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

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

Good morning, and welcome to Cengage's Fiscal 2021 Second 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 historical in nature, are forward-looking. 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 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 second quarter report for the 3 and 6 months ended September 30, 2020, which will be publicly posted to Cengage's website later today. The company disclaims any duty or intention to publicly update or revise any forward-looking statement, whether written or oral. 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 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 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 are 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 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 second quarter and first half financial results before we open the call for questions. Let me now introduce the Chief Executive Officer of Cengage, Michael Hansen.

Richard, thank you, and good morning, everyone. The end of our second fiscal quarter marks the conclusion of the back-to-school season, which is a key indicator of the health and trajectory of many of our business units. This is an important milestone every year. But during the global pandemic, the likes of which have not been seen in nearly a century, it is a critical milestone. Today, I'm happy to report that our U.S. higher education business, by far, the largest and most profitable of our business units has not only successfully navigated the uncertainties of COVID, but in fact, crossed a critical performance inflection point. The COVID pandemic has accelerated several existing trends that have been the focus of our strategy for many years. Our digital learning platforms, coupled with high-quality, affordable learning materials and unsurpassed customer service have taken center stage in the market. As a result, we have outperformed the competition yet again, but more importantly, powered the business to revenue growth despite substantial continued market headwinds. In addition, our early investments in Ed2Go, our online skills business has seen significant payoff with over 40% revenue growth year-to-date. While small, Ed2Go has proven mighty in a still fragmented market and is expected to grow strongly into the future. COVID-19 has had the predicted negative impact on markets served by our other business units. As a result, these businesses saw significant near-term revenue decline. However, we are already seeing some recovery in a number of these markets, and we expect these to continue, albeit at different grades. Given the uncertainties early on in the year, we have taken decisive cost actions to preserve our profitability and liquidity. We've done this through a series of structural changes as well as temporary sacrifices asked of all employees in the company. We have taken these actions with radical candor, transparency and in the spirit of "we are all in this together". This has led to not only strong financial results but also a unified rallying cry to focus on the health of our customer relationships, giving them our undivided attention that they so desperately need in these challenging times. As a result, the pandemic has not led to an attrition of talent from Cengage. Rather, we are seeing a continued strong sense of purpose and dedication. I experience it every day in my more than 4,000 colleagues around the world. As I know that most of you on this call love numbers, let's go to the financial headlines. Adjusted cash revenue for the second quarter were $534 million, only 2% behind the prior period. With the benefit of the second quarter, first half adjusted cash revenue was $723 million, down 7% against the first half of last year. The second quarter performance improved significantly and it moderated the overall year-to-date revenue decline from minus 20% in the first quarter. Digital sales now represent 68% of our total net sales. Our first half adjusted cash EBITDA less prepub was $243 million, up 13% against the prior period. We remain in a strong liquidity position. We ended the quarter with cash balances of $428 million and total liquidity of $614 million. Following the quarter-end, we successfully closed the 3-year extension of our revolving credit facility in October. As we all know, the COVID pandemic is still creating significant uncertainty. Therefore, similar to the previous quarter, we will not provide guidance for the rest of Fiscal '21. Let me now provide some further insights into the key performance trends across our businesses. Turning first to U.S. higher education on Slide 6. The U.S. higher education business came into the fall season with a strong digital base and good momentum from all the efforts we undertook starting in March to help faculty, students and institutions rapidly respond to their COVID reality. We have strong confidence in our leadership position as a provider of affordable quality digital solutions with unsurpassed customer service. At the same time, there was tremendous uncertainty on the impact of COVID on enrollment. This fall, the business passed a critical inflection point, as digital acceleration drove strong net sales growth despite an enrollment decline of around 4%. Through the first half of the fiscal year, the business grew 4% in net sales and 9% in units. We achieved strong double-digit digital growth in all key areas: Courseware activations, subscriptions, eBooks and in our institutional model. If you turn to Slide 7, you can see that we continue to significantly outperform the course materials industry as measured by MPI. On a trailing 12-month basis, Cengage net sales growth of 5% outperformed the industry, which declined by 5%. We continue to see strong market resonance and impact from our Cengage Unlimited subscription service, which offers unlimited access to all our digital products for one low price. We estimate that we want net adoption share of 50 basis points in Courseware this fall. This is even more remarkable as during the pandemic, faculty were more reluctant to change their course materials. So we are both winning more adoptions and increasing the use of our digital solutions. COVID clearly was a catalyst to increase our rate of digital conversion. Our performance, despite the impact of COVID on enrollments, it's based on a strong foundation, laid over multiple years as we prioritize product and business model innovation, quality, service and affordability. Because of this foundation, we think the U.S. Higher Ed business has a sustainable positive growth trajectory despite macro and COVID uncertainty. Over 85% of our business is now recurring on an annualized basis. And we can see a lot of room to continue to grow digital with both share gains and conversion of current Cengage content users to digital. At the same time, the impact of the decline of print sales continues to get smaller every year and is now outweighed by digital growth. In addition, based on our own student research, we believe there may be some upside from prospective enrollment growth as students who delayed starts this year enroll over the coming semesters. We will continue to focus on leading the market and growing the impact we can have on faculties, students and our institutional customers. Slide 8 covers the trends we are seeing across our other businesses. The Gale business continues to prove resilient in the face of increasing funding pressures on libraries and institutional customers. The second quarter represents the peak period for subscription renewals and year-to-date, renewal rates were successfully maintained above 90%. Demand for databases and eBooks is holding up well. Print declines have moderated over the second quarter, as libraries have reopened. Beyond these factors, the full year performance of Gale will be principally driven by the extent to which global demand for digital archives recovers. These transactional sales, which represent over $40 million in revenue last year, have typically been heavily weighted to the second half. With the onset of COVID at the beginning of this calendar year, we saw over 10 million of such deals fall away in Q4 of last year. We are seeing some recovery in sales momentum in China. In September, we closed one of the 7-figure deals carried over from Q4 last year with a leading Chinese university, our first major archive sale of the year. Across our international businesses, the impact of COVID has generally been more acute. This reflects higher structural dependency on print products, in-person learning and distributors as a channel to the market. We have seen some improvement in demand during the second quarter as schools and colleges have reopened, moderating the year-to-date revenue decline from Q1. We are seeing strong growth in digital across Asia, Europe, Middle East and Africa and the LATAM market. But as it starts from a smaller base, this only partly mitigates print declines driven by school closures, enrollment declines and widespread distributor destocking. Within International, our English Language Teaching business has high dependency on print and in classroom teaching. As a result, widespread school closures driven by COVID have had a significant, but we believe temporary impact on this business in the current fiscal year. Global demand for English Language Teaching is expected to continue to grow. Our business is well positioned to return to growth as markets recover, which we expect to extend into FY '22. We are seeing the pace and shape of the recovery vary significantly by market. In China and certain other Asian markets, demand has virtually recovered to pre-COVID levels as schools have reopened. In contrast, demand across Latin America and European markets remains at depressed levels and is likely to take longer to recover. In international higher education, we are seeing similar variations in the impact of COVID and pace of recovery across different geographic markets. COVID has also accelerated the shift to digital across international Higher Ed markets, albeit from a lower base. Digital activations are up 28% through the first half. And digital now represents 30% of net sales year-to-date, up from 20% in the prior period. Our Canadian business, which we acquired from Nelson in July of this year is performing ahead of our acquisition plan after a strong back-to-school season. With higher digital penetration, we expect this business to more closely track the performance of our U.S. Higher Ed business going forward, as we integrate and leverage established capabilities into the Canadian market. In the U.S. core business, demand progressively improved during the second quarter as customers finalize their back-to-school plans. Year-to-date sales performance has broadly tracked the overall market, which is estimated to be down around 20% based on AAP data. From an already high base, we saw solid improvement of digital shares in the sales mix from 60% to 63%. Usage significantly increased with activation up 34%, as more learning was provisioned remotely or in hybrid settings. At this point in the year, we believe 80% of annual sales have been recorded. Let me now hand over to Bob to take us through the second quarter and first half financial performance and our liquidity position in more detail.

Thank you, Michael, and good morning. Turning to Slide 10 and the second quarter. The business delivered a solid second quarter. Adjusted cash revenues were $534 million, down just 2%. Adjusted cash EBITDA less prepub was $261 million, 10% ahead with the ELPP margin improving by a full 500 basis points. With revenues marginally behind, the strong growth in profits was driven by improved gross margin and continued momentum in reducing our costs. Gross margin was up 90 basis points to 80.1% compared to Q2 last year. Operating and prepublication costs were reduced by $25 million, adding to the $36 million of savings already achieved in Q1. The Q2 costs include a $4 million impact of the Nelson Canada acquisition, before which costs were down 15%. The overall revenue performance is underpinned by the strong performance of U.S. Higher Ed and continued high growth in online skills. Total Learning segment revenues were up 1% on the prior year. In U.S. Higher Ed, net sales were up 3%, driven by the strong digital performance. This, combined with another quarter of over 40% growth in online skills, outweighed moderating declines in the school business. School revenues were $84 million, down 7% as demand recovered from Q1. For Gale, Q2 revenues declined at 6%, reflecting a continuation of trends from the first quarter. Digital performance remained strong with the decline reflecting weak print demand. In the International segment, where the COVID impact remains the most acute, demand did begin to recover through Q2. Underlying revenue declines moderated in both English Language Teaching and Higher Education compared to Q1. Total International revenues were bolstered by the acquisition of Nelson Canada. This acquisition was completed on July 7 and added $9 million to adjusted cash revenues compared to the same period last year. Improvements in demand across all businesses in the second quarter meaningfully improved the revenue trajectory of the business in the first half. If we turn to Slide 11. Adjusted cash revenues for the first half was $723 million. Revenues of $55 million lower, down 7% compared to the prior period. Gale has proved reasonably resilient through the first half, with revenues of $98 million, 7% behind the prior period. In the U.S. market, revenues are down 7% as strong subscription renewals were outweighed by shortfalls in print and archive sales. Print and archive orders have been impacted by library closures in the first half of the year and increasing budgetary pressures. In the International segment of Gale, first half revenues were down 5%. Shortfalls in archive sales in Europe, Middle East and Africa, outweigh growth in China, where sales momentum improved in Q2 with customers reengaging as institutions reopen. In International as a whole, adjusted cash revenues were $99 million, down $29 million or 23% against last year. Within the International segment, English Language Teaching revenues declined by 25% against the first half last year. The year-to-date revenue decline moderated in Q2 driven by Asia, where sales were flat in the quarter. The European, Latin America and U.S. markets are recovering more slowly. This reflects the relative status of the pandemic which is slowing school reopenings, impacting enrollment and significantly constraining the European English Language travel market. In International Higher Education, adjusted cash revenues were down 16% through the first half. This reflects the combination of $7 million of revenue growth from the acquisition of Canada, which partly mitigate significant but moderating declines across other markets. We are encouraged that the Canadian business performed well ahead of our expectations through the key fall season. In markets other than Canada, revenue declines reflect widespread distributor destocking, delayed school openings and a onetime impact in this fiscal year of exiting a trading relationship with a major distributor. We have seen some further recovery in demand through October, notably across our European and Middle Eastern markets, as colleges and universities have reopened. Moving to Slide 13. In school, adjusted cash revenues were $113 million for the first half. This represents a 22% decline against a tough comparative, which included a strong performance in the California social studies adoption. Over the second quarter, order flow and demand progressively improved as schools finalized reopening plans, moderating the year-to-date revenue decline. The performance of the school business is broadly in line with the overall market. This reflects a cyclically weaker adoption year and COVID-driven demand weakness. In higher education and skills, first half adjusted cash revenues increased $13 million to $412 million, representing growth of 3%. Our Ed2Go online skill business continued its strong growth trajectory in Q2. The business, which generated over $30 million of revenue in fiscal '20 is seeing demand increase sharply from the onset of COVID. Through the first half, it has maintained revenue growth of over 40%, driven by strong demand for advanced career training courses. If we turn to higher education on Slide 14. The Higher Education business performed strongly through the back-to-school season, passing a key inflection point and returning to overall growth. Adjusted cash revenues were 1% ahead of the prior period, underpinned by net sales growth of 4%. The net sales performance was driven by the acceleration of digital, which now represents 82% of total net sales on a trailing-12 month basis. First half digital net sales grew by 7% or $21 million, outweighing the reducing drag of print, which declined by $5 million. Year-to-date net sales growth has further improved through the end of October to between 5% and 6%. This pickup is primarily driven by strong growth in institutional deals, both Cengage Unlimited and Inclusive Access. A significant proportion of these deals are built in October shifting revenues between quarters. Return trends through October remained favorable and are less volatile as the weight of returnable product in the sales mix has progressively fallen. Given this, we are confident that the 5% to 6% net sales performance through October is a fair reflection of our overall performance through the summer and fall seasons. We go to Slide 15. Adjusted cash EBITDA less prepub for the first half was $243 million, 13% or $28 million ahead of last year. The $55 million first half decline in adjusted cash revenues reduced gross margin by $33 million. This revenue effect was moderated by changing product mix and structural cost actions, which improved the gross margin by 130 basis points to 78.4%. The gross margin impact was more than offset by $61 million of first half cost reductions. These savings flow from our actions to mitigate the impact of the COVID crisis, ongoing transformation of our business and the annualization of benefits from the restructuring in the second half of the last fiscal year. COVID has accelerated the transition to digital and driven changes to our working practices. In this, COVID is also a catalyst to further transform and simplify our business, embed new ways of working and structurally lower our cost base. The wide-ranging actions already taken this year, together with the ongoing evolution of our operating model, build on these opportunities. Our costs for this year will be significantly lower than last, and we expect the majority of these savings to be maintained in fiscal '22. Slide 16 addresses the trajectory of our cost base. The first half cost savings of $61 million continues the momentum of fiscal '20 where costs were reduced by 10% year-over-year. Taking into account an additional $11 million reduction in underlying capital expenditure, total spend declined by $72 million in the first half, a 17% reduction. The underlying reduction in CapEx reflects prioritization of investments in light of COVID and excludes the $14 million onetime impact of fitting out our Boston office in fiscal '20. In our first quarter call, we indicated that full year spend savings, including underlying CapEx would be around $100 million, of which around half was temporary savings benefiting only fiscal '21. Full year spend savings, including CapEx, are now projected to be around $60 million. This is after including $13 million of incremental operating spend relating to the consolidation of the acquisition of Canada. Beyond the Canada acquisition, the other driver of the change is our decision to expand the annual incentive plan to enable employees to earn back salary, which they sacrifice over past 5 months as part of our mitigation plans against very severe COVID scenarios. With the business performing substantially better than those scenarios, we have done the right thing to enable employees to earn this back against the stretched financial target. This amounts to the reversal of over $20 million of temporary benefits, which have been included in our previous estimation. The trajectory of operating costs and prepub savings over the balance of the year reflects this reversal together with the normalization of temporary labor savings in Q3 and that the benefits of the FY '20 actions are already in the second half base. In addition, Q4 of fiscal '20 benefited from below target sales commissions and annual incentive costs, which are expected to normalize this year. It is worth emphasizing that our expectation of structural savings carried into fiscal '22 is broadly unchanged at around $50 million. As I mentioned, we will also continue to leverage the accelerating shift to digital to further simplify and rationalize our operating model as we go through the second half. Let me now turn to our cash flow performance and liquidity position on Slide 17. Levered free cash flow for the first half was $120 million compared to an outflow of $86 million last year. This $206 million improvement is driven by the strong results of our liquidity management program. This program targeted around $200 million of cash flow benefits compared to fiscal '20 through a combination of operating cost savings, lower one-off spending and wide-ranging working capital initiatives. The business is on track to deliver these cash benefits. The full year target, around 75% or $150 million is being delivered in the first half. The first half improvement of $206 million benefited from some temporary actions to maintain cash through the summer low season in the cash cycle. These effects, most notably the deferral of fiscal '20 incentive compensation payouts, which were paid in October, will reverse in the second half. The net impact of the liquidity program on the full year levered free cash flow will be dependent on both the absolute revenue performance and phasing of customer payments through the second half. Given the strong results of the liquidity program and the solid trading performance through the fall season, the $50 million drawn on the revolving credit facility in March was repaid in September. After the repayment of the ABL, the business ended the quarter with $428 million in cash and in a strong liquidity position. This is set out on Slide 18. The business has significantly strengthened its cash and liquidity position over the first half. Total liquidity was $614 million at the end of September. This comprised unencumbered cash balances of $428 million and $186 million of additional availability under the revolving credit facility. In October, we successfully amended and extended our revolving credit facility for an additional 3 years to October 2023. This amendment provides $225 million maximum borrowing capacity through June 2021 and then $206.5 million through the remaining term. Improved profitability and strong cash generation in the first half reduced net leverage at September 30 to 5.6x, down from 6.5x at the end of fiscal '20. The leverage ratio benefits from first half phasing effects in both cost savings and cash. Looking ahead to the rest of fiscal '21 and into fiscal '22, the business is in a strong liquidity position and is well placed for the post COVID recovery. Recognizing that the pace and shape of the recovery remains uncertain, we remain focused on executing to our plans, tightly managing our liquidity and cost base, investing against growth opportunities, and continuing to simplify and transform our operating model. Let me now pass 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 few key points in summary. Our core U.S. Higher Education business has returned to revenue growth, driven by a successful multiyear strategy, the impact of which has been accelerated by COVID. Online skills and Ed2Go will become an ever more important part of our business mix. The rest of our portfolio is well positioned to benefit from a post COVID recovery, the shape and timing of which, however, remains uncertain. And finally, our decisive and targeted cost actions have preserved profitability and liquidity in the short term and position us well for a post COVID recovery of our markets. We will now open the floor for your questions.

[Operator Instructions] Our first question comes from the line of David Farber with Crédit Suisse.

I wanted to just touch upon a couple of topics. First, just on cost savings, which flowed through in this quarter, in particular, I guess I was curious, maybe you could just drill down a little bit on where you're seeing the savings come from? And then to the extent you can help us think about how much of the savings are permanent in nature versus, perhaps, just related to the environment you're seeing today? And then I had a follow-up.

Great. David, I think Bob is in the best position to answer the breakdown of the cost savings. So Bob, go ahead.

Sure. David. So as you saw, the costs, including CapEx, were down $72 million in the first half. When we're all done this year, I expect savings, which will benefit FY '22 to be $50 million, which is sort of consistent with what we said at the end of the first quarter, and we're very much on track for that. In terms of where the savings are coming from, a large part of the savings are related to labor and that's a reflection of actions that we've taken to change the operating model, both over FY '20 and further actions in FY '21, which structurally lowering our sort of cost base, changing our operating model to better support the digital future. We are also seeing benefits, of course, from the fact that we're all sitting on this call working from home. We're saving on T&E. But like many companies, where we are getting temporary savings, I think an important point is we are taking this opportunity to really reimagine how we're going to work going forward, how we're going to use our real estate, how we're going to travel, how we're going to interact. So we do expect, as we go into next year, to convert some of those savings, which certainly started off feeling temporary into permanent changes, as we embed new working practices, new ways of working.

Understood. And then perhaps as the business performed better since last we spoke on the public conference call. I guess I'd be curious for either of you guys to maybe just talk a little bit about what you've learned from the selling season? And does it give you any increased comfort or perhaps concern related to 2021, any thought of general thoughts there? And then if you could just touch on the balance sheet a little bit in terms of how you're thinking about the upcoming maturities in '22, that would be helpful as well. And that's it for me.

Yes. Thanks, David. Let me take the first part, and then Bob will comment on the balance sheet. I think the key learnings from the season that we had so far is, one, the obvious and well reported one, most schools have actually ended up in some sort of hybrid mode where there were some in-person classes, but a significant amount of classes were held online, virtual. The students might have been on campus but the classes were still held virtual for obvious pandemic-related reasons. What we have seen is that the faculty that had historically been reluctant to switch, were forced, obviously, by the circumstances to switch to a virtual model and to be bred for that. And currently, what we saw is that those that had originally been reluctant actually found the transition easier than they had expected and found also significant benefits in doing it that way. So we've been encouraged by the reaction that was originally reported, obviously, by our salesforce who is closest to the customer. But then we also followed it up with detailed customer surveys, faculty surveys, student surveys, et cetera. So the transition to the hybrid model has gone well. We expect that, as a result, to be not a temporary switch. Now that doesn't mean for everybody, obviously, there will be differences, some people might revert back to "the old way of teaching", but we believe that the significant majority will continue in this mode that we have seen being experimented with originally and then now becoming much more of a regular posture. And I think we've seen this play out both for Courseware as well as for eBooks, depending really on the subject matter, what people are teaching and how they're teaching. So that's been encouraging. The second thing I would say is that our real focus on services has been key in that transition. In other words, we have not pulled back or tried to centralize or tried to outsource to call centers somewhere the customer service, but rather keep it close to home, close to the customer. And I think that has really paid off. So what we're hearing time and again is that the Cengage service really stands out and that's critical as faculty, in particular, are experimenting and switching to that new modality of teaching. So I would say these are, from our perspective, the highlights. And the data on enrollment, you have seen it, it's been fairly consistent. And we expect a slight uptick, but we don't expect a turnaround in enrollment, all of a sudden next year, but rather a moderation of the decline that we have seen. So that would be my quick summary. Bob, do you want to comment on the balance sheet question that David had.

Yes, sure, Michael. So just to level set, David, first of all, the first maturity, it's actually June 2023, which is the term loan, so 2.5 years away. Our expectation is that as we come out of COVID, the business recovers, we are going to return to a strong trajectory of earnings growth and a stronger cash flow profile, which is going to sort of systematically improve the leverage ratio as we go through the next couple of years. And on the back of that, we will be obviously, sort of thinking about, sort of refinancing and sort of appraising sort of opportunities and timing on an ongoing basis, depending upon the position of the market. So very much sort of front of mind. But we have some time before we get there.

Our next question comes from the line of Sami Kassab with Exane.

I have a few questions, if I may. Net sales in Unlimited grew nicely in Q2, but net sales in your stand-alone core digital revenues grew well over 30%. They were down last year. Can you discuss what drove the performance in core digital stand-alone and whether that's sustainably, please, Michael? Secondly, can you make some comment on the progress you have made in Inclusive Access, how much of your Higher Ed revenues come from those deals today? And perhaps, how much do you think may come from Inclusive Access 3 years from now? And lastly, you just said that you expect a moderation in the rate of enrollment decline next year, but not a turnaround. What is holding you back from calling a return to growth in enrollment next year? Why wouldn't the historical countercyclical trends not be at play next year?

Yes. Sami, it's Michael. Good to hear your voice. Let me take those and ask Bob to chime in specifically on a couple of data points. So in terms of net sales growth in digital -- in core digital, what we are seeing is really twofold. One is we are seeing a strong performance of our Courseware solutions. And we are seeing, in addition, a very strong performance of eBook solution. And if you see it from the customer perspective, from the market perspective, that is actually what we would have expected in that there are a number of faculty who are increasingly getting comfortable with Courseware solution and find out it actually, it's not that difficult for them to set it up, and there are significant benefits in terms of being able to monitor the classes, being able to customize the assignments and customize the assessments to specific students in the class. The eBook solution sees also a significant amount of uptake because it is kind of the "easier entry point" into digital teaching. And the faculty might use some additional tools from the LMS to support the eBook but we have seen a significant uptick where essentially faculty is [ saying ] and directing students to the use of the eBook. And as a result, we are seeing those 2 factors really driving an overall core digital performance that, as you said, is significantly higher than it's been historically. Let me talk to the second question, Inclusive Access. Inclusive Access is something that we offer to the market, like every other competitor is offering to the market. To put it in perspective, though, there are only a smaller number of institutions that are currently willing and interested in Inclusive Access. Wherever they are, we offer it, and we are certainly seeing an increase in this. But for instance, Inclusive Access in California -- in the state of California is simply not allowed. And we are seeing a mixed picture across the different markets. So it is part of our -- arsenal part of our portfolio, but it's not something that we're betting on exclusively. The second aspect of Inclusive Access is that Inclusive Access really doesn't allow you to move market share. Whereas Cengage Unlimited -- the offering of Cengage Unlimited really allows you to move market share and get adoption share from the competition, whereas Inclusive Access really cements market share, right? I mean you win the adoption and then you actually go for better sell-through because of Inclusive Access. So it's strategically a very different approach. As I said, we have both in our portfolio and if customers ask us, we're more than happy to discuss Inclusive Access arrangements as we have. And Bob, maybe you can comment on Inclusive Access in a bit more detail. And then lastly, on enrollment. Look, I think there are 2 factors at play. One is, obviously, the countercyclical nature of the recession that you alluded to. And I think that will provide some uplift in enrollment. At the same time, the structural issues that have hindered enrollment or lowered enrollment in the past are not gone. So there are still questions that students have as to, is it worthwhile? Isn't it too expensive for me to get this education right now? There are more alternatives right now in terms of certificates that are available where you can get shorter courses for significantly less money that might serve the purpose. And that's why I have said that the online skills business, which is currently centered around our Ed2Go asset, is going to be critically important in the future because we will see an environment where students are not only having one choice with -- which is either go to college or I don't, but they will have multiple choices to acquire the necessary skills that they need and that they want to be competitive in the marketplace. So I think those will be countervailing. We are not making heroic assumptions around massive enrollment growth in the past, but we do think that there is a moderation of the decline that we have seen this year. Bob, anything specific you want to add to that?

Sami, perhaps just to give some shape. Last year, for the full year, our IA revenues were around $50 million, Sami. And that's a full fiscal '20. This year, through the first half they're sort of getting up towards 40, so we're seeing good growth. But I think as you also hopefully saw in the pack in Cengage Unlimited Institutional, which we -- which is a true differentiated product, which drives, as Michael says, both share gains as well as sort of sell-through. And the number of institutions there is now over 150, so up 50% compared to the beginning of the year. So very good momentum there.

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

Could we go back to the enrollment question, Michael. And I'm just curious, even when you guys quote a number of 4%, where that number comes from and I have always understood you guys to have a little bit more of a weighting to community college. And I was wondering if you have an estimate of what the enrollment declines are like there?

Yes. Matt. Happy to do this. So in fact, funny you've mentioned this, this morning. So the source is the National Student Clearinghouse Research Center. And they publish on a regular basis, enrollment numbers. And in fact, this morning, they published the latest, which saw the undergraduate enrollment running at 4.4% below last year. So still within that 4% -- in that 4% ratio. Now if you peel the onion, which you can do on their website, you can see that it's actually a very different scenario for -- between different school types where you see -- the brunt of the decline is really in public 2 year community colleges, which saw a decline this year of close to 10%, 9.5%. And I think that it's symptomatic and a reflection also of the typically types of students that the community colleges serve and in particular, the social demographic background of these students. And frankly, from a societal perspective, this is a very concerning and very worrying trend that we're seeing that those students where affordability really is a key factor in the decision as to whether they can attend college or not and get the extra qualification or not, we're seeing a more significant decline in those enrollments in those schools. And for us, as a business, we are exposed more to freshman, obviously, as you know, based on the nature of our business. And we are also -- we have exposure to, as you said, to the 2-year and the full year, it's fairly balanced relative to their relative share in the market. So for us, it's not an overexposure to the 2-year schools, but the trend overall in the 2-year community colleges is worrying. Bob, any additional color for Matt?

No, I think that covers it, Matt. [indiscernible].

Yes.

And Michael, does the online skills business complement that community college competency?

Absolutely, Matt. It does in the sense that what Ed2Go really does is, it helps community colleges offer alternatives to students who come to the community college, explore whether they want to enroll, but then decide for a variety of reasons, many of them, unfortunately, affordability driven, not to do it. And then they can offer them an alternative and Ed2Go in some respect to borrow that phrase is the intel inside. So they get referred to Ed2Go. They complete a course, they get a certificate for instance, medical coding or something like that, that will allow them at a much lower cost to get a skill that they need to effectively compete in the marketplace. And we're seeing that, as we've said, with continued, right now, massive growth but we also are very optimistic about the growth going forward into the future.

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