Making Sense of the Turmoil at HMH
The headlines announcing Houghton Mifflin Harcourt’s disappointing third-quarter results were the kind that readers of the business press are used to seeing: “Houghton Mifflin Harcourt Sales Declined 7% in Q3 2016,” read one. “Houghton Slashes Expectations Again After Poor Quarter; Stock Falls Sharply,” read another.
Was HMH’s stumble just another sign of how hard it is for a publisher to succeed in today’s challenging marketplace, or is there a lesson here for other publishers?
If you are unfamiliar with the mix of HMH’s business, we should note that the company is primarily an educational publisher. In fact, its trade unit had a strong third quarter; HMH’s earnings announcement said, “Trade Publishing… 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 company’s total sales, however, fell from $576 million to $533 million in the quarter, causing a 31% decline in profits. The heart of the problem was that HMH lost 3 to 4 market share points in the U.S. education market, largely because its new reading program fared poorly in the state of California, which adopted new English/language arts programs during the past year.
“We offered a California standards-based reading program that used as a foundation our existing industry-leading reading program, coupled with new technology and enhancements,” HMH’s interim CEO L. Gordon Crovitz told analysts and investors during the third-quarter earnings call. Translation: instead of developing a new program, HMH gave a facelift to an old one – and the customers saw through it.
Note the word “interim” in front of Crovitz’s title, as there is a back-story here. Crovitz took over as CEO in September from Linda Zecher, who joined HMH in 2011 from Microsoft. She obviously had the technology chops to help HMH migrate its business from print to digital, but she came to HMH with no direct experience in either publishing or education (though she was responsible for Microsoft’s education business during her tenure there).
While Zecher had some successes during her five years at the helm – for example, she led HMH’s public offering in 2013 after the company emerged from bankruptcy – the strategic direction she provided may be at the heart of what went wrong in the most recent quarter. I’d point to three specific moves that might look smart individually but in combination provide an explanation for how HMH lost its way:
- The launch of Curious World, an online learning platform for children ages 3-7. Brought to market a year ago, it is designed to leverage HMH’s educational expertise and its ownership of the Curious George copyright, offering an array of educational videos, games, and books that enable parents to take an active role in their children’s learning.
- Establishment of the HMH Marketplace, an online educational resource store. Now in beta, the HMH Marketplace is meant to be a source of lesson plans, activities, classroom décor, and technology for teachers, offering not just HMH’s products but products from other publishers and resource providers as well.
- HMH’s acquisition of Scholastic’s educational technology business, which it bought for $575 million in May of 2015.
Why do we say these are signs of a misguided strategy? In its mission statement, HMH says it “specializes in pre-K–12 education content, services, and cutting-edge technology solutions for today’s changing landscape.” A look at the three initiatives mentioned above indicates that the company tilted too far away from the first of its three areas of specialization – developing content for pre-K-12 students.
Curious World is an educational product, but its primary target is parents, not educators. It offers great content, but creating products for parents to help them educate their children is a very different proposition from developing K-12 curriculum products. The HMH Marketplace, on the other hand, is designed for educators, but it effectively turns HMH into an educational retailer – of its competitors’ products as well as its own. While both initiatives appear to be good line extensions, they can also be viewed as statements that the company lost faith in its ability to develop new products for its core K-12 customer base. And indeed, its inability to develop a strong new product for the California English/language arts adoption reinforces this viewpoint.
HMH’s acquisition of Scholastic’s educational technology business is a different story. Scholastic raised a lot of eyebrows when it sold the business, since it left that company without a strong foothold in edtech. But Scholastic’s CEO Richard Robinson, whose strategic moves can be baffling at times, clearly had a reason to sell the business.
Scholastic’s edtech business was built around a reading intervention product called Read 180 that drove success for years but is now mature. Robinson probably evaluated what it would take to set the business on a renewed growth path and decided he’d rather sell it than invest in it. When Robinson becomes a seller, it’s caveat emptor. Given the trends in the K-12 market, Zecher had good reason to want to expand HMH’s edtech footprint – but she didn’t do a good enough job of kicking the tires of the business she bought from Robinson.
Hence Crovitz’s statement: “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.” Or, to put it differently, it will be a while before the business grows as fast as HMH thought it would.
So what’s the lesson for educational publishers? I’d say, first, that it’s fine to diversify, either into an adjacent market (consumers) or into another activity (retailing) that serves your core customer base – but only if you have your internal house in order. And, secondly, if you stray too far from your roots as a developer of K-12 curriculum content, tread carefully as you expand in edtech. Success is as difficult to come by in that space as it is in print.