Why Shares of Houghton Mifflin Harcourt Surged Today

By Timothy Green Markets Fool.com

What happened

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Shares of education services and content provider Houghton Mifflin Harcourt (NASDAQ: HMHC) jumped on Thursday after the company reported its first-quarter results. Revenue and earnings came in above analyst expectations, prompting investors to push the stock 9.4% higher as of 1:21 p.m. EDT.

So what

HMH reported first-quarter revenue of $222 million, up 8% year over year and well above the $196.9 million analysts were expecting. Billings were up 10% year over year to $184 million. The sales increase was driven by an increase in domestic education net sales and Heinemann professional publishing net sales, as well as other items.

Image source: Houghton Mifflin Harcourt.

HMH posted a net loss of $121 million, down 27% year over year. EPS was a loss of $0.98, $0.10 higher than analysts were expecting. Higher revenue and decreases in both cost of sales and operating expenses boosted the bottom line.

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HMH CEO Jack Lynch emphasized that 2017 would be a year of change:

We began 2017 with a solid first quarter. This is a transitional time for HMH as we make the necessary operational changes to streamline the Company. Importantly, we remain focused on strengthening our core business and improving our industry-leading educational offerings.

Now what

HMH is engaged in a review and evaluation of its business, with plans to improve its operational efficiency and right-size its cost structure. The company expects to achieve between $70 million and $80 million in annualized cost savings by the end of 2018, although this will come with charges totaling $41 million to $45 million.

HMH CFO Joe Abbott painted a rosy long-term picture despite the company's current challenges:

While the first quarter has historically been a small contributor to our annual results, with both net sales and billings up year-over-year, we are encouraged by our early performance this year. After a thorough review of our operations, our main priorities are simplifying our business, reducing costs and focusing our investments in areas of our business with the highest potential for long-term growth. We are confident that these initiatives will make HMH more efficient, more competitive and better positioned to generate long-term value.

Investors bought into the turnaround story on Thursday, but the company has a long road ahead of it.

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Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.