Last week, publisher Houghton Mifflin Harcourt (HMH) announced plans to strategically restructure the company which includes laying off 525 employees and focusing on recurring subscription revenue. The company introduced its restructuring plans last October as it began working toward a digital-first learning environment. However, the COVID-19 pandemic pushed more K through grade 12 education online, forcing the publisher to accelerate their plans to remain sustainable.

President and CEO outlines plans

“The COVID-19 pandemic has cemented the central role of technology within the K–12 space. As districts embrace new remote learning formats and rely more heavily on digital solutions than ever before, HMH is well-positioned to be a holistic partner in delivering successful outcomes and supporting educators and the students they serve,” said Jack Lynch, HMH president and CEO, in an October 1 news release.

“The actions we announced today will help us to realize our digital-first vision by creating a more focused company with increased recurring digital subscription revenue that produces higher margins and free cash flow. We recognize the personal impact these actions will have on our HMH team members. We thank our departing colleagues for their contributions and are committed to treating them in a respectful and compassionate way,” Lynch added.

Specific changes include:

• Labor and non-related cost cutting measures totaling $95 million to $100 million annually
• Organizational restructuring including a 22% reduction in the HMH workforce, including positions that were cut as part of a voluntary retirement incentive program
• A reduction in costs including manufacturing expenses as the company moves from print to digital, lower service delivery costs due to the digital transformation, and streamlining operational expenses by retiring legacy systems and print-centric processes
• One-time charges of $34 million to $36 million, including the costs of the voluntary retirement incentive program

Company to focus on recurring subscription revenue

Joe Abbott, HMH chief financial officer, also commented on the changes.

“The actions we’re taking are intended to drive billings growth, position us to build our recurring subscription revenue base, simplify and strengthen our business model, reduce costs, and generate sustained and positive free cash flow,” Abbott said. “By realigning our organization, we will be better positioned to support our customers in today’s learning environment while creating value for our shareholders. We are taking decisive steps to further improve our free cash flow potential and dramatically lower our break-even billings levels in the future.”

In their announcement, HMH said the restructuring will simplify the company’s business model with a greater reliance on recurring revenue while increasing value to their customers, teachers, students and shareholders. The company will provide additional updates in their November earnings call.

Insider Take

A visit to the company’s website did not immediately yield any subscription products. After doing some digging, we found some licensed products and a few minor subscriptions which were annual upgrades on specific topics like biology. However, if HMH genuinely wants to make a digital transformation, the time is now. With so many school districts going to remote learning, either part-time or full-time, and many parents choosing to homeschool their kids, they have a huge opportunity to transform their business from one-off purchases to ongoing customer relationships with school districts, teachers and parents and to generate recurring subscription revenue.

This new model will ultimately be good for HMH, and it will help the publisher keep up with the changing educational environment, provided they haven’t pivoted too late. It is, unfortunately, terrible for the employees who are losing their jobs. With tens of millions of Americans already out of work, this reality is painful. We’ll keep you posted when we learn more of HMH’s plans.