Q2 2026 McGraw Hill Inc Earnings Call

Good morning, and welcome to the maghra hill Inc. Fiscal second quarter 20126 earnings. Conference call, for the quarter ended, September 30th, 2025 all participants are in a listen-only mode. As a reminder, today's call is being recorded and a written transcript will be made available in the events and presentations section of the company's investor relations website. Hey, webcast replay of today's call will also be made available on the company's investor relations. Website. Following the prepared remarks, we will open the call for questions.

I would now like to turn the call over to your host Daniel Colin.

Treasurer and Senior Vice President of Investor Relations. Please go ahead, Danielle.

Good morning, everyone. Welcome to McGrath Hills fiscal second quarter 2026 results.

Chairman president and chief executive officer and Bob salmon. Executive Vice President and Chief Financial Officer.

During this call, we will be making forward-looking statements about the company.

These statements are based on our current expectations and the current economic environment.

Forward-looking statements estimates and projections are inherently subject, to significant economic competitive, Regulatory, and other uncertainties. And contingencies, many of which are beyond the control of management.

These forward-looking statements are also subject to the cautionary statement that is included in our earnings release and the investor presentation. These are further detailed in our 10q and other filings with the FCC.

Important assumptions and factors that could cause actual results to differ materially from those, in the forward-looking statements are specified in our earnings release issued today as well as in our SEC filings.

We will also refer to certain non-gaap measures today.

We believe that these measures provide useful supplemental data that will not a substitute for gaap measures allow for greater transparency, in the review of our financial and operational performance.

In the earnings press release and the appendix of the investor presentation, as well as supplemental files on the investor relations website. You can find a definition of these non-gaap measures and reconciliations to the most directly comparable, gaap measures.

For those who listen to the recording of This call. We remind you that the remarks made herein are as of today. November 12th, 2025 and have not been subsequently updated.

With that, I'll turn the call over to our chairman president and chief executive officer Simon Allen.

Thank you, Danielle and good morning everyone. Mcroy 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 which serves the learning life cycle during the pivotal back to school season.

This strength was underscored by fiscal Q2 Revenue which reached 669 million. Our second best performance for this quarter in a decade despite a 2.8% year-over-year, decline due to the anticipated smaller K12 Market.

Reoccurring Revenue grew 6.5% year-over-year to 422 million or 63% of total revenue underscoring, the strength of our subscription-based model.

Digital Revenue increased 7.6% year-over-year to 352 million representing 53% of total revenue.

In particular, our higher education, business delivered, exceptional results Revenue expanded 14% year-over-year while digital Revenue grew 18.4%, due to continued market. Share, gains inclusive, access growth, enrollment favorability and realizing value-based pricing.

Our training 12-month market share Rose, 160 basis points to 30%, according to MPI data.

The Evergreen content delivery model. Now available across more than 700 leading titles, continues to resonate reflected in the record, high NPS score during the full semester.

The K12 selling season. Met our expectations with continued solid performance, despite the smaller Market opportunity.

Early momentum is building for Alex Adventure. Our supplemental math offering for K3 students, positioning us for growth beyond the core ahead of the major California. Math opportunity in fiscal year 2027,

We're already seeing positive early indicators for California, with two large deals booked in fiscal year 2026.

Our team also continued to deliver compelling profitability.

Adjusted IBA reached 286 million in Q2 yielding. A margin of 43% up 60 basis points year-over-year.

And an expanding digital mix amid reinvestment, that is enabling an exceptional pace of innovation.

Visibility gives us confidence to raise fiscal year 2026 guidance, across the board which Bob will detail shortly.

At mcro hill, we focus on solutions, that demonstrate proven efficacy by integrating high-quality proprietary, content with actionable student data and thoughtful pedagogy. We deliver meaningful learner outcomes,

Our multi-layered mode is built upon 3 elements.

Firstly, our intellectual property with 137 years of trusted content developed, alongside our authors and more than 50 Nobel laureates. Our pedagogical driven approach is held to the highest standards

Secondly, our proprietary data provides us with a deep understanding of the learning journey, fueled by billions of student interactions across millions of digital users annually.

Our Solutions deliver structured learning progression through real-time insights, and feedback built on evidence rather than prediction alone.

And thirdly our domain expertise. We have Decades of experience, helping Educators and institutions integrate digital tools into curricula.

Our Workforce, including former Educators and Technology, experts ensures Solutions are grounded in pedagogy and structured learning methods that reflect classroom realities.

Along with strong relationships, a trusted brand and a robust distribution Network. This mode forms the foundation that allows us to deploy AI effectively across learning environments.

While large language models. Serve as valuable information tools, education demands of structured learning progression supported by continuous student interaction and data to ensure true comprehension over memorization.

Educators. See us as a trusted partner reflected in the recent survey we commissioned through morning consult with K12 teachers and administrators ranking, mcroy Hill as the education company using AI most effectively in its products.

Helping teachers harness the power of AI to address specific student, needs differentiates mcroy. Hill from emerging AI. First entrance.

Consider the student who is falling behind in math.

Our AI powered supplemental solution Alex which spans K through 12, through higher education, uses machine learning to pinpoint knowledge gaps and deliver targeted content.

it helps improve password rates by 20%, according to a recent Clemson University case study

Alex Adventure is our recent addition for K3 math, which is gaining traction. We are also optimistic about the global launch of Alex calculus unlocking 100 million dollars in Tam.

Now, consider the fifth grade teacher struggling with administrative tasks and lesson plans.

Mcroyal plus simplifies workloads and provides real-time insights into student proficiency, enabling targeted instructions.

Available in math in 10 states with 2 more States coming online. Next fiscal year, we experienced a 67% increase in the number of districts that accessed mcroyal plus this school year alone along with Rising utilization rates

Alex muroi Hill plus are primed to expand in the multi-billion dollar supplemental and intervention Market. Where we hold only 5% share today.

We remain very enthusiastic about gen Ai and continue embedding it into our solutions, to enhance, learning experiences. And to support educators.

AI Reader is a prime example of how we scaled a proven tool across our portfolio.

Launched last spring, the AI reader encourages higher education students to actively engage with content until concepts are fully understood.

1 million students are engaging with the tool and 11 million learning interactions were generated in Q2, alone and accelerating.

Kinect titles as well as within our first aid forward solution for medical students.

Additionally we recently introduced 4 exciting new AI powered solutions to enhance our portfolio. Firstly sharpen Advantage transforms our popular college student study app into an AI powered Enterprise solution focused on academic success through real-time faculty dashboards to track progress, address, learning gaps and create personalized learning study experiences.

Underpinned by our content. Sharpen Advantage offers a responsible alternative to generic chat Bots institutions can trust unlocking significant growth opportunities, beyond our core

Secondly, clinical reasoning, leverages our evidence-based content and introduces virtual. Patient interactions to prepare medical students for real world, clinical care. Positioning us for incremental digital growth,

Thirdly writing assistant provides real-time personalized feedback to students, fostering skill development through, self-checking and self-correction.

We've recorded over 130,000 interactions across 877 unique school districts nationwide in October alone.

Fourthly and finally teacher assistant gives K12 teachers. Instant planning support reducing prep time, it's currently available for California, math with the Nationwide rollout to follow.

we believe our writing and teaching assistant capabilities will enhance market, share and retention, particularly in the larger upcoming K12 Market opportunity

In closing, we believe that our momentum is undeniable, our market. Share is growing, user engagement is accelerating and our reoccurring Revenue. Mix is expanding,

Our business remains resilient with no significant impact from tariffs or proposed federal education policy changes.

As you know, the vast majority of funding comes at the state and local levels with an immaterial portion of K12 budgets tied. To course materials

Now, I'll turn the call over to Bob to discuss our financial performance.

Thank you Simon. Good morning, everyone. 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.

Now, let's take a closer look at our fiscal, Q2 financial performance.

Total revenue reached 669 million down 2.8% year-over-year due to the anticipated smaller K12 Market opportunity. Which was largely offset by the strength and higher education.

First half Revenue decline, just half a percent to 1.2 billion.

Recurring revenue increased 6.5% year-over-year to $422 million, representing 63% of our total revenue in the quarter. This growth was primarily driven by digital revenue growth of 7.6% to $352 million.

Higher margin digital contracts continue to enhance Revenue quality and predictability.

Our remaining performance obligation, or RPO, surpassed $1.9 billion at the end of the quarter, which provides valuable forward visibility.

Gross profit margin increased, nearly 150 basis, points year-over-year to 79.2% supported by efficient operations.

Favorable, digital Revenue, mix and outperformance and higher education.

Adjusted ebitda was 286 million with a 43% margin up, 60 basis points. Year-over-year driven by gross margin strength and discipline expense management. Amid continued. Growth reinvestment.

AI implementation is enhancing internal efficiency and customer experience reducing K12 border processing times like 27% and automating 25% of service checks.

While our AI powered content creation tools described delivered, strong Roi. Recouping its initial investment in a year with use cases expanding which should unlock incremental margin expansion over time.

Now, let's dive into our business segments.

In Q2, higher education revenue grew 14% year-over-year to $213 million in the quarter.

Business Revenue was 395 million also up 14% year-over-year.

Revenue grew 13.8% to 162 million while digital Revenue expanded 18.4% to 186 million.

This exceptional performance was led by market, share gains of 160 basis points. Reaching 30% on a trailing 12-month basis.

Inclusive access sales grew a notable 37% year-over-year. It represents over 50% of our higher education sales and has been adopted by nearly 2,000 campuses.

The majority of inclusive, access growth continues to come from existing customers adding new courses, demonstrating the effectiveness of cross sell within accounts and significant expansion opportunities within the 82% of Institutions served

This is supplemented by the annual onboarding of approximately 100 new universities into the program, which becomes more impactful to girls in the coming years.

These new inclusive access relationships, typically take, at least 2 years to fully scale. In other words, based on recent performance, we expect the activations for accounts landed in fiscal year 2026 to increase by 15 to 20 times by fiscal year 2028.

This is key to support invisibility into our future growth, Runway.

I want combined with Innovation such as Evergreen. We unlock more Avenues to support retention and drive. Takeaway opportunities to enable incremental market, share gains.

This performance reflects our successful execution of investment initiatives in recent years. In addition, we captured benefits from healthy enrollment trends and value-based pricing realization.

I am incredibly proud of the team's outstanding performance with their Innovation and dedication yielding differentiated results.

In K12 Revenue was 359 million in the quarter down, 11.2% year-over-year due to the anticipated smaller Market opportunity and lapping of exceptional capture rates in the prior year.

First half Revenue was 630 million down 7.3% versus prior year.

Reoccurring Revenue increased 2.8% to 216 million with RPO of 1.4 billion supported by multi-year, procurement cycles and upfront payments, which provide strong forward visibility and the foundation for our return to growth and K12 in fiscal year 2027.

We continue to outperform the market and retain our leadership position in Florida Science. Our national science program is driving shared gains in other states, along with Investments, that have bolstered, our go to market coverage, which reinforces our optimism moving forward.

While the supplemental and intervention Market, is also smaller our integration with the core and early success with Alex Adventure is encouraging.

Pilots generated strong momentum in South Carolina's map adoption, showcasing share gains in the K-5 market.

It's worth reiterating that we anticipated a smaller market in fiscal year 2026 due to predictable school purchasing cycles and proposed federal education policy changes. These have had no material impact on our business, as 90% of district revenue is funded by state and local budgets.

We believe we are well, positioned for fiscal year 2027 opportunities in California, math and Florida, Ela among others.

And our Nationwide Emerge pilot is progressing well, ahead of the large California ELA opportunity in fiscal year 2028.

Global professional Revenue was 40 million in the quarter relatively flat year-over-year. While reoccurring Revenue, grew 5.4%, to 25 million

Strength in medical and Engineering offset, the exit of non-strategic. Print with ongoing Innovation such as a launch of clinical reasoning expected to drive incremental digital growth over time.

Finally, International Revenue, decreased 8.8%, year-over-year to 50 million in Q2, a relative improvement from the double digit year-over-year decline in q1.

The decline in reoccurring Revenue, also, narrowed sequentially year-over-year to 4.8%.

Digital growth and select K12 markets has partially offset softness in Canada and timing in Spain.

Moving on to our balance sheet and cash flow. We ended Q2 with $463 million in cash and $913 million of liquidity with our revolving credit facility on draw.

Net leverage was 3.3 times as of September 30th.

Cash flow from operating activities in the quarter. Working capital was largely impacted by the K12 Market opportunity and prior year expense timing.

In October, we prepaid 150 million in Term Loan. Principal following September's repricing that reduced our interest rate spread by 50 basis points.

Year to date. We've prepaid 542 million in term loan, debt, resulting in over 40 million in annualized, cash interest savings.

Our disciplined Capital, allocation strategy. Prioritizes reinvestment, and debt reduction. We remain committed to a net leverage Target of 2 to 2 and a half times. And to strategic talking m&a.

We will pursue incremental debt reduction over the remainder of the fiscal year, leveraging cash flow from the business, which has been bolstered by cash, tax savings from new tax legislation and will remain opportunistic on the capital structure.

Looking ahead based on our strong first half performance, RPO visibility sustained, share, gains and favorable enrollment Trends. We are raising our full year guidance.

We now anticipate total revenue for fiscal year 2026 in the range of 2.031 and 2.061 billion.

Reoccurring Revenue, ranging from 1.54, to 1.524 billion and adjusted EPA between 702 and 722 million.

Unlevered free, cash flow is expected to slightly exceed the low end of the 50 to 100% adjusted. Eva conversion range while capex and product development as a percentage of Revenue remains unchanged.

Our Q2 tax provision was positively impacted by recent changes, to federal tax policy, and is expected to lower our fiscal year, 2026 tax, liability below, the previous 30 to 50 million range, both on a cash and gaap basis.

Finally a few modeling items, we expect Revenue, seasonality Trends in the back half of fiscal year 2026 to be relatively consistent with our historical average.

Stock-based compensation expenses expected to be 1 to 2 million dollars in both the third and fourth quarters.

Total interest savings are expected to be $5 million in the second half of the fiscal year, and we expect approximately $6 million of debt extinguishment in Q3.

For the fiscal year 2026, we expect our GAAP effective tax rate to be approximately 15% to 20%, and our marginal non-GAAP cash income tax rate for the incremental changes to book income to be around 18%.

We are proud of our performance and confident in our strategy. Higher education's power performance is notable and we are well positioned for K12 growth in fiscal year 2027 and Beyond.

Operator, let's open the call up for questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. Again, we ask that you please limit yourself to one question and one follow-up. Your first question today comes from the line of Ryan McDonald from NEM. Your line is open.

Hi, thanks for taking my questions and congrats on a great quarter. Um, Simon I wanted to start with, uh, higher ed, uh, clearly an excellent performance, uh, within that segment of the business, can you just kind of break down a little bit further for us? Um, sort of the mix of benefit from sort of enrollments. I think, I think the data is showing about 2.4% enrollment growth, uh, you know, for the, the current fall semester versus sort of execution and share gains and then

You know, on the inclusive access component of that impressive growth there, can you just give us a sense of sort of the durability uh and runway for growth with an inclusive access still. Thanks,

Utilize Ai and what we deliver and prove in a very efficacious way why we've done well. And then also I'll go to market teams, are truly the best in the industry, in my view. And and I think the performance justifies that that comment when you look at again, uh, retention rates that are growing substantially through what we've done with our market share gains, uh, all of the competitors that we're taking share from across every discipline on the college campus, we're seeing record NPS scores through this back to school period. And I think best of all for us to now get to 30% market, share. And if you remember, if you go back a decade, we were at barely 21/21 and a half Ryan. I mean, it was way lower. We've grown now to 30% 160 basis point growth here on year and we're very proud of that. I the last thing I'd say is that when we look at Innovations like AI reader, this is the product. If you remember, we launched launched a couple of quarters ago and it's really

Really proven the tremendous retention tool for us. We're seeing over it's actually I think we quoted 11 million interactions. At the end of Q2 I can tell you through October it's it's about 20 million now, in terms of read the interactions and we're just growing that month by month as students, see the value and professors see the value of what that can give students to really help them in their class and help them succeed. So the, the last thing I'll say is, well, you mentioned inclusive access

Again, we've been telling telling our investors about that for the longest time, it's open to everybody. We recognize the value of it. First, we continually grow every quarter, our business through IA. It's a wonderful business model and the land. And expand the Bob talked about earlier is really true. This is where we're seeing the huge benefit of that. And I think, when I, I look at the new solutions that we're creating with products, like, Alex calculus that's going to give us another 100 million in untapped Tam what we've done with sharpen and sharpen Advantage as we look at building an Institutional, uh, AI driven product. We really are understanding what faculty want to see how we can help them utilize AI for benefits, and for absolute, uh, gain in student performance and outcomes. So, let me Bob, let me pass on to you a bit because I know you love the inclusive, access modeling, when you look at the land and expands. So maybe.

You can help find a part of Ryan's question.

Sure thing. Uh, thanks, Simon Ryan. You know, I also before I jump into that, I do want to highlight the national student Clearing House data, you quoted as preliminary. We've seen changes from that, from our initial print to subsequent uh prints. So, I just want to caution you that that 2.4% you quoted as preliminary but within that, you should also note that the 2 year and community colleges has higher growth rates. We over index their relative to the the

General market. So we're seeing enrollment slightly higher than that 2.4%, but it's it's worth noting that it is preliminary and then jumping into the inclusive. Access model. We highlighted this, you know, just the sustainability of that, you know, we have added 100, uh, new logo, new institutions annually. So clearly there's a lot of runway for us to continue to land but more impactful, is that expansion? So as we land, those institutions, we see 15 to 20 times growth over the first couple years and then you'll get continuation of growth. So when we think about sustainability, lots of Runway there, we're very excited about it. And um, we're we're looking forward to continuing to talk through that.

Awesome. I really appreciate that and maybe just to follow up in terms of K12. Um, you know what kind of great to hear some of the commentary around, California math and and and in Florida as well. Um, can you just remind us? Um, you know what, you're seeing with California math and Florida Ela right now in terms of performance and then how that or what sort of level of confidence that gives you as we go into I think they call it year 1 but are the the second sort of tranche of that funding and in fiscal 27. Thanks.

There are a bunch of different uh, uh, opportunities coming out for FY, 27, where we are encouraged. Is that we've already had good successes in California at the very earliest stages and it's it's all about the suitability of our product. We have to make sure that as we create our material, we understand completely the state standards required. We make sure our pedagogical delivery of our products just fits at the right learning age range that is there. And then, of course, with supplementing, all of our core material with mcroy Hill plus and of course, Alex that, you know, very well. So, we are, we're very, very bullish indeed about next. Year. Bob, do you have anything to add on specifically on California or, or Texas for Ryan?

I think the 1 thing that we are excited about is being able to uh, supplement and supplemental intervention and having a bundled Solutions as we enter into that market. So again, as we think about that portion of our business, which represents about 15% of the K12 uh Revenue. Uh we we really see a nice opportunity to bundle those offerings as we walk into those opportunities next year.

Thanks for all the color. Congrats again.

Thank you, Ron. Thanks for the questions.

Your next question comes from a line of Henry Hayden from Rothschild. Your line is open.

Morning everyone. Thanks for taking the time today. Um, we've seen kind of lots of concern across the sector around Ai disintermediation and and we were hoping just to get some incremental color on how you would describe the competitive modes around the business or kind of in other words, what uniquely differentiates maghra Hills capabilities from Genai? Native new entrance, thanks.

Henry, thank you for the question and, and just lovely to hear a familiar accent. And uh, and it's a good question because when you think of of the issue around AI, I think that there's been an enormous amount that's been underappreciated or just not yet recognized about mugrow Hill and our abilities to really make a difference and CI is a massive, uh, real Tailwind for our business. And, you know, we're only in. Of course, this is our second quarter earnings call. So it's new to everybody but my hope is over the coming quarters, people recognize the real value and strength that AI gives to our business. And again the Tailwind that we're seeing and we're seeing it across the entire part of our entire structure. When you think about what we're doing in higher education, we've talked to great deal about our products around AI reader. We've talked a lot about what we've done with sharpen Advantage when you think about the institutional opportunity and we've talked about the ability for clinical

Reasoning in, in our medical business. And that is a significant upside. For when you think about potential students learning, and what they need to understand when they're going through their medical programs. And then there's Alex and and you've known for for years that that we've worked with Alex for now. Well, well, really over 2 decades. And when you think about the ability for machine learning now to focus on generative AI delivery for our adventure for K5 as well. Now, at the other end for Alex calculus, all of these factors give us a substantial uh, confidence. And we're seeing that in our customer reactions, we're seeing it in our financial performance. As you've heard, we're seeing it from our customers, saying to us, we are using sharpen and it is helping our students. We are seeing a massive increase in students learning and spending time on your great platform. With AI reader, uh, medical students are benefiting from Clinical reasoning. So these

Are functional efficacious products that we deliver. And because of our Mo Henry, we we've got, you know, the strength of our 137 years, The Trusted position that we have in the education community and really um the the reliability that we provide our customers with that level of trust and they want to work with us and they want to understand how we can enhance the materials the way they teach through um through

AI integration. So again the long answer but it's important to me and to all of us that I think uh The World At Large understands just how beneficial this is former grow Hill because we can absolutely improve learning outcomes the way we've integrated AI.

Yeah, thank you for that. It's, it's very helpful and then, just as a follow-up for that. We've, we've heard from some of your peers around, kind of, the increased cost to store and leverage data, which has been made, you know, quote, AI ready. Um, how would you think about the margin Outlook as data becomes a more substantial part of your offering?

get too much detail, but we do have an answer I think for Henry,

yeah, and Henry, as we think about

a ultimately see this as margin expansion.

Time.

you know, when we've talked about

the use of scribe, which reduces our cost in certain use cases by 60% and time to Market by 50%. We're able to reduce overall cost to build product. So as we think about that cost, uh, to to serve AI, we're able to um, offset that by driving, uh, cost reductions in our product and platform development. So we ultimately see this as margin expansion over time.

That's very clear. Thank you both.

Thank you. You are a good question.

Your next question comes from a line of Stephen Sheldon from William Blair. Your line is open.

Hey thanks and nice results here maybe. Maybe you wanted to dig in a little bit more on the K through 12 side I guess. Can you just provide some more color on underlying Trends there and specifically how

Newer product traction is progressing relative to expectations. It's we think about, you know, Alex Adventure, MH plus other things. And then just as we think about the benefit of some of these newer products, I know of some are incremental Revenue opportunities, but how much could they help you as you pursue some of these larger core contracts? Um, you know, how much could these new product capabilities and bundling, uh, help with positioning to win those those large contracts.

Yeah, it's a it's a good question. I I'll kick off and then Bob we'll, we'll talk to you as well to add any information you that I've forgotten. But what I would say Stephen is is that the and you mentioned a couple of them, the products that I'm making the big difference. Alex Adventure will give us New Growth going forward. It's already beginning. It's been out about a year give or take mcroyal plus we've extended. It's been in 10 states. We've extended it uh and we're about to get into 2 more each 1 of those shows, substantial increase in teacher intervention and teacher activity. And the reason is that it's giving such a great level of data and detail on the student performance that teachers find very helpful. But a key part of your question is, is what does this do to the core? Because, you know, that we're a very, very successful player in core. The market opportunity is much, bigger next year, but it isn't just that for us, the supplemental intervention space, where it's really, uh,

15% of our business, but we have less around 5% market share, that's where the real opportunity for growth comes. It's really building on the core successes that we've enjoyed building on with Alex with our Math Corps, adoptions building on the ELA adoptions with actively learning the chief 30000. These are the tools and then all of them integrating more Hill plus these are the tools that give us great confidence for growth. Going forward to in

Enable the market share growth to continue Bob. You may have something else to to say to that as well.

We have talked about in our prior quarter winning an 8 of 9 markets and so uh We've demonstrated that and and what we're suggesting is that you'll see that, you know, over the next several years. And so what that means is while we're winning, we provide forward visibility to the next several years. These are multi-year contracts.

1 of the things I'll highlight is, if you exclude the 3, large states, particularly Florida, and Texas where we had strong performance last year. We exclude that, and we look at the remainder of the district. So we operate in, we're expanding share, we grew 200 bits. So, we're winning at a greater rate. So we're winning across the market.

Um, a couple other things that, you know, we're that excites us we've talked about being in 10 states for McGrath Hill plus, let me double click on that and provide you some more insights. As we talked about being in 10 states growing into 12, what does that really mean for our K12 business? Again we're going to help plus is going to allow us to be very sticky uh over time. And so we look at it and 25% of our teachers using our Core math products reveal now have access to moral plus that's nearly a 50% increase year-over-year.

We've seen 4X increase in the unique users in Mora Hill plus year-over-year. And now we're serving over 10% districts have access to Maura health class. So again the importance of that is really driving that stickiness and retention over time and then ultimately the other big innovation we're driving is our new Ela product product emerge, that will be coming into Market again addressing California Ela in 2028. So, again really well, positioned the business performed and and met our expectations in the period. We're really excited about how positions us for a return to growth.

as we think about,

Incremental spending plans, I guess just given what you've seen so far this year. Have your priorities changed at all? Where your pushing the pedal more in certain areas of the business than others? Um, especially as we think about product development and sales capacity across different segments, I guess just at a high level, where, where you pushing the investment pedal more.

Yeah, so first, let me had a high level, we're not going to be changing, sort of the level of investment. We've highlighted that has been 8 to 9% of our Revenue. We'll continue to be at that level. Now, of course we re-evaluate and redeploy where we're putting our dollars, um, and give it some of the efficiencies that we are driving in product development. It's allowing us to accelerate the pace of investment in other areas such as some of the AI tools that we've recently, released Simon mentioned. Before new products, we brought to Market again, the pace in which we're releasing things. Um, is allowing us, uh, to bring new products to Market but most critically. Uh, I just want to remind you that we do believe that all of this Innovation will still allow us to continue to expand our margin

Great. Thank you.

Your next question comes from a line of Steve. Coney from McCrory group. Your line is open.

Hi, thanks. And I'll offer my congratulations as well on a really good quarter. Um, first question would be, um, been thinking about your outlook for the second half. Um,

Uh, maybe preface this question by asking. How did you all do kind of relative to your internal expectations in the quarter. And um, in terms of raising that full year guide, how much of that is related to the 22 performance and how and, and um, and and how much of its related to your outlook for the back half. Um, and and any changes in your method or assumptions on your, on your guidance, thanks for that.

Sure. I

This 1 Simon, you know, with respect to our guide in the quarter you know first you know noting that Q2 is the most significant quarter for our business. It provides us visibility into both enrollments. Uh, share gains and otherwise and it most importantly in our K12 business it provides us the RPO that gives us that clear visibility to the rest of the year.

Another guy and I'll walk you.

Through the guide from prior quarter to, to current meaning. The revenue guide we had from high to low, 60 million range. We've now narrowed that to 30 million and then on the reoccurring and ebita we were at 40 million. In Prior guy, we've taken that down and narrowed our guidance to 20 million

And again, that is driven by the fact that we've moved through that seasonally important Q2 and now have greater visibility.

With respect to the portions of the business that met expectations, I would say that, um,

K K12 was certainly in line with our expectations. You know, we we noted that we were having shared gains our products are well positioned. We anticipated some of those share gains that we delivered and the overall Market size being smaller is um, is coming to in line with expectations where we performed slightly better, and I'll highlight that would be in higher education. You know, obviously the share gains were very pleased with the continued share gains and the magnitude of those shared gains and enrollment with slightly higher and again, we talked about it on Ryan's first question about what the Clearing House is providing. We see it slightly above that which is providing us a little bit of a Tailwind

When I walk through for the full year, you know, I I think it's important to to recognize that um, you know, we have seasonality in our business. So, first half being seasonally important, second half is smaller that will then translate into a lower ibida margin on the lower Revenue base. And then ultimately, I also think it's important to recognize that that seasonality from first half to second half will also present itself more like fiscal year 2024 than fiscal year 2025 and it's important that I highlight that. So you're modeling considerations thinking about Q3 and Q4 phasing. Um, as 2025 had that outsized performance in K2,

Off. So we're like anchor yourself back to 2024, um, and I think, then, as we think about that overall guide, um, you know, we are, we are very pleased with how we position the business and, and it's built on the success that we've had in 4 Visa.

Terrific. Um, thank you for that, Bob. And if I may get in one follow-up, um, maybe building on the earlier question about internal investment, it may be expanding that to, um, ask for your color more generally on your thinking on capital allocation here moving forward. Yeah.

Provide us with the greatest ROI. Um, and then we remain very committed to de-levering and our target of 2 to 2.5 times. And that's demonstrated our commitment to this by the $150 million we paid down in October.

Based on cash flow and where we see the business of Romaine opportunity for us to further de-lever in the remainder of the year.

We also balance that with talking m&a and the funnel today is very full. We're looking at smaller opportunities that we consider make versus buy, uh, expanding, you know, the addressable Market. We look at these opportunities. And so we think that there's a chance for us to continue to explore that. But nothing transformational at this point is in the funnel.

Got it. Uh, very good. Thanks very much, very helpful.

You bet.

Your next question comes from a line of George Tong from Goldman Sachs. Your line is open.

All right, thanks. Good morning. You highlighted a strong capture rate performance in K-12 so far this adoption cycle. Can you share what capture rates are so far this year and how they compare to last year at the same time?

Yeah, uh, George. We're not going to provide visibility exactly on what those capture rates are. As you recall that's coming off of our internal sales force data. Um, but I will highlight. When we look at that market, it's 2005 bits higher than prior year, which is in line with our expectations.

Got it, that's helpful. Um and then you talked about strong visibility into the K through 12 Tam years in advance. Uh based on what you see today, how much do you see the K through 12 Tam growing in 2027?

Yeah so that we we've highlighted that the overall Market is 300 million that we see as as growing um and again we're really well positioned as we think about the largest opportunity being at California math, we're excited about the opportunity for us. So I'm not sure if there's anything else you want to add on on that.

No, just exactly. And we we've mentioned this earlier on George that that the extent of um the market growth. Next year. It's very encouraging for us and and you've seen it in Prior years. Where the term is it a much higher level, we've done very well. And and of course we would expect to have the same level of growth and performance in the in the out years. And um FY 26 is, we've communicated very clearly has has always been a low year and you look at the 7, 2 7. 2 8.

Got it. Thank you.

You are. Our next question. Comes from a line of Marvin Fong from btig. Your line is open.

Good morning. Thanks for taking my questions and, and congratulations as well on on a great quarter. Uh, the first question, uh, just like to follow up again on that enrollment data that that we all are looking at. And I would, I would like to attack it from, uh, from the subject matter standpoint since that's the other major change. And you just talk about, um,

You know, your do you, uh,

Over-index, under-index, and subject matters. It was like health and business, where we are seeing strength, and computer science, a bit lower for understandable reasons. But anything in the subject matter trends that are beneficial to you?

Yeah, great. Great. Great insightful, question. Um we we certainly see that that we have uh those disciplines that we see the highest growth rates, you know, that is very favorable to us.

Business and other curriculum and science related, uh, subject matter. So, it does play out favorably to us. And again, I think that bodes well for how we're seeing our enrollment slightly higher than that, 2.4% as advertised as a headline for undergraduate growth.

Simon. I know you had. Let me take. Yeah, let me add a little bit to that because it's a good question, Madam. We 1 of the big benefits and I I've been operating and as you know, the higher ed sector and that'll be 40 years in August. And the reason that we do so well is that we we cover everywhere. So you look at the business economics disciplines, you look at the Sciences.

Subject areas some are higher than others but when we look ahead, it's the scale and the breadth of product that we have, that gives us such a strong advantage.

Fantastic and a follow-up question. If I may on on International, we don't talk about it as much but the trends are improved you called out Spain, uh, as well as Canada from from moving Parts. There could you just kind of discuss what you're seeing there and and, and how we should be thinking about Trends both in the back half and maybe even next year?

Yeah, and and it's a good 1. I mean, when you look at as Bob indicated earlier, the, the decline we expected the decline this year and I think in, in areas like Spain where we've got a good K12 business, it has a similar cycle, uh, coincidentally this year to the US. Um, so that's clearly a lower year for us in Spain, that timing purely, it'll things would change next year. When I look at what's happening in Canada, we benefited from the enrollment surge in Canada, over the last few years and now of course enrollments in Canada have significantly reduced, but what I look at their more than anything is our market share growth. It's

If the overall Market is in Decline, but how are we doing? And this what makes me very happy because Canada our share. We've grown over 3 and a half percent this year, we're looking at about a 27 2027 and a half percent market share position in Canada. It it was barely 15% in 2019 before Co. So, you know, you're seeing really good growth in share again, where the opportunity is for excellent product, and great. Go to market. We succeed. And we've done that very well in Canada. We've also seen upside in Latin America, uh, we continue to do well, there with our school in higher, ed business, and also the GCC Market in the Middle East is, is very, very strong for us. So, um, it it's, it's a good position that we're in. We're looking forward to continuing growth as we go forward. And I think it's, uh, it's important that we focus on those markets where we know growth can occur.

That's great. Thank you, Simon. Thank you, Bob. Thank you.

You are. Our next question comes from a line of Tony Kaplan from Morgan Stanley. Your line is open.

Thank you so much. Uh, wanted to ask another question on higher ed, you know really strong performance this quarter there you talked about the share gains getting to 30% um and obviously this is off the back of Evergreen being launched and I imagine that that is helping contribute to that stronger retention.

And perhaps sales people being able to focus more on new business. And so I was wondering if the success you're seeing is related to that platform shift or if there are other is there anything you know, content-wise or or otherwise that is is contributing to that as well. Um, just wanted to understand the sustainability, essentially of the higher. Ed share gains. Thanks, mhm. That's a very insightful question, Tony. Thank you. I, I would say it. It's, it's across the board is the reason that we're doing very, very well in higher ed. Yes, Evergreen. And that's unique to us as you know, that we launched about a year ago. Now, it's over 600 titles. Um, we're seeing tremendous retention with that. And faculty are just appreciating the ability to be kept completely up-to-date as they're thinking about their courses, and it's also new products that we launched. It's it's

Products that we're looking at with Alex calculus which is a tremendous additional Tam opportunity for us in higher education, what we've done with sharpen at the consumer level, but then particularly now sharpen advantage of the institutional level gives us a great deal of excitement. Then there are new content. Of course, we always look at our authors in higher education and we commissioned new content and new material. That's something we're very, very proud of. We have various new courses and titles that we launched and

We released through our connect platform. It's very, very significant and and I think the sustainability for us is proven by the last number of years of our growth in higher ed up. Now, as you say, to that 30% market share and we feel extremely bullish about our potential in higher ed. And, uh, we appreciate the question actually. It's a very good weather to pose it.

Great. And

I was hoping you could talk about if that's still the case, and if you're seeing push back from customers to that, um, or with your new content and platforms, maybe they're not pushing back because of the value, add that you're providing. And so wanted to understand the pricing Dynamics going forward. Thanks.

Sure thing. Thanks Tony. Yeah the from a pricing Dynamic is we've mentioned before we we apply a value, based pricing model you highlighted. Some of the value adds that we've been putting in place we have not been seen any push back around our pricing. The, the price realization has been inflationary levels, um, which is now in line with what we've planned for in the in the, in the quarter. Um, so we're realizing the price that we planned.

Thank you.

Thanks Tony.

Your next question comes from a line of Jeff Mueller, from beard. Your line is open.

Yeah, thank you. Um, how are you viewing the mix of K-12 opportunities in 2027 by state and subject? I guess for you, do they play to your strengths to an increasing degree at all?

Well, I'll let I'll let you run into the detail there, but I mean, state by state as. As you know, Jeff we've got substantial opportunities, as we look at FY, 27. I don't think we want to get within California. We talked about that, we talked about Texas and Florida, Allah, Bob, I don't know if you want to get into any more detail, it may be a bit early.

As we think about that, I know you want to give guidance there, uh, as we get to the end of this whole year. But you may have comments to make

No, and I and I think if we in our prepared remarks, we highlighted, the fact that we're preparing for the larger opportunities in ela in 28 and then in 27 being mapped. So we're well positioned to play to our strengths as we think about the market opportunities in the next several years. Um, and again, from a subject mix strengths reside in ela and math, uh, and our new emerge products. So, we're well positioned and I think that will benefit us over the next several years. Um, that, that overall mix in in the K12 Market

Got it and then lots of good AI anecdotes and how it's positively impacting your business and you continue to take share on the emerging AI first entrance that you mentioned Simon, where are you predominantly seeing them? Is it more on the supplemental or intervention side or are they starting to come into the RFP process, uh, for Core Curriculum or not? Thank you.

Good 1. I I would say it's coming uh at the more at the, the RFP. Yes. But I think increasingly as we talked to uh, teachers and we talked to school districts that we, they understand they've added value that we can provide through our supplemental, Interventional tools. Some of them though are now requiring that they want that continuity, if they're using a reveal that, let's look at the math tool that captures, those students that may be underperforming. So

Of course we have Alex. When we look at our ELA business with Emerge that we just launched, and as we think about 2728 and beyond, that's when teachers are saying, "Well, listen, we need writing tools and writing instruction tools to aid in our ability to assess students." Then we provide what we've just launched with Writing Assistant. I think it's now becoming an opportunity for us to really extend our potential with that growth by providing complete solutions, not just in the core but also in supplemental.

Thank you.

Thanks.

You are. Our next question. Comes from a line of FASA, all we from Deutsche Bank. Your line is open.

Yes. Hi, thank you. Um, for a follow-up on the higher education segment, you know, there's some concerns around like, future enrollment Trends, as we look ahead over the next, you know, call it 3 years, uh because of what's been called the demographic cliff. And you alluded to, you know, just the fact that you've seen higher enrollment relative to, you know what, we might be hearing from the industry. So hoping you could expand a bit more around that just taking a step back around where you have higher exposure and, you know how you're thinking about, you know, just outside of the market share gains how you're thinking about, you know, enrollment as we look ahead and how how that might impact your business whether um you think there's opportunity for

For greater pricing in the future or just any color. There would be helpful.

When you look at the amount of business we have at the community college level, those students are often in their 30s and 40s. So I would say we're less concerned about enrollment issues in that way. The key element for us is, you know, there's TAM expansion in the products that we are now offering and the solutions that we provide, so we see growth that way. We don't see enrollment decline being a big issue for us because of the expansion and the market share opportunities that we've seen and our ability to really serve customers, particularly with AI. That's what they genuinely need, and they need our help. So we're seeing very strong growth that will continue going forward. We need to keep innovating with new products and new solutions to enhance the time that we operate within.

understood. Thank you. Um and then just to follow up on the Kate Wolf segment, you alluded to, you know, market share gains in that segment. And just to put a finer point on that, are you really referencing market share gains, you know, in supplemental and intervention, or are you seeing market share? Gains in the core relative to, you know, more established players

My my comment on the 200 basis points was largely around.

The core and keep in mind that that represents 85% of our business. Um, but we are seeing gains in supplemental intervention, particularly as you think how we connect to the core and and again, I just want to reiterate how well that positions us as we move into California math into next year.

Great. Thank you.

Thanks for your questions.

Your next question comes from a line of Jeff silver from BMO Capital markets, your line is open.

Thanks so much. I know it's late. I'll just ask 1. Um I I know we're not talking about fiscal 27 yet but generally what are you hearing about State budgets going into next year? Thanks.

Jeff. It's a good question and we're happy to run over. It's lovely to have so many questions. But um, we're we're hearing good things about State budgets. We're not concerned about decline. As you know, when you look at the budgeting process in K12, it's very much a local and state-run activity. When you think about the overall percentage that of any budget education budget that's given over to courseware and course materials. It's probably less than 1%. It's a tiny fraction of the overall number. So we're we're not seeing any concern around budgeting for next year and and the years forward and that's 1 of the reasons, 1 of the many that we get. That gives us so much confidence.

Okay, great. Thanks so much.

Thank you.

You're our next question. Comes from the line of Josh Chan from UBS. Your line is open.

Hi, good morning, Simon and Bob. I'll keep it to 1 as well. I'll do the time, um, I guess. Um, could you talk about the the runway that you see in inclusive access in higher ed? And then kind of how that and share gains May both contribute to your kind of ongoing growth and Beyond this year.

Yeah, yeah sure. It's a great question. You both, you go, right ahead. You love inclusive access. It's become your, your flight. I do. I know we all do. Yeah. And again, just that, that Runway is significant for us in terms of inclusive access and obviously very impressed with the growth that we experienced in the quarter. But more importantly, is that Dynamic where we're adding a hundred institutions per year. We're at 2,000, you can see long Runway to continue to add over the years, more and more institutions. And then that several year path where we continue to grow. So, you know, it is sustainable. It's going to continue to grow long Runway there and we're excited about inclusive access.

Great and congrats on the quarter.

Thank you, Josh.

Your next question comes from the line of David carnovsky from JP Morgan. Your line is open,

Thank you, maybe just 1 on K through 12. Uh I think there's been some investor concern recently about Federal funding and and what impact that might have to the procurement process for core or supplemental. So, maybe just can you speak to what you saw in the recent selling season or what you're hearing from districts on this? Thanks.

Change. But we're not seeing anything. Widespread that would indicate that Federal funding is an issue at the district level.

And that concludes our question-and-answer session. I will now turn the call back over to Simon Allen for some final closing remarks.

Thank you Rob and and thank you everyone for for dialing in and bearing with us. And and for allowing us to go over the hour, we do appreciate the questions, it makes our lives much more enjoyable, and I hope you get a sense from myself. And from Bob, and Danielle whom you will speak to regularly, just how enthusiastic we are, uh, about our performance and how optimistic we are. It's a pleasure to beat and raise and it's a lovely feeling to look at our performance and our market share growth across the businesses. And we really do feel very, very good, um, uh, about upcoming conversations with you. Uh, thank you for your attention. Always, and thank you for your interest, in mcroy hill. We deeply. Appreciate your commitment to us, and we look forward to serving you and, and particularly our customers going forward. So, thank you for dialing in and we look forward to talking to you again, in a few months. Bye bye.

this concludes

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