Q4 2026 Cengage Learning Holdings II Inc Earnings Call

June 25, 2026

Speaker #1: Greetings, and welcome to the Cengage Group's fourth quarter and full year 2026 year-end conference call. At this time, all participants are in a listen-only mode.

Operator: Greetings. Welcome to the Cengage Group's Q4 and full year 2026 Year-End Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Ed Ditmeyer, SVP, Investor Relations. You may begin.

Operator: Greetings. Welcome to the Cengage Group's Q4 and Full Year 2026 Year-End Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Ed Ditmire, SVP, Investor Relations. You may begin.

Speaker #1: A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.

Speaker #1: Please note this conference is being recorded. I will now turn the conference over to your host, Ed Ditmeyer, SVP of Investor Relations. You may begin.

Speaker #2: Thank you, operator. Good morning to everyone connected today, and welcome to Cengage's fiscal 2026 fourth quarter and fiscal full year 2026 investor update. Joining me on the call are Michael Hansen, Chief Executive Officer, and Dean Tilsley.

Ed Ditmeyer: Thank you, operator. Good morning to everyone connected today, and welcome to Cengage's fiscal 2026 Q4 and fiscal full year 2026 investor update. Joining me on the call are Michael Hansen, Chief Executive Officer, and Dean Tilsley, Chief Financial Officer. A copy of the slide presentation for today's call has been posted to the company's website at cengagegroup.com/investors. The following discussion and the earnings materials contain forward-looking statements about the company. 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. These statements are based on our current expectations and are subject to the cautionary statement in our accompanying investor presentation and our financial reports. The company disclaims any obligation to update any forward-looking statements except as required by law.

Ed Ditmire: Thank you, operator. Good morning to everyone connected today, and welcome to Cengage's fiscal 2026 Q4 and fiscal full year 2026 investor update. Joining me on the call are Michael Hansen, Chief Executive Officer, and Dean Tilsley, Chief Financial Officer. A copy of the slide presentation for today's call has been posted to the company's website at cengagegroup.com/investors. The following discussion and the earnings materials contain forward-looking statements about the company.

Speaker #2: Chief Financial Officer. A copy of the slide presentation for today's call has been posted to the company's website at cengagegroup.com/investors. The following discussion and the earnings materials contain forward-looking statements about the company.

Speaker #2: Forward-looking statements relate to the future and are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict, many of which are outside of our control.

Ed Ditmire: 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. These statements are based on our current expectations and are subject to the cautionary statement in our accompanying investor presentation and our financial reports. The company disclaims any obligation to update any forward-looking statements except as required by law.

Speaker #2: These statements are based on our current expectations and are subject to the cautionary statement in our accompanying investor presentation and our financial reports. The company disclaims any obligation to update any forward-looking statements, except as required by law.

Speaker #2: On today's call and in our investor presentation, we will refer to certain non-GAAP financial measures, definitions, and the rationale for using these measures. Reconciliations to their most directly comparable GAAP financial measures are provided in the legal disclaimer and in the appendix to the investor presentation.

Ed Ditmeyer: On today's call and in our investor presentation, we will refer to certain non-GAAP financial measures. Definitions and the rationale for using these measures and reconciliations to their most directly comparable GAAP financial measures are provided in the legal disclaimer and in the appendix to the investor presentation. Michael will first share a high-level overview of company performance and a review of our progress on key strategic priorities, followed by Dean, who will take you through the financial performance in detail. We will open the call for questions. Michael?

Ed Ditmire: On today's call and in our investor presentation, we will refer to certain non-GAAP financial measures. Definitions and the rationale for using these measures and reconciliations to their most directly comparable GAAP financial measures are provided in the legal disclaimer and in the appendix to the investor presentation. Michael will first share a high-level overview of company performance and a review of our progress on key strategic priorities, followed by Dean, who will take you through the financial performance in detail. We will open the call for questions. Michael?

Speaker #2: Michael will first share a high-level overview of company performance and a review of our progress on key strategic priorities, followed by Dean, who will take you through the financial performance in detail.

Speaker #2: We will then open the call for questions. Michael?

Speaker #3: Thank you, Ed. Let me start off with the performance for the year, then highlight our strong progress in key strategic areas, and how I see the market demand for the year ahead.

Michael Hansen: Thank you, Ed. Let me start off with the performance for the year, highlight our strong progress in key strategic areas and how I see the market demand for the year ahead. Dean will follow with detailed Q4 results. Fiscal year 2026, ending 31 March 2026, delivered solid overall results, with adjusted cash revenue of $1.55 billion, up 1% year over year, and adjusted cash EBITDA of $545 million, up 1% as well, with a 35% adjusted cash EBITDA margin. Our performance was in line with expectations despite timing-driven declines in K-12 and impact in international due to the strategic shift away from print to digital. Additionally, we have made significant strides in fiscal year 2026 to implement our new global operating model and execute on our strategic priorities beyond the top-line results.

Michael Hansen: Thank you, Ed. Let me start off with the performance for the year, highlight our strong progress in key strategic areas and how I see the market demand for the year ahead. Dean will follow with detailed Q4 results. Fiscal year 2026, ending 31 March 2026, delivered solid overall results, with adjusted cash revenue of $1.55 billion, up 1% year-over-year, and adjusted cash EBITDA of $545 million, up 1% as well, with a 35% adjusted cash EBITDA margin. Our performance was in line with expectations despite timing-driven declines in K-12 and impact in international due to the strategic shift away from print to digital. Additionally, we have made significant strides in fiscal year 2026 to implement our new global operating model and execute on our strategic priorities beyond the top-line results.

Speaker #3: Dean will then follow with detailed Q4 results. Fiscal year 2026, ending March 31, 2026, delivered solid overall results, with adjusted cash revenue of $1.55 billion, up 1% year over year, and adjusted cash EBITDA of $545 million, also up 1%.

Speaker #3: With a 35% adjusted cash EBITDA margin, our performance was in line with expectations—despite timing-driven declines in K12 and the impact in international due to the strategic shift away from print to digital.

Speaker #3: Additionally, we have made significant strides in fiscal year 2026 to implement our new global operating model and execute on our strategic priorities beyond the top-line results.

Speaker #3: Elaborating further, it is important to recognize that we delivered stronger mid-single-digit adjusted cash revenue growth in each of our two largest and most strategic segments.

Michael Hansen: Elaborating further, it is important to recognize that we deliver stronger mid-single-digit adjusted cash revenue growth in each of our two largest and most strategic segments, higher education and work. These segments are our clear long-term secular growth engines, as well as the areas most aligned with the power of our education for employment mission. Second, it was very encouraging to see our momentum build as fiscal 2026 progressed. With H2 adjusted cash revenues up 6% and adjusted cash EBITDA up 21%. Our higher education and work growth engines played a big part in that H2 improvement, with top-line growth in the key U.S. higher ed business up 8% and ed2go up 21% year over year for the last six months. The H2 also benefited from annualized cost savings of $40 million, driven by efficiencies derived from our new global operating model.

Speaker #3: Higher education and work—these segments are our clear long-term secular growth engines, as well as the areas most aligned with the power of our education-for-employment mission.

Speaker #3: Second, it was very encouraging to see our momentum build as fiscal 2026 progressed, with second-half adjusted cash revenues up 6% and adjusted cash EBITDA up 21%.

Speaker #3: Our higher education and work growth engines showed significant improvement, with top-line growth in the key U.S. Higher Ed business up 8%, and Ed2Go up 21% year over year for the last six months.

Speaker #3: The second half also benefited from annualized cost savings of $40 million, driven by efficiencies derived from our new global operating model. H2 adjusted EBITDA margins rose points year over year.

Michael Hansen: H2 adjusted EBITDA margins rose over 360 basis points year over year. Stronger performance in the less cyclical strategic growth segments and better growth and momentum as the year progressed. I've spoken earlier in the year about the company's strategy to deliver strong, sustainable growth. To reiterate, it is built on a belief that trusted content is considered table stakes and value is shifting profoundly to impact and outcomes. When we consider our largest opportunities for that sustainable growth, we believe our work segment is right at the front in terms of long-term growth rates, while also being capable of driving higher margins due to our very efficient operating model. Interest in rewarding career paths outside of four-year degree programs is growing strongly and accelerating with workplace changes due to AI, creating a huge opportunity for Cengage, a market leader in this space.

Speaker #3: So, stronger performance in the less cyclical, strategic growth segments, and better growth and momentum as the year progressed. I've spoken earlier in the year about the company's strategy to deliver strong, sustainable growth.

Speaker #3: To reiterate, it is built on a belief that trusted content is considered table stakes, and value is shifting profoundly to impact and outcomes. When we consider our largest opportunities for that sustainable growth, we believe our work segment is right at the front in terms of long-term growth rates, while also being capable of driving higher margins due to our very efficient operating model.

Speaker #3: Interest in rewarding career paths outside of four-year degree programs is growing strongly and accelerating with workplace changes due to AI, creating a huge opportunity for Cengage, a market leader in this space.

Speaker #3: For full fiscal 2026, we continue to see sustained growth within the largest area of the Work segment, Ed2Go, with 24% year-on-year growth on an adjusted cash revenue basis.

Michael Hansen: For full fiscal 2026, we continue to see sustained growth within the largest area of the work segment, ed2go, with 24% year-on-year growth on an adjusted cash revenue basis. While ed2go's well-established higher ed distribution channel continues to perform well, we are also realizing large growth in our new corporate distribution channel. The corporate channel's revenue more than doubled over the past 12 months, with new partnership with organizations such as HCA, Amazon, and Novant Health. Additionally, this March, we released the third edition of the Cengage Work Learner Outcomes Report. This report offers a transparent and verifiable view of how our workforce education and upskilling programs translate into real-world employment results. Based on payroll record data validated by a global credit bureau, our report provides more reliable insights than traditional surveys.

Speaker #3: While Ed2Go is a well-established higher ed distribution channel and continues to perform well, we are also realizing large growth in our new corporate distribution channel.

Speaker #3: The corporate channel's revenue more than doubled over the past 12 months, with new partnerships with organizations such as HCA, Amazon, and Novant Health. Additionally, this March we released the third edition of the Cengage Work Learner Outcomes Report.

Speaker #3: This report offers a transparent and verifiable view of how our workforce education and upskilling programs translate into real-world employment results. Based on payroll record data validated by a global credit bureau, our report provides more reliable insights than traditional surveys.

Speaker #3: And because of that, it is especially satisfying to see people who complete our courses attain 9% to 14% average year-one compensation increases, and 18% average compensation increases within two years of certification completion.

Michael Hansen: Because of that, it is especially satisfying to see people who complete our courses attain 9% to 14% average year one compensation increases and 18% average compensation increases within 2 years of certification completion. ROI is critical. We are excited to leverage these exceptional outcomes to differentiate ourselves and win in this fast-growing market. As we begin fiscal 2027, we continue to increase our investment to extend our reach. For example, we've recently began offering our advanced career certifications in the Canadian market, partnering with Canadian institutions and expanding ed2go's catalog with the first localized Canadian option in Q1. We are also working to reach more learners by offering Spanish language courses. Now, let's turn to our strategic technology priorities. There are three central pillars to how we are leveraging powerful technology to transform our business and how we serve our customers.

Speaker #3: Our OI is critical, so we are excited to leverage these exceptional outcomes to differentiate ourselves and win in this fast-growing market. As we begin fiscal 2027, we continue to increase our investment to extend our reach.

Speaker #3: For example, we've recently begun offering our advanced career certifications in the Canadian market, partnering with Canadian institutions and expanding Ed2Go's catalog with the first localized Canadian option in Q1.

Speaker #3: We are also working to reach more learners by offering Spanish language courses. Now, let's turn to our strategic technology priorities. There are three central pillars to how we are leveraging powerful technology to transform our business and how we serve our customers.

Speaker #3: First is the ongoing digitization of the business—moving from a legacy of print textbooks to increasingly interactive digital content and courseware delivered over highly scaled platforms.

Michael Hansen: First is the ongoing digitalization of the business. Moving from a legacy of print textbooks to increasingly interactive digital content and courseware delivered over highly scaled platforms. We now have over 16 million digital users, and digital revenue reached $1.2 billion on a GAAP basis for fiscal 2026. This digital revenue represents an increase of 10% year over year, and now representing 81% of the company's total GAAP revenue for the period. Second, with the digitization of our business significantly complete in key markets, we have set the foundation to add AI-enabled tools for our customers, products that accelerate learner outcomes and enhance effectiveness for instructors. Fiscal 2026 was the year Cengage launched AI solutions for each of its business segments. User engagement is building nicely, and we're seeing encouraging evidence on impacts.

Speaker #3: We now have over 16 million digital users, and digital revenue reached $1.2 billion on a GAAP basis for fiscal 2026. This digital revenue represents an increase of 10% year over year and now represents 81% of the company's total GAAP revenue for the period.

Speaker #3: Second, with the digitization of our business, significantly completing key markets, we have set the foundation to add AI-enabled tools for our customers—products that accelerate learner outcomes and enhance effectiveness for instructors.

Speaker #3: Fiscal 2026 was the year Cengage launched AI solutions for each of its business segments. User engagement is building nicely, and we're seeing encouraging evidence of their impact.

Speaker #3: For example, an internal study of students in early-release testing who began using Student Assistant and described themselves as struggling in a course were 90% more likely to continue submitting assignments through the end of the term.

Michael Hansen: For example, an internal study of students in early release testing who began using Student Assistant, who described themselves as struggling in a course, were 90% more likely to continue submitting assignments through the end of the term. We are focused on continuing to drive higher adoption of these new tools. Third, we are investing in AI capabilities to improve enterprise performance. However, we are taking a disciplined and cost-effective approach to enterprise AI adoption, prioritizing use cases with clear business impact, measurable productivity benefits, and the ability to scale responsibly. This work is led by our AI Enablement Center, a dedicated team responsible for helping us deploy AI safely and effectively. We are already seeing tangible benefits. In our work segment, AI is helping us accelerate the development and release of new products in high-demand areas.

Speaker #3: We are focused on continuing to drive higher adoption of these new tools. Third, we are investing in AI capabilities to improve enterprise performance. However, we are taking a disciplined and cost-effective approach to enterprise AI adoption.

Speaker #3: We are prioritizing use cases with clear business impact, measurable productivity benefits, and the ability to scale responsibly. This work is led by our AI Enablement Center, a dedicated team responsible for helping us deploy AI safely and effectively.

Speaker #3: We are already seeing tangible benefits. In our Work segment, AI is helping us accelerate the development and release of new products in high-demand areas.

Speaker #3: In higher education and schools, we are using AI to streamline content development, including media production, translation, and assessment creation, while maintaining high standards for quality, accuracy, and efficacy.

Michael Hansen: In higher education and school, we are using AI to streamline content development, including media production, translation, and assessment creation, while maintaining high standards for quality, accuracy, and efficacy. We also see meaningful opportunity beyond content creation. For example, AI is helping us improve the performance of our digital products and support faster, more effective customer service. Overall, we view AI as an enabler of our strategy, helping us move faster, operate more efficiently, improve the customer experience, and strengthen our ability to deliver innovative learning solutions at scale. We expect to mature our capabilities significantly over the coming years. I'm proud of the progress the organization has made in enabling these opportunities, and I'm grateful for the culture of innovation that has taken root in the company's talented team.

Speaker #3: We also see meaningful opportunity beyond content creation. For example, AI is helping us improve the performance of our digital products and support faster, more effective customer service.

Speaker #3: Overall, we view AI as an enabler of our strategy, helping us move faster, operate more efficiently, improve the customer experience, and strengthen our ability to deliver innovative learning solutions at scale.

Speaker #3: We expect to mature our capabilities significantly over the coming years. I'm proud of the progress the organization has made in enabling these opportunities, and I'm grateful for the culture of innovation that has taken root in the company's talented team.

Speaker #3: Because of this, it was especially appreciated when, in March of this year, Fast Company named Cengage to its prestigious list of the world's most innovative companies for 2026.

Michael Hansen: It was especially appreciated when March of this year, Fast Company named Cengage to its prestigious list of the world's most innovative companies in 2026, a list which shines a spotlight on businesses that are shaping industry and culture through their innovations. Cengage's recognition reflects its leadership in building a responsible AI-powered learning ecosystem that spans K12, higher education, and workforce training. Pedagogy-first innovation with AI tools that enhance rather than shortcut the learning process. I congratulate the team again and thank our customers for their trust as we work together to innovate. Let me speak briefly on the demand dynamics that our larger businesses are facing as we begin executing in fiscal 2027. In our Work segment, we expect continued increased demand for credentialed training.

Speaker #3: A list that shines a spotlight on businesses shaping industry and culture through their innovations. Cengage's recognition reflects its leadership in building a responsible, AI-powered learning ecosystem that spans K-12, higher education, and workforce training.

Speaker #3: Pedagogy-first innovation with AI tools that enhance, rather than shortcut, the learning process. I want to congratulate the team again, and thank our customers for their trust as we work together to innovate.

Speaker #3: Now, let me speak briefly on the demand dynamics that our larger businesses are facing as we begin executing in fiscal 2027. In our Work segment, we expect continued increased demand for credential training.

Speaker #3: National Student Clearinghouse preliminary data released this month showed undergraduate certificate enrollment up 10.2% in spring 2026, underscoring the shift towards shorter, career-focused education pathways.

Michael Hansen: National Student Clearinghouse preliminary data released this month showed undergraduate certificate enrollment up 10.2% in spring 2026, underscoring the shift towards shorter, career-focused education pathways. In higher ed, we expect to see continued strong demand for digital courseware and solutions. In K12, where certain states support and coordinate buying by district and schools on approximately six-year cycles, we are shifting to a multi-year phase beginning in fiscal 2027 that will be characterized by anticipated cyclical increases in those large state adoptions. I will now hand the call over to Dean, who will provide a more detailed review of our fiscal Q4 and full year 2026 financial performance. Dean?

Speaker #3: In higher ed, we expect to see continued strong demand for digital courseware and solutions. In K-12, where certain states support and coordinate buying by districts and schools on approximately six-year cycles, we are shifting to a multi-year phase beginning in fiscal 2027 that will be characterized by anticipated cyclical increases in those large state adoptions.

Speaker #3: I will now hand the call over to Dean, who will provide a more detailed review of our fiscal Q4 and full-year 2026 financial performance.

Speaker #3: Dean?

Speaker #2: Thank you, Michael. For the financial review, unless otherwise noted, I will be citing financial figures on an adjusted cash basis, and comparisons will be to the prior-year period.

Dean Tilsley: Thank you, Michael. For the financial review, unless otherwise noted, I will be citing financial figures on an adjusted cash basis, and comparison will be to the prior year period. Consistent with prior presentations, the appendix includes explanations of any adjustments made, as well as the GAAP financial results. Let's review the high-level group financials first. For fiscal Q4, the company delivered solid performance with revenue growth of 4%, driven by increases in our two largest segments, higher ed and workforce skills. School, where Q4 is traditionally the smallest sales quarter, declined year over year due to a lack of large deals and the early renewal of key Gale contracts that were recognized in Q3.

Speaker #2: Consistent with prior presentations, the appendix includes explanations of any adjustments made, as well as the GAAP financial results. Okay, let's review the high-level group financials first.

Speaker #2: For fiscal Q4, the company delivered solid performance, with revenue growth of 4%, driven by increases in our two largest segments—Higher Ed and Workforce Skills.

Speaker #2: School, where Q4 has traditionally been the smallest sales quarter, declined year over year due to a lack of large deals and the early renewal of key GAIL contracts that were recognized in Q3.

Speaker #2: That Q4 top-line growth of 4% was compounded at the EBITDA level with a 9% increase, as the company implemented its new operating model, delivering a mid-single-digit reduction in operating expense and unlocked almost 200 basis points of margin expansion.

Dean Tilsley: That Q4 top-line growth of 4% was compounded at the EBITDA level with a 9% increase as the company implemented its new operating model, delivering mid-single-digit reduction in operating expense and unlocked almost 200 basis points of margin expansion. Looking at full year 2026 results, as Michael mentioned earlier, we achieved a modest increase of 1% in both adjusted cash revenues and EBITDA, supported by our strong H2 momentum with H2 2026 EBITDA up 21% on 6% higher revenue. We continue to improve the strength of our balance sheet with net debt at 2.3x adjusted trailing 12-month cash EBITDA, a 300 basis points reduction over the last 12 months, and total liquidity of $561 million, up $109 million or 24% year over year. This improvement is driven by a significant expansion of levered free cash flow, which was up $133 million year over year.

Speaker #2: Looking at full-year 2026 results, as Michael mentioned earlier, we achieved a modest increase of 1% in both adjusted cash revenues and EBITDA, supported by our strong second-half momentum. H2 2026 EBITDA was up 21% on 6% higher revenue.

Speaker #2: We continue to improve the strength of our balance sheet, with net debt at 2.3x adjusted trailing 12-month cash EBITDA, a 300 basis point reduction over the last 12 months.

Speaker #2: And total liquidity of $561 million, up $109 million, or 24% year over year. This improvement is driven by a significant expansion of leverage-free cash flow, which was up $133 million year over year.

Speaker #2: Turning now to Q4 highlights by segment, starting with Higher Education. Higher Education segment revenues rose 6% in Q4, with the key U.S. Higher Ed business up 6%, driven by increased sales of digital products, price, and growth in the institutional sales channel.

Dean Tilsley: Turning now to Q4 highlights by segment, starting with Higher Education. Higher Education segment revenues rose 6% in Q4, with the key U.S. higher ed business up 6%, driven by increased sales of digital products, price, and growth in the institutional sales channel. Institutional sales rose 18% to over $330 million and now make up 57% of U.S. higher ed revenues. The other smaller higher ed businesses, international and Gale, combined for an 8% year over year increase, led by Gale. Which continued to see a strong H2 with both US and international sales recovering following government actions earlier in the fiscal year. Canada enrollment continues to be impacted by government policy that sets limits on the number of foreign students.

Speaker #2: Institutional sales rose 18% to over $330 million, and now make up 57% of U.S. higher ed revenues. The other, smaller higher ed businesses—international and Gale—combined for an 8% year-over-year increase, led by Gale.

Speaker #2: We continue to see a strong H2, with both U.S. and international sales recovering following government actions earlier in the fiscal year. Canada enrollment continues to be impacted by government policy that sets limits on the number of foreign students.

Speaker #2: Q4 Higher Ed profitability built on that 6% top-line increase with an 8% increase in EBITDA, due to the higher profitability of digital products as well as benefits from our implementation of the new operating model.

Dean Tilsley: Q4 Higher Education profitability built on that 6% top-line increase with an 8% increase in EBITDA due to the higher profitability of digital products, as well as benefits from our implementation of the new operating model. Next, Cengage Work segment. Q4 revenues rose 4%, with our biggest work area, ed2go, delivering 20% growth year-on-year. As Michael highlighted, ed2go continues to see fantastic growth with increasing demand within our traditional two and four-year college and university partners, augmented with rapid growth in our emerging employer-focused channel, which has now more than doubled in the past year. ed2go growth was supported by continuing technical education or CTE, the second-largest business within the Work segment, which was up 2% year-over-year. Looking at the other areas of Cengage Work, which include Milady and Infosec, I'd like to take a moment to zoom in on Infosec.

Speaker #2: Next, Cengage Work segment. Q4 revenues rose 4%, with our biggest Work area, Yet2Go, delivering 20% growth year over year. As Michael highlighted, Yet2Go continues to see fantastic growth, with increasing demand within our traditional two- and four-year college and university partners, augmented with rapid growth in our emerging employer-focused channel, which has now more than doubled in the past year.

Speaker #2: Year-to-go growth was supported by continuing technical education, or CTE, the second-largest business within the Work segment, which was up 2% year over year.

Speaker #2: Looking at the other areas of Cengage work, which include Milady and InfoSec, I'd like to take a moment to zoom in on InfoSec. Here, there was a significant $4 million year-over-year headwind, which was driven mainly by the partial U.S. government shutdown, which negatively impacted enrollment.

Dean Tilsley: Here, there was a significant $4 million year-over-year headwind, which was driven in main by the partial US government shutdown, which negatively impacted enrollment. The shutdown has now been resolved, and we expect some bounce-back benefit in the early part of fiscal 2027. Looking at Q4 Work EBITDA, the 4% decrease year-over-year was heavily impacted by the Infosec business headwinds as well as investments to scale the ed2go and CTE businesses. Turning now to our School segment. As already mentioned, Q4 is the smallest quarter for sales, with only 5% of annual US K12 revenues occurring in Q4. Q4 revenues were down 11% year-over-year, but this was impacted by the early renewal of key Gale contracts recognized in Q3.

Speaker #2: The shutdown has now been resolved, and we expect some bounce-back benefit in the early part of fiscal 2027. Looking at Q4 Work EBITDA, the 4% decrease year over year was heavily impacted by the InfoSec business headwinds, as well as investments to scale the Yet2Go and CTE businesses.

Speaker #2: Turning now to our School segment. As already mentioned, Q4 is the smallest quarter for sales, with only 5% of annual U.S. K-12 revenues occurring in Q4.

Speaker #2: Q4 revenues were down 11% year over year, but this was impacted by the early renewal of key GAIL contracts recognized in Q3. Removing the timing impact and looking at H2 performance, adjusted cash revenues for the segment were up 3% year over year, which is a better reflection of the business performance versus the prior year, again during a traditionally low sales period.

Dean Tilsley: Removing the timing impact and looking at H2 performance, adjusted cash revenues for the segment were up 3% year-over-year, which is a better reflection of the business performance versus the prior year, again, during a traditionally low sales period. The full-year performance of a 7% revenue decline reflects what we have highlighted all year, that 2026 was a low adoption year. At the EBITDA level, we saw an $8 million decline in Q4 due to both the lower revenue as well as the net effect of a revised partner agreement in the prior year period. School is less than 20% of our total revenues, but as Michael mentioned, in fiscal 2027, we enter a multi-year period of large state adoption opportunities in California, Florida, and Texas.

Speaker #2: The full-year performance of a 7% revenue decline reflects what we have highlighted all year—that 2026 was a low adoption year. At the EBITDA level, we saw an $8 million decline in Q4, due to both the lower revenue as well as the net effect of a revised partner agreement in the prior-year period.

Speaker #2: School is less than 20% of our total revenues, but as Michael mentioned, in fiscal 2027, we enter a multi-year period of large state adoption opportunities in California, Florida, and Texas. This will move the demand backdrop from a 2026 headwind to a multi-year tailwind.

Dean Tilsley: This will move the demand backdrop from a 2026 headwind to a multi-year tailwind, and we enter that period of greater opportunity with products benefiting from recent investments in both core content and innovative AI tools. Finally, our smallest segment, English Language Learning, Q4 revenue rose $2 million or 4%, driven by higher sales in both the international and US K12 areas with a $1 million increase in EBITDA. When considering full-year results in ELL, I want to highlight that 2025 benefited from a single large, $6 million non-recurring deal in the Caribbean. Normalizing for the single deal, full-year revenue would have been down 2.5% year-over-year, driven by the lower US K12 adoption year. Full-year EBITDA fell a more moderate $4 million or 7% as cost actions offset more than half the revenue decline. Let's turn to the group cash flow dynamics.

Speaker #2: And we enter that period of greater opportunity with products benefiting from recent investments in both core content and innovative AI tools. Finally, our smallest segment, English Language Learning—Q4 revenue rose $2 million, or 4%, driven by higher sales in both the international and U.S. K–12 areas.

Speaker #2: With a $1 million increase in EBITDA. When considering full-year results in ELL, I want to highlight that 2025 benefited from a single large $6 million non-recurring deal in the Caribbean.

Speaker #2: Normalizing for this single deal, full-year revenue would have been down 2.5% year over year, driven by the lower U.S. K-12 adoption year. Full-year EBITDA fell a more moderate $4 million, or 7%, as cost actions offset more than half the revenue decline.

Speaker #2: Let's turn to the group cash flow dynamics. Leverage-free cash flows saw a fantastic improvement of $133 million in fiscal 2026, due to three key drivers.

Dean Tilsley: Levered free cash flow saw a fantastic improvement of $133 million in fiscal 2026 due to three key drivers. First, change in working capital improved by $55 million, reflecting stronger collections in the later portion of the year after H1 invoicing delays were resolved, as well as benefits from the ongoing shift to institutional sales. Full-year results also benefited from the timing of royalty payments that were accelerated to Q4 2025 due to the new ERP system going live in Q1 of 2026. Second, restructuring costs and other non-operating expenses were significantly lower in 2026. Plus, we had lower M&A activity, with the fiscal 2025, including the acquisition of Visible Body. Together, these items drove almost $50 million in improvement. Lastly, interest payments were lower by $25 million due to our successful refinancing of our term loan debt in January 2026.

Speaker #2: First, changing working capital improved by $55 million, reflecting stronger collections in the later portion of the year after H1 invoicing delays were resolved.

Speaker #2: As well as benefits from the ongoing shift to institutional sales. Full-year results also benefited from the timing of royalty payments that were accelerated to Q4 2025, due to the new ERP system going live in Q1 of '26.

Speaker #2: Second, restructuring costs and other non-operating expenses were significantly lower in 2026. Plus, we had lower M&A activity, with fiscal 2025 including the acquisition of Visible Body.

Speaker #2: Together, these items drove almost $50 million in improvement. And lastly, interest payments were lower by $25 million due to our successful refinancing of our term loan debt in January 2026.

Speaker #2: So, in 2026, we stepped up to deliver $181 million in leverage-free cash flow, almost four times the prior year, representing a large improvement in our cash conversion rate.

Dean Tilsley: In 2026, we stepped up to deliver $181 million in levered free cash flow, almost four times the prior year, representing a large improvement in our cash conversion rate. Total liquidity, comprising cash on the balance sheet and available capacity on our revolving credit facility, rose $109 million over the last 12 months to $561 million as at 31 March 2026, driven by improved cash balances. Net debt declined by $121 million to $1.26 billion, with net leverage at 2.3x, trading 12 months adjusted cash EBITDA, a 300 basis point reduction year-over-year. Our strong balance sheet and liquidity positions us well to continue our strategic execution. We have presented our financial results on an adjusted cash basis.

Speaker #2: Total liquidity, comprising cash on the balance sheet and available capacity on our revolving credit facility, rose $109 million over the last 12 months to $561 million as of March 31, 2026, driven by improved cash balances.

Speaker #2: Net debt declined by $121 million to $1.26 billion, with net leverage at 2.3x trailing 12 months adjusted cash EBITDA, a 300 basis point reduction year over year.

Speaker #2: Our strong balance sheet and liquidity position us well to continue our strategic execution. So, we have presented our financial results on an adjusted cash basis.

Speaker #2: For those who want to compare us with some of our public company peers, I would like to highlight that our fiscal '26 results on a GAAP basis, group adjusted EBITDA was up 9% year on year, on 4% higher revenue.

Dean Tilsley: For those who want to compare us with some of our public company peers, I would like to highlight that our fiscal 2026 results on a GAAP basis, Group adjusted EBITDA was up 9% year-on-year on 4% higher revenue. With our key Higher Ed and Work segments, adjusted EBITDA up 11% and 16% respectively. With that, I'd like to pass back to the moderator for any questions.

Speaker #2: With our key Higher Ed and Work segments, adjusted EBITDA was up 11% and 16%, respectively. With that, I'd like to pass back to the moderator for any 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 1 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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Your first question for today is from David Salpeter with Jain Global.

Speaker #1: A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.

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 poll for questions.

Speaker #1: Your first question for today is from David Salpeter with Jefferies Global.

Speaker #3: I know it's one of your smaller segments, but I wanted to talk briefly about K-12 and the coming adoption cycle. I think one of your competitors, on their most recent earnings call, talked a little bit about decision-making in California being perhaps delayed longer than they had originally expected.

David Salpeter: I know it's one of your smaller segments, but I want to talk briefly about K-12 and the coming adoption cycle. I think one of your competitors on their most recent earnings call talked a little bit about decision making in California being perhaps delayed longer than they had originally expected and some of the challenges around Texas sort of pushing state-developed open education resources in terms of adoption of math curriculum there. Just was hoping if you could talk about basically the size and timing of the opportunity and whether that has changed relative to what you once might have thought given that kind of commentary.

Speaker #3: And some of the challenges around Texas sort of pushing open, edge state-developed open educational resources in terms of adoption of math curriculum there.

Speaker #3: I was just hoping you could talk about the size and timing of the opportunity, and whether that has changed relative to what you might have previously thought, given that kind of commentary.

Speaker #4: Yeah, David, it's Michael. Happy to take that question. The first I want to reiterate, it is a K-12 in general is a smaller segment, much smaller segment for us, sub 20% of total revenue.

Michael Hansen: Yeah, David, it's Michael. Happy to take that question. I mean, first, I want to reiterate, K-12 in general is a smaller segment, much smaller segment for us, sub 20% of total revenue. More importantly, even the K-5 segment where many of the adoptions that you currently cited in Texas and California are focused on is an even smaller segment for us. It's around 3% of our total revenue. Clearly not a major area of focus for us. That said, the comments made by our competitors, I think we can confirm. What happened in California is there was a lot more experimentation with different types of approaches and different kinds of pedagogy. As a result, a lot of districts pushed their decision making out to next year, which will benefit everybody and us as well next year.

Speaker #4: More importantly, even the K–5 segment, where many of the adoptions that you currently cited in Texas and California are focused, is an even smaller segment for us.

Speaker #4: It's around 3% of our total revenue, so clearly not a major area of focus for us. That said, regarding the comments made by our competitors, I think we can confirm what happened in California is that there was a lot more experimentation with different types of approaches and different kinds of pedagogy.

Speaker #4: And as a result, a lot of districts pushed their decision-making out to next year, which will benefit everybody—and us as well—next year.

Speaker #4: And in the Texas initiative, the use of OER with Blue Bonnet is also a fact in this market. There has been experimentation with open educational resources for many decades, but that said, again, it is not a major area for us and not a major area of concern at all.

Michael Hansen: In the Texas initiative to use OER with Bluebonnet Learning is also a fact in this market. There has been experimentation with open educational resources for many decades. That said, again, it is not a major area for us and not a major area of concern at all in terms of our overall performance.

Speaker #4: In terms of our overall performance.

Speaker #3: Thank you.

David Salpeter: Got it. Thank you.

Speaker #1: Once again, if you would like to ask a question, please press star one. We have reached the end of the question-and-answer session, and I will now turn the call over to Michael for closing remarks.

Operator: Once again, if you would like to ask a question, please press star one. We have reached the end of the question and answer session, and I will now turn the call over to Michael for closing remarks.

Speaker #4: Thank you, Holly, and thank you to everyone joining the call, and for the time and focus you have put into reviewing this Cengage story.

Michael Hansen: Thank you, Holly, and thank you to everyone joining the call and for the time and focus you have put into reviewing the Cengage story. I just want to close with a brief summary of our messages today regarding our fiscal 2026 results, and in particular the H2, where we saw a building of momentum that we are working to continue with where we are investing in the business and in the technology in ways that are completely aligned with our strategic direction. We have begun our fiscal 2027 with a demand context that when paired with strong execution, is healthy overall and conducive to continued progress. Thank you all for joining us, and we are looking forward to update you in three months. Thank you.

Speaker #4: I just want to close with a brief summary of our messages today regarding our fiscal 2026 results, and in particular, the second half—where we saw a building of momentum that we're working to continue, with investments in the business and in technology in ways that are completely aligned with our strategic direction.

Speaker #4: And we've begun our fiscal '27 with a demand context that, when paired with strong execution, is healthy overall and conducive to continued progress. So thank you all for joining us, and we're looking forward to update you in three months.

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

Q4 2026 Cengage Learning Holdings II Inc Earnings Call

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