Q4 and Fiscal Year 2018

Transcription

1 and Fiscal Year 2018 Investor Update May 17, 2018

2 Investor Call Safe Harbor/Forward-Looking Statements Cautionary Note Regarding Forward-Looking Statements This following slides and related discussion contain forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of Forward-looking statements can be identified by words such as: anticipate, intend, plan, goal, seek, believe, project, estimate, expect, strategy, will and similar references to future periods. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. 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. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, 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. You should consider such factors, many of which are outlined in the Risk Factors section of our Annual Report for the period ended March 31, 2017 and the Special Note Regarding Forward-Looking Statements section of the same report. The Company s Annual Report will be posted to the Company website shortly. Any forward-looking statement made by us in this presentation is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. Non-GAAP Financial Measures This presentation contains disclosures of Adjusted Revenue, Adjusted EBITDA, Adjusted Cash Revenue, Adjusted Cash EBITDA, Adjusted EBITDA less Prepub, Adjusted Cash EBITDA less Prepub on a quarterly and year to date basis and Free Cash Flow on a year to date basis, all of which are non-gaap financial measures. See the Appendix for the definition of these measures, the rationale for their use, and a reconciliation to the most comparable GAAP measure. This presentation may also contain discussions of gross sales measures by markets, which represent amounts invoiced to our customers. Consequently, gross sales are before any adjustments for sales returns provision or revenue deferral. We believe this measure provides investors with a more comprehensive understanding of our underlying revenue results and trends by presenting amounts invoiced on a consistent basis. We may also discuss net sales which represents gross sales less actual returns of products. 2

3 Agenda Introduction Dan Sieger SVP, Corporate Communications Business Update Michael Hansen Chief Executive Officer Financial Update Rebecca McNamara SVP, Financial Planning & Analysis Q & A

4 Business Update Michael Hansen

5 and Fiscal Year 2018 Financial Highlights Cengage overall adjusted revenue grew 10% (+$30.3 million), Adjusted EBITDA less Prepub flat, with the normalization of the Bonus and sales commission accruals having the largest impact Learning Revenue up 14% in with benefit from sustainable unit strategy contribution from rental partnerships, lower returns and growth in standalone digital Fiscal Year 2018 overall adjusted revenue flat, Adjusted EBITDA Less Prepub down 15% Adjusting for expansion of rental program, adjusted revenue up 1%. Topline inflection point has been achieved. EBITDA Less Prepub impacted by strategic growth investments, one-time impact from expansion of rental partnerships, and normalization of bonus and commissions vs Prior Year Learning performed in-line with expectations with adjusted revenue down -3% Adjusting for expansion of rental program, adjusted revenue lower by 1% Higher Ed net sales lower by 7%, adjusted for expansion of rental program, lower by 5% Overall net unit growth of 11% year-to-date driven by standalone digital and participation in rental programs, trading off strong unit growth for lower ASP Core Digital net sales growth of 12% Returns were lower by 25% in and 29% year-to-date Launched market-leading subscription model, Cengage Unlimited Contribution from Growth businesses and Gale School (part of Learning segment), 23% net sales growth, strong flow through International 12% revenue growth, 33% EBITDA less Prepub growth Gale posted 2% revenue growth, 4% EBITDA less Prepub growth Adjusted EBITDA less Prepub of $298 million, down $52M or 15%, was driven primarily by investments to drive digital growth in Higher Ed (-$27M), including the launch Cengage Unlimited, partially offset by savings in Prepub ($17M) and Cost of Sales ($10M). The expansion of rental partnerships (-$15M) and the normalization of Bonus (-$27M), and sales commissions ($8M) following a weaker than anticipated. Absent these cost normalization items, Adjusted EBITDA 5 less Prepub was flat

6 Fiscal 2018 Adjusted Revenue Bridge Full Year ($M) $1,461 $30 $4 $29 -$35 -$20 -$8 $1,461 HE: Impact of 1st Full Year of Operationalized Rental Partnerships (1) Adjusted Revenue International Gale Learning: School Learning: HE Net Sales Learning: Higher Ed Rental (2) Learning: HE Deferred Revenue Adjusted Revenue (1) Launch of rental pilot program in F17 and the continuation and expansion of the program in resulted in a $20M impact to net sales variance in, which impacted ELP by $15M. Rental programs ontribute positively to revenue in FY19. Note: Financials results based on constant currency. Amounts above may not sum due to rounding. 6

7 EBITDA less Prepub Bridge Full Year ($M) Normalization of Cost Base EBITDA Less Prepub Flat on Normalized Basis $350 -$4 -$8 -$27 -$15 $297 $12 $3 $10 -$13 $17 -$27 $298 HE: Impact of 1st Full Year of Operationalized Rental Partnerships (2) Higher Ed Revenue flowthrough, savings & digital investments EBITDA Less Prepub Learning: Tax Benefit (1) Learning: HE Sales Commission Normalization Learning: Bonus Normalization Learning: Higher Ed Rental (2) Normalized EBITDA Less Prepub International Gale Learning: School Learning: Higher Ed Revenue Flow- Through Learning: Prepub Reduction Learning: Digital Investments/ CU Launch EBITDA Less Prepub (1) one-time tax benefit represents the reduction of property, sales and use tax reserves as a result of the expiration of statute of limitations for certain periods. (2) Launch of rental pilot program in and the continuation and expansion of the program in resulted in a $20M impact to net sales variance in and an $15M impact to EBITDA less Prepub. Rental programs contribute positively to revenue in FY19. Note: Amounts above may not sum due to rounding. 7

8 Fiscal 2018 Recap Higher Ed stabilized and strategies to address affordability and drive recurring units gained traction. 11% growth in net units Recurring units now account for 81% of total Launched Cengage Unlimited: a transformational subscription-based business model that will increase the value proposition to students and professors School, International and Gale delivered profitable revenue growth 8

9 Driving Digital Adoptions RELATIVE ADOPTION VALUE PRINT VS DIGITAL MAXIMIZING REVENUE PER ADOPTION 2.0x 1.5x 1. Convert Print to Digital Monetize print adoption through rental Recapture revenue from print adoption seats through competitive pricing on print texts and ebooks 2. Digital Adoptions provide 2x more net sales than print PRINT ADOPTIONS DIGITAL ADOPTIONS: BUNDLES + STANDALONE DIGITAL ADOPTIONS STANDALONE ONLY 3. Within digital, standalone net sales value is 1.5x vs bundles Students activate product at 50% higher rates Does not feed secondary market 9

10 Driving Towards Recurring Units Recurring units increased to 81% in from 70% in 1 Recurring units - Rental, Core Digital & ebooks - are sold each year of an adoption Recurring units do not feed secondary market Units by Product Type Units by Product Type ebooks Other Print Transactional ebooks Other Print Transactional Print Rental (Recurring) Print Rental (Recurring) Core Digital Core Digital 70% Recurring 81% Recurring 1 Recurring units sold into 2-Year and 4-Year Non-Profit Institutions; Excludes Units sold to For-Profit Institutions 10

11 Participating in Rental Economics increases 4-year cumulative revenue by at least 75% CUMULATIVE REVENUE TRADITIONAL PRINT VS RENTAL PARTNERSHIPS Frontlist $M Rental Partnership Traditional Print REVENUE OVER LIFE OF AN EDITION Year 1: Upfront purchase of New print in first year of an edition exceeds revenue received under rental model in that year Year 2: Rental: text continues to be rented & Cengage receives a portion of revenue Traditional model: Channel partners replenish inventory for rental, slightly increasing new Print sales (most of replenishment comes from used market) FY19 FY20 (1) Year 3 and Beyond: Rental: In year 3, rental revenue exceeds upfront revenue from traditional print Traditional model: Channel partners rent existing inventory and do any replenishments from used market 11 (1) -18 actual results & FY19-FY20 estimates.

12 Cengage Unlimited Fall-Spring Semester Sales B-to-C Adoption Seasons B-to-B Semester Readiness Activities Returns Periods Over halfway through the Fall B-to-B: Strong momentum during current adoption season 5/17/18 12

13 Driving results in Higher Growth Education Markets School International Gale Net sales: : Declined -8% (a seasonally small quarter) : Grew 23% Adjusted revenue: : Grew 4% : Grew 12% Adjusted Revenue: : Grew 9% : Grew 2% Maximize growth by leveraging HE products in Advanced Placement market and our National Geographic partnership growth driven by strong Higher Ed performance in Australia and English Language Teaching (ELT) growth in EMEA & Latin America Strong growth in Latin America, Australia, and Asia 13

14 Go forward guidance On-track to return Higher Ed business to growth with cyclically moderate topline performance from International, School and Gale Continue to invest in strategic priorities while generating solid positive free cash flow Positions Cengage for strong top and bottom line growth in FY20 and beyond 14

15 Financial Update Rebecca McNamara

16 Cengage Financial Highlights ADJUSTED REVENUE (Millions) $ % $288.8 $1, % $1,460.6 revenue up $30M, or 10%, with growth across all segments EBITDA less Prepub essentially flat. Revenue flow through offset by reinstatement of bonus ($12M) and normalized Learning sales commission levels ($10M) FISCAL YEAR 2018 Adjusted Revenue flat ADJUSTED EBITDA LESS PREPUB (Millions) MARGIN % $25.4-2% $25.8 $ % $ % 9% 20% 24% Excluding impact of expanded rental programs, adjusted revenue was up 1% Adjusted EBITDA Less Prepub driven by normalization of non-run rate costs ( bonus & sales commission reversals, onetime tax benefit in prior period, expansion of rental partnerships) and investments to drive growth in School, International and Higher Ed digital, partially offset by cost of sales savings and reductions to prepub Note: Financials results based on constant currency. See Appendix for reconciliation to GAAP reporting measures and reconciliation of prior year results to current year exchange rates. 16

17 Learning Financial Highlights ADJUSTED REVENUE (Millions) ADJUSTED EBITDA LESS PREPUB (Millions) MARGIN % $ $ % 15% $ $8.4 $944.6 $ % -27% $978.2 $250.1 Note: Financials results based on constant currency. See Appendix for reconciliation to GAAP reporting measures and reconciliation of prior year results to current year exchange rates. -4% -6% 29% 19% 35% 26% Adjusted Revenue up $21M or 14% vs PY. Net sales up +13% Print net sales +28% vs PY driven by rental & lower returns Standalone digital net sales +15% vs PY Returns better by 25% vs PY EBITDA less Prepub up by $1 million with revenue flow through offset by reinstatement of bonus ($12M) and normalized sales commission levels ($10M) FISCAL YEAR 2018 Adjusted Revenue declined 3% Excluding impact of expanded rental programs, adjusted revenue down -1% Strong school performance (+23%) partially offset lower sales in Higher Ed (-7%, adjusted for rental -5%) Adjusted EBITDA Less Prepub driven primarily by revenue flow-through, including rental impact, investments in digital and impact of non-run rate costs (bonus, commissions and tax benefit) 17

18 Learning Revenue Drivers FULL YEAR CONTRIBUTION BY KEY DRIVERS Contribution to YoY Revenue Growth ADJUSTED REVENUE IMPACT UNIT IMPACT Relative impacts of key drivers of Adjusted Revenue and Net Units based on currently available data and internal estimates. Core Digital Growth +5% 10% Core digital contribution driven by 12% net sales growth and 18% unit growth 0% School Deferred Revenue +1% NA (1%) NA School contribution to revenue performance of 1%. (Digital sales included in core digital) Excluded from unit growth analysis. Print Attrition (4%) (5%) Print continued impact of used, rental, counterfeit and non-consumption by students Enrollments - Based on recently reported enrollment data from National Student Enrollment (2%) (2%) Clearinghouse and driven primarily by 2-year and for-profits institutions Rental Partnerships (2%) +9% Rental - Significant expansion of rental program has short term cannibalization impact on revenue majority and will be a positive contributor in FY19 : (3%) +11% Amounts above may not sum due to rounding. Core Digital growth inclusive of School digital sales 18

19 International Financial Highlights ADJUSTED REVENUE (Millions) $ % $70.7 $ % $253.4 Adjusted Revenue up $3M or 4%, vs PY EBITDA less Prepub lower due to investment in ELT product, go-tomarket and higher bonus provision ADJUSTED EBITDA LESS PREPUB (Millions) -38% +33% FISCAL YEAR 2018 Adjusted Revenue up 12% or $30M, driven by Australia Higher Ed share gains and growth of English Language Teaching $7.2 $11.7 $48.7 $36.6 Adjusted EBITDA less Prepub grew $12M with significant margin improvement MARGIN % 10% 17% 17% 14% Note: Financials results based on constant currency. See Appendix for reconciliation to GAAP reporting measures and reconciliation of prior year results to current year exchange rates. 19

20 Gale Financial Highlights ADJUSTED REVENUE (Millions) $ % $65.5 $ % $229.0 revenue up 9% with several large deals in Asia and the U.S. EBITDA less Prepub improved to $25.3 M, up 12% FISCAL YEAR 2018 ADJUSTED EBITDA LESS PREPUB Full Year Adjusted Revenue increase of 2% driven by 9% International growth and a flat US revenue performance (Millions) $ % $22.5 $ % $63.7 Adjusted EBITDA less Prepub increase of $3M is driven by a combination of revenue flow-through and strict cost management MARGIN % 35% 34% 29% 28% Note: Financials results based on constant currency. See Appendix for reconciliation to GAAP reporting measures and reconciliation of prior year results to current year exchange rates. 20

21 Summary of Cash Flows $M Adjusted EBITDA Less Prepub $298 Less: Capex (53) Plus: Change in Working Capital 27 Less: Other Operating Costs 1 (24) Less: Investing Activities (24) Less: Tax & Other Financing Activities (9) Less: Net Cash Interest (153) Levered Free Cash Flow 2 $62 Less: Dividends (1) Less: Share Repurchase (67) Less: Debt Repayment (28) Net Increase (Decrease) in Cash and Cash Equivalents ($33.0) Levered Free Cash Flow, or FCF before the impact of repurchases, debt repayment and dividends, was $62 million in Fiscal 2018 $61M of share repurchases in were from net debt proceeds on debt refinancing, remaining $6M of share repurchases is net settlement of equity-based awards 1 Other operating costs include restructuring payments, gain on lease buyout, unusual items, difference between prepub and capex spend in ELC and GAAP CF, and FX 2 See Appendix for definition of this non-gaap reporting measure. 21

22 Liquidity and Net Debt Existing Repurchase Capacity: Debt Current board authorization of up to $100M, no restrictions under Term loan facility/bond Indenture on amount company can buyback Equity No current board authorization (last stock repurchase program completed in Q2 ), capacity of $50M under general restricted payment basket 1 The available credit under the revolving credit facility is based on the ABL defined borrowing base and is subject to fluctuations each month based on eligible receivables, eligible inventories, cash on hand and letters of credit issued, with a maximum borrowing capacity of $250M. 2 The carrying value of Total Debt is presented net of the unamortized original issue discount and deferred financing costs of $38.2 million and $45.3 million as of March 31, 2018 and March 31, 2017, respectively. 3 Adjusted EBITDA less Prepub is based on constant currency. See Appendix for reconciliation to GAAP reporting measures and reconciliation of prior year results to current year exchange rates. 22

23 Go forward guidance On-track to return Higher Ed business to growth with cyclically moderated topline performance from International, School and Gale Continue to invest in strategic priorities while generating solid positive free cash flow Positions Cengage for strong top and bottom line growth in FY20 and beyond 23

24 Q & A 24

25 Appendix 25

26 Definitions: Non-GAAP Financial Measures We believe that certain non-gaap financial measures provide useful information for evaluating our business performance. These non- GAAP measures are on a constant currency basis whereby we convert current period and prior period amounts from local currency to U.S. dollars using standard internal currency exchange rates held constant for each year. As needed, we restate these non-gaap measures for the prior period based on our internally-derived standard currency exchange rates used for the current period in order to remove the impact of foreign currency exchange fluctuation. We believe that these performance measures provide our management and investors with a meaningful basis for reviewing the results of our operations by eliminating the effects of financing decisions as well as excluding the impact of activities not related to our ongoing operations. However, these measures should be viewed in addition to, and not as a substitute for, the Company s reported results prepared in accordance with GAAP. Financial Measure Adjusted Revenue Adjusted EBITDA Adjusted EBITDA less Prepub Description This measure is defined as revenues before the impact of changes in foreign currency exchange rates and the adoption of fresh start accounting, which resulted in the reduction of deferred revenue on the March 31, 2014 Effective Date, and a reduction of revenue recognized subsequent to the Effective Date. This measure is defined as net income (loss) before: (benefit from) provision for income taxes; reorganization items, net; interest expense, net; loss on early extinguishment of debt, net; other (income) expense, net, in operating income (loss); amortization of identifiable intangible assets; depreciation; operational restructuring and other charges, net; amortization of prepublication costs; the impact of fresh start accounting; other income (expense), net, below operating income (loss); equitybased compensation expense and non-core other operating expenses. This measure also removes the impact of changes in foreign currency exchange rates on the items noted above. This measure reflects Adjusted EBITDA less the impact of additions to prepublication costs (or Prepub ) on an accrual basis, which are costs incurred prior to the publication date of a title or release date of a product and represent activities associated with product development including, but not limited to, editorial review and fact verification, graphic art design and layout and the process of conversion from print to digital media or within various formats of digital media. In addition, Prepub includes the cost to procure perpetual rights for the use of content which have been developed by third parties and are to be included in our products. Costs are capitalized when the title is expected to generate probable future economic benefits and are amortized upon publication of the title over its estimated useful life. Adjusted Cash Revenue, These measures remove the net impact of the deferral of revenue and the non-cash recognition of deferred revenue on sales Adjusted Cash EBITDA, of strategic digital products from the respective non-gaap measures, as defined above. Adjusted Cash EBITDA and Adjusted Adjusted Cash EBITDA Cash EBITDA less Prepub also remove the impact of the associated deferred costs on these strategic digital products. Full less Prepub payment for strategic digital products is normally collected close to the time of sale whereas revenue from such arrangements is deferred and subsequently recognized ratably over the term of the customer contract. Free Cash Flow This measure is defined as net cash provided by operating activities less additions to property, equipment and capitalized internal-use software and to prepublication costs. Levered Free Cash Flow This measure is a management reporting view of cash flow defined as net cash provided including all operating, investing and interest activities. 26

27 Learning Performance by Key Product Types GROSS SALES NET SALES FISCAL 2018 FISCAL 2018 ACTUAL B / (W) B / (W) B / (W) B / (W) % ACTUAL % % % PRINT $59 (15%) $362 (28%) 28% (22%) BOUND BUNDLE $12 (23%) $141 (13%) 7% (6%) LOOSE-LEAF BUNDLE $17 7% $159 9% 13% 7% STANDALONE $76 15% $241 26% 15% 27% CORE DIGITAL $105 8% $542 8% 15% 12% Note: Print gross and net sales negatively impacted by rental program expansion (~$20M in Fiscal 2018) OTHER DIGITAL 1 $6 (33%) $32 (45%) (23%) (41%) EBOOKS $22 (5%) $70 (5%) (5%) (5%) OTHER 2 $22 25% $123 21% 25% 22% TOTAL SALES $213 (1%) $1,129 (9%) 13% (2%) ADJUSTMENTS 3 ($39) 38% ($185) 24% 18% (32%) TOTAL ADJUSTED REVENUE $174 14% $945 (3%) 14% (3%) 1 Other digital includes legacy products that Cengage is sunsetting 2 Other gross sales is comprised primarily of School product and Ed2Go 3 Adjustments are primarily related to Sales Returns Reserve (SRR) and Deferred Revenue Amounts may not sum due to rounding. 27

28 Learning Digital Activations COURSEWARE ACTIVATIONS (LEARNING) (Thousands) +16% +14% 1,505 1,301 4,108 3,605 MINDTAP ACTIVATIONS (LEARNING) (Thousands) Core Digital activations up 16% from ; +14% from MindTap activations up +41% from ; +39% from +41% +39% 703 1, ,289 28

29 Non-GAAP Financial Measures¹ ¹ Financials results based on constant currency. See Appendix for reconciliation to GAAP reporting measures. See Appendix for reconciliation to GAAP reporting measures and reconciliation of prior year results to current year exchange rates. 29

30 Non-GAAP Cash Financial Measures 1 1 Financials results based on constant currency. See Appendix for reconciliation to GAAP reporting measures. See Appendix for reconciliation to GAAP reporting measures and reconciliation of prior year results to current year exchange rates. 2 Prior periods may differ from previously reported amounts due to product classification change to conform to current year presentation and as prior year numbers now include the acquisition of WebAssign. 30

31 Cengage Cash Financials ADJUSTED CASH REVENUE (Millions) $ % $257.3 ADJUSTED CASH EBITDA LESS PREPUB (Millions) MARGIN % -$1.9 67% -$5.7 $1,467.4 $1,465.4 $ % -15% Note: Financials results based on constant currency. See Appendix for reconciliation to GAAP reporting measures and reconciliation of prior year results to current year exchange rates. $ % -2% 21% 24% revenue up $34M, or 13%, with growth across all segments EBITDA less Prepub up $4M, or 67%. Revenue flow through offset by reinstatement of bonus ($12M) and normalized Learning sales commission levels ($10M) FISCAL YEAR 2018 Adjusted Cash Revenue flat Excluding impact of expanded rental programs, adjusted revenue was up 2% Adjusted EBITDA Less Prepub driven by normalization of non-run rate costs ( bonus & sales commission reversals and one-time tax benefit in prior period) and investments to drive growth in School, International and Higher Ed digital, partially offset by cost of sales savings and reductions to prepub 31

32 GAAP Results 32

33 Balance Sheet 33

34 Non-GAAP Reconciliations 1 1 Non-GAAP measures are on a constant currency basis, including additions to prepublication costs. Additions to prepublication costs are reported at actual rates in our statement of cash flows. FX impact due to the difference between actual rates and current year plan rates. 2 Prior periods may differ from previously reported amounts due to product classification changes to conform to current year presentation and acquisition of WebAssign. 3 Represents net impact of prior period accrued prepub costs paid in current period and current period accrued prepub additions. 34

35 Summary of Cash Flows 1 See Appendix for definition of this non-gaap reporting measure. 35

36 to Constant Currency Reconciliation Reconciliation of rates to rates: Our non-gaap financial measures are on a constant currency basis. Cengage updates the constant currency rates based on the spot rates as of April 1 of the current fiscal year. Amounts may not sum due to rounding. 36