Thank you for joining us. My name is Marlene Pereiro. I'm the High Yield Cable and Media Analyst at Bank of America. I'm pleased to have with us today from McGraw Hill, Bob Sallman, and Danielle Kloeblen. Thank you for joining us today. Thank you. Thank you. Just to start at a high level, you know, obviously, McGraw Hill has been around for 137 plus years. For those who are not as, you know, close to the story, you know, can you share some key highlights from the company's evolution over the past decade? Yeah. Maybe I'll even go back a little further. Over the last 20 years, you can see the evolution where we've moved to a very digital-oriented business. Today, we're nearly two-thirds of our business is delivered digitally. Just 10 years ago, it would have been half of that. You can see that it's really accelerated to a digitally delivered content material. What you'll see is that there's a platform in which we deliver our content. Rewind when I was in school. I was lugging books around. You know, professors and educators would use those books, and you'd have workbooks. All of that now is digitally delivered. What we've started to see evolution towards is we've been leaning into machine learning for the last decade. What that allows us to do is move towards a personalized learning experience for students. Now let's fast forward to where we are today, as that's evolving to utilizing AI. We're leaning into AI, and AI is really enabling the personalized learning. That's been the holy grail for education for the last 100 years. How can you do that? You can imagine the scenario: classroom filled with 25 students, and all of those students have different learning capabilities, right? We pitch to the meeting today, but all of the students are in a different place. Now, because they're using AI as a tool to help enable personalized learning, the outcomes will be radically improved. Additionally, what you're seeing is that the administrative burden on teachers today is overwhelming. We're utilizing technology to reduce the administrative burden on teachers as well to allow them to have more time directly with students. Those are the areas that we continue to invest in, and we will see further investment over time leaning into AI to help us. I would say the last place that we are leaning into AI, like other companies you hear from today, is, of course, driving efficiency in our organization. We spend a significant amount of money on content creation, and you can imagine our ability to use AI to reduce the cost of content creation. Those are the three areas that you will see us continuing to lean into over the future. Great. You know, looking ahead, what new capabilities will customers, i.e., students have on your platform as, you know, next year, even three years from now, that they do not have today? Sure. Three weeks ago, we just announced launching some new products. This will be a flavor of what you'll hear that McGraw Hill will continue to deliver over the next several years. The two new features we launched two weeks ago or three weeks ago was in our K-12 business. We had an educator assistant, right? Think about a teacher creating lesson plans. We had tools to help them enable lesson planning, which is, again, that administrative burden on the teachers. We also launched a writing assistant. The writing assistant, you know, think about this scenario. My wife is a high school English teacher. I demo this product with her, and we walked through it. You can imagine the scenario: the same 25 students, you have 15 minutes where the teacher is trying to help write essays with those students. The teacher, my wife, would be running around in the classroom trying to have that individualized education with those students. That is two minutes per student. What we have launched in our writing assistant is helping queue up those students. While they may not get that personalized teacher experience, they are actually having some personalized learning to help them continue. Most importantly, as we have developed this, and again, our company has been around for 137 years improving education, is embracing the productive struggle. By doing that, students still are challenged and queued in terms of not giving answers, but ultimately helping them think through, like, how do I move to the next phase of my essay writing? These are the kind of things that you'll see again, great examples of reducing the administrative burden for educators, as well as personalizing learning for students. You know, Bob, I'll just add the strength of the partnership with the educators and the institutions, having that strong pulse read on exactly what they need and what they want is really critical and a strength of ours as well. Great. You know, how do you see AI transforming the competitive landscape in education, you know, over the next three to five years? Yeah. What I would start with is really our strengths. Yeah. You know, brand is really, really important, as you can imagine. So we have a trusted brand. Red Cube is known all over the world. And so we have that trusted brand that we can lean into. And so that is a differentiator when we think about, you know, as you hear all these startups and emergence of AI in education, well, what is our differentiation? Red Cube, the brand goes so far, allows us to walk into any institution, any school district, and start having those conversations. Our IP, right? And our IP is not just that content we have been creating for 137 years. It is really the platforms as well. So it is the combination of having the great content and delivering it with platforms. But the key about the platforms is the data that we can come off of that. That is the third benefit, really thinking about we have 25 million paid digital users that are generating over 19 billion learning interactions every single year. Using all of that learning interaction and all those data points is starting to inform that personalized learning that we had already talked about. Lastly, we remain a very relationship-based business. We have the longest tenure, the best reps in the industry, and they deeply understand the educators' challenges, right? What we are able to do is understand those educational challenges, use that insight, and help us really further improve our product. While, you know, we will hear about small edtech startups creating AI platforms, they lack sort of that brand, that reputation, the IP, all the data. It becomes almost an arms race where scale matters. Because of our scale, we are in every district in America. You know, talking to all of our, you know, all of the institutions, that scale really matters. I think we're really well positioned to, you know, improve and win in an, you know, ongoing AI-advancing environment. Great. You know, you've also talked about, you know, in the higher education market, your shares recently, you know, hit around 30%. That's up from about 21% a decade ago. You know, what have been the biggest drivers of that growth? You know, is it, you know, investment in digital, some of the products that you mentioned? Also taking a step back, you know, how sustainable are these share gains given competition and emerging AI entrants, AI-first entrants? You know, I think, yeah, we've grown to 21% to 30% over the last several years. We're actually seeing our share gain accelerate. So we grew 14% in the quarter year over year. Majority of that is through share gains. We're continuing to take insurance. So why? The question is, how come? What are we doing so great, right? Obviously, our content, you know, we believe is differentiated. There's really three large players in the higher education space. All of us have great content. Again, very relationship-based. We have deep relationships. Some of the innovation, and I think this is probably the bigger catalyst for what's changing it, we started introducing new tools, our platforms. I think on every sort of survey we've tested out in the marketplace, our platforms that support both the educator as well as the student, you always score the highest. We continue to invest in that. We've recently launched something called Evergreen. This, to me, is really game-changing, and it'll further accelerate those share gains in the future. Let me describe this for a moment. Think about your iPhone every day, every month, whatever it is, you get your iOS update. No big deal. You accept. What's different about the education space is you used to, in higher education, have an edition cycle. Every three to four years, you would have a new edition. What makes that important is you'd go out, and McGraw Hill is a new edition will come out. We'd go out and tell the professor how great the content is, how we're addressing the relevant materials. Again, it might be two or three years old at that point. That was also an inflection point for the professor. The professor is now selecting different content. They'd say, "Oh, great. I really appreciate it, but I'm going to go look and see what the competition has out there." At that point was when you would actually see turnover. We knew it both when our competitors would be launching a new edition, we would target those opportunities to go out and win. The reason why this is so important is now first to market with this offering, our Evergreen, which is effectively that professor over 95% of the time hitting accept, meaning the latest and greatest content. If it's, you know, an economics professor teaching about tariffs, it'll have relevant real-time information. The beauty of what we've done is we've removed the edition cycle. The importance of this now is we no longer have to defend that, keeping that professor when we provide the new edition, but we're giving our salesforce a time machine in a sense that they get to go out, and instead of focusing on retaining that professor and selling our latest edition, they get to go out and target takeaways. To me, that is really what's going to be the next accelerant for our further share gains going from 30 and well on beyond. I think that gives us long runway for the next several years to further, you know, capture share. Great. You know, Inclusive Access sales grew 30% year over year in the quarter. They are now roughly half of the, you know, revenue in higher education. How does this model, you know, strengthen retention and share gains? Yeah. Yeah. Exactly right. Inclusive Access is a delivery model that's available to all of our competitors. We've embraced it before others did. We saw the economic benefit of Inclusive Access. Effectively, what that is, is it's a channel in which students now get to purchase their courseware material through the university. At the bursar bill, they get invoiced just like they would their tuition statement. What's really happening, it allows the students to have materials day one. Obviously, there's a benefit to the professor knowing that all the students have the exact same materials. It's available on day one. For us, and the benefit we see is that we have much higher sell-through. When I was a student, and we go back a long time ago at the university level, you'd maybe have a third of students purchasing a new textbook. Now, through the inclusive access model, that's over 98%. You're having the high sell-through. The way the economics of that works is we have higher retention, greater sell-through, but we're also offering a lower price point to the student. Inclusive Access rolled out by the Department of Education requires us to have the lowest price point available to the student. While we lower the price, we're getting greater sell-through and greater retention. For us, the economics make lots of sense. You know, we've embraced this earlier. We're growing at a much higher rate than our competition because we see the merits and benefits for it's a win-win-win for the institution, for the student, and the professor. The way the model works, and I'll just share with you sort of how we're growing our land and expand approach, is we have about 2,000 universities of the 4,500 higher education institutions today using Inclusive Access. We're gaining about 100 institutions per year. I don't think that we're ever going to say of the 4,500 institutions, will they all be on Inclusive Access? Probably not. There is a clear path that it could be, you know, 2,500, 3,000, somewhere up to the 3,500 that we serve today. When you gain the 100 institutions, the first sale is actually a single professor. As we talk to that professor and say, "Hey, here's the merits of this program. Would you like to join?" We actually will have a single professor at an institution come on board. That professor, over time, will tell his peers in the Department of Accounting. Next thing you know, they're talking to their finance colleagues and then maybe economics professors. It grows. After the second to third and fourth year, you go from one professor to 20 professors. Again, that is that accelerant for higher sell-through. Of course, once they're in that program, it's easier to have all their students on it. We see much higher retention. All of those things will continue to fuel growth. We think there's a long runway there with Inclusive Access. You know, we're excited to continue to deliver through that model. Great. You know, which subject areas do you consider your strongest categories today? Where are you most focused on gaining here? That one I can start with. I think, you know, we play everywhere, but some of our strength is really the business, economics, and computing, and in particular, the business classes and the business schools. You know, top to bottom, we cover all subjects and disciplines, and that has shown over time to be really favorable in terms of enrolled students, social sciences as well. We have some really interesting things that we're doing with science, anatomy, and physiology, a digital lab, which is really compelling. Lots of opportunities there, as well as some new offerings, calculus being one of them, an area that, you know, we see as an opportunity to further expand our talent. One interesting point, when I go back to using AI in terms of driving efficiency in our organization, not only does it, you know, when we're using AI in use cases, we're seeing oftentimes 60% cost reduction, 50% faster time to market. That calculus example, we were able to bring a calculus program, which everyone knows the McGraw brand. We didn't actually have a calculus offering. We did pre-calculus. We had different math course. We didn't have calculus. We were able to bring that to market 50% faster than we would have without using AI tools. That was something we launched this year. Yeah. Federal funding has obviously been a big topic. You know, how have recent federal education policy changes impacted your business thus far? Good news is, you know, we haven't seen any impact. First, let me say, you know, whether or not the Department of Education, what that may look like, doesn't really impact our business. A couple of different things is while there is funding at different levels, the Department of Education, while that funding will just move to a different organization. When I think about where funding comes in, and let's just talk through, you know, starting in K-12, and that's where the questions often come in, we have not seen any impact. A relatively small portion, and I mean single digit, of a district's budgets in K-12 is actually for course materials. If you think about their overall budget, very small portion. That means that the federal budget is, you know, 2%, 3%, while you'll have state and local driving the remainder of it. Majority of their budgets are going to staff. What's really important also, and I've talked about it several times, and what we really focus on is driving efficiency for the educator. Our ability to do that allows those dollars that the district is funding to be more efficient, right? They know it's a small portion of their budget, but we're driving efficiency for the educators. When they're looking at budget constraints, budget dollars, that's not an area that they typically look at because they acknowledge the fact that our tools are allowing those classroom teachers to be more efficient. As we reflected back on sort of any sort of budget challenges, we have not seen any impact. The federal government, small portion, and whether, you know, funding comes from the DOE or elsewhere in higher ed, you know, it still will remain intact. Great. You know, given that most K-12 funding is state and local, have you seen any indirect effects from federal initiatives? Is there some hesitancy, uncertainty that could be affecting decisions? Yeah. Certainly when we talk about core and core would be, you know, ELA, math, science, social studies. That is our biggest portion of our business today, 85% of our revenue is supporting the core in K-12. There have been absolutely no funding delays, challenges, or anything around that. I think students need to have those materials. They need to support their courseware. We have not seen any impact. That remaining percentage, supplemental and intervention space, there has been some hesitation, let's say a little bit more thoughtfulness. Would I say it is more widespread? No, I would say it is pretty consistent with years past where they are very deliberate with their spend and how they are utilizing their budgets. We have not seen anything widespread that would tell us that funding is being, you know, withheld. Okay. The shutdown, any impact on the business thus far? Anything that you could anticipate or we should look out for? No. Similarly, when we talked about, you know, any shutdown, any impact to our business? None. The other one I do like to call out is obviously we do not have impact from tariffs. As you have walked around and heard different impacts from other businesses, we have no tariff impact either. We have been fortunate in that regard. State adoption is a big, another big topic. California math, Florida ELA, obviously major opportunities in 2027, 2028, in those years. Yes. You know, how are you positioning now to capture those wins? Sure. Just to sort of level set, in our K-12 business, we have, you know, market opportunity that is variable, right? It is predictably variable. The way we think about it, there are three large states, and that is really driven by population of those states: California, Florida, Texas. They operate a little bit different than other states. What they do is they will have a statewide procurement cycle. What you are describing is how we look out into the next several years. This year was a predictably smaller market opportunity than last year. We had the benefit of Florida, Texas, and Florida and Texas science programs last year. This year the market is relatively smaller. As we look out into our Fiscal 2027, that's next year, and then into 2028, the market opportunity that you described, first being math, followed by ELA, is accelerating and growing. That's really important as well. Not only is the market opportunity is bigger, which gives us the right to go out and compete and win. We've already been put on the California list, which means like you have to make a short list to go out and compete district by district. We have been put on the list. As our strategy, we play everywhere. We fully intend to be on all of those. We made the list. We're out. We also highlighted in our last earnings call that we've been awarded two significant districts in California. That's important because momentum, like anything is real. As the superintendents are going around the state at conferences just like this, talking about their business, what they have selected, the fact that these two influential districts have selected McGraw Hill for their new math curriculum is very helpful. It plays to our strengths. If we look at, you know, our relative revenue composition in our K-12 business, it is more heavily weighted, first being ELA as our biggest, followed by math. Those are the next cycles that we are walking into. Bringing new products into market always plays out very favorably for us. The next cycle being math and ELA-driven is also very beneficial for us. I'll just add on the math side. We have a really comprehensive offering in market, right, with the core program. ALEKS Adventure is our new supplemental offering for K-5. And then McGraw Hill Plus, which goes over the top and integrates with third-party assessment. Maybe just to double-click on that just a second. In our supplemental intervention, again, reminder, 15% of our business. The key on that is today we have about, you know, a 25% to 30% share in the core. That's, you know, ELA, math, science, social studies. Supplemental intervention, we have 5% share. Why relatively smaller? We believe we have the right to win there and compete. We have opportunity to grow that share to be more like our core. We also didn't have a full portfolio of offering. As we've now launched, you know, the younger grade math supplemental intervention, that happens to coincide with this new cycle that we're mentioning. Not only will our core, you know, our ability to win and compete in core, but, you know, having a more comprehensive solution in supplemental intervention will definitely play out in our favor. Has there ever been a scenario where adoption cycles are unexpectedly delayed? Has that ever happened? You know, we just experienced an ELA cycle pulled forward. What you'll generally see is moving things forward. The state boards of education will give three to five year visibility out. That's why I said it's a variable, but very predictable business that we operate in our K-12 business. In that cycle, California ELA was going to be a 2029 move forward. As they move it forward a year, you'll start to see the benefits. They're more likely to pull it in because they see the merits and benefits of having the new program. They have their state standards that they want to be addressed. The state is motivated, but they have to work with McGraw Hill and other competitors to ensure that we can meet those deadlines. We're having discussions with the Boards of Education, and yep, we can deliver in time. They actually moved it forward. I'd say that that's more common than actually a delay because they're motivated to actually get product in the market. From launching, saying it five years out, you might see a year pull forward. Typically they build those milestones and targets to ensure that the providers can all be ready for those delivery dates. Great. You know, following the IPO this year, obviously, you know, large portion of debt reduction as well. How are you prioritizing capital allocation between reinvestment, delevering, M&A? On the topic of M&A, where are your focus areas? The first place we always invest, we fully fund all of our organic growth opportunities. That is always in our budget. They always have the best ROI, and they are fully funded. What we are left with is, and the fortunate part of our business, we generate lots of cash. In October, we paid down an incremental $150 million in addition to the IPO proceeds to pay down debt. That is really balancing the right balance between M&A and debt repayment. Today, as we look at that funnel, and this will help sort of figure out where that balance sits, there is nothing transformational. As we think about what we are going to do, M&A is really going to accelerate our product roadmap, or it could be an adjacency or small tuck-in bolt-on. If you look at sort of what zip code those are in, we're going to use cash on the balance sheet and get those things done to accelerate our growth or accelerate our technology roadmap. We just closed a little while back on an SoapBox. Again, that's a prime example of the make versus buy. We canvassed the marketplace. We knew there was great technology out there that we incorporated now in our next generation ELA program that we talked about just a moment ago. We were really torn saying, do we make it or do we just buy it? We went out and bought it. Those are the kind of things that I think you'll see us continue to do on the M&A side. Nothing transformational, nothing that would ever, you know, lever up the business. You know, ultimately balancing that paydown over time. We've stated our target leverage of 2 to 2.5 times. We remain committed, as evidenced by our October repayment. Great. You know, right now, if I look at Moody's and S&P, you have positive outlooks on debt. Just from a longer-term perspective, you know, is, you know, kind of an investment grade rating something you aspire to or just kind of, you know? Yeah. Yeah. No, I mean, we have great dialogue with the rating agencies, v ery constructive. And as you noted, we're both on positive outlook, and we recently got upgraded by S&P, which is great to see. You know, as Bob mentioned, we're committed to our leverage target, 2 to 2.5 times. And, you know, when we think about M&A, you know, nothing that would require us to lever up the business in any way. You know, from an industry consolidation perspective, you know, do you think it will favor, you know, diversified players, mostly tuck-ins, assessment, supplemental providers? Obviously, we touched on, you know, AI first entrance, but from an industry perspective, how do you see that playing out? From a broader industry, I really think scale matters. Data is what's going to drive that personalized learning. That goes K through life, right? Personalized learning is the holy grail and e verybody's been, you know, moving towards that direction, but without really that rich data. Again, our data runs K through life. Part of that, we talked about McGraw Hill Plus, that's longitudinal student learning record. It's akin to a medical record, but it would be your learning record. If you have children, you could think about your student going from 3rd to 4th grade, then 4th to 5th. Those teachers are inheriting those students. They now understand how they learn, what's their best outcomes for them, how to teach to them. That data becomes really, really critical. I mentioned it before. I think scale in this industry really matters. We get lots of calls from edtech startups saying, "Hey, you know, we just don't have the scale. We don't have the channel to enter the market. We don't have the data to ultimately drive these really cool tools we've created." I think scale is going to matter. You're going to see, you know, there's big three players in both K-12 and in higher ed. I suspect you'll see both growing in terms of adding more capabilities and supplemental intervention as we are a core player. Core is very difficult to get into. There's a high moat, barrier of entry, very expensive. I don't see there being tons of new core providers. I can see there being consolidation in supplemental intervention, lower barrier of entry, a lot of really cool technology they're creating. Without the underlying data, I think they're missing a big element. I can imagine there would be some consolidation in that space. Yeah. I mean, for the right opportunity, you know, given the dynamic nature of the space right now, you know, would McGraw Hill entertain, you know, a transaction that might temporarily bring you out of your leverage profile? You know, I think we have all the attributes that we look for today. There isn't anything that we've looked at our portfolio and said, "We're missing this." We made a large acquisition of A3K in 2020. It was really saying we were missing a part of our portfolio, and that was a supplemental intervention product in ELA. If we look at our portfolio today, there isn't anything that we're missing. I don't think it makes sense for us right now. You know, we have all of the tools and all the equipment we need. We may make small tuck-ins just because it accelerates our roadmap. I don't really see anything of scale being needed tomorrow. The other thing that we have that no one else has is Red Cube, the logo, the brand. That brand and the power, the trust that goes along with that brand is something that really differentiates us in the market, especially getting us in the door, having conversations with educators, being that partner that Bob mentioned. That along with our moat, our IP, our data, and that domain expertise is really a differentiating factor for McGraw Hill. You know, you recently reported a strong quarter. We've touched on higher education, market share gains. You know, can you remind us of some of the other key drivers in the quarter and ultimately what led you to raising your full-year guide for the year? Yeah. One of the nice attributes of our business is that predictability of it. In our K-12 business, we have the back-to-school selling season. We get multi-year revenue related to those contracts. The way school districts work, and those who do not know our space, this is the most incredible thing. We get five to eight years cash upfront. That allows us to have clear visibility of the revenue recognition over time. That predictability and visibility has been very helpful. We built our RPO or our deferred revenue. The other really strong indicator is higher ed. What you have a tendency to see, the fall semester and spring semester, there is a direct correlation. For us, really big, really important second quarter. Because of the success in the quarter, we executed really well. That gives us that confidence and conviction to go out and raise our guidance for the full year. Great. You know, as we think about, you know, next year, what are you most excited about for McGraw Hill? The things that really excite me is that we're continuing to take share across all of our businesses, right? If you look at all four of our segments, we are winning in all of them. We're continuing to win. That allows us to innovate and continue to build and innovate at a greater pace than our competition. We are well positioned, not just for next year, but for the next 10 years and beyond. Really excited about our ability to keep winning and taking share. Great. We have very few moments left, but if anyone has a question, we can squeeze one in super quick. Obviously, there was a big acceleration during the pandemic with digital in the classroom. I guess, where do you see, like,, what ending are we in in terms of digital adoption, particularly in Core? Over the next couple of adoption cycles, where's the biggest opportunity, like in which grade ranges? Yeah. K through five still remains largely print. Parents and educators want those younger learners to stay in a print format. I do not know that you will see a ton of a change. For us, supplemental intervention is digital at all grade levels. We are seeing that. As we, as McGraw Hill, move to have more supplemental intervention, as Danielle mentioned, we have a new math offering, our relative digital mix will continue to increase. For us as an organization, I would say that we are still in the middle innings in terms of our ability to grow in K-12. In higher ed, we are 92% plus digital today. Yes, I do think it is going to continue to grow to 98%. I can tell you, if you go on campus, you can see the professors who are still teaching from a textbook. They're not going to always be there, and they probably won't be teaching that much longer. The younger professors have all moved digitally. I think there's still some room to grow. Certainly internationally, they're lagging three to four years behind the North American U.S. market. That's why I put us in the middle innings. There's still more to go. Obviously, the great part about digital is it's a higher margin profile business as well. We like the attractive and predictable nature of that recurring model, and it'll continue to grow for the next foreseeable future. Great. Well, Bob, Danielle, thank you so much. Thank you. Thank you. Yeah. It's a pleasure.