McGraw Hill Education · 2018. 7. 4. · McGraw‐Hill Higher Education First Half 2017 Results...
Transcript of McGraw Hill Education · 2018. 7. 4. · McGraw‐Hill Higher Education First Half 2017 Results...
McGraw‐Hill EducationQ2‐2017 Update
August 10, 2017
This presentation has been prepared for existing debt holders of McGraw‐Hill Global Education Holdings LLC and MHGE Parent, LLC . Final
Important Notice
Forward‐Looking Statements
This presentation includes statements that are, or may be deemed to be, “forward‐looking statements.” These forward‐looking statements can be identified by the use of forward‐looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology. These forward‐looking statements include all matters that are not historical facts. They appear in a number of places throughout this presentation and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate.
By their nature, forward‐looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward‐looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from those made in or suggested by the forward‐looking statements contained in this presentation. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward‐looking statements contained in this presentation, those results of operations, financial condition and liquidity or developments may not be indicative of results or developments in subsequent periods.
Any forward‐looking statements we make in this presentation speak only as of the date of such statement, and we undertake no obligation to update such statements. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
Non‐GAAP Financial Measures
Certain financial information included herein, including Billings, EBITDA and Adjusted EBITDA, are not presentations made in accordance with U.S. GAAP, and use of such terms varies from others in our industry. Billings, EBITDA and Adjusted EBITDA should not be considered as alternatives to revenue, net income from continuing operations, operating cash flows or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance, debt covenant compliance or cash flows as measures of liquidity. Billings, EBITDA and Adjusted EBITDA have important limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP. This presentation includes a reconciliation of certain non‐GAAP financial measures to the most directly comparable financial measures calculated in accordance with U.S. GAAP.
Adjusted EBITDA, which is defined in accordance with our debt agreements, is provided herein on a segment basis and on a consolidated basis. Adjusted EBITDA by segment, as determined in accordance with Accounting Standards Codification Topic 280, Segment Reporting, is a measure used by Management to assess the performance of our segments. Adjusted EBITDA on a consolidated basis is presented as a debt covenant compliance measure. Management believes that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about certain material non‐cash items and about unusual items that we do not expect to continue at the same level in the future as well as other items to assess our debt covenant compliance, ability to service our indebtedness and make capital allocation decisions in accordance with our debt agreements.
2
Business Review
4
McGraw‐Hill Education
Total MHE Performance: YTD 6/30/17MHE Billings $704M (‐2.1%) MHE Adjusted EBITDA $12M (‐23.4%)
MHE Digital Billings $337M (+15.2%)% MHE Digital Billings 48% (+700bps)
Market Share1Higher Ed ‐ LTM 6/30/17 (+) ~67 bps K‐12 Market Share Not meaningful until Q3
YTD 6/30/17 Key Indicators Connect/LearnSmart Paid Activations 1.7M (+8.1%)ALEKS Unique Users 2.0M (+24.8%)
MHE Inc. Liquidity at 6/30/17Cash $133MCredit Line Capacity 290MTotal Liquidity $423M
MHE 1H‐17 performance in‐line with expectations, but adversely impacted by timing compared to prior year
₋ Q3 critically important for both Higher Ed and K‐12
Higher Ed net sales improved significantly Y/Y due to early season digital growth and a reduction in product returns
₋ 2H front‐list sell‐through is an important driver of FY‐17 performance; early signs are favorable
K‐12 continues to perform well in key New State Adoptions; Open Territory is mainly a Q3 opportunity and too early to report
₋ Will remain a market leader in CA English Language Arts (ELA) despite significant competition from niche players
₋ Leading in FL K‐12 Social Studies
₋ Open Territory developing later for much of the industry; believed to be timing but limited visibility until Sept.
Cash beginning to build seasonally in Q3
‐ $290M available revolving line of credit line at 6/30; Expect outstanding ($60M) repaid in Q3
Anticipate providing brief market update to investors in early Oct.
McGraw‐Hill Education First Half 2017 ResultsHigher Ed performance on track
1 Per Management Practice, Inc. (MPI)
Higher Education Solid 1H digital performance and a continued reduction in
product returns drove double‐digit net sales growth
₋ Digital back‐list net sales and direct‐to‐student e‐commerce grew Y/Y
₋ Timing of large bookstore orders continue to shift from late June to July/August
Front‐list1sell‐through, destocking abatement, continued digital growth and favorable returns remain key in 2H
YTD net sales up low‐single digits through early Aug.
₋ MHE front‐list title sales, especially 2018©, performing well in first five weeks of Q3
₋ Actual product returns remain low YTD as destocking continues to abate; expect a return to more normalized ordering of back‐list titles in Q3
Piloting multiple initiatives to recapture share from used and rental
₋ Rental pilots in process for front‐list and back‐list and a pricing pilot on several hundred back‐list titles
Continue to aggressively combat piracy
McGraw‐Hill Higher Education First Half 2017 ResultsFavorable 1H; front‐list sell‐through and destocking abatement remain key in 2H
McGraw‐Hill Higher Ed Performance: YTD 6/30/17Billings (net of accrued returns) $227M (‐3.8%) Digital Billings $157M (+4.8%)% Digital Billings 69% (+600bps)
Direct‐to‐Student E‐Commerce Net Sales $98M (+21.4%)
Net Sales (net of actual returns)2 $190M (+11.1%)Back‐list Sales (net of actual returns) $141M (+24.4%)Front‐list Sales (net of actual returns) $48M (‐16.7%)
MHE Actual Product ReturnsActual Returns Change YTD 6/30/17 ‐$23M (‐17.7%)
Industry Net Sales (actual returns basis)3YTD 6/30/17 +11.0%
MHE Market Share LTM 6/30/173Market Share Change (actual returns basis) (+~67 bps)
YTD 6/30/17 Key IndicatorsConnect/LearnSmart Paid Activations 1.7M (+8.1%)ALEKS Unique Users 0.9M (+31.1%)
2Total net sales include the impact of accounting accruals / reversals3Per Management Practice, Inc. (MPI)
5
*Primary difference between Billings and net sales (industry market share measure) is the accrual of returns
12017 front‐list represents 2018 and 2017 copyrights sold in 2017; they do not begin to impact current year until very late Q2.
6
Timing Driver Results/Status
Jan. – Feb. Digital sales / paid activations Strong results‐ Direct‐to‐student e‐commerce +21% YTD June 30th‐ Paid activations remain strong through early Aug.
Feb. – Apr. Actual product returns Strong results ‐ Returns down $23M or 18% YTD June 30th
Apr. – June Low digital; Start of print ordering by channel
Digital sales later in season‐ Digital ordering continues to shift to the start of school as direct‐
to‐student sales increase
End of June – early Sept.
Sell‐through of larger front‐list Abatement of print channel destocking
Early signs are favorable ‐ Typical print channel ordering in last week of June shifted to
July/Aug. ‐ Ordering will continue until Labor Day
Aug. – Sept. Direct‐to‐student e‐commerce sales Paid digital activations
Too early in the season‐ 1H digital growth and materially larger front‐list support
continued optimism
Oct. – Nov. Actual product returns Too early in the season
Dec.Print sell‐through to channel for Jan. back‐to‐school; digital sales shifting closer to start of
school in Jan.Too early in the season
McGraw‐Hill Higher Education First Half 2017 ResultsKey drivers for a successful 2017
7
1 As per Monthly AAP data ‐ Cohort of publishers for monthly AAP data differs from that of annual AAP data‐Monthly data reflects net sales on an actual returns basis submitted by 6‐7 publishers‐ Annual data reflects net sales on an actual returns basis submitted by 5 publishers2 Projected industry market size reflects an average of MHE estimates with estimates from three wall street firms; data unchanged from May 2017 investor presentation3 California market size is New Adoption only for K‐8, excludes grades 9‐12 (which CA considers open territory) and K‐12 residual sales
*Primary difference between Billings and net sales (industry market share measure) is the accrual of returns
K‐12 1H performance in‐line with prior year despite tough
comparison to strong 2016 performance in California
Expect to retain a leadership position in a larger, but more competitive, year‐2 CA ELA market
‐ Expect FY‐17 CA K‐12 Billings of ~$200M (incl. residual sales) due to continued strong performance outside of L.A.
‐ K‐8 New Adoption share approaching 40% statewide (incl. L.A.) with continued strength in middle school
‐ Niche player (non‐AAP participant) took lead in L.A.
Expect to be a leader in FL K‐12 Social Studies, the second largest New Adoption opportunity, with particular strength in middle school
‐ Anticipate FY‐17 FL K‐12 Billings of ~$40M (incl. residual sales)
Open Territory sales pipeline robust but ordering developing later than in the past for much of industry
Preparations on track to compete in upcoming New Adoptions
‐ CA Social Studies and FL Science (2018) and TX Reading (2019)
McGraw‐Hill K‐12 Performance: YTD 6/30/17Billings (net of accrued returns) $320M (‐0.3%)Digital Billings $138M (+35.5%)% Digital Billings 43% (+1,100bps)
*Industry Net Sales (actual returns basis)1YTD 6/30/17 0.1%
2017 Market Drivers:Total Market Size: $2.7‐3.2B estimated range2
California Year 2 of 3; 50% of purchases(K‐8 ELA): ~$400M market size3
Florida 1 year buy(K‐12 Social Studies): ~$100M market size
YTD 6/30/17 Key IndicatorsConnectED Unique Users 4.0M (+33.1%)ALEKS Unique Users 1.2M (+20.3%)
McGraw‐Hill K‐12 First Half 2017 ResultsA leader across key New Adoptions; Open Territory sales pipeline building but still early
8
International & ProfessionalInternational
YTD Billings declined Y/Y on a constant FX basis due to weaker print Billings in select Higher Ed markets
‐ Growth in EMEA and Canada was more than offset by declines in Latin America, India and Asia Pacific due to increased competition in these markets
Margin unfavorably impacted by pre‐publication expense to support content requirements for UAE contract
‐ Multi‐year contract; continue to build out content in advance of anticipated increased enrollment
Professional
YTD Billings declined Y/Y largely due to lower print and e‐book sales driven by the strategic decision to focus on medical and technical publications
Digital Billings growth Y/Y negatively impacted by timing of Access contract renewals and the decline in e‐book sales
Margin favorably impacted by ongoing shift to higher margin digital Access platform solutions
McGraw‐Hill International Performance: YTD 6/30/17Billings (constant FX) 1 $106M (‐1.7%)Digital Billings $15M (+2.2%)Digital Billings % 14% (+100bps)
YTD 6/30/17 Key Indicators ‐ InternationalConnect/LearnSmart Paid Activations 150K+ ALEKS Unique Users ~78K
McGraw‐Hill Professional Performance: YTD 6/30/17Billings $51M (‐5.1%)Digital Billings $27M (+1.0%)Digital Billings % 53% (+400bps)
Key Indicators ‐ ProfessionalAccess Platform Renewal Rate2 93%
1 K‐12 business in Canada was sold in May 20172As of December 2016; updated on an annual basis.
McGraw‐Hill International & Professional First Half 2017 ResultsPortfolio in transition with significant future digital opportunities
0.7 1.0 1.6 2.01.0 1.2
0.80.9
1.11.3
0.7 0.91.52.0
2.73.3
1.62.0
2013 2014 2015 2016 YTD 2016 YTD 2017
K‐12 Higher Ed
2.22.6 3.0 3.3
1.6 1.7
2013 2014 2015 2016 YTD 2016 YTD 2017
CONNECT/LEARNSMART PAID ACTIVATIONS (US HIGHER ED)
ALEKS UNIQUE USERS (GLOBAL HIGHER ED, K‐12)
(Millions)
ConnectED UNIQUE USERS (K‐12)
2.23.5
5.2
7.1
3.04.0
2013 2014 2015 2016 YTD 2016 YTD 2017
International Connect/LearnSmart Paid Activations of 150K+ not incl.in Connect/LearnSmart totals above; International ALEKS Unique Users of ~78K incl. within total ALEKS Unique Users above.
+8%+33%
+25%
LONG‐STANDING LEADER IN DIGITAL ADAPTIVE LEARNING
MHE digital adaptive learning exhibiting strong growth in users, paid activations and interactions
‐ 52M assignments submitted through Connect, up 12% Y/Y
‐ ~8.0B interactions (questions answered) on LearnSmart since 2009
‐ ~5.8B interactions (questions answered) on ALEKS since 2010
Recently launched StudyWise, an off‐line adaptive offering, extending the ‘practice’ element of Connect / Connect2 to smartphones
Learning Science Platform ‐ leveraging existing learning science technology for deployment in corporate learning
‐ Two large corporate clients moving to production for their employees after successful pilots
‐ Proof of concept that existing learning science technology is scalable and deployable to other content; requires limited incremental investment
McGraw‐Hill Education First Half 2017 Digital Ed Tech Highlights~14 billion cumulative adaptive interactions
9
34% 38% 45% 56% 63% 69%
66% 62% 55% 44% 37% 31%
2013 2014 2015 2016 YTD 2016 YTD 2017
Digital Print (Traditional + Custom)
DIGITAL VS. PRINT BILLINGS MIX %
10
DIGITAL MIX CONTINUES TO GROW Digital Billings continue to grow as a share of total Higher Ed
Billings and reached 69% of total in H1‐17
Digital mix continues to expand as professors increasingly adopt Connect, with more direct‐to‐student sales
Direct‐to‐student e‐commerce sales were 50%+ of total Higher Ed sales in the YTD period (seasonally impacted)
‐ Business, economics and science disciplines comprise the majority of Connect / LearnSmart sales
‐ E‐commerce platform continues to be the largest net sales distribution channel for Higher Ed
Aug.‐ Sept. are the largest months for direct‐to‐student activations and e‐commerce sales
‐ Believe a stronger front‐list will help drive the transition to digital among some professors using older programs
McGraw‐Hill Education Higher Ed First Half 2017 Digital BillingsDirect‐to‐student digital sales growing at double‐digit rates
$67
$105
$140$172
$81 $98
2013 2014 2015 2016 YTD 2016 YTD 2017
E‐COMMERCE NET SALES
+21%
($ in Millions)
Financial Review
$180 $221
$293 $337
38% 47% 41% 48%
$17 $18 $26 $27
53% 59% 49% 53%
$7 $8 $14 $15
11% 13% 13% 14%
$87
$128 $102
$138
32% 45% 32% 43%
$69 $67
$150 $157
63% 69%
12
($ in Millions)
MCGRAW‐HILL EDUCATION+15%
K‐12
YTD 16 YTD 17
HIGHER ED
PROFESSIONALINTERNATIONAL
% of TotalBillings
% of TotalBillings
% of TotalBillings
% of TotalBillings
% of TotalBillings
+5% +36%
+1%+2%
Q2‐16 Q2‐17
YTD 16 YTD 17Q2‐16 Q2‐17
63% 69%
‐3%
YTD 16 YTD 17Q2‐16 Q2‐17
+46%
YTD 16 YTD 17Q2‐16 Q2‐17
+15%+6%
YTD 16 YTD 17Q2‐16 Q2‐17
+23%
McGraw‐Hill Education First Half 2017 Digital Billings Mix1H digital performance impacted by timing and product mix
K‐12 increase driven by product mix with strong sales of 6‐12 digital Literature in the CA ELA New Adoption
Higher Ed impacted by the shift to e‐commerce purchasing closer to the start of school
$481 $474
$719 $704
MHE TOTAL BILLINGS
13
($ in Millions)
Digital %
(2%)
38% 47%
Constant FX (1%) $475 (2%) $705
McGraw‐Hill Education
YTD 16 YTD 17Q2‐16 Q2‐17
41% 48%
(1%)
MHE ENTERING SEASONALLY IMPORTANT 2H MHE YTD Billings declined Y/Y on constant FX largely due to
timing of sales to the channel in Higher Ed and lower print sales within International and Professional
‐ K‐12 Billings relatively flat Y/Y due to timing; mix of New Adoption sales outside of CA is greater and ordering appears to be later vs. prior year
Higher Ed positioned well for 2H but remains dependent upon front‐list performance and better back‐list ordering due to abatement of destocking
‐ Initial ordering of new front‐list titles by the channel began in July; early signs are favorable
Expect to maintain a leadership position across New Adoptions in K‐12 but still early in the Open Territory season
ADJUSTED EBITDA SEASONALLY SMALL YTD
Adjusted EBITDA declined $4M Y/Y YTD pre‐publication investment of $49M increased $18M Y/Y
in support of future New Adoption opportunities in K‐12 and future front‐list titles in Higher Ed
‐ Excl. pre‐publication investment, EBITDA increased 30% Y/Y
‐ FY‐17 pre‐publication investment will increase Y/Y; timing expected to shift a portion of 2H spend into 2018
$97 $105
$16 $12 20% 22% 2% 2%
MHE ADJUSTED EBITDA1
(23%)
Margin %
Constant FX (+8%) $104 (30%) ($11)
+8%
YTD 16 YTD 17Q2‐16 Q2‐17
1Includes the impact of pre‐publication costs incurred in advance of future year sales.
McGraw‐Hill Education Financial ReviewGood start to 2017 but Q3 is the important selling season for MHE
$(5)$(7)
$2 $5
1% 2%
$109 $97
$236 $227
YTD 16 YTD 17Q2‐16 Q2‐17
14
($ in Millions)
HIGHER ED TOTAL BILLINGS
HIGHER ED ADJUSTED EBITDA
Digital %
(4%)
Margin %
63% 69%
Higher Education
63% 69%
(11%)
* % Y/Y change not meaningful
(5%) (7%)
1% 2%
YTD 16 YTD 17Q2‐16 Q2‐17
FAVORABLE YTD TRENDS OVERALL Q2 impacted by timing of print sales to the channel,
transition to digital and direct‐to‐student e‐commerce sales
‐ Channel partners continue to order closer to the start of school, shifting purchasing from late June to July/Aug.
1H trends favorable overall due to growth in digital and lower actual returns
‐ YTD net sales up low single‐digits through early Aug.
‐ Digital ordering continues to shift to the start of school as direct‐to‐student sales increase
‐ E‐commerce sales occur later in the season (Aug.‐ Sept.)
Ordering of new front‐list titles, restocking of back‐list titles, ongoing digital growth and low returns later in the year remain key in 2H
ADJUSTED EBITDA FAVORABLY IMPACTED BY MIX 1H Adjusted EBITDA increased $3M Y/Y due to digital mix
Pre‐publication investment will increase ~$3‐5M vs. 2016 in support of the future front‐list
Adjusted for change in deferred royalty 1 (8%) $100 (1%) $235
1Effective Q4‐16 and prospectively, MHE no longer reflects the change in deferred revenue inclusive of the change in deferred royalties.
On a FY basis, the net change is immaterial; prior periods do not reflect the change.
Higher Ed Financial Review1H indicators favorable buy key drivers remain critical to FY results
$100 $99
$26 $13 36% 35% 8% 4%
$275 $284 $321 $320
15
($ in Millions)
K‐12 TOTAL BILLINGS
K‐12 ADJUSTED EBITDA
Digital %
(0%)
Margin %
(48%)
K‐12
32% 45% 32% 43%
+3%
YTD 16 YTD 17Q2‐16 Q2‐17
(1%)
YTD 16 YTD 17Q2‐16 Q2‐17
YTD RESULTS IMPACTED BY ORDER TIMING YTD Billings flat Y/Y despite a challenging 2016 comparison
in CA
‐ Mix of New Adoption sales outside of CA is greater than 2016 with ordering more concentrated in Q3
Expect to retain a leadership position in year‐2 of CA ELA despite tougher competition
Expect to be a leader in FL K‐12 Social Studies, the second largest opportunity in 2017, with particular strength in middle school
Still early in the Open Territory season as order timing seems to be later (similarly reported by other industry participants)
‐ Sales execution is key for 2H performance and Open Territory volatility will continue through Sept.
MHE preparations on track and progressing for future New Adoption opportunities in 2018 and 2019
SEASONALLY SMALL 1H ADJUSTED EBITDA IMPACTED BY PRE‐PUBLICATION INVESTMENT
Adjusted EBITDA declined $13M Y/Y in 1H vs. prior year
Pre‐publication investment to increase ~$10‐15M vs. 2016 in advance of future New Adoption opportunities
K‐12 Financial ReviewExpect to be a leader across key New Adoptions; Open Territory significant driver for 2H
$(1)
$0
$(10)$(15)
(‐3%) nm (‐9%) (15%) $9 $9 $7
$9
$31 $30 $53 $51
$65 $64 $108 $105
International
16
($ in Millions)
INTERNATIONAL TOTAL BILLINGS
INTERNATIONAL ADJUSTED EBITDA
Margin %
Digital % 11% 13% 13% 14%
PROFESSIONAL ADJUSTED EBITDA
PROFESSIONAL TOTAL BILLINGS
Digital %53% 49% 53%
Margin %
(3%)
Constant FX (2%) $64 (2%) $106
(5%)
Constant FX nm ($0) nm ($16)
+25%
Professional
(2%)
YTD 16 YTD 17Q2‐16 Q2‐17
* % Y/Y change not meaningful
YTD 16 YTD 17Q2‐16 Q2‐17
59%
YTD 16 YTD 17Q2‐16 Q2‐17
(4%)
YTD 16 YTD 17Q2‐16 Q2‐17
28% 31% 14% 18%
+6%
YTD Billings declined Y/Y on constant FX as lower Higher Ed print sales within Latin America, APAC and India more than offset strong sales in EMEA and Canada
Margin impacted by lower Billings and timing of pre‐publication investment for UAE contract
YTD Billings decreased Y/Y as Access Billings growth was more than offset by the decline in print and e‐book sales across the portfolio
Margin favorably impacted by product mix and the shift to higher margin digital solutions
K‐12 business in Canada was sold in May 2017.
International & Professional Financial ReviewPortfolio remains in transition from print to digital
MHE efficiently managed cash through the seasonal trough in 1H, repurchased $49M of debt in the open market in Q1 and continued to invest for future opportunities
‐ Revolver repayment began in June; expect full repayment in Q3
‐ YTD 2017 revolver usage only to support MHGE Parent (Holdco) debt repurchase program
$58M repurchase authorization for 8.5% 2019 PIK/Toggle Notes remains available with cash now held at Holdco
‐ No repurchases made in Q2‐17
‐ Semi‐annual cash interest payment of $19M made on Aug. 1 (does not utilize RP capacity)
Term Loan Restricted Payment capacity was ~$100M at June 30, 2017 and will fluctuate seasonally1
1 Includes $100M general RP basket.
Capital Structure and LiquidityBusiness reached annual cash trough in June; cash building in 2H
Senior Secured Term Loan due 2022 $1,559Revolving Credit Facility due 2021 ($350M) 60 Total First Lien Indebtedness $1,619
Less: McGraw‐Hill Global Education Cash and Cash Equivalents (74)
Net First Lien Indebtedness $1,545Last Twelve Months Covenant EBITDA $419
Net First Lien Leverage Ratio 3.7x
Senior Unsecured Notes Due 2024 400Net Total Indebtedness $1,945
Cash and Cash Equivalents
McGraw‐Hill Global Education Holdings $74MHGE Parent LLC / MHE Inc. 59
Total McGraw‐Hill Education, Inc. $133
Available under Credit Facilities at June 30, 2017 290
Total Liquidity $423
MCGRAW‐HILL EDUCATION INC. (MHE INC.) LIQUIDITY: 6/30/17
Notes˗ Net Total Indebtedness calculation excludes debt held at MHGE Parent LLC and
cash held at MHGE Parent LLC and MHE Inc.˗ Net First Lien Leverage covenant takes effect only if 30% of revolving line of credit
is drawn at quarter‐end. Usage was less than 30% at June 30, so covenant did not apply. Covenant level is 5.25x in Q2 and 4.8x in Q1, Q3 and Q4. 17
MCGRAW‐HILL GLOBAL EDUCATION HOLDINGS COVENANT LEVERAGE
($ in Millions)
As previously disclosed, the Company will restate 2016 annual and quarterly financial statements and Q1‐2017 financial statements primarily related to the timing of deferred revenue recognition within the Company’s U.S. K‐12 business and the correction of the Company’s deferred tax asset valuation allowance.
‐ The Company previously did not defer certain print subscription products resulting in revenue being recognized upfront instead of being deferred and amortized over the subscription period.
‐ The Company’s historical calculation of the deferred tax asset valuation allowance netted certain deferred tax liabilities related to indefinite lived intangible assets resulting in an understatement of our valuation allowance and the domestic provision for income taxes.
A summary of the corrections and impact is as follows1:
The Company has substantially completed its review of the corrections noted above, however, our external auditors require additional time to finalize their audit of the restated financial statements. We have notified the agent for our banks that we anticipate providing the restated financial statements as well as Q2‐2017 financial statements during the month of September.
1Amounts disclosed are preliminary and subject to change based on the finalization of the audit.
YTD March2013A 2014A 2015A 2016A 2017A
Non‐GAAP Impact (unaudited)Billings 0.0 0.0 0.0 0.0 0.0Adjusted EBITDA 0.0 0.0 0.0 2.3 (2.3)
YTD March2013A 2014A 2015A 2016A 2017A
GAAP Impact (unaudited)GAAP Revenue (1.1) (12.7) 0.0 (18.2) 0.8Net (loss) income from Operations before taxes (0.4) (12.2) 0.1 (15.3) (1.5)Net (loss) income (0.3) (24.1) (6.5) (21.9) (3.2)
YTD December
YTD December
18
Accounting Restatement
19
Summary1H in‐line with expectations; 2H execution critical to FY Results
A good start to the year in 1H with digital growth and low product returns in Higher Ed
Strong performance across key New Adoptions in K‐12 despite more intense competition
While 1H indicators in Higher Ed signal the abatement of channel destocking, ordering of MHE
front‐list remains the significant driver of Q3 and FY results; early signs are favorable
‐ Several pilots to recapture share from used and rental currently underway in Higher Ed;
experience from these pilots will be important stabilizing print and growing our business
Expect to maintain a leadership position in K‐12 across key New Adoptions but still early to
evaluate Open Territory results
Successfully managed seasonal cash trough; Management remains focused on using excess cash to
de‐lever
20
CODiE AwardsMHE recognized for its innovation and impact on education technology
More recognition than anyone else in the industry
Winner of two CODiE Awards and nominated for a dozen awards in 2017
‐ Best Authoring/Development Tool for Educators: Learning Science Platform
‐ Best Instructional Solution in Other Curriculum Areas: SIMnet
The Software and Information Industry Association (SIIA) recognizes the top education technology companies and products with CODiE Awards on an annual basis
Each CODiE Award win serves as incredible market validation for a product’s innovation, vision, and overall industry impact
Winner of 2 CODiE Awards in 2017
58 CODiE Award finalists since 2013, including 12 in 2017
Appendix
Financial Terms and Acronyms
22
Financial Terms Description
Adjusted EBITDA
Non‐GAAP financial measure that includes adjustments required or permitted in calculating covenant compliance under our debt agreements. Adjusted EBITDA is a non‐GAAP financial measure defined as net income from continuing operations plus net interest, income taxes, depreciation and amortization (including amortization of pre‐publication investment cash costs) and adjusted to exclude unusual items and other adjustments required or permitted in calculating covenant compliance under our debt agreements less cash spent for pre‐publication investment in addition to the change in deferred revenue.
Billings (formerly referred to as AdjustedRevenue)
Non‐GAAP financial measure that we define as U.S. GAAP revenue plus the net change in deferred revenue excluding the impact of purchase accounting. Billings, a measure used by management to assess sales performance, is defined as the total amount of revenue that would have been recognized in a period if all revenue were recognized immediately at the time of sale.
Change in Deferred Revenue
The Company receives cash up‐front for most product sales but recognizes revenue (primarily related to digital sales) over time recording a liability for deferred revenue at the time of sale. This adjustment represents the net effect of converting deferred revenues to a cash basis assuming the collection of all receivable balances.
Change in Deferred Royalty
Royalty obligations are generally payable in the period incurred with limited recourse. This represents royalties primarily associated with digital sales which are deferred and amortized over the subscription period. It is the net effect of converting deferred royalties to a cash basis assuming the payment of all amounts owed in the period incurred.
Digital Billings (formerlyreferred to as Digital Adjusted Revenue)
Represents standalone digital sales and, where digital product is sold in a bundled arrangement, only the value attributed to the digital component(s) is included. The attribution of value in bundled arrangement is based on relative selling prices (inclusive of discounts).
EBITDA Earnings before interest (net), income tax, depreciation and amortization.
Front‐list and Back‐list Front‐list represents brand new titles and new revisions of existing titles previously published. For example, the 2017 front‐list represents 2018 and 2017copyrights sold in 2017. Back‐list represents copyrights from 2016 and prior sold in 2017.
Net Sales Gross sales less actual returns; net sales are not adjusted for the impact of accruals / net change in deferred revenue.
Pre‐publicationInvestment
Pre‐publication costs reflect the costs incurred in the development of instructional solutions, principally design and content creation. These costs are capitalized when the title is expected to generate future economic benefits and are amortized upon publication of the title over its estimated useful life of up to six years.
Sell‐through Represents the percentage of net sales a new or revised title generates vs. prior editions of the same title.
KPI Terms Description
Paid Activation A user who accesses a purchased digital product for the first time. Access can be through a physical access card purchased from a bookstore or directly over MHE’s e‐commerce channel.
Unique User on a platform An individual who authenticates a product at least once during a given period of time.
Product Description Higher Education K‐12 International Professional
Access Digital subscription platform that provides easily searchable and customizable digital content integrated with dynamic and functional workflow tools
ALEKS Adaptive learning technology for the K‐12 and Higher Ed markets
Connect Open learning environment for students and instructors in the Higher Education market and K‐12 students taking AP courses
Connect2 Collaborative teaching and learning environment for the International Higher Education market
ConnectED Content delivery platform for the K‐12 market
ELLevate English Six level English Language Learning (ELL) course
EngradeDeveloper of an open digital platform for K‐12 education that unifies the data, curriculum and tools to drive student achievement and inform district educational strategy
LearnSmart Adaptive learning program which personalizes learning and designs targeted study paths for students
RedbirdA leading digital personalized learning company that offers courses in K‐12 math, language arts and writing, and virtual professional development programs for educators
SmartBookAdaptive reading product designed to help students understand and retain course material by guiding each student through a highly personal study experience
StudyWiseAdaptive offering that supports students in adaptive practice on smartphones. StudyWise extends the reach of Connect and Connect2allowing students to efficiently learn in their natural environment
Digital Product Offering Descriptions
23
Supplemental Financial Disclosure
25
Billings is a non‐GAAP sales performance measure that provides useful information in evaluating our period‐to‐period performance because it reflects the total amount of revenue that would have been recognized in a period if we recognized all print and digital revenue at the time of sale. We use Billings as a sales performance measure given that we typically collect full payment for our digital and print solutions at the time of sale or shortly thereafter, but recognize revenue from digital solutions and multi‐year deliverables ratably over the term of our customer contracts. As sales of our digital learning solutions have increased, so has the amount of revenue that is deferred in accordance with U.S. GAAP. Billings is a key metric we use to manage our business as it reflects the sales activity in a given period, provides comparability from period‐to‐period during this time of digital transition and is the basis for all sales incentive compensation. In the K‐12 market where customers typically pay for five to eight year contracts upfront and the ongoing costs to service any contractual obligation are limited, the impact of the change in deferred revenue is most significant. Billings is U.S. GAAP revenue plus the net change in deferred revenue.
EBITDA, a measure used by management to assess operating performance, is defined as net income from continuing operations plus net interest, income taxes, depreciation and amortization (including amortization of pre‐publication investment cash costs). Adjusted EBITDA is a non‐GAAP debt covenant compliance measure that is defined in accordance with our debt agreements. Adjusted EBITDA is a material term in our debt agreements and provides an understanding of our debt covenant compliance, ability to service our indebtedness and make capital allocation decisions in accordance with our debt agreements.
Each of the above described measures is not a recognized term under U.S. GAAP and does not purport to be an alternative to revenue, income from continuing operations, or any other measure derived in accordance with U.S. GAAP as a measure of operating performance, debt covenant compliance or to cash flows from operations as a measure of liquidity. Additionally, each such measure is not intended to be a measure of free cash flows available for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Such measures have limitations as analytical tools, and you should not consider any of such measures in isolation or as substitutes for our results as reported under U.S. GAAP. Management compensates for the limitations of using non‐GAAP financial measures by using them to supplement U.S. GAAP results to provide a more complete understanding of the factors and trends affecting the business than U.S. GAAP results alone. Because not all companies use identical calculations, our measures may not be comparable to other similarly titled measures of other companies.
Management believes Adjusted EBITDA is helpful in highlighting trends because Adjusted EBITDA excludes the results of decisions that are outside the control of operating management and can differ significantly from company to company depending on long‐term strategic decisions regarding capital structure, the tax rules in the jurisdictions in which companies operate, and capital investments. In addition, Billings and Adjusted EBITDA provides more comparability between the historical operating results and operating results that reflect purchase accounting and the new capital structure post the Founding Acquisition as well as the digital transformation that we are undertaking which requires different accounting treatment for digital and print solutions in accordance with U.S. GAAP.
Management believes that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about certain material non‐cash items and about unusual items that we do not expect to continue at the same level in the future as well as other items to assess our debt covenant compliance, ability to service our indebtedness and make capital allocation decisions in accordance with our debt agreements.
Note: In compliance with SEC interpretative guidance, we now refer to ‘Adjusted Revenue’ as ‘Billings’ throughout the presentation.
Billings and Adjusted EBITDA
26
($ in Millions)
12017 front‐list represents 2018 and 2017 copyrights sold in 2017; they do not begin to impact current year until very late Q2.2Gross sales less actual returns; net sales are not adjusted for the impact of accruals / net change in deferred revenue.3Reflects the impact of accounting related to accruals / deferrals.
MHE Higher Ed Front‐List / Back‐List Net Sales1
Twelve Months Ended December 31 Six Months Ended 2012 2013 2014 2015 2016 June 2016 June 2017
Digital Net SalesFront‐list $100 $126 $132 $156 $149 $35 $31Back‐list 137 153 194 220 263 102 126
Total Digital Net Sales $237 $278 $326 $376 $411 $136 $157
Y/Y %Front‐list (6.0%) 25.1% 5.2% 18.2% (4.7%) 3.4% (10.9%)Back‐list 53.7% 11.8% 27.1% 13.4% 19.2% 20.1% 24.1%
Total Digital Net Sales 21.1% 17.4% 17.2% 15.3% 9.3% 15.4% 15.2%
Print Net SalesFront‐list $317 $323 $291 $233 $149 $23 $17Back‐list 205 215 233 178 152 12 15
Total Print Net Sales $523 $538 $524 $411 $302 $35 $32
Y/Y %Front‐list (23.9%) 1.9% (9.9%) (20.0%) (35.9%) (42.2%) (25.3%)Back‐list 0.6% 4.7% 8.5% (23.6%) (14.6%) (42.7%) 27.0%
Total Print Net Sales (15.9%) 3.0% (2.6%) (21.6%) (26.7%) (42.3%) (7.9%)
Total Net SalesFront‐list $418 $449 $423 $389 $298 $58 $48Back‐list 342 368 427 398 415 113 141
Total Net Sales 2 $760 $817 $851 $787 $713 $171 $189
Y/Y %Front‐list (20.3%) 7.5% (5.7%) (8.1%) (23.4%) 21.5% (16.7%)Back‐list 16.7% 7.5% 16.2% (6.8%) 4.1% 8.0% 24.4%
Total Net Sales (7.0%) 7.5% 4.2% (7.4%) (9.5%) (4.2%) 10.5%
Other (Accounting Accruals/Reversals) 2 (1) 4 5 (2) (1) 1
Total Net Sales3 $762 $816 $855 $793 $711 $171 $190
Y/Y % (7.5%) 7.1% 4.8% (7.3%) (10.3%) (4.0%) 11.1%
27
($ in Millions)
2011 2012 2013 2014 2015 2016 June 2016 June 2017
Higher Ed Industry per Management Practice, Inc.1
Higher Ed Market Gross Sales $5,726 $5,420 $5,453 $5,465 $5,302 $4,695 $1,525 $1,442Returns 1,323 1,311 1,262 1,214 1,377 1,250 694 519
Net Sales $4,403 $4,110 $4,191 $4,251 $3,925 $3,446 $831 $923
Y/Y %Gross Sales n/a (5.3%) 0.6% 0.2% (3.0%) (11.4%) n/a (5.5%)Returns n/a (0.9%) (3.7%) (3.8%) 13.5% (9.2%) n/a (25.2%)Net Sales n/a (6.7%) 2.0% 1.4% (7.7%) (12.2%) n/a 11.0%
McGraw‐Hill Education Return Detail
Actual Returns $263 $276 $257 $252 $277 $237 $131 $108Reserve for Returns Adjustment (3) (13) 9 16 (31) (23) (53) (37) Reported Returns $260 $263 $266 $268 $246 $215 $78 $71
Return Accrual % 24.4% 25.8% 25.1% 24.4% 23.4% 22.7% 22.1% 20.9%
Six Months EndedTwelve Months Ended December 31
1MPI data reflects gross and net sales on an actual returns basis and includes other adjustments, eg. advanced placement which are reported in K‐12.Amounts may not sum due to rounding.
Higher Ed Industry and MHE Higher Ed Sales Trend
28
2012 2013 2014 2015 2016 2017E 2018E 2019ELargest Adoption States
Reading Reading* Science
Math Social Studies Social Studies*
Reading (K‐5) Reading (6‐12)
Math (K‐5) Math (6‐12)
Math (K‐8) Math (9‐12)Social StudiesScience*
All Other Adoption States
Alabama Math Reading Social Studies Science
Arkansas Math
Math*Reading
Idaho Science Reading Math Social Studies Reading
Indiana Reading Reading*
Math (K‐8)Social Studies
North Carolina Math Science Social Studies Reading
New Mexico Science Math Reading Social Studies Science
MathSocial Studies (6‐12)
MathSocial Studies*
Social StudiesMath
Science
Social Studies 2
MathReading
Math Reading*
Social Studies
Reading Math (9‐12) Reading Science 2
Social Studies Science Reading Math
Social StudiesScienceMathReading*Reading
Social Studies
Reading
Social Studies
Social Studies (K‐5)Reading
Science
Science
Social Studies
Louisiana
New State Adoptions by Purchase Year1
California (K‐8)
Florida
Texas
Georgia
Science Reading (K‐8)
MathScienceSocial Studies
Math
Social Studies
Math* Reading Reading*
West Virginia
Mississippi
Oklahoma
Oregon
South Carolina
Tennessee
Virginia
Reading (9‐12) Reading (K‐6) Social Studies Math Science
Reading Science Math
1Excludes new state adoptions in non‐core disciplines such as career and technical education, music, art, world languages, health, etc.Purchases from AR and IN classified as open territory effective 2015.GA has revised its adoption schedule to “local school system decisions” for 2017 and, as a result, predictability is not assured, so the schedule above will not reflect GA adoptions post‐2016.2Mississippi swapped Science (now 2018) with Social Studies (now 2019).*Disciplines reflect 2ndand 3rdyear of major purchasing.
K‐12 Industry New Adoption Market Overview
29
($ in Millions)
*Data unchanged from Q1‐17 investor presentation issued in May 2017
2012 2013 2014 2015 2016 2017E 2018E 2019E
Historical Industry Net Sales Per AAP1 Projected Industry Net Sales (Mean) 2
Total Adoption Net Sales $1,311 $1,391 $1,860 $1,621 $1,250 $1,354 $1,443 $1,710
$1,207 ‐ $1,608 $1,400 ‐ $1,471 $1,530 ‐ $1,910
Total Open Territory Net Sales $1,423 $1,563 $1,425 $1,431 $1,467 $1,503 $1,557 $1,580
$1,475 ‐ $1,546 $1,500 ‐ $1,608 $1,500 ‐ $1,672
Total Adoption & Open Territory Net Sales $2,734 $2,954 $3,285 $3,052 $2,717
$2,682 ‐ $3,154 $2,900 ‐ $3,079 $3,030 ‐ $3,582
Projected Total Adoption Net Sales (Low/High) 3
Projected Adoption & Open Territory Net Sales (Low/High) 3
Projected Total Open Territory Net Sales (Low/High) 3
Adoption and Open Territory Net Sales
1AAP total adoption and open territory net sales include front‐list and back‐list and is based on actual returns submitted by five publishers.AAP net sales reflect US sales only and includes sales of core and non‐core disciplines, AP products, software and platforms etc.Total adoption net saIes includes net sales from both new state adoptions and residual purchases. 2Reflects an arithmetic average of MHE estimates with estimates from three wall street firms. 3High and low of MHE estimates with estimates from three wall street firms; data unchanged from Q1‐17 investor presentation issued in May 2017.
K‐12 Industry Adoption and Open Territory Market Net Sales
30
($ in Millions)
Twelve Months Ended December 31 Six Months Ended
2012 2013 2014 2015 2016 June 2016 June 2017K‐12 Industry per Association of American Publishers (AAP)
AAP U.S. Net Sales 1
Total Adoption $1,311 $1,391 $1,860 $1,621 $1,250 $573 $587Open Territory 1,423 1,563 1,425 1,431 1,467 616 603
Total Net Sales $2,734 $2,954 $3,285 $3,052 $2,717 $1,189 $1,190
Y/Y %Total Adoption n/a 6.2% 33.6% (12.8%) (22.9%) n/a 2.4%Open Territory n/a 9.8% (8.8%) 0.4% 2.5% n/a (2.1%)
Total Net Sales n/a 8.1% 11.2% (7.1%) (11.0%) n/a 0.1%
McGraw‐Hill Education K‐12
McGraw‐Hill Education Billings 2
Total Adoption $320 $318 $366 $450 $411 $194 $199Open Territory / Other 378 359 369 348 348 127 121
Total K‐12 Billings $698 $677 $734 $798 $758 $321 $320
Y/Y %Total Adoption n/a (0.5%) 15.0% 23.0% (8.6%) n/a 2.6%Open Territory / Other n/a (5.0%) 2.6% (5.7%) (0.1%) n/a (4.7%)
Total K‐12 Billings n/a (3.0%) 8.5% 8.6% (4.9%) n/a (0.3%)
MHE Adoption Participation % 96% 79% 67% 76% 87% n/m n/m
1AAP annual data reflects unrestated net sales on an actual returns basis submitted by five publishers; data reflects US sales & includes sales of AP products, software & platforms, etc. AAP includes front‐list and back‐list net sales; annual data prior to 2015 has not been restated for the shift of AR and IN from adoption to open territory.Monthly AAP data reflects net sales on an actual returns basis submitted by six ‐ seven publishers; YTD 2016 data has been restated.2MHE Billings reflect an accrued returns basis and will not reconcile to AAP submission due to classification of revenue; total adoption includes new adoption and residual.MHE Billings have not been restated for the shift of AR and IN in prior periods.
K‐12 Industry and MHE K‐12 Sales Trend
31Figures are represented on a cash basis inclusive of actual returns but excluding purchase accounting adjustments. Accrued returns are reflected in print revenue.
($ in Millions) Q2‐2017 Billings Detail by Component
YTD June 2017 Billings Detail by Component
2015 2016 2017 2016 2015 2016 2017 2016 2015 2016 2017 2016
Higher Ed $60 $69 $67 (3.0%) $65 $40 $30 (25.7%) $125 $109 $97 (11.4%)K‐12 98 87 128 46.2% 161 187 156 (16.9%) 259 275 284 3.2%
International 6 7 8 14.9% 68 58 56 (4.3%) 74 65 64 (2.2%)Professional 16 17 18 5.5% 14 15 12 (16.0%) 30 31 30 (4.5%)
Other 1 0 1 N/M 0 0 0 (99.9%) 2 0 1 156.4%
Total MHE $181 $180 $221 22.7% $308 $300 $253 (15.7%) $489 $481 $474 (1.3%)
% of TotalHigher Ed 48% 63% 69% 52% 37% 31% 100% 100% 100%
K‐12 38% 32% 45% 62% 68% 55% 100% 100% 100%International 8% 11% 13% 92% 89% 87% 100% 100% 100%Professional 53% 53% 59% 47% 47% 41% 100% 100% 100%
Total MHE 37% 38% 47% 63% 62% 53% 100% 100% 100%
% vs % vs% vsQ2 Digital Billings Q2 Print Billings Q2 Total Billings
2015 2016 2017 2016 2015 2016 2017 2016 2015 2016 2017 2016
Higher Ed $128 $150 $157 4.8% $116 $86 $70 (18.6%) $244 $236 $227 (3.8%)K‐12 106 102 138 35.5% 190 219 182 (16.9%) 296 321 320 (0.3%)
International 10 14 15 2.2% 106 93 90 (3.2%) 117 108 105 (2.5%)Professional 25 26 27 1.0% 27 27 24 (11.1%) 52 53 51 (5.1%)
Other 2 0 1 N/M 0 1 0 (99.8%) 2 1 1 14.1%
Total MHE $272 $293 $337 15.2% $439 $427 $367 (14.0%) $710 $719 $704 (2.1%)
% of TotalHigher Ed 52% 63% 69% 48% 37% 31% 100% 100% 100%
K‐12 36% 32% 43% 64% 68% 57% 100% 100% 100%International 9% 13% 14% 91% 87% 86% 100% 100% 100%Professional 49% 49% 53% 51% 51% 47% 100% 100% 100%
Total MHE 38% 41% 48% 62% 59% 52% 100% 100% 100%
% vs % vs % vsJun YTD Digital Billings Jun YTD Print Billings Jun YTD Total Billings
Digital vs. Print Billings Detail
Supplemental GAAP Schedules & Free Cash Flow
32
Supplemental Financial Schedules to be Available when Financial Statements are Filed