Steve Koenig

Steve Koenig asked about how Sharpen Advantage expands McGraw Hill's Total Addressable Market (TAM) by offering institution-wide solutions. He also asked about the competitive moat derived from McGraw Hill's technology, go-to-market strategy, and content, particularly in the context of AI.

Answer

Simon Allen, Chair of the Board of Directors, explained that Sharpen Advantage's institutional focus, allowing educators to integrate their own content and expand usage across departments, significantly broadens its market. Philip Moyer, President and CEO, highlighted McGraw Hill's deep domain expertise, localized education requirements, and ability to build security, trust, and personalization with AI as key competitive advantages.

Steve Koenig asked about how Sharpen Advantage expands McGraw Hill's Total Addressable Market (TAM) by offering institution-wide solutions. He also sought insights from President and CEO, Philip Moyer, on the competitive moat derived from technology, go-to-market strategies, content, and AI.

Answer

Chair of the Board of Directors, Simon Allen, explained that Sharpen Advantage, initially focused on student learning, now offers broader institutional coverage, allowing educators to include their own content and expanding its use across entire networks. President and CEO, Philip Moyer, highlighted McGraw Hill's AI moat, emphasizing understanding local education requirements, age-appropriate learning pathways, security, personalization, and the ability to enter new curriculum markets.

Steve Koenig inquired about McGraw Hill's second-half outlook, asking how much of the full-year guidance raise was attributable to Q2 performance versus changes in the outlook or assumptions for the back half of the year. He also asked for general color on the company's capital allocation strategy moving forward.

Answer

Bob Sallmann, EVP and CFO, explained that Q2 is the most significant quarter, providing visibility into enrollments, share gains, and K-12 RPO. He noted that K-12 performance was in line with expectations, while higher education performed slightly better due to continued share gains and slightly higher enrollment. The full-year guidance was narrowed due to greater visibility post-Q2. For capital allocation, Bob Sallmann stated that organic investments are the priority due to the greatest ROI. The company remains committed to deleveraging to a target of 2-2.5 times, as demonstrated by recent debt prepayments. He also mentioned a full funnel of smaller, strategic tuck-in M&A opportunities that expand the addressable market, with nothing transformational currently planned.

Steve Koenig followed up by asking for more general color on McGraw Hill's capital allocation strategy moving forward.

Answer

Bob Sallmann, EVP and CFO, outlined capital allocation priorities: first, organic investments for the highest ROI; second, deleveraging to a target of 2-2.5 times net leverage, demonstrated by a $150 million term loan prepayment in October; and third, strategic tuck-in M&A, with a full funnel of smaller, addressable market expansion opportunities, but nothing transformational currently.

Steve Koenig asked Bill Staples about the most immediate productivity impact areas of the Duo Agent Platform across the software development lifecycle and inquired whether the observed SMB softness is primarily a macro-economic issue or related to execution.

Answer

Bill Staples, CEO, GitLab, explained that Duo Agent Platform's impact is broad, enabling AI orchestration for tasks like planning, bug analysis, code review, security analysis, and pipeline troubleshooting, automating fixes across the lifecycle. James Shen, Interim CFO, GitLab, attributed SMB softness to segment-specific weakness, price and spend sensitivity, and license usage scrutiny, noting it's a macro trend impacting a small (8% of ARR) segment.

Steve Koenig asked about the most immediate impact areas for productivity improvement across the software development lifecycle once the Duo Agent Platform is generally available and adopted. He also requested more details on the SMB softness, specifically whether it's a macro-economic issue or related to GitLab's execution.

Answer

Bill Staples, CEO, GitLab, explained that Duo Agent Platform, being a platform approach, allows customers to orchestrate AI actions for any engineering problem, from planning and documentation to bug analysis, code authoring/review, security analysis, and troubleshooting failing pipelines. James Shen, Interim CFO, GitLab, attributed SMB softness to segment-specific weakness observed for several quarters, noting price and overall spend sensitivity, and increased scrutiny around license usage. He confirmed it's a macro issue, not execution, and SMB is a small part (8% of ARR) of their business.

Steve Koenig from Macquarie Capital followed up on the back-end weighted linearity, asking if it was macro or execution-related, what metrics are used to track the macro environment, and if any go-to-market adjustments are planned.

Answer

CFO Brian Robbins indicated the end-of-quarter dynamics were normal and not indicative of a specific execution issue. He noted that while they track linearity and pipeline metrics closely, the platform's strong ROI continues to resonate with customers. He stated that while the company always focuses on improving execution, no specific tactical adjustments were being made as a result of Q1's linearity.