
And again, if you have a question the comment at this time. Please press Star then one on your telephone keypad.
As stated earlier if you have a question for me. Please ask that you limit yourself to one question and follow up and you may rejoin the queue. If you have additional questions.
Our first question of the comment comes from the line of George Tong from Goldman Sachs. Your line is open.
Hi, Thanks, good morning.
As we head into 'twenty and 'twenty, one can you provide and update on the California, and Florida, the adoption cycles, and how Houghton Mifflin disposition and those cycles.
Yes, Thank you George.
Let me take Florida, and there will of.
Second I'll talk about California, and then the other adoptions taking place right now.
First thing to know is that in Florida. There are two elements to the Florida adoption.
There is.
Of literature element that is 612.
612, there was a reading.
Element that is kindergarten through fifth grade and then and this is kind of unique to Florida. There is the intervention.
And element to this adoption as well so while the adoption is not complete we're about two thirds of the way through the adoption and as it relates to the 612 literature adoption, we are performing in line with our expectations and grade in the.
Those grades and.
And seeing very strong win rates in the in the market that has decided on.
And so as I said I think we will continue to perform in line with our expectations. However, we're seeing underperformance and the elementary market due to the dynamics that we believe are specific to Florida adoption, including.
And some challenges the educators of had evaluating HMH is program online, which are more acute and the COVID-19 environment and they would be otherwise we've address these challenges and it will not impact other markets. Finally, we are over performing in the intervention the.
<unk> and Florida.
A large number of wins and.
And this is a part of the overall adoption of opportunity as I indicated previously intervention right now is especially important in K 12, and given the learning loss issues that were that are related to COVID-19.
So we're seeing significant funding being allocated by key districts to intervention in this particular adoption and in Florida and.
And we're winning because HMH intervention programs and then proven effective by hundreds of the independent research studies, including thousands of students over the last 20 years in fact the.
The U S Department of education, and found that our read 180 intervention program with the only intervention program out of 10 evaluated the had positive effects.
And for for adolescent students reading achievement. So we're very excited about our success there and obviously because of the gravity of blurring loss, we're very excited about.
With that translates into across the country as more and more teachers are now becoming intervention and teachers and more and more students even students who.
And historically you've been on grade level are now requiring intervention.
And if you look at the overall stimulus package of one nine trillion of about $200 million of K 12 education.
Hi.
Clothing, including the previous cares Act funding.
About 30 billion of <unk>.
That funding is allocated to learning loss. So we feel like we have a great solution, that's weighing and the marketplace and ads.
And one in Florida.
And it relates to California.
We are seeing.
The decision making 2020.
Was impacted by Covid. So it looks like this three year adoption will be a four year adoption and some of the delays that we saw in year two should be showing up in 2021, but all of this is.
The outperformance and Florida, our performance and California are obviously factored into our guidance for this year and then the other thing I would say is that there are other adoptions, taking place, where we're performing incredibly well, Alabama and now.
Doing very well the air Virginia play very well there of West Virginia.
Same Oklahoma sign so all in all we feel good about our progress thus far this year.
Got it very helpful and then on the.
The potential sale of the media business can you talk a little bit about the process and internally the restructuring process, how that's coming along.
Yeah.
Two parts of that question George the first being the <unk>.
Exploration and the HMH books, <unk> media business and that exploration is ongoing and as soon as we have news there, we'll obviously report with the.
At news is.
From from that exploration and then secondly in terms of.
And the restructuring that we did we had a major cost reduction action.
Back in October.
And and a lot of the performance that we're guiding to this year and in future years is a result of really aligning our cost structure to this digital first connected strategy.
So for example.
And if you look at the amount of work that we're doing virtually right now.
More and more of our sales force is selling inside versus face to face more and more of our delivery of professional development is done virtually in fact all of it is done virtually right now and we've proven that we have higher NPS scores for virtual and the delivery of.
Of our professional and development that we have had historically face to face. So those are two examples of major cost reductions that are aligned to this digital first.
Connected strategy and across the board, we have become a far more efficient and effective organization.
Very helpful. Thank you.
Thank you again, ladies and gentlemen, if you have a question of comment at this time. Please press Star then one on your telephone keypad.
I'm showing no additional questions in the queue at this time I would like to turn the conference back over to management for any closing remarks.
Thank you everyone for joining us on today's earnings call and we look forward to speaking with you again on the Q1 call a day so have a great day. Thank you.
Ladies and gentlemen, thank you for participating on today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
[music] moving.
And the.