McGraw-Hill Q2 financial results: Education is declining faster than Financial is growing

McGraw-Hill has released its Q2 financial results. The company is headlining its record adjusted diluted earnings per share of $0.85, but that's mainly to deflect attention from what's overall a disappointing report:

• Q2 revenue was $1.547 billion, down 1% year-over-year, due to a 12% decline in revenues at McGraw-Hill Education that wasn't compensated for by a 5% increase in revenues at McGraw-Hill Financial. 
• Net income from continuing operations increased 2% to $216 million, and diluted EPS increased 11% to $0.76. 
• When one-time costs related to the company's Growth and Value Plan (planning for a sell-off or spin-off of McGraw-Hill Education) are subtracted out, adjusted net income from continuing operations increased 15% to $243 million, and adjusted diluted EPS increased 25% to $0.85. (That's where the "record quarter" came from.) 
• McGraw-Hill Education's revenue for the quarter declined 12% to $474 million, but operating profit increased by 36% to $57 million, due primarily to restructuring and cost controls. 
• Revenues in the Higher Education, Professional and International (HPI) Group declined 2% to $241 million. 
• 34% of HPI's revenue in the quarter came from digital products and services; digital subscription platforms grew 33%. 
• Revenues in the School Education Group declined 20% to $233 million, and the Group expects an overall 10% reduction in the K-12 market this year, the lowest spending level in over a decade.

McGraw-Hill puts its Education division up for sale

First, McGraw-Hill released details of its plan to spin its education division off as a publicly-traded company, and now, the New York Post is reporting that the company has hired Evercore Partners and Goldman Sachs to run an auction of McGraw-Hill Education. The big question, which the article doesn't answer, is why McGraw-Hill is trying to sell off the division. It's possible that the company doesn't think that it would get enough for it in an IPO, but given private equity's poor track record with educational publishing and distribution companies (Houghton Mifflin Harcourt and Nebraska Book Company being two examples,) it's unlikely that McGraw-Hill could raise much more through an outright sale.

McGraw-Hill Education cuts "pay-for-performance" deal with Western Governors University

In what's certainly one of the first deals of its kind, McGraw-Hill Education has agreed to a "pay-for-performance" compensation deal with Western Governors University in Salt Lake City, which specializes in online courses. The publisher will sell its eBooks and adaptive learning tools to the University for a discounted flat fee; in turn, the University will pay McGraw-Hill a premium for each student who uses the materials and passes the course. The press release doesn't say how deeply McGraw-Hill is discounting its eBooks and tools, but given that the publisher is selling directly to the University instead of through a third-party bookstore operator, it has quite a bit of room to discount without affecting its profit margins.