Cengage Learning Holdings II, Inc.

Good morning, and welcome to Cengage's Fiscal 2026 Third Quarter Investor Update. Joining me on the call are Michael Hansen, Chief Executive Officer; and Dean Tilsley, Chief Financial Officer.

A copy of the slide presentation for today's call has been posted to the company's website at cengagegroup.com/investors. The following discussion and the earnings materials contains forward-looking statements within the safe harbor provisions of the U.S.

Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as believe, expect, intend, may, could, should, will, estimate, likely or similar words and are neither historical facts nor assurances of future performance and relate to future results and events, and they are based on Cengage's current expectations and assumptions.

Forward-looking statements relate to the future and are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Forward-looking statements are not guarantees of future performance, and you should not rely on any of these forward-looking statements.

Many factors could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements. Any forward-looking statement made during this discussion or any earnings materials is based on currently available information and speaks only as of the date of this discussion and the date of the earnings materials.

The company disclaims any obligation to publicly update or revise any forward-looking statements, whether written or oral, except as required by law. On today's call and in our slide presentation, we will refer to certain non-GAAP financial measures.

Definitions and the rationale for using these measures and reconciliations to its most directly comparable GAAP financial measure are provided in the legal disclaimer and in the appendix to the slide presentation. I'll now turn the call over to Michael for an update on the business, followed by Dean, who will take you through the third quarter and year-to-date details before we open the call for questions.

Michael?

Thank you, Richard, and good morning, everyone. Our third quarter results reflect strong momentum across our major businesses and continued progress executing our strategy.

Q3 adjusted cash revenue increased 10% with meaningful growth across nearly all segments. U.S.

Higher Education outperformed expectations, driven by robust digital and institutional sales, reinforcing the strength of our platform strategy and customer relationships. Our Work segment also delivered solid growth, led by the advanced career certificate programs and continued momentum in career and technical education.

These gains were partially offset by federal regulatory headwinds and immigration-related impacts on our cybersecurity and Beauty and Wellness business. During the quarter, we announced new partnerships and products that strengthen the connection between education and employment and help learners build career-ready skills.

We deepened our AI partnership with Amazon Web Services to deliver scalable, trusted AI solutions that personalize instruction, save educators time and better prepare learners for the workforce. By combining AWS' AI capabilities with our expertise in learning design, we are embedding AI readiness across programs in health care, business and many other fields.

We also partnered with LinkedIn Learning to expand access to 20 expert-led courses in AI, machine learning, security and threat intelligence, helping address the AI skilled confidence gap among graduates and working professionals. Our AI strategy is deliberate and course specific.

Rather than building a stand-alone model, we leverage leading LLMs and embed them directly into our platforms to deliver targeted value within the flow of instruction. This ensures educators receive support when and how they need it and students learn in alignment with instructors' intent.

Engagement with our AI tools remain strong. We are expanding availability of student assistant and seeing increased adoption with measurable improvements in learning outcomes among active users.

Following a successful beta, we launched Instructor Assistant in January and will broaden access over the coming year. Our AI road map continues to focus on strengthening career alignment, evolving assessment for GenAI world, improving platform usability and supporting diverse learning preferences.

In higher education, we launched Introduction to Artificial Intelligence: A Business Perspective. And we are developing a GenAI guide to the humanities, added AI modules across introductory computing and introduced an AI primer throughout our business school curriculum.

Well beyond AI, we continue to enhance platform usability and guided experiences. In our school segment, we launched Explore, our unified K-12 digital learning platform designed to engage every student and personalize instruction.

Explore is a key step in transforming our school business into a predominantly digital model. Consistent with our operating model, we are unifying all businesses under a single Cengage brand.

This simplifies our go-to-market approach, strengthens institutional partnerships and creates additional cross and upselling opportunities. In closing, our third quarter results demonstrate strong operating performance and continued progress against our strategy to connect education to employment.

I want to thank our customers for their partnership and my colleagues for their dedication to serving learners around the world. I will now turn the call over to our CFO, Dean Tilsley, for more details on our third quarter financial performance.

Dean?

Thank you, Michael. As you have heard, the company is making impressive progress in terms of innovation, speed of execution and financial performance.

I'm now going to walk through the specifics of our financial results, including highlights by segment and our continued improvement in leverage. Q3 was a very strong quarter for the company with adjusted cash revenues up $22 million or 10% year-on-year and adjusted cash EBITDA up $21 million to positive $18 million for the quarter versus negative $3 million reported in the same period last year.

These results were led by the continued strong performance within our key Higher Ed and Work segments, which account for almost 70% of our revenues. They grew 14% and 6%, respectively, in Q3, supported by return to growth for our Gale and international businesses.

On the cost side, the management team remains focused on implementing our new operating model to ensure we achieve our margin goals, improve the profitability of the business while better allocating capital to invest in focused areas of growth such as AI, ed2Go and digital-first strategies. Operating expenses were down year-on-year for the quarter and flat on a TTM basis, net of key investments, representing an improvement in our operating leverage and ensuring enhanced flow-through of revenue to EBITDA.

Moving to our consolidated financials. TTM adjusted cash revenues came in at $1.53 billion, up $41 million or 3% year-on-year as reported, driven by growth in the key U.S.

Higher Ed and ed2Go businesses, which were up 10% and 26% year-on-year, respectively. TTM adjusted cash EBITDA came in at $532 million, up $29 million or 6% year-on-year, improving from the 4% year-on-year growth reported in Q2 as cost discipline adds to revenue growth.

This represents a 71% flow-through of revenue growth into EBITDA. Year-to-date results, both adjusted cash revenues and EBITDA report significant improvement from the first half of the year due to continued growth in Higher Ed and Work plus stabilization of our international and Gale businesses.

Year-to-date adjusted cash revenues reached $1.1 billion, a slight increase year-on-year with Q3 performance helping lift year-to-date performance from the 2% decline reported for the first half of the year. Year-to-date adjusted cash EBITDA at $362 million represents a small decline of 2% year-on-year as reported, but flat when normalizing for a single nonrecurring $6 million ELL contract.

This is a significant improvement from the 8% year-to-date decline reported for the first half of the year as we continue our upward trajectory. Moving to the quarter, where I'll also provide some segment highlights.

Q3 adjusted cash revenues came in at $245 million, up $22 million or 10% year-on-year. Q3 adjusted cash EBITDA grew $21 million year-on-year to positive $18 million for the quarter.

This compares to a reported negative $3 million as reported for the previous year. reflecting the continued impact of our new operating model.

By segment, Higher Education, which represents nearly 50% of our business, leads in our digital-first strategy and is leveraging strong tailwinds within its key U.S. market.

Q3 Higher Ed adjusted cash revenues grew 15% year-on-year and 3% year-to-date, primarily driven by the U.S. market, but helped with returns to growth for Gale and international markets.

Q3 U.S. Higher Ed, the largest business within the segment, grew 20% year-on-year for the quarter, driven by 9% growth in digital sales and strong institutional sales.

Institutional sales at circa $250 million year-to-date grew 23% year-on-year and now represent 56% of U.S. Higher Ed sales.

As I said, Gale returned to growth with both renewals and demand for content beginning to normalize as we get past the uncertainty in federal funding for research universities that impacted the first half of the year. Adjusted cash revenues were up 8% year-on-year for Q3, following a 7% decline in Q2 and a 15% decline reported in Q1.

International adjusted cash revenues, including Canada, grew 5% year-on-year in Q3 as this business stabilizes, helped by go-to-market improvements implemented for key markets. Turning now to the Work segment.

Work is a key investment focus for the company in terms of both revenue and EBITDA growth due to our strong market position within this very large and growing TAM for work-based skills certification. Q3 adjusted cash revenues were up 6% year-on-year and 4% year-to-date, powered by ed2Go.

Ed2go delivered 24% growth for the quarter and 26% growth year-to-date. Ed2go growth was driven by pricing initiatives, investment to improve pipeline conversion and triple-digit growth in our emerging employer sales channel.

We continue to drive investment in this business with plans to expand the number of courses, institutions, geographies and languages that we operate in as we continue to build growth and scale for this key business. The other large revenue line within work, Career and Technical Education, or CTE, grew 14% year-on-year and as a company focused for continued future growth and new investment.

The smaller InfoSec and Milady businesses remain challenged due to federal headwinds impacting enrollment. In line with expectations, they are down year-on-year with the near-term outlook still looking challenged.

We are, therefore, managing costs within these businesses to reflect this expectation. Moving to our K-12 focused businesses.

Just to remind everyone, 2026 is a low adoption year for our two K-12 focus segments, school and English language learning or ELL, with no large state adoptions in '26 versus the $50 million of large state adoption signed in 2025. School improved Q3 performance with adjusted cash revenues up 17% year-on-year for the quarter, really driven by the positive early Gale renewals and stabilization of this business following market headwinds earlier in the year, plus retaining strong win rates within open territories.

I do want to note that Q3 is a quiet sales period for K-12. So whilst it's great to see this improved momentum, the key focus remains on the large adoption years in 2027 and 2028 with updated platforms, content and go-to-market capabilities.

ELL, our smaller segment, reported Q3 adjusted cash revenues up 1% year-on-year. Year-to-date revenue comparisons are impacted by a single nonrepeating $6 million Caribbean deal.

Normalized for this, ELL adjusted cash revenues would be down 5% year-on-year, reflecting the low adoption year in the U.S. Turning now to cash flows.

Improvement in working capital reflects strong collections in Q3 as we get past the invoicing issues experienced in the first half of the year due to the new ERP system that was rolled out last April, plus growth in institutional sales and lower reimbursements to Big Ideas Learning as it relates to the new partnership deal. The improvements in working capital flows, coupled with lower interest payments, flow through to improved leverage free cash flow by $10 million versus the same period last year.

Note, this past January, we successfully repriced our term loan, lowering our borrowing cost by 50 basis points, resulting in an incremental $8 million of annual interest savings going forward, bringing total savings from debt repricing to over $20 million since March 2024. Net cash taxes increase reflects improved profitability.

And as a reminder, an additional preferred equity dividend payment was made in 2026. Finally, our liquidity position remains strong with net leverage down 0.2x to 2.5x.

We remain on a continued path to lower leverage as we move forward. We expect this position to continue to strengthen as cash collections ramp up in Q4 and restructuring costs decline.

Cumulative deleveraging over the past 24 months reinforces Cengage's prudent and proactive management of liquidity and provides capacity to navigate macro challenges while executing growth and transformation strategies. In summary, the Q3 strong performance without normalization reflects the culmination of management's efforts to build a sustainable and scalable cost structure that delivers both top line growth and enhanced profitability.

Our key Higher Education and Work segments continued to deliver strong growth in the third quarter and on a TTM basis, supported by improvements in the Gale and international businesses. School and English Language Learning, our K-12 focus segments, year-on-year performance reflects the known low 2026 adoption year, but we continue to make the key investments to position us for the large adoption years in '27 and '28.

We continue to implement our new operating model across the company to deliver improved efficiencies, productivity and profitability to free up capacity for focused investments while still improving margin. We will continue to improve our free cash flow and strong financial trajectory to generate value for our shareholders.

We are now happy to take your questions.

So just quickly, in terms of the competitive dynamic, I can see that both McGraw-Hill and yourselves have performed very well in this quarter in U.S. higher education.

I can see that inclusive access is a big part of that for both of you in terms of your commentary. To what extent do you think that you're gaining share of adoptions and that that's also helping your strong growth?

Yes, Nick, it's Michael. Good to hear your voice.

You know, I mean, you followed this sector quite a while. You know that the source of data for real adoption share gain, the official source is NPI data.

Based on the NPI data, we are seeing that we are actually gaining share. It's not clear from whom from that data.

Obviously, that is not being disclosed. And based on our internal CRM system, we would also -- we are also able to confirm that we're gaining share.

So yes, there is share gains, adoption share gains as part of that as well.

I'm glad to see the good billings results across the business. My question was also on the higher education side.

It's obviously pretty atypical to see double-digit billings growth even if it was a single quarter year-over-year that we're talking about here. But can you just elaborate like how you guys actually achieve that?

It sounds like there is some nominal share gain from your response to the last question. We know enrollments are probably up, call it, low single digits.

But how do we get from there to like a double-digit increase in billings? Is there a timing involved in that, pricing?

Or what are the other steps upwards, please?

Yes. John, so I think, first of all, I think your -- the underlying assumption in your question that we should not assume double-digit growth in this sector every single quarter, I think, is correct.

But what we are seeing is very robust growth that goes way beyond enrollment. And the simple reason is that we have now fully turned the corner away from print into digital.

And what we are seeing with digital units is that they're growing because the market as a whole is not as digital as we are from a revenue perspective. So our revenues are approaching almost 90% digital and so does our large competitors.

But if you think about number of seats, number of courses being taught in the United States, roughly about 90 million, only about 50% of them are really taught with digital platforms. So we still have substantial growth opportunity from that, that comes from courses that are currently being taught with print and that we're gaining share with digital platforms.

And we expect that also to continue, particularly as we are leveraging AI to make the platforms even more powerful and more personalized.

And Michael, if I could just add to that, there's no timing issues. There's no balance sheet adjustments that is a real year-on-year growth.

And obviously, with institutional sales, to support Michael's point, it does improve our sell-through rate or the amount of ability to monetize students who are using our content is significantly enhanced by the growth in institutional sales and digital sales versus the traditional print textbook sales. And these trends will continue for the foreseeable future.

That's helpful. And it seems like the, I guess, the acceleration, which is the part that I'm still a little bit confused on was mostly driven by a continued transition away from print to digital, which you guys are obviously ahead of the curve on.

But that's not really new. Like that transition has been happening for years now.

And I think you guys have always been a step ahead of the competitor. So what was it about this quarter that kind of stood out as an acceleration?

Well, John, I think it's basically simple math in the sense that our print sales used to be a much higher portion of our total sales. They are now de minimis.

And they are declining, still continue to decline, but they're overpowered by the digital sales, which are growing robustly, as Dean was pointing out. So part of it is just the simple math of print being so de minimis at this point.

Dean, any other observations that would be helpful for John.

Yes. Yes.

So John, like print, look, I'm 12 months in here, but print just several years ago was $120 million annualized just in U.S. alone.

It's down now to something just in the $40 million range. So print has been declining by about deliberately and intentionally been declining by about 28%, 29% year-on-year.

Well, that's now 29% of a much, much smaller number. So you're getting -- that's been a drag on the growth historically over the last few years, including the first half of this year.

That's now sort of significantly gone away. And again, that drag going forward will go away as print continues closer to trend towards 0.

I think also Q3 is not the biggest quarter for U.S. Higher Ed.

So to Michael's point, are we going to do this growth rate every quarter? Probably, probably not.

Q4 is the second highest sales season. So whilst we're seeing -- we've got very good expectations for Q4.

A little bit of also Q3 is a relatively quiet period for Higher Ed. So again, you get a function of the math around that.

Yes, that's certainly helpful. Those are both very good points.

I appreciate you clarifying. So I think if I were to take something away, the very, the biggest driver of improvement here is there's no longer a significant drag from print, which has been declining in the past.

You got it. Absolutely.

Absolutely. And I'll say some of your competitive question, McGraw-Hill historically have been a little more aggressive on pricing than we have.

But as we continue to roll out our AI functionality tools, digitization, clearly, we're always -- we are assessing what is the appropriate pricing strategy for ourselves.

Can you please share some color what you see on the ground in K-12 biggest markets like California and Texas? I appreciate it's early days in the cycle, but you have some early wins or competitive dynamics so far that you can share?

Yes. It's -- I would say it's still early, as you said.

The signs that we're seeing are encouraging, but we would need to continue to see this encouraging signs for the next few weeks and months, but early indications are positive.