Houghton Mifflin Harcourt Company

Bianca Olson - Houghton Mifflin Harcourt Co. Louis Gordon Crovitz - Houghton Mifflin Harcourt Co.

Joseph P. Abbott - Houghton Mifflin Harcourt Co.

Peter P. Appert - Piper Jaffray & Co.

Jason Boisvert Bazinet - Citigroup Global Markets, Inc. Jeffrey Marc Silber - BMO Capital Markets (United States) Andre Benjamin - Goldman Sachs & Co.

Jeffrey D. Goldstein - Morgan Stanley & Co.

LLC Trace Adair Urdan - Credit Suisse Securities (USA) LLC Drew Crum - Stifel, Nicolaus & Co., Inc.

Thank you, Vince, and good morning, everyone. Before we begin, I would like to point out that the slides we will reference during the course of this presentation can be accessed via the Investor Relations section of the Houghton Mifflin Harcourt website at www.hmhco.com.

A replay of today's call will be available via phone until March 2, 2017 and the webcast will be available on our website for one year. We filed our financial statements and our quarterly report on Form 10-Q with the U.S.

Securities and Exchange Commission earlier this morning, along with our fourth quarter 2016 earnings release, which can also be accessed via the Investor Relations section of the Houghton Mifflin Harcourt website at www.hmhco.com. After our prepared remarks, we will open the call to questions from investors.

To be fair to everyone, please limit your question to one, plus a follow-up. You may get back into the queue if you have additional question.

Before we discuss our results, I encourage all listeners to review the legal notice on slide two, which explains the risks of forward-looking statements and the use of non-GAAP financial measures. Additionally, please refer to our Forms 10-K and 10-Q for a discussion of risk factors that could cause actual results to differ materially from these forward-looking statements.

Our slide presentation and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measures and related disclosures are in the appendix to the presentation.

This non-GAAP information should be considered supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly entitled measures reported by other companies.

This morning, Gordon Crovitz, Houghton Mifflin Harcourt's Interim Chief Executive Officer and Joe Abbott, HMHC's Chief Financial Officer, will provide a company update, as well as an overview of the company's fourth quarter and full year 2016 results. I will now turn the call over to the Interim Chief Executive Officer of Houghton Mifflin Harcourt, Gordon Crovitz.

Thank you, Bianca. Good morning and thank you for joining our call today.

I am pleased to be here with you once again as Houghton Mifflin Harcourt's Interim CEO. Before we jump into the business update, I want to highlight the recent appointment of John J.

Lynch Junior as President, CEO and a Member of the Board. We are delighted to welcome Jack to HMH.

With his deep experience in K-12 education, combined with an outstanding track record of generating exceptional returns for investors, we are confident Jack is the right leader for the company as we and the education industry overall continue to transform. Jack will be a strong partner for our leadership team and our customers and I look forward to working with him in the weeks ahead to ensure a seamless transition into the CEO role.

Turning to our results for the full year, HMH met its revised guidance for 2016 with $1.37 billion of net sales and $1.41 billion of billings. As we look back on the year, as you know, our performance in the California Reading adoption was not the strongest we had hoped.

However, we had very strong performance in several key adoptions, such as Florida, Oregon and California Math, as well as Florida, Georgia and Louisiana English Language Arts where our secondary literature product captured strong market share. We introduced new core products, saw increased International, had the 11th consecutive year of growth in our Heinemann business and launched top-performing titles in Trade.

That being said, as we expressed last quarter, 2016 proved to be a challenging year for HMH, and we are disappointed with our performance. Several factors contributed, including an overall smaller domestic K-12 education market combined with slower growth than anticipated in the EdTech business.

As we look to 2017, we remain focused on regaining share in our core business and are taking necessary steps to get back on track and in a position to achieve sustainable long-term growth through our industry's funding cycle. This year will represent a year of continued investment and transition for HMH with a focus on development of the core programs that we believe will position us well for critical adoptions in the years ahead.

We will focus on strengthening our market share in key adoptions in open territories as well as on leveraging the strategic adjacencies that complement and align with our core. Importantly, we are taking steps to improve our operational efficiency and right-size our cost structure.

This includes a thorough review and evaluation of our current operating model and organizational design to help ensure we are structured efficiently and effectively and are strategically reducing costs in ways that will simplify our business and enable us to reinvest for growth. We are working with the Boston Consulting Group to advise us as we undertake this project and we've been benchmarking HMH against other leading companies to help ensure we are taking the right steps to set us up for success today and into the future.

In particular, we expect that these efficiency initiatives, combined with our strategic investments, will set the company on a path to long-term, sustainable free cash flow generation and growth through our industry's funding cycle, including high points and trough years. Looking at our education segment, net sales for 2016 were $1.21 billion, down 3.5% compared to 2015.

As expected, our share of the domestic K-12 market for 2016 was 39%, lower than our 40% market share in 2015 or 42% on a pro forma basis including the EdTech business as though we owned it for all of 2015. Going forward, the performance of the EdTech business will not be broken out separately, now that we have a full year of ownership as a basis of comparison, and instead will be reported in a integrated fashion within the Education segment.

As we told you last quarter, we believe the main reason for this domestic market share loss stems from choices made on the product and marketing level leading up to the 2016 Reading and English Language Arts adoptions, most notably in California. We have learned from this experience.

We are committed to allocating sufficient capital to our core educational products to improve our competitive position ahead of large adoption opportunities. In response to the challenges we faced in California, we have increased our investments targeting opportunities in that state, and we have worked to address operating factors that contributed to our lagging sales.

We believe these changes will make us more competitive in the remaining years of the adoption. As we look ahead to future large adoptions across subject areas in 2018, 2019 and beyond, we believe we are well-positioned for strong performance.

For example, in the fourth quarter, we launched HMH Science Dimensions, the first K-12 curriculum built from the ground up to address the next-generation science standards. We also introduced HMH Social Studies, our next-generation social studies curriculum for grades 6 through 12, and just this week, launched a new K-6 Social Studies program created in partnership with Kids Discover, a leading provider of dynamic, engaging magazine-style curriculum.

These K-12 programs were created to address the needs of our customers and represent new approaches within their categories, including the incorporation of virtual reality technology through HMH Field Trips for Google Expeditions. Also critical in the development and launch of our new core programs is the new technology platform that we mentioned to you previously, formally referred to as HMH 1 (09:27), which we are introducing to the market as Ed: Your Friend in Learning.

This platform represents HMH's commitment to improving the user experience and leveraging the power of simplicity. All of HMH's new programs will be built on the Ed digital platform, which provides a single portal through which students and teachers can experience our content, and will be able to leverage adaptive technology and analytics to gain the best possible understanding of student needs.

This all-in-one platform represents HMH's focus on offering best-in-class, differentiated solutions to students, parents and educators. We continue to see intervention solutions and professional services as key growth opportunities that leverage the strength of our core Education business.

While we saw softness in intervention in 2016 due to a number of factors, including lower-than-expected purchases of READ 180 due to delays in the California Reading adoption, we had low-single digit growth for the year as projected on our third quarter earnings call, and we are confident in the growth potential for this business in the years ahead. Our professional services business continues to gain traction.

We saw an increase in the percentage of services within our core product sales in 2016, an encouraging trend. Our Heinemann division continues to perform very well with a remarkable 73% increase in orders over $100,000 in 2016.

This business provides valuable solutions to educators, and as mentioned, last year marked its 11th year of consecutive sales growth, which included a 12% increase in school sales. HMH also continues to expand its Curious World consumer focus subscription service with engaging new content, including a recently announced partnership with The Fred Rogers Company, the award-winning producers of the children's classic Mister Rogers' Neighborhood and many of the award-winning series on PBS Kids today.

As we outlined last quarter, we are committed to grow in strategic adjacencies where we can leverage the strength of our core business. We plan to continue judiciously to invest in these areas.

Our Trade Publishing group was up slightly year-over-year. Net sales were $166 million in 2016 versus $165 million in 2015, an increase of 0.4%, driven by steady performance in key verticals such as lifestyle, which is a fast-growing focus for HMH.

The Whole30 by Melissa Hartwig is going on 52 weeks on the best-seller list, and we have an agreement to publish two new titles by this influential author in December 2017. Tim Ferriss' Tools of Titans debuted number one on the New York Times bestseller list in December and remains on the list today.

Ferriss' podcast is consistently ranked as one of the most popular in the world, and his book is the first podcast-based title to hit number one on the New York Times bestseller list. Within HMH Books for Young Readers, beloved brands continue to be popular with Little Blue Truck leading the way in the fourth quarter.

Shifting now to our outlook for the rest of the year, we expect our addressable market opportunity for 2017 to be flat to slightly higher than 2016, and for HMH to maintain share. We believe that 2016 and 2017 represent a cyclical low point for the market with 2018 and 2019 as the next high point, with major adoption opportunities in Texas, Florida, California, Alabama, Georgia and Virginia, as well as our expectation of continued growth in the open territory market opportunity.

To summarize, in 2017, our focus will be on investment in core K-12 product development ahead of the large upcoming adoption opportunities in 2018, 2019 and beyond, driving performance within the adjacencies that best elevate and enhance our core business, and improving execution overall and implementing operational efficiencies and improvements to position us better for success serving our customers. In addition, this year, Joe will work closely with Jack to provide our shareholders with greater visibility and clarity around our business and performance.

Now, I'll turn it over to Joe, who will provide a deeper dive into our financials and our guidance for the year ahead.

Thank you, Gordon, and good morning to everyone on the call today. I'll provide an overview of our full-year 2016 financials as well as market and business updates and our expected financial performance, after which we will have some time to take your questions.

Net sales for the full-year 2016 were $1.37 billion, a 3% decrease compared to net sales in 2015, mostly due to a decline in sales in our core Education business due to a smaller new adoption market in 2016 compared to 2015, coupled with an overall lower market share. Our net sales came in at the high end of our full-year revised guidance range of $1.32 billion to $1.38 billion.

Our billings, which we define as net sales plus the net change in deferred revenue, were also within our guidance range for the full-year. We ended 2016 with billings of $1.41 billion, an 8% decrease compared to 2015, largely due to the same factors that contributed to the decline in net sales.

Change in deferred revenue for the year was $38 million versus $124 million last year. The change in deferred revenue can be attributed primarily to lower billings and the mix of products being sold.

Pre-publication or content development costs, which we projected would be in the range of $120 million to $140 million, were $124 million in 2016. Operating loss for the full year was $311 million, compared to a loss of $116 million in 2015.

The unfavorable change of $195 million was primarily the result of our strategic decision to emphasize our world-leading HMH brand over legacy brands, such as Holt McDougal and various supplemental brands, resulting in a $139 million non-cash impairment charge. Additionally, the decline in net sales and an increase in selling and administrative costs contributed to the year-over-year change.

Overall cost of sales was $802 million in 2016 compared with $824 million in 2015. Cost of sales, excluding publishing rights and pre-publication amortization, decreased by $12 million to $611 million in 2016 from $623 million in 2015.

This decrease was driven by lower volume, partially offset by our product mix carrying higher costs coupled with higher technology costs to support our digital products. Selling and administrative costs in 2016 were $700 million, up $19 million compared to 2015.

This increase was due to higher fixed and discretionary expenses attributed to the full-year effect of owning the EdTech business, coupled with higher lease cost offset by lower variable compensation payments. For the full year 2016, our net loss was $285 million, $151 million more than the $134 million net loss we reported in 2015.

Again, this was largely due to the previously mentioned $139 million non-cash impairment charge. Adjusted EBITDA for the full year was $183 million compared to $235 million in 2015.

The change was mostly due to the same factors impacting net sales, cost of sales and selling and administrative expenses. As of December 31, 2016, we had cash, cash equivalents and short-term investments of $307 million compared to $432 million at year end 2015.

Our cash from operating activities was $144 million for the full year 2016 compared with $348 million in 2015. The resulting free cash flow, which we define as cash from operations less capital expenditures, was a usage of $86 million compared with free cash flow generation of $162 million for the same period in 2015.

The change in free cash flow was primarily due to the negative effect of operating leverage during a low point in our industry's funding cycle; unfavorable net changes in operating assets and liabilities; and higher capital expenditures related to infrastructure support for new facilities and our ERP system, along with the impact of owning the EdTech business for the full year. Now, I'd like to share what we see as the next significant upcoming opportunities for HMH.

As you know, domestic education, our largest market, is highly cyclical and the adoption calendar drives market size fluctuation year-over-year. We see HMH's addressable market for 2017 as flat, slightly higher than 2016, both years at approximately $2.7 billion, with the open territory opportunity up year-over-year and our addressable portion of the new adoption market down.

Beyond 2017, however, we see the market opportunity returning to pre-2016 levels as we gear up for the next cyclical high point, with many large new adoptions coming in the 2018 and 2019 purchasing season. We expect to maintain our market share in 2017 and return to market share growth in the years to come as a result of addressing these larger markets with our next generation programs in Social Studies, Science, Reading and Math.

Other than the second year of California's English Language Arts adoption, the 2017 new adoption opportunities that HMH is participating in are not large. Looking ahead, however, we intend to participate in California Social Studies and Florida Science, which present billing opportunities beginning in 2018.

We also intend to participate in Texas Reading, California Science and Florida Math, which present billings opportunities beginning in 2019. In all of these 2018 and 2019 opportunities, we will be competing with next generation programs which will have either been launched or are in development, and all leveraging our next generation platform.

With this market backdrop, we now turn to our expected financial performance for 2017. We expect billings in a range of $1.375 billion to $1.455 billion, net sales in a range of $1.325 billion to $1.405 billion, content development expenditure in a range of $140 million to $160 million, with total capital expenditure, which includes non-plate capital expenditures in a range of $190 million to $220 million.

In addition, based on these guidance ranges and our assumptions of market size and share comparable to 2016 levels, we would expect our adjusted EBITDA margin to be flat or slightly below the 2016 level, as our variable compensation levels normalize following the year of lower accruals in 2016. And we would expect our free cash flow to be negative at the midpoint of our billings guidance range with the potential to be breakeven at the top end of our billings guidance range.

In light of our free cash flow expectations, we intend to manage our capital expenditures and fixed operating costs in the context of our billings performance this year, while ensuring focus on investment in next generation programs and technology enhancements to support expected addressable market growth in 2018 and beyond. We believe this approach and the operational [Technical Difficulty] (22:38) will position us well to return to long-term sustainable levels of annual free cash flow in 2018 and beyond, whether in a market high point or through trough years like 2016 and 2017.

As we discussed in the last quarter earnings call, we intend to balance our allocation of capital between strategic reinvestment in our business, acquisitions and returning capital to shareholders as appropriate, taking us through-the-cycle approach to our deployment. Given the significant opportunities for billings we anticipate in 2018 and 2019, we plan to focus our capital allocation on reinvesting in our business in 2017.

We continue to plan for an Investor Day in 2017 which we will schedule as soon as practical once Jack Lynch joins us. In that Investor Day, we intend to provide more insight to assist you in modeling our business and better understanding the key drivers of our performance.

Just as we expect 2017 will be, 2016 was very much an investment year for the company, both on the content development side and the infrastructure side. It was also a year of uneven execution.

That said, 2016 is behind us and we believe the changes we have made to improve overall execution will begin to position us well for our transition to improved financial performance across all market conditions, including future trough years like 2016 and 2017. We remain focused on regaining share in our core market, continuing our expansion into complementary adjacencies and ensuring our business is operating efficiently and effectively.

We look forward to providing additional updates on our performance on future calls. We would now be pleased to take any questions you may have.

Operator, you may now open the line.

Thank you. Good morning.

Joe or Gordon, as you think about the 2018, 2019 adoption opportunities, can you parse it a little more or finely? It feels like maybe things are really going to be loaded more to 2019 and that 2018 perhaps could be more of a flattish kind of year, how are you guys thinking about that?

Hey, good morning, Peter. Yeah, a good question.

I mean, as we look out at the next couple of years, you are right, and we have a slide in our earnings presentation today that shows you, you start to see many more of the large adoption opportunities with billings opportunities starting in 2019 than 2018. That said, we do expect 2018 to be a larger overall new adoption opportunities set for us in 2018 relative to 2017.

Okay, fair enough. And then one follow-up, Joe.

The issue of balancing costs with growing share, it's a tough job, obviously. Where are the opportunities on the costs side, and how significant are these savings, is there any quantification you can offer us?

Peter, we are not in a position yet to size the cost efficiency initiatives that we are undertaking right now, that is something that we have put a conservative set of assumptions into our guidance range that we've provided you today. We do expect that there is upside to the opportunity there, but we are not in a position yet to size those total opportunities for you.

And we will and intend to provide you more information as we move through the year and our plans firm up.

Okay. Thanks, Joe.

Sure.

Yeah. In the 10-K, you guys talk about some of the changes at the federal level with the Department of Education, and I think most investors sort of look at this as a potential headwind even though most of the monies come from state and local governments.

But anything that you can share on that? And in particular, I was wondering if there is sort of a stealthy tailwind in there to the extent that we end up seeing more students go to pro-care or charter schools could then (27:08) not result in incremental sales for the industry?

Thanks.

Yeah, Jason, thanks for that question. I think we are very well-positioned kind of regardless of where public policy goes with regard to education.

If there is more of a move to charter schools, we're well-positioned for that. And, of course, the dollars that make up our addressable market are largely state funds, not so much federal funds.

Okay. So you don't anticipate any headwinds?

No, we really don't. It is too early to call, Jason.

Clearly policies being formed as folks look at the potential outcomes of what might result for many changes at the federal level, to Gordon's point, difficult for us to foresee that, that will impact us directly immediately. We are well-positioned.

We actually do sell into – the charter school channel, as an example, have a good robust business there that we feel that positions us well.

Okay. Thank you.

Sure.

Thank you so much. Have some questions about your outlook for this year.

And, first of all, thank you for giving us more metrics than we're used to in the past, I really do appreciate the color. And I know the prior management team – and I don't mean to knock them, but their forecasting and outlooks were, I would say, less than stellar.

Did you do anything differently this year in terms of forecasting methodology that you give more comfort or can give us more comfort compared to what we've seen in prior years?

Yeah, thanks, Jeff. Appreciate the question.

As we talked about in our third quarter call, one of the major focuses for setting expectations for ourselves, budgeting this year was to incorporate a bottoms-up approach for 2017 and then for our outlook going forward. So that's a major difference we think that will allow us ultimately to have better visibility and set expectations both internally as well as for our investment community as well.

That was one of the major changes. We continue to work on our forecasting methodology.

We think this is an area that we can continue to improve upon, but we feel quite comfortable in the ranges that we've put out today from a guidance perspective.

Okay. Appreciate the color.

And when will Jack be starting?

Jack has got a little bit of wrapping up to do with Renaissance Learning. We expect him to be joining us officially in the weeks ahead.

Okay, great. Thanks so much.

Thanks, good morning. As my first question, I appreciate the conservatism around the addressable market view.

I guess given there is some bidding to be done as some states catch up on Science and Social Studies in next year, is there any view around maybe what the range you could potentially expect around that $2.7 billion number for next year, plus or minus?

Andre, is that a question for 2017 when you say next year?

Yeah. 2017, sorry.

Okay. Well, we've kind of intentionally left it at $2.7 billion, kind of roughly flat to slightly up because, you are right, there are some moving parts as it relates to that.

We don't think that we have – we don't think that there's big movement in and around that kind of $2.7 billion area. But we do expect overall given some of the growth expectations we have in the open territories that we will see some slight growth potentially in the overall market opportunity for us in 2017.

I notice they are work-in-progress, but could you maybe give us a little more color on what you are actually changing this year as you go to market in California versus last year? And how long will it take to complete the revamp of the Reading program as you go into 2018 and 2019?

So in terms of California, we have increased our investments targeting opportunities in that state, both from a product and a marketing perspective. And we've worked to address some of the operating factors that contributed to our lagging sales.

And we think those changes are going to make us more competitive in the remaining years of that adoption.

And then, Andre, I think the rest of your question was for future years. So as you know, and we've talked about, we are continuing to invest in our next generation Reading program, which we expect to compete with in the Texas Reading adoption with billings opportunities beginning in 2019.

And that actually is a brand new program built from the ground-up will also be launched on our Ed platform. And we expect that that will actually perform quite well.

Thank you.

Hey. This is actually Jeff Goldstein on for Toni.

Can you talk a little bit about the competitive dynamics you are seeing right now in the market? You've mentioned your lower market share this year.

But are you still seeing customers stick with the larger players? Are you seeing any increased threat from smaller low-cost players that may be are more focused on digital offerings?

Hey, good morning, Jeff. Well, it continues to be a competitive marketplace out there most definitely.

And I think folks have spent a lot of time looking at California and the number of players that are on the list there. It is really a mix, and it does vary market by market.

But without talking about any specific competitor, I can tell you that there continues to be a competitive marketplace out there. And we do like our position, but (33:25) there certainly are folks in different areas of the market that are competitive.

Okay. And then just on share repurchases for next year, with your expectations for negative free cash flow at the midpoint of your billings guidance, should we be expecting buybacks to stop, just what's your thinking there?

No, as we said in the remarks, Jeff, our attention in 2017 is to reinvest and re – and deploy our capital for reinvestment in 2017. But as we look forward in two years where (33:57) we do expect to generate positive free cash flow, we've also said that we intend to take a balanced approach to our capital allocation.

That, of course, will take into account that through-the-cycle approach as we've termed it here, but really what that means is looking forward to the opportunities in front of us or opportunities to redeploy capital at great rates of return. And of course, we will factor in return of capital as appropriate as part of that balanced approach

Thank you.

Thanks. So, do you have any concern that the underperformance of Reading in California could be an issue for you in the intervening adoptions in open territories?

And I know there is a Mississippi adoption this year for Reading before you get that new product out. And weren't you initially slated to have the Reading product ready in time for a 2018 Texas adoption, so might it not be ready sooner than 2019?

Yeah, thanks, Trace. Well, look, one thing I will say about the program that we went to market with in California is that it does and has performed quite well in the open territories.

We expect that it will continue to do well there as – into the future. The overall opportunity set for new Reading adoption this year is less than it was in 2016, but we do expect with the existing program, there are opportunities for us to continue to do well with the existing program.

To your earlier question, yes, I mean, the net generation program will be ready in time for us to submit for the call in 2018. But as we've talked about, the major opportunity here from a billings perspective, as we see it, is going to be in that Texas Reading adoption in 2019 with that program.

(36:03).

Just to be – sorry, Trace, just to be clear on the timing, the next generation Science and Social Studies program will be fully available on Ed this spring and the next generation Math and Reading programs will be available for adoption in the spring of 2018 and built entirely on this new platform, Ed.

So, what is that – that's confusing to me, Gordon, because I had understood that the Science and the Social Studies product was already complete. Now, it sounds like it's not.

So I'm wondering what the implications of that are for the adoptions that are sort of currently underway.

They are complete and fully available the spring which is right about now.

Okay, all right. And I have to say, among the many frustrations that those of us who follow your business have with lack of transparency, one of them is the habit of redefining the addressable market to sort of suit your own kind of particular approach.

So your numbers differ from those published by the AIP. And McGraw-Hill in the third quarter using AAP consistent data (37:22) forecasts a 13% increase in the adoption market between 2016 and 2017.

So, I would like to get a little bit of color from you as to why – where is the $350 million differential between what AIP (37:40) reports and what you guys have sized for the 2016 adoption market, and then why such a large discrepancy in terms of your take on 2017 versus what your principal competitor is saying?

Sure, Trace. Yeah.

And it really is not an attempt at all to create confusion. It's actually a reflection of our participation rates in the new adoption portion of the market.

And I think what's important to understand is that if we don't submit for a particular call in any given year for adoption that there's an – a portion of budgetary dollars that we don't have access to, and frankly are not addressable. Now what that doesn't mean is, we don't have the opportunity to compete in those markets.

It's just that we don't have that portion of the market that we call the new adoption portion of the market available to compete for. Now, as it relates to other folks' calls on the particular market, that has everything to do, we think, with certain expectations around the remaining segments of the market as well as their own participation rates in any given year whether they have...

So, okay, let me stop you, Joe, because this is not productive. What adoptions are you not submitting for in 2017?

Sure.

What major portions of the market are you choosing not to compete in? I'm not talking about driver's ed or whenever the depth for this is (39:16).

But just dealing with the top four categories, where are you choosing to stay away?

Yeah. I think K-6 Social Studies really is one of the biggest areas there in terms of the new adoption portion of the market where we did not submit for participation in the adoption.

So that's the big one. And there are a number of states there, so Florida, North Carolina and a couple others that we didn't submit in that area.

So how do I jive that with Gordon's assertion just now that the Social Studies program was developed and available?

That's the 6 through 12 portion of the market, Trace. So we do bifurcate the program – and the next generation Social Studies program that we are referring to here is in the 6 through 12 portion of the market.

Okay. So why we stayed away from K-5?

Well, when we were making decisions – and as you know, Trace, typically anywhere from 18 to 24 month in advance of the opportunity, K-6 Social Studies was not an area of particular focus for us in lieu of various other capital allocation priorities. What we saw set up in 2017 is we, of course, approach the market with that – that roughly equated to, call it, a quarter or so of the potential addressable market.

So from a participation rate perspective, think about – our participation rate which, of course, excludes the K-6 opportunity and Social Studies at about 75% to 80% of what we could have had we invested. We didn't – at the time of the investment decisions didn't see all those stacking up in 2017.

That said, we do – and I want to continue to reiterate that we do have opportunities to continue to compete in those markets with outside and off-list. But that's really helped square the circle a bit on some of the comments and your interposition there, I hope that makes that clearer.

Okay. Thank you.

Sure.

Okay. Thanks.

Good morning, everyone. So I think you kind of answered my question in the last response you gave.

But as far as your assumption around flat market share for 2017, is that for only in which the adoption opportunities and open territory opportunities you are participating in? And if that's the case, where do you see opportunities to gain or potentially lose market share?

So, that's my first question. Second question relates to content development, $140 million to $160 million was the guidance range for this year, where do you see that trending beyond 2017?

Thanks.

Sure. So the $2.7 billion AIP AIP (42:29) market size is the market that we're measuring share against.

And so I think your question is, is that just in our addressable portion of the market. It is just in the addressable portion of the market.

We do have the opportunity to participate off-list in those adoption states. And of course we will continue to take share in residual buys in the adoption states, is that portion of the market.

And we see opportunity in the open territory as well with the launch of our next generation Social Studies in the secondary arena, with the Kids Discover partnership for K-6 that we announced, as well as with the next generation Science program that we've launched and a few other programs recently that we've launched that we think will be very effective in helping us to take some share in the open territory portion of the market.

But does that $2.7 billion, for example, include Florida K-5 Social Studies?

It does not. It does not.

Okay, I got.

Yeah, yeah. It does not.

Right. What I should note though, is we do have opportunity, of course, to make sales into that portion of the market.

And so far, we have seen some traction in that portion, and that would be categorized as the off-list portion of the...

Got it.

...adoption market. I think your next question was where do we see content development spend trending after this year?

Yeah.

Is that right?

Yeah.

So, what we do expect – and this will be a heavy year as we look forward to 2018 and 2019 over time, we would expect over time as we start to complete these next generation programs that we will have the opportunity to reduce the overall spend level for content development as we move forward.

Okay, great. Thanks, guys.

Great.

Thank you to everyone for joining us on the call this morning. If you need additional information, please reach out to Bianca Olson at HMH.

And operator, this ends our call today. Thank you.