McGraw Hill (MH) Q2 2027 earnings review
McGraw Hill's school sales drop, but its full-year plan holds
McGraw Hill, the publisher of school and college textbooks, shrank during its peak back-to-school quarter as weak school math sales outweighed steady college subscriptions. Revenue fell 6% from a year ago and profit margins narrowed on higher software and marketing costs, though management said sales beat its own expectations. Chief executive Philip Moyer kept the full-year outlook unchanged, which by our math leaves revenue growing 7% and profit excluding one-offs jumping 17% in the second half.
| Revenue | $632.2M -5.5% from a year ago |
|---|---|
| Re-occurring subscription revenue | $414.1M -2.0% from a year ago |
| Remaining performance obligations (backlog) | $1,790.5M -6.4% from a year ago by our math |
| Full-year outlook | Unchanged middle of the range: 2.0% revenue growth |
⚖️ Verdict: 🔴 Bearish
The story got worse because the summer buying season did not refill the company's contract backlog, which fell 6% from a year ago by our math and pulled quarterly subscription revenue into a 2% decline. On the positive side, college digital subscriptions kept growing against a tough comparison, and the publisher connected its materials to Microsoft and Anthropic AI tools.
The question now is whether McGraw Hill can hit its unchanged full-year outlook with a smaller contract backlog. Either second-half college and international sales rebound strongly with tight cost cuts, or the draining school backlog forces a step-down later in the year. Third-quarter subscription revenue and the November 18 investor day will show which way it breaks.
🐂 Bull Case
College Digital Subscriptions Kept Growing on Tough Comparisons
Higher Education sells digital courseware and textbooks to college students and represents a third of revenue. The unit faced a hard comparison against 14.0% growth a year ago and depended on fall enrollment holding up, but it still grew 0.2% to $213.5 million.
Re-occurring revenue — sales from multi-year and digital subscriptions — rose 5.5% to $170.6 million. McGraw Hill expanded Evergreen, its system that updates digital textbooks continuously without new editions, across more than 800 titles, "driving a 35% reduction in sales touchpoints and 20% higher competitive win rates".
This matters because college subscriptions are carrying the business while school textbook sales shrink. Contracted future college revenue rose 4.3% from a year ago to $386.6 million, showing that share gains held through the fall rush.
What to watch: Higher Education revenue in the third quarter, when the segment compares against a 24% jump a year ago. Holding revenue steady against that peak would show that higher prices and share gains are durable.
AI Tools Reached More Students and External Platforms
Chief executive Philip Moyer wants to turn the publisher into an AI learning platform, while critics worry that free chatbots and open educational resources will reduce what schools pay for textbooks. In the second quarter, McGraw Hill connected its curriculum to Microsoft Copilot and Anthropic's Claude for Teachers, which Moyer said is "unlocking the next generation of learning and expanding our addressable market".
Student usage inside the company's own software also rose. AI Reader, a study tool inside its college platform, reached 80 million interactions across 3.4 million students through October, up from 63 million interactions and 2.6 million students three months earlier. The publisher also spent $29.2 million in cash to buy TeachFX and Teachally, two K-12 AI tools for teacher coaching and lesson planning.
What to watch: whether management attaches a dollar revenue figure or price increase to these AI integrations at its November 18 investor day. Rising usage without separate fees would mean AI is a cost of keeping existing customers rather than a new revenue stream.
Reading Programs Gained Ground Before the 2028 Buying Cycle
State textbook buying runs in multi-year waves, and McGraw Hill is preparing for a nationwide wave of English Language Arts (ELA) reading purchases starting in fiscal 2028. The company said its new reading programs — Emerge, Summit, and Soar — beat early win-rate targets in open-territory school districts.
In California math, where slow district buying hurt sales this year, the publisher reported "four times the number of pilots versus prior year, ahead of year two of the fiscal year 2028 adoption". Pilots let teachers test materials in classrooms before districts place large orders. Winning these trials matters because current school sales are shrinking, so the 2028 recovery depends on converting classroom tests into contracts next summer.
What to watch: K-12 contract backlog in the fourth quarter, when early orders for the fiscal 2028 school year begin. An upturn in that balance will provide the first numerical proof of the reading cycle.
🐻 Bear Case
Contract Backlog Kept Shrinking Through Peak Billing
Remaining performance obligations (RPO) measure the value of signed contracts not yet recognised as revenue. The company highlighted $1,790.5 million in RPO, "demonstrating strong revenue predictability and future growth visibility", and noted that first-half re-occurring subscription revenue grew 3.7%, "underscoring subscription model durability".
The year-over-year numbers tell the opposite story. By our math, total RPO fell 6.4% from $1,913.6 million a year ago, and K-12 RPO dropped 10.0% to $1,289.0 million. Because older multi-year school contracts are running off faster than new orders replace them, quarterly re-occurring revenue shrank 2.0% to $414.1 million.
- Total RPO: $1,790.5 million, down 6.4% from a year ago by our math
- K-12 RPO: $1,289.0 million, down 10.0% from a year ago by our math
- Implied Q2 billings (revenue plus RPO change): $900.6 million, down 3.4% from a year ago by our math
- Q2 re-occurring subscription revenue: $414.1 million, down 2.0% from a year ago
What to watch: re-occurring revenue growth in the second half, which must reach 5.0% by our math to hit the middle of the full-year outlook. Missing that mark would confirm that the smaller contract backlog is dragging down subscription sales.
School Textbook Sales Dropped Despite an Easy Comparison
The second quarter covering July through September is the biggest delivery period for K-12 school materials. McGraw Hill said total revenue fell 5.5% to $632.2 million, "favorable to expectations, as market share gains and strong capture rates across most markets partially offset anticipated lower capture rates in select math markets".
In K-12, revenue dropped 9.6% from a year ago to $324.6 million, and K-12 subscription revenue fell 7.8% to $199.5 million. This drop came on top of an 11.2% K-12 decline in the same quarter last year, meaning school sales have shrunk by nearly a fifth over two summers.
Lower win rates in California and Texas math — where Texas promotes its own free curriculum — outweighed gains in science and reading. For the first half, K-12 sales fell 4.9% to $599.0 million, proving the summer drop was not just early June shipping.
What to watch: second-half total revenue, which must grow 7.2% from a year ago by our math to reach the middle of the full-year plan. Because school buying is slow in winter, college and international sales must carry that rebound.
Higher Costs Squeezed the Profit Margin
Finance chief Bob Sallmann highlighted a "strong margin profile" and confidence in full-year margin expansion. However, the Adjusted EBITDA margin — profit before interest, taxes, depreciation, amortisation and one-offs — fell 3.2 percentage points from a year ago to 39.6%, as Adjusted EBITDA dropped 12.5% to $250.6 million.
Gross margin — profit after the direct cost of making books and software — held steady at 79.2%. The squeeze came from overhead: by our math, operating and administrative expenses excluding one-offs rose 3.1 percentage points of revenue to 39.5%. Selling and marketing costs rose 1.3 percentage points of revenue, and research and development rose 1.3 percentage points as the publisher invested in new software while sales shrank.
What to watch: second-half Adjusted EBITDA, which must rise 17.2% from a year ago by our math to meet the middle of the full-year outlook. Hitting that target requires tight cost control during the seasonally smaller winter quarters.
Risks this quarter didn't answer
Three standing concerns from prior filings received no new figures in the earnings release.
- False Claims Act lawsuits: no update in the release on the Florida appeal or Illinois most-favoured-nation pricing suit; the quarterly Form 10-Q legal footnote will show any status change.
- Segment profit margins in Global Professional and International: the release did not include the segment profit table; the Form 10-Q segment footnote will show whether international margins stabilized.
- Customer concentration: no update on the single reseller that accounts for roughly 11% of revenue; full-year filings track this concentration.
👓 Other Themes
New Presidents Appointed for College and School Units
McGraw Hill promoted two internal executives in October to run its two largest divisions, which together generate 85% of revenue. Robin Lucas, formerly chief sales officer for Higher Education, became president of that unit following the retirement of Michael Ryan. Jana Thompson, formerly chief product officer and interim head of K-12, became president of the K-12 school business.
💲 Other KPIs
McGraw Hill paid down $50 million of its term loan in the quarter, bringing net debt (total borrowings minus cash) down 3.3% from a year ago by our math. Net debt stands at 3.2 times trailing 12-month profit excluding one-offs, unchanged from March and June. S&P and Moody's both upgraded the company's credit ratings during the quarter.
Down 18.2% from $81.8 million in the first half of last year by our math (the release provides six-month cash flows only). Operating cash flow improved by $21.7 million on lower interest and tax payments, but capital and product development spending rose from $86.6 million to $123.2 million (10.4% of revenue) as the publisher funded new curriculum.
International revenue rose 1.6% from a year ago to $51.1 million after falling 12.1% in the first quarter, helped by "delayed Middle East shipments being fulfilled". Global Professional revenue slipped 2.7% to $38.7 million as the publisher winds down older print titles, though its subscription revenue grew 5.5% on 7% medical growth.
🔮 Guidance
Unchanged. The plan still calls for about 2.0% revenue growth at the middle of the range ($2,145 million) for a second straight quarter. Because first-half revenue fell 1.9%, by our math the outlook leaves 7.2% growth for the second half — a sharp turn from the 5.5% drop in the second quarter.
Unchanged. The publisher kept its subscription revenue plan at 4.3% growth at the middle of the range ($1,607 million). By our math, that requires 5.0% growth in the second half, up from 3.7% in the first half and a 2.0% decline in the second quarter.
Unchanged. The target still points to 3.5% profit growth and a 35.9% margin at the middle of the range ($770 million), up 0.5 percentage points from fiscal 2026. Because first-half Adjusted EBITDA fell 4.2%, by our math the plan requires 17.2% growth and a 32.4% margin in the second half, up from 29.9% in the second half of last year.
❓ Key Questions
What drives the 17% second-half profit jump?
First-half Adjusted EBITDA fell 4.2%, so hitting the middle of the full-year outlook requires 17.2% growth in the second half by our math. Which cost lines or revenue streams will deliver that rebound during the slower winter quarters?
Why did management leave the full-year outlook unchanged?
Last quarter management said it would factor back-to-school college enrollment and school district awards into the outlook in November, and it said second-quarter revenue beat its expectations. Why did the full-year range not move up?
How are the Copilot and Claude integrations priced?
McGraw Hill connected its textbook content to Microsoft Copilot and Anthropic's Claude for Teachers and acquired two K-12 AI companies for $29.2 million. Does the company charge schools extra for AI access, or is it bundled to defend existing subscriptions?
What are the terms of the post-quarter debt extension?
The release noted that McGraw Hill "proactively extended near-dated maturities subsequent to quarter end", with $828 million of secured notes due in August 2028. How much of the 2028 notes was extended, and at what interest rate?