Cengage Learning Holdings II, Inc. (CNGO) Earnings Call Transcript & Summary

Good morning, and welcome to the Cengage Fiscal 2020 Third Quarter Investor Update. Participating on the call will be Michael Hansen, Chief Executive Officer; Bob Munro, Chief Financial Officer; and Richard Veith, Senior Vice President and Treasurer. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Richard Veith. Please go ahead, sir.

Good morning, and welcome to Cengage's Fiscal 2020 Third Quarter Investor Update. A copy of the slide presentation for today's call has been posted to the company's website at cengage.com/investor. The following discussion may contain forward-looking statements with the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to future results and events, and they are based on Cengage's current expectations and assumptions. Actual results may differ materially from those currently expected and are subject to the risks and uncertainties discussed in the Risk Factors section of our fiscal 2019 annual report for the year ended March 31, 2019, the special note regarding forward-looking statements section of the same report and the Risk Factors section of our fiscal 2020 third quarter report for the 3 and 9 months ended December 31, 2019. The company disclaims any duty or intention to update or revise any forward-looking statements. This presentation, including the appendix, contains disclosures of adjusted revenue, adjusted cash revenue, adjusted EBITDA, adjusted cash EBITDA, adjusted EBITDA less prepub and adjusted cash EBITDA less prepub on a quarterly and year-to-date basis and free cash flow and levered cash flow on a year-to-date basis, all of which are non-GAAP financial measures. Adjusted revenues and adjusted EBITDA measures are on a constant currency basis. Definitions, rationale for the use of these measures and reconciliations of each to its most directly comparable GAAP financial measure is provided in the appendix to today's slide deck. We may also discuss digital product sales, which represents gross sales less actual returns of digital stand-alone products and bundled print and digital products. And now we can turn to Slide 3 for today's agenda. Michael Hansen, Chief Executive Officer, will provide an update on the business; followed by Bob Munro, Chief Financial Officer, who will take you through the details of our financial results before we open the call for questions. Let me now introduce the Chief Executive Officer of Cengage, Michael Hansen.

Thank you, Richard. Good morning, everyone. At our last update in November, we focused on the performance of the higher education business through the back-to-school season, including the actions we implemented to respond to emerging trends in the business as we saw a weaker-than-expected market. I will share progress on these initiatives as I provide an update on the performance of the business and the outlook for the full year. I will also update you on the progress of our merger with McGraw-Hill. Bob will then take you through the financials in more detail before we open the line for questions. Turning first to the financial headlines. Cengage delivered a solid third quarter performance. Our adjusted cash revenues in the quarter were 1% ahead of the prior quarter. And as we approach the halfway mark in the final quarter of the year, the business is firmly on track to deliver our full year guidance, which remains unchanged. Our year-to-date adjusted cash revenue reached $1.031 billion. Revenues now trail the prior period by 6%. This is a 2 percentage point improvement compared to the half year mark. Adjusted cash EBITDA less prepub was $214 million, which is 2% behind the prior year. This represents a significant narrowing of the gap to the prior year compared to the half year. The successful mitigation of the EBITDA impact of the revenue decline and the positive trajectory of EBITDA reflects the continued simplification of our cost structure enabled by our Cengage Unlimited business model in U.S. higher ed as well as overall strong cost discipline across the business. Since we believe that the market conditions are unlikely to materially improve or stabilize in the near term, we are pleased that we have taken early and decisive action to simplify our business model and lower our cost structure. The results are tangible and clear. We will reduce our cost base by 10% in the current fiscal year. In addition, we will see meaningful benefits in fiscal year '21 from the full year effects of these actions. Within the Learning segment, the higher education and skills business is the key driver of the year-to-date adjusted cash revenue decline, specifically, the core nonprofit sector of the market. Looking through the whole academic cycle to the end of the fiscal year, we confidently expect underlying net sales in the higher education nonprofit business to be down mid-single digits. In the trailing 12 months to the end of December 2019, industry net sales, as measured by MPI, were down more than 10% year-over-year. Against this, Cengage net sales were down around 5%. Cengage has outperformed the other industry peers in this benchmark by over 5 percentage points, and we have gained around 1.6% in market share over the past 12 months. It is notable that over the 3-year period, prior to the launch of Unlimited, Cengage underperformed against the rest of the industry peer group according to the MPI data. This was caused by our greater exposure to soft side disciplines, resulting lower digital penetration and our legacy of high price points. With the introduction of the Cengage Unlimited subscription model, we have reversed this trajectory. In fact, since the launch of Cengage Unlimited in 2018, Cengage has gained around 1.8% share and has consistently outperformed. These net share gains translate into around $50 million of revenue gains. The change in the trajectory of the business provides clear evidence that our strategy is working. In addition, we are building strong and sustainable direct relationships with faculty and students alike. We sold almost 900,000 Cengage Unlimited subscription in the fiscal year to the end of December, which is an increase of 50% over the prior period. This number of subscriptions sold has increased to around 1.3 million, saving students well over $65 million in the current academic year-to-date. Since launching August 2018, we have sold over -- well over 2 million subscription, are on track to save students $160 million since launch. While these savings are clearly beneficial to students, our focus on affordability is also a clear competitive advantage with faculty. The vast majority of faculty are very conscious of the financial pressures on their students and cite affordability as one of their principal concerns when deciding what product to use. Our focus on faculty and the broader student/faculty network effects are driving increasing penetration across Cengage Unlimited accounts. High Cengage Unlimited penetration accounts typically see double-digit sales growth. In addition, we are seeing increased momentum in direct to institution Cengage unlimited deals, which are often multiyear committed contracts. These trends are driving improvements in the overall revenue profile of our higher education business, while also building and deepening our direct relationship with students. While Cengage Unlimited is clearly working, our insights from the fall season made clear that we need to continue to innovate to meet the overall market challenges. Our U.S. higher education revenues will fall again this year as print declines outweigh the strong momentum in digital, driven by Cengage Unlimited. To address these challenges and optimize the potential of the Unlimited subscription, we continue to evolve our go-to-market strategy and product offerings. Turning to the next slide. The fall season performance and market trends further underscore the imperative to keep affordability at the core of our strategy. We continue to see customers and students shift to more affordable options with Cengage Unlimited being the clear winner. The fall season also highlighted 2 other important facts. First, concerns about affordability are putting pressure on courseware growth. In fact, many faculties say that affordability is their biggest concern when they consider the adoption of courseware solutions. This came through in lower rates of faculty requiring the use of digital courseware in the classroom, instead, making digital optional. Second, there remains significant barriers to digital courseware adoption in large segments of the market, which are still dominated by print. In these segments, digital courseware penetration is increasing very slowly and we saw higher rates of reversion back to print and share loss to smaller, low-cost print-focused publishers. In response to these trends, we continue to innovate and introduce new products quickly and at scale. For example, in January, we announced our plan to offer an e-textbook option with Cengage Unlimited. This option will be available in August 2020. This new option targets those segments of the market, which remain print-focused and where digital adoption is low and only slowly growing. Cengage Unlimited e-textbook further demonstrates our commitment to offering affordable options that best fit our customer needs. The announcement has been well received by customers and faculty and is generating good sales momentum ahead of the fall season. The pricing and design of the offering reflects detailed course level segmentation and analysis. In addition, the offering reflects our focus on building direct relationships with students. In addition to the launch of Cengage Unlimited e-textbooks in Q3, we reorganized our sales force to an account-based model. These initiatives will have some benefit in the spring season. However, they are principally focused on the upcoming fall season to further accelerate the good momentum we see in the broader digital business. This is summarized on Slide 7. The strong momentum of Cengage Unlimited is reflected in the continuing robust progression in courseware activation and the proportion of the higher education business represented by recurring units. Cengage Unlimited net sales reached $124 million in the year-to-date, which is 44% ahead of prior year. Recurring units comprising rental, core digital and eBooks, were up 4 percentage points to 83% of the total in year-to-date compared to 79% in the same period last year. Courseware activations were up 14%, which reflects continued strong momentum through the back-to-school season. In fall 2019, 24% more students activated Cengage courseware than 2 years ago. Before I turn to the merger, let me summarize our full year guidance for fiscal '20. This is shown on Slide 8. Subject to the risks associated with the evolving coronavirus situation in China, our full year guidance is unchanged. This is underpinned by the solid third quarter and a better spring season performance in higher education, where we are on track. Before any potential shortfall in China, we expect Cengage total adjusted cash revenues to decline by around 5%. Excluding the impact of the large nonrecurring software license sale in fiscal '19, the full year underlying decline moderates to minus 4%. We are on track to deliver strong margin expansion and adjusted cash EBITDA less prepub of $305 million. This growth is driven by the structural simplification and rationalization of the cost base. The decisive action taken in fiscal '20 and the benefits of our new operating model will deliver around 10% reduction in operating costs year-over-year. Before merger costs, we expect positive leverage, free cash flow and a leverage ratio of around 6.2 to 6.3x by March 31, 2020. Our full year outlook includes about $20 million of revenue to be closed in China in the balance of the year. Of this, around $10 million of revenue is at risk of slipping into fiscal '21 as a result of the unfolding coronavirus situation. The related risk to adjusted EBITDA less prepub is estimated at about $7 million. This risk is principally focused in Gale, where we have our strongest-ever pipeline of institutional deals with universities in China. Our ability to close these deals is being impacted by extended closures of institutions in Mainland China and travel restrictions to the region. At this stage, to the extent we are unable to close deals this year, we expect them to slip to the next fiscal year. A prolonged and/or worsening crisis, however, would put these deals at further risk. With the strong earnings growth, continuing outperformance of the industry and the momentum of Cengage Unlimited, the business is positioned well for both fiscal '21 and for the merger with McGraw-Hill. And now let me turn to an update on the merger, which is covered on Slide 9. We continue to make good progress on the merger with McGraw-Hill. However, the regulatory process will require more time. And as a result, we now expect to close the merger in mid-2020. Therefore, and by mutual agreement, Cengage and McGraw-Hill recently extended the outside date for regulatory approval for the merger agreement to May 1, 2020. The merger agreement also allows for the further extension of the outside date by mutual agreement to August 1. This updated time line reflects our reassessment of the time required to complete the U.S. regulatory approval process. Although we have made good progress, the number of courses, which are being reviewed, poses a workload challenge for all parties. We continue to work diligently and collaboratively with the DOJ to expedite the process as effectively as possible. Outside of the United States, we are similarly working closely with the authorities in Australia, New Zealand, the United Kingdom and Mexico. These processes are on track and are expected to be completed within the same overall time line. The ongoing detailed course level assessment is expected to result in a requirement to divest titles across the Cengage and McGraw-Hill portfolio. We are not yet able to quantify the impact of such remedies. We remain confident we can reach a mutually acceptable agreement with the DOJ and other authorities. To expedite the overall process, we are already engaged with prospective purchases of courses and/or titles in parallel with the regulatory review. On the financing amendments, we will align the amend and extend process for the first lien credit agreement tightly to the transaction close. We will bring the transaction back to market when the time line to close and the impact of any required title divestments is better understood. We do not expect the financing amendment to affect the timing of the merger closing. Given the most recent industry developments and ongoing affordability pressures, the rationale for the merger remains strong. The core objectives of the merger to improve affordability, extend choice and deliver high-quality products will deliver significant benefits to faculty, institutions and, importantly, students. Let me now hand over to Bob, who will take you through the third quarter and year-to-date financial performance in more detail.

Thank you, Michael, and good morning. Turning to Slide 11 and the financial headlines for the third quarter. The business delivered a solid third quarter. Adjusted cash revenue was $260 million, 1% ahead of the prior period. Adjusted cash EBITDA less prepub was $11 million. This represents a $23 million uplift over the prior period. The growth in adjusted cash EBITDA less prepub was driven by structural cost reductions. Our Q3 costs have been reduced by $22 million to $184 million. This has been achieved through the elimination of fiscal '19 onetime costs and the simplification of the operating model in both fiscal '19 and '20. In October and November, we further rationalized and simplified our business to lower our ongoing cost to serve in view of the pressures in higher education. Given the timing of these actions, the full impact of savings come through in the fourth quarter run rate. As a result, Q4 year-on-year cost savings are set to be meaningfully higher than in Q3. The Q3 adjusted cash revenue performance is driven by strong performance in international and an improving trajectory in higher education as we expected. International revenues were up 17%, reflecting over 20% growth in both international higher education and the English language teaching business. This is largely driven by order phasing compared to the fiscal '19 quarter. In U.S. higher education and skills, adjusted cash revenues were down 5% in the quarter compared to a 14% decline for the half year. The marked improvement in the trajectory of the higher education business reflects the following trends in the key nonprofit sector. First, the partial reversal of adverse channel purchasing and the effects of returns timing, which depressed the first half performance. These will fully normalize in Q4. And second, the normal restocking by channel partners ahead of the spring season. Net sales in the nonprofit sector were up on an underlying basis by around 20% in the third quarter as a result. The third quarter represents an important inflection point in the higher education performance in the current year. It further illustrates the importance of looking across the academic year rather than quarter-to-quarter given the cyclicality and phasing impacts in our business. Now let's turn to the year-to-date performance on Slide 12 and what this means by business for the full year outlook. As Michael addressed, with a solid third quarter, the year-to-date performance and trajectory of the business has demonstrably moved into alignment with the full year guidance. Adjusted cash revenues for the third quarter were $1.031 billion. Revenues are $67 million lower or 6% down compared to the prior period. This is 2% better than the 8% decline at the half year. Adjusted cash EBITDA less prepub for the year-to-date was $214 million. The shortfall to the prior period has also narrowed to 2% or $5 million. The impact of the year-to-date revenue decline, which stabilized over third quarter, has now been largely mitigated by realized cost savings. Year-to-date costs have been reduced by $53 million. This represents an 8% reduction in the cost base. Before any impact of China, the business is on track to deliver low single-digit revenue declines in the fourth quarter. This will further moderate the full year adjusted cash revenue decline to around 5%. Adjusted cash EBITDA before prepub is expected to be $305 million. The acceleration of run rate savings in Q4 will deliver full year cost reductions of around 10% and underpins the profit outlook. As Michael covered, we foresee revenue risk of around $10 million related to China, which translates to a $7 million of profit risk. Aside from China, the full year outlook is dependent upon the performance of higher education in the current spring season, which I will come on to. A few comments first on the performance and outlook for Gale and international. Gale year-to-date adjusted cash revenue was $156 million, which is 3% or $4 million behind the prior period. The shortfall to the prior period is driven by the U.S. business, which accounts for around 80% of revenues. The U.S. library market continues to face funding pressures, depressing transactional sales of archives and eBooks. Against this backdrop, it is encouraging that subscription renewals continue to track well above 90% and are around 4% higher than the prior period. In the international segments of Gale, adjusted cash revenues are marginally behind at this stage. Before the coronavirus impacted China, the international business was on track to deliver another year of good growth, backed by a strong pipeline. At this stage, it is difficult to assess the extent to which the $10 million of revenue at risk will crystallize given the unfolding situation in China. China aside, given the pressures in the U.S. market, for the full year, Gale is not expected to recover the year-to-date shortfall. International adjusted cash revenues reached $202 million year-to-date, up $12 million or 6% on the prior period. All businesses, that's international higher education, English language teaching and the Australia school business, contributing meaningfully to year-to-date growth. For the full year, we expect year-to-date growth to reverse and revenues to be broadly flat. This is driven by the Australia school business. We benefited from a $17 million export order in Q4 of fiscal '19 in relation to the Texas English language reading adoption. With this order in the fiscal '19 full year comparative, Australia school revenues will be around $10 million lower in fiscal '20. This wholly reflects the year-on-year decline in revenues in relation to the Texas reading adoption. This school decline masks solid growth in the international higher education and English language businesses. Revenues in English language teaching are up 7% year-to-date. The business is on track for another year of mid-single-digit revenue growth, with full year adjusted cash revenue set to exceed $100 million. This is driven by continuing growth in China and the Middle East. In international higher education, the business picked up momentum in Q3, which has been maintained in the fourth quarter. Year-to-date adjusted cash revenues were up 4%, and we expect low to mid-single-digit growth for the full year. This growth is being driven by Europe, India and Latin America. On Slide 14, the Learning segment is further broken down into school and the higher education and skills business. In school, year-to-date adjusted cash revenues were $144 million, down 5% from the prior period. The K-8 business has delivered solid growth with net sales up mid-single digit year-to-date. This is a result of strong performance in the California social studies adoption, where we estimate that the school business secured over 10% share. However, the growth in K-8 is outweighed by weakness in the high school segment, where net sales of advanced placement and career technical products are together down 9%. We are focused on stabilizing these segments going into the next academic year through products upgrades and improved go-to-market capabilities. The school business is largely through its selling season, with the fourth quarter representing only a little over 10% of annual sales. As such, the year-to-date shortfall to the prior period of $8 million is expected to carry into the full year outcome. In higher education and skills, year-to-date adjusted cash revenues reached $518 million. This is 12% lower than the prior period. The overall revenue performance is driven by the higher education nonprofit sector. The skills businesses, which include Ed2Go and Milady, are together up 7% year-to-date and are both on track to deliver mid-single-digit growth for the full year. The for-profit sector is marginally behind the prior period with declines continuing to moderate. As highlighted, the revenue trajectory of the higher education business positively shifted in the third quarter. The fall season and first half performance of higher education nonprofit was significantly impacted by the timing of channel orders and returns and by channel shift to direct-to-consumer and institutional deals. Our expectation was that these effects would reverse over the third and fourth quarters. The net sales performance in the third quarter and fourth quarter-to-date is firmly in line with these expectations. In the third quarter, our underlying net sales in higher education nonprofit were ahead by over 20%. Within this, our returns were down $22 million or 30%. The overall decline in adjusted cash revenues for the higher education and skills business is expected to further moderate in the full year to 10% or less. This includes the drag from the large software license deal closed in Q4 last year and lower net revenues from ordinary course content licensing deals in the year. The nonprofit business is expected to decline mid-single-digit on an underlying net sales basis. This decline is largely being driven by pricing as customers and students continue to shift to more affordable options, namely Cengage Unlimited, rental and e-textbooks. To conclude on higher education, I would like to provide some further insight into the outlook for the fourth quarter. If we turn to Slide 15. The nonprofit segment is on track for another quarter of strong growth in net sales. This reflects the further unwinding of order and returns timing differences and a solid spring season to-date. This slide sets out the gross product sales mix split between product types that have low rates or no rate of return and those with high rates, which are principally sell-through book stores. The clear year-on-year decline in gross sales reflects the combination of the underlying trading decline and changes in ordering patterns and channel shift. The proportion of returnable product in the channel is progressively falling, which reflects product and channel shifts. It is a result of this that we saw significantly lower returns in the third quarter and year-to-date. We expect a similar trend in the fourth quarter. This is further supported by the product sales mix and inventory levels at our major channel partners, which remain relatively low despite restocking for the spring season. Recognizing that February is also key to spring season, to-date, our net sales are tracking in line with expectations. In January last year, our underlying net sales were between $90 million and $100 million. Underlying net sales this year are marginally better, and this is carried into February to-date. In summary, all key indicators continue to support our fourth quarter and full year expectations for higher education. Turning now to the adjusted cash EBITDA less prepub on Slide 16. This slide details the cost actions, which have largely mitigated the year-to-date EBITDA impact of revenue shortfalls. The $67 million decline in adjusted cash revenues translates to a $57 million gross margin impact. Against this, total year-to-date cost reductions of $53 million on an adjusted cash basis. This includes the elimination of $20 million of onetime and initiative costs incurred in 2019. These costs were incurred largely in relation to the launch of Cengage Unlimited. Beyond the elimination of onetime costs, savings have been driven by the progressive simplification and rationalization of our operating model. The combination of the Cengage 2.0 initiative in fiscal '19 and actions taken in the third quarter of this year have reduced costs by $21 million. The operating model changes included revised product life cycles, which, together with supply chain initiatives, have driven savings in prepublication costs. Slide 17 sets out the quarterly cost profile and the strong progression and trajectory of savings in the year. Through the end of December, operating costs were $574 million. This reflects the $53 million in savings on a cash basis, an 8% reduction. For the full year, we are firmly on track to deliver cost reductions of around 10% against the fiscal year '19 baseline of $828 million. In addition to this, we expect to reduce total capital expenditure before the fit-out of the new Boston office by around 5% year-on-year. This full year expectation reflects further improvement in run rate savings in Q4, which is driven principally by the actions taken in October and November. This program is on track to deliver targeted incremental savings of $18 million in the current fiscal year. The business incurred an additional onetime restructuring charge of $40 million in the third quarter related to this. It's worth reemphasizing that the actions taken will generate full year annualized savings of around $36 million in fiscal '21. Turning to Slide '18, the summary of cash flows. From the normal seasonal low point in the annual cash cycle at the end of the first quarter, the business generates cash in each subsequent quarter. In the third quarter, the business generated $54 million of levered free cash flow compared to $47 million in the same period last year. Year-to-date levered free cash flow was an outflow of $31 million. This resulted in a total cash outflow of $49 million after $19 million of debt repayments and equity payments. The year-to-date levered free cash flow is $42 million lower than the prior period. Beneath this, the underlying cash profile of the business is continuing to be improved. The transition to digital and initiatives across the supply chain and go-to-market functions are driving working capital efficiencies, with $54 million released from working capital in a year-to-date. These benefits are being driven by improved cash collections and reduced inventory levels. These benefits are being offset in fiscal '20 by one-off expenditures: first, merger-related payments, which to-date is $30 million; second, higher capital expenditures, driven by the onetime fit-out cost of the new Boston office. Consistent with the prior year, we expect the business to generate positive levered free cash flow over the remaining quarter. For the full year, levered free cash flow will be positive and broadly in line with fiscal year '19 after the onetime Boston office spend but before merger-related costs. Merger-related costs are now expected to be up to $40 million for the fiscal year reflecting the revised time line. As a result of the Boston office, full year cash CapEx will be a little over $60 million in fiscal year '20 compared to a normalized run rate of $45 million to $50 million. The changing dynamics of the business present further opportunity to improve the cash profile of the business going forward. This will further enhance the strong liquidity position, which is set out on the final slide. The liquidity position continues to be strong and is expected to remain so going forward. The total liquidity was $382 million at the end of December, including availability under the revolving credit facility. The business has not drawn on the revolving credit facility in fiscal year '20 or prior years and does not anticipate doing so. Net leverage at December 31 rebounded to 6.9x from 7.8x at the end of September. This was driven by the $24 million improvement in the Q3 profit performance compared to the prior period. As a result, the trailing 12 months adjusted cash EBITDA less prepub was lifted to $282 million, marginally behind the fiscal year '19 full year result. The further progression in profits over Q4 to our guidance of $305 million, together with some margin improvement in the net debt position, will further improve the leverage position. Before risks associated with China, we expect the net leverage at March 31, 2020, to be around 6.3 to 6.4x. Adjusting for our share of merger costs, estimated at up to $40 million, reduces leverage by 0.1x. The risk that China represents to adjusted cash EBITDA less prepub, which is $7 million, has the potential to increase leverage by 0.1x. As a reminder, other than the mandatory annual amortization payments of $17 million on the term loan, we are not anticipating any repurchases or early redemption of debt prior to the merger, and the merger agreement precludes us from buying back equity. Let me hand briefly back to Michael for concluding remarks before we turn to questions.

Thank you, Bob. In closing, I want to leave you with a few key points. First, our higher education affordability strategy centered around Cengage Unlimited is working. We are meaningfully outperforming the industry for a second year, driving both share gains and profit improvements against the backdrop of a declining industry. We are focused on continuing this performance trajectory. Second, we continue to innovate and act more quickly than our competitors, leveraging our ability to introduce new products and business models quickly and at scale. And finally, the business is well positioned going into fiscal year '21, and it is well positioned for the merger with McGraw-Hill. We remain confident in the rationale for the merger and are committed to completing the regulatory process as quickly as practicable. Let me now open the floor for your questions.

[Operator Instructions] Our first question comes from the line of Mary Gilbert with Imperial Capital.

Cengage Unlimited continues to grow very strong. However, what do you estimate the growth would have been had select institutions and professors decided to wait until after the merger, in other words, the opportunity to have grabbed some of the McGraw-Hill business? And then also, given the delay in the closing of the merger, will that impact the go-to-market for fall and being able to gain with McGraw-Hill, let's say, with this Cengage Unlimited model? And then also, if you could talk about the reversal in trend that you're seeing. You started to see that there was a trend toward print and away from enforcing digital. And if you could talk about those aspects, although it sounds like because of your business model, you're not seeing as much of the impact. If you could please go over that as well.

Sure. This is Michael. Mary, how are you? So let me take those in turn. With regard to the performance of Cengage Unlimited, you're right. We're very pleased with the continued trajectory. It's very hard to quantify what the impact of the merger announcement on that growth rate is. It is safe to say that we have seen some impacts because, obviously, a faculty that is currently a McGraw-Hill faculty is considering "Why don't I just wait until the completion of the merger, I don't have to switch content, and I still get the benefit of the unlimited model." So yes, there was an impact. Hard to quantify exactly what it is, but we certainly have seen that as a headwind for us. In terms of the delay of the merger, yes, the delay will have an impact on our ability to jointly go to market. We believe it is not going to be material. You know very well how cyclical and how seasonal our business is. So the real question, I think, is will we be in a position to jointly go-to-market for the full '21 back-to-school season? And as we said in our announcement, we are confident that we can do this. And then in terms of the overall trends, print and enforcing digital, we see those trends. And frankly, we saw those trends already in a much smaller scale earlier on. And this was part of the reason that we introduced Unlimited. And as you correctly stated, that makes you less vulnerable, not completely immune to be clear, but less vulnerable to this and gets "the faculty over the hurdle of adopting digital," which they see very much as a price-driven hurdle rather than, "Do I see the benefits of digital." So those were the 3 answers.

Our next question comes from the line of David Farber with Crédit Suisse.

I appreciate your prepared remarks and especially with respect to maintaining the guidance. My question is related to the merger, and maybe this is best for Michael. I don't know. But are there scenarios in your mind where you're potentially asked to divest too many assets, the dynamics of the merger perhaps don't make as much sense for students or for you guys? Just some thoughts there as you continue to sort of describe to us how the merger is going, I wanted to ask.

Yes. Thanks, David. I would say, generally speaking, yes, there's obviously scenarios that you can paint where the logic for the merger no longer holds. But as I said in my prepared remarks, we are continuing in very constructive and thoughtful discussions, and frankly, we would not have entered the agreement if we thought that, that would be a big possibility. So we don't see this as a real big scenario at this point. But the situation is fluid. We continue in discussions with the DOJ, and we'll see.

Our next question comes from the line of Matt Swope with Baird.

Michael, just continuing on that, the regulatory question. Have you run into resistance that you didn't expect? Can you talk about what's making this take a little longer? To David's question, are you going to maybe have to divest a little more than you thought? Sort of anything that's different from what you guys expected when you entered this process.