McGraw Hill, Inc. (MH) Q2 2026 Earnings Call Transcript

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Overview

The earnings call highlights strong growth in Higher Ed and promising developments in K-12 markets, driven by new products and AI integration. The Q&A reveals confidence in product differentiation and market expansion, despite some international revenue declines. Positive guidance for 2027 and focus on organic growth and M&A support a positive outlook. Management's strategic priorities and AI-driven margin expansion further bolster the sentiment. However, lack of specific guidance and details on some metrics slightly tempers the optimism, leading to a positive, rather than strong positive, rating.

Key Financial Performance

Fiscal Q2 Revenue $669 million, a 2.8% year-over-year decline due to the anticipated smaller K-12 market.

Reoccurring Revenue $422 million, a 6.5% year-over-year increase, driven by the strength of the subscription-based model.

Digital Revenue $352 million, a 7.6% year-over-year increase, reflecting an expanding digital mix.

Higher Education Revenue $213 million in Q2, a 14% year-over-year increase, driven by market share gains, Inclusive Access growth, enrollment favorability, and value-based pricing.

Adjusted EBITDA $286 million in Q2, a 43% margin, up 60 basis points year-over-year, reflecting strong operating leverage and an expanding digital mix.

Gross Profit Margin 79.2%, an increase of nearly 150 basis points year-over-year, supported by efficient operations and favorable digital revenue mix.

K-12 Revenue $359 million in Q2, an 11.2% year-over-year decline due to the anticipated smaller market opportunity.

Global Professional Revenue $40 million in Q2, relatively flat year-over-year, with reoccurring revenue growing 5.4%.

International Revenue $50 million in Q2, an 8.8% year-over-year decline, with digital growth in select K-12 markets partially offsetting declines in Canada and Spain.

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Operating Highlights

ALEKS Adventure: Early momentum is building for this Supplemental Math offering for K3 students, positioning for growth beyond the Core ahead of the major California Math opportunity in fiscal year 2027.

ALEKS Calculus: Global launch is unlocking $100 million in TAM.

AI Reader: Expanded to 600+ Connect titles and First Aid Forward solution for medical students, generating 11 million learning interactions in Q2.

Sharpen Advantage: Transforms college student study app into an AI-powered enterprise solution with real-time faculty dashboards, unlocking growth opportunities beyond Core.

Clinical Reasoning: Introduces virtual patient interactions for medical students, positioning for incremental digital growth.

Writing Assistant: Provides real-time personalized feedback to students, fostering skill development with 130,000 interactions across 877 school districts in October.

Teacher Assistant: Gives K-12 teachers instant planning support, reducing prep time, currently available for California Math with nationwide rollout to follow.

Higher Education: Revenue expanded 14% year-over-year, with digital revenue growing 18.4%. Market share rose 160 basis points to 30%.

K-12: Despite a smaller market, reoccurring revenue grew 3% year-over-year with share gains in Core Science, ELA, and Math. Early success with ALEKS Adventure in South Carolina's Math adoption.

Supplemental and Intervention Market: McGraw Hill holds only 5% share but is primed for expansion with products like ALEKS and McGraw Hill Plus.

Digital Revenue: Increased 7.6% year-over-year to $352 million, representing 53% of total revenue.

Adjusted EBITDA: Reached $286 million in Q2, yielding a margin of 43%, up 60 basis points year-over-year.

AI Implementation: Enhanced internal efficiency, reducing K-12 order processing times by 27% and automating 25% of service checks.

AI Integration: Continued embedding AI into solutions to enhance learning experiences and support educators, differentiating McGraw Hill from AI-first entrants.

Debt Reduction: Prepaid $542 million in term loan debt year-to-date, resulting in over $40 million in annualized cash interest savings.

Guidance Update: Raised fiscal year 2026 guidance across the board, with total revenue expected between $2.031 billion and $2.061 billion.

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Risk or Challenges

Market Conditions: Revenue declined 2.8% year-over-year in Q2 due to a smaller K-12 market opportunity, which was anticipated but still impacted overall performance.

Competitive Pressures: Emerging AI-first entrants in the education sector pose a competitive threat, particularly as McGraw Hill works to differentiate its AI solutions.

Regulatory Hurdles: Proposed federal education policy changes have had no material impact yet, but the reliance on state and local funding for 90% of district revenue could pose risks if policies shift.

Supply Chain Disruptions: No explicit mention of supply chain disruptions, but reliance on digital and subscription-based models may mitigate traditional supply chain risks.

Economic Uncertainties: Economic conditions and enrollment trends are favorable now, but any downturn could impact revenue, particularly in Higher Education and K-12 segments.

Strategic Execution Risks: The company is heavily reliant on the success of AI-driven tools and new product launches like ALEKS Adventure and McGraw Hill Plus. Failure to scale these effectively could hinder growth.

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Guidance & Outlook

Fiscal Year 2026 Revenue Guidance: Total revenue is anticipated to range between $2.031 billion and $2.061 billion.

Recurring Revenue Guidance: Recurring revenue is expected to range from $1.504 billion to $1.524 billion for fiscal year 2026.

Adjusted EBITDA Guidance: Adjusted EBITDA is projected to be between $702 million and $722 million for fiscal year 2026.

Unlevered Free Cash Flow: Expected to slightly exceed the low end of the 50% to 100% adjusted EBITDA conversion range.

Capital Expenditures and Product Development: CapEx and product development as a percentage of revenue remain unchanged.

Tax Liability for Fiscal Year 2026: Tax liability is expected to be below the previous $30 million to $50 million range due to recent changes in federal tax policy.

Higher Education Growth Projections: Inclusive Access activations for accounts landed in fiscal year 2026 are expected to increase by 15 to 20 times by fiscal year 2028.

K-12 Growth Outlook: Positioned for growth in fiscal year 2027 with opportunities in California Math and Florida ELA markets.

Supplemental and Intervention Market Expansion: ALEKS and McGraw Hill Plus are expected to expand in the multibillion-dollar Supplemental and Intervention market, where the company currently holds only a 5% share.

AI-Powered Solutions: Continued embedding of generative AI into solutions to enhance learning experiences and support educators.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:Can you break down the mix of benefits from enrollments and execution in Higher Ed, and discuss the durability and runway for growth within Inclusive Access?

A:Higher Ed saw 14% growth, primarily from market share gains, with enrollment growth at 2-2.5%. Inclusive Access continues to grow with 100 new institutions added annually, showing 15-20x growth over the first few years. Innovations like AI Reader and ALEKS Calculus are also contributing to growth.

Q:What are the current performances in California Math and Florida ELA, and how confident are you about the funding in fiscal '27?

A:California Math and Florida ELA are performing well, with FY '27 expected to see an additional $300 million TAM, driven by these and other opportunities. The company is optimistic about its product suitability and bundling solutions.

Q:How does McGraw Hill differentiate itself from Gen AI native entrants, and what are the competitive moats?

A:McGraw Hill leverages its 137-year history, trusted position, and AI integration in products like AI Reader and Sharpen Advantage. Its breadth of offerings across disciplines and proven efficacy in improving learning outcomes are key differentiators.

Q:What is the margin outlook as data becomes a more substantial part of the offering?

A:AI is expected to drive margin expansion over time by reducing product development costs by 60% and time to market by 50%, offsetting the costs of serving AI.

Q:Can you provide more color on K-12 trends and the impact of new products like ALEKS Adventure and McGraw Hill Plus?

A:New products like ALEKS Adventure and McGraw Hill Plus are driving growth and stickiness. McGraw Hill Plus has expanded to 12 states, with a 50% increase in teacher usage year-over-year. These products are enhancing the company's ability to win Core contracts and grow in Supplemental/Intervention.

Q:What are the capital allocation priorities moving forward?

A:The company prioritizes organic investments, deleveraging to a target of 2-2.5x, and exploring tuck-in M&A opportunities to expand the addressable market.

Q:What are the capture rates in K-12 this year compared to last year?

A:Capture rates in K-12 are 200 basis points higher than the prior year, aligning with expectations.

Q:What is the outlook for the K-12 TAM in 2027?

A:The K-12 TAM is expected to grow by $300 million in 2027, driven by opportunities in California Math, Florida ELA, and Texas Math.

Q:Where are AI-first entrants predominantly seen, and how is McGraw Hill addressing this?

A:AI-first entrants are seen more in RFP processes. McGraw Hill is addressing this by providing complete solutions that integrate Core and Supplemental/Intervention tools, enhancing their value proposition.

Q:What is the runway for Inclusive Access in Higher Ed?

A:Inclusive Access has significant runway, with 100 new institutions added annually and continued growth over several years. It is a sustainable and growing model.

Q:What are the trends in international markets like Spain and Canada?

A:Spain's K-12 market is lower this year due to timing, while Canada has seen a 3.5% market share growth despite declining enrollments. Latin America and the Middle East are also performing well.

Q:What is driving the strong performance in Higher Ed, and is it sustainable?

A:Higher Ed's strong performance is driven by Evergreen, new products like ALEKS Calculus, and innovations like Sharpen Advantage. The company's 30% market share and continuous innovation suggest sustainability.

Q:What are the pricing dynamics in Higher Ed?

A:The company uses a value-based pricing model and has not seen pushback on price increases, which are at inflationary levels.

Q:What are the state budget trends for K-12 in 2027?

A:State budgets for K-12 in 2027 are expected to be stable, with no concerns about declines. Education budgets for course materials are a small fraction of overall budgets.

Q:What is the impact of the demographic cliff on Higher Ed?

A:The demographic cliff is less concerning for McGraw Hill due to its focus on older students and community colleges. TAM expansion and market share gains are expected to offset any enrollment declines.

Q:Review of Unclear Management Responses

A:Management avoided providing specific capture rates for K-12, only stating a 200 basis point increase. They also did not provide detailed state-by-state breakdowns for K-12 opportunities in 2027, deferring guidance until the end of the fiscal year. Additionally, they did not disclose exact pricing details or specific impacts of federal funding on K-12 procurement.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

MH Transcript

McGraw Hill, Inc. (MH) Q2 2026 Earnings Call Transcript

Positive11-17

MH Report

McGraw Hill, Inc. 10-Q

10-Q

2025-08-14

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