What happened
Shares of education company Houghton Mifflin Harcourt (HMHC) soared on Thursday after it announced a restructuring of its business. The changes are expected to save it money in the long term, but will cost the company about $35 million in the near term.
Despite the upfront costs, investors like the sound of the changes HMH will be making to its business structure. As of 12:25 p.m. EDT, the stock was up 13%, though it had traded as much as 30% higher earlier in the session.
Image source: Getty Images.
So what
Houghton Mifflin Harcourt's second-quarter results clearly demonstrated that its future is in digital products. Most schools continued to operate remotely during the period, which ended June 30, and with districts focused on adapting to that change, sales of the company's physical products plummeted. But its digital platform usage was up 486% year over year, and software-as-a-service (SaaS) billings were up 127%.
Therefore, Houghton Mifflin Harcourt is restructuring its business to align with its digital growth opportunity. The company is laying off 22% of its workers, anticipating the efficiency that should come with a greater focus on learning technology. Also, it's going to be printing fewer physical materials in the future as it shifts the balance of its offerings toward digital publications.
Management believes these moves will result in $34 million to $36 million in one-time charges. These will drag on its free cash flow, which was already negative $248 million in the first half of 2020. But long term, the company expects to reduce expenses by $95 million to $100 million annually.
Now what
It remains to be seen whether Houghton Mifflin Harcourt's digital transformation will pan out. For now, one pressing issue is whether the company has the necessary cash available to navigate the shift. On that front, management reassured investors by pointing out it has $265 million in cash and $160 million it could tap from its credit line if needed.
That's a lot of liquidity for a company that slid into the penny stock range this year. (Houghton Mifflin Harcourt, which only a few years ago had a multibillion-dollar valuation, today has a market cap of just $248 million.) But investors should remember the company also had $631 million in long-term debt as of the end of Q2.
