Houghton Mifflin Harcourt Announces Fourth Quarter and Full Year 2020 Results, Achieved 2020 Billings at the Top End of its Revised Guidance Range and Positive Free Cash Flow

SaaS billings growth of 142% and digital platform usage growth of 306% as HMH continues transformation to K-12 pure-play learning technology company; Successful achievement of HMH 2020 strategy lays foundation for Digital First, Connected future

BOSTON — February 25, 2021 — Learning technology company Houghton Mifflin Harcourt (“HMH” or the “Company”) (Nasdaq: HMHC) today announced financial results for the fourth quarter and full year ended December 31, 2020 and introduced new operational metrics HMH will use to track growth in recurring revenue and progress on connected solutions selling.

“As we head into a new year focused on executing against our Digital First, Connected strategy, we are supporting teaching and learning nationwide in every environment. HMH has unsurpassed reach to the nation’s schools and we continue to see strong growth in important key performance indicators, including accelerating digital adoption of our platforms and tools, positioning HMH amongst the largest and fastest growing companies in the edtech market,” said Jack Lynch, President and Chief Executive Officer of Houghton Mifflin Harcourt.

Q4 2020 Headlines:

HMH achieved 2020 billings at the top end of its revised guidance range and positive free cash flow, outperforming its revised guidance range for 2020. Additionally:

  • Continued momentum with SaaS billings growth of 142% and digital platform user growth of 306% for full year 2020
  • Annualized Recurring Revenue (ARR) 1 of $58 million in 2020; HMH will report its Net Retention Rate (NRR) beginning in the first quarter of 2021
  • Connected Sales1 made up 50% of Education segment billings in 2020


Joe Abbott, HMH’s Chief Financial Officer said, “During the quarter, we also continued to manage our expenses with discipline, and as a result, delivered higher adjusted EBITDA margins for the fourth quarter and for the full year. Additionally, we generated positive cash flow during the fourth quarter, resulting in positive free cash flow for the full year."

Outlook:

HMH expects 2021 billings in a range of $1.10 billion to $1.15 billion resulting in an unlevered free cash flow margin in a range of 9% to 11%.

Full year 2020 Financial Results:

Net Sales: HMH reported net sales of $1,031 million for the full year of 2020, down 26% compared to $1,391 million in 2019. The net sales decrease was driven by a $371 million decrease in our Education segment, offset by a $12 million increase in our HMH Books & Media segment. Within our Education segment, the decrease was primarily due to lower net sales in Extensions, which decreased $252 million from $632 million in 2019 to $380 million, due to lower sales and a difficult comparison to prior year Texas K-6 sales coupled with the impact of the COVID-19 pandemic in 2020. Also, contributing to the decrease was lower professional services with the decline of the in-person learning environment as a result of the COVID-19 pandemic. Further, there were lower net sales from Core Solutions which decreased by $119 million from $578 million in 2019 to $459 million, primarily due to the smaller new adoption market opportunity in Texas ELA, along with the impact of the COVID-19 pandemic. Within our HMH Books & Media segment, the increase in net sales was primarily due to an increase in licensing revenue of $13 million, which includes $10 million of licensing revenue from a new production series and $3 million from the Carmen Sandiego series on Netflix.

Billings1: Billings for 2020 decreased $502 million, or 32%, from 2019. The billings decrease was driven by a $515 million decrease in our Education segment offset by a $13 million increase in our HMH Books & Media segment. Within our Education segment, the decrease was primarily due to lower Core Solutions billings which decreased $306 million due to the smaller new adoption market opportunity in Texas ELA, along with the impact of the COVID-19 pandemic. Further, Extensions billings decreased by $209 million due to lower billings of the Heinemann products due to a difficult comparison to prior year Texas K-6 billings coupled with the impact of the COVID-19 pandemic in 2020 and reduced face-to-face delivery of professional services. HMH Books & Media billings increased primarily due to an increase in licensing revenue of $13 million, which includes $10 million of licensing revenue from a new production series and $3 million from the Carmen Sandiego series on Netflix.

Cost of Sales: Overall cost of sales decreased by $200 million to $644 million in 2020 from $844 million in 2019, primarily due to lower billings and to a lesser extent, lower amortization expense.

Selling and Administrative Costs: Selling and administrative costs decreased by $185 million in 2020, primarily due to lower labor costs of $77 million, resulting from cost savings associated with our employee furlough initiative in response to COVID-19, our 2020 Restructuring Plan and a freeze on hiring. Further, there was a decrease in variable expenses of $52 million, including reduced commissions and transportation expenses due to lower billings and $44 million of lower discretionary costs related to travel, decreased marketing activities and other expense reduction measures. There was also lower depreciation expense of $11 million.

Restructuring/severance: Our restructuring/severance and other charges for the full year ended December 31, 2020 increased by $12 million primarily due to severance costs associated with the 2020 restructuring plan.

Operating Loss: Operating loss for 2020 was $429 million, a $266 million unfavorable change from the $163 million operating loss in 2019 primarily due to a non-cash impairment charge for goodwill in 2020 of $279 million. This charge was a direct result of the adverse impact that the COVID-19 pandemic had on our Company. Additionally, lower net sales contributed to the operating loss. Partially offsetting the unfavorable operating loss was a decrease in selling and administrative expenses.

Net Loss: Net loss of $480 million for 2020 was a $266 million unfavorable change from the net loss of $214 million in 2019, due primarily to the same factors impacting operating loss along with an increase in interest expense of $17 million resulting from the debt refinancing during the fourth quarter of 2019 and a favorable change in income taxes of $17 million due primarily to the non-cash impairment on goodwill.

Adjusted EBITDA: Adjusted EBITDA for 2020 was $132 million, a $34 million unfavorable change from $166 million in 2019.

Cash Flows and Liquidity: Net cash provided by operating activities for 2020 was $115 million compared with $255 million in 2019. HMH’s free cash flow, defined as net cash from operating activities minus capital expenditures, for 2020 was $3 million, a $112 million unfavorable change compared to $115 million in 2019. The primary driver of the unfavorable change in net cash provided by operating activities and free cash flow was the COVID-19 pandemic in 2020.

As of February 25, 2021, there were no amounts outstanding under our revolving credit facility. We expect our net cash from operations combined with our cash and cash equivalents and borrowing availability under our revolving credit facility to provide sufficient liquidity to fund our current obligations, capital spending, debt service requirements and working capital requirements over at least the next twelve months.

Conference Call:

At 9:30 a.m. ET on Thursday, February 25, 2021, HMH will host a conference call to discuss the results and management’s outlook with its investors. The call will be webcast live at ir.hmhco.com. The following information is provided for investors who would like to participate:

Toll Free: (844) 835-6565

International: (484) 653-6719

Passcode: 1675959

Moderator: Brian Shipman, Senior Vice President, Investor Relations

Webcast Link: https://edge.media-server.com/mmc/p/oyi49sqv

An archived webcast with the accompanying slides will be available at ir.hmhco.com for one year for those unable to participate in the live event. An audio replay of this conference call will also be available until March 7, 2021 via the following telephone numbers: (855) 859-2056 in the United States and (404) 537-3406 internationally using passcode 1675959.

Use of Non-GAAP Financial Measures:

To supplement our financial statements presented in accordance with Generally Accepted Accounting Principles (GAAP) and to provide additional insights into our performance (for a completed period and/or on a forward-looking basis), we have presented adjusted EBITDA and free cash flow. These measures are not prepared in accordance with GAAP. This information should be considered as supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. Management believes that the presentation of these non-GAAP measures provides useful information to investors regarding our results of operations and/or our expected results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business.

Management believes that the presentation of adjusted EBITDA provides useful information to our investors and management as an indicator of our performance that is not affected by debt restructurings, fluctuations in interest rates or effective tax rates, gain or losses on investments, non-cash charges and impairment charges, or levels of depreciation or amortization along with costs such as severance, separation and facility closure costs, acquisition/disposition-related activity costs, restructuring costs and integration costs. Accordingly, management believes that this measure is useful for comparing our performance from period to period and makes decisions based on it. In addition, targets in adjusted EBITDA (further adjusted to include the change in deferred revenue) are used as performance measures to determine certain incentive compensation of management. Management also believes that the presentation of free cash flow provides useful information to our investors because management regularly reviews these metrics as an important indicator of how much cash is generated by general business operations, excluding capital expenditures, and makes decisions based on it.

Other companies may define these non-GAAP measures differently and, as a result, our use of these non-GAAP measures may not be directly comparable to adjusted EBITDA and free cash flow used by other companies. Although we use these non-GAAP measures as financial measures to assess our business, the use of non-GAAP measures is limited as they include and/or do not include certain items not included and/or included in the most directly comparable GAAP measure. Adjusted EBITDA should be considered in addition to, and not as a substitute for, net income or loss prepared in accordance with GAAP as a measure of performance; and free cash flow should be considered in addition to, and not as a substitute for, net cash from operating activities prepared in accordance with GAAP. Adjusted EBITDA is not intended to be a measure of liquidity nor is free cash flow intended to be a measure of residual cash flow available for discretionary use. You are cautioned not to place undue reliance on these non-GAAP measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures (to the extent available without unreasonable efforts in the case of forward-looking measures) and related disclosure is provided in the appendix to this news release.

Operating Metrics:

Annualized Recurring Revenue (ARR) for a given period is the annualized revenues derived from termed subscription contracts existing at the end of the period. ARR excludes contracts that are one-time in nature. ARR is currently one of the key performance metrics being used by management to assess the health and trajectory of our business. ARR does not have a standardized definition and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of U.S. GAAP revenue, deferred revenue and unbilled revenue and is not intended to be combined with or to replace those items. ARR does not represent revenue for any particular period or remaining revenue that will be recognized in future periods. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers.

Connected Sales are billings from the sale of core, intervention, supplemental, assessment and service offerings hosted on or transitioning to be hosted on our Ed: Your Friend in Learning® teaching and learning platform.

Billings is an operating measure which we derive from net sales taking into account the change in deferred revenue. Education and HMH Books & Media segment billings represent an operating measure which we derive from net sales taking into account the change in deferred revenue. Billings for Core Solutions and Extensions is an operating measure based on invoiced sales adjusted for returns, other publishing income and change in deferred revenue.

About Houghton Mifflin Harcourt

Houghton Mifflin Harcourt (Nasdaq: HMHC) is a learning technology company committed to delivering connected solutions that engage learners, empower educators and improve student outcomes. As a leading provider of K–12 core curriculum, supplemental and intervention solutions, and professional learning services, HMH partners with educators and school districts to uncover solutions that unlock students’ potential and extend teachers’ capabilities. HMH serves more than 50 million students and 3 million educators in 150 countries, while its award-winning children’s books, novels, non-fiction, and reference titles are enjoyed by readers throughout the world. For more information, visit www.hmhco.com.

Follow HMH on Twitter, Facebook and YouTube.

Contact

Investor Relations

Brian S. Shipman, CFA

SVP, Investor Relations

(212) 592-1177

brian.shipman@hmhco.com

Media Relations

Bianca Olson

SVP, Corporate Affairs

(617) 351-3841

bianca.olson@hmhco.com

Forward-Looking Statements

The statements contained herein include forward-looking statements, which involve risks and uncertainties. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “projects,” “anticipates,” “expects,” “could,” “intends,” “may,” “will,” “should,” “forecast,” “intend,” “plan,” “potential,” “project,” “target” or, in each case, their negative, or other variations or comparable terminology. Forward-looking statements include all statements that are not statements of historical facts. They include statements regarding our intentions, beliefs or current expectations concerning, among other things: 2021 outlook for billings and unlevered free cash flow margin; the expected impact of our Digital First, Connected strategy and the actions described in this press release; the expected impact of the COVID-19 pandemic; our future results of operations, financial condition, liquidity, prospects, growth and strategies; the timing, structure and expected impact of our operational efficiency and cost-reduction initiatives and the estimated savings and amounts expected to be incurred in connection therewith; and potential business decisions. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. We caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are based upon information available to us on the date of this report.

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 actual results may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if actual results are consistent with the forward-looking statements contained herein, those results or developments may not be indicative of results or developments in subsequent periods.

Important factors that could cause actual results to vary from expectations include, but are not limited to: the duration and severity of the COVID-19 pandemic and its impact on the federal, state and local economies and on K-12 schools; the rate and state of technological change; state requirements related to digital instructional materials; our ability to execute on our Digital First, Connected growth strategy; increases in our operating costs; management and personnel changes; timing, higher costs and unintended consequences of our operational efficiency and cost-reduction initiatives, including the actions described in this press release; our ability to sell the HMH Books & Media business and the terms of any such potential sale; and other factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. In light of these risks, uncertainties and assumptions, the forward-looking events described herein may not occur.

We undertake no obligation, and do not expect, to publicly update or publicly revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained herein.

Appendix: Financial Tables