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

Good morning, and welcome to the Cengage Fiscal 2020 Fourth Quarter and Full Year 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.

Good morning, and welcome to Cengage's Fiscal 2020 Fourth 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 within 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, a special note regarding such -- 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's FY '20 annual report will be posted to the company website shortly. 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. Our investor 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. And now 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 call on May 4 when we announced the termination of the merger with McGraw-Hill, we also shared our preliminary results for fiscal '20 and provided an update on our response to COVID-19. Notwithstanding the significant diversion of resources and focus on execution of the merger, in fiscal 2020, Cengage delivered a solid financial performance in challenging markets and continued to make strong progress against our strategic and operational priorities. This strong progress, which I will cover in more detail, reaffirms that our strategy in U.S. higher education and other key markets is working. The strength of our digital offerings and differentiated customer service capabilities also position the business very well to respond effectively to customer needs through the ongoing COVID crisis, which I will also address. Bob will walk through the financials in more detail, including an update on our liquidity management program, which is very much on track. We will then open the line for questions. Turning first to the financial headlines. Before the impact of COVID, which reduced adjusted cash revenues by $25 million and adjusted cash EBITDA less prepub by $17 million, the business delivered our full year revenue guidance and outperformed the profit guidance. Before COVID, full year adjusted cash revenue was $1.379 billion. On this basis, revenues were down 5% against the prior year. Of this decline, 1% relates to the onetime software license sale in fiscal '19. Again, before the COVID impact, adjusted cash EBITDA less prepub was $313 million, 9% ahead of the prior year. Through fiscal '20, we continue to simplify our operating model and cost structure and continue to embed strong cost discipline across the business. This enabled us to mitigate the profit impact of the revenue decline and significantly improve our operating leverage. The adjusted cash EBITDA less prepub margin improved by 300 basis points to 22.7% before COVID effects. The overall financial performance is principally driven by the higher education and skills business within the Learning segment, and specifically, the core nonprofit sector of the market. The higher education nonprofit business finished the year strong, resulting in the full year underlying net sales decline moderating to minus 5%. This represents a second year of both significant and accelerating industry outperformance as measured by MPI. This outperformance is driven by the strength of our Cengage Unlimited subscription service. It has enabled us to win adoptions, grow market share, drive the use of digital and build direct relationship with students as well as deepening our relationships with faculty. Our leadership in delivering affordable access to high-quality learning materials is progressively improving the underlying profile of the higher education business and charting a path back to revenue stabilization over the medium term. Turning to Slide 6. In the last fiscal year, we sold 1.5 million Cengage Unlimited subscriptions, up 36% on the prior year. This generated adjusted cash revenue of $188 million, an increase of 40% over the prior year. Since launching in August 2018, we have now sold 2.6 million subscriptions, and importantly, have saved students an estimated $200 million in cost materials. Our well-established reputation for quality learning materials, coupled with a strong focus on affordability, resonates strongly with faculty who cite quality of content and affordability as principal considerations when they adopt course material. Our share of faculty adoptions improved by an estimated 70 basis points over fiscal '20. At an institutional level, fiscal '20 saw strong growth in penetration across many Cengage Unlimited accounts. This reflected accelerating student-faculty network effects and increasing momentum in institute-wide subscriptions. We now have more than 100 Cengage Unlimited institutional customers with the majority committing to multiyear subscription contract. Our Cengage Unlimited institutional sales grew 40% in fiscal '20. We continue to develop our go-to-market approach to further drive institutional deals and accelerate penetration of accounts. This increased penetration is, in turn, delivering more value to students and driving digital activations. In fiscal '20, students averaged 1.4 Courseware activations per Cengage Unlimited subscription compared to 1.1 in the prior year. Overall, Courseware activations have grown at a compound rate of 16% over the past 3 years. In the last 2 years, growth has been driven by Cengage Unlimited, which accounted for 45% of activations in fiscal '20. While activation growth continued its strong trajectory, digital performance was held back by affordability considerations and other barriers to digital adoption in large segments of the market still dominated by print and where Courseware is not integral to grade assignment. To address this, in January, we announced the launch of Cengage Unlimited e-textbooks, which is in the market for the upcoming fall semester. This offer is specifically aimed at driving non-Courseware share and sell-through and targets print market segments where digital adoption is low. In parallel, we have continued to invest in our Courseware offerings to improve ease of use, drive usage and retain adoptions. The strong progress with Cengage Unlimited, while driving significant industry outperformance, has not translated into overall revenue growth. The growth in digital units has been outweighed by price compression across print and digital as students move to more affordable options and by continued sharp volume declines in the residual print base. We expect COVID-19 to be a significant inflection point for the use of digital in education as it will likely usher in a new hybrid model where face-to-face will be effectively combined with our powerful digital learning platforms. As a result, we expect sales to stabilize in the medium term. Cengage Unlimited, combined with ongoing products, customer service and go-to-market initiatives, is expected to continue to drive net adoption gains, digital unit growth and sell-through. The negative drags on growth are expected to moderate, resulting in continued improvement in the profile of our higher education business. This better profile is driven by a decisive competitive outperformance relative to our large competitors, which is set out on Slide 7. As mentioned earlier, fiscal '20 represented a second year of both significant and accelerating industry outperformance. In fiscal '20, industry net sales, as measured by MPI, were down 13% year-over-year. This represents a significant acceleration in the overall rate of decline compared to the previous 2 years, which averaged around 4% to 5%. Against this challenging industry environment, Cengage built on the first year momentum of Cengage Unlimited and accelerated its outperformance of industry peers. Cengage's net sales decline of 5% was 10 percentage points ahead of the remaining peer group whose net sales declined by 15%. Our level of outperformance has steadily accelerated since the launch of Cengage Unlimited from 3 percentage points in fiscal '19, the first year post launch, to 7 after the fall season to 10 percentage points in this full academic year. The introduction of Cengage Unlimited subscription model successfully reversed the trajectory of historic underperformance. Since launch, this outperformance record has enabled Cengage to gain over 2 percentage points industry share. We estimate that these net share gains translate into well over $50 million of revenues annually. Turning to Slide 8. The revenue profile of the higher education business has been progressively improved by our affordability and digital strategy. Recurring units, comprising core digital, rental, and e-books, continue to grow and now represent 84% of total units sold. This is up 19 points over the last 3 years and is driven by the rental program and Cengage Unlimited. Print units, excluding rental, now comprise only around 16% of total units and net sales. Both print units and net sales declined by 20% in fiscal '20. While print trends are not expected to change, the drag from print on sales performance is expected to moderate given the lower dependency in the overall mix. Digital, including e-books, now comprise 70% of overall units sold and 81% of net sales. The proportion of sales represented by digital is up 15% over the past 3 years. The higher education business finished the academic year with strong customer momentum and well-positioned to support our customers as the COVID crisis rapidly unfolded. This reflected the strength of our digital product offerings, the scalability and resilience of our underlying technology platforms and the breadth of our customer service capabilities. Our other businesses were also well-positioned with comprehensive digital offerings, built and supported to the same high-technology and service standards. Let me finish with an update on our response to COVID and what we are seeing in the markets we serve. Turning to Slide 9. As evident in our fiscal '20 results, COVID had an immediate impact on our customers and business. The rapid spread of COVID across our markets resulted in the widespread shutdown of academic institutions, both here in the U.S. and globally. Cengage responded quickly and decisively to COVID following 3 guiding principles: one, to ensure the health and safety of our employees; two, to stand shoulder-to-shoulder with our customers, faculty and students and support them through this crisis; and three, to ensure Cengage was able to maintain a strong liquidity position in the event of a potential very severe downturn in revenues -- I am proud of the way Cengage has responded to all 3 of these priorities. Excluding our physical distribution facilities, our whole organization moved to remote working without skipping a beat in early March. This is testament to the strength of our culture and technology infrastructure. Our customers faced unprecedented and immediate challenges as COVID shutted academic institutions globally. Our response to customers first, focused on supporting their needs to rapidly transition to online learning in March and April and then in understanding and addressing their evolving needs for the upcoming back-to-school season. In higher ed, we offered free access to Cengage Unlimited for all students through the end of the spring semester. This was gladly accepted by around 300,000 students. Beyond providing free access to our digital resources, we clearly differentiated our response to the strength and breadth of our customer service capabilities. The full weight of these resources was focused on supporting faculty and students who were rapidly transitioning to online learning. Over March and April, we helped around 15,000 instructors move courses online, creating about 17,000 courses that benefited an estimated 750,000 students. For our school, international higher ed and English language teaching business, we adopted the same principles. We provided free access to digital resources for the remainder of the academic year and provided additional support and training for teachers to transition to online learning. In international higher education, we saw digital activation increase by over 700% in Latin America and 200% in Europe, Middle East and Africa. COVID has clearly accelerated the need for students to have the ability to learn wherever they are and for instructors to be able to seamlessly teach across physical and online learning modalities. This is expected to drive acceleration in digital adoption and usage, which has been clearly evident over the past few month. Over March and April in the U.S. higher ed, we saw Courseware activations grow well over 30%, excluding students who took up free access to Cengage Unlimited. This positive trend has continued into the summer, underpinned by a surge in instructors adopting Courseware The uncertain impact and extent of COVID, including the risk of further waves of infection, continues to hang over the education sector at large. Consequently, we expect the accelerating trend of digital adoption to continue. To optimize this opportunity and support our customers, we are well advanced in our preparations for a complex back-to-school season and in our development efforts to further improve the online experience. In addition to the launch of Cengage Unlimited e-textbooks, we will be introducing several other product features to simplify and improve the online learning experience. These include improved learning management system integration and ongoing simplification of Courseware. Beyond product releases and enhancement, we are expanding our customer service function and adding tools and capabilities to effectively support onboarding in a hybrid environment. While the digital adoption trend is positive and looks set to continue, the direct impact of COVID and its broader economic impact on higher education enrollments in the fall and on the overall ecosystem remains highly uncertain. Reliable leading indicators and industry information remains sparse but continue to point to a significant decline in fall enrollments. Based on this limited data, we are cautiously optimistic that the enrollment decline will be less pronounced than the 20% plus we assumed in our very severe case for the purpose of liquidity planning. I would stress, however, that there remains significant uncertainty. We are in an unprecedented circumstance, and we really do not know. As a result, due to the many factors beyond our knowledge or control, we will not be providing any financial guidance for fiscal '21. We have very deliberately taken prudent steps to mitigate the potential risk of a very severe downturn in revenues. Our response plan is now fully implemented, and we are highly confident that we have sufficient liquidity and strong headroom should these very adverse conditions materialize. Let me now hand over to Bob who will provide further detail on the full year financial performance and our liquidity management program.

Thank you, Michael, and good morning. Turning to Slide 11 and the financial highlights for the fourth quarter. The business delivered a solid fourth quarter. Excluding the impact of COVID-19, adjusted cash revenues were $348 million, down 3% or $11 million. It is worth noting that the Q4 fiscal '19 comparative included the benefit of the $14 million one-off software license sale. Before which, adjusted cash revenues would have been flat. Excluding the profit impact of COVID-19, fourth quarter adjusted cash EBITDA less prepub was $99 million, a 45% improvement over the prior year. In February, we expected the impacts of COVID-19 to be limited to our Gale business in China and estimated the revenue impact to be around $10 million. Ultimately, COVID impacted all of our businesses to some extent and depressed our fourth quarter and full year performance by $25 million in adjusted cash revenues and $17 million in adjusted cash EBITDA less prepub. After these COVID impacts, adjusted cash revenue was $323 million, down 10% compared to the prior period. Adjusted cash EBITDA less prepub was $82 million, which is still $14 million or 20% ahead of the prior period. The strong growth in adjusted cash EBITDA less prepub was underpinned by reductions in our cost base. These are principally structural savings driven by the ongoing transformation of our operating model. Q4 costs were $170 million, $33 million lower than in fiscal '19. As previously reported, in light of pressures in higher education, in Q3, we further restructured our business to lower our ongoing cost to serve. The full impact of these savings came through in Q4, further accelerating our run rate savings compared to Q3. Turning to the full year performance on Slide 12. With a solid finish in Q4 before the impact of COVID-19, the business delivered its revenue guidance for the year and exceeded profit guidance. Full year adjusted cash revenues were $1.38 billion, down 5% before the $25 million COVID impact. Excluding the $17 million COVID impact, adjusted cash EBITDA less prepub was $313 million, up 9% year-on-year and ahead of our guidance of $305 million. The profit impact of the full year revenue decline was outweighed by realized cost savings. Full year costs were reduced by $86 million, a 10% reduction in the cost base. Turning to the businesses. For Gale, adjusted cash revenue was $200 million. Gale was the most impacted by COVID, which reduced revenues by $14 million, of which $10 million related to China. Before COVID, Gale revenues were down 4% against the prior year. This is driven by the U.S. business where the library market remains under funding pressure, depressing transactional sales of archives and e-books. Against this, the core subscription business performed well, achieving a 94% renewal rate, around 4 percentage points higher than the prior year. In international, adjusted cash revenues were $283 million. COVID depressed revenues by $5 million. Before which, revenues were ahead of the prior year by 3%. Within this overall performance, adjusted cash revenues in the Australia school business declined by $12 million against the prior year. The performance of the Australia school business reflects lower export sales in relation to the Texas English language adoption, which contributed $17 million in fiscal '19. This decline was more than offset by solid growth in international higher education and in the English language teaching business. The English language teaching business delivered another year of good growth, with adjusted cash revenues up 6% to $104 million. This was led by strong momentum in Asia and China, which posted double-digit gains. COVID held back growth in this business by around 2 percentage points. In international higher education, adjusted cash revenues were up 9% before COVID impacts, with solid underlying growth of 4% boosted by content licensing revenues in the fourth quarter. All regions delivered growth led by Latin America, which was up over 20%. Turning to the Learning segment on Slide 14 and the performance of the school and higher education and skills businesses. In school, adjusted cash revenues were $158 million for the year. Excluding COVID impacts, which depressed revenues by approximately $4 million, adjusted cash revenues were down 5% against the prior period. The K-8 business finished the year marginally ahead of the prior year, underpinned by a strong performance in the California social studies adoption, where the business won over 10% share. The overall decline in school revenues is driven by the performance in high school where sales declined by over 10%. This reflects cyclically lower funding in addressable adoption markets and the need to upgrade products in advanced placement and career segments, which is being addressed through ongoing programs. In higher education and skills, full year adjusted cash revenues reached $712 million, 9% behind the prior year. COVID is estimated to depress full year sales by around $3 million. Excluding the impact of the large software license deal closed in Q4 of fiscal '19 and lower net revenues from ordinary course content licensing deals, the underlying decline in the higher education and skills business moderates to 6%. This is driven by the higher education nonprofit sector where net sales declined on an underlying basis by 5%. As Michael mentioned, we still meaningfully outperformed the course material market as measured by MPI, which was down 13%. The skills businesses, Ed2Go and Milady together grew net sales by 7% for the year. The declines in the for-profit sector further moderated and ended the year only marginally behind the prior period. The net sales decline of 5% in the higher ed nonprofit sector is driven by pricing. Overall volumes were broadly flat, the result of high single-digit growth in digital Courseware units and more modest growth in e-books being offset by continued sharp declines in print units. The price pressure reflects the continuing shift to more affordable options, namely Cengage Unlimited, rental and e-textbooks. While the trend for affordable options is expected to continue, price compression is expected to moderate due to changing mix and onetime factors that will not repeat in FY '21. The moderation in the rate of net sales decline in higher education nonprofit over the course of the third and fourth quarters, which is in line with the expectations we previously set, reflects the normalization of the significant channel order and returns phasing impacts, which impacted the first half of this year. Turning now to the adjusted cash EBITDA less prepub on Slide 15. Adjusted cash EBITDA less prepub finished the year at $296 million, up 3%. Excluding COVID effects, adjusted cash EBITDA less prepub were up 9% to $313 million. This reflects strong margin progression, which was up 3% to 22.7% as cost savings more than offset the impact of revenue declines. In total, adjusted cash revenues declined by $103 million in fiscal '20, translating to a $78 million gross margin impact. This was outweighed by $86 million in cost savings. These savings are largely structural and have been driven by the progressive simplification and rationalization of our operating model. The operating model changes are addressing product life cycles, which, together with supply chain initiatives, drive the savings in prepublication costs. Cost savings also include the elimination of $25 million of onetime and initiative costs incurred in 2019, mainly in relation to the launch of Cengage Unlimited. The strong progression of savings over the course of the year is set out on Slide 16. Again, consistent with our guidance, fiscal '20 costs were reduced by 10% against the fiscal year '19 baseline of $828 million. On top of these savings, underlying capital expenditure was down 7% to $47 million. This is before the fit-out of the new Boston office, which added $14 million of one-off CapEx and was completed in the first half of the year. The quarterly cost run rate has been progressively improved through the year and accelerated over the third and fourth quarters as the benefits from third quarter restructuring actions were fully realized. The combination of full year effects of the actions taken in fiscal '20, actions recently implemented to mitigate COVID-19, and the continued evolution of our operating model are expected to drive material structural reductions in the cost base and underpin continued margin expansion as the business comes out of COVID. Before we turn to cash flow and liquidity, I wanted to cover one further point, which is addressed fully in the annual report to be published later today. In our GAAP financial statements, we have recorded a noncash goodwill impairment charge of $768 million. This charge is made against the goodwill balances that were established at the time of emergence from Chapter 11. Whilst over the medium term, we expect to continue to stabilize revenues and grow profits and expand margins in light of more pronounced headwinds in the higher education markets evident in fiscal '20 and the additional challenges of COVID, we have revised our future projections compared to a year ago. The noncash goodwill impairment flows from this reassessment. Let me now turn to our cash flow performance and liquidity position on Slide 17. Full year levered free cash flow was $4 million. The levered free cash flow performance is depressed by significant one-off expenditures in fiscal '20 totaling $71 million. This comprises merger-related payments of $37 million, one-off capital expenditures related to the Boston facility of $14 million and restructuring payments, which were around $20 million higher than the prior years. Before these payments, levered free cash flow was around $75 million, well ahead of the prior year and reflecting the continued progress in improving the underlying cash profile of the business. The transition to digital, e-commerce channels and ongoing initiatives across the supply chain and go-to-market functions underpin the $57 million released from working capital. Through an abundance of caution, as part of liquidity planning and risk mitigation against COVID, we drew down $50 million on our ABL in March to bolster available cash resources. With the benefit of the drawdown, overall cash resources increased by $30 million after $23 million of debt repayments and equity payments. As a result, the business finished the year with cash balances of $366 million and in a very strong liquidity position, which is set out on Slide 18. The business was well-positioned going into the COVID crisis. Total liquidity stood at $421 million at the end of the year, comprising unencumbered cash balances of $366 million and $55 million of additional availability under the revolving credit facility. Net leverage at March 31 was 6.5x. This is 0.2 turns ahead of the prior year driven by the improvements in profitability. As mentioned earlier, adjusted cash EBITDA less prepub was reduced by $17 million as a result of lost revenue due to COVID. Before this, net leverage would have been 6.2x ahead of the guidance we provided in February. As Michael emphasized earlier, at this point in the academic cycle, we still do not know with any precision what the impact of COVID will be in the fall and for our current fiscal year. We are, therefore, continuing to manage our liquidity tightly and consistent with the principles we outlined in May at the investor update. To recap the liquidity planning and management purposes, we have implemented plans to ensure we are able to maintain a strong liquidity position in the event of a very severe downturn scenario in fiscal '21. Our actions are positioned to ensure we have the operational capability, capacity and flexibility to respond to evolving customer needs and opportunities as we better understand how the fall semester and year plays out. The very severe scenario against which we framed our liquidity plans anticipated declines in U.S. enrollment of 20% plus and revenue declines across our other businesses and markets of a similar magnitude. While we are cautiously optimistic that declines, while significant, may not be as pronounced as our liquidity planning, there are many factors beyond our knowledge and control, and we are not able to provide any guidance. As a result of the early and comprehensive actions taken, our liquidity position has remained strong through the first quarter. At the end of May, our cash balances stood a little over $330 million, with $30 million of additional availability on the revolver. The cash balance will reduce to around $300 million by the end of June by virtue of the $30 million semiannual interest payment on the unsecured notes. We will end the quarter having successfully maintained a strong liquidity position ahead of the fall selling season. Our liquidity plans provide a significant headroom throughout fiscal '21 against our very severe scenario. We do not anticipate having to further draw on our ABL to fund operations. Nevertheless, I would note that the availability under our ABL will increase with the selling cycle, providing substantial additional liquidity capacity through the fall and spring seasons. Finally, it is worth stating that while COVID will make this year challenging, we expect to exit COVID in a stronger position. This reflects the actions we have taken, which can structurally lower our cost base and the revenue benefits we expect from accelerated digital adoption and improved sell-through in both existing and new adoptions. Let me pass you 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 U.S. higher education strategy focused on providing affordable, high-quality learning solutions through Cengage Unlimited is working. We meaningfully outperformed the industry based on MPI data for a second straight year, and the margin of outperformance increased and continued to improve the profile of our business. Second, COVID is accelerating the disruption of the education sector and the move towards a more digitally enabled hybrid education model. This will benefit students and our business. And finally, Cengage is in a strong liquidity position. We have fully implemented plans to mitigate the potential risk of a very severe downturn driven by a temporary yet severe enrollment decline. These plans provide for significant liquidity headroom should such a scenario materialize. Let me now open the floor for your questions.

[Operator Instructions] And our first question is from the line of Mary Gilbert with Imperial Capital.

Yes. I wondered if you could talk a little more about the price compression that you're seeing, if you could just discuss that. And how much of that reflects cannibalization associated with CU? And then with regard to Slide 7 and the industry sales decline of 13%, can you break out how much is related to pricing pressure versus units and the effect of enrollment and how we should think about this with the -- well, of course, the upcoming school season ex COVID effect? And then any antidotes you can give us regarding the fall '21 school season that you can share on how universities are handling campus versus online for students and any enrollment estimates in terms of anecdotally. I understand there's no industry data.

Yes. Mary, it's Michael. So let me take the questions in order, and I'll ask Bob to chime in as well. So the first question vis-á-vis price compression versus unit. In our case, the cannibalization of the existing, particularly bundled, is exactly the design of Cengage Unlimited. And as you can see in our relative performance, what we predicted would happen is exactly happening. In other words, we are making up in volume the cannibalization effect on the price. And what we're seeing overall in the market is actually consistent with the pattern that we have seen over many, many years, which is students have a choice between different modalities in which they can acquire the content. And they will opt with an overwhelming majority for the least expensive option. Whatever that may be, they're going there. And that was the design of Cengage Unlimited to begin with. This is the purpose of Cengage Unlimited e-textbooks in largely print segments that have remained stubbornly print. And in that respect, that is exactly how the strategy is really unfolding and succeeding. Vis-á-vis the industry and the 13% decline, there is no reliable data in terms of what of that is pricing pressure vis-á-vis volume decline. So -- and our data, as I said, because of our unique strategy, it's very hard to extrapolate that to the rest of the industry. And then last but not least, vis-á-vis your question of what we're seeing anecdotally on campuses for the fall. What we are seeing is that the vast majority of campuses are getting ready for -- nobody -- let me put it this way. Nobody is getting ready for -- let's just go back on campus. Everybody will show up in August, September, and we are back to where we were in '19. The contingency planning covers a wide array of teaching modalities from, as you have probably seen, California making a decision to just teach online in the fall to a large number of institutions essentially planning for a hybrid model, which is really complex in the sense they will have the students on campus. They will teach certain courses online while the students are in the dorms and then others that they will teach face-to-face with appropriate social distancing. To some that are trying to push the boundaries more towards a, I would say, traditional campus experience, there is a significant amount of regional variation in this as well depending on what the state or even the smaller region are seeing in terms of prevalence of COVID cases or the prospect of resurgence in COVID cases as you can see now across the southern states most recently. So the bottom line is highly flexible planning for all of them. Mostly hybrid, a few purely online. And there were -- the impact on enrollment is, at this point, extraordinarily hard to gauge because a lot of students, and by extension, parents and also a lot of working students have the opportunity to decide whether they're going to attend or whether they're not going to attend until the very last moment. And many institutions have given extended deadlines, flexibility with regard to down payments, et cetera. So the situation will really not be clear until the fall is actually happening. Bob, anything I forgot in...

Mary, just a couple of points I'd add on the question around price. I think there were 2 other important sort of effects, which we mentioned. The first is the growth of Cengage Unlimited institutional deals. We've now got over 100 institutional contracts. And those are naturally at a lower price point given the volume commitments and both the contract term commitments we're agreeing with those institutional customers. The second point, which I also mentioned, was that the compression that we saw in fiscal '20 did have a couple of one-off drags on it as digital inventory and channel sort of unwound. And also we refined the access model around Cengage Unlimited, which also had a small impact. So I think those are the 2 points I would add, Michael.

Thanks, Bob.

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

I guess I just wanted to quickly touch on the cost structure. It sounds like the admissions picture is hard for all the reasons you've already outlined. But maybe walk us through how you feel about the cost structure going into the uncertainty. Are you guys able to position yourselves in a way where there's upside to the margin profile of the business, and how you think about that going into September and beyond? And then I had a follow-up.

Yes. David, let me just make an overarching comment, and then I'll ask Bob to specifically talk about the cost structure and the profile and the potential for additional leverage there. What we have is a very interesting challenge in the fall, just very simply. The demand for our products, and in particular, for our services is going significantly up in the fall. And the simple reason is, and I'm talking U.S. higher ed specifically, but that's also true globally. As I said before in response to Mary's question, there is a huge amount of contingency planning going on right now on university campuses. And one of the key elements is faculty training. Faculty is not used to teach in a hybrid model by and large. Many faculty are not used to teaching with the technologies, the features and functionalities that we have in our products like MindTap and WebAssign, et cetera. So what we wanted to make sure is that in the fall, we were there to help our customers through this challenge and get the campuses ready as best as we can. That doesn't translate immediately into revenue, but it is the right thing to do for the long-term health of the business. So what we didn't want to do is kind of go in and then respond as it was a slash and burn the cost structure and then not be able to help our customers in the fall. So instead, what we opted is to take some pretty significant temporary measures in terms of the cost structure and then prepare for the structural adjustments longer term throughout the year that we're making gradually as we are seeing how the year is going to unfold. So that was the overarching and guiding philosophy that we had with regard to that. And let me hand it over to Bob to talk a bit more specifically.

Thanks, Michael. So yes, as you've seen, we delivered very significant margin improvement in fiscal year '20. And consistent with previous discussions, absent COVID and the current circumstances, we would have expected to continue that trajectory. So that's the first point. The second point is, if I come to the actions that we've taken to mitigate the risks we see around COVID, when we spoke in May, I mentioned that those actions were expected to deliver around $200 million in liquidity improvement. And the way I would think about those $200 million liquidity improvements, which are now fully implemented, is around half of it is sort of working capital related. There are things like the benefits of FICA deferral under the CARES Act, which saves us around $20 million, other payment abatements, deferrals, and so on, working capital management. Of the other half, and to Michael's point, I would say around half will translate into structural savings and around half is temporary, which will adjust back to give you some sense of where we're at.

That's very helpful. And then just a quick follow-up. I guess this is a big picture question and maybe a difficult one. As more of the competitors move to I wouldn't say an unlimited model, but a sort of cheaper-to-deliver model in this corona COVID environment, do you find that it's harder to convince professors about the affordability factor? Maybe just some thoughts there, and that's it for me.

Yes. Thanks, David. Actually, it's -- let me answer that more broadly. I do think we -- the affordability issue has not been lost on our competitors. But I think they've also found that implementing something like an unlimited model is not as easy as it may sound on paper. So therefore, they are opting more for sort of discount schemes, simple discount schemes. That said, I do think what we're going to see in response to COVID medium term that it's going to be harder for anybody, including us, to take share in the near term. And the reason is the following. If you think about being a faculty right now on campus, you have other problems than switching providers. At this point, your biggest problem is how do I teach in a hybrid model? And how do I teach online? So I think -- and it's not only that I think that, but I -- the evidence that is coming out of the adoption season that we're now at the tail end of is that the focus has shifted from, for us at least, from the share taking because simply faculty is not open and ready to switch providers to deepening the penetration of digital, which obviously has a lot of potential for us as a business. So I think that's what's going to happen in the very near term. By that, I mean the fall. So we're seeing a significant increase in digital less share shift. But I do think over the next year or so, we will see a bit of a return to normal in terms of the competitive share shift. And as we said, we continue to believe that Cengage is just -- Cengage Unlimited is just a superior model.

The next question comes from the line of Nick Dempsey with Barclays.

I've got 2, please. A follow-up -- just to follow-up on something you said there, Michael, about the adoption share. I mean through the spring adoption season, are you saying that you have gained less share of adoptions than you have in the past given the different focus of the people, your customers you're talking to, and therefore, it's more like sticking where we were back in the spring of 2019 for adoptions? That's the first question. And then secondly, just going back to enrollment. What is it that you have seen has made you a bit more optimistic than your severe scenario? And maybe you could break that down into 2-year community colleges, where you focus some of your concerns on your make-all versus the other types of university?

Yes. Actually, Nick, great question. So in terms of -- let me start with the enrollment. I think what we are seeing as a slightly positive sign is that we don't have more universities, particularly in the 4-year category, opting for a purely online start for the fall season or even a full fall season. That it's true for the 4-year market. So as I said, the majority, around 65%, are at this point assuming that they are going to have the hybrid model that I described. With regards to your question around the community colleges, this is -- there is no hard evidence at this point, and there cannot be really because, frankly, the enrollment deadlines and ultimate enrollment numbers are much closer to the beginning of the start of the fall season. And so we're not seeing really any tangible evidence that the pressure there is going to be less. But certainly, in 4 years, I would say that there is some reason for some very, very cautious optimism. Again, as I said, the situation is highly fluid, and an outbreak in a particular state, an outbreak in a particular region could significantly alter that picture. With regard to the share gains, what we're seeing is less share gain in the past adoption season and less share loss. I mean, there's a natural ebb and flow of share gains, share losses every year. We tended to be on the winning side as we demonstrated through the MPI data. We would expect this to moderate a little bit in this particular adoption season simply for the reasons that I stated before that the vast majority of faculty at this point did not want to switch. But we're seeing less losses as well. So net-net, a moderation a little bit of that picture, but significant upside in terms of the sell-through driven by essentially the mandate from the institutions that faculty has to use digital as part of the teaching modality.

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

So I've got 2 here coming up. So how much of the -- so obviously, you guys did gain some market share, and that's good to hear. Given the enrollment declines, how much do you think you won from competitors versus how much do you think was basically the same size slice of a smaller pie? And any way you could quantify that would be helpful.

Ben, it's Michael. I'm not sure. Can you clarify that question? I mean the MPI data is self-reported data by the 6 largest publishers in the space. So it is -- there's really no -- I mean this is truly apples-to-apples comparisons over time, and the spread that you see that we shared in the data is truly how much are we gaining relative to these traditional large 6 competitors. So there's really no enrollment factor in there. The pie is shrinking as we demonstrated because the industry is down as you know. But the share gain, the net share gain is truly an apples-to-apples comparison over the years.

All right. Okay. And then second question, just a follow-up for me. Given the relatively strong liquidity position not only at the end of the quarter, but also as you guys highlighted in the slide deck and in the scripted portion, at the end of May and expected at the end of June, I think you're going to have $300 million of cash on the balance sheet. Are there any plans to pay down the $50 million drawn on the revolver? And then that will be it for me.

Bob?

I'll take that. As you said, we're in a strong position, but we're also sort of cautious. So at the moment, the answer is no. But as Michael said, we are in a very dynamic market, and we'll continue to reevaluate that as we go forward.

Our next question comes from the line of Todd Morgan with Jefferies.

I was hoping to ask about the CapEx and prepub direction for the coming fiscal year. Prepub has been trending down over the last couple of years. And is there any reason to think that, that won't continue as you kind of work through the restructuring plans that you've outlined earlier? And also I think your headquarter investments are largely coming to an end on the CapEx front.

Yes. Todd, so in terms of CapEx first, just to be clear that the investments in sort of properties are done and dusted. So our CapEx, excluding the Boston fit-out, was $46 million, $47 million in fiscal year '20. And I think in a normal year, as we've said before, we would expect CapEx to be around sort of $45 million. This year, we have made -- we have trimmed that further. And as we come out of COVID, we will sort of reassess where we reposition it. I think the -- in prepub, we are likely to see a more pronounced decline sort of this year. But the trend as we continue to transform the business, transform our models, looking through COVID, will continue to drive sort of productivity and efficiency in that spend.

The next question comes from the line of Tom Dobesh with Palmer Square.

The -- going to Slide 16 and looking at the full year savings of $86 million, if you were to have -- and I know a lot of what drove that with some actions in the third quarter. Are you able to quantify or at least give some sense of the magnitude of what that $86 million would have been if you had those actions in place for the full year?

Yes. I think I did sort of cover this specifically quarters ago, very specifically, that the third -- those third quarter actions delivered, on an annualized basis, around $36 million of savings and of which, around $18 million hit in fiscal year '20. So the full year benefit of those actions incrementally is $18 million. Full year annualized run rate of those actions is $36 million.

The next question will be coming from the line of Eric Baer with CFI Partners.

My questions were addressed.

The next question will be coming from the line of Albert He with Vector Capital.

Just trying to understand a bit, like I've seen some articles saying that the decline instead of 20% down are expected to be 5% to 10% down for the upcoming school year on student enrollment. How does that translate into fiscal year '21 EBITDA, if that's the case with all your cost savings?

Yes. I mean I'll let Bob chime in on the second part of your question, Albert. The first one, the first response I would have, I would take all of these things at this point with a huge grain of salt. There is really no reliable data source that tells you what is going to happen on the campuses in September. At this point, a lot of pundits are taking steps in the dark. We are talking to these institutions on a regular basis, as you know, and when you talk to the senior people in these institutions, they will admit that there is a potentially a wide range of outcomes that they're still contemplating. And there are a number of factors playing into that as I mentioned before. So while we are obviously doing scenario planning, et cetera, but I would warn all of us to be too hung up on whatever gets published in any given day or week as a source of truth at this point. The only thing that is true is that it is highly uncertain. Bob, any specifics on Albert's question around the 5% to 10% decline?

No, all I'd say is that we're not going to be drawn on guidance. I think the -- just to reiterate, the early point of the sort of $200 million of liquidity savings, I expect that to be sort of around 50% working capital, 50% spend reduction. And then in terms of sort of scenarios, I'd just encourage you to think about revenue declines in the context of our average gross margin, which is probably a fair estimate of the impact of revenue declines as you see them across the business.

Our next question is a follow-up from the line of Tom Dobesh with Palmer Square.

Quick follow-up. You had mentioned the Cengage Unlimited institutional deals and up to, I think, you said about 100 institutions. Can you just remind me broadly what that looks like from a discount standpoint from a -- kind of what does it mean? Do they -- did the professors have to offer it? Is there -- kind of how do the minimums work? Just -- I realize you probably can't give me exact contract details, but are you able to just kind of give a sense qualitatively what those deals look like as a reminder?

Yes. Tom, I mean, as you already anticipated, we can't really give you, for obvious reasons, contract details. But to think about it, it's essentially a volume for price deal that we strike with these institutions. And the reason is that they are attractive to institutions and why we're seeing that strong uptake is that you are not locking faculty into a very narrow set or even one choice for a learning material or a book, but you're giving them our entire library of 22,000 titles. So even in that particular discipline, typically, we would have multiple type of -- titles in the discipline so people can mix and match. And that's really the attraction of it. Beyond that, as you already anticipated, we really can't comment on the structure.

At this time, we've reached the end of our question-and-answer session, and I'll turn the floor back to Michael Hansen for any further or closing comments.

Yes. Thank you, and thanks to all of you for participating. It's probably an understatement to say we live in highly dynamic times in the education market. But I hope you got a sense from this call that while we are appropriately braced for a very challenging fall season, we are, at the same time, highly optimistic that COVID has actually accelerated many of the trends that we have been pushing and that are ultimately good for the student and good for the faculty in terms of ushering a new era of online learning, which will benefit them, and as a result, benefit us as a business. So. Thank you for listening, and we're looking forward to updating you on our next call.

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