McGraw Hill, Inc. 2027 Q1 Earnings Call

Welcome to McGraw Hill's earnings call for the first quarter of fiscal year 2027. Joining me today are Philip Moyer, President and Chief Executive Officer, and Bob Sallmann, Executive Vice President and Chief Financial Officer. During today's call, we will make forward-looking statements that are based on our current expectations and the current economic environment. These statements, estimates, and projections are subject to significant uncertainties beyond management's control, as detailed in the cautionary language in our earnings release for the fiscal first quarter ended June 30, 2026, the accompanying investor presentation, our Form 10-Q for the same fiscal quarter, and our other SEC filings. We will also reference certain non-GAAP measures today, which we believe provide useful supplemental insight into our financial and operational performance, though they are not substitute for GAAP measures.

Definitions and GAAP reconciliations are available in our earnings release, the appendix to the investor presentation, and on our investor relations website. For those listening to a recording of this call, please note that the remarks are as of today, August 13, 2026, and have not been subsequently updated. With that, I'll turn the call over to the President and Chief Executive Officer, Philip Moyer.

Good morning, everyone. Thank you for joining us. Millions of students and educators are preparing to head back to school, and McGraw Hill is leading the way. We're entering our most important selling season, off the back of a stronger than expected first quarter. McGraw Hill has more paid enterprise users than any other education company in the world. Over 100 million active curriculum licenses, over 7.5 million users of our AI solutions, and billions of learning interactions. This is what it looks like to be the world's preeminent education company. Q1 exceeded our expectations, both on revenue and profitability. Revenues grew 2.6% year-over-year, while recurring revenue grew 9.8%, representing 77% of total revenue. Adjusted EBITDA was $207 million, yielding a margin of 37.7%, more than 192 basis points of growth over the prior year, and net income was $58 million.

These results represent disciplined execution across our teams, building on our fiscal year 2026, where we delivered revenue growth, margin expansion, and positive net income, and a $646 million reduction in gross debt. In higher education, Inclusive Access, our Evergreen content delivery model, and our world-class go-to-market team continue to drive momentum. Q1 marked another quarter of share gains, extending our 10-year streak. Our Connect offering exhibits the stickiness of enterprise software, which gives us considerable confidence as we head into the fall. In K through 12, we're at the beginning of a multiyear curriculum adoption cycle driven by the science of reading. 44 states, representing 86% of K through 5 enrollment, have mandated science of reading-based pedagogy, with large states like California accelerating their ELA cycles.

In fact, Stanford University projects 300 to 700 additional districts could adopt science of reading curriculum materials over the next seven years, on top of the usual cycle. Our new literacy programs, Emerge!, Summit!, Soar!, and Leer Juntos, is a comprehensive K through 12 program built on the science of reading. It will also be one of the only dual language programs in the U.S. market, and I'm very happy to say that it's exceeding our expectations, with early cumulative capture rates above our 25%-30% target range. We've seen additional adoptions since last quarter, many of which are in open territory districts that were not previously our customers. In July, our California ELA programs were recommended for approval by a state reviewer panel, and we're looking forward to November, when the state will approve the final vendor list for the procurement cycle that begins in fiscal year 2028.

I'm also excited to announce our expansion into the increasingly important dyslexia screening market. It's estimated that one in 10 people have dyslexia, including 10 million students in the United States alone. As a result, 40 states in the United States have mandated student screenings for dyslexia. We're launching an exclusive integration with Stanford University for ROAR, which stands for the Rapid Online Assessment of Reading. It's an evidence-based dyslexia screener, and the only screener designed to assess foundational reading skills across the full K through 12 spectrum. We're going to integrate ROAR data with our McGraw Hill Plus analytics platform, which will uniquely help teachers identify, intervene, and target instruction all in a single unified interface and experience for the student and the teacher.

On a separate note, I'm also excited to announce Florida's recently approved our math programs ahead of the state's upcoming adoption beginning in fiscal year 2028. In Global Professional, medical information now doubles every 73 days. The need for curated, medical-grade content at scale is growing, and McGraw Hill's building directly into the convergence of medical education and clinical workflows. Our AI Reader tool now spans four new pharmacotherapy and pharmacological titles, with 96% of pharma doctor penetration. Our clinical reasoning tool has added 18 cases and landed its first commercial deals across osteopathic medicine, physician assistants, and nurse practitioner programs.

I'm also excited to note that last month, our AI agent, powered by Harrison's Medicine, was tested head-to-head against leading LLM platforms before a panel of respected medical editors and physicians, and it outperformed every tool on every question, delivering more complete, accurate, and up-to-date clinical responses without hallucinations. We're trusted by 98% of U.S. medical schools, and with our new agentic AI platforms, we're just scratching the surface of how our medical-grade content can be applied across the $13 trillion medical industry. International also continues to present attractive growth opportunities. In Australia, we secured our largest K through 12 ELA intervention deal with the Tasmania Department of Education, covering nearly 200 schools and approximately 5,000 students.

Student populations around the world are growing, and McGraw Hill is one of a few ed tech companies that is able to serve globally at scale, and these wins reflect the growth opportunity ahead. AI is another growth vector, and the narrative is shifting. The world is realizing that AI is not replacing jobs or destroying companies, it's making them better, and education is a best example of this. Humans have an insatiable desire for knowledge, and the need to educate the next generation is growing daily. We will simply not have astronauts reach Mars or manage fleets of robots, harness biology to extend lifespans, or usher in global peace and prosperity without doing an excellent job in education. Education is the fountainhead of human progress, and unlike other industries, it simply doesn't have a terminal value.

The challenge is we must teach more subjects to more students faster and in more ways than ever before. Teachers and students are having a hard time keeping up and are looking for someone they can trust. According to our global education insights report that we just released, educators are 81% more likely to completely trust AI that is embedded in existing educational platforms versus general-purpose chatbots. It was also interesting that trust among educators in general purpose GenAI chatbots declined 33% year-over-year. These surveys, along with customer conversations, continue to reinforce that AI will be a tailwind for McGraw Hill, because we can teach more subjects to more students with more trust than any other option. A great example of this is the contrast between OER and McGraw Hill. As mentioned, we take more business from OER than we lose.

The average school district uses over 2,400 disparate tools, and the average teacher and student has over 25 separate logins. Do it yourself content and chatbots that the educator must self-correct takes their time away from students and is not driving repeatable outcomes. McGraw Hill doesn't make educators piece it together. We deliver a fully integrated system of curriculum, assessment data, personalized learning, and professional development integrated directly into the daily workflows of the educator and the student. As we build our AI-driven adaptive ed tech tools, we start with a deep moat of high-quality, human-curated content, a proprietary education ontology with 26 billion annual learning interactions and a 7,000-educator research network, and over 100 independent peer-reviewed education outcome validations.

When given a choice between our integrated, trusted AI model versus a general-purpose chatbot with OER content found on the internet with no efficacy studies, teachers and students tend to choose McGraw Hill. As a result, we now have eight live AI learning tools serving more than 7.5 million active users with three additional launches planned this fiscal year. Our AI Reader alone has scaled to 63 million interactions across 2.6 million users to date. We are just getting started. Agentic AI is quickly becoming one of the most important technologies in the AI race. Agentic AI allows companies to create purpose-built knowledge graphs and couple these with different-sized models to achieve higher accuracy rates, better speed, and efficiency levels that surpass the general-purpose AI models.

We believe the future of knowledge will be agentic, and the agentic AI pilot that I mentioned last quarter continues to grow. We already have over 14 companies in our pilot group, and they are using a wide variety of third-party chatbots and open-source tools, which we can integrate with. We are building our agentic tooling to be a part of any education experience with any choice of chatbot that supports agentic standards. We believe this represents an opportunity for meaningful TAM expansion. We look forward to sharing more about our agentic strategy, our broader suite of tools, and our growth priorities at our Investor Day on November 18th. Our mission to build human intelligence across the full education life cycle has never been more vital, and our ability to deliver on it has never been stronger.