McGraw Hill, Inc. Q4 FY2026 earnings call

### Overall Business & Strategic Context - New CEO Philip Moyer completed 120 days in the role, with 250+ stakeholder meetings, and has full confidence and alignment from the board of directors. - Fiscal 2026 full-year results exceeded IPO expectations for total revenue and adjusted EBITDA. - Recurring revenue grew 6% year-over-year and now represents over 73% of total company revenue; adjusted EBITDA margin expanded nearly 80 basis points year-over-year. - The company's four core strategic priorities are: strengthening the core business, expanding cross-sell opportunities, growing the addressable market (TAM), and driving operational efficiencies.

### AI Innovation & Competitive Position - 8 AI-powered learning tools have been launched, serving over 7.5 million users, with 3 additional launches planned for fiscal 2027. - McGraw-Hill's competitive moat for AI is rooted in four key assets: pedagogically ordered deep curriculum content across thousands of learning objectives, personalized delivery tools validated to improve student outcomes, 190 terabytes of learning data from 25.6 billion annual student learning interactions, and an established customer success organization to integrate tools into classroom workflows. - The company is piloting a new purpose-built agentic AI tool, representing a potential new business model and TAM expansion to non-education customers; the tool enables secure, auditable access to McGraw-Hill's curated curriculum content. - Independent third-party studies validate AI tool outcomes: Alex adaptive learning achieves 90%+ math topic mastery; Sharpen drives 47% higher final exam scores versus generic AI tools.

### K-12 Segment Milestones - Launched the new California math curriculum and the company's largest ever curriculum investment, a new Science of Reading-aligned ELA literacy program (Emerge, Summit, and SOAR), with over $100 million invested since 2021. - Launched a dedicated K-12 AI curriculum to teach AI concepts integrated into classroom learning. - Early positive momentum for the new ELA program: it received the highest rating in Colorado's K-3 instructional material review, and has won early adoption in low-penetration urban markets like Seattle. - The California math adoption cycle is progressing slower than expected, with 80% of the market still undecided, allowing the company to customize materials to fragmented local pedagogy needs.

### Higher Education Segment Momentum - 40 consecutive quarters of market share gains, with share approaching 31% as of Q4 2026. - Net promoter score reached a record high in spring 2026, with strong retention and volume growth; solid adoption of new credentialing and AI professional development offerings.

### Global & International - Medical education expanded into clinical training and AI-powered diagnostic simulations, positioned to address the projected 11 million global healthcare worker shortage by 2030. - International market conditions are improving: Canadian higher education enrollment is stabilizing, with new demographic-driven opportunities in Latin America and the Middle East.

### Balance Sheet & Capital Allocation - Gross debt was reduced by $646 million in fiscal 2026, including IPO proceeds; net leverage decreased by ~80 basis points, with a target net leverage of 2.0x to 2.5x. - Full-year 2026 unlevered free cash flow was $335 million; the company ended the year with $254 million in cash and $704 million in total liquidity, with undrawn revolving credit facilities.

1. **Higher Education**: Full-year 2026 revenue grew 12% year-over-year to $879 million, with recurring revenue up 10% to $734 million. Market share now approaches 31%, the 40th consecutive quarter of gains. The evergreen delivery model represents 68% of higher education revenue, and inclusive access represents 56% of 2026 fiscal year revenue. Net dollar retention reached 114% for the full year. Fourth quarter 2026 revenue grew 2% year-over-year to $258 million. This segment contributed ~41.9% of total full-year 2026 revenue.

2. **K-12**: Full-year 2026 revenue was $884 million, down 9% year-over-year, reflecting an anticipated smaller market opportunity and tough prior year comparisons. Recurring revenue grew 3% year-over-year to $620 million. Performance exceeded expectations due to stronger capture rates in key adoption markets. Fourth quarter 2026 revenue was $126 million, down 10% year-over-year. ELA (English Language Arts) is the largest subject area, representing ~40% of historical K-12 revenue, with math representing ~20%. This segment contributed ~42.1% of total full-year 2026 revenue.

3. **Global Professional**: Full-year 2026 digital revenue grew 4% year-over-year, supported by medical content (which represents over 75% of the segment's total revenue) and early traction from AI-enabled solutions. Growth was partially offset by the ongoing wind-down of non-core print products, which is expected to be completed in fiscal 2027. The underlying core medical segment is a mid-single digit grower.

4. **International**: Full-year 2026 revenue declined 7% year-over-year due to macro pressure in select markets, and a $39 million impairment charge was recognized in the fourth quarter driven by geopolitical and macroeconomic factors. Fourth quarter performance was further impacted by Middle East project delays shifted to the second half of fiscal 2027. Management expects improving market conditions and a return to growth in fiscal 2027.

- **Fiscal 2027 Total Revenue**: Expected range of $2.115 billion to $2.175 billion, which is consistent with dollar-level expectations set at the IPO; the midpoint implies ~2% year-over-year growth. - **Fiscal 2027 Recurring Revenue**: Expected range of $1.587 billion to $1.627 billion, which is above IPO expectations, reflecting a growing high-quality predictable revenue stream. - **Fiscal 2027 Adjusted EBITDA**: Expected range of $750 million to $790 billion, which is above IPO expectations; the midpoint implies an adjusted EBITDA margin of 35.9%, a 50 basis point year-over-year expansion. - **Fiscal 2027 Unlevered Free Cash Flow**: Expected to reach approximately $400 million, a ~20% year-over-year increase, with further growth expected in fiscal 2028. - Capital expenditure and product development spending are expected to remain approximately 10% of total revenue. - The board of directors has authorized a new $50 million share repurchase plan. - Management reaffirmed the medium-term framework of mid-single digit plus total revenue growth. - GAAP net income for fiscal 2027 is expected to increase significantly compared to fiscal 2026.

- The California K-12 math adoption cycle has been slower than expected, with current win rates falling slightly behind management expectations, though 80% of the market opportunity remains undecided. - Geopolitical and macroeconomic headwinds in select international markets caused project delays and a $39 million impairment charge in the fourth quarter of fiscal 2026. - Generic AI and open educational resources (OER) represent competitive pressure for core curriculum adoptions, though McGraw-Hill has a 6:1 win rate against these competitors due to stronger validated outcomes. - State-funded OER curriculum experiments like Texas' Blue Bonnet math create near-term adoption uncertainty, though short-duration contracts leave room for future share gains if OER outcomes underperform. - Copyright infringement of McGraw-Hill's content by large AI models that train on pirated content is a key risk; the company is participating in litigation to protect its intellectual property. - Screen time backlash and parental pushback on digital tools in early K-12 creates near-term adoption uncertainty, though McGraw-Hill's ability to deliver balanced paper-digital curricula positions the company to benefit from this trend long-term.

Q: Can you break down the drivers of 2026 higher education growth and what to expect for 2027? / A: 12% 2026 growth came from four sources: ongoing sustained share gains, 3-4% growth from enrollment (above the national 1.3% average due to over-indexing on two-year colleges and high-demand business/science disciplines), ~2% net price growth (up from the historical 1% as additional AI features add value), and a non-recurring 3% benefit from lower sales returns as digital adoption reduces reserves. For 2027, management expects continued share gains and mid-single digit overall growth, with the non-recurring sales return benefit not repeating. We are assuming 1% overall enrollment growth for the coming year, which is a measured outlook ahead of the fall academic term. This segments revenue contribution is expected to remain strong driven by the inclusive access and evergreen models that drive high retention.

Q: What is the size and timeline of the Science of Reading ELA opportunity in K-12, and could state-owned OER hurt this opportunity? / A: ELA represents 40% of our historical K-12 revenue, and our previous literacy program generated over $1.5 billion over 10 years. 42 U.S. states now mandate Science of Reading-aligned literacy instruction, creating what management expects to be a multi-year super cycle for this segment, with both domestic TAM acceleration and global TAM expansion. We do not see widespread state OER adoption risk for literacy similar to Texas math. The Texas state OER math curriculum already had over 4,000 identified errors, and our program meets unique requirements: multilingual support for all grades, full accessibility, the right balance of screen and paper time, and third-party validation, which are very difficult for low-cost OER to deliver. We are already seeing strong early wins in large districts that were historically outside of McGraw-Hill's literacy footprint.

Q: How does McGraw-Hill's AI strategy compare to competitors, and what is the outlook for OER and generic AI competition? / A: McGraw-Hill has four key competitive advantages that generic AI startups and OER cannot match: pedagogically sequenced deep curriculum aligned to thousands of local learning standards, personalized delivery validated to improve student outcomes, decades of granular learning data to tune AI models, and an established go-to-market and customer success team to integrate tools into classroom workflows. Investors frequently ask if AI will disrupt McGraw-Hill, but education customers almost never ask this question, because they do not want to rely on uncurated generic large language models for student learning. We have a 6:1 win rate against OER and AI-generated curriculum competitors, and we are seeing increasing win-backs as districts find that OER does not deliver the outcomes or support they require.

Q: What is the outlook for the new agentic AI opportunity, including timeline, pricing, and margin profile? / A: We have already built internal agentic AI tools and are now moving into external customer pilots, with business model testing expected to continue through the end of calendar 2026. Agentic AI allows us to securely deliver our curated content to external AI workflows while controlling access and auditing usage, opening up new lifelong learning and non-education customer opportunities. Management expects pricing to evolve, but education customers need predictable costs, so we will not move to a volatile per-token pricing model that creates cost uncertainty for districts and students. Longer-term, we believe purpose-built small models paired with vectorized curriculum content will deliver far better outcomes at a fraction of the cost of generic large models, leading to attractive margin profiles for this new line of business.

Q: What is your position on the copyright lawsuit against Meta for training LLMs on your pirated content? / A: We believe that strong copyright protection and innovative AI are not mutually exclusive. Our content is behind paywalls, and any content used to train AI that was obtained from pirate sites is illegal. We are actively protecting our intellectual property, and support a clear licensing market for AI model training, which already exists for other content types like images and news. We are building agentic AI technology that enables secure, metered access to our content, creating a legitimate commercial model for AI access to our curriculum that benefits both customers and McGraw-Hill.