Cengage Group (NYSE: CNB), a leading educational content, technology, and services company, held its Second Quarter Fiscal Year 2025 Conference Call, where CEO Michael Hansen and CFO Bob Munro provided an optimistic outlook for the company. Despite flat first-half revenues totaling $841 million, the company experienced an 8% increase in EBITDA to $323 million due to efficiency programs and margin expansion. The U.S. Higher Education segment saw a 3% revenue increase, and the company expects to exceed this growth by the year's end. Cengage Work's ed2go revenue grew by 20%, and Infosec saw a 4% increase. The company remains on track to meet its full-year guidance, with strong double-digit profit growth anticipated.
Key Takeaways
- Cengage Group's EBITDA rose 8% to $323 million in the first half of FY 2025.
- U.S. Higher Education segment revenue increased by 3% to $309 million.
- Cengage Work's ed2go and Infosec segments reported revenue growth of 20% and 4%, respectively.
- The company's new K-12 math program, Math & YOU, showed strong performance in initial markets.
- Full-year guidance remains unchanged, with solid revenue growth and strong double-digit profit growth expected.
Company Outlook
- Cengage anticipates robust growth in Academic and Work sectors for fiscal 2025.
- Select sector expected to be flat, factoring in the impact of the Ministry of Education contract rebasing.
- The company projects full-year growth to exceed the 3% achieved in fiscal 2024 for U.S. Higher Education.
- Digital products anticipated to represent 90% of annual sales by fiscal 2025.
- Strong double-digit EBITDA growth and significant margin expansion are supported by cost savings and enhanced profit contributions from Cengage Work.
Bearish Highlights
- International Higher Education saw flat revenues at $55 million due to market dynamics.
- Secondary education revenues declined by 6% to $158 million due to timing effects.
- Cengage Select's revenues decreased by 3% to $231 million, mainly from timing effects in Research and K-12 businesses.
Bullish Highlights
- The company's cost savings program is nearly complete, with over $100 million in expected savings for fiscal years 2025 and 2026.
- Unlevered free cash flow increased to $128 million, doubling from the previous year.
- Net leverage improved to 2.9x, with an expectation to decrease to 2.5x or lower by the end of fiscal 2025.
Misses
- First half revenues remained flat compared to the previous year.
- The overall ELT revenue growth is expected to be flat due to a $20 million rebasing of a large Ministry of Education contract.
Q&A Highlights
- The company discussed the completion of its cost savings program, with one-time implementation costs of approximately $90 million.
- Cumulative charges incurred reached $85 million, with savings exceeding $100 million expected by the end of fiscal 2025.
- Cengage reported a strong liquidity position, with cash balances of $247 million and total liquidity of $442 million.
- The company expects an increase of over $100 million in liquidity by the fiscal year's end.
Cengage Group's second-quarter earnings call highlighted the company's financial health and strategic initiatives that are expected to drive growth. The company's focus on its U.S. Higher Education segment and digital offerings, along with efficiency improvements and cost savings, are poised to contribute to a positive financial trajectory in the coming periods. With a steady outlook and a strong liquidity position, Cengage Group is set to navigate the fiscal year with confidence, aiming to deliver on its promises to stakeholders and maintain its growth momentum.
Full transcript - None (CNGO) Q2 2025:
Operator: Greetings. Welcome to the Cengage Group's Second Quarter Fiscal Year 2025 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Richard Veith. You may begin.
Richard Veith: Good morning. And welcome to Cengage Group's fiscal 2025 second quarter investor update. Joining me on the call are Michael Hansen, Chief Executive Officer; and Bob Munro, 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 contains forward-looking statements within the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements can be identified by words such as believe, expect, may, will, estimate, likely and similar words and are neither historical facts nor assurances of future performance and relate to future results and events, and they are based on Cengage Group's current expectations and assumptions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Many factors could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements. You should consider such factors, many of which are subject to the risks and uncertainties discussed in the slide presentation, which accompanies this call and in the Risk Factors section of our fiscal 2024 annual report for the year ended March 31, 2024, as may be updated by our quarterly reports for fiscal year 2025. Any forward-looking statement made in this presentation is based on currently available information. The company disclaims any obligation to publicly update or revise any forward-looking statements, except as required by law. On today's call and in our slide presentation, we will refer to certain non-GAAP financial measures. Definitions and the rationale for using these measures and reconciliations of each to its most directly comparable GAAP financial measure are provided in the appendix to the slide presentation. I will now turn the call over to Michael for an update on the business, followed by Bob, who will take you through the second quarter and first half details before we open the call for questions. Michael?
Michael Hansen: Thank you, Richard and good morning, everyone. Again, many thanks for joining us for our fiscal 2025 first half update. Having closed out a successful fall season, I am pleased to share that we are on track to deliver our guidance for fiscal 2025. We expect another year of solid revenue growth and strong double-digit profit growth. Our full year's guidance reflects the underlying sales momentum and strong sales pipelines we have taken into the second half. First half revenues of $841 million remained flat against a high prior year comparative, which benefited from earlier ordering and favorable timing of several large deals. Despite revenues being flat, EBITDA increased 8% to $323 million. This strong margin expansion in the first half of the year underlines the increasing impact of our now largely executed efficiency program and new operating model. We expect profit growth and margin expansion to further accelerate in the full year whilst also funding the investments we are making in our business to sustain growth over the medium term. Our strong cash performance is also driven by an ongoing global working capital optimization program. This strong cash performance is providing us increased financial flexibility and capacity for both organic investment and accretive acquisition opportunities. Let's now take a closer look at the performance highlights across our business. Within Cengage Academic, our U.S. Higher Ed business continues to demonstrate strong momentum with a 3% improvement in first half revenues totaling $309 million. Having returned to growth in fiscal 2024, we expect our U.S. Higher Ed business to improve on last year's growth rate in fiscal 2025. We are encouraged by the recent initial release of fall enrollment data by the National Student Clearinghouse. Looking beyond the headline numbers, our initial estimates are that enrollment is 1% to 2% ahead in the segments relevant to our business. Our secondary business had a solid fall season. With our long-term exclusive partner, Big Ideas Learning, we brought a brand-new comprehensive K-12 math program entitled Math & YOU to market. Math & YOU performed extremely well in its first adoption cycle, garnering an estimate share of over 40% in the Oklahoma math adoption, which is a strong early indicator. First half growth in secondary was held back by temporary sales timing impacts with the prior year first half representing a high comparative due to earlier ordering tied to significant wins in Nevada and Florida. These effects are expected to largely reverse in the second half, supported by our solid sales pipeline. Within Cengage Work, ed2go first half revenue increased 20% as more learners look at our advanced career training courses to prepare for in-demand careers. We recently announced that 18 of our most popular advanced career training courses received American Council on Education credit recommendation ratings, opening new pathways for ed2go learners to earn college credit for prior learning. Additionally, our Infosec business, a leading cybersecurity education provider, had a solid first half year with revenue up 4% compared to prior year. We are sharply focused on go-to-market strategies and product initiatives to accelerate Infosec's growth over time with two notable recent wins from these efforts. The first is a substantial five-year agreement to deliver boot camp and skills courses to personnel in federal government agencies. In addition, the Infosec team announced a new partnership with Right-Hand Cybersecurity to help organizations drive employee behavior change and reduce human cyber risk via real-time training. Cengage Work partners with over 1,800 academic institutions and 200 workforce agencies to provide flexible, affordable education programs that deliver impactful outcomes for both learners and businesses. Our most recent learner outcomes report found that 90% of learners enrolled in a Cengage Work course completed. This is far above the industry average of 50% to 70%. This report is a continuation of our commitment to transparently measure educational outcomes and gather valuable feedback, ensuring our offerings align with learners' needs. In Cengage Select, our ELT English language teaching business grew revenues by 7% in the first half, sustaining the strong underlying growth momentum this business has consistently shown over many years. We expect ELT to continue to be a key driver of long-term growth for Cengage Group, and we are pleased to share that we have extended our agreement with the National Geographic Society until 2043. This will allow us to deepen our strategic partnership with them. Overall, first half performance in Select was held back by temporary sales phasing in research with the prior year benefiting from timing of large archive sales and earlier subscription renewals. The business goes into the second half with a solid sales pipeline and renewal rates running at 93%, underpinning our expectation that these timing effects will reverse over the balance of the year. We are investing across our business to drive future growth and as part of this, are committed to advancing our AI and machine learning capabilities to drive both learner and instructor outcomes and accelerate internal efficiencies. We are steadily expanding our innovation team led by Darren Person, Chief Digital Officer; Michelle Gregory, Head of AI, working closely with the Chief Technology Officer, Jim Chilton. This fall, we had over 5,000 higher ed students beta test our discipline-specific general AI-powered student assistance, receiving positive feedback from both learners and educators. Based on this feedback, we plan to expand the student assistance to additional disciplines in the coming months. Adding to our momentum in using AI to personalize learning, later this month, Infosec will launch the Skills Navigator, leveraging artificial intelligence to create custom training programs aligned to the skills recommended for a specific role or job posting. We are also leveraging strategic partners and their AI-enabled platforms. In some key operations, we are seeing the potential for up to 40% efficiency and productivity gains. We will accelerate our investment in AI to improve student outcomes, instructor experiences and operational productivity and efficiency while taking a disciplined approach to how and when we expect returns of these investments. In closing, we are pleased with our results at the half year mark and our progress across our key strategic initiatives, and we are confident that we will deliver our guidance for the full year. I will now turn the call over to Bob Munro, our Chief Financial Officer, to provide more detail of our financial performance.
Bob Munro: Thank you, Michael and good morning. Turning to the Cengage Group financial highlights. Our business continued to perform well in the second quarter and through October to close out a successful fall season. With this and the solid sales momentum going into the second half, our guidance for the full year is unchanged. We expect to deliver another year of robust revenue growth and strong double-digit EBITDA growth, which I will come back to. First half adjusted cash revenues were $841 million, flat against a high comparative in the prior year. The first half revenue and EBITDA growth performance is held back by significant sales timing effects, notably in our secondary, research and Australia K-12 businesses, which are all down compared to the prior year. In fiscal 2024, our first half performance benefited from favorable sales timing setting a high comparative. In secondary, we had earlier orders from large wins in Florida and Nevada. In Research, we saw favorable timing of large archive sales and renewals. And in Australia K-12, the first half of fiscal 2024 benefited from earlier export orders. These businesses are all expected to largely recover first half shortfalls in the second half, underpinned by healthy sales pipelines and confirmed orders. These timing effects are estimated to hold back our first half revenues by around $20 million, before which revenue growth would be around 3%. First half adjusted cash EBITDA was $323 million, up 8% over the prior year on flat revenues, representing almost 300 basis points in margin expansion. This accelerated improvement in margin reflects the increasing and significant benefits of our cost savings program aligned to our new operating model. Adjusting for the estimated sales timing effects, first half adjusted cash EBITDA growth would be meaningfully over 10%. And taking account of the sales timing effects, the underlying first half performance is broadly in line with our overall Cengage Group expectations for the year. On a trailing 12-month basis, revenues are also flat at $1.54 billion. Trailing 12 months EBITDA reached $485 million, up 6% over the comparative period. In this trailing 12-month period, sales timing effects are greater in dollar terms due to secondary and are estimated to have a similar dampening effect on the September trailing 12 months revenue and EBITDA growth. Notwithstanding the sales timing effects, we continue to see strong digital progression with trailing 12 months digital net sales of $1.15 billion, up 4% and now representing 77% of the total. Across our businesses, we are seeing EBITDA growth significantly outpace revenue growth, reflecting accelerating margin expansion driven by cost savings from the implementation of our new operating model. This is substantially complete, and we are on track to realize over $100 million of expected incremental savings over fiscal 2025 and 2026. Of this total, over $60 million is expected to be realized in this fiscal year. Turning to the first half performance across our business segments. The Cengage Group revenue performance reflects the aggregate of flat revenues in Academic, sustained high growth of 15% in Work, offset by a 3% temporary reversal in Select. The temporary sales timing effects depressed the first half performance in Academic and Select and act as a significant drag on the trailing 12-month performance of the same business units. In Cengage Academic, first half adjusted cash revenue was flat at $523 million with accelerating growth in U.S. Higher Education, offset by the significant adverse timing effects in secondary. U.S. Higher Education first half revenues were $309 million, up 3% on the back of a successful fall season. U.S. Higher Education is sustaining strong digital and institutional growth momentum and benefiting from lower returns across the small residual print and bundle base. On a trailing 12-month basis, adjusted cash revenues for U.S. Higher Ed was $624 million, up 5%. Institutional revenues, which reflect the combination of Inclusive Access and Cengage Unlimited Institutional sales were $102 million in the first half and grew 31% on an underlying basis. This is after taking account of a large customer that changed billing schedule to the detriment of the first half. Through the end of October and the completion of the fall season, we expect the year-to-date institutional revenues to advance to around $145 million, representing growth of approximately 29%. On a trailing 12-month basis, institutional sales were $249 million, up 29% on an underlying basis and now represent 40% of total U.S. Higher Education revenues. Exiting fiscal 2025, we expect stand-alone digital products, including institutional sales to represent around 90% of annual sales with print and bundled products increasingly immaterial and accounting for less than 10% of revenues. This high continuing growth of the institutional sales base and predominantly digital nature of our business has significantly strengthened the profile of U.S. Higher Education, improving profitability, customer retention and predictability. In fiscal 2024, the U.S. Higher Education business returned to growth as our business passed an inflection point driven by our digital strategy, where that sustained growth in stand-alone digital products outweighed declines in the ever smaller print and bundle base. With a successful fall season behind us, strong underlying digital and institutional momentum and modest enrollment tailwind, our expectations remain that the U.S. Higher Education business is on track to deliver a second successive year of digitally driven top line growth. Further, given the improving underlying trends in the business, we expect growth to accelerate in the second half with full year growth outpacing the 3% we achieved in fiscal 2024. In International Higher Ed, first half cash revenue was $55 million, essentially flat against the prior period. This reflects the combination of low digitally driven growth in our Canadian business, which is our largest international market, representing around 35% of the annual business, together with good growth in our test prep business in India. These were moderated by other regions where a combination of market dynamics and strategic actions we are taking in response is putting some pressure on revenues in the near term. We have continued to progress plans to stabilize the business and return it to growth. ' In fiscal 2024, we took onetime actions to rebase the European, Middle East and Africa business. And in this fiscal year, we have repositioned our business in Latin America from direct go-to-market to a licensing distribution model. This is expected to have a modest onetime drag on international revenues this year whilst improving profit margins. Our secondary business has performed solidly through the fall season with first half performance impacted by temporary sales timing effects. The first half of fiscal 2024 benefited from large wins in Nevada and Florida and earlier ordering driving a high comparator. As a result, first half cash revenues of $158 million trailed the prior period by 6% or $10 million. Looking beyond the timing effects, our business performed well in the Oklahoma math adoption and in Florida Social Studies and Science and is now well over 80% through its annual selling cycle. With a solid sales pipeline going into the second half, we now expect secondary to largely reverse the sales timing effects and end the year with broadly flat revenues. In summary, for the full year fiscal 2025, we continue to expect Cengage Academic as a whole to deliver low single-digit growth, driven by accelerating growth in U.S. Higher Education. At Cengage Work, first half adjusted cash revenues reached $71 million, up 15%. This reflects sustained high double-digit growth in ed2go, where revenues were up 20% to $49 million, moderated by 4% growth with Infosec, where revenues hit $22 million. The strong performance in ed2go mainly reflects continued enrollment growth. This is driven by proven go-to-market strategies focused on expanding our footprint of educational institutions and integrating more tightly with them, extending distribution and diversifying sources of funding through B2B partners and new commercial models and through the optimization of our sales funnel. At Infosec, the year-to-date performance reflects strong single-digit growth in the boot camps business, moderated by lower revenues in our security awareness software segment, partly driven by temporary slippage of renewals. In boot camps, against the backdrop of some slowdown in overall market growth, we recently won a significant new contract with the federal government, which is testament to the competitive strength of our training forces. In software, we are focused on returning the business to strong growth and investing in go-to-market capabilities and ongoing product initiatives. These include our recently announced partnership with Right-Hand Cybersecurity to launch new human risk management solutions. The cybersecurity training market remains highly attractive with strong long-term demand and growth dynamics, and we believe Infosec is well positioned to capitalize on these trends. Notwithstanding this, with the boot camp market growing well but more slowly than we expected and considering the investments we are making to accelerate the growth in the software business, we have prudently revised our long-term projections for Infosec. This has resulted in a onetime and noncash goodwill impairment charge of approximately $60 million in the second quarter. Cengage Works continues to scale profitably and rapidly expand margins. First half adjusted cash EBITDA reached $11 million, more than double the contribution in the prior period, with EBITDA margins now around 15%. For the full year, we expect Cengage Work to broadly maintain the pace of revenue and EBITDA growth delivered in the first half, resulting in another year of strong double-digit revenue growth and significantly increased EBITDA contribution and margins. In Cengage Select, first half cash revenues were $231 million, 3% lower than the prior period, driven principally by sales timing effects in the Research and Australia K-12 businesses, which we expect to reverse in the second half of the year. English Language Teaching maintained good underlying growth momentum with adjusted cash revenues up 7% to $84 million. This reflects high double-digit growth in Latin America and sustained strong growth in the U.S. market. Overall growth is moderated by lower sales in Europe, Middle East and Africa, held back by temporary timing effects and onetime changes to a large Ministry of Education contract. In fiscal 2025, we expect overall revenue growth to be broadly flat at ELT, consistent with our previous guidance. This reflects the combination of sustained strong underlying revenue and profit growth across core markets being offset by changes in the commercial model on the large Ministry of Education contract in Europe, Middle East and Africa. This contract reset is expected to drive a onetime rebasing of revenues of around $20 million without any significant impact on the group's profits. The rebasing is expected to hold back ELT revenue growth by over 10% and represents around 125 basis point drag on overall Cengage Group revenue growth in this fiscal year. In Research, first half adjusted cash revenues were $113 million, 8% behind the strong prior period comparative. Year-to-date performance is largely driven by sales timing effects being some slippage of subscription renewals and the timing of archive sales with several large deals completed in the first half of the prior year. These timing effects are expected to reverse in the second half of the year, underpinned by a healthy archive sales pipeline and strong subscription renewals, which are running at 93%. For the full year, we expect research revenues to be broadly flat, marginally lower than previous guidance. This reflects some weaker demand in the U.S. public and school library markets and sunsetting of certain products. In the other segment, first half cash revenues reached $34 million, $4 million behind the prior period. The year-to-date revenue shortfall was driven by adverse phasing of export orders in the Australia K-12 business. With these export orders now received for fulfillment in the fourth quarter, for the full year, we expect the Australia K-12 business to stabilize and the other segment to deliver another year of growth driven by Milady. Turning to our cash performance, where the business has strong and accelerating momentum. First half unlevered free cash flow or operating cash flow was $128 million, more than double the $60 million achieved in the prior period. The improvement in operating cash performance reflects accelerating EBITDA growth and improved working capital driven by our global working capital efficiency program, which we have been executing in parallel to the cost savings program. To-date, we estimate this has delivered over $50 million of sustainable benefits from inception during fiscal 2024. These benefits significantly outweigh the reducing drag of our ongoing investments in global business systems with this program now in its final year. We expect to maintain strong momentum in operating cash performance in fiscal 2025 and beyond and this year, expect to deliver significantly improved operating cash conversion compared to the 69% achieved last year. First half levered free cash flow was $5 million compared to an outflow of $73 million in the prior period. This is after non-operating onetime cash flows of $55 million and lower interest payments. The lower year-to-date net cash interest is driven by the successful refinancing of the term loan completed in March 2024 and includes payment timing effects. For the full year, we expect cash interest to be around $135 million compared to $213 million in fiscal 2024. This reflects the lower interest costs post refinancing and benefits from interest rate hedges, which kick in, in the second half. In September, we entered three-year swaps hedging $550 million of our term loan at a fixed rate of approximately 3.23%. In addition, our term loan provides for two further step-downs in margin over SOFR currently at 425 basis points. These steps, each of 25 basis points are tied to reductions in our leverage ratio. We expect our cost of capital to further reduce as we progress through the second half and at least meet the first step down this fiscal year. We have now substantially completed the execution of our cost savings program. We expect total onetime implementation costs of around $90 million, which are largely cash costs and savings of over $100 million over fiscal 2025 and 2026. Of the onetime implementation costs, we have now incurred cumulative charges of $85 million. Also, on a cumulative basis, we have now paid out $70 million, of which $37 million was paid in the first half of this year. We expect the balance of costs of around $5 million and balance of cash payments of around $20 million to be largely incurred in fiscal 2025. Given our strong and improving liquidity position, we entered fiscal 2025 expecting to pay dividends on our outstanding preferred equity in cash going forward. This remains our expectation and consistent with this, the first quarter and second quarter dividends payable at the beginning of July and October, respectively, were settled in cash. Turning to our liquidity position. The business has a healthy balance sheet with long-dated debt maturities, increasing financial flexibility and a strong liquidity position. We finished the first half with cash balances of $247 million and total liquidity of $442 million, including the revolving credit facility. We expect this to increase by well over $100 million by the end of the fiscal year, reflecting the strongly cash-generative nature of our business and reducing cash cost of our capital structure. The combination of growth in trailing 12 months EBITDA and strong cash generation improved our net leverage to 2.9x at the end of September compared to 3.2x a year ago. We expect net leverage to further improve through the balance of the year, driven by cash generation and accelerated growth in EBITDA. Beyond the step changes in spread built into our term loan, with this continued strong progression on leverage and liquidity, we will continue to assess options available to drive further reduction in our cost of capital as we go forward. To close with our full year guidance, with a successful back-to-school season behind us and good underlying momentum going into our second half, our expectations for the full fiscal year 2025 are unchanged, and we are pleased to both reconfirm and refine our guidance. We expect Cengage Group to deliver another year of robust top line growth driven by proven go-to-market strategies and execution capabilities, which have predictably delivered and sustained growth over the last three fiscal years. This is after taking account of the estimated 125 basis point drag on growth from the onetime rebasing of the large Ministry of Education contract in English Language Teaching. Overall growth will be driven by Cengage Academic and Work. Select and each of its subsegments are expected to be broadly flat, taking account of that estimated $20 million onetime effect of the large Ministry of Education contract. In Cengage Academic, we expect low single-digit growth driven by U.S. Higher Ed. Having returned to solid growth in fiscal 2024, U.S. Higher Ed is expected to build on that success and accelerate growth in fiscal 2025. Secondary revenues are expected to be broadly flat with modest declines in international, driven by the onetime restructuring of the go-to-market model in Latin America. In Cengage Work, we expect the business to broadly sustain the first half growth through the full year. With the execution of our cost savings program nearing completion, we are on track to deliver the expected incremental cost savings of over $100 million over this and the next fiscal year. Of this, we expect incremental savings of over $60 million in fiscal 2025. We expect to deliver strong double-digit EBITDA growth and meaningfully accelerated margin expansion. This reflects the strong unit economics of our business, the expected benefit of cost savings and the significantly accelerating profit contribution from Cengage Work as the business continues to scale. The combination of the expected strong EBITDA growth and working capital efficiencies is expected to improve cash generation and operating cash conversion, and we expect to end fiscal 2025 with net leverage of 2.5x or lower. I will now pass back to the operator for questions.
Q -:
Operator: Thank you. At this time, we will conducting a question-and-answer session. [Operator Instructions] There appear to be no questions in queue. I will now turn the call over to Michael for closing remarks.
Michael Hansen: Yes. Thank you, everybody, for listening. We are looking forward to updating you on our next quarter, and have a good rest of your day.
Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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