Cengage Learning Holdings II, Inc.

Greetings. Welcome to the Cengage Group's fourth quarter and full year 2025 year-end conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Richard Weiss. Sir, you may begin.

Good morning, and welcome to Cengage Group's fiscal 2025 fourth quarter and full year 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 forward slash investors. The following discussion contains forward-looking statements within the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements can be identified by words such as believe, expect, may, will, estimate, likely, and 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 Group's current expectations and assumptions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict, and many of which are outside of our control. Many factors could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statement. You should consider such factors, many of which are subject to the risks and uncertainties discussed in the slide presentation, which accompanies this call and the risk factors section of our fiscal 2024 annual report for the year ended March 31st, 2024, as may be updated by our quarterly reports for the fiscal year 2025. The company's fiscal 2025 annual report will be posted shortly. Any forward-looking statement made in this presentation is based on currently available information. The company disclaims any obligation to publicly update or revise any forward-looking statements 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 of each to its most directly comparable GAAP Financial measures are provided 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 fourth quarter and full year details before we open the call for questions.

Michael? Thank you, Richard. Good morning, everyone, and thank you all for joining us today. I am pleased to report that Cengage Group delivered a fourth consecutive year of growth with adjusted cash revenue up 1% as reported and up 2% on an underlying basis. Adjusted cash EBITDA is up 15%, resulting in a strong EBITDA margin of 34%. These results reflect the continued execution of our strategy, the strength of our diversified portfolio, and our commitment to operational excellence. Let me walk you through the performance of our business units. Our Cengage Academic business grew adjusted cash revenue by 2% versus the prior year. Within Cengage Academic, the U.S. higher ed business continued to accelerate revenue growth with its adjusted cash revenue up 7% year over year. A key driver of this growth is the continued expansion of our institutional offerings. Institutional revenues now account for 51% of our fiscal year 25 higher ed revenues, underscoring the strength of our Cengage Unlimited institutional and inclusive access models. The growth in institutional sales is improving the financial profile of our higher ed business. We are seeing higher sell-through rate, improved retention, better unit economics, and greater predictability. Our Cengage work business continues to be a standout performer, with adjusted cash revenue up 14%. This growth is fueled by EPS2Go, which delivered its 11th consecutive quarter of high double-digit growth, ending the year with a 23% increase in adjusted cash revenue year over year. we are also seeing rapid margin expansion in this segment, positioning us well for continued success. Adjusted cash revenue for Cengage Select were down 6% versus the prior year, largely due to the expiration of a large government contract in the Middle East. Excluding this contract impact, Cengage Select revenues were down 2%. Importantly, We've seen a significant shift to digital by ELT customers where ELT digital's net sales rose from 37% in fiscal 24 to 64% in fiscal 25. This transition is creating a higher sell-through opportunity, stronger retention, and greater stickiness with our customers. This spring, we made great slides in the application of generative AI, which we see as a significant opportunity to drive future revenue growth and margin expansion. In April, we announced the expanded availability of our GenAI-powered Student Assistant. This fall, over 1 million students will have access to this tool embedded within our MindTap platform. Student Assistant supports students by guiding them through the learning process with tailored, just-in-time feedback, helping them understand concepts and apply their knowledge, rather than simply providing answers. We also introduced a new AI-powered faculty insight dashboard, launching this fall. Built on anonymized, real-time interactions from student assistants, this dashboard gives instructors class-level, actionable insights to support students, track learning patterns, and enhance engagement. It helps faculty look beyond grades to understand how students study, where they struggle, and what support they need, enabling more personalized and effective instruction. This is the beginning of our significant push to give faculty the AI tools they need to augment instruction and improve learner outcomes. In our Gale business, we're launching an AI-powered Lexile Leveler, This tool allows teachers to adjust reading levels of Gale-authored content on demand. In user testing, 94% rated the output as very good or good, and 100% said they would use it in their classrooms. And we are proud to see our school business featured in a recent NPR story, highlighting how DeKalb County, Alabama dramatically improved student math performance using Big Ideas Learning, a Cengage partner. Alabama is now the only state in the Union where fourth-grade math scores are higher than they were pre-pandemic, a testament to the impact of our learning materials. As part of our growth strategy, we are always looking for strategic investments that expand our offerings in key markets. VisibleBody, which we acquired during the second half of fiscal 2025, is on course for a successful integration in our existing portfolio. With VisibleBody, we bring augmented and mixed reality experiences to our global higher education and K-12 science customers. Customer acceptance has been extremely positive. With the new U.S. Administration and Congress, our dedicated policy task force has been closely monitoring the various education-related executive orders and policies introduced in the past five months for potential impacts to our businesses. Importantly, the inclusion of workforce power in the recent budget reconciliation bill could create new opportunity for both our work and higher ed business. We will continue to monitor developments closely and we believe that we are well positioned to address the impact on our business and take advantage of emerging opportunities. Looking ahead to fiscal year 26, our focus remains on delivering for our customers. maintaining cost discipline, and driving operational efficiency to deliver another year of revenue and EBITDA growth. Thank you for your continued support. I will now hand it over to our CFO, Dean Telsley, who will walk us through the financials in more detail.

Dean? Thank you, Michael, and good morning. 2025 was another strong year for Cengage. We achieved our fourth consecutive year of revenue growth, improved profitability, and continued to strengthen our financial foundation. These results have expanded our ability to invest in the business and grow long-term equity value. Full-year centage group cash revenues came in at $1.54 billion, representing underlying growth of 2%. Adjusted cash EBITDA came in at $530 million, This represents growth of $71 million, or 15% year-on-year, and a 437 basis point improvement in margin to 34%, in line with previous guidance. Sales of digital products across our higher ed and school businesses, as well as sales of our workforce skills courses, continue to be the main driver of the revenue growth for the company. Digital net sales were up 6% year-on-year and now represent 79% of total sales. EBITDA growth significantly outpaced revenue growth with accelerated margin expansion due to the flow-through of cost savings related to implementing a new operating model. In fiscal 25, we delivered over $60 million in savings before taking account of new investments All planned cost saving initiatives are now fully in place and we remain on track to reach over $100 million in total savings by the end of fiscal 2016. With continued strong cost discipline and targeted investments, we are well positioned to continue revenue and margin growth through the next fiscal year. So now turning to our business segment, Cengage Academics, four-year cash revenue ended at $939 million, up 2% year-on-year. U.S. higher ed continued to be the engine of growth, up 7% year-on-year, driven by sustained institutional and digital sales growth. Institutional revenues were up 22% year-on-year, reaching $333 million, and now represent 51% of total U.S. higher ed revenues. US higher ed digital-only net sales were up 8% year on year, following 6% growth last year, confirming the success of our digital strategy to drive sustained growth in standalone digital products. The transition from print to digital is now substantially complete, strengthening the product profile of the US higher ed, increasing profitability, customer retention, and predictability for this key segment. In addition to the digital growth, two consecutive years of student enrollment growth provided a further welcome boost. Turning to international higher ed and secondary products, cash revenues were down a combined 8.5% year on year. International higher ed was impacted by a decline in Canadian student enrollment due to government policy. coupled with softness in our EMEA and Asia markets for the first three quarters of the year. For EMEA and Asia, Q4 this year material rebound, growing 10% year-on-year versus mid-single-digit decline for the first three quarters. We continue to transition its national revenues away from print to digital, repeating our proven U.S. strategy. For the left-hand markets, we successfully repositioned our business from a direct go-to-market model to third-party partners, helping to improve profitability and reduce the need for future capital investment. Secondary cash revenue decline reflected a weak adoption year in high school and middle school programs, softer off-cycle residual sales in Q4 due to macro challenges, and a sharper-than-expected decline in our legacy K-5 English Language Arts program, which as previously stated, we have been strategically exiting from this product. We continue to see good growth in career and technical education, along with advanced placement programs, all cornerstones of our education for employment strategy. We also see high double-digit growth and big ideas math revenues, where we gained over 40% share in the Oklahoma adoption of our new program, Math and You. We continue to make key investments in this area, placing us in a very strong position as we look towards future large estate adoptions in California and Florida. Moving to C&K's work, four-year cash revenues were $143 million, up 14% year-on-year. Work continues to be an area of growth and focus for the company, as the demand for advanced career training courses continues to grow strongly. Ed2Grow revenues were up over 20% again, representing the fifth consecutive year of double-digit growth, resulting in the business more than doubling in size over the past four years. Moderating this growth, InfoSec Q4 revenues were negatively impacted by delays in key software renewals and by the federal government imposing restrictions to spend limits on government-issued procurement cards, which resulted in reduced boot camp sales. The final segment, Engage Select reported cash revenues at $431 million were down 6% year-on-year. The reported year-on-year change includes the one-time impact due to the expiration of a large government contract in the Middle East for our ELT business. Excluding this, The underlying growth rate for the select segment would be a decline of less than 2% due to market uncertainty for our research business. The underlying growth in ELT, Milady and Australian K-12 businesses remained robust at a combined 8% growth year-on-year. Research Q4 performance was down 20% year-on-year, with two large China renewals being delayed as a result of recent trade tension, and lower activity at leading U.S. research universities if they assess the impact of federal announcement to their research funding. Turning to our cash performance, our business is highly cash generative with full-year unlevered free cash flow or operating cash flow reaching $328 million, up from $317 million in the prior period. This operating cash performance was lower than the previous guidance, reflecting three main factors. First, it was a decision to bring forward royalty and other select April 1 contractor payments to March due to the company transitioning to its new accounting ERP system on April 1. We wanted to avoid any risk of non-payment for these critical contracts. Second, several large sales channel partners sent payments on April 1 versus March as expected. Both these occurrences reversed in 2026 and will generate strong Q1 cash results. Finally, there was an increase in long-term deferred revenue due to the strong growth in our institutional and air-to-go businesses. The combination of these three factors resulted in a drag on change in working capital. Full year levitary cash flow was $49 million compared to $46 million in the prior period. Non-operating cash flow were impacted by the accretive acquisition of visible bodies, successful settlement of outstanding legal cases, and moderately higher restructuring costs associated with run rate expense takeout. This was offset by lower net interest payments of $78 million, We've taken the lower interest rate and negotiated last November and helped by our interest rate swaps, hedging $550 million of the term loan at a fixed rate of 3.23%. To remind everyone, a revised agreement lowered margins by 50 basis points to 350 basis points over SOFRA. And we expect this to fall another 25 basis points by Q3 this year as we continue to lower our net leverage. We finished the 25th fiscal year with a net leverage margin of 2.6x compared to 3x for the prior year. And since July 24, ThinkAge has paid three quarterly cash dividends on our preferred equity, reflecting the strength of our liquidity position. At the end of March, cash balances totaled $256 million with total liquidity of around $0.5 billion. But to finish, I would like to reiterate that 2025 represented a strong year for execution and operational transformation, leaving the company a strong operational position to maintain sustainable revenue and EBITDA growth and the financial flexibility to invest in organic growth and targeted M&A. I will now pass back to the operator for questions.

Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Your first question for today is from Nick Dempsey with Barclays.

Yeah, good morning, guys. Just a couple from me. So you've seen 14% constant currency revenue growth in the quarter to end March in U.S. higher ed. Looking at Pearson in the same period, they grew 6%. Do you think that you have gained share versus Pearson or versus others in terms of adoptions? Or is the difference perhaps more to do with mix, higher proportion of institutional revenues, for example, in your mix of revenues? And the second question, just on your comments in research in relation to U.S. universities, does the weakness you've seen in the quarter relate to adoption? and ask for lower spending.

Yeah, Nick, it's Michael. Thanks for the questions, and let me take them in reverse order. With regard to the library spend, we're seeing exactly what you're describing, meaning the uncertainty in the environment causes people to not make decisions and therefore not write new orders. What we haven't seen is people breaking existing orders, so That is not a phenomenon that we've observed in the library market. And to your question on higher ed, you know, you've been following us in the industry for a long time, and you know how difficult it is to really assess truly market share gains. All the data that we have that we track with our internal systems would indicate that we have had modest share gains. But as I said, the database of those share gains is not always reliable, and it's better to look at it over a longer period of time. And over that longer period of time, looking back over the last three years or so, we've seen consistent share gains for our products.

Thank you.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.