HMH Holdings' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar. 6.14 | About: HMH Holdings (HMHC)

HMH Holdings (Delaware), Inc. (NASDAQ:HMHC)

Q4 2013 Results Earnings Conference Call

March 06, 2013, 08:30 AM, ET

Executives

Rima Hyder - Vice President, Investor Relations

Linda K. Zecher - Chief Executive Officer

Eric L. Shuman - Chief Financial Officer and Executive Vice President

Analysts

Trace Urdan - Wells Fargo Securities

Andre Benjamin - Goldman Sachs

Jason Bazinet - Citi

John Crowther - Piper Jaffray

Denny Galindo - Morgan Stanley

Mark Braley - Deutsche Bank

Drew Crum - Stifel

Lance Vitanza - CRT Capital Group

Operator

Good morning, and welcome to the Houghton Mifflin Harcourt's Fourth-Quarter and Full-Year 2013 Earnings Call. I would like to inform you that this call is being recorded for broadcast, and that all participants are in listen-only mode.

I would now like to introduce Rima Hyder, Vice President, Investor Relations for Houghton Mifflin Harcourt. Ms. Hyder, you may now begin.

Rima Hyder

Thank you, operator, 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 and on our website later today until March 28. We plan to file our audited financial statements in our Annual Report on Form 10-K with U.S. Securities and Exchange Commission later this month.

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 Annual Report on Form 10-K when it is filed for a discussion of risk factors that could cause actual results to differ materially from these forward-looking statements.

Our slide presentation and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures 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 Linda Zecher, Houghton Mifflin Harcourt's President and Chief Executive Officer will provide an overview of the company's 2013 results, followed by the presentation of financial results by Eric Shuman, HMH's Executive Vice President and Chief Financial Officer.

I will now turn the call over to the Chief Executive Officer of Houghton Mifflin Harcourt, Linda Zecher.

Linda K. Zecher

Thank you, Rima; and thank you, everyone for joining us today on our first earnings call as a public company. Houghton Mifflin Harcourt delivered solid financial results for 2013, which Eric will review in just a few moments. But first, I would like to take few moments and discuss some important milestones and accomplishments from 2013, and to do so let's start at the end.

2013 culminated with an IPO in November. We had been encouraged with the performance and interest in the stock since our NASDAQ listing. This milestone elevates our brand and our 180-year rich history on a global stage. It creates a platform to offer our customers, investors and the market a clear understanding of who we are as a company and the solution services we offer and our commitment to lifelong learning.

While the IPO was a tremendous experience, it was the work leading up to that that allowed it to happen. First, following the realignment of our sales force at the end of 2012, last year we continued to optimize our distribution channels and moving to adjacent markets with a partner strategy allowing our sales force to focus on enterprise sales.

I am pleased to announce that in accordance with our strategy we entered into an agreement with a third-party retailer in the private parochial and charter school market to maximize sales in this channel.

Focusing our sales force on enterprise accounts have led to stronger relationships and more meaningful customer engagements, and an improved go-to-market model, allowing us to better target potential customers. The results are obviously with a 6% increase in revenue from open territories.

Second, the reengineering of our content development organization has allowed us to focus on the creation of quality content regardless in medium. By redesigning our workflows built around a new studio production model. We have fundamentally changed the way we build our products. This shift has allowed us to increase production efficiencies and deliver to the market content that is engaging as well as effective.

And third, we made meaningful strides in building a consumer business from the ground up, leveraging the strength of our education trade content. This business opens up new revenue streams and expands future growth opportunities as we introduced new B2C education tool.

Collectively, these efforts have strengthened our offerings and our operations as we continue to shift to a world powered by technology and adapt its content. Our focus is clear. It's more than just a digital transformation that so many others are talking about.

We believe in a learning transformation. And to accomplish that we continue to focus on the development of quality content built for a digital age that facilitates anytime and anywhere learning.

And now I would like to spend a few minutes taking you through some of the 2013 highlights from our education trade publishing businesses. Within our education segment we are very pleased with our 2013 performance.

According to the Association of American Publishers, AAP, our addressable market grew 5% to $2.6 billion as compared to 2012, and we have captured a 38% market share. 2013 annual sales grew 7% over 2012 as our core K-12 market was driven by stronger adoption cycles in states such as Florida, Tennessee and Georgia as well as in open territories like New York.

Our Common Core programs including Journeys and GO Math! were among the best in the market. The strength of these two programs resulted in HMH taking the number one spot in the new elementary reading and math adoptions last year. Our other lines of business also performed well, in particular, Heinemann with almost 30% growth in sales year-over-year.

GO Math! continues to perform well with a number of impressive wins including its selection for Elementary Math District-wide in New York City. Recently, California selected seven of our programs including GO Math!, Math in Focus and Big Ideas Math for their 2014 math adoption, a decision that impacts over 4 million students.

As most of you many know, GO Math! is already the most widely adopted K-6 math program in U.S. And in 2013, we strengthened and capitalized on this success. Through our partnership with Knewton we enhanced the program with adaptive technologies to offer the personal math trainer.

The trainer provides a new level of insight into student's ability, enabling teachers to provide the help necessary to reach proficiency level, and we plan to deepen our alliance by offering Knewton-powered products in reading, English language learning and other subjects.

In September last year we introduced an engaging new English language arts program for grades six through 12. Collections 2015 offers a hybrid of print and digital component promotes active participation and is another example of our robust and innovative product pipeline as we look to further enhance our offerings year-after-year.

As I touched upon earlier, in addition to classroom education, this year we took significant steps to leverage our content to build a consumer business. As parents allocate more and more wallet share to their children's education, we view our entry into this space as strategic and a natural extension of our core solution.

For example, we've recently introduced GO Math! Academy, our first at-home and on-demand digital learning environment, built with GO Math! institutional content parents can be confident that the product provides a continuous learning experience based on standards that build on what children are learning at school. This is the first product in HMH Academy series. We're seeing great potential on this subscription-based model and plan to extend it into additional subject areas.

As I mentioned, another important growth area is early childhood. Our plans to further penetrate this market coincide with U.S. budget proposal that is earmarked to $75 billion of spending over the next 10 years for pre-K educational development programs.

We are expanding our presence in this market by leveraging our top children plans including Curious George, Lyle the Crocodile and Gossie and Gertie. Adding elements of gamification to this premium content will contribute to effective solutions in the early childhood development market.

We remained passionate about ensuring more students have access to our content because they know it makes a difference and it leads to higher proficiency levels in core subject areas. An Educational Research Institute of America's study recently found that students using our What's Happening? 2012 reading intervention program improved their scores by an average of 9%.

And the students who were most in need of help at the start of the program improved an average of 20%. And because many of our programs can be paired together such as What's Happening? and Collection, we'll have new opportunity to get new partnerships and provide customers with complementary services.

While we have clearly placed high importance on quality content that yields results, we are also acutely aware of the need to distribute this information in a way that best suits learners' technology resources and needs. For this reason, we maintain an extensive domestic and international partner network that encompasses the world's leading technology partners like Apple and Amazon.

This keeps continue to grow with our recent partnership announcement with Google. Our K-12 content will soon be available on Google Play for education. Partnerships such as this strengthened our offerings and overall brand equity and enabled us to deploy content in the way that best engages students and increases achievement levels.

In addition to our U.S. growth we've strengthened our international capabilities last year to capitalize on the rising global demand for education. Our alliance with leading Filipino publishing house, Vibal, to exclusively distribute HMH's Journeys, GO Math! and ScienceFusion is just one example of how our partner-led model enables us to adapt and distribute content for local markets. And we continue to strengthen and streamline our overall organizational structure to ensure we gain additional scale and momentum outside the U.S.

Turning to trade publishing, this business continued on a solid trajectory with 9% growth compared to 2012 as we saw sustained strong performance from Young Readers category and the Culinary line. Year-over-year front list sales were higher as we expanded our offerings of team related fiction and back list sales benefited from increased interest in the Common Core standards.

Higher sales from our beloved Curious George titles also added to be improved trade results. Our Young Readers titles received four honours at the American Library Association's Young Media Awards. Among these honours, Mr. Wuffles! by David Wiesner won the coveted Caldecott Honor Award. This is the 30th Caldecott Honor Award for HMH's books, an achievement that makes us very proud.

In our general interest category we had a strong showing on the New York Times best seller list including one of my favourite books, The Essential Scratch and Sniff Guide book by Robert Betts. The strength of our brand and title line-up offers opportunities to grow to both new markets and product expansions. Through our agreement with Hachette Book Group we have enhanced our sales and distribution channels in international markets.

On the product side, our expanding offerings include additional Curious George apps. The apps build positive skills and foster lifelong learning from the earliest ages by offering children a variety of development exercises, ranging from creative skills all the way to fiscal responsibility.

curiousgeorge.com, our dedicated website for the iconic monkey teaching audio e-books and interactive games recently won the Parents' Choice Award. This award recognizes quality, children's media and honours the best children material for parents to make informed decisions.

Of course, the launch of our unified ecommerce platform also created additional sales opportunity. HMH Co. now serves as a one-stop shop for education and trade material and offers us a direct sales channel to consumers, students, teachers, parents and lifelong learners of all ages.

In addition to our growth initiatives and advancements in our Core segments, in 2013 we've remained opportunistic on the acquisition front. This included the acquisition of education technology company, Tribal Nova, data and analytics provider Choice Solutions, a stake in accreditation services SchoolChapters, and in 2012 acquisition of specific content from John Wiley, including a strong front and back list of trade assets and CliffsNotes.

We have taken a multifaceted approach to leading a learning transformation powered by digital content. Our successors are driven by an outstanding team leading with demonstrated expertise in the fields of technology, education, innovation.

To ensure we remain on the forefront of our industry, we have recently deepened our bench of talent with the addition of Dr. Nicole Melander as SVP of Digital Strategy. We are delighted to have Nicole onboard to help further evolve our social media and business capabilities in this age of digital collaboration.

We have also been working with the Messina Group to expand our social media strategy focusing on understanding the needs of the consumers through various social media. I am pleased with our performance in 2013. And as we progress into 2014, I'm excited about our growth prospects. We have the structure, strategy, team and resources in place to make this a year of growth through focus.

The education market outlook is strong. Based on the size and number of states actively adopting new curriculum in 2014, we estimate the new adoptions market to be approximately $800 million led by Texas and California. This brings our total addressable market size to approximately $3 billion in 2014, a 13% increase and a level we haven't seen since 2010.

This is a clear sign of the upturn in the education market. Our current lineup positions us to benefit from this market growth as we offer our premium content and solutions in major territories such as Florida, California and Texas.

Further building on this core, our trusted partnerships with customer's position us to offer comprehensive services. These solutions enabled us to become more deeply ingrained within the classroom learning environment as our capability supports everything from instruction, classroom assessments, teacher effectiveness, and school turnaround solutions. We will focus on creating a unified approach to this business opportunity and extract maximum value from our solutions.

We will also continue to ramp up our capabilities in key growth areas I’ve already outlined such as direct-to-consumer and early childhood. Simultaneously, we will seek additional opportunities to extend our vast network of technology partners and operationalize our international partner-driven strategy. We have a solid trajectory and a plan in place.

Our growth strategy enables us to strengthen our core and capitalize on targeted growth markets. I’m confident in the direction we’re headed and looking forward to all that is to come in 2014.

So, with that, I will turn the call over to Eric Schuman to walk you through our financials. Eric?

Eric L. Shuman

Thank you, Linda, and good morning, everyone.

As Linda has already stated, we delivered solid results in 2013 with increased market share, higher revenues, and higher adjusted EBITDA. As you can see on slide 11, for the full year 2013, net sales were $1.379 billion, an increase of $93 million or 7% from $1.286 million in 2012.

The increase was largely driven by $34 million of increased new adoption sales, primarily in Florida and Tennessee together with a $12 million of increased sales in the open territory market driven by a large sale to the New York City school district.

Heinemann contributed an additional $37 million in sales from Fountas & Pinnell's Leveled Literacy Intervention program and Units of Study by Lucy Calkins.

Additionally, we were able to increase sales in the private, parochial, and charter school channel through an agreement with the reseller. The private, parochial and charter school channel incremental sales along with the sale of consumable backless products sold to both other resellers and directly to consumers resulted in an increase of $16 million in 2013 as compared to 2012.

Trade publishing revenues grew by $14 million to $171 million as a result of its Culinary products in Young Readers titles.

Offsetting the above positive factors were lower residual sales of $13 million, which are typically lower in years of larger adoption sales and $16 million of lower sales of a Proprietary Learning Management System as we migrate to a broader learning management system partner strategy with open APIs.

For the fourth quarter of 2013, net sales were $299 million, an increase of $17 million or 6% as compared to net sales of $282 million for the fourth quarter of 2012.

Similar to a fourth quarter 2012 reseller transaction, 2013 fourth quarter sales increased primarily as a result of the previously mentioned reseller agreement for product sales in private, parochial and charter schools which generated $40 million in incremental revenue in our adjacent market channel.

This was partially offset by $9 million in lower other adjacent market sales, a $6 million decline in sales in our trade business, primarily due to higher sales for movie tie-ins in the fourth quarter of 2012 versus the same period in 2013, and approximately $8 million in other lower revenues such as the runoff of our old Learning Management System.

On slide 14, you can see that our operating loss for the 12 months ended December 2013 was $87 million, an improvement of $34 million or 28% from $121 million in the same period of 2012.

The improvement was primarily driven by a $90 million reduction in amortization expense related to publishing rights, prepublication and other intangible assets due to our use of accelerated amortization methods and lower pre-publication spending over the past several years as compared to previous years.

And $93 million in higher sales, partially offset by $69 million in higher cost of sales as a result of both increased sales volumes and a shift in our product mix impacting production and royalty costs.

Factors offsetting the positive impacts were a $47 million increase in selling and administrative expenses including approximately $20 million in costs associated with our IPO, which consisted primarily of selling shareholder costs paid by the company, pursuant to the terms of our Investor Rights Agreement, and increases in stock compensation costs and variable costs such as sales commission expense, and sampling expenses in advance of the 2014 scheduled adoptions. These costs represent an investment in our future growth.

Additionally, there was a $31 million one-time gain on certain John Wiley assets acquired in 2012.

Operating loss for the fourth quarter was $60 million compared to a loss of $28 million in the fourth quarter of 2012. The $32 million deterioration is primarily due to the same drivers impacting the full year operating loss. These were offset by a reduction in amortization and impairment charges in 2013.

Net loss for the full year of 2013 was $111 million, $24 million higher than the net loss of $87 million for the full year of 2012. The loss was primarily impacted by the same drivers as the operating loss along with the absence of $149 million in one-time gains from our restructuring in 2012. These were offset by an approximately $100 million reduction in interest expense due to our restructuring and debt refinancing.

Net loss for the quarter was $65 million, $31 million higher than the net loss of $34 million for the fourth quarter of 2012. The drivers for the fourth quarter losses were primarily the same as full year.

Adjusted EBITDA for the 12 months ending 2013 was $325 million, an increase of $5 million or 2% from the same period in 2012 of $320 million. The $5 million increase results from the previously described item excluding changes in amortization, depreciation, interest and taxes, which do not impact adjusted EBITDA.

Our adjusted EBITDA for the fourth quarter of 2013 was $55 million, a decrease of $16 million or 22% from the fourth quarter 2012 of $71 million. The decrease in EBITDA was mainly due to an increase in net sales substantially offset by the aforementioned higher selling and administrative expenses including expenses related to our investment in 2014 growth but excluding IPO costs. A detailed reconciliation of our GAAP results to adjusted EBITDA is included in the appendix to this presentation on slide 19.

For the full year of 2013, our cash flow from operating activities excluding IPO cost was $72 million greater than 2012, primarily due to reduced interest payments from our debt restructuring.

Free cash flow defined as operating cash minus capital expenditures for the full year 2013 was approximately $50 million better than 2012 excluding the IPO cost. Total liquidity, as seen on slide 15 was greater than $600 million.

In closing, HMH delivered another strong year by capitalizing on the market recovery, maintaining cost discipline and providing lifelong learners with the best-in-class education products.

As a new public company, we will be giving annual guidance on revenues, our addressable market size, and content development or plate spend.

Looking forward to 2014 we expect our revenues to grow in the 5% to 8% range over the 2013 revenues. We expect our domestic education addressable market for instructional resources to be approximately $3 billion. Additionally, we expect content development spend for 2014 to be approximately in the range of $100 million to $120 million.

Before we open it up to questions, I want to briefly explain the Form 8-K that we filed this morning which included a discussion of the shelf registration. The company intends to file a shelf registration statement on Form S-1 with the SEC to cover the resale of shares of the company's common stock that are held by the Investor Rights Agreement or IRA stockholders.

This is required under the IRA and each of the IRA stockholders has the right to include all or a portion of its common stock in the shelf registration statement by notifying the company. Please refer to the filing for additional details.

Thank you for your time today. Now, let's open it up to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Trace Urdan from Wells Fargo Securities. Please proceed.

Trace Urdan - Wells Fargo Securities

Hey, good morning guys, and congratulations.

Linda K. Zecher

Thank you, Trace. How are you?

Trace Urdan - Wells Fargo Securities

I’m very well, thank you. Let's see, the first question I had was in the guidance you’re telling us that the market growth is going to be 13%, but that's outpacing the growth that you’re anticipating in your own guidance and I'm just wondering if you could speak to that?

Eric L. Schuman

Yes, the market size is on a billings basis. So, the billings in our market are going to be 13% greater next year. However, because of the bundles that we put together that include consumable vortex products and include technology products, there is a deferred element to it. So, we will bill more next year than we’ll be able to recognize as revenue.

Trace Urdan - Wells Fargo Securities

Got it. Thank you, Eric. And then I wondered if you could as well -- this may be a little too finite to answer cleanly, but I'm wondering if you could speak to -- you so affectively kind of told us what the drivers were by product area in 2013. And I'm wondering if you can just give us a general sense of what products you think will be the primary drivers of growth in 2014?

I guess GO Math! in California might be one of them, but I wondered if you could just sort of speak to that a little bit more.

Eric L. Schuman

Yeah, well, if you look -- I mean if you look at what the adoption market is in 2014, its Texas science, Texas math, California math, Georgia reading and lit, Florida reading and lit. So, it’s going to be those products in which we have a number one market share such as GO Math!, as you suggested, such as Collections, such as Collections 2014, our Fusion Science product and our Journeys reading product all of which have a leadership position.

Trace Urdan - Wells Fargo Securities

Okay. Thank you. Just two more and then I’ll turn the line over to my colleagues. Eric, you were very helpful in breaking out the EBITDA number excluding the one-time cost. I wondered if you could just do that for the purposes of EPS as well.

In other words, I'm asking of the $18 million in IPO costs is there a tax effect there? Do you have an EPS number that excludes that?

Eric L. Schuman

The EPS number that excludes that would be $0.65 for the full year and $0.32 for the quarter, loss.

Operator

Your next question comes from the line of Andre Benjamin from Goldman Sachs. Please proceed.

Linda K. Zecher

Hey, Andre.

Andre Benjamin - Goldman Sachs

Hi, good morning. I was hoping first you could maybe provide a little bit more detail around what guides the low end versus the high end of your revenue growth guidance? Any mix between education and trade growth?

And then I guess how much of that is based on contracts that you already have in hand given so much of it has been negotiated versus expectations for business you’re still going to meet one?

Eric L. Schuman

Well, if you look at what the guidance from low end to high end, I think it’s really the strength of the market itself. If the market has upside, we expect to capture that upside which would give us the 8% growth. As far as any indication as to next year, the selling season has just started, but I can -- of those places that have announced we’re doing extremely well.

Andre Benjamin - Goldman Sachs

Okay. And then on the margin side, I apologize if I missed it. But did you give any color on maybe what EBITDA margins are likely to be for the year? And then any color on the mix between education and trade?

Eric L. Schuman

We’re not giving guidance on individual line items, nor on EBITDA percentage.

Operator

Your next question comes from the line of Jason Bazinet from Citi. Please proceed.

Linda K. Zecher

Hey, Jason.

Jason Bazinet - Citi

Hi, good morning. I just had two quick questions. In the press release, you guys sized the addressable market at $2.5 billion going to $2.9 billion; I think in your verbal remarks you said $2.6 billion to $3.0 billion. First, if you could just clarify that difference.

And then second, regardless of what the 2014 number is, whether it’s $2.9 billion or $3 billion, where do you think that is relative to a steady state number? In other words, is there still opportunity for that number to rise potentially or do you think we sort of -- we're back at sort of steady state with the 2014 market size numbers?

Eric L. Schuman

Well, Mark, it should have been $2.6 billion to $3.0 billion. There was probably some rounding in there. But in terms of out into the future, we see a -- we see the market out into the future really having some upside to it, but I think a good steady state would be around $3 billion for the next year or two.

Jason Bazinet - Citi

Okay, very helpful. Thank you.

Linda K. Zecher

Thank you.

Eric L. Schuman

Next?

Operator

Your next question comes from the line of Peter Appert from Piper Jaffray. Please proceed.

John Crowther - Piper Jaffray

Yes, you’ve got John Crowther on for Peter. Just as we look at -- you gave some great detail on the education side of the business, what was driving it and what to look for in 2014? Just wondering on the trade side, I know you’re not giving guidance on the growth there, but maybe you could call out what particular titles or brands are really going to drive your performance there?

And then just to kind of piggyback on that question, wondering if you could talk just a little bit about your branding strategy in sort of a direct-to-consumer model, because obviously, you’ve got some great titles with -- like great brand equity there. Just wondering how you kind of wrap that up into the greater Houghton Mifflin brand?

Linda K. Zecher

Yeah, I think the on the trade side, the two major drivers this year was really Culinary and Early Literature, Young Reader literature and both of those, obviously, are very strong for us, and they were major drivers.

They also really tie into the consumer space. And as we look at what we're doing into consumer, we’re taking many of these early childhood brands and, like Lyle the Crocodile, like Curious George, obviously and we’re moving those into both the consumer space and also as we go down market into early childhood.

And so we think that there is a lot of crossover there. We're also doing a lot more in crossover between our trade division and our education division and that many of the titles that we have in our strong backlist of Young Readers are also things that are prevalent in the classroom. And so there is a lot of overlap there.

Again, we’re trying to make sure that all of these accrue to HMH. But one of the reasons that we have the HMHCo and that we changed our website and changed our approach, and then also curiousgeorge.com is to make sure that we have a site that everyone can go to and really get access to all the different brands that are available.

John Crowther - Piper Jaffray

Okay, great. And then just real quickly, you called out in this last quarter that kind of switching to or migrating to a partner strategy impacted a little bit of your Learning Management System sales. I’m wondering if there is any carryover of that into next year or if we should start to see the impact of that new strategy early in 2014?

Linda K. Zecher

Yeah, I think we're actually already seeing some of the impact of that strategy this year and we’re pretty excited about it. I mean one of the major changes that we did in the salesforce was to reorganize it, so our sales team would be in a position to focus on enterprise accounts, open territory, and then through a telesales model some of our smaller accounts. And the upside of that was the increase in open territory by 6%.

As we move forward, we think that moving into some of these new adjacent markets and then also in international, this partner strategy gives us the opportunity to really expand our opportunities without adding a lot of direct cost.

I mean, I come from an organization that was very strong in a partner model, and this is something that I am very strong on. And I think you're going to see more of this, and it gives us an opportunity to really expand our footprint.

Operator

Your next question comes from Jeff Silber from BMO.

Linda K. Zecher

Hey, Jeff.

Unidentified Analyst

Hey, good morning, this is Henry [Chan] calling on behalf of Jeff.

Linda K. Zecher

How are you?

Unidentified Analyst

Good. How are you guys?

Linda K. Zecher

Good.

Unidentified Analyst

I just have a quick question with respect to some of the backlash to Common Core across the different states. Could you just talk a little bit about whether that's impacting or any color around the competitive environment for Basel sales?

Linda K. Zecher

Yeah, we’re not really seeing any issue with that at all. I mean the issue around Common Core is really that the standards are not going to change and everyone agrees that we need to have these strong standards.

What we’re seeing is a little bit of delay in the testing. And I think that some of the high stakes testing have been delayed by some of the states, but that doesn't really impact us. That's not really our core business. From a content perspective, you’re seeing Common Core standards being driven across the market. So, we really don't see any impact of that all -- really at all.

Unidentified Analyst

Got it. And just last question in terms of the addressable market, the estimates for 2014. Does the -- I guess the mix between adoption open territory, is that consistent with 2013? And sort of related to that in terms of your expectation for sales, is that -- is there implied market share gains in terms of your expected net sales for 2014? Thanks.

Eric L. Schuman

In terms of the split between adoption and open territory, because the adoption market is growing by such a large margin, the percentages have changed. So, almost -- not quite, but almost -- I would say if you include adoption residual business probably 55-45 and that's an estimate from probably the adoption market being slightly smaller than the open territory market in 2013.

And what was your -- I'm sorry, what was your other question? Do we see -- market share gain, I’m sorry. We expect to continue to be able to grow our market share given our superior products and the salesforce reorganization.

Operator

Your next question comes from Suzy Stein from Morgan Stanley. Please proceed.

Linda K. Zecher

Hi Suzy.

Denny Galindo - Morgan Stanley

Hi, this is Denny Galindo on for Suzy Stein.

Linda K. Zecher

Hi, how are you?

Denny Galindo - Morgan Stanley

Congratulations on the first quarter, very good.

Linda K. Zecher

Thank you. You don't sound like Suzy.

Denny Galindo - Morgan Stanley

Yeah. A little different voice there. Yeah. First question just coming back into that open territory versus adoption market. It sounds like the open territory market has accelerated a little bit in the last year, is this something that could get a lot higher if real estate values continue to increase and local budgets improve with real estate values?

Linda K. Zecher

Yeah, absolutely. I mean the open territory market is primarily driven by real estate values and state tax revenues. So, as those increase, that gives us a great opportunity to -- that is going to increase also.

State tax revenues I think are showing almost 9% growth in the first quarter of 2013 over the prior year, so that was pretty significant. And I think that marked like 13th consecutive quarter of growth and we expect that to continue.

Denny Galindo - Morgan Stanley

Okay. And then moving on to the early childhood opportunity. There has been a lot of talk in New York about that opportunity. But I just wanted to get some idea, some color around how fast that might translate into revenue for you guys, how big an opportunity it could represent.

And then also have you already make the investments you need to seize this opportunity or might you see some increase in investments and content in order to really take advantage of the early education opportunity?

Linda K. Zecher

Well, actually I think we’re in a very good strong position with the content that we have today. I mean we’ve been in the early childhood market already. But we do -- we’re going to continue to enhance our content, we’ll take some of our content and move it down market.

But we -- this is an area that I believe we talked about this a little bit in the previous comments. But I think it’s -- the Obama Administration is putting about $75 billion into the market over the next 10 years. And so on top of that, there is a tremendous amount of spend -- parental spend that goes into this market for supplemental materials from the time the child is born to the time they are like in fourth grade.

So, we think that by both going into the institutions and expanding our relationships with both the schools like in New York that are going down to the pre-K and/or to the private institutions, and then going directly to the parents with our content is going to be a strong market opportunity for us. I can't really tell you what -- we think we're going to grow in that market, but I will tell you from our consumer perspective that's a major part of our consumer play.

We grew our consumer business this year off of a very small number. We had year-over-year growth of -- doubled our market or doubled our size. We expect to see that in the foreseeable future, but again it’s off of a very small market but a lot of that is going directly to parents in the pre-K market.

Operator

Your next question comes from the line of Mark Braley from Deutsche Bank.

Mark Braley - Deutsche Bank

Yeah, good afternoon. Thanks for taking the question. I just wanted to understand when you think about market size and market share going forward sort of how comfortable you are that the AAP numbers are going forward going to be a particularly meaningful ways of measuring where instruction materials and related spend is going?

And kind of associated with that I think in the California math adoption there are something like 30 different programs that have been approved, which seems like a big increase on where we would have been kind of five or 10 years ago.

And it does feel like Common Core plus technology change you're seeing a bigger competitive set appear. Do you just want to kind of talk around that issue?

Linda K. Zecher

Well, I think the first thing is that we feel very comfortable with our market share numbers leveraged off of the AAP numbers. I mean we've been using that metric for a long time, it’s sort of a standard in the industry.

And so, we feel very good about where we are. We also know in the adoptions where we're playing that our products are standing up very well, and for those that have been announced I think that we're in very good shape.

I would agree, in California there are a lot of products on the market. I mean, they have not gone out to do an adoption for very long time. So obviously, in all product areas beyond just Common Core, they have a lot of needs that they are trying to address.

But I think, at the end of the day, we have a product in our Journeys, and our GO Math! and our Collections that stands up as far as being pedagogically sound and efficacy-based content. And we are really moving in the direction of an adaptive learning environment. We feel very good about our content and we expect to be competing very well.

Mark Braley - Deutsche Bank

Okay. Thank you.

Operator

Your next question comes from the line of Drew Crum from Stifel. Please proceed.

Drew Crum - Stifel

Okay. Thanks. Good morning, everyone.

Linda K. Zecher

Good morning, Drew.

Drew Crum - Stifel

Can you comment -- you've made some comments on the approvals in California with your programs. Could you comment on what you've seen today in the Texas and Florida adoptions?

Linda K. Zecher

Can't really give you details; because I mean that would sort of go to guidance. But I can tell you that we feel very good about our position. And we feel that we're very well-positioned in those adoptions and our products are doing very well.

Drew Crum - Stifel

Okay. And just one housekeeping question. Eric, are there any adjustments we need to make to the share count with this self-registration you've announced?

Eric L. Shuman

No.

Linda K. Zecher

Again, this was something that was mandated in our Shareholder Rights Agreement, so nothing really changes.

Drew Crum - Stifel

Got it. Okay. Thanks guys.

Linda K. Zecher

Thank you.

Operator

Your next question comes from Lance Vitanza from CRT Capital Group. Please proceed.

Linda K. Zecher

Hi Lance.

Lance Vitanza - CRT Capital Group

Hi. Thanks for taking the question. Eric, just nuts and bolts question for you, and then may be a bigger picture question for Linda. But you report EBITDA on a pre-plate basis, is that right? And I was just wondering if you could give me the plate CapEx numbers for the fourth quarter of '13 and fourth quarter of last year.

Eric L. Shuman

Yeah, the plate number -- the plate number for the full-year this year was $127 million, the plate number for 2012 was $115 million.

Lance Vitanza - CRT Capital Group

So I think that implies about $15 million in the fourth quarter this year versus $25 or so last fourth quarter, is that right?

Eric L. Shuman

Yeah.

Lance Vitanza - CRT Capital Group

Okay. And then, for Linda, just wondering where you see, where are we in the transition from print to digital? Are we second inning, third inning? I mean, I tend to think of it more as an evolution as opposed to a transition, but I guess what I'm trying to get at is, is there a point in time when you think we get, I don't know, let's just call it, most of the way there.

Linda K. Zecher

You know, you call it an evolution; I call it a dimmer switch. So I think we're on the same page with that. I think that one of the reasons that we changed the way that we are developing our content is so that we could do everything digital first and make print a distribution vehicle.

We find that every instance when we're out talking to our customers, they want to talk about our digital content, then they buy hybrid and they use primarily print. I would say, I mean -- and the good news is, I mean we're in a position that as they move to digital we can very rapidly make that switch. And sooner they move the better off we all are.

But I think that we're still at about a 30% to 40% transition. I think it's slower than I would like. I'm hoping as broadband gets more ubiquitous in the schools that it goes more quickly, but I still think there is trying to be an issue with teacher training and some of the ancillaries around it. It's more than just putting technology in the classroom. It's really learning to teach in a different way.

One of the reasons that we're so excited about our GO Math! Academy and the work that we're doing with Knewton is it really gives us the opportunity to use some adaptive learning platform. And I think that as people start seeing the impact of that and the effect it has on student achievement, I think that the demand to move is going to be quicker, and hopefully that will be sooner than later.

Lance Vitanza - CRT Capital Group

Thanks very much.

Linda K. Zecher

Thank you.

Operator

I would now like to turn the call back over to Linda Zecher for closing remarks.

Linda K. Zecher

Well, thank you, everyone. And we really appreciate all of you taking time to join us on the call today. If you do have any additional questions related to our result, please do not hesitate to contact Rima and our Investor Relations group.

So operator, that ends the call and thank you all very much.

Operator

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect, have a great day.

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