McGraw-Hill (MH) Q2 2026: Higher Ed Digital Revenue Jumps 18%, Extending Share Gains
McGraw-Hill’s Q2 showcased a decisive pivot toward digital and recurring revenue, as higher education outperformed and K-12 held steady despite a smaller market. Digital innovation, AI-powered solutions, and margin discipline combined to drive both market share and profitability, supporting a full-year guidance raise. The company’s expanding digital moat and visibility into future adoption cycles position it for multi-year growth tailwinds, especially with major K-12 opportunities on the horizon.
Summary
- Higher Ed Share Acceleration: Digital-driven market share gains powered outperformance and retention in higher education.
- K-12 Resilience Amid Cyclicality: Core curriculum share expanded despite a down market, with new products gaining traction.
- AI and Recurring Model Tailwind: Proprietary content, data, and AI innovation reinforce competitive moat and margin expansion.
Performance Analysis
McGraw-Hill’s Q2 results reflected the company’s strategic transition to a digital, recurring-revenue-centric model, with 63% of total revenue now recurring and digital revenue accounting for 53% of the mix. The standout was higher education, where revenue surged 14% and digital revenue jumped 18.4%, propelled by market share gains and the scaling of inclusive access programs, which now cover over half of segment sales and span nearly 2,000 campuses. The K-12 segment, while down 11.2% year-over-year due to a smaller adoption cycle, still delivered share gains in core subject areas and early momentum for supplemental offerings like Alex Adventure.
Profitability was robust, with gross margins up nearly 150 basis points to 79.2% and adjusted EBITDA margin rising to 43%. This was achieved through a favorable digital revenue mix, disciplined expense management, and operational leverage. AI-driven internal efficiencies, such as the Scribe content creation tool, yielded significant cost savings and faster time-to-market, directly supporting margin expansion. International and global professional segments remained stable, with selective digital growth offsetting regional headwinds.
- Higher Education Outperformance: Market share reached 30% (up 160 basis points YoY), with digital and inclusive access as primary growth levers.
- K-12 Share and Product Innovation: Despite a cyclical down year, share expanded 200 basis points in core, and new products set up for future growth.
- AI-Driven Operational Efficiency: AI tools reduced K-12 order processing times by 27% and cut content creation costs by 60% in key use cases.
The quarter’s results validate McGraw-Hill’s digital-first strategy, with recurring and digital revenue now the majority of the business, and position the company for stronger performance as larger K-12 adoption cycles return in FY27 and beyond.
Executive Commentary
"McGraw-Hill continues to shape education through innovation and AI-driven technology that personalizes learning experiences at scale, driving deeper engagement and better outcomes. Fiscal second quarter results exceeded expectations, showcasing strengths, resilience, and the scale of our diverse portfolio."
Simon Allen, Chairman, President, and Chief Executive Officer
"Our fiscal second quarter results demonstrate the strength, scale, and diversity of our business. We are delivering on our financial priorities which are disciplined execution, reinvestment to fuel growth, and continued gross debt reduction."
Bob Salmon, Executive Vice President and Chief Financial Officer
Strategic Positioning
1. Digital and Recurring Revenue Model
Subscription and digital revenue streams now anchor McGraw-Hill’s business model, with recurring revenue at 63% of total and digital at 53%. The company’s pivot away from one-time textbook sales toward digital platforms (such as Connect, inclusive access, and evergreen content) has improved revenue predictability and margin structure. This shift underpins both financial resilience and forward visibility, as reflected in the $1.9 billion remaining performance obligation (RPO).
2. Higher Education Share and Product Expansion
Market share gains in higher education are being driven by a combination of digital platform innovation, value-based pricing, and the expansion of inclusive access. The land-and-expand dynamic is powerful: new university logos onboarded annually typically scale up 15-20x in adoption over two years. New digital tools—AI Reader, Sharpen Advantage, and Alex Calculus—are further increasing retention, engagement, and total addressable market (TAM), with Alex Calculus alone targeting $100 million in incremental TAM.
3. K-12 Positioning for FY27 Upswing
Despite a low adoption year in K-12, McGraw-Hill expanded share in core subjects and is building momentum with supplemental offerings. Early wins in California math and bundled solutions set the stage for a $300 million TAM expansion in FY27, with further upside in ELA and math adoptions in major states. The company’s multi-year contracts and strong RPO in K-12 provide forward visibility, while new products like Alex Adventure and McGraw-Hill Plus are driving adoption and retention.
4. AI and Proprietary Moat
McGraw-Hill’s competitive advantage is rooted in a multi-layered moat: 137 years of proprietary content, a vast trove of student interaction data, and deep domain expertise in pedagogy and digital integration. The company’s AI strategy is focused on augmenting teacher effectiveness and student outcomes, not just automation. Tools like Scribe, AI Reader, and Teacher Assistant are improving both product efficacy and internal efficiency, supporting sustainable margin expansion.
5. Capital Allocation and Balance Sheet Discipline
Management continues to prioritize organic investment and debt reduction, with net leverage reduced to 3.3x and over $540 million in term loan prepayments year-to-date. The company remains opportunistic on tuck-in M&A but is not pursuing transformational deals, opting instead to strengthen its digital core and maintain financial flexibility.
Key Considerations
McGraw-Hill’s Q2 performance and commentary signal a business in transition, with a clear focus on digital, recurring revenue, and AI-powered innovation. Investors should weigh the following:
- Digital Mix Drives Margin: Higher digital and recurring revenue are structurally lifting gross and EBITDA margins, with further upside as AI scales internally.
- Higher Ed Momentum Is Durable: Market share gains are broad-based across disciplines and supported by both product innovation and value-based pricing.
- K-12 Cycle Poised for Growth: FY27 brings a $300 million TAM expansion, with early wins and bundled products positioning McGraw-Hill to capitalize.
- AI Moat vs. New Entrants: Proprietary content, data, and pedagogical expertise differentiate McGraw-Hill from GenAI-first competitors, reducing disintermediation risk.
- Balance Sheet Optionality: Continued debt reduction and strong cash flow support reinvestment and strategic flexibility.
Risks
Key risks include potential K-12 adoption cycle delays, competitive pressure from AI-native startups (especially in supplemental/intervention), and unpredictable state or local budget shifts. While management downplays federal funding risk, any broad-based education budget tightening could impact procurement cycles. The company’s margin expansion narrative is contingent on continued digital adoption and successful AI integration without escalating compute or data storage costs.
Forward Outlook
For Q3 and Q4, McGraw-Hill guided to:
- Revenue seasonality in line with historical averages, with Q2 as the peak quarter.
- Stock-based compensation of $1–2 million per quarter, and interest savings of ~$5 million in H2.
For full-year 2026, management raised guidance:
- Total revenue: $2.031–$2.061 billion
- Recurring revenue: $1.504–$1.524 billion
- Adjusted EBITDA: $702–$722 million
Management cited strong RPO, higher education share gains, and a favorable K-12 setup for FY27 as key drivers. Guidance reflects higher visibility and a narrowed range, with continued investment in digital and AI innovation.
- Back half margin will be lower due to seasonality, mirroring historical patterns.
- Cash tax liability will be below prior estimates, supporting additional debt paydown.
Takeaways
McGraw-Hill’s Q2 confirms the payoff from its digital and recurring revenue strategy, with higher education leading the way and K-12 set for a rebound as adoption cycles normalize. The company’s proprietary content, data, and AI execution reinforce its moat, while margin discipline and capital allocation provide resilience and optionality.
- Digital and Recurring Revenue Now Anchor the Model: The business is less cyclical and more predictable, with improved margin structure and cash flow visibility.
- Higher Ed and K-12 Both Gaining Share: Share expansion is broad-based, with new products and platforms deepening engagement and retention.
- AI Execution and Moat Are Key Watchpoints: Continued innovation and differentiation will be critical as GenAI-native competitors scale up.
Conclusion
McGraw-Hill’s Q2 results validate its digital-first, recurring revenue strategy, with higher education outperformance and margin expansion offsetting K-12 cyclicality. The company enters FY27 with strong share, a robust pipeline, and an expanding AI-driven moat, positioning it for multi-year growth and improved resilience.
Industry Read-Through
McGraw-Hill’s results signal that digital and recurring revenue models are now table stakes in educational publishing, with AI-powered tools and proprietary data becoming key competitive differentiators. The company’s success in higher education suggests that scale, content breadth, and platform integration matter more than ever as enrollment and procurement cycles fluctuate. For peers, the bar for digital engagement, product efficacy, and margin discipline continues to rise, while the K-12 adoption rebound in FY27 will be a critical battleground for share and innovation. Investors should watch for further consolidation and increased investment in AI and data infrastructure across the sector.