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

Greetings. Welcome to the Cengage Investor Call. [Operator Instructions] Please note, this conference is being recorded. At this time, I'll turn the conference over to Richard Veith, Senior Vice President, Treasurer. Mr. Veith, you may begin.

Thank you. Good morning, and welcome to today's conference call to discuss the termination of the merger agreement with McGraw-Hill and Cengage's go-forward opportunity. The following discussion contains forward-looking statements with the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. 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 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. 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 as a result of new information, future developments or otherwise. This conference call includes disclosures of adjusted cash revenue and adjusted cash EBITDA less prepub on a year-to-date basis, all of which are non-GAAP financial measures, are unaudited and are on a preliminary basis. Our fiscal 2020 financial results are preliminary, unaudited and subject to completion. Definitions, rationale for the use of these measures are provided in the company's investors' material for our fiscal 2020 third quarter report for the 3 and 9 months ended December 31, 2019, posted on our website at www.cengage.com. We caution that the preliminary financial results for the 2020 fiscal year are not guarantees of future performance or outcomes and that actual results may differ materially from those described above. Such preliminary results are subject to the closing of the 2020 fiscal year and finalization of accounting and reporting procedures, which have yet to be performed and should not be viewed as a substitute for full 2020 fiscal year financial statements prepared in accordance with accounting principles generally accepted in the U.S. GAAP. Cengage will report its full audited fiscal 2020 fourth quarter and full year ended March 31, 2020, results in June. Michael Hansen, Chief Executive Officer, will address the termination of the merger agreement and discuss the opportunities ahead. Bob Munro, Chief Financial Officer, will then provide a brief financial update. Let me now introduce the Chief Executive Officer of Cengage, Michael Hansen.

Thank you, Richard, and good morning, everyone. Let me first do a quick technology update in the sense that we are doing this, as many things these days, for the first time entirely remotely as I'm sure all of you are remotely and hopefully safe. So bear with us if there are a couple of delays in between -- particularly in the question-and-answer session. With that said, I am sure you already saw that we announced that the merger agreement with McGraw-Hill has been terminated by mutual agreement. As the proposed merger presented a significant opportunity for millions of students globally, an opportunity to help students save substantial amount of money when purchasing their cost material, but also an opportunity to drive further investment into desperately needed innovation in their education journey. Unfortunately, the cost and duration of the regulatory review far outweigh the financial benefit for the company and our customers. From the start, we have no intention of pursuing this merger at unfavorable terms. We do not intend to get into details of private discussions and conversations. But suffice it to say that we were very hopeful that this would not be the result. We were ultimately not able to secure the approval from the U.S. Department of Justice on terms and within a timing that was commercially acceptable to us. As a result, we mutually determined to terminate the merger agreement and go our separate ways. At the same time, our customers are facing unprecedented challenges due to the uncertainty and impacts of COVID-19. Cengage is very focused on addressing customer needs during this very uncertain time, which, as you would imagine, requires significant allocation of resources. Continuing to dedicate those same resources to a prolonged review process that was presenting a less than palatable outcome contributed to the decision to terminate the merger review process. Of course, we are disappointed about this outcome. A lot of people across both of our organizations dedicated significant amount of time in the past year to try and make this happen. But now that it's over, we can truly focus on the opportunities emerging ahead of us. The COVID crisis is accelerating the need for students to have the ability to learn wherever they are. Cengage entered into this merger agreement as a leader in affordability and helping educators and students transition to digital courseware. On a stand-alone basis, we believe Cengage is in a strong position to continue to support the transition to digital and help students learn online, while at the same time, saving students significant amount of money. We are now singularly focused on promoting our Cengage Unlimited subscription service, which delivers affordable access to quality learning materials. As we did throughout the merger review process, we will execute our stand-alone strategy of marketing Cengage Unlimited to continue to win adoptions, grow market share and stabilize revenue against the cost structure that has been reset to drive EBITDA margin growth. We have shown in recent quarters that the strength of our model and offering, more and more educators and students are drawn to the affordable access to high-quality learning materials that are our -- that our solutions provide. Across our other businesses, we will continue to drive our stand-alone strategies. We will adjust our approach to support our customers and meet the challenges and opportunities resulting from the significant dislocation in the provision of education caused by COVID-19. Just an overall note on the current business context. We are in an unprecedented situation, and we don't know how it will evolve and for how long it will persist. Any indication on outlook that we may have given before is, therefore, unreliable and withdrawn. And we are able -- we are unable to predict how the future looks, particularly the near future, and how we will perform. That is what you are hearing from many companies, and it is true for Cengage as well. Amidst the current crisis, we have taken proactive and prudent steps to cut costs and preserve liquidity while leaving room for continued investment in innovation. Bob will now provide an update on those actions. Bob?

Thank you, Michael, and good morning. One final note on the merger agreement before I turn to the current situation. Under the terms of the merger agreement, neither Cengage nor McGraw-Hill will be responsible for any payment to the other party as a result of the termination of the merger agreement. As Michael mentioned, we are focused on our stand-alone strategy and building on the momentum in higher education and other parts of our business, which has enabled us to outperform our competitors. Cengage will hold its quarterly conference call to discuss the full year fiscal '20 results on Thursday, June 18. Ahead of that full discussion, I wanted to take this opportunity to provide a brief update on how we finish FY '20 and how we have responded to the COVID-19 crisis. Turning to fiscal year '20. At our quarterly update to the third quarter in February of this year, we reconfirmed our guidance. Namely that we expected Cengage total adjusted cash revenues to decline by around 5% for the fiscal year '20 before the impact of COVID. On that revenue outlook, we expected to deliver strong margin expansion and adjusted cash EBITDA less prepub of $305 million. Before COVID, the business delivered against these expectations. In February, we also expected the impact of COVID to be limited to our Gale business in China and estimated this at around $10 million in revenues with a margin impact of $7 million to $8 million. Since that update, the impact of COVID rapidly accelerated across the market. In March, we saw widespread closures of academic institutions in the U.S. and the majority of the market. As a result, we now estimate that COVID impacted our adjusted cash revenues by around $25 million in fiscal year '20 and our adjusted cash ELPP by around $17 million. Flowing from this, our full year adjusted cash revenues finished at a little over $1.35 billion or down 7%. Excluding COVID, the decline was 5%. Our adjusted cash ELPP finished at over $290 million up around 3% versus the prior year. Excluding COVID, ELPP growth would have been closer to 9%. Our margin was strongly ahead by around 200 basis points. This reflects reductions in our cost base of around 10% as we continue to transform our operating model. In our higher education nonprofit business, our underlying net sales were down mid-single-digit. This reflected strong share gains, a meaningful outperformance of the industry based on MPI data. Finally, the business finished the year in a strong liquidity position with over $350 million of cash on hand. This includes $50 million, which was drawn from the ABL in an abundance of caution in response to the evolving COVID crisis. Let me now turn to the COVID crisis. While we ended the year in a strong liquidity position, we faced a highly uncertain outlook as a result of COVID and are unable to provide guidance. However, we have taken steps to ensure Cengage is better positioned to weather a potential severe revenue downturn in the fall and for fiscal year '21 as a whole. The immediate impact of COVID on the business in '20 and in April was modest in the context of fiscal year '21 as a whole. It provides no insight into prospects for the key fall selling season, given where we are in the academic cycle. At this point, we just do not know with any precision what the impact of COVID will be in the fall. We, together with our customers face acute uncertainty around student enrollment and weather and how schools are likely to reopen. Against this, we also see opportunities to accelerate the transition to digital in support of our customers, and beyond that, the retraining or reskilling in response to increased unemployment. We plan to take advantage of these 2 tailwinds with our digital solutions and other products and services. Our response to COVID has been driven by the following principles to balance these risks and opportunities. Firstly, we have taken action early to ensure we have sufficient liquidity against the severe downturn scenario in fiscal year '21. Secondly, our actions are positioned to preserve the operational capability, capacity and flexibility so that we can respond effectively to evolving customer needs and opportunities as we better understand how the fall and year will play out. The liquidity planning purposes, our severe scenario anticipates the potential for high double-digit enrollment declines and similar revenue declines across other markets and channels. Against this, we have already implemented comprehensive measures across our cost base and channel relationships to preserve and improve liquidity. These actions include wide-ranging employee actions including temporary reductions to remuneration and benefits, actions across the whole scope of our supply chain and reassessment of spend plans against customer priorities and leveraging of government programs where available. These actions have scoped to deliver up to $200 million in additional liquidity in fiscal year '21 compared to our pre-COVID plans and could meaningfully offset the revenue impact in our severe scenario. In addition, these actions provide substantial liquidity headroom through the course of the year and, by their nature, allow us to retain the flexibility we need to respond to changing circumstances. I will now hand you back to Michael.

Thank you, Bob. In closing our official remarks, I want to leave you with a few key points. First, while we are disappointed with the outcome of the merger, the opportunities ahead remain significant, and we are well positioned for continued leadership. Second, since the introduction of Cengage Unlimited, in 2019 and 2020, we were outperforming the industry on the basis of MPI data, driving both share gains and profit improvement against the backdrop of a declining industry. As a stand-alone company, we remain focused on continuing this performance trajectory. We see a significant medium-term opportunity to drive digital courseware as 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. The disruption facing the education sector is being accelerated by COVID, and we have the technology, skill and capability to capitalize on these opportunities. Finally, while we face near-term challenges, we have been highly proactive in taking actions early to support our customers and sustain our business. We think there are some real opportunities on the other side, but right now, we are focused on providing great service to our constituents, so we come out of this crisis stronger. Let me now open the floor for your questions.

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

I wanted to see if you could go into more detail regarding leveraging government programs and the $200 million of increased liquidity. I didn't fully understand that completely. Also, what does this mean with McGraw-Hill offering free access to its content? What does that mean for Cengage? And given the merger previously in a process, does that mean that they could also be a threat to Cengage Unlimited?

Yes. Thanks, Mary, and good morning. Sorry to bring this very early on you on the West Coast, and good to hear your voice. Let me take the second question that you asked and then ask Bob to comment on leveraging government program. So in terms of the offering that you referred to that McGraw-Hill offer to their content for free during the crisis, I just want to be very emphatic. I think that virtually all of the competitors in the market did the same in the midst of the crisis. This was in the midst of the academic year and, in fact, in the mid of the semester that it hit in the United States. And just to give you a sense, we have done the same thing on March 16. We opened up Cengage Unlimited to all students regardless of whether they -- the faculty had adopted our materials or not. And we had close to 300,000 students take advantage of free Cengage Unlimited since March 16. So that gives you a sense of the scope of the reaction to Cengage Unlimited. And we have been, as you know, singularly focused on driving the success of Unlimited. And frankly, since the announcement of the merger, you can imagine that this vis-à-vis McGraw-Hill had become incredibly hard because any faculty that was a McGraw-Hill faculty would basically say, well, you're going to offer Cengage Unlimited anyway once the merger is completed, so why switch now, I'll just wait, and then I'm going to get Cengage Unlimited as a result of the merger. So in some respects, we have been fighting for a year with the hands tied behind our back. And what -- now this opportunity with the conclusion of the merger and the cancellation of the merger, we now have that opportunity to go aggressively even in this semester. I was just on with our sales leaders, even in this semester, there are -- this adoption season, there are significant outstanding opportunities still to take away market share. And we are focused on this very, very aggressively because we know Cengage Unlimited has gotten tremendous amount of traction. You can verify that through the MPI data. And we are intent on leveraging that even further going forward. So that's vis-à-vis -- so I'm not concerned about that. And I think it's also very clear that we are -- we continue to be the only one driving this. And the longer we are, the only one driving this unlimited subscription, the better off we are. So in that respect, this is the second part to your question. The first part, Bob, can you comment on the government programs that we are leveraging and that we'll continue to look out for?

Yes, sure. Mary, in terms of government programs, clearly, here in the United States, we have the CARES Act. The key component of that, that we like other companies have taken advantage of, is the ability to defer FICA payments to the government, which is a meaning -- very meaningful amount of money. All payments through 31st of December of this year can be deferred and repaid in 2 tranches at the end of calendar '21 and then calendar '22. Around the world, we've also taken advantage of government programs to the extent that they are applicable to us. So for example, the U.K. government furlough program, where we have furloughed members of our team against an immediate reduced demand outlook. But in those situations, the government contributes up to 80% of the individual's salary. So those are the sorts of the different things. The large government funding programs as they're currently constructed and not available to us, but we will continue to monitor further U.S. government and global funding packages as they're developed. The majority of our liquidity initiatives really stem from the actions we've taken around our employee base and our supply chain. We have asked our employees to make a considerable sacrifice in terms of temporary remuneration and benefit reductions. And we've been able to apply those same reductions to our outsourced supply base in many respects where we have outsourced suppliers and so on. But we've also looked across all of our supply chain. Adjusted against spending against revised demand forecast, sought deferral of payment where appropriate, all against this very uncertain outlook. And we've done the actions in that way, I come back to the point, so we're able to course-correct as we learn more about how demand is going to change over the coming months and into the fall season.

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

I have a number of questions I want to touch upon. Just first on the merger, I guess, trying to just understand a couple of different things. Maybe, can you just sort of characterize how you would describe it in the context of are there too many businesses that perhaps need to be sold? Does this sort of suggest that this sort of merger is unlikely on a go-forward basis? I'd love to just sort of hear some broader thoughts that you could share with us on your experience and then certainly have some business questions I wanted to try and tackle as well.

Sure, David. Look, I think it's probably not wise to kind of re-legislate the entire process. But suffice it to say that the remedies that the Department of Justice was looking for was divestiture particularly focused on U.S. higher ed courses. So think about it like any course was considered a specific area that was being investigated, introduction to chemistry, introduction to psychology, you name it, all the courses, of which we have a considerable in the high hundreds of different courses. And I think it is fair to say that the department took a very -- we had a very different view of the market. I would argue that the department took an outdated view of the market. When 10 years ago, there were essentially only publishers competing in this market, as you who follow this industry know there is vibrant competition out there right now. There is OER, there is used, there is rental, there are small publishers, they are large publishers. But suffice it to say, we had a difference of opinion that led to a large request for divestitures, which made the transaction from a financial perspective just not sensible. So that's why we terminated the agreement.

Okay. I appreciate that. Just maybe to the extent that we're operating in times that we haven't seen before, I'd love to sort of hear from your perspective how you guys would describe your business in terms of the costs? And I mean that specifically fixed versus variable, we've been spending a lot of time just thinking about monthly operating costs or burn rates in an absent revenue environment. So I would love to sort of talk a little bit about that. And then to the extent that we can talk about how perhaps this would accelerate the digital process that you and others have been working on, that might dovetail nicely with that. So those are some two open-ended questions I'll leave with you guys.

Thanks, David. I appreciate that. Let me do it actually in a bit of a reverse order. I'll talk about the acceleration of digital first, and then Bob will talk about the fixed versus variable cost structure of the business. I think that what has become clear over the last 2 months is that any faculty and any institution in the United States and around the world who basically thinks they can essentially stick with the traditional textbook model and work through largely print materials has been proven dramatically wrong in a very short period of time. So depending on the institution, anywhere between the beginning of March and the end of March, literally 18 million students had to move online. And for the vast majority of them who had faculty that was not prepared and institutions that were not prepared, this was actually pretty miserable experience. I mean, essentially, you were sitting at home. You -- if you were lucky, you've got a bunch of PowerPoints and maybe a video lecture and that was it. And this was a far cry from what digital platforms like MindTap and WebAssign can do. And these institutions and these faculty have clearly understood that not only do they need to prepare should something like that happen next time around, but it's also uncertain as to whether they will just move back on-campus in -- certainly in the summer they won't, and then in the fall, there is a significant amount of uncertainty as to whether they can just readmit students to campus, whether they can do it maybe as a kind of trial and error and then be prepared to shut down and move online again if they should have an outbreak on campus or whether they want to try different kinds of approaches, having the semester in different ways, et cetera. So there is a lot of planning going on right now. There's a lot of speculation going on. But the reality is all of those have a very strong digital component as an underpinning. The faculty that's out there and says, I can teach out of the used or rental book and I'll be fine, I think, has been soundly proven wrong. So this is going to be a massive acceleration. Now in the near term, if you think about the fall, that acceleration of digital is going to be offset by what we don't know yet is a drop in enrollment. And we don't know what that degree of drop in enrollment is. We have taken a very prudent approach. We have said we are working for the best, but we are planning based on a very severe scenario because we just -- simply, there has been no precedent in this. So we are cautious but aggressively working for the best in that respect. And that's how we designed our cost savings initiatives and our liquidity preservation initiatives. So that is the answer to the second question. Bob, do you want to comment on the fixed versus variable question that David was asking?

Sure. David, I think perhaps just bridging the two questions. The transition to digital and the acceleration thereof, it presents other sort of natural opportunities to transform our business. If you look at the cost reductions that we have made historically, those have been driven by our transformation of our operating model against the changing shape of our markets and customer demand and the transition to digital. So that's going to continue. I think at this point, our cost base is predominantly our people, whom we value incredibly highly, and third-party supply chain. And across that cost base, we do have levers, and we do have a track record of continuing to adjust and transform our cost base against the evolving market opportunities ahead of us. At this point, the actions that we've taken, as I say, come back to preserving the flexibility, given that uncertainty, so we can react both on the upside and the downside, and we're confident we can do that.

And from your perspective, do you have an idea of sort of what your monthly operating costs are absent revenue? Or how you think about the liquidity picture in terms of what it takes to just run the business from where it stands today? Because I think that would probably be a talk of a question amongst investors.

Yes. If you take a simple math, our cash spend for a year would ordinarily be in the order of $1 billion. So take the $200 million that I referred to in terms of liquidity measures and that gives you a perspective of the extent of the actions that we've taken to manage against that potentially very severe scenario.

Our next question is from the line of Nick Dempsey with Barclays.

I've got two questions. Do you think that the synergies with McGraw-Hill in your kind of 5-, 6-year plan would have given you more room to invest in product innovation over those years than you now do without those synergies and without that coming together? And do you think that will affect you competitively over that time frame? Second question, I think, Bob, you referred to high double-digit declines in enrollment as characteristic of your severe scenario. Did you mean kind of high teens? And you're talking about high double digit? Or what exactly what you pointed to there?

So Nick, it's Michael. Let me take those two questions and ask Bob to chime in with his perspective on that. First of all, with regard to the synergies in the merger, the answer to this is yes. That's why we entered the merger agreement. We thought that the merger was actually the best way to free up -- through cost-saving free up additional investment capital to invest in the digital transformation. And that's where we're very emphatic with the regulators in the U.S. and in the U.K. and Australia that this is actually a deal that is ultimately good for innovation and it's good for students because we have the track record of actually saving students' money, so -- particularly with Cengage Unlimited. So this was very much the plan and the rationale for the merger. So you're absolutely right on this. Now having said this, with the merger review having been drawn out now for a year and now with the COVID crisis on top of that over the last two months, we have taken significant actions to transform our cost base along the lines of what Bob just described. So naturally, the amount of synergies available get smaller and smaller the more time passes by and the more individual companies like ourselves are taking actions, and McGraw has done some of the same. So in that respect, the -- it's sort of -- it was extremely compelling at the beginning and then it started to get smaller and smaller as time went by. And as you know, based on the CMA ruling that they wanted to have a second look and another 6 months, et cetera, there was actually no way that we would even conclude the merger within a foreseeable time frame from now. So that became a diminishing rate of return for that. And then in terms of the enrollment, I think double digit, you should assume more than in the teens. And we have certainly assumed more than in the teens because I do think that what many people tend to forget who don't -- who are not that familiar with this market is, the vast majority of students, for instance, in community colleges, are not students that are full-time completely dedicated to their education process, but are actually working adults. And for those working adults in the near term, the question becomes very much -- I mean, I need to make some money, and I need to make some money to finance my education and to earn some money. I might have a spouse that has lost his or her job over the course over the last 2 months or has been furloughed, et cetera. So we believe that the immediate pressure on the system for people dropping out or considering not going because the initial digital learning, remote learning experience was not as satisfying as it could have been I think is pretty significant. So we are assuming higher than high-teens percentage drop in enrollment. Bob, you want to add some color to that?

Yes. Just two comments. Going back to the first point on synergies that would -- just sort of state the obvious, it's -- there are two sides to the equation, the synergies and the divestment. So -- and we were -- as Michael has said, we weren't able to get to an acceptable position, so the synergies became rather a moot point. On the question of enrollment. As Michael says, it's more than high teens. I would point you to sort of north of sort of 20%, but we have taken a considered view market by market. And just to pick, it is not in the grand scheme of things in material market. But if you look at the U.K., Australia, where there is very high dependency on international students. In Australia, for example, very high dependency on Chinese students. If those students are not able to enter the country or come back to college, then the impact in that market is going to be more severe. International students in the United States are important but a lower proportion of the overall population. But in all markets, we are beyond high teens and essentially into the 20%.

And, Nick, let me just add one other comment on your question on the outlook. There is -- as Bob said, we have looked at this business unit by business unit and market by market. And one of the things that turns out to be a blessing in the COVID crisis is, for us, our limited exposure to K-12. As you know, our K-12 business is very focused on high schools and skills and is not the large basal adoption that is highly dependent on state revenue and as you will appreciate with the large amount of state funding now going into revising the economy, going into making sure that people can go back to work and companies don't go under, that market will come on a tremendous amount of pressure. And we believe it might be a bit delayed, but it will come under a tremendous amount of pressure for funding for these kinds of materials. So we literally went market by market, assessed it on a very severe basis, but our higher exposure to the higher ed markets around the world and in the U.S. was actually something that gave us, certainly for the medium term, a fair bit of confidence.

Our next question is from the line of Ben Briggs with International FCStone.

So really just one quick one for me here. I know you touched on liquidity a few minutes ago, if you could -- or during the scripted portion. If you could just give us some numbers for -- as expense today, I know you said that you drew the revolver of $50 million, have you drawn any more since the end of the quarter? And what is the cash balance as of today?

Sure. I'll take that Michael. We haven't drawn further on the ABL. There is some headroom, but we haven't drawn and our cash balances at the end of April were around $320 million and so they have -- still very strong and healthy position.

Okay. That's very helpful. I appreciate that. And also the $200 million that you said you -- of potential cost save, is that all cost cut or is that a mix of cost and working capital?

So it's a mix of both. But what we -- yes, just to be clear. What we haven't done, very deliberately, is slashed and burned. And what we have done is made very deliberate actions to reduce our spend and our cash burn rate over the course of fiscal year '21 through asking sacrifices of our employees, through making adjustments to their remuneration, through the selective application of furloughs, to preserve our capacity and capability to come back as that uncertainty is taken away as we go through the year. So it's a comprehensive sort of set of actions as we tried to balance those priorities of giving ourselves high confidence that we have sufficient liquidity against the very severe scenario, but one seems to be able to capitalize on the opportunities and the -- in the market as they evolve over the coming months.

Okay. That's very helpful. So of the $200 million can you say how much is actual cost reductions?

So if I think about sort of cost that's coming out of the profit and loss this year, it's over $100 million. But what I wouldn't want you to go walk away from this with is that, that is $100 million out of our profit and loss account next year. As I mentioned earlier, the temporary adjustments that we've made to employees' remuneration are just those temporary. It is not sustainable to ask employees to take pay cuts in perpetuity. That's not what we have done.

And Bob, let me elaborate one more around on this -- on Ben's question. As you said, we took this set of actions very deliberately, because -- and I want to make this very, very clear, there is this threat and opportunity at the same time. And what we don't -- what we know that in the fall, and to be very specific on that, while we might have significant drops in enrollment that we just discussed, the need of our customers' faculty to be able to go online and our ability to capture them, service them and make sure that they go online successfully is going to skyrocket, no matter what, because everybody is going to be very, very clear that this is no longer optional. And therefore, we decided not to do what others have done and say, go out to your employees' population and say, you know what, we're only going to work 4 days or we're going to cut people out and allow them to work less. What we have said to our employees and with great resonance is, you know what, we've actually got to work more because that lays the foundation, the service that we're going to provide in the fall lays the foundation for this transition to digital that we have been pushing for, for the last decade and now it's tangible in front of us. But if the experience of faculty with our products, with our platforms, in the fall is actually a bad experience, we're shooting ourselves in the foot. So we've deliberately taken temporary actions and put us in a position to actually apply the maximum amount of manpower to the fall and even to the summer programs, the quarter school programs right now. And we have seen great success in terms of the ability to move students online, just to give you one data point, within four weeks, we moved 750,000 students online with faculty, with the help of their faculty and in a very, very seamless way. So that's exactly what we're trying to do with our strategy around saving costs, preserving liquidity, but at the same time, making sure that we take advantage of the opportunity.

Okay. That's extraordinarily helpful. And then just really quick to follow-up on one of the previous questions. I just want to make sure I'm clear here. I know you said that it's going to be -- your potential revenue decline is going to be or could be greater than high teens. Does that mean in the 20 percentages, in the 30 percentages, higher than that? Because I mean high double digits could theoretically mean 99%. I don't think you guys mean revenues that's going to decline by 99%. But I also understand that it might be greater than the high teens, and so there's kind of a big gap between the two there. So just rough estimate of 20 percentages, 30 percentage, greater than that, less than that? Any color would be great.

Yes. We'll give you some color. But I think, Ben, what I say -- what I just want to make sure that you understand and everybody on the call understand. We are planning for a very severe scenario, but we're working to make sure that this is the best possible outcome for us. So just to be clear on this. But Bob, as -- maybe you can give a little bit more color about -- without giving guidance. We're just reluctant, then just to understand. We're just reluctant to give guidance in an environment where there is such a high degree of certainty, but I think Bob can probably ballpark it for you.

Yes. And I would just stress what Mike said. This is -- we have approached this from a liquidity planning standpoint to frame a very severe scenario, recognizing we really don't know, which is why we are not and cannot give guidance. I think the -- to your point, I would think about it in the -- sort of around 25% plus range, but we're not at this point, in a very severe scenario, anticipating the size of impacts that have set sectors such as retail and hospitality and so on. But to come back, we're not giving any guidance because we really don't know. We have framed it to manage our liquidity and give us the confidence that we will be able to respond and react to our customer need as they evolve.

Nearing the end of our question-and-answer session. I have time for one final question, which is coming from the line of Nick Ghoussaini with Vector.

I just wanted to make sure I understand the implications on profitability. So when we're talking -- and this is a very severe case that you're talking about is the 25% decline, and you're hoping to do better. So that basically means -- implies, call it, $300 million of revenues coming out and $100 million of cost is coming out in that situation. Is there -- is that inclusive of variable costs for not producing books, et cetera, et cetera? I'm just trying to figure out what the flow-through is, so I can kind of model this severe.

Nick, I appreciate the question, but I'm not -- I'm really not going to get drawn on providing more guidance because we don't know. I think if you frame how you're thinking about revenues and apply a standard sort of rough margin, then I think that would be a sensible set of assumptions to however you're thinking about the revenue outlook.

Okay. So assume normal gross margin and then the $100 million of cost takeout is incremental on top of that?

Again, I'm not going to get drawn on helping refining guidance, Nick. The uncertainty ahead of us is just too great, I'm afraid.

Got it. Pivoting then a little bit, what are you seeing for summer courses? I mean, students are not going back to campus this summer, but are most summer courses online? Or is the summer quarter basically -- help us understand what the 6/30 quarter looks like.

Yes. The quarter schools, Nick, that's probably a good point to end it on because that's sort of emerging hard data. What we're seeing that the quarter schools, which are primarily the summer courses you're referring to, see a significant drop in revenue. It is still -- still the jury is not fully in, but it is not as bad as our worst-case scenario or a very severe case scenario, but it is significant. And it will -- it plays out, as you suggested, that some of them are being offered online. There are very few institutions that attempt to restart on-campus face-to-face, but they are very few and far between. So mostly it's summer. But really, the jury is out until the fall, and this is where every institution right now is planning and modeling scenarios. So that's kind of where we're at, at this stage. Nick, thanks very much, and thank you all of you for jumping on the call. Bob and I made a very deliberate decision to be with you very, very quickly after the announcement because we want to make sure that you have the full transparency of what we know and also what we, at this point, don't know about yet. And we appreciate all of your responses and questions. And hopefully, we will then obviously talk in the middle of June about our last year results. But in the meantime, please be safe, and we'll talk soon.

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.