Houghton Mifflin Harcourt Sales Declined 7% in Q3 2016
Houghton Mifflin Harcourt's interim CEO Gordon Crovitz expressed his disappointment last week in the education publisher's poor Q3 performance. The quarterly results revealed a 7% drop in sales and a 31% decline in net income compared to Q3 2015. Crovitz said in a recent press release that his attention is now set squarely on growth: "We are taking necessary steps to remedy issues which resulted in loss of market share in California this year, as well as to accelerate growth in our adjacent markets in order to create greater value for shareholders and improve our financial performance."
HMH's "adjacent markets" include consumer products like reading and education platform Curious World, assessment products, and professional services for educators.
The poor financial performance comes after the resignation of former HMH CEO Linda Zecher in September. Although Zecher did not indicate the reason for her resignation, some speculate her departure was the result of HMH's disappointing 2016 financial results. In February the publisher forecasted 2016 net sales from $1.5 billion to $1.58 billion. In its announcement of Q3 results, however, HMH lowered those expectations to just $1.32 to $1.38 billion.
Read the complete press release from HMH below.
BOSTON – Global learning company Houghton Mifflin Harcourt (“HMH” or the “Company”) (NASDAQ: HMHC) today announced its financial results for the third quarter ended September 30, 2016.
Third Quarter 2016 Highlights:
- Net sales for the three months ended September 30, 2016, were $533 million, a 7% decrease compared with $576 million in the same period in 2015.
- Billings for the three months ended September 30, 2016, were $620 million, a 9% decrease compared with $682 million in the third quarter of 2015.
- Net income for the third quarter of 2016 was $90 million, a 31% decrease compared with $131 million for the same period in 2015.
- Adjusted EBITDA was $168 million for the three months ended September 30, 2016, a 12% decrease compared with $192 million for the same period in 2015.
- Pre-publication or content development costs for the third quarter were $29 million, a 12% decrease compared with $33 million for the same period in 2015.
- The Company has lowered its full year 2016 outlook for net sales and billings in light of weaker-than-expected results in the domestic education market. 2016 net sales are now expected to be between $1,320 and $1,380 million, and billings are now expected to be between $1,370 and $1,430 million.
- HMH launched its new science curriculum, HMH Science Dimensions, the first comprehensive K-12 science curriculum in the education market created specifically to meet the new Next Generation Science Standards (NGSS). The Company continues to innovate and develop leading core products for upcoming large new adoption market opportunities.
“While we are disappointed with the Company’s performance year to date, especially in the domestic education market, we are squarely focused on restoring growth to the business,” said Gordon Crovitz, Interim Chief Executive Officer of HMH. “We are taking necessary steps to remedy issues which resulted in loss of market share in California this year, as well as to accelerate growth in our adjacent markets in order to create greater value for shareholders and improve our financial performance.”
Joe Abbott, Chief Financial Officer of HMH added, “We believe the factors contributing to our weak performance in the California English Language Arts adoption will result in lower than expected market share for the full year. We have revised our full year 2016 outlook to reflect year to date results and our expectations for fourth quarter performance. As we look forward, we see robust domestic education market opportunities and are focused on capturing market share as we continue to invest in our core business and adjacencies.”
Full Year 2016 Outlook:
In light of weaker-than-expected year to date financial results and a forecasted lower fourth quarter compared with the fourth quarter of 2015, the Company has revised its 2016 net sales and billings guidance. Net sales are now expected to be in the range of $1,320 to $1,380 million. Billings are now expected to be in the range of $1,370 to $1,430 million.
Pre-publication or content development costs for 2016 are still expected to remain in the range of approximately $120 to $140 million.
Third Quarter 2016 Business Update:
Education Segment: Outside of the California English Language Arts adoption, HMH continued its solid performance in other adoption opportunities including California Math and Florida Literature.
HMH is committed to investing in its core curriculum programs to improve its future competitive position in the domestic education market. The Company intends to offer new, state-of-the-art instructional programs in upcoming adoptions in Florida secondary Social Studies with opportunity beginning in 2017, California Social Studies and Florida Science beginning in 2018, and Texas Reading, California Science and Florida Mathematics beginning in 2019. HMH plans to further monetize these core curriculum program investments in other adoption and open territory markets. The Company’s new technology platform, which provides an intuitive and modern user experience leveraging digital functionality to engage students and enhance the learning experience, supports the recently launched next generation science programs, and will serve as the basis for HMH’s soon-to-be-announced social studies programs as well as new reading and mathematics curriculums.
HMH’s recently launched science program, HMH Science Dimensions, is the first K-12 program in the market built from the ground up to meet NGSS adopted by states nationwide. The program represents an entirely new approach to teaching science, focusing on investigative activities and three-dimensional learning while leveraging technology to provide new opportunities for engagement. The program includes integrated engineering content, new interactive learning components including HMH Field Trips, a virtual reality learning tool powered by Google Expeditions, and unparalleled teacher support.
Adjacent Markets: HMH plans to continue investing in its adjacencies, including intervention, assessment, professional services, international and consumer to achieve higher growth in these markets.
The Company continues to integrate the EdTech business during its first full year of ownership. While HMH anticipates higher growth in this business, the Company’s sales integration efforts are ongoing and it now expects single digit growth rate for the EdTech business for full year 2016 compared to the more rapid realization of revenue synergies expected at the start of the year.
HMH’s Heinemann business had another strong quarter of performance due to many bestselling products such as the new edition of Benchmark Assessments I and the continuing strength of Reading Strategies, which is close to becoming Heinemann’s best all-time selling professional development title.
In the consumer space, HMH launched GO Math! GO, a playful learning app that offers kids 3-7 a fun, engaging math experience rooted in its popular GO Math! classroom curriculum. Curious World, HMH’s curated digital collection of licensed and original short-form video, games and books for young learners, continued to grow, topping over 1,000 pieces of content and adding films from known and beloved IP such as They Might Be Giants from Disney Sound and StoryBots® from JibJab Bros. Studios.
Trade Publishing Segment: HMH’s Trade Publishing segment performed well largely due to strong sales of frontlist titles such as The Whole 30, Little Blue Truck Halloween, Steve Young’s QB and How to Bake Everything. The Whole 30 has been on the New York Times bestseller list for over 52 weeks, with over half a million copies sold.
In December, HMH plans to publish a new title by #1 bestselling author of the 4-Hour Workweek, Tim Ferriss. On the cusp of 100 million downloads, The Tim Ferriss Show is consistently ranked as one of the most popular podcasts in the world. Ferriss has been included in Fast Company’s “Most Innovative Business People” and Forbes magazine’s “Names You Need to Know.”
Integration and Corporate Highlights: 2016 is an investment year for the Company. The Company continues to integrate the EdTech business, implement upgrades to its technology infrastructure and relocate to more efficient new office locations. These investments will increase operational efficiencies to allow for HMH’s continued growth.
Third Quarter 2016 Financial Results:
Net Sales and Billings: Net sales for the three months ended September 30, 2016 were $533 million, a decrease of 7%, or $42 million, from the same period in 2015. The net sales decrease was primarily driven by a decline in domestic education net sales of $48 million due to a smaller new adoption market in 2016 versus 2015, coupled with lower market share, $6 million of lower delivered professional services and $6 million of lower net sales from the assessment business, primarily clinical, due to the natural decline of sales over time following the initial release of a new product version in 2014. Partially offsetting the decrease was a $3 million increase in net sales of the international business and $3 million of higher Trade Publishing net sales.
Billings, an operating measure, which is calculated as net sales taking into account the change in deferred revenue, for the three months ended September 30, 2016 were $620 million compared with $682 million for the same period in 2015. This 9%, or $62 million, decrease in billings was largely driven by the aforementioned drivers for net sales.
Net Income: Net income in the third quarter of 2016 was $90 million, a decrease of 31% or $41 million, compared with net income of $131 million in the third quarter of 2015. The decrease was primarily due to lower net sales as well as a lower income tax benefit due to a large reversal of uncertain tax positions in the prior year, partially offset by lower operating costs and lower interest expense.
Adjusted EBITDA: Adjusted EBITDA for the third quarter was $168 million, a decrease of 12% or $23 million, compared with $192 million, in the third quarter of 2015. The decline is primarily due to lower net sales partially offset by lower operating costs.
Cost of Sales: Cost of sales decreased by 6% or $18 million, year-over-year from $272 million to $255 million, due to lower net sales volume and lower amortization costs.
Selling and Administrative Costs: Selling and administrative costs for the three months ended September 30, 2016, decreased 3% or $7 million, year-over-year to $185 million, compared with $192 million for the same period in 2015, primarily due to lower sales commissions attributed to lower sales performance partially offset by higher labor costs.
Pre-Publication Costs: Content development or pre-publication expenditures decreased 12% or $4 million, from $33 million to $29 million in the third quarter of 2016, primarily due to timing.
Cash Flow: Net cash provided by operating activities was $9 million for the nine months ended September 30, 2016, a $154 million decrease from the $163 million provided by operating activities for the nine months ended September 30, 2015. The decrease in cash provided by operating activities from 2015 to 2016 was primarily driven by less profitable operations and the impact of changes in working capital.
HMH's free cash flow, defined as net cash from operating activities minus capital expenditures, for the nine months ended September 30, 2016, was a usage of $176 million compared with favorable free cash flow generation of $35 million for the same period in 2015. The increased usage of $210 million is primarily due to drivers impacting reduced operating cash and higher capital expenditures.
As of September 30, 2016, HMH had $217 million of cash and cash equivalents and short-term investments compared with $432 million at December 31, 2015. Our cash position for the quarter was impacted by the inherent seasonality of the academic calendar. Consequently, the performance of the business is difficult to compare by consecutive quarters and should be considered on the basis of results for the whole year.
Share Repurchase Program: During the third quarter, HMH repurchased 271,648 shares of its common stock for approximately $4 million under its share repurchase program. As of the end of the third quarter 2016, approximately $482 million was available for share repurchases under the aggregate $1 billion share repurchase program. The aggregate $1 billion share repurchase program may be executed through the end of 2018. Repurchases under the program may be made from time to time in open market, including under trading plans, or privately negotiated transactions. The extent and timing of any such repurchases would be at the Company’s discretion and subject to market conditions, applicable legal requirements and other considerations.