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

Good morning, and welcome to Cengage's Fiscal 2022 Second Quarter Investor Call. [Operator Instructions] It is now my pleasure to turn the call over to your host, Richard Veith. Sir, the floor is yours.

Good morning, and welcome to Cengage Group's Fiscal 2022 Second Quarter Investor Update. Joining me on the call are Michael Hansen, Chief Executive Officer; and Bob Munro, Chief Financial Officer. A copy of the slide presentation for today's call has been posted to the company's website at cengagegroup.com/investors. The following discussion may contain forward-looking statements within the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements are neither historical facts nor assurances of future performance and relate to future results and events, and they are based on Cengage Group's current expectations and assumptions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. 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 2021 annual report for the year ended March 31, 2021. Any forward-looking statement made in this presentation is based on currently available information. The company disclaims any obligation to publicly update or revise any forward-looking statements. Today's call and in our slide presentation, we will refer to certain non-GAAP financial measures. Definitions and the rationale for using these measures and reconciliations of each to its most directly comparable GAAP financial measure are provided in the appendix to the slide presentation. I'll now turn the call over to Michael for an update on the business followed by Bob, who will take you through the second quarter and first half details before we open the call for questions. Michael?

Thank you, Richard. Good morning, everyone, and welcome to our business update call. Through the first half of our fiscal year, we continued to make steady progress to meet our financial goals. We executed well against our strategic priorities despite continued disruption in the market due to COVID and a further enrollment decline in U.S. higher education. Our resilience is rooted in the strategic decisions we have made in our business units during the past 5 years and our focus on delivering innovative products and best-in-class service. As we look forward, our plan is to stay the course, execute flawlessly on our strategy and continue to outperform the market. I am pleased to share that we remain on track to deliver our full year guidance of mid-single-digit revenue growth, increased profitability and margin expansion. Despite continued macro challenges in the markets, every Cengage Group business delivered strong growth for the first half of the fiscal year with the exception of U.S. Higher Ed which we will come to in more detail shortly. Our secondary education and research businesses capitalized on returning demand and customer confidence in our product and services resulting in better-than-expected second quarter performance. Our international Higher Ed and English language teaching businesses recovered as expected from COVID with strong digital momentum and continued shifts in learner demand extended the strong growth trajectory of our workforce skills business. This first half performance provides further evidence of the sustainable growth trajectory we are pursuing. We are confident that we will achieve growth by remaining focused on our 3 strategic priorities: one, grow digital user in our U.S. Higher Ed business; two, rapidly grow our workforce skills business; and three, leverage our technology, content and distribution platforms across our synergistic portfolio of businesses. I will now take a few moments to provide more information on the progress we have made against each of these priorities, starting with the performance of our U.S. Higher Ed business. As we have shared during prior updates, we do not assess our U.S. Higher Ed business on a quarter-over-quarter basis. It is more indicative to look at the business on a year-to-date basis and through the academic cycle, which Bob will elaborate on shortly. This longer-term view shows stable underlying momentum, which is supported by our continued revenue outperformance and share gains against key competitors as measured by MPI. When setting performance, we think about the U.S. Higher Ed business in relation to 4 key drivers: The first driver is adopting share, which was mostly flat versus the gains reported in previous periods. This is the result of our sales team's inability to be on campus due to COVID restrictions and uncertainty from Delta limiting faculty migration. The good news is that starting in mid to late October, our sales teams began the return to campus. We expect this to positively impact our ability to increase adoptions and share gains going forward. The second driver of our Higher Ed business is sell-through, which continues to improve, largely driven by the success of our institutional models. Together, Cengage Unlimited institutional and inclusive access have grown 24% year-over-year. As the only provider in the market with a seat-based institutional model, we expect continued growth beyond our current 200 institutional customers and $180 million in sales on a trailing 12-month basis. The third driver is price attrition, which continued as expected as instructors and students demand more affordable cost materials. However, pricing headwinds are moderating from the long-term trends and now represent only a minor drag on our business. We believe we are now getting to a sustainable blended price point in the market with lower drags of new print and bundles. The fourth driver of this business is enrollment, which dropped significantly for a second consecutive year. This decline is driven by the strength of the economic recovery and tight labor markets. Lack of comprehensive reforms to date that reduce the cost of education and ongoing concerns related to COVID and the Delta variant. Our strategy and execution are on track. This is proven by the fact that we outperform in the areas of our business that are within our control. With that said, we expect U.S. Higher Ed to recover partially during the second half of the fiscal year based on timing shifts and our key areas of differentiation. As our institutional models continue to grow, we are capturing more revenue later in the season. In addition, the overall growth of our digital sales resulted in a decline in bookstore returns. The impact of both effects will benefit our third and fourth quarter results. We also know that the spring season typically has a more favorable product mix for us, including more eTextbooks and stand-alone courseware, which are growing and fewer new books and bundles, which are declining. Looking further ahead, we are confident that enrollment will stabilize in line with the macroeconomic picture. While we believe this recovery will occur, we will not attempt to predict with any precision the timing of the recovery. Our key points of differentiation further boost our confidence that our U.S. Higher Ed business will perform well in the coming years. Our unmatched service model predicated on deep partnership with our support teams and faculty has led to a market-leading Net Promoter Score. Our suite of leading digital platforms continue to meet the growing demand from students, instructors and colleges for affordable quality learning solutions. And finally, we remain focused on providing impactful learning experience and unique business model, such as Cengage Unlimited and Cengage Unlimited Institutional. In summary, despite enrollment declines, we still expect adjusted cash revenues in our U.S. Higher Ed segment to be flat to very modestly down against fiscal '21 and to be on a solid growth trajectory in subsequent years. Our second priority is to rapidly grow our workforce skills business. There is a clear secular trend of learners seeking shorter, more flexible, less risky and cheaper path to advance their careers and find meaningful employment through reskilling or upskilling. These learners are well served by our workforce skills business, which continues to see outstanding growth. Our workforce skills service are predominantly female, mid- to late career and with household incomes around $50,000. Through our workforce skills business, learners earn the certifications needed to boost their careers and earnings potential. Our business will continue to add partners and courses, improve lead conversion and explore adjacent markets for added growth. In the rest of our portfolio, we saw strong growth across the board, underpinned by our powerful technology, content and distribution synergies. Our international Higher Ed business saw strong growth across regions. We continue to leverage our full suite of capabilities to expand in Canada, which is a key market for us. Leaning into our Digital First strategy, we recently leveraged Cengage share technology platforms to launch Cengage Unlimited institutional in several pilot markets. Our secondary education business, which is focused on career and college readiness achieved strong growth, most notably in the advanced placement segment which leverages synergistic content from our Higher Ed business. Our English language teaching business is recovering as expected from COVID. We recently announced the successful closure of a multimillion-dollar contract to supply English language teaching material to nearly 7 million children in Egypt in partnership with their Ministry of Education. And finally, our research business posted strong growth with sustained renewals in core database subscriptions and a strong recovery in demand for archives. In summary, we remain confident in our strategy and are on track to deliver our guidance for this fiscal year. More importantly, our performance so far this year is in line with our long-term plan. Our strong team of more than 4,000 Cengage Group employees remain focused on the diverse needs of our customers. Their passion to deliver the power and joy of learning to millions of global customers is what drives our resilience and continued business success. Bob will now take us through the business performance in more detail. Bob, over to you.

Thank you, Michael, and good morning. I'll begin on Slide 8 with the financial highlights for Cengage Group through the second quarter of fiscal '22, including our results on both the year-to-date and trailing 12-month basis. As we've addressed previously, our quarterly results are significantly impacted by continuing shifts in timing of revenue recognition, most notably in U.S. Higher Ed. In fiscal '22, profit trends are further impacted by cost phasing resulting from COVID mitigation actions that we implemented at the height of the pandemic in fiscal '21. Given these effects, I will focus primarily on our results for the first half of the year, the impact of timing effects and the outlook for the full year. Our intent is to provide a clear picture of the underlying trajectory of the business and factors underpinning our high conviction in the financial outlook that Michael just outlined. Touching briefly on the second quarter. Adjusted cash revenue for Q2 was $514 million, down 5% against the prior period. This was driven by U.S. Higher Ed, which was significantly impacted by adverse revenue timing effects. And these are expected to reverse in the second half and also by unexpected enrollment declines, both of which I will come back to. Adjusted cash ELPP in the second quarter was $232 million. For the first half, adjusted cash revenue was up 3% to $757 million. This solid first half revenue performance drove adjusted cash revenues on a trailing 12-month basis to be flat to the prior period. When compared to a revenue decline of 6% in fiscal '21, this underlines the significant momentum in the recovery of the business and strong progress towards our full year mid-single-digit growth target. There also continues to be good digital momentum across the business with digital reaching 72% of net sales on a trailing 12-month basis, which is over 300 basis points higher than the comparative period. Adjusted cash ELPP for the first half was $247 million, up 1% in the period. The year-over-year comparative is impacted by COVID measures taken in fiscal '21, most significantly, the temporary salary sacrifice, which shifted significant normal costs from the first to the second half last year. Normalizing for those impacts, our year-to-date adjusted cash ELPP is up 7%, meaningfully outpacing revenue growth and reflecting continued strong expansion in our operating margin. We ended the second quarter with strong liquidity of over $660 million, providing substantial financial capacity to execute both our organic strategy and against an active pipeline of inorganic growth opportunities. And turning to Slide 9 and the next few slides, I will cover the operating performance and financial results in our 6 segments. During the second fiscal quarter, we continue to make significant progress in executing our strategy and positioning Cengage Group for long-term success, which is reflected in the performance in our businesses. Year-to-date, we saw the benefits of the inherent operating leverage across our international Higher Ed, ELT, secondary and research segments with strong revenue growth in each translating into accelerated ELPP growth. In our workforce skills business, we are reinvesting the incremental contribution margin from continuing high revenue growth to further scale the business. Unlike our competitors in education technology sector, we faced an unexpected decline in college enrollments in the second quarter in our U.S. Higher Education segment, which masks the underlying progress against our strategic objectives. If we look at each segment in turn, starting with U.S. Higher Ed on Slide 10. The first half adjusted cash revenue decline of 5% is driven by net sales, which at $386 million are 7% behind the prior period. This net sales performance is significantly impacted by adverse timing effects, which largely reverse in the next quarter and substantially so in the month of October. There were 2 meaningful timing effects. The first is the continued strong growth in institutional sales, both Inclusive Access and our unique Cengage Unlimited institutional offering, both of which shift sales from Q2 into Q3 and principally into October. The second is year-over-year changes in fall return patterns from our channel partners. These mainly hit post September were typically around 80% of full returns being received by the end of October. With these effects largely reversing through the end of October, the decline in net sales moderated to 3% to 4%, excluding Milady. We believe this is a strong indicator of our net sales performance through the full fall season and also for the forthcoming spring season, which we expect to largely mirror the fall as in prior periods. This is expected to result in flat to slightly declining adjusted cash revenue performance for the U.S. Higher Ed segment this year, taking account of strong digitally driven growth in Milady, content licensing revenues and benefits to returns provisions. Let me walk through the underlying drivers of our full performance through October and our expectations for the full year. Our net sales this year are tracking closely in line with the well-documented 3% decline in undergraduate enrollment. Whereas last year, we were able to outperform enrollment. This year, with our sales organization not being in the field for 3 sales seasons in succession and customer reticence to move given Delta variant uncertainty, the net adoption shares which have been a recurring driver of Cengage's market outperformance temporarily stored. As a result, our adoption share has remained broadly flat this year. Beyond these factors, improvements in sell-through driven by the strong growth in institutional sales offset modest price attrition as prices continue to stabilize as we expected. The limitations on sales activity and moderation of adoption share gains mainly impacts digital courseware and Cengage Unlimited, which is reflected in the activations and sales by product trends. We firmly believe our overall and digital performance this year to be a temporary aberration. With our sales team back in the field building pipeline ahead of the next academic year, our unique product and commercial offerings further enhanced and differentiated by the launch of Cengage and Fuse. And with leading customer service capabilities, we expect to return to strong adoption share gains in fiscal '23, resulting in even greater market outperformance. Turning to our other segments on Slide 11. International Higher Ed's adjusted cash revenues grew 8% year-to-date, reaching $78 million. This reflects the continued recovery from the pandemic across the majority of our geographic markets going into the new academic year. We saw strong sales growth across Asia, Latin America and EMEA, driven by increased digital demand in those markets and restocking by our distribution partners. Recovery in the Australian market remains elusive, reflecting continuing pressures on international student enrollments. For the full year, we expect market conditions and revenue trends to be broadly in line with the first half performance and the business to continue to recover through fiscal '23. In our secondary business, adjusted cash revenues grew 7% in the first half to $120 million after another good quarter, and revenues are now ahead by 10% on a trailing 12-month basis. The performance reflects steady progress in repositioning the business to focus on career and college readiness segments in high school and the favorable funding environment flowing from the federal elementary and secondary school Emergency Relief Act, or ESA, which we expect to carry into future years. With over 80% of sales recorded for the fiscal year, we expect to maintain the year-to-date momentum through the full year and are on track both for a strong sales performance in this transitional year and to be well positioned in fiscal '23. In English language teaching, we continue to see a strong rebound from the pandemic as schools reopen, enrollment recovers and digital demand increases to support evolving hybrid learning models. Over the first half, all geographic regions recovered strongly, led by Latin America, which was up 60%, with Asia and EMEA also posting strong double-digit gains. These same regions also posted double-digit growth in digital sales, taking digital net sales to $22 million, up 53% against last year. Notably, we recently announced a significant 5-year contract with the Egyptian Ministry of Education. This more than offset the impact of recently announced legislative changes in China, which limit the activities of private language schools. It also underpins our expectation that the strong momentum seen in the first half will be broadly maintained through the full year and will contribute meaningfully to growth in fiscal '23 and beyond. On Slide 12. Research had another strong quarter that exceeded our expectations. Adjusted cash revenue of $115 million grew 16% in the first half, reflecting the combination of first half phasing benefits and continuation of the positive trends we saw in the prior quarter. In the U.S., our growth was underpinned by subscription renewal rate of 94%, 2 points higher than this time last year and also a strong recovery in demand for archives and collections. In addition, we are seeing strong growth in the K-12 library business where we are a market leader and customer demand is being supported by the SF Federal funding program. Internationally, the business is similarly seeing a recovery in demand with a strong rebound in archive sales, which increased adjusted cash revenues by 30%. For the full year, we expect the business to deliver strong revenue growth albeit lower than in the year-to-date as first half phasing benefits reverse. Workforce skills delivered another excellent quarter taking adjusted cash revenue to $29 million for the first half, a 21% increase. Growth continues to be driven by our online advanced career training courses which represents around 80% of annual revenues and typically provide students end-to-end training leading to job-specific certification. Our strategy is focused on career verticals with high structural employment demand such as Allied Health, where we are a leader and which is a significant driver of this growth. The combination of a leading position in the academic segment of the market, together with the returns from the ongoing investments to scale the business give us confidence in workforce skills ability to sustain 20% plus organic growth for this year and beyond. Now turning to the cash performance of the business on Slide 13. The business continues to be highly cash generative, underpinned by an attractive business model, low capital intensity and the working capital benefits of the continuing shift to digital. First half operating cash flow was $149 million, which translated to levered free cash flow of $49 million. The variance to the prior period reflects significant temporary benefits from COVID mitigation measures in fiscal '21, namely the timing of bonus payments, which were made in June this fiscal year versus October last year, the timing of interest payments and the temporary salary sacrifices that were repaid in February of last fiscal year. Slide 14 sets out our liquidity position and net leverage. We have maintained a strong liquidity position. Our total cash balance at the end of September was $497 million with total liquidity over $660 million. The combination of strong cash generation and the LPP growth continues to progressively bring down our leverage, we stood at 5.7x on a net basis at September 30. After normalizing adjusted cash ELPP for the timing effects of the fiscal '21 salary sacrifice, net leverage would be 5.6x. We expect the positive momentum in reducing leverage to accelerate in the second half and expect to end the year with net leverage closer to 5x. In summary, with the full season behind us and good growth momentum going into the second half of the year, we remain on track to meet our full year guidance for fiscal '22. This is recapped on Slide 15. We expect mid- to single-digit adjusted cash revenue growth in fiscal '22. This is underpinned by the resilience of the broader Cengage Group with continued high growth in workforce skills and the accelerated recovery evident in our other businesses outweighing the unexpected, but we believe temporary enrollment headwinds in U.S. Higher Ed. Adjusted cash ELPP growth is expected to meaningfully outpace revenue growth, continuing our track record of margin expansion despite the ongoing normalization of short-term COVID cost savings, which benefited fiscal '21. We now expect operating expenses, prepub and CapEx to increase by $30 million to $40 million in the full fiscal year. To close, 7 months into this fiscal year, we are encouraged by the progress we have made against our current year financial objectives and in operationalizing our strategy in support of our longer-term growth objectives. Now I'll turn the call over to the operator for questions.

[Operator Instructions] And your first question is coming from Matt Swope from Baird.

Michael, can you tell us where this leaves us from a strategic perspective? And maybe, Bob, if we could roll the capital structure into that, too. But there have been many transactions in the industry, some rumors around Cengage in particular to about potential sale even of the entire company or division. And then, Bob, sort of rolling that into what's the plan with the capital structure, now you redid the bank debt over the summer. What's the plan with the bonds? How soon could we see those come out sort of putting that all together, how do you guys think about that?

Yes. Thanks, Matt. It's Michael. I think you'll appreciate we really don't want to comment on rumors in the market. There's so many swirling around and keep getting them every day kind of thing. We are really focused on the execution of our strategy right now. And as you can tell from the results, we are very confident about delivering the results that we promised, and that's really our operating focus at this stage. Clearly, the -- what you said is absolutely right. There is a fair amount of turmoil in the industry. But I think what is paying off for us is -- has been this focus on our key strategic objectives that we reiterated on this call, and we plan on continuing that focus.

Matt, if I just pick up on the capital structure. As you've seen, we successfully refinanced the term loan this year and thanks to the support of many of you. And we've continued to progressively reduce our leverage, and we've guided towards 5x as we come out of this year. So I think it puts us in a very good position. The notes still have a core premium through to June of next year. And given the strength of the business, we're not in a rush to refinance the notes. As I look over the quarter of the next sort of 12, 18 months, clearly, that is on the horizon, however. And we are retaining significant excess cash on our balance sheet, but quite deliberately, and if I tie that to the strategy and our focus on both organically and inorganically growing our workforce skills business, that consideration is also front of mind as we think about that longer-term development. And then final thing I would say is we are committed to progressively bringing down our leverage on a net basis to the 4x, which I've previously spoken about. And the path there will depend upon that inorganic strategy in the intervening period.

And Bob, can I interpret that as there are some acquisitions you guys are looking at specifically in that space?

And we said there's a lot of activity in workforce skills, as I'm sure you've seen, and we are sort of actively participating in what's going on in that space.

Your next question is coming from Nick Dempsey at Barclays.

I've got 2 questions. So just to better understand what you said about timing effects. So are we saying that net sales growth for the 3 months to end September in the higher education was minus 4%? But then if you were to create a 4-month year-on-year growth number for that same measure, that will be more like minus 3% to 4%? So in that case, are the returns -- and a big driver of that is the returns that you're seeing in October are sharply lower than what you saw in October last year. I just wanted to get clarity on that. And the second question, Pearson were flagging as one reason for weakness year-on-year in calendar Q3, the fact that Google made the decision in May to disallow e-books from product listing ads at the top of search results, thus driving people more back towards print this year versus digital. Is that something that you recognize? Is that a phenomenon that's had an impact on this quarter?

So Nick, it's Bob. So let me take those in turn. So just to clarify, the minus 3% to 4% at the end of October will represent our year-to-date sales for the net sales for the 7 months. And that's -- and that gives us the best picture of the trajectory of the business through the fall season. The fall season starts before July. We see orders going into channel as early as May, but certainly ramping up in June. And what we always try to do is look through the season as a whole. And so that 3% to 4% is year-to-date through the end of October. There are 2 key timing impacts. The first is what's happening with institutional sales? So we are seeing tremendous growth sustained through both Cengage Unlimited institutional and IA. At the end of September, combined those sales were up 24%. But a significant proportion of those sales are also falling into October. And by the end of October, we expect our institutional business to be up more like 30%. And those sales typically shift out of Q3 into Q4. The second effect is returns, and we are -- we've closed October. We get 80% of returns in, in the month of October. And the returns pattern is very significantly favorable. So it's those 2 effects, which take us from where we were at the end of September to the minus 3% to 4%, which is very much in line with enrollment. I think if you think back a little bit into the midst of time, I think, we talked about similar effects, which impacted our fiscal '20 first half. And as we are seeing this year, those timing effects did reverse and we delivered against the guidance that we reemphasize at that point. So if I move to the second point on Google Shopping. So as we understand it, the change in Google's policy only impacted sort of Google Shopping apps. We did not see any impact of that fundamentally because we do not participate in Google Shopping. We focus on other ways to drive student demand, which could be Google search keywords, sort of SEO. But most importantly, we spend an awful lot of time working with instructors to our customer service organization. That's where we see the highest ROI in driving student demand. So short answer is no impact on us from what Pearson put out there.

Your next question is coming from Todd Morgan from Jefferies.

I had kind of 2 business questions in Higher Ed. The first one, Cengage Unlimited subscriptions, I think, you said they were down 8% in the first half of '22 versus '21. Could you just talk further about that? I mean the student population in the U.S. was -- the registered students' kind of about 3%, obviously, a lot of that was involved with the 2-year and 4-year nonprofit and -- or for-profit school, excuse me. Is that sort of a skew of the student base that you're serving there? I was just surprised to see kind of a better mousetrap product like CU actually decline even much more than the overall enrollment.

Yes, Todd, it's Michael. Let me take that. And let me take the opportunity of your question to clearly delineate the picture of what happened last fall to what happened this fall. Last fall, as you recall, everybody on campus in the United States was fully in an online virtual teaching mode. And that decision was made for most institutions in the summer. Everyone, every faculty member essentially was getting ready and was scrambling and a lot in many cases with our help to get ready to teach online. So we saw a very, very significant pickup of all kind of online modalities that we are selling, whether that's stand-alone courseware, Cengage Unlimited, et cetera. This fast forward to this fall -- this fall, the vast majority of institutions were ready and preparing for in-person teaching again. And as a result of that, professors and faculty members and administrations were evaluating very -- a whole host of different methods, not only the online method. And I think that as a result, some of the faculty that last fall was forced to go online, a small portion of that went back and we saw a sort of a normalization of the trend, they went back to other modalities that they were comfortable with. That's point number one. Point number two, for now almost 20 months, none of our sales forces -- by that, I mean, sales forces of the large 3 players in the market were on campus. And with the sales force on campus is where you win adoption share. Those are the discussions that happen with faculty members. Those are the discussions that happen with committees that are formed. And over the last 20 months, those activities essentially came almost to a standstill. Now the reason for our optimism going forward is our sales force has returned to campus in October. We are seeing a pent-up demand. We are seeing committees form, and there is pent-up demand for switches of adoptions, which we have historically done, as you know, since the introduction of Cengage Unlimited have done extremely well. The reduction of Cengage Unlimited is really -- with that backdrop, you can understand that what we are seeing is that digital courseware is regressing a little bit from the comparison of last fall and Cengage Unlimited is a store front for the digital courseware. So we are seeing this trend as a result of the phenomenon that I just described. So why we are confident in the future is that we are believing that we are picking up the trends that we have established very well since the introduction of Cengage Unlimited. And in fact, that now with adoptions being opened again for competition, we are going to resume the trend that we have seen in the past. And I want to add, finally, there is really no competitor that has any similar product to our Cengage Unlimited in the market in the sense that our unlimited product not only offers access to e-books, but it also offers access to all of our digital platforms which really makes it very differentiated in the market.

No, I guess that's helpful. I guess I just would have thought that with -- as this continues to sort of become more pervasive within the student body of someone who used it last year has come back than this year, they want to, obviously, have -- still have access to the materials they had before. The new crop of students are coming in, I would have thought that, that would have grown regardless. But anyway, that's very helpful. And just very quickly as a follow-up...

Yes. Can I just interject one other thing, Todd, if I may? I think one other thing is the shift that we're seeing from Cengage Unlimited as a stand-alone purchase by students to Cengage Unlimited institutional, where we strike deals with entire institutions, and that has grown very significantly for us. And as Bob alluded to before, many of the -- much of the revenue recognition happens later in the year, i.e., specifically in October and in some cases, even into November, and we've seen this materialize.

That's fair. Okay. No, no. Again, really quickly then, just on pricing. I think you mentioned that sort of modest price declines realized in the period. Is that -- are those pure price, i.e., list price changes? Or is that simply kind of a mix event where people are buying perhaps more supplemental as a percentage of the mix? And certainly, I imagine the institutional deals offer some kind of a price break. Is that really behind the price movement? Or is there real pure price changes?

Absolutely, Todd. It's the latter. It's a change in mix rather than pure price changes.

Your next question is coming from Jeff Brown from Apollo.

Two quick questions. One, on the year-to-date, so is it right to think that maybe you were tracking -- on U.S. Higher Ed, you were tracking down 3% to 4%. And then the quarter -- September quarter hit and maybe September was really weak, and that's down 11%. And then ultimately, a lot of it just rebounded back. So kind of in October as the timing shift, and that kind of brought you back to down 3% to 4% again. Is that like the right way to think about it generally?

Yes. I think the thing I would really focus on is the 3% to 4% through the end of October, where those timing differences of institutional have largely come through and we've got 80% plus of our returns back in the warehouse and fully processed. So...

The only second question is, so we're down 3% to 4% year-to-date through October, let's say that 7 months. So -- and I know you're talking about flat for the year, that would suggest that you probably have to be up and given that the last 5 months is probably a little less on a percentage basis of the total annual revenues second half versus first half. That implies those last 5 ones have to probably be up like 8% or something like that year-over-year to get it to flat. What -- or roughly something like that, what makes you feel good about like getting that level of growth given the enrollment issues and maybe some more delta issues or whatever else is out there?

Yes. I think -- so I'll break it down into a couple of pieces. So the 3% to 4% is the underlying net sales trend in the sort of Higher Ed business. It excludes Milady, and it also excludes content licensing. For the spring, which is important, we expect the spring to pretty much follow what we've seen in the fall. Often, the spring is a little bit better because of our course and product mix but we're assuming it's going to pretty much follow the fall, so 3% to 4%. So how one bridges back from the Higher Ed biz, that underlying Higher Ed business trend to the segment revenue of flat is, number one, very strong growth, which is digitally driven in Milady. Number two, we have some benefit of content licensing revenues, which are very much part of our business but can be a little bit bumpy. And then from the returns trends, we expect to see some provisioning benefit by the time we get to the end of the year. So those bridges back to the flat to sort of very modestly down expectation for the full year for the segment on an adjusted cash basis.

Got it. So when you're thinking about the U.S. Higher Ed, it's like the core -- not ultimately the core stuff in Higher Ed, that may be still down 3% to 4%, but that's offset -- that means stayed at the down 3% to 4% and then offset some of these other issues, correct, or these other initiatives?

Yes. We -- so this year, we expect the core U.S. Higher Ed business to track enrollment because of temporary aberrations that we're seeing this year.

Your next question is coming from Lovro Curcija from SKY Harbor Capital Management.

Curious if you can provide some sort of average sensitivity between U.S. Higher Ed enrollments and just revenue in that segment. I understand that changes depending on the season and depending on what's going on in the world. But if there is some kind of benchmark that we can use, that would be very helpful.

So very simply, we think about a plus or minus 1% change in enrollment having a revenue impact of $6 million in any year.

And that is to the total revenue or just for the revenue of U.S. Higher Ed segment?

Just -- well, to both. So plus or minus 1% impact U.S. Higher Ed by plus or minus sort of $6 million that would flow into the group. I mean around the world, within international Higher Ed, we've got the businesses a little over $100 million. So plus or minus 1% there would impact you $1 million, $2 million. And I guess a little bit -- I mean, it's interesting in international because of different dependency on international students in certain markets, but I'd think about it in those simple terms.

Your next question is coming from Sami Kassab from Exane.

I have 2 questions. The first one, in your view, how did the pandemic impact the OER market trends? Has your adoption share of OER going up or down? Or has it been stable? And secondly, can you comment on any impact, if at all, you may have seen from Pearson+?

Yes, Sami, it's Michael. Nice to talk to you again. Let me take some in order. OER, as I said earlier, what's happened in the last 20 months or so, is that none of the competitors, the large competitors that offer technology platforms, had their sales force on campus really in any meaningful way and also because faculty was preoccupied with other things adoption decisions weren't made. As a result, what we saw is that alternatives like OER, but also self-generated materials, et cetera, were happening, particularly in this fall season more than we've seen before. I wouldn't call it a real trend. It was just people were experimenting with different things. So we don't see really this as a trend change. OER has been a factor in the market but not nearly growing as fast as many industry observers had predicted, and we don't see this as a trend change this season, but rather as Bob said, as an aberration. To your second question, we really -- the Pearson+, I mean, we're, obviously, delighted that other competitors see affordability as a key issue in the market as we have pioneered this some 3 years ago. But it's really an apples-to-oranges comparison because what Pearson+ is it's comparable to what we do with CU textbooks only where we just offer textbooks, eTextbooks that is to students. It's a very different value proposition than if you offer eTextbooks and the learning platforms, the underlying learning platforms which, in our case, is what we do. So Cengage Unlimited is really not comparable to Pearson+. And we have a [indiscernible].

Your next question is coming from Matthew Walker from Credit Suisse.

I've got 2. The first one is, if you go back to the previous quarter's presentation, it talks about last 12 months' MPI share up 146 basis points. And then this quarter, it's down to around 60, which I guess implies some loss of share. It looks like you guys were similar to Pearson in your September quarter. So who actually is gaining the share? Or what is happening with share movements? Can you just maybe help us understand that? And the second question is, you said you were very confident of enrollment getting back to stability, but you didn't want to say when. I think Chuck said on their call, they didn't really know either. But why do you think that the labor market won't continue to be very good through next year and therefore, the same problems will recur next fall? And also, any thoughts around demographic trends would be helpful.

Yes. Happy to do this, let me take that in reverse order. So on the enrollment front, I think, you characterized it correctly. We are confident that enrollment is going to come back. There is a lot of pent-up demand. We strongly believe that the demand for education is not is not gone away. But right now, students are faced -- many students, particularly adult learner students are faced with the trade-off between the opportunity cost to work and to work for a very attractive -- for very attractive salaries and with a lot of demand in the labor market, and faced with the cost of education, which still is very high, and we have set that consistently, we got to get that equation better. But the demand is still there and the demand for degree conferring education is something that we don't think has gone away. The timing is unpredictable exactly for the reasons that you said. Nobody, I think, can predict what the labor market is going to look like next year. And therefore, we are not pinpointing to a specific date for the recovery, but the underlying demand is there. In terms of your first question regarding the share movement, as I alluded to before, I think that -- and we -- every evidence that we have and we collect a lot of that evidence through surveys of faculties over many, many years now. We believe what has happened is that in this fall season, none of the large publishers have actually gained share. But what has gained share is things like OER and smaller publishers, which were just ways that faculty could stitch together an in-person and sometimes online experience in a way that they thought was fit for this particular season. But we don't think this is a reversal of the trend, but it's a rather temporary aberration.

Can I just have one quick follow-up? So if that's the case, I didn't know that OER sales or giveaways were included in the MPI data. It just talks about the big 3 plus Wiley, plus another...

Yes, It's the big 6. It's the big 6, yes, [indiscernible] yes.

I'm not sure. Can it be the case that OER can affect the MPI share data?

No, no. MPI does not include OER. You're absolutely correct on this, but MPI is not the only source -- data source that we are relying on. We have done and continue to do over many years, a very extensive faculty survey. So we are relying on a multitude of data sources and we are triangulating those, and that's why we have that conviction about the shared shifts.

The other thing, perhaps, if I could just add to your point about the trend, which really goes back to how you think timing and point of measurement. Our position at the end of September, as I've hopefully illustrated is very different to the position rolling on to the end of October. And the -- how one is reporting and how one is going to market and the impacts. I think it's -- our expectation would be you will see some recovery of the prior trends as we get the October and November data and the full effects of the fall season come through. Because to Michael's point, the extensive survey that we do of adoptions with over 5,000 faculty members points to the fact that our adoption share has been very much stable.

We have time for one final question today and it's a follow-up from Nick Dempsey from Barclays.

I just wanted to squeeze in one more. I mean the trend that you're tapping into with your workforce skills business of shorter, cheaper, more flexible courses, doesn't that trend suggests that the 2-year community colleges will see structural pressure from that trend on their enrollments for multiple years? And given that's the volatile part of the enrollment picture, always has been, couldn't that very trendy or benefiting from in workforce skills mean a persistent decline in total enrollments beyond this year?

Yes. Nick, I think, what you're pointing out is partially correct. But there is underlying demand for degree conferring programs that we believe is going to return, particularly as the labor markets normalize. That said, as you know, we are very bullish and are seeing very good traction and workforce skills as a way to primarily add to or access customers that actually never consider going into a degree conferring program. And that is, in the United States, still the majority of students are not in degree programs and they need skills in the labor markets to compete. So we are seeing this more as an in addition to degree conferring programs as opposed to a substitute for degree conferring programs. That said, is there a partial overlap between the 2? And will there be competition? Absolutely. But we don't see this as a flip the switch. All of a sudden, everybody will go to online skills program as opposed to degrees. I think there is a bit of overlapping competitiveness, but the vast majority is add-on.

Thank you, ladies and gentlemen. There are no further questions in queue at this time. Thank you for joining today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you once again for your participation.

Thanks, everybody.