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

Good morning, and welcome to the Cengage Fiscal 2021 First Quarter Investor Update. Participating on the call will be Michael Hansen, Chief Executive Officer; Bob Munro, Chief Financial Officer; and Richard Veith, Senior Vice President and Treasurer. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Richard Veith.

Good morning, and welcome to Cengage's Fiscal 2021 First 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. All statements regarding the anticipated effects of the novel coronavirus or COVID-19 pandemic and the responses thereto, including the pandemic's impact on general economic and market conditions as well as on our business, customers, end markets, results of operation and financial condition and anticipated actions to be taken by management to sustain the company during the economic uncertainty caused by the pandemic and related governmental and business actions as well as other statements that are not strictly historic in nature and are forward-looking. 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 2020 annual report for the year ended March 31, 2020 and a special note regarding Forward-Looking Statements section of the same report and the Risk Factors section of our fiscal 2021 first quarter report for the 3 months ended June 30, 2020, which will be publicly posted to Cengage's website later today. 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, adjusted cash EBITDA less prepub, free cash flow and levered cash flow on a quarterly 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 or 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 product. And now we can turn to Slide 3 for today's agenda. Michael Hansen, Chief Executive Officer, will provide an update on the business; followed by Bob Munro, Chief Financial Officer, who will take you through the details of our first quarter financial results before we open the call for questions. Let me now introduce the Chief Executive Officer of Cengage, Michael Hansen.

Thank you, Richard, and good morning, everyone. In the 2 months since the release of our fiscal year '20 results, we have continued to witness the profound impact of COVID-19 on our customers, our business, the overall education system and the economy at large. The crisis has led to massive dislocation in the provision of learning. And the critical need for the education system to rapidly adapt to ensure not only continuity of learning for students, but that the learning experience is of the highest quality possible across mixed modalities of learning. COVID-19 has presented considerable short-term challenges, whilst also accelerating the shift to online learning and driving long-term structural change, which we believe will ultimately be beneficial for students. Cengage has responded with absolute clarity of focus on 3 overarching priorities. Our first priority is the health and safety of our employees. Second, we are focused on supporting our customers, faculty and students initially through the sudden dislocation in learning at the onset of the crisis. And since then, to be ready for a back-to-school season, which demands the full spectrum of learning modalities and high-quality digital experiences. And thirdly, we are focused on maintaining the health of our business by continuing to transform our cost base and ensuring a strong liquidity position. Cengage has delivered strongly against these priorities. Our experience over the summer working shoulder to shoulder with customers reaffirms that our strategy in U.S. higher education is working. It also clearly demonstrates that we have the products and capabilities to accelerate the shift to online learning for the mutual benefit of our customers and Cengage. Financially, Cengage delivered a solid profit and cash performance in the first quarter, despite significant COVID-related headwinds. Adjusted cash revenues were $191 million, down 17% against the same quarter last year. Against these revenue pressures, the comprehensive liquidity and cost management program delivered an improvement in profitability and helped us to maintain a strong liquidity position. Our adjusted cash EBITDA less prepub was a seasonal loss of $70 million, $9 million ahead of the prior period, and we ended the quarter with a cash balance of $321 million. Bob will share the first quarter financial performance in more detail later. Keep in mind, our fiscal Q1 is a small quarter with limited indicative value in a normal year. It is ahead of the critical back-to-school season. This year, the first quarter coincided with the peak impact of COVID-19 in the majority of our markets, further clouding the outlook. The impact of COVID-19 was felt across all of our businesses and varied considerably. The situation continues to rapidly change. And I personally have never witnessed this amount of volatility so close to the back-to-school season. Given the situation, we feel validated in our approach to work for the best, but plan for a very severe short-term downturn by executing deep and decisive cost actions across all cost categories. So let me turn to what we are seeing across our different businesses and address how we have prepared for the fall season. If we turn to Slide 6, we will start with the U.S. higher education business. The higher education nonprofit business came into the COVID crisis with strong digital momentum. Cengage significantly outperformed the course materials industry as measured by MPI in both fiscal '19 and fiscal '20, driven by the strength of our Cengage Unlimited subscription service, which offers unlimited access to all of our digital products for one low price. Our leadership in delivering affordable access to high-quality digital learning materials has progressively improved the profile of the business. It has enabled us to win adoptions, grow share, drive the use of digital, directly engage with students and deepen our institutional and faculty relationships. COVID is expected to be a significant inflection point for the use of digital in education, accelerating and solidifying the shift to online learning. The crisis has driven the need for new virtual and hybrid learning modalities, where face-to-face is effectively integrated and synchronized with remote learning, supported by digital platforms, which provide a high-quality and consistent learning and assessment experience. The market data during the spring and summer supports this accelerating shift. At the onset of the crisis in March, which led to widespread and immediate closure of academic institutions, we supported our customers to rapidly transition to online learning. We provided free access to around 300,000 students to Cengage Unlimited through the spring semester. We supported 15,000 instructors to move courses online, and we created 17,000 courses that impacted around 750,000 students. During our first quarter, which provides insight into the performance in summer courses, higher education saw a continuation of the March and April trends. This delivered higher education revenues marginally ahead of the same period last year against summer enrollments that we believe to have been broadly flat. The summer performance has shown an acceleration in the shift of demand to digital-only solutions. Cengage Unlimited, standalone digital solutions and eBooks. This trend came at the expense of accelerated declines accelerated in bundles and print. Digital net sales growth was led by Cengage Unlimited, with net sales up 59% in the quarter compared to a 40% increase over fiscal '20. Growth in Courseware activations was 35% in the quarter compared to 13% in the prior fiscal year. Looking forward to the fall, leading indicators support this continued momentum in digital. For example, we have seen increased demand of between 15% and 20% for digital courseware set up compared to a year ago. This is against a background of neutral to marginally positive adoption share gains as faculty was squarely focused on transitioning to remote learning and had virtually no time to focus on switching providers. One other important trend I would highlight is that many faculty are leveraging courseware tools available to them in existing institutional learning management system. Preparing for this challenging fall, we have prioritized investments in features and functionalities that enhance the online learning experience and ease of use, and expanding our customer service capabilities to meet the increased demand. Specifically, these initiatives include enhanced learning management system integration, new content and platform releases in key subject areas, including psychology, marketing and biology; expanding our customer service team by 10%; and further increased customer service and career handling capabilities through enhanced chat tools, self-service, knowledge basis and improved workflows. In addition, we went live with Cengage Unlimited eTextbooks offering at the start of August, further expanding student choice to another unique and affordable product. While the digital trends are positive and it stands to reason they will continue through the fall, these are overshadowed by the likelihood of significant declines in enrollment. The status of college reopenings and the enrollment outlook across the U.S. remains in a state of high flux, mirroring the constantly changing incidence of the disease and public health responses. Based on our own survey and external industry information, which is SPARS, we continue to expect a significant decline in fall enrollments. Our current estimate is for a decline of between 10% to 15%. This broad range reflects the fundamental issue that we are in unprecedented circumstances and there remains significant uncertainty. Actual enrollments will only become clear over the next few weeks when schools commence their fall semester. Let me now address our other businesses. Our other businesses were also well positioned at the onset of COVID with comprehensive digital offerings and strong customer service capabilities. Our teams are supporting customers as they address shared issues of how to reopen and provision remote learning whilst facing heightened funding pressures and enrollment declines across all international markets. Our Gale business was significantly impacted at the onset of the COVID crisis in the last quarter of our fiscal year '20. This reflected Gale's fourth quarter revenue dependency on large transaction sales to China, which closed down its education system early on in the pandemic. At this stage, we have not seen any meaningful recovery in transactional sales momentum despite China having opened up its economy. In light of COVID, library customers are likely to face increased funding pressures, creating significant uncertainty around the potential recovery in demand. Subscription renewals, on the other hand, for digital collections are holding up well as libraries look to maintain core services. In our international business, COVID had significant impact on all businesses and geographic markets, reflecting widespread school and institutional closures. The impact varies by region, reflecting the relative status of the pandemic and plans and progress in reopening. Notwithstanding this, generally, the impact to date on our international business has been more severe reflecting a greater level of structural dependency on print product, in-person learning and distributor channels to market. In international higher education, risks around reopening and enrollment risks are prevalent in all markets, suppressing demand and delaying ordering. Against this, COVID is also accelerating the shift to digital, albeit from a much lower base. Digital activations are up 90% through the first quarter, and digital billings represent over 1/3 of total billings in the quarter. In the U.S. school business, the impact of COVID-19 was acute in the first quarter. School governing authorities have focused on the critical priority of developing plans to reopen schools and provision teaching in the fall. This, together with increased uncertainty around budgets and funding, adversely impacted both overall demand and the timing of orders. As the back-to-school season has progressed, we have seen some improvement in overall demand as delayed orders were released and a strong uptake of digital, which represents over 50% of Q1 net sales. Across all of our businesses, we are continuing to navigate unprecedented and rapidly changing circumstances. We are unable to predict the extent or duration of the COVID-19 pandemic. As a result, due to these many factors beyond our knowledge or control, we will not be providing any financial guidance for fiscal year '21. Before handing over to Bob, I just wanted to circle back to our first priority, supporting the health of our employees. Our ability to effectively support our customers rests on the commitment and resilience of all Cengage employees. In the face of this global crisis, the strength of our values and culture, which has been built from the ground-up over many years, has been shining through in a powerful way. I am personally deeply proud of the many ways, large and small, the Cengage team has responded. Consistent with these values and our role as an education business, the heightened focus on issues of social injustice and inequality and the imperative for change strongly, resonates within our organization. We acknowledge we can and must do more. And the public debate has acted as a catalyst for us to reassess how we address inclusion, diversity and equity. We are committed to long-term efforts, which could drive sustained and systemic change. We are implementing programs centered around 3 key spheres of influence: Cengage as a corporate citizen, Cengage as an employer and Cengage as an important part of the education ecosystem. I firmly believe our culture, which has inclusion, diversity and equity as one of its pillars, is a key strength of our business, and these initiatives will further enhance this. Let me now pass the baton to Bob, who will provide further detail on the first quarter financial performance and the strength of our liquidity position.

Thank you, Michael, and good morning. We turn to Slide 9 and the financial highlights for the first quarter. COVID-19 has had a significant impact on our customers and overall trading performance in the first quarter. Adjusted cash revenues were $191 million, down 17% or $41 million. Adjusted cash EBITDA less prepub was a seasonal loss of $17 million, a $9 million improvement compared to the first quarter last year. The profit impact of the $41 million first quarter revenue decline was more than offset by realized savings. This reflects the benefit of cost transformation initiatives taken in the second half of fiscal '20 and the operational discipline and early and decisive actions to reduce costs and optimize liquidity in light of COVID-19. Q1 costs were reduced by a total of $35 million, an 18% reduction in the cost base. Whilst COVID-19 has impacted all customers and markets, the impact on our businesses in the first quarter has varied. For Gale, Q1 adjusted cash revenue was $34 million, down 7% against the first quarter last year. This modest decline was underpinned by the resilience of the digital subscription business and typically low weighting of transactional sales in the first quarter. In Q1, 94% of subscriptions by value, which fell due, have been successfully renewed, consistent with the strong performance over fiscal year '20. Transactional sales, which include digital archives and collections, represented between 20% and 25% of cash revenues in fiscal year '20. These revenue streams are weighted to the second half of the year. The widespread closure of academic institutions had a significant impact on these revenue streams in Q4 of last year, impairing our ability to close deals. While institutions are reopening, we have yet to see meaningful recovery in sales momentum against a background of heightened uncertainty around funding and budgets. In international as a whole, adjusted cash revenues were $32 million, down $23 million or 42% against the first quarter last year. This partly reflects a strong comparative which included the benefit of a $5 million export order in the Australia school business related to the Texas English language adoption. In English Language Teaching within our International segment, adjusted cash revenues declined by 31% against Q1 last year. The year-to-date revenue decline across all regions as [ moderated ] through May to the end of July, led by Asia and China with distributors prudently increasing order volumes as schools reopened. In international higher education, adjusted cash revenues were down over 40% through the first quarter. This reflects significant delays in orders from distributors in response to high uncertainty around school reopenings and enrollments. The Q1 performance of international higher ed was exacerbated by the temporary closure of our Indian warehouse for a period of 2 months. As with the English language business, the year-to-date revenue decline has seen modest improvement from May through to the end of July. The approaching back-to-school season, progress in reopening and accelerating digital sales, albeit from a low base, has seen some uplift in demand. Before we leave International, it's worth mentioning that on July 7, we formally completed the acquisition of certain Canadian business operations and assets from Nelson. This established a new international division to directly serve the Canadian higher education market in place of the partnership and distribution agreement we have with Nelson. The acquisition price was USD 9 million with minimal upfront consideration. Turning to Slide 11 and the Learning segment. In school, adjusted cash revenues were $30 million for the first quarter. This represents a decline of 39% against a strong comparative, which benefited from a cyclically better adoption year and a good performance in the California social sciences adoption. Over June and July, the year-to-date revenue decline has moderated to an extent as orders were received later in the cycle. COVID-19 is expected to have both depressed overall market demand and delayed orders. The relative impact of these effects on Q1 is, however, unclear with many authorities still finalizing plans for back-to-school. In higher education and skills, first quarter adjusted cash revenues increased $4 million to $96 million, representing growth of 5%. This growth has been driven by our online skills business. This business, which is well positioned to meet the increasing demand for nontraditional education and address skilled gaps in high demand areas of the economy, delivered high single-digit growth in fiscal year '20. From the onset of COVID-19, the business has seen demand increase sharply, accelerating revenue growth to over 40% in the first quarter. We are investing in marketing, new distribution partnerships and expanded service capabilities to capture these near-term opportunities. At the same time, we are building out our strategy to capitalize on the strong market growth dynamics over the medium term. Turning to higher education. In a seasonally small first quarter, the higher education business delivered a solid Q1 performance with adjusted cash revenues 1% ahead of the prior period. This was underpinned by the higher education nonprofit sector. Against an estimated backdrop of flat summer enrollments, underlying net sales were also essentially flat. This is after taking account of estimated delays in Q1 returns of up to $5 million as a result of COVID bookstore closures. These delayed returns were reflected in higher returns provisions at June 30, which, in turn, are included in the adjusted cash revenues. As Michael stated, it is worth reemphasizing that the Q1 performance does not provide any realistic indication of performance through the fall, given the significant continuing uncertainty around enrollment. Turning now to the adjusted cash EBITDA on Slide 12. Adjusted cash EBITDA less prepublication costs for the first quarter was a loss of $17 million but $9 million ahead of the same period last year. The Q1 adjusted cash revenue decline of $41 million translated to a $25 million gross margin. This was outweighed by $35 million in cost savings. These savings reflect the combination of annualization of benefits from the structural actions taken in the second half of the last fiscal year, which drove $9 million of savings. And the comprehensive program to mitigate the impact of the COVID crisis, which drives the balance. The savings actions implemented through this year encompass the ongoing simplification of our operating model, broad-based supply chain initiatives, changes to working practices and temporary labor cost reductions. The significant operational constraints and changes to working practices necessitated by COVID are driving increased workforce productivity and significant vendor savings in areas such as travel, marketing events and facilities cost. As a key part of our post-COVID planning, we are critically assessing our future working requirements and practices. And through this, expect to preserve a meaningful level of these savings beyond fiscal year '21. Of the Q1 savings of $35 million, we expect around half of this to be captured on a permanent basis. This Q1 cost performance continues the strong progression of the past year and our cost base. This is summarized on Slide 13. The Q1 cost savings of $35 million builds on the strong momentum of fiscal year '20 where costs were reduced by 10% year-over-year. Taking into account an additional $6 million reduction in underlying capital expenditure, total spend declined by $41 million in the first quarter, a 20% reduction. The reduction in CapEx reflects prioritization of investments in light of COVID and excludes the impact of the fiscal year '20 Boston office fit-out, which added $12 million of onetime CapEx to spend in Q1 of the prior fiscal year. The level of quarterly savings is expected to increase further in the second quarter. This reflects the full quarter impact of temporary labor savings and other actions, which were implemented partway through Q1. In the second half of the fiscal year, the quarterly run rate of savings will moderate. This is a function of temporary labor savings, which will largely normalize in Q3 and as a result of the benefits of the fiscal year '20 actions already being in the base. As covered in the previous update, our COVID-19 liquidity management program targeted around $200 million of liquidity savings in fiscal year '21 and the business remains firmly on track to deliver this. Of these cash savings, around half are expected to translate to year-on-year savings that favorably impact adjusted cash EBITDA less prepub in fiscal year '21. These savings are estimated in turn to fall evenly between temporary savings impacting just the current year and permanent benefits carried into fiscal year '22. As we progress through the year, we will continue to explore the further simplification and rationalization of our operating model, including in the context of the accelerating shift to digital. Let me now turn to our cash flow performance and liquidity position on Slide 14. Levered free cash flow for the first quarter was a net outflow of $41 million. This compares to an outflow of $150 million in the first quarter of last year, a $117 million improvement. The improvement in cash flow performance is driven principally by wide-ranging working capital initiatives, which drives $61 million of this improvement. In addition, the current quarter benefited from a $21 million reduction in cash interest payments and a $19 million reduction in CapEx, largely driven by the nonrecurring spend of $12 million from the Boston office last year. The cash interest improvement reflects timing of interest payments, combined with the benefit of rate reductions. The business ended the quarter with cash balances of $321 million and in a strong liquidity position, which is set out on Slide 15. As a result of the early decisive and comprehensive actions taken in response to COVID, the business has maintained a strong liquidity position through the first quarter and into the fall season. Total liquidity was $356 million at the end of the quarter. This comprised the unencumbered cash balances of $321 million and $35 million of additional availability under the revolving credit facility. Net leverage at June 30 has been held at 6.6x, consistent with the position at March 31. In prior years, the net leverage has increased over the first quarter as cash reserves were used through the seasonal low period in the business cycle ahead of the back-to-school season. The significant change this year reflects the benefits of the comprehensive liquidity management program, which both significantly reduced the Q1 cash outflow and underpinned the growth of $9 million in adjusted cash EBITDA less prepub. As Michael covered earlier, whilst we are well prepared for the back-to-school season, we cannot predict what the impact of COVID will be in the fall and for our current fiscal year. In view of this uncertainty, we continue to be fiscally prudent and tightly manage our liquidity and cost base to the plans we put in place earlier in the year. These plans were implemented to ensure we maintained a strong liquidity position through the seasonal low period ahead of the fall season and across fiscal '21 as a whole in the event of a very severe downturn scenario. With July now behind us and the fall season underway, we are successfully through the seasonal low period in our cycle. At the end of July, the cash balance stood at $314 million, with approximately $48 million of availability on the revolver. From this point, we expect to generate strong cash flow over the coming months as the fall season progresses. The actions taken have put the business in a position to maintain strong liquidity throughout fiscal year '21 and going into fiscal year '22 with substantial headroom against the very severe scenario, should it arise. In addition, it is worth noting that availability under our ABL will increase with the selling cycle, providing substantial additional liquidity capacity through the fall and spring seasons. Finally, we are well advanced in discussions to extend the term of our ABL and confident that we'll be able to execute this over the coming months on acceptable terms. Let me now hand you back to Michael for concluding remarks before we open the line for questions.

Thank you, Bob. In closing, I want to leave you with a couple of key points. First, our U.S. higher education strategy focused on providing affordable, high-quality, stable digital learning solutions at scale through Cengage Unlimited, is not only working but it is proving to be a major competitive asset as education is turning to virtual or hybrid modalities across the globe. Second, our decisive early actions facing the reality that COVID will likely result in profound near-term revenue challenges are paying off. These actions were building on our track record to simplify and reduce cost in our operations. As a result, we are in a strong liquidity position. We have fully implemented plans to mitigate the potential risk of a very severe downturn. These plans provide for significant liquidity headroom should such a scenario materialize. We will now open the floor for your questions.

[Operator Instructions] And our first question is from Todd Morgan with Jefferies.

Michael, you mentioned sort of a 10% to 15% enrollment decline potential this year. Is there any way to kind of think about the propensity for those students who are not showing up to be kind of buying your materials? Or are they less likely to be customers? In other words, is there kind of like a ratable decline in perhaps volumes? Or is there a different way to think about that?

Yes. Thanks, Todd. The -- our assumption is that the students who decide not to show up in college are -- the vast majority are not going to be using any materials. However, what is going to happen and what we're seeing in the market is that increasingly students are looking for alternatives to the degree conferring 2- to 4-year experiences. And they will go to online options that they have, and that is why we have put a particular emphasis on the online skills area and our business in there at to go. So we'll see some pickup there, but it's really hard at this point to estimate how much that would be. But I would say, it's safe to say that the majority of them will just simply decide to postpone their education plans rather than look for alternatives.

Our next question is from the line of [ Joe Garvic ] with Pretium Partners.

So on the $200 million of cash savings, can you just help us understand how much of that we would expect -- we can expect to reverse next year into fiscal '22? And how much can be permanent?

Sure. So just to be clear, the $200 million is sort of liquidity savings, of which we expect roughly half, so $100 million to benefit this year's profit and loss account. And of that $100 million, around $50 million. So again, half again of those P&L savings to reverse. So those -- that reversal relates to the temporary labor savings, which we will not carry into next year. Just also some level, a reversal of the benefit that we're getting from the change working practices. I used the example of T&E, where, like many companies, we're seeing very significant savings given travel constraints. We do not expect to return to where we are, but we do expect to return to a different point sort of perhaps midway. Of the working capital savings, so the other $100 million, we -- I would expect some of the actions we've taken to represent sort of a permanent sort of step down. So we have been very aggressively managing our inventory positions. And yes, that's very much against the expectation of accelerated shift to digital, which we are seeing. So we don't expect that trend to reverse. But benefits such as CARES Act FICA deferral. Some of the extended payment terms that we've reached with suppliers will reverse next year as those normalize.

The next question is from the line of Nick Ghoussaini with Vector.

A quick continuation of that question, then I have one more. Just -- so the working capital savings of $100 million, how much do you expect to give back next year? And then I thought I heard you say that a lot of the interim -- or sorry, the short-term P&L savings will revert and go back to normalization in Q3. So I just wanted to understand that a little bit better. Does that imply that a majority of the impact is hitting us in Q2 and then it kind of goes back to Q3? And then my last question is, you've historically talked about a $5 million revenue impact for every 1% impact in enrollment. Does that still hold true given the migration in digital and what you're seeing? That's all for me.

Nick, let me just take those perhaps in reverse order. So I think as a rule of thumb, the 1% enrollment impact translating to around a $5 million revenue impact. I think it still sort of holds true in our estimation. I think I just -- you're not losing sight of the point that Michael made in that we are seeing that very strong growth in online skills. And going back to the first question, we may see sort of a pickup there. In terms of the quarterly P&L savings, the point I was, sort of, making, again, if you frame it in terms of an estimate of $100 million for the year, in the first quarter, our total spend savings including CapEx were $41 million. In Q2, we expect that run rate to increase because we will get a full quarter's benefit of temporary labor savings and other actions that would put in place partway through the first quarter. As we go into the second half, our temporary labor-saving actions will actually reverse because those are put in place effectively through October. And the benefits that we're seeing from the actions that we took in fiscal year '20 also fall away. So we will continue to build savings in the second half, but at a lower run rate. And I think the final point I would make on that, that's where we stand today. Just going back to the point I made, as we were going through the presentation, we are continuing to look at opportunities to further transform our operating model and our cost base, particularly in light of the changes that we're seeing across our markets. And that will remain very much front of mind as we continue to progress through this year. I think going then to the first part of your question, which was, I think, focused on the working capital piece. I think with working capital, you see -- I mean, there are 2 effects. There are sort of permanent step down effects like inventory. But if I use an example of, say, the CARES Act, we've had a benefit in working capital this year of deferring sort of payments to the government for FICA. But we have an obligation to pay those back over the next 2 years. So in fact, what we are going to see next year is normal FICA payments plus sort of repayment. And so when I sort of wash all of that through, I think the working capital benefits of that $100 million, we're not going to -- I think we will hold a good chunk of it in terms of inventory, but a lot of the other factors will reverse.

Our next question is from the line of Robert Vida with Elmwood.

I wanted to touch on the modalities of learning. And as students are potentially doing more virtual, how does that impact the likelihood or the uptake of digital versus print versus just students who are more on campus? And then the second part is, last year, you talked about the fact that some of the Cengage Unlimited purchasing was happening later in the 2Q cycle and so resulting in some shift into the 3Q revenue. Could you talk about maybe how that dynamic might play out?

Sure, Robert. It's Michael. Let me take those 2 in order. First of all, yes, we do think that the shift to -- and we're seeing evidence of this, that the shift to virtual and hybrid learning models, which are happening in the vast majority of the higher ed institutions around the country right now is benefiting our Courseware, our digital courseware, and we're seeing -- we have seen this in the shift that happened over the summer towards more digital stand alone and, in our case, Cengage Unlimited subscriptions in the product mix. Keep in mind, though, I mentioned this in my remarks that the faculty have a variety of options when they consider how they can best teach in these new modalities. They can use our Courseware or they can use some LMS functionality as well. So it's an individual decision. We feel that the Courseware is the better learning experience, but obviously, we are -- in that respect, we are working with our faculty to do what's right for them and for their students. With regard to the CU shift, the Cengage Unlimited purchases typically happen nearer to the class starts. So any shifts we're seeing relative to next year are predominantly driven by the start of classes when actually students go back to college and then acquire the materials. And unless there is still some shift away from print, which obviously tended to happen earlier in the season, i.e., the channel stocking up with print. So we will see some residual shift, but not as pronounced as we saw it last year.

At this time, we've reached the end of our question-and-answer session. And I'd like to turn the floor back over to management for any further or closing comments.

Thank you, Rob, and thanks, everybody, for participating. We are -- and thanks for your questions. We are looking forward to updating you on the results of the fall back-to-school season next quarter. And for now, all remains for us to wish you a good rest of the summer. Thank you. Bye-bye.

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