Q3 2026 Cengage Learning Holdings II Inc Earnings Call

February 19, 2026

Richard Veith: 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.

Speaker #1: No 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.

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: 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.

Richard Veith: 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 Q3 and year-to-date details before we open the call for questions. Michael?

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: Michael.

Speaker #2: 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.

Fernando Bleichmar: 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. US 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.

Michael Hansen: 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. US 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.

Speaker #2: US 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.

Speaker #2: 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.

Speaker #2: 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.

Fernando Bleichmar: 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's AI capabilities with our expertise in learning design, we are embedding AI readiness across programs in healthcare, 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 skills confidence gap among graduates and working professionals. Our AI strategy is deliberate and course-specific. Rather than building a standalone 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 remains strong.

Michael Hansen: 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's AI capabilities with our expertise in learning design, we are embedding AI readiness across programs in healthcare, 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 skills confidence gap among graduates and working professionals. Our AI strategy is deliberate and course-specific. Rather than building a standalone 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 remains strong.

Speaker #2: By combining AWS's AI capabilities with our expertise in learning design, we are embedding AI readiness across programs in healthcare, business, and many other fields.

Speaker #2: 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 skills confidence gap among graduates and working professionals.

Speaker #2: Our AI strategy is deliberate and course-specific. Rather than building a standalone model we leverage leading LLMs and embed them directly into our platforms to deliver targeted value, within the flow of instruction.

Speaker #2: This ensures educators receive support when and how they need it, and students learn in alignment with instructors' intent. Engagement with our AI tools remains strong.

Speaker #2: 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.

Fernando Bleichmar: 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 roadmap continues to focus on strengthening career alignment, evolving assessment for Gen AI 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 Gen AI 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.

Michael Hansen: 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 roadmap continues to focus on strengthening career alignment, evolving assessment for Gen AI 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 Gen AI 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.

Speaker #2: Our AI roadmap 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.

Speaker #2: 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.

Speaker #2: 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.

Speaker #2: 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.

Fernando Bleichmar: 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?

Michael Hansen: 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?

Speaker #2: 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 thank our customers for their partnership, and my colleagues for their dedication to serving learners around the world.

Speaker #2: I will now turn the call over to our CFO, Dean Tilsley, for more details on our third quarter financial performance. Dean?

Speaker #3: 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 in our continued improvement and leverage.

Dean Tilsley: ... 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 and 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: They grew 14% and 6% respectively in Q3. Supported by returns to growth for our GAIL and international businesses. On the cost side, the management team remained 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.

Dean Tilsley: 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 US higher ed and ed2go businesses, which were up 10% and 26% year-on-year, respectively.

Speaker #3: 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.

Speaker #3: Moving to our consolidated financials, TTM adjusted cash revenues came in at 1.53 billion dollars, up 41 million or 3% year on year as reported.

Speaker #3: Driven by growth in the key US higher ed and Ed2Go businesses, which were up 10% and 26% year on year respectively. TTM adjusted cash EBITDA came in at 532 million dollars, up 29 million or 6% year on year.

Dean Tilsley: 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 improvements 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.

Speaker #3: 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.

Speaker #3: Year-to-date results, both adjusted cash revenues and EBITDA report significant improvements from the first half of the year, due to continued growth in higher ed and work, plus stabilization of our international and GAIL businesses.

Speaker #3: Year-to-date, adjusted cash revenues reached 1.1 billion dollars, 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.

Speaker #3: Year-to-date adjusted cash EBITDA at 362 million dollars, represents a small decline of 2% year on year as reported, but flat when normalizing for a single non-recurring 6 million dollar EOL contract.

Dean Tilsley: Year to date, adjusted cash EBITDA at $362 million represents a small decline of 2% year-over-year as reported, but flat when normalizing for a single non-recurring $6 million EOL 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-over-year. Q3 adjusted cash EBITDA grew $21 million year-over-year to positive $18 million for the quarter. This compares to a reported -$3 million as reported in the previous year, reflecting the continued impact of our new operating model.

Speaker #3: 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 also provide some segment highlights, Q3 adjusted cash revenues came in at 245 million dollars, up 22 million or 10% year on year.

Speaker #3: Q3 adjusted cash EBITDA grew 21 million dollars year on year, with positive 18 million for the quarter, this compared to reported negative 3 million as reported for the previous year.

Speaker #3: 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.

Dean Tilsley: 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 US market. Q3 higher ed adjusted cash revenues grew 15% year-on-year and 3% year to date, primarily driven by the US market, but helped with returns to growth for Gale and international markets. Q3 US 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 US higher ed sales.

Speaker #3: Q3 higher ed adjusted cash revenues grew 15% year on year and 3% year-to-date, primarily driven by the US market. But helped with returns to growth for GAIL and international markets.

Speaker #3: Q3 US Higher Ed, the largest business within the segment, grew 20% year on year for the quarter, driven by 9% growth from digital sales and strong institutional sales.

Speaker #3: Institutional sales, at circa 250 million dollars year-to-date, grew 23% year on year, and now represent 56% of US higher ed sales. As I said, GAIL 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.

Dean Tilsley: 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-over-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-over-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 the very large and growing TAM for work-based skill certification. Q3 adjusted cash revenues were up 6% year-over-year and 4% year to date, powered by Ed2Go.

Speaker #3: 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.

Speaker #3: 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 the very large and growing TAN for work-based skills certification.

Speaker #3: 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.

Dean Tilsley: ed2go delivered 24% growth for the quarter and 26% growth year to date... ed2go growth was driven by pricing initiatives, investments 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 are the company focus 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.

Speaker #3: 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.

Speaker #3: The other large revenue line within Work, Career and Technical Education, or CTE, grew 14% year on year, and as the company focused for continued future growth and new investment.

Speaker #3: 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.

Speaker #3: We are therefore managing costs within these businesses to reflect this expectation. Moving to our K12-focused businesses, just a reminder, everyone, 2026 is a low adoption year for our two K12-focused segments: school and English language learning, or ELL.

Dean Tilsley: Just to remind everyone, 2026 is a low adoption year for our two K-12 focused segments, School and English Language Learning, or ELL, with no large state adoptions in 2026 versus $50 million of large state adoptions signed in 2025. School improved Q3 performance with adjusted cash revenues up 17% year-over-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 while 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-over-year.

Speaker #3: With no large state adoptions in '26, we're still 50 million dollars 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 GAIL renewals and stabilization of this business following market headwinds earlier in the year.

Speaker #3: Plus, retaining strong win rates with an open territory. I do want to note that Q3 is a quiet sales period for K12, 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.

Speaker #3: ELL, our smaller segment, reported Q3 adjusted cash revenues up 1% year on year. Year-to-date revenue comparisons are impacted by a single non-repeating 6 million dollar Caribbean deal.

Dean Tilsley: Year-to-date revenue comparisons are impacted by a single non-repeating $60 million Caribbean deal. Normalized for this, ELL adjusted cash revenues will be down 5% year-on-year, reflecting the low adoption year in the US. 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 related 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.

Speaker #3: Normalized for this, ELL adjusted cash revenues would be down 5% year on year, reflecting the low adoption year in the US. 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.

Speaker #3: Whilst growth in institutional sales, and lower reimbursements to big ideas learning, as 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 dollars versus the same period last year.

Speaker #3: Note, this past January, we successfully repriced our term loan, lowering our borrowing cost by 50 basis points, resulting in an incremental 8 million dollars of annual interest savings going forward, bringing total savings from debt repricing to over 20 million dollars since March 2024.

Dean Tilsley: Note, this past January, we successfully repriced our term loan, lowering our borrowing cost by 50 basis points, resulting in an incremental $80 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.

Speaker #3: Net cash taxes increased, reflecting 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: 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.

Dean Tilsley: 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 segment, 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 2027 and 2028. We continue to implement our new operating model across the company, deliver improved efficiency, 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.

Speaker #3: Our key higher education and work segments continue to deliver strong growth in the third quarter, and on a TTM basis. Supported by improvements in the GAIL and international businesses.

Speaker #3: School and English language learning, our K12-focused 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.

Speaker #3: We continue to implement our new operating model across the company, deliver improved efficiencies, productivity, and profitability, to free up capacity for focused investments, while still improving margin.

Speaker #3: We will continue to improve our free cash flow and strong financials trajectory to generate value for our shareholders. We are now happy to take your questions.

Dean Tilsley: We are now happy to take your questions.

Speaker #1: Certainly. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad.

Operator: Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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.

Speaker #1: A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue.

Speaker #1: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions.

Speaker #1: Your first question for today is from Nick Dempsey with Barclays.

[Analyst] (Barclays): Yes, good morning, guys. 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 US 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, though, do you think that you're gaining share of adoptions, and that that's also helping your strong growth?

Speaker #3: Yes, good morning, guys. 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 US higher education.

Nick Dempsey: Yes, good morning, guys. 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 US 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, though, do you think that you're gaining share of adoptions, and that that's also helping your strong growth?

Speaker #3: I can see that inclusive access is a big part of that for both of you, in terms of your commentary. To what extent, though, do you think that you're gaining share of adoptions and that that's also helping your strong growth?

Speaker #2: Yeah, Nick, it's Michael. Good to hear your voice. 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 MPI data.

Fernando Bleichmar: Yeah, Nick, it's Michael. Good, 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.

Michael Hansen: Yeah, Nick, it's Michael. Good, 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.

Speaker #2: Based on the MPI 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.

Speaker #2: And based on our internal CRM system, we would also 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.

Speaker #3: Thank you.

[Analyst] (Barclays): Thank you.

Nick Dempsey: Thank you.

Speaker #1: Your next question is from John Kovacs with Diameter.

Operator: Your next question is from John Kovacs, with Diameter.

Operator: Your next question is from.

Speaker #4: Hey, good morning. Thanks for taking the questions. I'm glad to see the good billings results across the business. My question was also on the higher education side.

[Analyst] (Diameter): Hey, good morning. Thanks for taking the questions. 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 billing growth, even if it was, you know, 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, you know, call it low single digits. But how do we get from there to, like, a double-digit increase in billings? Is there timing involved in that, pricing, or what are the other steps upwards, please?

John Kovacs: Hey, good morning. Thanks for taking the questions. 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 billing growth, even if it was, you know, 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, you know, call it low single digits. But how do we get from there to, like, a double-digit increase in billings? Is there timing involved in that, pricing, or what are the other steps upwards, please?

Speaker #4: It's obviously pretty atypical to see double-digit billing growth, even if it was a single-quarter year-over-year that we're talking about here. But can you just elaborate how you guys actually achieve that?

Speaker #4: 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.

Speaker #4: But how do we get from there to a double-digit increase in billings? Is there timing involved in that? Pricing or what are the other steps upwards, please?

Speaker #2: Yeah, John, so I think, first of all, I think you're the underlying assumption in your question that we should not assume double-digit growth in this sector every single quarter.

Fernando Bleichmar: Yeah, John, so I think first of all, I think 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, you know, almost 90% digital, and so does our large competitors.

Michael Hansen: Yeah, John, so I think first of all, I think 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, you know, almost 90% digital, and so does our large competitors.

Speaker #2: I think is correct. But what we're 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 prints into digital.

Speaker #2: And what we're 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.

Speaker #2: So, our revenues are approaching almost 90% digital, and so do those of our large competitors. But if you think about the number of seats, the number of courses being taught in the United States—roughly about 90 million—only about 50% of them are really taught with digital platforms.

Fernando Bleichmar: 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, you know, 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.

Michael Hansen: 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, you know, 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.

Speaker #2: 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.

Speaker #2: And we expect that also to continue, particularly as we are leveraging AI to make the platforms even more powerful and more personalized.

Speaker #4: Yeah, and Michael, if I could just add to that, there is no timing issue. There's no balance sheet adjustments. That is a real year-on-year growth.

Dean Tilsley: Yeah, and if I, Michael, if I could just add to that, there is no timing issue. There's no balance sheet adjustment. That is a real year-over-year growth. And obviously, you know, with Institutional Sales, you know, to support Michael's point, you know, it does improve our sell-through rates or, you know, the amount of the ability to monetize students who are using our content is significantly enhanced by, you know, the growth in Institutional Sales and digital sales versus the traditional print textbook sales. So. And these trends will continue for the foreseeable future.

Speaker #4: And obviously, with institutional sales, to support Michael's point, it does improve our sale-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.

Speaker #4: Versus the traditional print textbook sales. And these trends will continue for foreseeable future.

[Analyst] (Diameter): That, 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.

John Kovacs: That, 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.

Speaker #3: 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.

Speaker #3: But that's not really new. That transition has been happening for years now. And I think you guys have always been a step ahead of the competitor.

Fernando Bleichmar: Yeah.

Michael Hansen: Yeah.

[Analyst] (Diameter): 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?

John Kovacs: 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?

Speaker #3: So what was it about this quarter that kind of stood out as an acceleration?

Speaker #2: 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.

Fernando Bleichmar: Well, John, I think it's basically simple math in the sense that, you know, our print sales used to be, you know, a much higher portion of our total sales. They are now de minimis, and they are, you know, declining, still continue to decline, but they are 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?

Michael Hansen: Well, John, I think it's basically simple math in the sense that, you know, our print sales used to be, you know, a much higher portion of our total sales. They are now de minimis, and they are, you know, declining, still continue to decline, but they are 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?

Speaker #2: They're 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.

Speaker #2: 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?

Dean Tilsley: Yeah. Yeah. Yeah, so John, like, like, you know, print, look, I'm 12, 12 months in here. The print just several years ago was $120 million annualized just in the US alone. It's down now to something just in the $40 million range. So, you know, print's been declining deliberately and intentionally 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 and including the first half of this year. That's now sort of seriously, significantly gone away. And again, that drag going forward will, will, will go away as print continues closer trend towards zero.... I think also, you know, Q3 is not the biggest quarter for US higher ed.

Speaker #4: Yeah. Yeah, yeah. So John, print look, I'm 12 months in here. The print just several years ago was 120 million dollars annualized. That's in US alone.

Speaker #4: It's down now to something just in the 40 million dollar range. So print's been declining by about deliberately and intentionally been declining by about 28, 29 percent year-on-year.

Speaker #4: Well, that's now 29 percent 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.

Speaker #4: That's now sort of seriously significantly gone away. And again, that drag going forward will go away as print continues closer trend towards zero. I think also HQ3 is not the biggest quarter for US higher ed.

Speaker #4: So to Michael's point, are we going to do this growth rate every quarter? Probably not. Q4 is the second highest. Sales season. So whilst we're seeing we've got very good expectations for Q4.

Dean Tilsley: So to Michael's point, are we going to do this growth rate every quarter? Probably, probably not. You know, Q4 is the second highest sales season. So while we're seeing, you know, we've got very good expectations for Q4, a little bit is also Q3 is a relatively quieter period for Higher Ed. So, you know, again, you get a function of the math around that.

Speaker #4: A little bit is also Q3 is a relatively higher period for higher ed. So again, you get a function of the math around that.

Speaker #3: Yeah, 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 biggest driver of improvement here is there's no longer a significant drag from print, which has been declining in the past.

[Analyst] (Diameter): Yeah, that's, 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 biggest driver of improvement here is there's no longer a significant drag from print, which has been declining in the past.

John Kovacs: Yeah, that's, 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 biggest driver of improvement here is there's no longer a significant drag from print, which has been declining in the past.

Dean Tilsley: You, you got it. Absolutely. Absolutely. And I'll say, you know, from your competitor question, you know, McGraw Hill historically have been a little more aggressive on pricing than we have. But as you know, we continue to roll out our AI, you know, functionality tools, digitization, you know, clearly, you know, we're always assessing, you know, what the appropriate pricing strategy for ourselves.

Speaker #2: You got it.

Speaker #4: Absolutely. Absolutely. And I'll say, you're compared to 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're assessing what is the appropriate pricing strategy for ourselves.

Speaker #1: Your next question for today is from Alexi Chilitas with JPMorgan.

Operator: Your next question for today is from Alexi Chilitaz with JP Morgan.

Speaker #5: Yes, hello. Can you please share some color with you see on the ground in K12 biggest markets like California and Texas? Appreciate it. It's early days in the cycle.

[Analyst] (J.P. Morgan): Yes, hello. Hi, can you please share some color what you see on the ground in K-12 biggest markets like California and Texas? Appreciate it's early days in the cycle, but we have some early wins or competitive dynamics so far that you can share. Thank you.

Alex Ciliotta: Yes, hello. Hi, can you please share some color what you see on the ground in K-12 biggest markets like California and Texas? Appreciate it's early days in the cycle, but we have some early wins or competitive dynamics so far that you can share. Thank you.

Speaker #5: But we have some early wins or competitive dynamics so far. If you can share. Thank you.

Speaker #2: Yeah, 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 these encouraging signs for the next few weeks and months.

Fernando Bleichmar: Yeah, it's still early, as you said. The signs that we're seeing are encouraging, but you know, we would need to continue to see these encouraging signs for the next few weeks and months, but early indications are positive.

Dean Tilsley: Yeah, it's still early, as you said. The signs that we're seeing are encouraging, but you know, we would need to continue to see these encouraging signs for the next few weeks and months, but early indications are positive.

Speaker #2: But early indications are positive.

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

Q3 2026 Cengage Learning Holdings II Inc Earnings Call

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