McGraw Hill Earnings Call Highlights Digital-Led Surge

McGraw Hill, Inc. ((MH)) has held its Q3 earnings call. Read on for the main highlights of the call.

McGraw Hill’s latest earnings call struck a decidedly upbeat tone, with management stressing strong execution despite pockets of weakness. Higher education, recurring and digital revenue, and margins all moved sharply higher, while cash flow and debt reduction showed clear balance-sheet progress, offsetting pressure in K-12 and some international softness.

Steady Top-Line Growth in Q3

Total revenue for fiscal Q3 rose 4.2% year-over-year to $434 million, giving the company modest positive momentum. On a fiscal year-to-date basis, revenue is up 0.7% compared with the prior year, reflecting resilience despite a smaller K-12 market and mixed international trends.

Recurring and Digital Revenue Power the Model

Recurring revenue climbed 14.8% to $357 million and now makes up 82% of total sales, underpinning visibility and stability. Digital revenue expanded 11% to $364 million, representing roughly the mid-80% of the overall mix and underscoring the company’s successful pivot away from print.

Higher Education Delivers Standout Performance

Higher education was the clear star, with revenue surging 24% year-over-year to $225 million in the quarter. Recurring revenue in this segment jumped 33.5% and digital revenue grew 24.8%, supported by Inclusive Access at about 60% of higher-ed revenue and Evergreen driving roughly 70%, fueling land-and-expand and retention.

AI Products Gain Traction Across Use Cases

AI Reader reached more than 1 million higher-ed students in Q3, generating 16 million learning interactions versus 11 million in Q2 for a cumulative 27 million since launch. Additional AI tools, including ALEKS Calculus and various assistants for teachers, writing, and clinical reasoning, are winning pilots, lifting platform usage, and widening future use cases.

Margins and Profitability Trend Higher

Adjusted EBITDA rose 7.7% year-over-year to $136 million, lifting the adjusted EBITDA margin to 31.3%, nearly 100 basis points higher. Gross margin also improved by around 100 basis points to 85.3%, highlighting operating leverage from the shift to digital and tighter cost discipline.

Cash Flow Strengthens and Debt Comes Down

Operating cash flow reached $309 million in the quarter, up 12% from a year earlier, giving McGraw Hill ample financial flexibility. The company prepaid $200 million of term debt in Q3, $596 million year-to-date, cutting net leverage to 2.9x and generating more than $41 million in annualized interest savings with an undrawn revolver.

K-12 Platforms Show Digital Momentum

Despite revenue pressure, digital platforms in K-12 are gaining traction, with McGraw Hill Plus district access up 86% year-over-year and time spent on the platform up 40% since school started. ALEKS Adventure monthly users have quadrupled versus last year, and early wins in Florida and California suggest a potentially larger opportunity by fiscal 2027.

K-12 Revenue Hit by Smaller Market

K-12 revenue declined 14.6% to $128 million in Q3 as the market shrank and the company lapped strong prior-year adoption wins. Notably, recurring revenue in K-12 slipped only 1.6%, softening the blow and indicating that subscription-like streams are cushioning cyclical swings in state-driven purchasing.

International Faces Pockets of Weakness

International revenue dipped 1.8% year-over-year, as certain higher education markets proved challenging even amid market-share gains. Management highlighted ongoing product investments abroad, but the segment remains a modest drag on growth in the near term.

Leverage Still Above Target Range

Net leverage at 2.9x is now below 3x but remains slightly above the company’s target range of 2.0x to 2.5x. Management plans further deleveraging, including a planned $50 million additional paydown in Q4, signaling that balance-sheet repair remains a core capital allocation priority.

Q4 Comps and One-Offs Cloud Near Term

Executives cautioned that fiscal Q4 will face tougher year-over-year comparisons, which could temper reported growth despite solid underlying trends. Q3 also benefited from a sales-return reserve release, estimated at roughly 400 basis points, and AI-related efficiency tools are still early, making quarter-to-quarter margins less predictable.

Guidance and Outlook Point to Continued Expansion

Management raised fiscal 2026 guidance, now targeting total revenue of $2.067 billion to $2.087 billion and recurring revenue of $1.516 billion to $1.526 billion, with adjusted EBITDA of $729 million to $739 million. They expect unlevered free cash flow to slightly exceed the low end of a 50%–100% EBITDA conversion range, while keeping investment in CapEx and product development at 8%–9% of revenue and reaffirming a net-leverage goal of 2.0x–2.5x.

McGraw Hill’s call painted a picture of a business leaning into digital and AI to drive profitable, recurring growth while steadily reducing leverage. Higher education and subscription-based revenue are offsetting K-12 and international headwinds, and while near-term comps may be choppy, the raised guidance and strong cash generation point to a constructive long-term trajectory for investors following the name.