McGraw-Hill Education Q Update

Transcription

1 McGraw-Hill Education Q3-207 Update November 4, 207 This presentation has been prepared for investors in the currently outstanding debt of McGraw-Hill Global Education Holdings, LLC and MHGE Parent, LLC. Final

2 Important Notice Forward-Looking Statements This presentation includes statements that are, or may be deemed to be, forward-looking statements. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms believes, estimates, anticipates, expects, intends, plans, may, will or should or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this presentation and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this presentation. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this presentation, those results of operations, financial condition and liquidity or developments may not be indicative of results or developments in subsequent periods. Any forward-looking statements we make in this presentation speak only as of the date of such statement, and we undertake no obligation to update such statements. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data. Non-GAAP Financial Measures Certain financial information included herein, including Billings, EBITDA and Adjusted EBITDA, are not presentations made in accordance with U.S. GAAP, and use of such terms varies from others in our industry. Billings, EBITDA and Adjusted EBITDA should not be considered as alternatives to revenue, net income from continuing operations, operating cash flows or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance, debt covenant compliance or cash flows as measures of liquidity. Billings, EBITDA and Adjusted EBITDA have important limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP. This presentation includes a reconciliation of certain non-gaap financial measures to the most directly comparable financial measures calculated in accordance with U.S. GAAP. Adjusted EBITDA, which is defined in accordance with our debt agreements, is provided herein on a segment basis and on a consolidated basis. Adjusted EBITDA by segment, as determined in accordance with Accounting Standards Codification Topic 280, Segment Reporting, is a measure used by Management to assess the performance of our segments. Adjusted EBITDA on a consolidated basis is presented as a debt covenant compliance measure. Management believes that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future as well as other items to assess our debt covenant compliance, ability to service our indebtedness and make capital allocation decisions in accordance with our debt agreements. 2

3 Business Review

4 McGraw-Hill Education Q3-207 Results Back-to-school peak season complete for U.S.; performance in line with preliminary results McGraw-Hill continued to take share in Higher Ed; expanded its market share in K-2 Open Territory and performed well despite a prior-year tough comparison in K-2 Adoptions Higher Ed business stabilizing as anticipated and performing well vs. prior year - Stronger performance in front-list titles, primarily 208 ; continued digital growth led by e-commerce; and more normalized ordering and return patterns among largest channel partners Maintained a leadership position in CA and FL K-2 Adoptions despite competing against a +400 bp Adoption market share gain in 206; gained share in a smaller K-2 Open Territory market Pre-publication investment increasing in advance of sizeable Higher Ed front-list opportunities and large upcoming K-2 Adoptions Cash continuing to build seasonally with line of credit fully repaid in September Company fully compliant with all debt agreements Note: Connect paid activations and direct-to-student e-commerce sales updated as of YTD 0/3/7 Amounts may not sum due to rounding. McGraw-Hill Education Total MHE Performance: YTD 9/30/7 2 MHE Billings $,527M (-.6%) MHE EBITDA Before Pre-Publication $478M (-0.4%) MHE Pre-publication Investment $74M (+33.9%) MHE Adjusted EBITDA $405M (-4.8%) MHE Digital Billings $70M (+4.5%) % MHE Digital Billings 46% +700bps Direct-to-Student E-Commerce Net Sales $95M (+5.3%) (Updated as of YTD 0/3/7) Market Share Higher Ed 3 - LTM 9/30/7 +00 bps K-2 4 YTD 9/30/7 +0 bps Key Indicators Connect/LearnSmart Paid Activations 3.5M (+7.7%) (Updated as of YTD 0/3/7) ALEKS Unique Users 3.5M (+22.4%) (as of YTD 9/30/7) MHE Inc. Liquidity at 9/30/7 Cash $305M Credit Line Capacity $350M Total Liquidity $655M 207 front-list represents 208 and 207 copyrights sold in Effective Q4-6 and prospectively, MHE no longer incudes the change in deferred royalties within the change of deferred revenue. On a FY basis, the net change is immaterial; prior periods do not reflect the change 3 Per Management Practice, Inc. (MPI) 4 4 Per AAP

5 McGraw-Hill Higher Education Q3-207 Results Investment in front-list and digital leadership drive top-line stability in Higher Ed Higher Ed performed well in the back-to-school season, achieving results significantly better than prior year Digital transition continues with a 6 percentage point improvement in digital Billings mix to 63% - YTD e-commerce net sales surpassed full-year 206, exceeded net sales of three largest distribution channels combined and accounted for /3 of total YTD net sales - Strong digital growth continued into October Larger front-list led by 208, drove positive net sales growth and mitigated normal decline in back-list print - YTD front-list print net sales growth improved from -36% in 206 vs. +3% in 207 Returns tracking favorably YTD (through mid- November) with trend expected to continue through seasonally large return period that concludes at end of this month Continuing to invest in robust front-list for calendar year 208 (209 ) and expect to expand rental program in 208 based on 207 pilot learnings Continued to improve collaboration with some key distribution channel partners Note: Connect paid activations and direct-to-student e-commerce sales updated as of YTD 0/3/7 Primary difference between Billings and net sales (industry market share measure) is the accrual of returns Higher Education McGraw-Hill Higher Ed Performance: YTD 9/30/7 2 Billings (net of accrued returns) $574M (+2.%) Digital Billings $359M (+2.0%) % Digital Billings 63% +600bps Direct-to-Student E-Commerce Net Sales $95M (+5.3%) (Updated as of YTD 0/3/7) Net Sales (net of actual returns) 3 $582M (+3.4%) Front-list Sales (net of actual returns) $250M (+6.6%) Back-list Sales (net of actual returns) $33M (+.%) McGraw-Hill Higher Ed Actual Product Returns Actual Returns Change -$3M (-5.3%) (Updated as of YTD 0/3/7) vs. Industry Performance: (net actual returns basis) 4 Industry Net Sales YTD 9/30/7 +.3% MHE Market Share Change LTM 9/30/7 +00 bps Key Indicators Connect/LearnSmart Paid Activations 3.5M (+7.7%) (Updated as of YTD 0/3/7) ALEKS Unique Users.5M (+30.2%) (as of YTD 9/30/7) 207 front-list represents 208 and 207 copyrights sold in Effective Q4-6 and prospectively, MHE no longer incudes the change in deferred royalties within the change of deferred revenue. On a FY basis, the net change is immaterial; prior periods do not reflect the change 3 Total net sales include the impact of accounting accruals/reversals; accrued returns not included 4 Per Management Practice, Inc. (MPI) 5

6 McGraw-Hill Higher Ed Performance Overview Key MHE drivers for a successful 207 So far, so good.q4 remains important Timing Seasonal Considerations & Drivers Results/Status Jan. Feb. Digital sales / paid activations Strong results driven by e-commerce and paid activations Feb. Apr. Actual product returns Improvement in product returns vs. 206 Apr. June Low digital; Start of print ordering by channel Digital sales later in season - Digital ordering continues to shift to the start of school (Q2 to Q3) as direct-to-student sales increase End of June early Sept. Aug. Sept. Oct. Nov. Dec. Digital & print shift from Q2 to Q3 Sell-through of larger front-list Abatement of print channel destocking Direct-to-student e-commerce sales Paid digital activations Actual product returns Digital growth continues into Oct. Continue to shift to Jan. direct-to-student digital sales with the ongoing digital transition Solid Performance - Anticipated digital & print shift from late June to closer to school year did occur - Net sales +3.4% YTD Sept. 30 th 207 vs. -0.7% YTD Sept. 30 th 206 Strong results - Direct-to-student e-commerce +5.3% YTD Oct. 3 st - Connect/LearnSmart paid activations +7.7% YTD Oct. 3 st - Actual returns down $3M or -5.3% YTD Oct. 3 st 207.; rest of Nov. is critical - Some shifting of digital activations and sales from Sept. as students trial digital and activate in Oct. Too early in the season to determine impact of sales shift to Q Note: Connect paid activations and direct-to-student e-commerce sales updated as of YTD 0/3/7 6

7 McGraw-Hill K-2 Q3-207 Results Held market share overall despite tough CA comp; gained market share in Open Territory Expect to retain a leadership position in second year of the California ELA Adoption despite tough comparison to outsized 206 performance and to lead Florida Social Studies Adoption CA English Language Arts Billings in line with August estimate with total MHE CA sales greater than $200M FL Social Studies Billings ahead of prior estimate with total MHE FL sales greater than $60M Gained market share in Open Territory YTD Sept 30 th, while market contracted 6% YTD, contrary to broad industry expectations for market growth - Some schools ordered later than normal this year and some school districts have deferred purchase decisions - Q4 is a seasonally small period Preparations for 208 and 209 new adoptions remain on track, specifically California Social Studies (208), Florida Science (208), Texas Reading (209), California Science (209) and Florida Math (209) - On November 9 th, McGraw-Hill s Social Studies program was approved for sale in California Note: Primary difference between Billings and net sales (industry market share measure) is the accrual of returns K-2 McGraw-Hill K-2 Performance: YTD 9/30/7 Billings (net of accrued returns) $680M (-3.4%) Digital Billings $269M (+2.2%) % Digital Billings 40% +800bps vs. Industry Performance as per AAP : YTD 9/30/7 MHE Net Sales (-3.2%) Industry Net Sales (-3.8%) MHE Market Share Change +~0 bps MHE Adoption Net Sales (-3.%) Industry Adoption Net Sales (-.0%) MHE Market Share Change -~70 bps MHE Open Territory Sales (-3.3%) Industry Open Territory Net Sales (-6.3%) MHE Market Share Change +~60 bps Key Indicators: YTD 9/30/7 ConnectED Unique Users 7.2M (+22.4%) ALEKS Unique Users 2.0M (+7.0%) As per Monthly AAP data - Cohort of publishers for monthly AAP data differs from that of annual AAP data - Monthly data reflects net sales on an actual returns basis submitted by 6-7 publishers - Annual data reflects net sales on an actual returns basis submitted by 5 publishers 7

8 K-2 New Adoption Market Overview Significant Adoption growth anticipated in 209 & 2020; cyclically smaller market in 208 Big-3 State New Adoption Estimated Total Market California Florida 207E 208E 209E 2020E Reading* ~$400M Social Studies >$00M Reading* ~$60-80M Social Studies ~$60-80M Science ~$25-50M Social Studies* ~$85-5M Science ~$00-25M Math ~$50-200M Social Studies* (Yr.3 Remainder) Science* (Yr. 2) Reading Texas Big-3 State New Adoption Estimated Total Market Reading ~$ M >$500M ~$245-30M ~$ M Reading (9-2) All Other State New Adoption Estimated Total Market ~$00-50M ~$ M ~$ M Total New Adoption Estimate ~$ M ~$500-$600M ~$900-$,00M - Open Territory (New and Residual) total market estimated to fluctuate -3% to +3% per annum through E - Adoption market data above is new adoption only and does not include residual sales; see Appendix slide 29 for additional details - Market size ranges driven by several factors including ) applicable enrollment, 2) potential use of core instructional funds for off-list purchases (e.g. supplemental), and 3) other factors that may influence or defer purchase decisions *Disciplines reflect 2 nd and 3 rd year of major purchasing Source: MHE estimate of total market without adjustment for participation or market share 8

9 McGraw-Hill International & Professional Q3-207 Results Digital transition continues but sales growth not enough to offset print headwinds International Digital transition continues but not enough to offset declining print sales in several regions including Europe, India and Asia Billings on large Middle East contract to be recognized in fourth quarter; similar to prior year - Middle East contract is largely digital content Billings impact of $4M from sale of Canadian K-2 business in Q2 YTD favorable FX impact versus prior year of $2M on Billings and $3M on EBITDA Professional Digital subscription Billings favorable YTD, nearly offsetting print decline, with a strong pipeline built for Q4 as the digital conversion continues - YTD Access digital Billings subscription growth up 5% Margin improvement from continued growth in digital, coupled with operating expense reductions from earlier restructuring International & Professional McGraw-Hill International Performance: YTD 9/30/7 Billings (constant FX) $89M (-6.8%) Digital Billings $3M (+2.%) Digital Billings % 6% +00bps YTD 9/30/7 Key Indicators - International Connect/LearnSmart Paid Activations +~330K (+2%) ALEKS Unique Users +~23K (+27%) McGraw-Hill Professional Performance: YTD 9/30/7 Billings $80M (-.5%) Digital Billings $40M (+2.7%) Digital Billings % 50% +200bps Key Indicators - Professional Access Platform Renewal Rate 2 93% K-2 business in Canada was sold in May As of December 206; updated on an annual basis 9

10 McGraw-Hill Education Q3-207 Digital Ed Tech Highlights ~5 billion cumulative adaptive interactions providing valuable insights into learning outcomes (Millions) CONNECT/LEARNSMART PAID ACTIVATIONS (US HIGHER ED) ConnectED UNIQUE USERS (K-2) % % YTD Sept 206 YTD Sept YTD Sept 206 YTD Sept 207 ALEKS UNIQUE USERS (GLOBAL HIGHER ED, K-2) YTD Sept 206 K-2 Higher Ed +22% 3.5 YTD Sept 207 LONG-STANDING LEADER IN DIGITAL ADAPTIVE LEARNING MHE digital adaptive learning exhibiting growth in users, paid activations and interactions Continued growth in Connect/LearnSmart paid activations +7.7% YTD 0/3/7 Back-to-school season extended well into October as the successful digital transition has driven additional purchases through mid-terms/first assignment ~74M assignments submitted through Connect, up 0% Y/Y ~8.5B interactions (questions answered) on LearnSmart since 2009 ~6.2B interactions (questions answered) on ALEKS since 200 International Connect/LearnSmart Paid Activations of ~330K+ not incl.in Connect/LearnSmart totals above; International ALEKS Unique Users of ~23K+ incl. within total ALEKS Unique Users above. 0

11 McGraw-Hill Education Higher Ed Q3-207 Digital Billings 6 percentage point gain in digital mix driving revenue stability and predictability DIGITAL VS. PRINT BILLINGS MIX % YTD NINE MONTH E-COMMERCE NET SALES SURPASS FY % 62% 55% 44% 43% 37% Digital Billings continue to grow as a share of total Higher Ed Billings and reached 63% of total in YTD Sept. 30 th, up 6 percentage points 56% 57% 63% 34% 38% 45% YTD 206 Sept YTD YTD 207 Sept Digital Print (Traditional + + Custom) Digital sales benefited in part from more professors transitioning to digital when the new front-list editions became available Direct-to-student e-commerce sales represented 32% of total Higher Ed Billings in the YTD period (seasonally impacted) E-commerce is now a larger channel than the next three distribution channel partners combined, which each grew net sales YTD September E-COMMERCE NET SALES* August and September remain largest months for e-commerce but growth continues into October ($ in Millions) $67 $05 $40 $72 $62 +5% $86 Effective Q4-6 and prospectively, MHE no longer incudes the change in deferred royalties within the change of deferred revenue. On a FY basis, the net change is immaterial; prior periods do not reflect the change YTD YTD 206 Sept YTD YTD 207 Sept *Direct-to-student e-commerce net sales of $95, up +5% as of YTD 0/3/7

12 Financial Review

13 McGraw-Hill Education Q3-207 Digital Billings Mix Digital Billings up across all business units in Q3 and YTD ($ in Millions) MCGRAW-HILL EDUCATION +4% % of Total Billings $329 +3% $373 $62 $70 40% 45% 39% 46% Q3-6 Q3-7 YTD Sept 206 YTD Sept 207 Higher Ed favorably impacted by growth in e-commerce sales K-2 driven by product mix with strong sales of 6-2 digital Literature in California and Social Studies in Florida HIGHER ED $70 +8% $202 $320 +2% $359 K-2 +2% $222 +9% $30 $4 $269 % of Total Billings 52% 58% Q3-6 Q3-7 57% 63% YTD Sept 206 YTD Sept 207 % of Total Billings 34% 39% 32% 40% Q3-6 Q3-7 YTD Sept 206 YTD Sept 207 INTERNATIONAL +2% $30 $3 PROFESSIONAL +3% $39 $40 +2% $6 $6 +6% $3 $4 % of Total Billings 7% 9% 5% 6% Q3-6 Q3-7 % of Total Billings 46% 46% 48% 50% YTD Sept 206 YTD Sept 207 Q3-6 Q3-7 YTD Sept 206 YTD Sept 207 Effective Q4-6 and prospectively, MHE no longer incudes the change in deferred royalties within the change of deferred revenue. On a FY basis, the net change is immaterial; prior periods do not reflect the change. 3

14 McGraw-Hill Education Financial Review Strong performance in line with October preliminary report ($ in Millions) MHE TOTAL BILLINGS (2%) $,55 $,527 (%) $832 $823 Digital % 40% 45% 39% 46% Q3-6 Q3-7 YTD Sept 206 YTD Sept 207 Constant FX (-%) $820 (-2%) $,525 MHE EBITDA BEFORE PRE-PUBLICATION INVESTMENT MHE YTD Billings down.6% McGraw-Hill Education BILLINGS Higher Ed business turned around in 207 with outperformance in frontlist, stabilization of back-list and continued growth in digital K-2 gained market share in an Open Territory market that declined. Adoption state Billings were strong but down vs. a tough comp in 206 EBITDA BEFORE AND AFTER PRE-PUBLICATION EXPENSE EBITDA before pre-publication investment flat YTD as digital product mix and previous cost containment efforts more than offset lower Billings YTD pre-publication investment of $74M, up $9M or +34% as the company invests in a larger Higher Ed front-list in 208 and ahead of large K-2 adoptions in ; FY 7 pre-publication anticipated at $00-05M FY 208 pre-publication investment anticipated to be up ~$0-5M, driven by K-2 MHE ADJUSTED EBITDA 2 (0%) $480 $478 $433 (4%) $47 (4%) (5%) $409 $392 $425 $405 Margin % 52% 5% 3% 3% Q3-6 Q3-7 YTD Sept 206 YTD Sept % 48% 27% 27% Effective Q4-6 and prospectively, MHE no longer incudes the change in deferred royalties within the change Constant FX (-5%) $39 (-6%) $402 of deferred revenue. On a FY basis, the net change is immaterial; prior periods do not reflect the change. 2 Includes the impact of pre-publication costs incurred in advance of future year sales. Pre-publication costs relate to the cost of developing products and are capitalized and amortized over 4 the life of the new product for GAAP purposes and in Adjusted Post-Plate EBITDA reflected as cash investment. Margin % Q3-6 Q3-7 YTD Sept 206 YTD Sept 207

15 Higher Ed Financial Review Investment in front-list & continued digital leadership drove strong YTD performance ($ in Millions) Digital % HIGHER ED TOTAL BILLINGS +6% $326 $347 +2% $562 $574 52% 58% 57% 63% Q3-6 Q3-7 YTD Sept 206 YTD Sept 207 HIGHER ED EBITDA BEFORE PRE-PUBLICATION INVESTMENTS Higher Education BILLINGS YTD Billings driven by solid front-list performance (in both print and digital) and continued digital strength Front-list print increased 3% vs. a decline of 36% in prior year Net sales to each of three largest distribution partners increased YTD YTD 9/30/7 Connect activations up 7% and e-commerce sales grew 5% Expect product returns to continue to trend favorably and in-line with management expectations % of YTD Billings growth driven by change in deferred royalty calculation change; will reverse itself in Q4 EBITDA BEFORE AND AFTER PRE-PUBLICATION INVESTMENTS YTD EBITDA before pre-publication up 7% as stronger top line results and historical cost savings drove margin expansion YTD pre-publication investment of $24M, up $6M or +35% to support investment in current year and front-list HIGHER ED ADJUSTED EBITDA 2 +7% $228 $202 +3% $208 $22 +3% +5% $92 $99 $94 $204 Margin % 62% 60% 38% 40% Margin % 59% 57% 35% 35% Q3-6 Q3-7 YTD Sept 206 YTD Sept 207 Q3-6 Q3-7 YTD Sept 206 YTD Sept 207 Effective Q4-6 and prospectively, MHE no longer incudes the change in deferred royalties within the change of deferred revenue. On a FY basis, the net change is immaterial; prior periods do not reflect the change. 2 Includes the impact of pre-publication costs incurred in advance of future year sales. 5

16 K-2 Financial Review Held market share despite tough comparison in adoption market ($ in Millions) K-2 TOTAL BILLINGS (3%) $704 $680 (6%) $383 $360 Digital % 34% 39% 32% 40% Q3-6 Q3-7 YTD Sept 206 YTD Sept 207 K-2 BILLINGS YTD Billings declined slightly due to a tough comparison vs. 206 CA performance and despite taking market share in a declining Open Territory market where some local district buying decisions were postponed MHE preparations on track and progressing for future new Adoption opportunities in 208 and 209 EBITDA BEFORE AND AFTER PRE-PUBLICATION EXPENSE YTD EBITDA before pre-publication down 7% as margins were impacted by the lower Billings YTD pre-publication investment of $36M, up $3M or +57% reflecting investment in 208 and 209 adoption opportunities K-2 EBITDA BEFORE PRE-PUBLICATION INVESTMENTS K-2 ADJUSTED EBITDA (7%) $93 $80 (7%) $234 $27 $85 (9%) $68 $20 (4%) $8 Margin % 50% 50% 33% 32% Q3-6 Q3-7 YTD Sept 206 YTD Sept 207 Margin % 48% 47% 30% 27% Q3-6 Q3-7 YTD Sept 206 YTD Sept 207 Includes the impact of pre-publication costs incurred in advance of future year sales. 6

17 International Financial Review Digital transition continues; Middle East contract billings anticipated in Q4 ($ in Millions) INTERNATIONAL TOTAL BILLINGS International BILLINGS (0%) $95 $86 $203 (6%) $9 YTD Billings down 6% in reported currency, and decreased 7% in constant currency Excluding Canadian K-2 divestiture, reported YTD Billings declined 4% versus prior year Digital % 7% 9% 5% 6% Q3-6 Q3-7 YTD Sept 206 YTD Sept 207 Constant FX (-3%) $83 (-7%) $89 EBITDA BEFORE AND AFTER PRE-PUBLICATION EXPENSE YTD decline in EBITDA resulting from Billings decline and Middle East contract related expense timing YTD pre-publication investment of $8M, down $M or -0% INTERNATIONAL EBITDA BEFORE PRE-PUBLICATION INVESTMENTS * % Y/Y change not meaningful INTERNATIONAL ADJUSTED EBITDA * % Y/Y change not meaningful $22 $4 $6 Margin % 23% 6% 8% 3% Q3-6 Q3-7 YTD Sept 206 YTD Sept 207 K-2 business in Canada was sold in May 207. Includes the impact of pre-publication costs incurred in advance of future year sales $6 Margin % $7 $3 $7 8% 5% 4% (-$2) -% Q3-6 Q3-7 YTD Sept 206 YTD Sept 207 Constant FX nm $ nm -$5 7

18 Professional Financial Review Digital growth continues with digital pipeline building in Q4 ($ in Millions) Digital % PROFESSIONAL TOTAL BILLINGS +5% $28 $30 Q3-6 Q3-7 (%) $8 $80 46% 46% 48% 50% YTD Sept 206 YTD Sept 207 Professional BILLINGS Digital growth in Access product line is offset by continuing expected declines in trade print portfolio EBITDA BEFORE AND AFTER PRE-PUBLICATION EXPENSE YTD growth in EBITDA from margin growth as a result of higher digital Billings, coupled with operating expense savings from earlier restructuring YTD pre-publication investment of $5M, up $0.M or +3% PROFESSIONAL EBITDA BEFORE PRE-PUBLICATION INVESTMENTS PROFESSIONAL ADJUSTED EBITDA +8% $0 $2 $2 +7% $25 $9 +9% $0 $6 +22% $9 Margin % 37% 42% 26% 3% Q3-6 Q3-7 YTD Sept 206 YTD Sept 207 Margin % 3% 35% 20% 24% Q3-6 Q3-7 YTD Sept 206 YTD Sept 207 Includes the impact of pre-publication costs incurred in advance of future year sales. 8

19 Capital Structure and Liquidity Significant seasonal cash balances building; bank revolver fully repaid MHE s cash position is building in the second half of the year with $668M of liquidity at Sept. 30 th and continuing to grow in Q4 - Revolver fully repaid; $350M undrawn capacity $50M repurchase authorization for 8.5% 209 PIK/Toggle Notes remains available as of today with cash held at Holdco - No repurchases made in Q3-7; $8M repurchases made subsequently - Debt callable at par Term Loan Restricted Payment capacity was ~$60M at Sept. 30, 207 and will fluctuate seasonally - Not impacted by subsequent repurchases as cash used was already at Holdco ($ in Millions) MCGRAW-HILL EDUCATION INC. (MHE INC.) LIQUIDITY: 9/30/7 Cash and Cash Equivalents McGraw-Hill Global Education Holdings $246 MHGE Parent LLC (Holdco) / MHE Inc. 59 Total McGraw-Hill Education, Inc. $305 Available under Credit Facilities at Sept. 30, Total Liquidity $655 MCGRAW-HILL GLOBAL EDUCATION HOLDINGS COVENANT LEVERAGE Senior Secured Term Loan due 2022 $,555 Revolving Credit Facility due 202 ($350M) 0 Total First Lien Indebtedness $,555 Less: McGraw-Hill Global Education Cash and Cash Equivalents (246) Net First Lien Indebtedness $,309 Last Twelve Months Covenant EBITDA $402 Net First Lien Leverage Ratio 3.3x Senior Unsecured Notes Due Net Total Indebtedness $,709 Includes $00M general RP basket Notes Net Total Indebtedness calculation excludes $45M debt held at MHGE Parent LLC and cash held at MHGE Parent LLC and MHE Inc. as of Sept. 30 th Net First Lien Leverage covenant takes effect only if 30% of revolving line of credit is drawn at quarter-end. Usage was less than 30% at Sept. 30, so covenant did not apply. Covenant level is 5.25x in Q2 and 4.8x in Q, Q3 and Q4. 9

20 Summary Stabilization in Higher Ed; competitive performance in K-2 with large opportunities ahead MHE performed competitively in both Higher Ed and K-2 YTD Sept. 30 th Higher Ed plan was to rebuild the front-list and to continue growing digital - Successfully drove Billings stabilization YTD vs. decline of % last year K-2 plan was to aggressively compete in Adoption market against a tough 206 outperformance comparison and to take market share in Open Territory - Plan was successful in retaining leading market share in the two largest adoption markets and taking market share in Open Territory International business continues in transition with revenue related to large Middle East contract expected in Q4 Professional business continues digital growth with success of Access platform Revolving line of credit fully repaid and significant seasonal cash balances building Reinvesting in 208 front-list for Higher Education and Adoption opportunities in K-2 - Particularly K-2 large opportunities in 209 and

21 Appendix

22 Financial Terms and Acronyms Financial Terms Adjusted EBITDA Billings (formerly referred to as Adjusted Revenue) Change in Deferred Revenue Change in Deferred Royalty Digital Billings (formerly referred to as Digital Adjusted Revenue) EBITDA Front-list and Back-list Net Sales Pre-publication Investment Sell-through Description Non-GAAP financial measure that includes adjustments required or permitted in calculating covenant compliance under our debt agreements. Adjusted EBITDA is a non-gaap financial measure defined as net income from continuing operations plus net interest, income taxes, depreciation and amortization (including amortization of pre-publication investment cash costs) and adjusted to exclude unusual items and other adjustments required or permitted in calculating covenant compliance under our debt agreements less cash spent for pre-publication investment in addition to the change in deferred revenue. Non-GAAP financial measure that we define as U.S. GAAP revenue plus the net change in deferred revenue excluding the impact of purchase accounting. Billings, a measure used by management to assess sales performance, is defined as the total amount of revenue that would have been recognized in a period if all revenue were recognized immediately at the time of sale. The Company receives cash up-front for most product sales but recognizes revenue (primarily related to digital sales) over time recording a liability for deferred revenue at the time of sale. This adjustment represents the net effect of converting deferred revenues to a cash basis assuming the collection of all receivable balances. Represents royalties primarily associated with digital sales which are deferred and amortized over the subscription period. It is the net effect of converting deferred royalties to a cash basis assuming the payment of all amounts owed in the period incurred. Represents standalone digital sales and, where digital product is sold in a bundled arrangement, only the value attributed to the digital component(s) is included. The attribution of value in bundled arrangement is based on relative selling prices (inclusive of discounts). Earnings before interest (net), income tax, depreciation and amortization. Front-list represents brand new titles and new revisions of existing titles previously published. For example, the 207 front-list represents 208 and 207 copyrights sold in 207. Back-list represents copyrights from 206 and prior sold in 207. Gross sales less actual returns; net sales are not adjusted for the impact of accruals / net change in deferred revenue. Pre-publication costs reflect the costs incurred in the development of instructional solutions, principally design and content creation. These costs are capitalized when the title is expected to generate future economic benefits and are amortized upon publication of the title over its estimated useful life of up to six years. Represents the percentage of net sales a new or revised title generates vs. prior editions of the same title. KPI Terms Paid Activation Unique User on a platform Description A user who accesses a purchased digital product for the first time. Access can be through a physical access card purchased from a bookstore or directly over MHE s e-commerce channel. An individual who authenticates a product at least once during a given period of time. 22

23 Digital Product Offering Descriptions Product Description Higher Education K-2 International Professional Access Digital subscription platform that provides easily searchable and customizable digital content integrated with dynamic and functional workflow tools ALEKS Adaptive learning technology for the K-2 and Higher Ed markets Connect Connect2 Open learning environment for students and instructors in the Higher Education market and K-2 students taking AP courses Collaborative teaching and learning environment for the International Higher Education market ConnectED Content delivery platform for the K-2 market ELLevate English Six level English Language Learning (ELL) course Engrade LearnSmart Redbird SmartBook StudyWise Developer of an open digital platform for K-2 education that unifies the data, curriculum and tools to drive student achievement and inform district educational strategy Adaptive learning program which personalizes learning and designs targeted study paths for students A leading digital personalized learning company that offers courses in K-2 math, language arts and writing, and virtual professional development programs for educators Adaptive reading product designed to help students understand and retain course material by guiding each student through a highly personal study experience Adaptive offering that supports students in adaptive practice on smartphones. StudyWise extends the reach of Connect and Connect2 allowing students to efficiently learn in their natural environment 23

24 Supplemental Financial Disclosure

25 Billings and Adjusted EBITDA Billings is a non-gaap sales performance measure that provides useful information in evaluating our period-to-period performance because it reflects the total amount of revenue that would have been recognized in a period if we recognized all print and digital revenue at the time of sale. We use Billings as a sales performance measure given that we typically collect full payment for our digital and print solutions at the time of sale or shortly thereafter, but recognize revenue from digital solutions and multi-year deliverables ratably over the term of our customer contracts. As sales of our digital learning solutions have increased, so has the amount of revenue that is deferred in accordance with U.S. GAAP. Billings is a key metric we use to manage our business as it reflects the sales activity in a given period, provides comparability from period-to-period during this time of digital transition and is the basis for all sales incentive compensation. In the K-2 market where customers typically pay for five to eight year contracts upfront and the ongoing costs to service any contractual obligation are limited, the impact of the change in deferred revenue is most significant. Billings is U.S. GAAP revenue plus the net change in deferred revenue. EBITDA, a measure used by management to assess operating performance, is defined as net income from continuing operations plus net interest, income taxes, depreciation and amortization (including amortization of pre-publication investment cash costs). Adjusted EBITDA is a non-gaap debt covenant compliance measure that is defined in accordance with our debt agreements. Adjusted EBITDA is a material term in our debt agreements and provides an understanding of our debt covenant compliance, ability to service our indebtedness and make capital allocation decisions in accordance with our debt agreements. Each of the above described measures is not a recognized term under U.S. GAAP and does not purport to be an alternative to revenue, income from continuing operations, or any other measure derived in accordance with U.S. GAAP as a measure of operating performance, debt covenant compliance or to cash flows from operations as a measure of liquidity. Additionally, each such measure is not intended to be a measure of free cash flows available for management s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Such measures have limitations as analytical tools, and you should not consider any of such measures in isolation or as substitutes for our results as reported under U.S. GAAP. Management compensates for the limitations of using non-gaap financial measures by using them to supplement U.S. GAAP results to provide a more complete understanding of the factors and trends affecting the business than U.S. GAAP results alone. Because not all companies use identical calculations, our measures may not be comparable to other similarly titled measures of other companies. Management believes Adjusted EBITDA is helpful in highlighting trends because Adjusted EBITDA excludes the results of decisions that are outside the control of operating management and can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax rules in the jurisdictions in which companies operate, and capital investments. In addition, Billings and Adjusted EBITDA provides more comparability between the historical operating results and operating results that reflect purchase accounting and the new capital structure post the Founding Acquisition as well as the digital transformation that we are undertaking which requires different accounting treatment for digital and print solutions in accordance with U.S. GAAP. Management believes that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future as well as other items to assess our debt covenant compliance, ability to service our indebtedness and make capital allocation decisions in accordance with our debt agreements. Note: In compliance with SEC interpretative guidance, we now refer to Adjusted Revenue as Billings throughout the presentation. 25

26 MHE Higher Ed Front-List / Back-List Net Sales ($ in Millions) Twelve Months Ended December 3 Nine Months Ended Sept. 30, 206 Sept. 30, 207 Digital Net Sales Front-list $00 $26 $32 $56 $49 $5 $27 Back-list Total Digital Net Sales $237 $278 $326 $376 $4 326 $359 Y/Y % Front-list (6.0%) 25.% 5.2% 8.2% (4.7%) (5.9%) 0.7% Back-list 53.7%.8% 27.% 3.4% 9.2% 9.9% 9.8% Total Digital Net Sales 2.% 7.4% 7.2% 5.3% 9.3% 9.3% 0.% Print Net Sales Front-list $37 $323 $29 $233 $49 $20 $23 Back-list Total Print Net Sales $523 $538 $524 $4 $302 $237 $223 Y/Y % Front-list (23.9%).9% (9.9%) (20.0%) (35.9%) (35.8%) 2.7% Back-list 0.6% 4.7% 8.5% (23.6%) (4.6%) (9.7%) (4.7%) Total Print Net Sales (5.9%) 3.0% (2.6%) (2.6%) (26.7%) (28.7%) (5.9%) Total Net Sales Front-list $48 $449 $423 $389 $298 $235 $250 Back-list Total Net Sales 2 $760 $87 $85 $787 $73 $563 $582 Y/Y % Front-list (20.3%) 7.5% (5.7%) (8.%) (23.4%) (24.0%) 6.6% Back-list 6.7% 7.5% 6.2% (6.8%) 4.% 2.0%.0% Total Net Sales (7.0%) 7.5% 4.2% (7.4%) (9.5%) (0.7%) 3.4% Other (Accounting Accruals/Reversals) 2 () 4 5 (2) (6) (5) Total Net Sales 3 $762 $86 $855 $793 $7 $556 $576 Y/Y % (7.5%) 7.% 4.8% (7.3%) (0.3%) (0.9%) 3.6% 207 front-list represents 208 and 207 copyrights sold in 207; they do not begin to impact current year until very late Q2. 2 Gross sales less actual returns; net sales are not adjusted for the impact of accruals / net change in deferred revenue. 3 Reflects the impact of accounting related to accruals / deferrals. 26

27 Higher Ed Industry and MHE Higher Ed Sales Trend ($ in Millions) Twelve Months Ended December 3 Nine Months Ended Sept 206 Sept 207 Higher Ed Industry per Management Practice, Inc. Higher Ed Market Gross Sales $5,726 $5,420 $5,453 $5,465 $5,302 $4,695 $3,646 $3,477 Returns,323,3,262,24,377, Net Sales $4,403 $4,0 $4,9 $4,25 $3,925 $3,446 $2,87 $2,855 Y/Y % Gross Sales n/a (5.3%) 0.6% 0.2% (3.0%) (.4%) (9.8%) (4.7%) Returns n/a (0.9%) (3.7%) (3.8%) 3.5% (9.2%) (.6%) (25.0%) Net Sales n/a (6.7%) 2.0%.4% (7.7%) (2.2%) (.9%).3% McGraw-Hill Education Return Detail Actual Returns $263 $276 $257 $252 $277 $237 $63 $34 Reserve for Returns Adjustment (3) (3) 9 6 (3) (23) (0) 3 Reported Returns $260 $263 $266 $268 $246 $25 $53 $38 Return Accrual % 24.4% 25.8% 25.% 24.4% 23.4% 22.7% 22.7% 2.2% MPI data reflects gross and net sales on an actual returns basis and includes other adjustments, eg. Advanced Placement products, which are reported in the K-2 business. Amounts may not sum due to rounding. 27

28 K-2 Industry New Adoption Market Overview Largest Adoption States California (K-8) Florida Texas All Other Adoption States New State Adoptions by Purchase Year E 209E 2020E Reading Reading* Science Science* Math Math Math* Reading Reading* Social Studies Social Studies* Social Studies* Reading (K-5) Reading (6-2) Math (K-5) Math (6-2) Math (K-8) Math (9-2) Science Social Studies Science* Alabama Math Reading Social Studies Science Math Arkansas Georgia Social Studies Science Math Math Math* Reading Idaho Science Reading Math Social Studies Reading Science Indiana Reading Reading* Reading* Social Studies Science Math Reading (K-8) Reading (K-2) Reading (9-2) Louisiana Reading Math Math (K-8) Mississippi Reading Math (9-2) Reading Science 2 Social Studies 2 Social Studies North Carolina Math Science Social Studies Reading Math New Mexico Science Math Reading Social Studies Science Math Oklahoma Social Studies Science Reading Math Social Studies Oregon Social Studies Reading Reading* Math Science Social Studies South Carolina Tennessee Virginia West Virginia Reading Science Math Social Studies (6-2) Social Studies Math Social Studies (K-5) Science Reading (9-2) Reading (K-6) Social Studies Math Science Social Studies Math Social Studies* Social Studies Reading Reading Reading Science Reading Science Math Social Studies Reading Excludes new state adoptions in non-core disciplines such as career and technical education, music, art, world languages, health, etc. Purchases from AR and IN classified as open territory effective 205. GA has revised its adoption schedule to local school system decisions for 207 and, as a result, predictability is not assured, so the schedule above will not reflect GA adoptions post Mississippi swapped Science (now 208) with Social Studies (now 209). *Disciplines reflect 2 nd and 3 rd year of major purchasing. 28

29 K-2 Industry and MHE K-2 Sales Trend ($ in Millions) Twelve Months Ended December 3 Nine Months Ended K-2 Industry per Association of American Publishers (AAP) Sept. 30, 206 Sept. 30, 207 AAP U.S. Net Sales Total Adoption $,3 $,39 $,860 $,62 $,250 $,234 $,22 Open Territory,423,563,425,43,467,424,335 Total Net Sales $2,734 $2,954 $3,285 $3,052 $2,77 $2,658 $2,556 Y/Y % Total Adoption n/a 6.2% 33.6% (2.8%) (22.9%) n/a (.0%) Open Territory n/a 9.8% (8.8%) 0.4% 2.5% n/a (6.3%) Total Net Sales n/a 8.%.2% (7.%) (.0%) n/a (3.8%) McGraw-Hill Education K-2 McGraw-Hill Education Billings 2 Total Adoption $320 $38 $366 $450 $4 $39 $380 Open Territory / Other Total K-2 Billings $698 $677 $734 $798 $758 $704 $680 Y/Y % Total Adoption n/a (0.5%) 5.0% 23.0% (8.6%) (5.6%) (2.8%) Open Territory / Other n/a (5.0%) 2.6% (5.7%) (0.%) (.3%) (4.2%) Total K-2 Billings n/a (3.0%) 8.5% 8.6% (4.9%) (3.7%) (3.4%) MHE Adoption Participation % 96% 79% 67% 76% 87% 87% 96% AAP annual data reflects unrestated net sales on an actual returns basis submitted by five publishers; data reflects US sales & includes sales of AP products, software & platforms, etc. AAP includes front-list and back-list net sales; annual data prior to 205 has not been restated for the shift of AR and IN from adoption to open territory. Monthly AAP data reflects net sales on an actual returns basis submitted by six - seven publishers; YTD 206 data has been restated. 2 MHE Billings reflect an accrued returns basis and will not reconcile to AAP submission due to classification of revenue; total adoption includes new adoption and residual. MHE Billings have not been restated for the shift of AR and IN in prior periods. 29

30 Digital vs. Print Billings Detail ($ in Millions) Q3-207 Billings Detail by Component Q3 Digital Billings Q3 Print Billings Q3 Total Billings % D vs % D vs % D vs Higher Ed $60 $70 $ % $226 $56 $45 (6.8%) $386 $326 $ % K % (3.4%) (5.9%) International % (2.%) (9.7%) Professional % % % Other 0 0 N/M (0) 0 0 N/M N/M Total MHE $355 $329 $ % $597 $503 $450 (0.6%) $952 $832 $823 (.%) % of Total Higher Ed 42% 52% 58% 58% 48% 42% 00% 00% 00% K-2 39% 34% 39% 6% 66% 6% 00% 00% 00% International 3% 7% 9% 87% 83% 8% 00% 00% 00% Professional 38% 46% 46% 62% 54% 54% 00% 00% 00% Total MHE 37% 40% 45% 63% 60% 55% 00% 00% 00% YTD Sept. 207 Billings Detail by Component Sep YTD Digital Billings Sep YTD Print Billings Sep YTD Total Billings % D vs % D vs % D vs Higher Ed $288 $320 $ % $342 $242 $25 (.0%) $630 $562 $574 2.% K % (4.7%) (3.4%) International % (7.3%) (5.9%) Professional % (5.4%) (.5%) Other 2 0 N/M 0 0 N/M 2 N/M Total MHE $627 $62 $70 4.5% $,036 $939 $826 (2.0%) $,663 $,55 $,527 (.6%) % of Total Higher Ed 46% 57% 63% 54% 43% 37% 00% 00% 00% K-2 38% 32% 40% 62% 68% 60% 00% 00% 00% International % 5% 6% 89% 85% 84% 00% 00% 00% Professional 45% 48% 50% 55% 52% 50% 00% 00% 00% Total MHE 38% 39% 46% 62% 6% 54% 00% 00% 00% Figures are represented on a cash basis inclusive of actual returns but excluding purchase accounting adjustments. Accrued returns are reflected in print revenue. Effective Q4-6 and prospectively, MHE no longer incudes the change in deferred royalties within the change of deferred revenue. On a FY basis, the net change is immaterial; prior periods do not reflect the change. 30

31 Free Cash Flow ($ in Millions) Nine Months Ended Sep 30, Cash Flow Comparison Y/Y $ Key Drivers Adjusted EBITDA (2) in Accounts Receivable, net (88) (208) (9) AR: sales growth in Sep and timing of collections in Inventories, net (8) 9 Inventory: higher Dec-6 balances in anticipation of future K-2 opportunities in Prepaid & Other Current Assets (20) (7) 4 Prepaid: non-operational Transitional Services Agreement receivable changes in Accounts Payable and Accrued Expenses (07) (46) 6 (~$5M) and settlement of available-for-sale balances (~$5M) in FY 6 in Other Current Liabilities (3) (26) 4 AP / Accrued: lower spend in FY 6 and timing of AP payments in FY 5 and FY6 in Reported Working Capital Accounts (364) (286) 78 (~$40M), lower compensation accruals at Dec-6 (~$5M) Adjustments to Derive Operational Working Capital 29 5 (24) Other Current: driven by timing of expense and new capital lease obligations in Adjusted Working Capital Accounts (335) (28) 54 beginning in FY 6 Adjusted EBITDA less Adjusted in Working Capital Accounts Pre-publication Investment Pre-pub: driven by investment in Higher Ed front-list and K-2 new adoption Restructuring and Cost Savings Implementation Charges (0) (9) 0 opportunities Sponsor Fees (3) (3) 0 Cash Interest (40) (2) 9 Cash Interest: largely driven by refinancing Net (loss) from Discontinued Operations (2) (0) Operational Working Capital Adjustments and Other 2 (2) (8) (6) Cash (used for) provided by operating activities () in NWC including Adjustments to Derive Operational Working Capital Y/Y $ Adjusted EBITDA less in Working Capital Accounts per above in Accounts Receivable, net (84) (223) (39) - Capital Expenditures & Payment of Capital Lease Obligations (29) (38) (9) in Inventories, net (7) (2) 5 Operating Free Cash Flow in Prepaid & Other Current Assets (8) 9 in AP and Accrued Expenses (08) (44) 64 in Other Current Liabilities (8) (23) (5) Cash Balance at Beginning of Period (34) Total (335) (28) 54 Cash (used for) provided by operating activities () Dividends (320) (4) 37 Pre-Publication Investment Detail Net Debt (Payments) / Receipts 46 (2) (58) Y/Y $ Repurchase of MHGE PIK Toggle Notes - (48) (48) Higher Education Pre-publication Investment (55) (74) (9) K Capital Expenditures (26) (32) (5) International 9 8 () Investments, Acquisitions & Divestitures, net Professional Payment of Capital Lease Obligations (2) (6) (4) Total Repurchase of Equity (6) (6) 0 Other (2) 4 7 Cash Balance at End of Period Source: Consolidated Statement of Cash Flows and Adjusted EBITDA reconciliation includes the impact of certain non operational, Cash EBITDA or capital structure working capital items (i.e., purchase accounting, accrued interest, deferred royalties, income taxes, available for sale assets, etc.) 2 includes adjustment for deferred royalties included in calculation of Adjusted EBITDA Key Variance Drivers 3

32 Adjusted EBITDA Reconciliation ($ in Millions) ($ in Millions) Three Months Ended Nine Months Ended Year Ended LTM Sept. 30, 206 Sept. 30, 207 Sept. 30, 206 Sept. 30, 207 Dec. 3, 206 Sept. 30, 207 Net Income $ 39 $ 25 $ (89) $ (35) $ (35) $ (82) Interest (income) expense, net Provision for (benefit from) taxes on income Depreciation, amortization and plate investment amortization EBITDA $ 247 $ 248 $ 233 $ 288 $ 282 $ 336 Change in deferred revenue (a) Change in deferred royalties (b) (2) (29) (7) (35) (8) (36) Restructuring and cost savings implementation charges (c) Sponsor fees (d) Loss on extinguishment of debt (e) Other (f) Pre-publication investment cash costs (g) (24) (25) (55) (74) (90) (08) Adjusted EBITDA $ 409 $ 392 $ 425 $ 405 $ 423 $ 402 Amounts above may not sum due to rounding. Effective Q4-6 and prospectively, MHE no longer incudes the change in deferred royalties within the change of deferred revenue. On a FY basis, the net change is immaterial; prior periods do not reflect the change. 32