McGraw Hill, Inc. Q3 FY2026 earnings call

Management Statement and Operational Highlights

• Higher Education: Continued to significantly outperform the market with 24% year-over-year revenue growth, 30% market share. Evergreen platform has over 700 titles. AI-powered solutions like AI Reader reached over 1 million higher education students in Q3. New ALEKS for calculus solution unlocks market opportunity.
• K-12: Gained market share in a smaller year, ranked first or second in 10 of the top 11 adoption opportunities. Active pilots in California math and Florida ELA markets. Supplemental and intervention solutions like ALEKS Adventure and McGraw Hill Plus enhance capabilities.
• AI Innovation: AI-powered solutions driving deeper engagement. AI Reader expanded into professional segments. Clinical reasoning gaining recognition. Sharpen Advantage, an AI-powered enterprise solution, deepens penetration.
• Financials: Total revenue reached $434 million growth of 4.2% year-over-year. Reoccurring revenue grew 14.8% year-over-year to $357 million. Digital revenue grew 11% versus last year to $364 million. Adjusted EBITDA rose to $136 million in the quarter, achieving a 31.3% margin. Raised fiscal year 2026 guidance.

Segment Performance

• Higher Education: Revenue grew 24% year-over-year to $225 million in the quarter. Recurring revenue grew 33.5% and digital revenue expanded 24.8%. Inclusive Access now represents 60% of higher education revenue. 70% of Higher Education revenue comes through Evergreen.
• K-12: Revenue was $128 million, a decline of 14.6%, but recurring revenue only declined 1.6% in Q3. Gained market share in some states and actively preparing for fiscal year 2027 cycles.
• Global Professional: Revenue increased by 2%, and its recurring revenue grew by 3.5% in the quarter. Growth in digital medical and engineering solutions offset noncore print exit.
• International: Revenue declined narrowed sequentially to 1.8% year-over-year in the quarter. Gaining market share in higher education despite headwinds.
• Overall: Total revenue for the third quarter increased 4.2% year-over-year to $434 million. Recurring revenue grew 14.8% year-over-year to $357 million, representing 82% of total revenue. Digital revenue expanded 11%, representing 84% of total revenue. Gross profit margin expanded nearly 100 basis points year-over-year to 85.3%. Adjusted EBITDA rose to $136 million in the quarter, achieving a 31.3% margin.

Guidance

• Raised full year fiscal 2026 financial guidance. Now anticipate total revenue for fiscal year 2026 in a range of $2.067 billion to $2.087 billion. Reoccurring revenue ranging from $1.516 billion to $1.526 billion and adjusted EBITDA between $729 million to $739 million.
• Will share fiscal year 2027 financial guidance during the fiscal year-end earnings call in June. Remain confident in fiscal year 2026 and the foundation for fiscal year 2027, with a return to revenue growth and continued margin expansion.

Risks

• Forward-looking statements are inherently subject to significant economic, competitive, regulatory and other uncertainties and contingencies, many of which are beyond the control of management.
• Potential impact from proposed federal education policy changes, although currently no material impact has been seen.

Q: Can you help unpack the growth drivers that you're seeing in higher ed and how you're thinking about fiscal 4Q perhaps talk a bit about Evergreen as a differentiator?

A: Simon Allen and Philip Moyer discussed higher ed growth drivers including market share gains, price realization, enrollment, and sales return release. Evergreen is a differentiator providing continual updates to faculty, freeing sales reps' time for new adoptions.

Q: Congrats on a great quarter, and welcome to Philip. Maybe just to start, first question for me is around the K-12 business. Obviously, continuing to benefit from the strong market share gains, obviously, from last quarter. But as we look ahead to fiscal '27, can you just unpack a little bit more about what gives you that confidence in sort of the return to growth and magnitude of growth for that business?

A: Simon Allen talked about K-12's market share gains, performance in states like Florida and Alabama, and upcoming opportunities in California and Texas markets.

Q: Maybe I wanted to start with Philip as well. I guess you started the new role this week. I guess if you think about the coming months, what are some of your early priorities where do you envision spending your time across the organization as you think about the coming months?

A: Philip Moyer mentioned early priorities include learning the organization and products, getting out with customers to understand their concerns, and spending time with go-to-market teams to empower them.

Q: It's Steven Koenig with Macquarie. Nice to be on the call. Congratulations is due to Simon, I want to echo previous comments by others on your contribution financially, operationally and certainly culturally to McGraw Hill. So you leave a really -- really good position here for Philip to build on and welcome to Philip.

A: Philip Moyer thanked Steven Koenig.

Q: Marvin Fong: Congratulations on the great results as well as Philip for the new role and Simon I didn't have that long a time to work with you, but certainly hope to continue the relationship there and best of luck. Just a couple of questions. Again, on AI, biopic, maybe a different angle for either Simon or Philip to answer. But from the outside as investors, how would you suggest we measure the impact of AI on your business?

A: Simon Allen and Philip Moyer discussed measuring AI impact through user engagement, learning outcomes, and enterprise adoption.

Q: Henry Hayden: I'd like to add to the congratulations, Simon, on your retirement. I guess to start off, it's great to see leverage continuing to come down towards the target range. Could you please give us an update on capital allocation and how you're thinking about leverage progression from here? And since you commented on it, how are you thinking about M&A in that context? And what sort of assets would be of most interest.

A: Simon Allen and Robert Sallmann talked about capital allocation, leverage progression, and M&A plans, including organic opportunities, deleveraging, and looking for bolt-on tuck-ins in various business units.

Q: Joshua Chan: Congrats, Simon and welcome Philip. I'll just ask one to Simon. I guess, historically, in your experience as you gain share in higher ed, does it become easier or harder to keep gaining share? I guess I'm just asking kind of a momentum question. And then what does it take to kind of keep up the momentum?

A: Simon Allen discussed that success breeds success in higher ed, with factors like inclusive access, Evergreen platform, and go-to-market teams contributing to momentum.

Q: Toni Kaplan: Congrats on the quarter and also on Simon, on your retirement. It's been great working with you. You mentioned the strong stats on McGraw Hill plus with the 86% increase in district access and 40% increase in average time spent. Just to get maybe a little bit of additional context. Hoping to understand what the penetration rate is across the business from the school districts for that and how the forward pipeline looks for the platform?

A: Simon Allen talked about McGraw Hill Plus's ability to increase retention due to integrated data and products, and the importance of providing teacher relief.

Q: David Karnovsky: Maybe just following up on supplemental within K-12. Can you just update on the ongoing crossing opportunity there? And what the uptake has looked like recently for products like ALEKS?

A: Simon Allen and Robert Sallmann discussed the ongoing opportunity in supplemental and intervention within K-12, with ALEKS being a key product providing personalized learning in math and other disciplines.

Q: Faiza Alwy: I was also going to ask actually about the supplemental. And I think you addressed it on the prior question, but -- just specifically, I was curious, you mentioned the stat around 1,000 different tools that sit inside the average district. And I was curious, like, what do you think the real limitation is to kind of moving that or integrating that within the McGraw Hill offering. And I guess I'm just surprised that we still have that many tools. So I'm just curious if there is a limiting factor that the opportunity seems quite compelling.

A: Simon Allen talked about the overload of tools in school districts and McGraw Hill's role in simplifying choices and providing teacher relief through integrated products.

Q: Faiza Alwy: Great. That makes sense. And just -- I wanted to also ask about higher ed, right? I'm trying to reconcile some of your comments. And I know, Bob, you talked about a decline in revenue because of the tough comp. So -- but if I look at the numbers and not to get into the modeling details, but -- if I look at what you did in 4Q last year and what you did this quarter, it's not that different, you're still growing 24-something percent. So -- and I know you sound really good about the higher ed opportunity. So really just trying to reconcile sort of your optimism around the ability to continue to gain share versus sort of you talking about tougher comps.

A: Simon Allen and Robert Sallmann discussed the confidence in continuing to gain share despite tough comps, with focus on annual performance and taking share from competitors