Q3 2026 McGraw Hill Inc Earnings Call [BACKUP]

February 11, 2026

Simon Allen: employees to transform a legacy publisher into a market-leading digital education solutions provider powered by the trust, innovation, and strong financial profile that you'll hear more about today has been the greatest honor of my career. I will continue as chair of the board and will remain deeply engaged to ensure a smooth transition to Philip Moyer, who will lead the next chapter of McGraw Hill's proud history. When the board and I began our search for my successor, we were looking for a seasoned CEO and technology leader who could not only appreciate our strong foundation, financial profile, and trusted brand but also harness these strengths to fully capitalize on the enormous opportunities ahead for McGraw Hill. We led a comprehensive search, and I can say with absolute confidence that we found the right leader in Philip.

Simon Allen: Philip brings a wealth of experience from senior technology-focused roles at Google, Amazon, Microsoft, and most recently as CEO of Vimeo. One of the many attributes that set him apart was his early career passion for using technology to envision the future of education. From his creation of a digital software solution to modernize the management of individualized education plans to the growth he led in the education sector while at Vimeo, we believe that Philip brings the perfect blend of operational excellence, strategic vision, and customer-centric technology expertise to honor the commitments we have made to grow profitably, to expand margins, and to achieve our 2 to 2.5 times net leverage target. Philip, I'm extremely excited about our partnership. Welcome to McGraw Hill.

Robert Sallmann: Thank you, Simon. I have to thank you and acknowledge the incredible foundation that you and the team have built. It's a privilege to take the baton at a time when McGraw Hill is expanding market share, executing on its financial commitments, and positioning itself for long-term growth. What attracted me to this role wasn't just McGraw Hill's strong financial profile. It's the mission of the company, and it's the trusted position in the industry. Throughout my career, I've seen how technology can transform industries, but education is where technology can transform lives. We're at an important juncture in the education industry. Technology can be both a distraction or an accelerant to learning. It is essential to support teachers and school administrators in engaging this generation of students with new and more effective technologies.

Philip Moyer: Thank you, Simon. I have to thank you and acknowledge the incredible foundation that you and the team have built. It's a privilege to take the baton at a time when McGraw Hill is expanding market share, executing on its financial commitments, and positioning itself for long-term growth. What attracted me to this role wasn't just McGraw Hill's strong financial profile. It's the mission of the company, and it's the trusted position in the industry. Throughout my career, I've seen how technology can transform industries, but education is where technology can transform lives. We're at an important juncture in the education industry. Technology can be both a distraction or an accelerant to learning. It is essential to support teachers and school administrators in engaging this generation of students with new and more effective technologies.

Robert Sallmann: The experience I have in building enterprise-grade AI platforms and global video distribution technologies provides a unique vantage point into the opportunity ahead. While AI adoption grows, it's not a one-size-fits-all model that will be solved by large AI model companies. Instead, personalized learning and personalized AI is essential for the student and the educator. McGraw Hill is well-positioned to lead in this next generation of learning. We're harnessing one of the most trusted curriculum libraries in the world. We're building new learning technologies, leveraging billions of proprietary data points about what does and does not make learning effective. Importantly, we have one of the most respected global distribution and customer service teams in the world that connects directly with educators and students to make sure that they are successful in using our tools.

Philip Moyer: The experience I have in building enterprise-grade AI platforms and global video distribution technologies provides a unique vantage point into the opportunity ahead. While AI adoption grows, it's not a one-size-fits-all model that will be solved by large AI model companies. Instead, personalized learning and personalized AI is essential for the student and the educator. McGraw Hill is well-positioned to lead in this next generation of learning. We're harnessing one of the most trusted curriculum libraries in the world. We're building new learning technologies, leveraging billions of proprietary data points about what does and does not make learning effective. Importantly, we have one of the most respected global distribution and customer service teams in the world that connects directly with educators and students to make sure that they are successful in using our tools.

Robert Sallmann: My focus will be on accelerating growth, scaling our business, and maintaining our brand trust and academic integrity while we build some of the most engaging and exciting learning tools in the world. I admire the financial rigor that Bob and Simon have instilled, and I look forward to progressing further on our goals as we reinvest in growth opportunities and expand margins, reducing our debt, and leveraging McGraw Hill's strong brand and seasoned talent. I'm eager to partner with Simon, Bob, and the rest of the leadership team and our board to drive shareholder value. I look forward to meeting many of you in the coming months ahead and to speaking with you again in June when we report fiscal year end of 2026 results.

Philip Moyer: My focus will be on accelerating growth, scaling our business, and maintaining our brand trust and academic integrity while we build some of the most engaging and exciting learning tools in the world. I admire the financial rigor that Bob and Simon have instilled, and I look forward to progressing further on our goals as we reinvest in growth opportunities and expand margins, reducing our debt, and leveraging McGraw Hill's strong brand and seasoned talent. I'm eager to partner with Simon, Bob, and the rest of the leadership team and our board to drive shareholder value. I look forward to meeting many of you in the coming months ahead and to speaking with you again in June when we report fiscal year end of 2026 results.

Simon Allen: Thank you, Philip. Let's dive into some more details underpinning our exceptional Q3 performance. In higher education, we continue to significantly outperform the market with 24% year-over-year revenue growth supported by our record-high 30% market share according to MPI, our go-to-market execution, first-mover advantage in product innovation, and portfolio expansion. Building on this momentum, our Evergreen platform now boasts a growing library of over 700 titles. Evergreen streamlines workflow management for educators and enhances sales rep productivity, allowing an increased focus on takeaways. Additionally, our new ALEKS for Calculus solution supports a more comprehensive STEM offering that unlocks approximately $100 million in market opportunity globally. AI-powered solutions are driving deeper engagement, improving efficiency, and fostering academic success, all while boosting platform utilization and reinforcing our position as a leader in education innovation.

Simon Allen: For example, AI Reader reached over 1 million higher education students in Q3, generating 16 million learning interactions up from 11 million in Q2, for a total of 27 million since inception. We recently expanded AI Reader into our First Aid Forward and AccessMedicine offerings within our global professional segment, enhancing the learning experience with alternative explanations, summaries, and personalized quizzes. Building on this AI innovation, Clinical Reasoning is also gaining recognition from medical professionals for its ability to foster critical thinking and real-world application. We are experiencing promising momentum in institutional pilots and are advancing its impact by introducing new modules and virtual cases in the months ahead. As we scale, we are pursuing a greater institutional focus and deeper integration among our offerings.

Simon Allen: Sharpen Advantage, a new AI-powered enterprise solution, exemplifies this through an attractive TAM extension that leverages our existing content and capability to author unique content. Redefining our traditional professor-focused higher education approach, Sharpen Advantage deepens penetration by selling institution-wide with solutions for administrators, professors, and students alike, which all work together to improve student outcomes. Integrating Sharpen with ALEKS this fall should drive incremental upsell. In K-12, we've gained market share in a smaller year, building on strong prior-year performance. We are ranked first or second in 10 of the top 11 adoption opportunities with success in science as well as ELA. As we've said before, we've not experienced any material impact from proposed federal education policy changes. Fiscal year 2027 marks a larger market opportunity driven by purchasing cycles in California Math, Florida ELA, and Texas Math.

<unk> digital education solutions provider powered by the trust innovation and strong financial profile that you'll hear more about today has been the greatest honor of my career.

I will continue as chair of the board and will remain deeply engaged to ensure a smooth transition to fill it moya who will lead the next chapter of Luke Roy Hills proud history.

When the board and I began our search for my successor, we were looking for a seasoned CEO and technology leader, who could not only appreciate our strong foundation financial profile and trusted brand, but also harness these strengths to fully capitalize on the enormous Apis.

The unit is ahead from Mcgraw Hill.

We let a comprehensive search and I can say with absolute confidence that we found the right leader in Finland.

Send it brings a wealth of experience from senior technology focused roles and Google Amazon, Microsoft and most recently the CEO of Vimeo.

One of the many attributes that set him apart with his early career passion for using technology to envision the future of education.

Simon Allen: Active pilots in the California Math market are progressing, and we have secured some early wins. In Florida ELA, we secured a leadership position this year, which we believe should position us well moving forward. We are optimistic for Texas Math, where our offering will integrate with McGraw Hill Plus, a platform that has seen district access up 86% year-over-year and a 40% increase in average time spent on the platform since the start of the school year. We believe that our investments in innovation and portfolio breadth provide more integrated end-to-end solutions moving forward. Supplemental and intervention solutions like ALEKS Adventure, with four times more monthly student users than last year, McGraw Hill Plus, and AI capabilities like Teacher Assistant and Writing Assistant enhance our capabilities to fuel growth beyond the core.

From his creation of the digital software solution to modernize the management is individualized education plan to the growth. He led in the education sector wallet Vimeo, we believe that Philip brings the perfect blend of operational excellence strategic vision and customer centric.

Knowledge expertise to honor the commitments, we have made to grow profitably to expand margins and to achieve our two to two and a half times net leverage target.

Philip I'm extremely excited about our partnership welcome Tim Mcgraw Hill.

Thank you Simon I have to thank you and acknowledge the incredible foundation that you and the team have built.

It's a privilege to take the baton at a time and Mcgraw Hill is expanding market share executing on its financial commitments and positioning itself for long term growth.

What attracted me to this role wasn't just Mcgraw Hill's strong financial profile. It's the mission of the company since the <unk>.

Simon Allen: To this end, we have secured an early win with our new K5 literacy curriculum, Emerge, and launched Summit and SOAR for grades 6 to 12. These programs deliver cohesive, personalized literacy solutions integrated with tools like Teacher Assistant and Writing Assistant, which integrate EssayPop, which we acquired in March of 2025. We're strengthening our competitive edge by delivering more integrated end-to-end solutions, positioning ourselves to drive growth beyond our core offerings. Now, I'll turn the call over to Bob to discuss the financials.

Trusted position in the industry.

Throughout my career I've seen how technology can transform industries, but education is where technology can transform lives.

We're at an important juncture in the education industry technology can be both a distraction or an accelerant to learning.

It is a central to support teachers and school administrators and engaging this generation of students with new and more effective technologies.

The experience I have in building enterprise grade AI platforms and global video distribution technologies provides a unique vantage point into the opportunity ahead.

While AI adoption grows it's not a one size fits all model that will be solved by large AI model companies instead personalized learning and personalized AI is a central for the students and the educator.

Robert Sallmann: Thank you, Simon. I'll review the fiscal third-quarter results shortly, but first, I want to express my deepest gratitude for your mentorship and friendship during my tenure at McGraw Hill. You have been a transformative leader who has driven an exceptional financial turnaround that positions McGraw Hill as the global leader in education solutions. Under your guidance, the company has developed a unique culture that combines passion, excellence, and innovation, empowering teams to achieve exceptional results and laying the foundation for continued success in the years to come. You left an indelible mark on this organization, and we are all better for it. I've already spent significant time with Philip, and I'm energized by our partnership as we focus on scaling the business, expanding margins, reinvesting in growth, and achieving our net leverage target.

Mcgraw Hills, well positioned to lead in this next generation of learning.

We're harnessing one of the most trusted curriculum libraries in the world.

We're building new learning technologies, leveraging billions of proprietary data points about what does and does not make learning effective at.

And importantly, we have one of the most respected global distribution and customer service teams in the world that connects directly with educators and students to make sure that they're successful in using our tools.

My focus will be on accelerating growth scaling our business and maintaining our brand trust and academic integrity, while we build some of the most engaging and exciting learning tools in the world.

I admire the financial rigor that Bob and Simon have instilled and I look forward to progressing further on our goals as we reinvest in growth opportunities and expand margins rich.

Robert Sallmann: Now, onto the results, which demonstrate our strong earnings quality, our resilient business model, and unwavering dedication to meet our commitments, even in a seasonally small quarter for the business. In the quarter, total revenue reached $434 million, growth of 4.2% year-over-year, while fiscal year-to-date revenue increased 0.7% versus prior year. Reoccurring revenue grew 14.8% year-over-year to $357 million, representing 82% of total revenue, showcasing a robust digital mix. Digital revenue grew 11% versus last year to $364 million. Growth in higher-margin digital subscriptions continues to strengthen our financial profile, adding a layer of predictability that is reflected in our remaining performance obligation, which stood at $1.7 billion at the end of the quarter and will move higher as we begin to capture the first wave of larger K-12 opportunities.

Reducing our debt and.

Leveraging mcgraw Hill's strong brand and seasoned talent.

I'm eager to partner with Simon Bob and the rest of the leadership team and our board to drive shareholder value.

We look forward to meeting many of you in the coming months ahead and to speaking with you again in June when we report fiscal year end of 2026 results.

Thank you Phillip let's dive into some more details on the pending our exceptional third quarter performance and higher education, we continue to significantly outperform the market with 24% year over year revenue growth supported by a record high 30% market share according to MTI.

Our go to market execution first mover advantage in product innovation and portfolio expansion.

Building on this momentum however, grain platform now boasts a growing library of over 700 intellectuals evergreen streamlines workflow management for educators and enhances sales rep productivity, allowing an increased focus on takeaways.

Robert Sallmann: Gross profit margin expanded nearly 100 basis points year-over-year to 85.3% due to efficient operations and favorable digital mix, with no impact from tariffs on our business. Adjusted EBITDA rose to $136 million in the quarter, achieving a 31.3% margin, up nearly 100 basis points year-over-year, reflecting strong operating leverage amid ongoing reinvestment. Internally, we continue to infuse technology to streamline processes and enhance operations. In Q3, we launched an offer management system to strengthen our go-to-market by simplifying the sales process, compressing time to close deals, and improving pricing visibility. We also expanded AI use cases across product development and operations to enhance efficiencies and unlock incremental margin opportunities over time. Now, moving on to the segments, higher education revenue grew an impressive 24% year-over-year to $225 million in the quarter, with reoccurring revenue growing 33.5% and digital revenue expanding 24.8%.

Additionally, our new Alex for calculus solution supports a more comprehensive stem offering that unlocks approximately $100 million in market opportunity globally.

AI powered solutions and driving deeper engagement, improving efficiency and fostering academic success, all while boosting platform utilization and reinforcing our position as a leader in education innovation.

For example, AI rate reached over $1 million higher education students in Q3, generating 16 million learning interactions up from $11 million in Q2 for a total of 27 million since inception.

We recently expanded AI radar into our first date forward and access medicine offerings within our global professional segment enhancing the learning experience with alternative explanations summaries and personalized quizzes.

Robert Sallmann: This strong performance was fueled by market share gains, increased demand for our innovative portfolio offerings, enrollment growth, and strategic value-based pricing. Inclusive Access now represents 60% of higher education revenue, with nearly 2/3 of fall 2025 growth driven by new course adoptions from existing customers, highlighting strong cross-selling efforts. Onboarding approximately 100 new campuses annually further supports multi-year growth visibility as accounts typically scale within 2 to 3 years. We expect the activations for accounts landed in fiscal year 2026 to increase by 15 to 20 times in the next few years. 70% of higher education revenue now comes through Evergreen, exceeding our initial expectations. Professors are increasingly adopting the latest releases without sales rep intervention, allowing our sales team to focus on new opportunities, which positions us well for retention and market share takeaways heading into fiscal year 2027.

Building on this AI innovation clinical reasoning is also gaining recognition for medical professionals for its ability to foster critical thinking and real world application.

We are experiencing promising momentum in institutional pilots and are advancing its impact by introducing new modules and virtual cases in the months ahead.

As we scale, we are pursuing a greater institutional focus and deeper integration among our offerings sharpen advantage and new AI powered enterprise solution exemplifies this drove an attractive time extension that leverages, our existing content and capability to all.

It's a unique content.

Redefining our traditional professor focused higher education approach sharpened advantage deepened penetration by selling institution lie with solutions for administrators professors and students alike, which all work together to improve student outcomes.

Integrating sharpened with Alex this full should drive incremental upsell.

Robert Sallmann: Our exposure to resilient enrollment pockets also remains favorable. 1/3 of our higher education business is tied to two-year colleges, and our portfolio over-indexes to disciplines like business management, which continues to demonstrate relative strength. K-12 revenue was $128 million, a decline of 14.6%, in line with our expectations, given the impact of the smaller market this year and the lapping of exceptional capture rates in the prior year. In Q3, reoccurring revenue only declined 1.6%, benefiting from strong prior-year sales. As Simon mentioned, this year we continue to gain market share, and we took the lead in Florida ELA. We also continue to show momentum in science adoptions in Alabama and Tennessee. We are actively preparing for the fiscal year 2027 science cycle. California Math pilots continue as we enter the key selling season.

In K 12, we've gained market share in a small year building on strong prior year performance. We are ranked first or second intended the top 11 adoption opportunities with success in science as well as Eni.

As we've said before we have not experienced any material impact from proposed federal education policy changes.

Fiscal year, 2027, mops, and large market opportunity driven by purchasing cycles, and California, math, Florida E L, a and Texas math.

Active pilots in the California market are progressing and we have secured some early wins.

In Florida, we secured a leadership position this year, which we believe should position us well moving forward.

Robert Sallmann: In addition, we have seen initial success in ELA with an early K-5 Emerge! win in open territory ahead of the California ELA adoption in fiscal year 2028. We bring forward a competitive value proposition, leveraging integrated solutions like McGraw Hill Plus and a broader portfolio to drive growth beyond the core. Global professional revenue increased by 2%, and its recurring revenue grew by 3.5% in the quarter. Growth in digital medical and engineering solutions has successfully offset the impact of our non-core exit. Additionally, early momentum from our AI-powered Clinical Reasoning solution further strengthens our confidence in future opportunities. International revenue decline narrowed sequentially to 1.8% year-over-year in the quarter. While higher education headwinds persist, we are gaining market share and remain optimistic about growth opportunities driven by new innovative solutions like ALEKS Calculus.

And we are optimistic for Texas math, we're offering will integrate with Mcgraw Hill, plus a platform that has seen district access up 86% year over year and a 40% increase in average time spent on the platform since the start of the school year.

We believe that our investments in innovation and portfolio breadth provides more integrated end to end solutions moving forward.

Supplemental and intervention solutions like Alex adventure with four times more monthly student use of some last year Mcgraw Hill, plus and AI capabilities like teacher assistant and writing assistant enhance our capabilities to fuel growth beyond the core.

To this end we have secured an early win with a new U K five literacy curriculum in March and launched summit and saw for grades six to 12.

These programs deliver a cohesive personalized literacy solutions integrated with tools like teacher assistant and writing assistant, which integrate SA part, which we acquired in March of 2025.

Robert Sallmann: We ended the quarter with $514 million in cash and $964 million in liquidity, with our revolving credit facility remaining undrawn. Net leverage was 2.9 times as of 31 December. We generated $309 million in cash flow from operating activities in the quarter, an increase of 12% year-over-year. Our attractive cash flow profile enabled us to prepay an additional $50 million in term loan principal in December for a total of $200 million in the quarter. Year to date, we prepaid $596 million in term loan debt, generating over $41 million in annualized cash interest savings. Our disciplined capital allocation strategy continues to prioritize reinvestment and debt reduction while maintaining flexibility to optimize our capital structure. We remain committed to a net leverage target of 2 to 2.5 times and pursuing strategic tuck-in M&A.

We're strengthening our competitive edge by delivering more integrated end to end solutions positioning ourselves to drive growth beyond our core offerings now I'll turn the call over to Bob to discuss the financials.

Thank you Simon I'll review the fiscal third quarter results shortly but first I want to express my deepest gratitude for your Mentorship and friendship during my tenure at Mcgraw Hill.

You've been a transformative leader, who has driven an exceptional financial turnaround the positions Mcgraw Hill as the global leader in Education solutions.

Under your guidance. The company has developed a unique culture that combines passion excellence and innovation.

Robert Sallmann: Looking ahead, based on our strong performance, RPO visibility, sustained share gains, and favorable enrollment trends, we are raising our full-year fiscal 2026 financial guidance. We now anticipate total revenue for fiscal year 2026 in the range of $2.067 to $2.087 billion, reoccurring revenue ranging from $1.516 to $1.526 billion, and Adjusted EBITDA between $729 to $739 million. We continue to expect Unlevered Free Cash Flow to slightly exceed the low end of the 50% to 100% Adjusted EBITDA conversion range, while CapEx and product development as a percentage of revenue remain unchanged at 8% to 9% of total revenue. Finally, a couple of modeling items for Q4. Stock-based compensation is expected to be in the range of $1 to $2 million, and tax expense is expected to break even in the quarter. We will share our fiscal year 2027 financial guidance during the fiscal year-end earnings call in June.

Empowering teams to achieve exceptional results and laying the foundation for continued success in the years to come.

You often indelible mark on this organization and we are all better for it.

I've already spent significant time with Philip and I'm energized by our partnership as we focus on scaling the business expanding margins reinvesting in growth and achieving our net leverage target.

Now onto the results, which demonstrate our strong earnings quality, our resilient business model and unwavering dedication to meet our commitments even in a seasonally small quarter for the business.

In the quarter total revenue reached $434 million growth of four 2% year over year.

Fiscal year to date revenue increased 7% versus prior year.

Reoccurring revenue grew 14, 8% year over year to $357 million, representing 82% of total revenue showcasing a robust digital mix digital revenue grew 11% versus last year to $364 million.

Growth in higher margin digital subscriptions continues to strengthen our financial profile, adding a layer of predictability that is reflected in our remaining performance obligation, which stood at $1 7 billion at the end of the quarter and will move higher as we begin to capture the first wave of larger K 12.

Robert Sallmann: We remain confident in fiscal year 2026 and the foundations for fiscal year 2027 with a return to revenue growth and continued margin expansion. Now, we will open the call up for your questions.

Operator: We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of George Tong with Goldman Sachs. Your line is open. Please proceed with your question.

Opportunities.

Gross profit margin expanded nearly a 100 basis points year over year to 85, 3% due to efficient operations and favorable digital mix with no impact from tariffs on our business.

Adjusted EBITDA rose to 136 million in the quarter, achieving a 31, 3% margin up nearly 100 basis points year over year, reflecting strong operating leverage amid ongoing reinvestment.

Internally, we continue to infuse technology to streamline processes and enhanced operations.

In Q3, we launched an offer management system to strengthen our go to market by simplifying the sales process compressing time to close deals and improving pricing visibility.

George Tong: Hi, thanks. Good afternoon. Can you help unpack the growth drivers that you're seeing in higher ed and how you're thinking about fiscal Q4? Perhaps talk a bit about Evergreen as a differentiator.

We also expanded AI use cases across product development and operations to enhance efficiencies and unlock incremental margin opportunity over time.

Simon Allen: Hi, George. It's Simon. Thank you. It's a great question. I feel like I'm a broken record when I talk about our higher education business because every quarter I explain to you all that we are so proud of the growth we've had, our continuing ability to take market share, significant market share, really. And you look at the growth rates, and we're just extremely pleased with where we've landed this quarter. And there's a lot of reasons why we've had this growth, but primarily, I think you mentioned Evergreen.

Now moving on to the segment's higher education revenue grew an impressive 24% year over year to $225 million in the quarter with reoccurring revenue growing 33, 5% and digital revenue expanding 24, 8%.

This strong performance was fueled by market share gains increased demand for our innovative portfolio offerings.

Simon Allen: That's a wonderful innovation that we have that is unique to McGraw Hill in providing continual updates to faculty, making sure that they no longer need to think about new additions and ensuring that they have the most up-to-date information, meaning our reps need to spend really far less time working with the faculty and paying much more attention to growing market share by working new adoptions. That's been very successful for us. And our faculty tell us, our customers, how much they really enjoy Evergreen because it just gives them the immediacy and the knowledge that they've got the most current and engaging information for their students. And that's really very important. I think our go-to-market teams have done incredibly well. Our customer success groups, our representatives that we have, our learning specialists, you name it, ALEKS specialists, we've done so well across all of our go-to-market.

Enrollment growth and strategic value based pricing.

Inclusive access now represent 60% of higher education revenue with nearly two thirds of fall 2025 growth driven by new course adoptions from existing customers highlighting strong cross selling efforts.

Onboarding approximately 100, new campuses annually further supports multiyear growth visibility as accounts typically scale within two to three years and.

And we expect the Activations for accounts landed in fiscal year 2026 to increase by 15 to 20 times in the next few years.

70% of higher education revenue now comes through evergreen exceeding our initial expectations.

Professors are increasingly adopting our latest releases without sales rep intervention.

Allowing our sales team to focus on new opportunities, which positions us well for retention and market share takeaways heading into fiscal year 2027.

Simon Allen: It really is very, very pleasing for us. And I think the last thing I'd say, and there is a lot, George, I could say about higher ed and the growth that we've had. But when I think about the Morning Consult survey that we referenced in our script a little earlier, we're very proud that they cited us, McGraw Hill, as the company that uses AI most effectively. And that, of course, is told to us by our educator customers and our student customers. And that gives us great pride. And I think you put all those together, the value proposition that we've explained so carefully, the ability to innovate with so many different tools now with AI Reader really coming on stream, making a big difference to higher education students in pretty much every discipline. Evergreen, now 70% of our revenue, even more than we expected.

Our exposure to a resilient enrollment pockets also remains favorable one third of our higher education business is tied to two year colleges and our portfolio overindexes to disciplines like business management, which continues to demonstrate relative strength.

K 12 revenue was $128 million a decline of 14, 6% in line with our expectations given the impact of the smaller market this year and the lapping of exceptional capture rates in the prior year.

In Q3, reoccurring revenue only declined one 6% benefiting from strong prior year sales.

As Simon mentioned this year, we continued to gain market share and we took the lead in Florida. Eli. We also continued to show momentum in science adoptions in Alabama and Tennessee.

Simon Allen: It's just a very pleasing picture, George.

We are actively preparing for the fiscal year 2027 signed cycle, California math pilots continue as we enter the key selling season. In addition, we have seen initial success in L. A with an early K five emerge went in open territory ahead of the California, Ela adoption in fiscal year 2028.

Operator: Simon, maybe let me quantify some of that for you. George, I'll quantify some of that for you and lean into a little bit of Q4, how we're thinking about it. On the 24% growth, 17% year-to-date, 3 to 4% of that's coming from enrollment. You may have seen enrollments quoted at a lower number from the National Student Clearinghouse. Obviously, as we over-index into two-year colleges as well as business management, that allowed us to have a little bit stronger growth there. In addition, and I mentioned in the past, we continue to realize price. And so we go out with inflationary price. It sticks. But you have to offset that with some of the mix as it's associated to Inclusive Access. So on a net basis, we're getting over 1% of price in higher education.

Robert Sallmann: Simon, maybe let me quantify some of that for you. George, I'll quantify some of that for you and lean into a little bit of Q4, how we're thinking about it. On the 24% growth, 17% year-to-date, 3 to 4% of that's coming from enrollment. You may have seen enrollments quoted at a lower number from the National Student Clearinghouse. Obviously, as we over-index into two-year colleges as well as business management, that allowed us to have a little bit stronger growth there. In addition, and I mentioned in the past, we continue to realize price. And so we go out with inflationary price. It sticks. But you have to offset that with some of the mix as it's associated to Inclusive Access. So on a net basis, we're getting over 1% of price in higher education.

We bring forward a competitive value proposition.

Leveraging integrated solutions like Mcgraw Hill, plus and a broader portfolio to drive growth beyond the core.

Global professional revenue increased by 2% and it's reoccurring revenue grew by three 5% in the quarter.

Growth in digital medical and engineered solutions has successfully offset the impact of our noncore print exit.

Additionally, early momentum from our AI powered clinical reasoning solution further strengthens our confidence in future opportunities.

Operator: We also benefited in the quarter related to a sales return release. And that's really a result of a couple of factors, but first being lower level of returns coming in in the quarter. And this is a mechanical exercise we do every quarter. You could read about it more in our disclosures. But the other part I do want to highlight is we continue to move to more concentration of Inclusive Access. That higher quality revenue tends to show a lower level of return. So again, it positions us well as we think about the future. And then when we think about the Q4, we think about sort of how to think about the full year. I would just get you to think about double-digit growth in billings and on a revenue basis.

Robert Sallmann: We also benefited in the quarter related to a sales return release. And that's really a result of a couple of factors, but first being lower level of returns coming in in the quarter. And this is a mechanical exercise we do every quarter. You could read about it more in our disclosures. But the other part I do want to highlight is we continue to move to more concentration of Inclusive Access. That higher quality revenue tends to show a lower level of return. So again, it positions us well as we think about the future. And then when we think about the Q4, we think about sort of how to think about the full year. I would just get you to think about double-digit growth in billings and on a revenue basis.

International revenue decline narrowed sequentially to one 8% year over year in the quarter.

While higher education headwinds persist, we are gaining market share and remain optimistic about growth opportunities driven by new innovative solutions like Alex calculus.

We ended the quarter with $514 million in cash and 964 million in liquidity with our revolving credit facility remains undrawn.

Net leverage was two nine times as of December 31.

We generated $309 million in cash flow from operating activities in the quarter, an increase of 12% year over year, our attractive cash flow profile enabled us to prepay, an additional $50 million term loan principal in December for a total of $200 million in the quarter.

Operator: So when you do that math, you're still seeing that 4% to 5% growth from share gains. And you can tie that back to some of the MPI data that Simon had referenced before. So those are the areas. And you're probably coming on to the fourth quarter question around, "Hey, why is that change or why are we seeing the growth rates slightly decline?" As we highlighted before, we come to a difficult comp in the fourth quarter. And again, as we think about the full year, we're going to still experience that double-digit growth, but we are facing a more difficult comp in the fourth quarter.

Robert Sallmann: So when you do that math, you're still seeing that 4% to 5% growth from share gains. And you can tie that back to some of the MPI data that Simon had referenced before. So those are the areas. And you're probably coming on to the fourth quarter question around, "Hey, why is that change or why are we seeing the growth rates slightly decline?" As we highlighted before, we come to a difficult comp in the fourth quarter. And again, as we think about the full year, we're going to still experience that double-digit growth, but we are facing a more difficult comp in the fourth quarter.

Year to date, we prepaid $596 million of term loan debt generating over 41 million in annualized cash interest savings.

Our disciplined capital allocation strategy continues to prioritize reinvestment and debt reduction, while maintaining flexibility to optimize our capital structure.

We remain committed to our net leverage target of two to two and a half times and pursuing strategic tuck in M&A.

Looking ahead based on our strong performance our apio visibility.

Sustained share gains and favorable enrollment trends, we are raising our full year fiscal 2026 financial guidance.

[Analyst] (Goldman Sachs): Very helpful. Thank you.

George Tong: Very helpful. Thank you.

Operator: Your next question comes from the line of Ryan McDonald with Needham & Company. Your line is open. Please proceed with your question.

We now anticipate total revenue for fiscal year, 2026, and a range of 2.06 $722.087 billion.

Ryan MacDonald: Hi. Thanks for taking my question. Congrats on a great quarter and welcome to Philip. Maybe just to start, first question for me is around the K-12 business. Obviously, continuing to benefit from the strong market share gains, obviously, from last quarter. But as we look ahead to fiscal 2027, can you just unpack a little bit more about what gives you that confidence in sort of the return to growth and magnitude of growth for that business? And as you look across the three sort of large state opportunities with California, Florida, and Texas, I'm curious to get your thoughts on sort of the trajectory for the Texas opportunity. We've been hearing more and more about how as they've changed their adoption cycle and some of the mechanics there, there's just a lot more instructional materials that they have to review ahead of the sort of purchasing cycle.

Reoccurring revenue ranging from 1516 to $1.5 billion to $6 billion and adjusted EBITDA between $729 million to $739 million.

We continue to expect Unlevered free cash flow to slightly exceed the low end of the 50% to 100% adjusted EBITA conversion range, while capex and product development as a percentage of revenue remains unchanged at 8% to 9% of total revenue.

Finally, a couple of modeling items for Q4 stock based compensation is expected to be in the range of $1 million to $2 million and tax expense is expected to breakeven in the quarter.

We will share our fiscal year 2027 financial guidance during the fiscal year end earnings call in June we remain confident in fiscal year 2026, and the foundation for fiscal year 2027, with a return to revenue growth and continued margin expansion now we will open the call up for your questions.

Ryan MacDonald: Any concerns that that could delay decisions at all ahead of fiscal 2027? Thanks.

Simon Allen: Thank you, Ryan. That's a lot of questions in that one. Let me take them piece by piece, if I may. You're quite right. We're very pleased with our K-12 performance as well. You know that FY26 is a smaller market size, and yet we've continued to grow market share. That's what's important to us. We've got to keep outperforming our competitors at every level. We're very pleased that we've ranked number 1 and number 2 in the top 10 and really in 10 of the top 11 adoption opportunities this year. That's driven a lot by our ongoing success in science and ELA. As Bob indicated in our earlier comments in states like Alabama and Tennessee, we're very, very pleased with our performance there.

We will now begin the question and answer session. Please limit yourself to one question and one follow up if he would like to ask a question. Please press star one on your telephone keypad to withdraw your question Press Star One again, please pick up your handset when asking a question. If you are muted local.

Please remember to on mute your device. Please standby, while we compile the Q&A roster.

Okay.

Your first question comes from the line of George Tong with Goldman Sachs. Your line is open.

Simon Allen: And also looking ahead, I mean, to your question, Florida, ELA, we've got a good start there in year zero. We're feeling very good about what that could mean for us going forward. We will make sure that we recognize the market growth opportunity and what that means for us in FY27. I think we've mentioned before, Ryan, that we're looking at about a $300 million increase in the term for next year. So we're obviously optimistic about what that means for us. It's very early in the adoption process, as you know. The selling season really begins January and doesn't conclude until Memorial Day or even slightly after. So we're in the stages right now in the battle, which we love.

Please proceed with your question Hi, Thanks, good afternoon.

Can you help unpack the growth drivers that you're seeing in higher Ed and how youre thinking about fiscal <unk>, perhaps talk a bit about evergreen as a differentiator.

Hi, George It's Simon. Thank you. It's a great question I feel like I'm, a broken record when I talk about our higher education business because every quarter I explained to you all that we are so proud of the growth we've had a continuing ability to take market share significant market share really and you look at the growth rates and we're just extremely.

Pleased with where we've landed this quarter and there's a lot of reasons why we've had this growth, but primarily I think you mentioned evergreen that's a wonderful innovation that we have that is unique to Mcgraw hill, and providing continual updates to faculty, making sure that they no longer need to think about new additions and ensure.

Simon Allen: We'll know a lot more about how things are when we get to the end of May, early June, and we can update you at that stage then. But we're very pleased with the pilots we're offering. We've had some good wins with Emerge, our K6 literacy program. As you know, we've launched also our 6 to 9, 9 to 12 Summit and SOAR products, which are very exciting. We had a wonderful sales meeting in New Orleans. I won't give you all the details, but I will say that we had a great launch with that product and about 600 reps very excited about what they're seeing, which is marvelous. So we feel very good about that. Very briefly on Texas, your point's a good one.

During that they have most up to date information meeting our reps need to spend radios and far less time, working with the faculty and making much more paying much more attention to growing market share by working new adoption, that's being very successful for us and our faculty Palace.

Customers, how much they really enjoy evergreen because it just gives them the immediacy and the knowledge that they've got the most current and engaging information to this too.

Simon Allen: I mean, they're changing the style in a way, but we've got great relationships there, really great market, and a fine knowledge of how that state operates. We welcome new competitors. It may change. You mentioned a delay. We're not sure about that. The way decisions are made are extremely effective. They're very strong as they always have been. Really, we really feel that the end-to-end offerings that we have through all of our content, technology, you name it, that's something that other companies cannot provide. And they usually lack in the technology development that really integrates with a lot of the content. That's the key strength of McGraw Hill, as you know, which is why we feel good about how that's going to develop for us.

And that's really very important I think I'll go to market.

Teams have done incredibly well on customer success groups. Our representatives that we have a learning specialists you name it I'm, Alex, especially as we've done so well across all of our go to market. It really is very very pleasing for us and I think the last thing I'd say and there is a lot George I could say about Iran, and the growth that we've had but when I.

Think about the morning consult survey that we referenced in the script a little earlier.

We're very proud that they cited us Mcgraw Hill as the company that uses AI, most effectively and and that of course as told to us by out educates our customers enough student customers.

That gives us great pride and I think you put all those together the value proposition that we've explained so carefully the ability to innovate with so many different tools now with hey, I read are really coming on stream, making a big difference to higher education students in pretty much every discipline.

Ryan MacDonald: Really appreciate all the color there, Simon. Maybe as a follow-up, I would love to propose one to Philip. Obviously, early on in your tenure, but just curious, as you evaluate the opportunity coming in, I would love to get your view, particularly as a technologist, of sort of McGraw's AI strategy and how you think you can continue to evolve that in the role moving forward. Thanks.

Evergreen it now 70% of our revenue even more than we expected. It's just a very pleasing picture George.

Philip Moyer: Ryan, thank you very much for the question. I have to start by saying AI is only good as the data and the quality of the training. Coming in, it's one of the things that attracted me most to McGraw Hill. As you think about building a next-generation company, just any company, you're going to need data. You're going to need experience with workflows. You're going to need integrations. You're going to need go-to-market. You're going to need a whole variety of things. And ultimately, you're going to build a system that has experience in answering questions or taking action. We're coming into this next generation with simply unmatched assets in the education industry. We've got one of the largest vetted, localized content platforms or TAMs in the world with literally tens of thousands of specific AI or images and assessments specific to specific learning pathways.

And Simon maybe let me let me quantify.

George I'll I'll quantify some of that for you and lean into a little bit of Q4, how we're thinking about it.

On the 24% growth, 17% your year to date, 3% to 4% of that is coming from enrollment you may have seen enrollments quoted at a lower number firm the national student Clearinghouse you know obviously, we as we over index into two year colleges as well as business management that allow.

US to have a little bit stronger growth there.

In addition, I mentioned in the past, we continue to realize price and so we go out with inflationary price it sticks.

But you have to offset that with some of the mix.

Associated inclusive access so on a net basis, we're getting over 1% of price and higher education.

Philip Moyer: We also have mapped out these learning pathways that develop tens of thousands of discrete skills along the way at every single age. We have billions of data points and algorithms that understand when somebody's on the pathway and someone's off the pathway. And we can serve the teacher and also the student in really unique ways with that knowledge. And then we have go-to-market and service teams that have deep enterprise relationships, and they understand the regulatory environment down to a zip code level. And over the past 5 years, I have to say, coming in, what was so evident to me is that in the past 5 years, there's been a really significant investment in technology and AI. And you're seeing that.

We also benefited in the quarter related to a sales return or a lease.

And that's really a result of a couple of factors, but first being lower level of returns coming in in the quarter and this is a mechanical.

<unk>, we do every quarter you can read about it more in our disclosures.

But the other part I do want to highlight is we continue to move to more concentration of inclusive access at higher quality revenue tends to show a lower level of return so again.

Positions us well as we think about the future.

And then when we think about the fourth quarter, we think about sort of how to think about the full year.

I would just.

Philip Moyer: I don't think what's been talked about and what you're not seeing underneath the iceberg is all the tools that have been released over the past 12 to 24 months. ALEKS Calculus, an AI Reader, Teacher Assistant, and Writing Assistant. Sharpen, as an example, we just released within 9 months, and we already have 1 million active users on that platform. And so I'm excited about the pace at which we're innovating. I'm excited about the assets, and I'm really, really excited about all the opportunities ahead. So I feel very, very good as someone that's lived in tech my whole life about what we're going to do.

It gets you to think about double digit growth in billings and on a revenue basis. So when you do that math, you're still seeing that.

4% to 5% growth from share gains and you can tie that back to some of the MPI data that Simon had referenced before so.

Those are the those are the areas and in your <unk>.

Coming on to the fourth quarter question around Hey.

That change or why are we seeing the growth rates slightly decline.

As we highlighted before we come to a difficult comp in the fourth quarter.

And again as we think about the full year, we're going to still experience at double digit growth.

Ryan MacDonald: Appreciate it, Danielle Kloeblen. Thanks again.

Are facing a more difficult comp in the fourth quarter.

Operator: Your next question comes from the line of Stephen Sheldon with William Blair. Your line is open. Please proceed with your question.

Yeah.

Very helpful. Thank you.

Great question. Your next question comes from the line of Ryan Macdonald with Needham and company. Your line is open. Please proceed with your question.

Stephen Sheldon: Hey, thanks for taking my questions. Maybe I wanted to start with Philip as well. I guess you started the new role this week. I guess if you think about the coming months, what are some of your early priorities? Where do you envision spending your time across the organization as you think about the coming months?

Hi, Thanks for taking my question Congrats on a great quarter and a welcome to fill up maybe just to start first question for me is around the K 12 business, obviously continuing to benefit from from the strong market share gains obviously from last quarter, but.

Philip Moyer: Sure. First, obviously, I'm learning the organization. I'm learning the products. But most importantly for me is getting out with the customers. Already, the customers that I've been spending a little bit of time with, I hear very firsthand from customers already. Many are really concerned about AI. Many are confused around technology. Many are unsure whether or not their students are engaged and whether or not they're comprehending when they're using AI. And so most importantly for me is getting out with our higher ed customers, with our K through 12 customers, with our global professional customers, with our international customers. And I think that a lot of them want to know that there's going to be a trusted partner as they go into this next generation.

As we look ahead to fiscal 2007 can you just unpack a little bit more about what gives you that confidence in sort of a return to growth in magnitude of growth for that business and as you look across the three sort of large state opportunities with California, Florida, and Texas I'm curious to get your thoughts on on sort of the trajectory.

For the Texas opportunity, we've been hearing more and more about how as they've changed their adoption cycle in some of the mechanics. There theres just a lot more material instructional materials that they have to review ahead of the sort of purchasing cycle any concerns that that could delay decisions at all ahead of fiscal 2000.

Philip Moyer: So for me, it's going to be listening, and it's also going to be assuring them that we're going to be a partner every step of the way. The second thing I would tell you that's very important to me as well is just a little bit of what I was just talking about. We've got a great pace of innovation, and I really want to spend time to make sure that we've got a really solid vision for the customer, for the student, for the teacher, and for the administrator of where we're going in McGraw Hill with our technology. And are we executing as quickly as we can? I'm really looking forward as well to spending time with our go-to-market teams. They're world-class. They're world-renowned. They have incredible relationships. And so I also want to hear from them how we can empower them more to serve that customer base.

Thanks.

Thank you Ryan that's a lot of questions in that one and let me take them piece by piece, if I may in and you're quite right. We're very pleased with our K 12 performance as well.

No that FY, 'twenty, six which is a smaller market size.

And yet we continue to grow market share and that's what's important to us we've got to keep outperforming our competitors at every level.

And we're very pleased that we've ranked number one or number two in that.

Top 10 really intended the top 11 adoption opportunities this year and that's driven a lot by our ongoing success in science and L. A and as Bob indicated in our earlier comments and in states like Alabama, and Tennessee with very very pleased with our performance. There I would and also looking ahead I mean to your quest.

Stephen Sheldon: That's great. I appreciate that. And then maybe one for Bob as a follow-up. It sounds like the team is confident about a return to growth in K through 12 for next year. And you gave some helpful commentary on the factors driving growth in the higher ed segment. So just curious, if you look at higher ed and thinking about fiscal 2027, how much visibility do you have at this point on the potential growth heading into next year? Because it seems like some of the factors that are supporting growth, like broader adoption of Inclusive Access, some of those things should have some legs. So just at a high level, I know you're not giving guidance or anything at this point, but just, yeah, how are you thinking about growth heading into next year and how much visibility do you have into it at this point?

<unk>, Florida E. L. A we've got a good start there and and zero, we're feeling very good about what that could mean for us going forward.

We will make sure that we recognize the market growth opportunity and what that means for us in FY 'twenty seven I think we've mentioned before Ryan that we're looking at about a $300 million increase in the time for next year. So we are obviously optimistic about what that means for us. It's very early in the adoption process as you know.

The selling season really begins January <unk>.

And it doesn't conclude until memorial day, or even slightly after so we're in the stages right now and the Battle, which we love and we'll know a lot more about how how things are when we get to the end of May early June and we can update you at that stage then, but we're very pleased with the pilots we're offering we've had some good wins.

Robert Sallmann: Yeah, sure. And as you're aware, we'll provide guidance in our June call. And at that point, I'll be leaning into some of those early indicators, which we watch, would be FAFSA applications, high school graduation rates, information like that. But some of the things that give us confidence, we look at the RPO. We see activations in January, in the spring. Some of that will carry into next year. So all of those things. And I'd say the thing that we are most confident about is our ability to continue to take share. We've demonstrated that. We're seeing takeaways as we walk into next year already. So all of those things bode really well for us as we think about next year.

<unk> with in La Jolla, K six literacy program as you know we've launched also a six to nine 9% to 12 summit and soar products, which are very exciting we had a wonderful sales meeting in New Orleans I won't give you all the details, but I will say that we had a great launch with that product and about six.

So 100 reps very excited about what that's saying which is marvellous. So we feel very good about that very briefly on Texas.

Stephen Sheldon: Good to hear. Thank you.

Operator: Your next question comes from the line of Stephen Koenig with Macquarie Group. Your line is open. Please proceed with your question.

Your point's a good one I mean, they're changing the style in a way, but we've got great relationships that really great market.

): Great. Thanks. It's Stephen Koenig with Macquarie. Nice to be on the call. Congratulations are due to Simon. I want to echo previous comments by others on your contribution financially, operationally, and certainly culturally to McGraw Hill. So you leave a really good position here for Philip to build on. And welcome to Philip. I think my.

Stephen Koenig: Great. Thanks. It's Stephen Koenig with Macquarie. Nice to be on the call. Congratulations are due to Simon. I want to echo previous comments by others on your contribution financially, operationally, and certainly culturally to McGraw Hill. So you leave a really good position here for Philip to build on. And welcome to Philip. I think my.

And to find knowledge of how that state operates.

We welcome new competitors it might change you mentioned the delay we're not sure about that that they the way decisions are made are extremely are effective that very strong as I always have been and really we really feel that the end to end offerings that we have through all of our content technology you name it.

That's something that other companies cannot provide and they usually lack and the technology development that really integrates with a lot of the content. That's the key strengths of Mcgraw Hill as you know, which is why we feel good about how that's going to develop for us.

Operator: So, thank you. I'm very glad.

Robert Sallmann: So, thank you. I'm very glad.

): I have some questions on it.

Stephen Koenig: I have some questions on it.

Operator: Let me just say thank you.

Robert Sallmann: Let me just say thank you.

): Yes. Oh, you're quite welcome. Good, good. Yeah, it's pretty clear what your contributions have been, and it puts you in great stead. I wanted to ask maybe kind of a two-part question that's related. So one part of the question maybe for you, Simon, is you mentioned that Sharpen Advantage expands your TAM by providing the institution-wide solutions, not only for professors, but for administrators and students. Can you expand on that? And then I'm going to put the related question out there as well. And Philip, feel free to give us your thoughts on this as well. I think something that a lot of investors miss, certainly about my software coverage, is the competitive moat isn't just from the IP. It's from kind of the customer lock-in that happens when you integrate the solutions. You deploy them.

Stephen Koenig: Yes. Oh, you're quite welcome. Good, good. Yeah, it's pretty clear what your contributions have been, and it puts you in great stead. I wanted to ask maybe kind of a two-part question that's related. So one part of the question maybe for you, Simon, is you mentioned that Sharpen Advantage expands your TAM by providing the institution-wide solutions, not only for professors, but for administrators and students. Can you expand on that? And then I'm going to put the related question out there as well. And Philip, feel free to give us your thoughts on this as well. I think something that a lot of investors miss, certainly about my software coverage, is the competitive moat isn't just from the IP. It's from kind of the customer lock-in that happens when you integrate the solutions. You deploy them.

Yeah.

Really appreciate all the color there Simon and maybe as a follow up I'd love to.

Suppose one to fill up.

Obviously early on in your tenure, but just curious as you evaluate the opportunity coming in would love to get your view, particularly as a technologist sort of Mcgraw AI strategy and how you think you can continue to evolve that.

In the role moving forward. Thanks.

Ryan Thank you very much for the question.

I would I have to start by saying.

It's only good as the data and the quality of the training and coming in it's one of the things that attracted me most to Mcgraw Hill as.

As you think about building a next generation company just any company.

Youre going to need data youre going to need experience with workflows, you're going to need integrations, you're going to need to go to market, you're going to need a whole variety of things and ultimately you're going to build a system that has experience in answering questions or taking action. We're coming into this next generation was simply unmatched assets in the education industry.

): You integrate them with the data, processes, workflows, etc. And you're clearly doing that at McGraw Hill. And I'm not talking about just the technology solutions, but also your go-to-market and what you're doing to make yourself irreplaceable in the institutions. I'd love to hear your thoughts on how your technology, your go-to-market, your content all influence that. And then I'll leave it there. Thanks to you both.

Stephen Koenig: You integrate them with the data, processes, workflows, etc. And you're clearly doing that at McGraw Hill. And I'm not talking about just the technology solutions, but also your go-to-market and what you're doing to make yourself irreplaceable in the institutions. I'd love to hear your thoughts on how your technology, your go-to-market, your content all influence that. And then I'll leave it there. Thanks to you both.

We've got one of the largest vetted localized content platform.

Tom's in the world with literally tens of thousands of specific AI or images and assessment specific to specific learning pathways. We also have mapped out these learning pathways that develops tens of tens of thousands of discrete skills along the way at every single age we have billions of data points and al Gore.

The rhythms that understands when somebody's on the pathway in someone's off the pathway and we can serve the teacher and also the student in really unique ways with that knowledge and then we have go to market and service teams that have deep enterprise relationships and they understand the regulatory environment down towards Zip code level and over the past five years.

Robert Sallmann: Thank you very much, Steve. Again, thank you very much for your very kind comments. I'll kick off a little on Sharpen. Thank you for asking. We're very proud of Sharpen. The kind of product that we have there, as you may remember, is very much focused on how students learn today. That lovely quote that it's like my textbook and TikTok had a baby. That's how so many of students learn in their first and second year, particularly at university and at colleges, Steve. What we've done with Sharpen, we've got a proven model with students. We know that it works well. We know that they really appreciate the type of video-based learning and quiz-focused activity, really a lot of gamification tools in there.

So I have to say coming in and what was so evident to me as in the past five years, that's been a really significant investment in technology, and AI and Youre seeing that I don't think what's been talked about and what youre not seeing underneath the iceberg.

Is all the tools that have been released over the past 12 months to 24 months, Alex calculus in AI reader teacher, and reading writing assistant sharpen as an example, we just released within nine months and we already have 1 million active users on that platform and so I'm excited about the pace at which we're innovating I'm excited about the assets and I'm.

Robert Sallmann: What we discovered is that the market increasingly asks us to look at this in a more broader sense and what can we provide for the institution. Over time, what we've done is make sure that we can focus on a broader coverage, allowing the educator to include their own content, for example, making the institution at that level use Sharpen materials across the entire network, every single class, every single sector, and department where we operate, which is pretty much everywhere. The breadth of coverage at the institutional level really opens up a significant market for us, new market, if you like, beyond just that student, and, of course, the faculty relationships that are so near and dear to our company.

Really really excited about all the opportunities ahead, so I feel very very good as someone that has lived and check my whole life about what we're going to do.

I appreciate all the color. Thanks again.

Your next question comes from the line of Stephen Sheldon with William Blair.

Your line is open. Please proceed with your question.

Hey, Thanks for taking my questions, maybe I wanted to start with Philip as well.

Yes, I guess you started the new role this week I guess, if you think about the coming months what are some of your early priorities, where do you envision spending your time across the organization as you think about the coming months.

Robert Sallmann: I think with Sharpen, we're just really excited about how quickly, as Philip said earlier, we've really developed some serious revenue and customer base. Now we're looking forward very much to seeing that expand exponentially at the institutional level. I'll pass it over to Philip now for the additional questions that you had on AI.

Sure.

First obviously I'm learning the organization I'm learning the products, but most importantly for me is getting out with customers.

Already the customers that I have been spending a little bit of time with I hear very firsthand from customers already many are really concerned about AI. Many are confused around technology. Many are unsure whether or not their students are engaged and whether or not they're comprehending when they're using AI and so most importantly for me is getting out with our higher Ed.

Philip Moyer: Sure. I got to ask a lot about LLMs in the context of education. And I like to say that every generation of technology, whether or not it was a PC, the internet, the cloud, every one of those needs deep domain expertise to bridge the last mile for the big tech platforms. I lived in that for a long time. And I know that it was a very vibrant ecosystem of software companies, of services companies. It's become a massive industry to bridge that last mile. This era is no different in artificial intelligence. And I think that our moat is going to be really clear. A couple of things, as I mentioned, we understand local education requirements down to the zip code. And today, more than ever, educational requirements are becoming down to the zip code level. We have these specific age-appropriate learning pathways.

Customers with our K through 12 customers with a global professional customers with our international customers.

And I think that a lot of them want to know that theres going to be a trusted partner as they go into this next generation. So for me, it's going to be listening and it's also going to be assuring them that we're going to be a partner every step of the way.

The second thing I would tell you that is very important to me as well as just a little bit of what I was just talking about.

We've got a great pace of innovation and I really want to spend time to make sure that we've got a really solid vision for the customer for students for the teacher for the administrator of where we're going and Mcgraw Hill with our technology and do are we executing as quickly as we can I'm really looking forward as well to spending time with our go to market.

Philip Moyer: I like to say that an LLM may know what you're asking, but we know why you're asking it. We are able to build security, trust, and psychological safety into what we're building. We're building a building personalization for every student, for every teacher. We can enter new curriculum markets in a way that we've never been able to before with fine-grained supplemental work. And we're able to do really engaging learning experiences that just a standard LLM is not going to do. And then also just the ability to understand whether or not someone's comprehending what the answers are that they're giving to the teacher, and then also the teacher to understand their students. We think there's all these fantastic opportunities to build great moats with artificial intelligence and LLM technology.

Teams they are world class they are world renowned.

Incredible relationships and so I also wanted here to them, how we can empower them more to serve serve that customer base.

That's great I appreciate that and then maybe one for Bob as a follow up it sounds like the team is confident about a return to growth in K 12 for next year. He gave some helpful commentary on the factors driving growth in the higher Ed segment, but just curious if you look at higher Ed and thinking about fiscal 2027, how much has been.

Ability do you have at this point.

On the potential growth heading into next year. It seems like some of the factors that are supporting growth like.

Broader adoption of inclusive access some of the things.

It should have some legs. So just at a high level I know, you're not giving guidance or anything at this point, but just how are you thinking about growth heading into next year and how much visibility do you have into that at this point.

): That's super helpful. Thanks to you both.

Stephen Koenig: That's super helpful. Thanks to you both.

Operator: Your next question comes from the line of Marvin Fong with BTIG. Your line is open. Please proceed with your question.

Yeah, sure and as Youre aware, we will provide guidance in our June call and at that point I'll be leaning into some of those early indicators, which we watch would be fast for applications High school graduation rates information like that.

[Analyst] (BTIG LLC): Great. Good evening. Thanks for taking my questions. Congratulations on the great results as well as Philip for the new role. And Simon, I didn't have that long of time to work with you, but certainly hope to continue the relationship here. And best of luck. Just a couple of questions. Again, on AI, a very topical, maybe a different angle for either Simon or Philip to answer. But from the outside, as investors, how would you suggest we measure the impact of AI on your business? And I know you've also thrown out some internal metrics on climate development and costs that AI has benefited you from. Maybe on both sides of that coin, how can we measure AI and how it's impacting your business?

Marvin Fong: Great. Good evening. Thanks for taking my questions. Congratulations on the great results as well as Philip for the new role. And Simon, I didn't have that long of time to work with you, but certainly hope to continue the relationship here. And best of luck. Just a couple of questions. Again, on AI, a very topical, maybe a different angle for either Simon or Philip to answer. But from the outside, as investors, how would you suggest we measure the impact of AI on your business? And I know you've also thrown out some internal metrics on climate development and costs that AI has benefited you from. Maybe on both sides of that coin, how can we measure AI and how it's impacting your business?

But you know some of the things that give us confidence when we look at the IPO, we see Activations in January in the spring some of that will carry into next year. So all of those things and I'd say the thing that we are most confident about is our ability to continue to take share. We've demonstrated that we're seeing takeaways as we walk into next year already so all of that.

Those things bode really well for us as we think about next year.

Good to hear thank you.

Your next question comes from the line of Steven <unk> with Macquarie. Your line is open. Please proceed with your question.

Great. Thanks, It's Steve <unk> with Macquarie.

The call.

Congratulations is due to Simon I want to echo.

Robert Sallmann: Oh, thank you very much, Marvin. I'll kick off and then pass it over to our new CEO, Philip. I think what I would say first of all is that with everything that we do with AI, we've done a ton. We've released some tremendous products. All that we focus on is ensuring that we use a human-in-the-loop approach to make sure that everything that is delivered, we know, has efficacious value to the teacher. The focus of a lot of our AI tools, if I think of Writing Assistant, Teacher Assistant, is providing the educator more time to spend face-to-face with the student. That's got to be really emphasized all the time. You will have read a great deal recently about the need for that human interaction for the teacher and student to really bond and spend significant time together.

Simon Allen: Oh, thank you very much, Marvin. I'll kick off and then pass it over to our new CEO, Philip. I think what I would say first of all is that with everything that we do with AI, we've done a ton. We've released some tremendous products. All that we focus on is ensuring that we use a human-in-the-loop approach to make sure that everything that is delivered, we know, has efficacious value to the teacher. The focus of a lot of our AI tools, if I think of Writing Assistant, Teacher Assistant, is providing the educator more time to spend face-to-face with the student. That's got to be really emphasized all the time. You will have read a great deal recently about the need for that human interaction for the teacher and student to really bond and spend significant time together.

<unk> previous comments by others on your contribution.

Financially operationally and certainly culturally to Mcgraw Hill.

Levi.

A really really good position here for fill up to build on and welcome to Philips.

I think Michael I'm, sorry, I have two questions. Let me just say thank you.

Yes.

You're quite welcome good yes.

Pretty clear.

Your contributions have been.

It puts you in great food.

On the I wanted to ask.

Yes, I wanted to ask maybe kind of a two part question it's related.

So one part of the question maybe for you Simon is.

You mentioned that sharpen advantage expands your Tam by providing that institution wide solutions, not only for <unk>, but for administrators and students.

Robert Sallmann: So a lot of the AI tools that we've innovated in the last few months allow that. And they allow it because we're increasing the efficiency levels. You think about AI Reader in higher education. We're allowing the students to really understand more complicated materials in repetitive ways, in fact, that really help them grasp difficult concepts and enable them to then have more meaningful conversations with their professor. I think at the K-12 level, again, writing instruction tools, how do the students begin to think about creating sentences, paragraph structure, you name it, again, allowing for that formative discussion with the teacher at every stage.

Simon Allen: So a lot of the AI tools that we've innovated in the last few months allow that. And they allow it because we're increasing the efficiency levels. You think about AI Reader in higher education. We're allowing the students to really understand more complicated materials in repetitive ways, in fact, that really help them grasp difficult concepts and enable them to then have more meaningful conversations with their professor. I think at the K-12 level, again, writing instruction tools, how do the students begin to think about creating sentences, paragraph structure, you name it, again, allowing for that formative discussion with the teacher at every stage.

Can you expand on that and then I'm going to put the related question out there as well.

Philip you know feel free to give us your thoughts on this as well.

Think it's something that a lot of investors Ness, certainly about my software coverage, but like the competitive moat isn't just from the IP. It from kind of the customer lock in that happens when you you integrate the solution if you deploy them integrate them with it.

Data processes, workflows et cetera, and you're clearly doing that.

Yeah.

At Mcgraw Hill, and I'm not talking about this.

Robert Sallmann: And then as I look at our medical business, Clinical Reasoning, another great new innovation that we've provided for medical students that are looking at how they can diagnose, what they can think about utilizing as they look at the patient interactive evaluation tool that we provided so they can start to immediately relate to a patient's situation that they may need help within. And I think all of our tools that we've created, I know all of the tools that we've created are very valuable. We test them incessantly before we release anything to make sure that we're adding value to what we provide. So it's a very thoughtful process, Marvin, and it shall continue to be. But it's wonderful to have the opportunity to do this with the technology now and the advancements in AI.

Simon Allen: And then as I look at our medical business, Clinical Reasoning, another great new innovation that we've provided for medical students that are looking at how they can diagnose, what they can think about utilizing as they look at the patient interactive evaluation tool that we provided so they can start to immediately relate to a patient's situation that they may need help within. And I think all of our tools that we've created, I know all of the tools that we've created are very valuable. We test them incessantly before we release anything to make sure that we're adding value to what we provide. So it's a very thoughtful process, Marvin, and it shall continue to be. But it's wonderful to have the opportunity to do this with the technology now and the advancements in AI.

The technology solutions, but also your go to market and and what Youre doing to.

Make make yourself irreplaceable in the institution, but I'd love to hear your thoughts on.

How your technology your go to market.

Your content.

Influenced that and then I'll leave it there. Thanks, Thank you Bob.

Thank you very much Steve and again, thank you very much feel very kind comments and I'll I'll kick off a little on shopping and thank you for asking it said, we're very proud of shopping that the kind of product that we have there as you may remember is very much focused on how students learn today, you know that lovely quote that it's like a.

My my textbook can take talk had a baby and that's how so many of students learn.

Robert Sallmann: We've been operating with machine learning, as you know, for over 20 years with ALEKS. But now we really can stretch ahead with AI. But I'll pass it over to Philip. He may have other comments as well.

Simon Allen: We've been operating with machine learning, as you know, for over 20 years with ALEKS. But now we really can stretch ahead with AI. But I'll pass it over to Philip. He may have other comments as well.

And that first and second year, particularly at the University of that colleges, Steven what we've done with shop and we can do we've got a proven model with students. We know that it works well, we know that they really appreciate the type of video based learning and quiz focused activity really a lot of gamification tools.

Philip Moyer: Yeah. Coming at this as a technologist, I always look at user engagement. And so I want to know how many users are using it, how many are using it daily, and how long are they spending on the tools. So internally, we'll be tracking that. We're also going to be tracking outcomes. And we're seeing some pretty extraordinary outcomes already on our tools in terms of grade-level improvements, time engaged, and improvements overall in comprehension. So that's the second one, so really the learning outcome. But then a few other areas that you should really that you're going to be able to watch us focus on. I've heard a statistic, I think it was just today, that the average district has as many as 1,000 learning tools that are inside of their organization. And that's going to become even more complex.

And and then what we discovered is that the market increasingly asked us to look at this in a more broader sense and what can we provide for the institution. So over time, what we've done is make sure that we can focus on a broader coverage, allowing the educated to include their own <unk>.

For example, making the institution.

At that level us sharpen materials across the entire network every single class every single sector in department, where we operate which is pretty much everywhere. So the breath of calibration at the institutional level really opens up a significant market for us new market. If you like beyond just that students in it.

Philip Moyer: Imagine 1,000 AI tools sitting inside of a local district or a local university. And so enterprise adoption is going to be a really big focus. We're going to try and simplify for the institution the use of AI, whether or not it's from a cost perspective, whether or not it's from a content perspective, whether or not it's from a safety or security perspective. So enterprise adoption is going to be important. And the last thing, the way that we use AI is accelerating our own development and entry into new markets. And so I also expect that our ability to be able to do more supplemental work, to be able to do hyper-localization, so this market, entering new markets. When you look at the overall education industry on a worldwide basis, it's about $7.3 trillion. And it's growing to about $10 trillion by 2030.

Of course, the faculty relationships, so near and Dear to our company and I think with shop and we're just really excited about how quickly. It's Philipp said earlier, we've really developed some serious revenue and customer base and now we're looking forward very much to seeing that expand exponentially at the institutional level and I'll pass it over to.

Phillip now for the year. The additional questions that you had on I am sure you know I get asked a lot about about <unk> in the context of education and I'd like to say that.

Every generation of technology, whether or not it was a PC PC the internet the cloud.

Philip Moyer: And so how big can we think, and how many markets can we be in, and how many educators and students can we serve? I think it's really going to be driven by our harnessing of AI.

Everyone every one of those needs deep domain expertise to bridge the last mile for the Big Tech platforms I lived in that for a long time and I know that.

It's a very vibrant ecosystem software companies of services services companies. It became it's become a massive industry to bridge that last mile. This air is no different and artificial intelligence.

[Analyst] (BTIG LLC): Got it. That's terrific. And second question, maybe Bob can weigh in here as well, Philip. But in terms of and I know you mentioned we'll be discussing your outlook for next fiscal year and the upcoming quarter. But just in terms of spending priorities now and where you're focusing your incremental dollars, anything you can kind of help us out there as you balance both product development and, obviously, maintaining all of this great field sales, just kind of elaborate a little bit more on where your spending priorities these days.

Marvin Fong: Got it. That's terrific. And second question, maybe Bob can weigh in here as well, Philip. But in terms of and I know you mentioned we'll be discussing your outlook for next fiscal year and the upcoming quarter. But just in terms of spending priorities now and where you're focusing your incremental dollars, anything you can kind of help us out there as you balance both product development and, obviously, maintaining all of this great field sales, just kind of elaborate a little bit more on where your spending priorities these days.

And I think that our mode is going to be really clear.

A couple of things as I mentioned, we have we understand local education requirements down to the ZIP code and today more than ever educational requirements are becoming down to the ZIP code level. We have these specific age appropriate learning pathways I'd like to say that an LLS LLM. They know what you're asking but we know why you're asking it.

We were able to build security and trust and psychological safety into what we're building we've been building a building personalization for every student for every teacher, we can enter new curriculum markets in a way that we've never been able to before with fine grain supplemental.

Robert Sallmann: Yeah. And thanks. We definitely have our roadmap laid out. As we execute against that roadmap, we know where we're deploying the product development and technology spend. So we're just adhering to that. There's been no meaningful change. And over time, we expect that to remain to be the 8 to 9%. We don't really see a change into that. Now, it may mix shift in where we spend those dollars over time. But as we've gone through our strategic plans and understood sort of where we're spending dollars in that roadmap, we expect it to remain between 8 and 9%. All of that, why we continue to expand margins. So that's the other key point that we want to reiterate is that as we make those investments back into the business, we'll continue to be able to leverage, scale, and expand our margins.

Work and we're able to do really engaging learning experiences that are just a standard AUM is not going to do and then also just the ability to understand whether or not someone's comprehending what their what the answers are that theyre, giving to the teacher and then also the teacher to understand their students. We think theres all these fantastic opportunities to build great.

Modes, with artificial intelligence and <unk> technology.

That's super helpful. Thanks to you about.

Your next question comes from the line of Marvin Fong with <unk>. Your line is open. Please proceed with your question.

[Analyst] (BTIG LLC): That's great. Thank you so much, Bob. Thanks, everyone.

Marvin Fong: That's great. Thank you so much, Bob. Thanks, everyone.

Great. Good evening, Thanks for taking my question congratulations on the great results as well.

Operator: Your next question comes from the line of Jeff Silber with BMO Capital Markets. Your line is open. Please proceed with your question.

Hello, or the new role and I'm in.

No.

Long time to work with you but.

Jeffrey Silber: Thanks so much. I know it's late. I'll just ask one. I know you don't give specific guidance for the quarter, but obviously, results were better than expected. Were there any timing issues either in terms of revenue recognition or maybe deferring some expenses into Q4 that we should be aware about? Thanks.

Oh yeah.

Relationship there.

Best of luck.

Just a couple of questions again on AI very topical.

Maybe a different angle for either side.

The answer but.

No Tony.

Robert Sallmann: No. I'd just come back to as we think about the comp that we have in higher ed. I just want to reiterate that we do have a difficult comp as we think about Q4. But we're all doing this by taking share. And we've seen share gains in all of our businesses. And so as I think about Q4, really leaning into the RPO, also looking at the early activations that we saw in higher ed positions us to increase our guide. And that's sort of the drivers for us.

As investors, how how would you suggest we.

Measured the impact of AI on your business and I know you also some internal metrics.

The development cost.

Then if we do Phil maybe on both sides of that coin.

Measure AI.

Yes.

Thank you very much Marvin it's it's all I'll kick off and then pass it over to our new CEO Phillip and.

Jeffrey Silber: So there was nothing specific in the Q3 to call out one-time?

I think what I would say first of all is that with everything that we do with with AI. We've done a ton we've released some tremendous products.

Robert Sallmann: Well, let me come back to that reserve. I mentioned it in higher ed. I didn't mention it was about 400 basis points of benefit to us in the quarter. I just want to come back. That is not one time, if that's what you're alluding to. I mean, we have a mechanical process that we do every quarter, and we disclose that in the Q. But it was slightly larger than we've experienced in the past. That's why I wanted to call that out. And the reason for it being higher is just because of the smaller returns we experienced in the quarter. And that's why it was notable for us this quarter. And I wanted to call it out.

All that we focus on is ensuring that we use a human in the loop approach to make sure that everything that is delivered we know has efficacious value to the teacher and the focus of a lot of our AI tools, if I think of writing assistant teaching assistant.

Focus there is providing the educates them more time to spend face to face with the students. That's got to be really emphasized over time and you will have read a great deal recently.

Jeffrey Silber: All right. Really appreciate that. Thanks so much.

About the need for that human interaction for the teacher and student to really bond and spent significant time together. So a lot of the AI tools that we've innovated in the last few months allow that and they allow it because we're increasing the efficiency levels, you think about AI reader in higher education were allowing.

Robert Sallmann: You bet.

Operator: Your next question comes from the line of Henry Hayden with Rothschild & Co. Redburn. Your line is open. Please proceed with your question.

Henry Hayden: Yeah. Hi, everyone. Thanks for taking our questions. I'd like to add to the congratulations, Simon, on your retirement. I guess to start off, it's great to see leverage continuing to come down towards the target range. Could you please give us an update on capital allocation and how you're thinking about leverage progression from here? And since you commented on it, how are you thinking about M&A in that context, and what sort of assets would be of most interest? Thanks.

The students to really understand more complicated materials in ways repetitive ways in fact radio help them grasp difficult concepts and enable them to then have more meaningful conversations with that professor.

The K 12 level again, writing instruction tools, how do the students begin to think about creating sentences got pyrograph structure you name it again, allowing for that formative discussion with the Patriot every stage and then as I look at our medical business clinical reasoning another great.

Robert Sallmann: Sure. Thanks, Henry. And thanks for staying up late. First, our first priority is always the organic opportunities, right? So as we look at where we deploy capital, we see organic opportunities to generate the greatest ROI. We'll continue to do those. Those have always been fully funded, both in our budget, our guidance for next year, as well as our strategic plan. So we'll continue to put our dollars there first. Secondly, it comes back to our commitment to deleveraging. And so you saw that we were at 2.9 times leveraged at the end of the quarter. And we have a seasonal cash flow, which will result in that slightly ticking up as we think about both Q4 into Q1. And then ultimately, as we enter the fall, you'll see that that cash continues to build.

New innovation that we've provided for medical students that are looking at how they can diagnose what they can think about utilizing as they look at that patient interactive evaluation tool that we provided so they can start to immediately relate to a patient a situation that they may need help with.

And I. Thank all of our tools that we've created a I know all of the tools that we've created a very valuable we test them instead.

Incessantly before we release anything to make sure that we're adding value to what we provide so it's a very thoughtful process mob and it shall continue to be but it's wonderful to have the opportunity to do this with the technology now that any of the advancement and AI, we've been operating with machine learning as you know for over 20 years.

Robert Sallmann: However, we're really excited about where we sit in cash, our cash position as well. So we anticipate paying down another $50 million in Q4. So in addition to the $200 million we paid down in Q3, we will be paying down another $50 million here in Q4, given just the strength of our cash position. And then lastly, around M&A, we're looking at some bolt-on tuck-ins. We have a very active funnel. And I would tell you that they sit in all of our BUs. We're looking at things internationally in the global professional space, higher ed, and K-12, both as technology advancements as well as other small tuck-ins. There's nothing transformative in the funnel today. But we'll continue to look at things, and opportunistically, we'll execute when it makes sense, utilizing cash on the balance sheet.

With Alex but now we really can stretch ahead with AI, but I'll pass it over to Phillip He may have other comments as well.

This is a technologist I always look at user engagement and so I want to know how many users are using it how many are using it daily and how long are they spending on the tool. So internally, we'll be tracking that we're also going to be tracking outcomes and we're seeing some pretty extraordinary outcomes already on our tools in terms of like grade level improvements in time engaged and proven.

Overall and comprehension. So that's the second one so really the learning outcome, but then a few other areas that you should really that youre going to be able to watch us focus on I've heard a statistic I think it was just today.

Robert Sallmann: But again, we're excited about where we sit, the investments that we're making continue to pay down and delever. And just as a reminder, I think for modeling purposes, as a reminder, Q4 and Q1 represent our cash trough. And then it'll continue to cycle back up as we build the RPO in Q2.

The average district has as many as 1000 learning tools that are inside of their organization and thats going to become even more complex imagine a thousand AI tools sitting inside of inside of a local district or a local university and so enterprise adoption is going to be a really big focus we're going to try and simplify for the institution.

Henry Hayden: That's very helpful. Thank you. And then just as a quick follow-up, what sort of appetite are you seeing in the market for Teacher Assistant from the customer side? And how should we think about the relative growth uplift from that product as it gets a broader rollout kind of in the next year?

Yeah.

The use of AI, whether or not it's from a cost perspective, whether or not its from a content perspective, whether it is from a safety or security perspective, So enterprise adoption is going to be important.

Robert Sallmann: That's a good one. It's an encouraging answer, I think, Henry. Teacher Assistant is designed for exactly what it's described. It really has been well received to just enable the K-12 teaching community that they're feeling pretty beaten up in many situations. It's been a pretty tumultuous time for a lot of the teachers, particularly since COVID. They're looking for tools that whatever we can provide them that allow them the chance to do classroom preparation activities in a far more straightforward way, in a more enthusiastic way for their students, and just a chance to really build course material that they can teach with and utilize external materials as well that we can link towards just helping them find the right use of their time. It's really important that for us, it's a very competitive tool for us. No one else has anything like this.

And the last thing the way that we use AI is accelerating our own development and entry into new markets and so I also expect that our ability to be able to do more supplemental work to be able to do hyper localization. So there's markets entering new markets. When you look at the overall education industry on a worldwide basis is about seven three.

Trillion dollars and it's growing to about $10 trillion by 2030, and so how big can we think and how many markets can we be in and how many educators and students can we serve I think it's it's really going to be driven by our harnessing of AI.

Got it Thats terrific.

Question, maybe maybe Bob.

No.

In terms of like and I know you mentioned, we'll be discussing Europe.

Yes.

In the upcoming quarter, but just does.

In terms of spending priorities, now and where youre focusing your incremental dollar.

Robert Sallmann: We're very proud of how it integrates with our materials, our content. We're very, very pleased with how it's been launched. As you say, it's only recently launched. The early signals are extremely encouraging for us.

Anything you can.

Help us out there.

We balance both product development and all of that.

Maintaining all of it.

Yes.

Just kind of.

Henry Hayden: That's very clear. Thank you.

Elaborate a little bit more on any priority.

Robert Sallmann: Thank you.

Operator: Your next question comes from the line of Jeff Mueller with Baird. Your line is open. Please proceed with your question.

Yeah.

We definitely have our roadmap laid out and as we execute against that roadmap, we know where we're deploying the product development and technology spend.

Jeffrey Meuler: Yeah. Thank you. Congratulations, Simon. Welcome, Philip. This question's for Philip. So I hear you on being well-positioned with a lot of assets to leverage for the AI opportunity and hear you loud and clear on the related notes. Just on the comments about continued margin expansion for the enterprise, I just want to gauge, what gives you confidence that you're spending at the appropriate level to fully harness the AI opportunities?

So we're just adhering to that Theres been no meaningful change and over time, we expect that to remain to be the 8% to 9%. We don't really see a change into that now may mix shift in where we spend those dollars over time, but as we've gone through our strategic plans and understood.

Sort of where we're spending dollars on that roadmap, we expect it to remain.

Eight nine between eight 9% all of that why we continue to expand margins. So that's the other key point that you know we want to reiterate is that as we make those investments back into the business will continue to be able to leverage scale and expand our margins.

Philip Moyer: Well, I've been here for three days. It's my third day, so.

Robert Sallmann: You don't know it yet?

Philip Moyer: I've got the confidence of three days, so. I officially started on Monday. But what I would say to you is that already, my exposure around the efficiency and also the effectiveness of the development teams. I mentioned before, we've been able to release a record number of AI tools over about the past 12 to 24 months. And these are good tools. They're tackling really difficult problems. And so I'm excited, first and foremost, around the talent that's inside of the organization. The second thing is that we're not just talking about building AI. We're also using AI ourself. And we're also using cutting-edge tools. We're using processes. We are educating ourself. And we have a culture of learning internally around the use of these tools.

That's great. Thank you so much.

Sure.

Your next question comes from the line of Jeff Silber with BMO capital markets.

Your line is open. Please proceed with your question.

Thanks, So much I know, it's late I'll just ask one I know you don't give specific guidance for the quarter, but obviously results were better than expected were there any timing issues either in terms of revenue recognition or may be deferring some expenses into the fourth quarter that we should be aware about.

No I'd just come back to you know as we think about the.

The comp that we have in higher Ed I, just want to reiterate that we do have a difficult comp as we think about the fourth quarter, but we're all doing this why are taking share and we've seen share gains in all of our businesses and so as I think about the fourth quarter really leaning into the RP O also looking at the early Activations that we saw in higher Ed positions us.

Philip Moyer: I could not be more happy to be following Simon and Bob and the work that's been done over these past five years to really get, I'll say, the cost structure in line with where it should be. When you really look at our gross margins and you also look at our overall margins, we are set up to be a next-generation company, probably better than most of our peers in the industry based on the cost that we've taken out, and also the innovation, and the increases in the development teams, and also the improvements in development processes that we've already built. It's really evident to me that we've got a technology and digital-first culture here.

To increase our guide and that's sort of the drivers for us.

So there was nothing specific in the third quarter to call out one time.

Well.

Let me come back to that reserve I mentioned it in higher Ed I didn't mentioned it was about 400 basis points of.

Benefit to us in the quarter.

Jeffrey Meuler: Appreciate the perspective, three days in. And then, just, there was a comment about no material impact from proposed federal education policy changes. There's also been some government shutdowns. And there's been some headlines around federal student aid disbursement around those things. Just, I guess, what are you still watching for potential impact or, I guess, similar question, level of confidence that the risks related to that and risks related to the changes around Department of Education are not going to impact you? Thank you.

Just wanted to come back that is not one time, if that's what you're alluding Jonathan we have a mechanical process that we do every quarter and we disclosed that in it in the Q.

But it was slightly larger than we've experienced in the past that's why I wanted to call that out and the reason for it being higher is just because of the smaller reserves that we experience our returns we experienced in the quarter and Thats why it was notable for US this quarter and I wanted to call it out.

All right really appreciate that thanks, so much.

You bet.

Your next question comes from the line of Henry Hayden with Rothschild and co Redburn. Your line is open. Please proceed with your question.

Robert Sallmann: Yeah. It's a good one. I mean, without being naive, it really is true that we've seen no damage to our business. We obviously look with great interest at what's happening. And you mentioned the Department of Education. That is a good example. But honestly, it's made no difference to our business whatsoever because how we operate is very much directly with the school districts or with the states, in the case of K-12, directly with instructors and institutions in higher education. And this is true around the world. And clearly, there is no desire for any government or any federal or governmental institution to want to remove the focus on education. They would never get reelected again. So we don't see the effect on our business whatsoever. We describe ourselves, as you remember, as a very defensible company because of the resiliency that we have.

Yes, hi, everyone. Thanks for taking our questions and I'd like to add to the congratulations Simon on your retirement.

I guess to start off at its greatest deleverage continuing to come down towards the target range could.

Could you please give us an update on capital allocation and how you are thinking about leverage progression from here and since you commented on it how are you thinking about M&A in that context, and what sort of assets would be of most interest. Thanks.

Sure Thanks, Andrea and thanks for staying up late.

First are our first priority is always at the organic opportunities right. So as we look at where we deploy capital we see organic opportunities to generate the greatest ROI. We'll continue to do those those have always been a fully funded.

Both in our budget and our guidance for next year as well as our strategic plans. So we'll continue to put our dollars there first secondly.

Back to our commitment to deleveraging and so you saw that we were at two nine times leverage at the end of the quarter and.

Robert Sallmann: So the defense that we have is simply that our products are needed by schools, by students, by universities and colleges globally, and medical schools. And while that happens, there is no government intervention that will damage our business because the core of what we offer is so important to every aspect of society. And as a reminder, Jeff, a very small amount of districts' budgets come from the federal government as well.

We have a seasonal cash flow, which will result in that slightly picking up as we think about both the fourth quarter into Q1, and then ultimately as we enter the fall Youll see that that cash continues to build however, we're really excited about where we sit in cash our cash position as well so we anticipate.

Paying down another $50 million in the fourth quarter. So in addition to the 200, we paid down in the third quarter, we will be paying down another 50 here in the fourth quarter, given just the strength of our cash position and then lastly around M&A. We're looking at some bolt on tuck ins, we have a very active funnel and I would tell you that.

Jeffrey Meuler: Got it. Thank you.

Operator: Your next question comes from the line of Josh Chan with UBS. Your line is open. Please proceed with your question.

Henry Hayden: Hi. Good afternoon. Congrats, Simon. And welcome, Philip. I'll just ask one to Simon. I guess historically, in your experience as you gain share in higher ed, does it become easier or harder to keep gaining share? I guess I'm just asking kind of a momentum question. And then what does it take to kind of keep up the momentum? Thank you.

Josh Chan: Hi. Good afternoon. Congrats, Simon. And welcome, Philip. I'll just ask one to Simon. I guess historically, in your experience as you gain share in higher ed, does it become easier or harder to keep gaining share? I guess I'm just asking kind of a momentum question. And then what does it take to kind of keep up the momentum? Thank you.

They sit in all of our being used we're looking at things internationally and the global professional space higher Ed and K 12, both as a technology advancements as well as.

Other small tuck ins, there's nothing transformative in the funnel today, but we'll continue to look at things and Opportunistically, we will execute when it makes sense utilizing cash on the balance sheet.

Robert Sallmann: That's a good question. What I would say is, and I've done this for, it's 40 years in August, actually, Josh, 40 years on August 16th, if you want to be precise. I can tell you that since I've been in higher education, and the momentum that you get is a joyful situation because it really does success breed success. The reason is that you have, for example, the growth we've seen in Inclusive Access. You heard Bob earlier talk about continued growth well beyond 20% yet again this quarter. You look at what that does as you realize that the land and expand strategy with Inclusive Access gives you a far greater number in the second and third year of the institution's use of Inclusive Access. That momentum just continues and continues in a wonderful way.

Simon Allen: That's a good question. What I would say is, and I've done this for, it's 40 years in August, actually, Josh, 40 years on August 16th, if you want to be precise. I can tell you that since I've been in higher education, and the momentum that you get is a joyful situation because it really does success breed success. The reason is that you have, for example, the growth we've seen in Inclusive Access. You heard Bob earlier talk about continued growth well beyond 20% yet again this quarter. You look at what that does as you realize that the land and expand strategy with Inclusive Access gives you a far greater number in the second and third year of the institution's use of Inclusive Access. That momentum just continues and continues in a wonderful way.

But again you know we have.

We're excited about where we set the investments that we're making continue to pay down and Delever and just as a reminder, I think for modeling purposes. As you as a reminder, Q4 and Q1 represent our cash trough and then it will continue to cycle back up as we build the RP O and in our Q2.

That's that's very helpful. Thank you and then just as a quick follow up what sort of appetite are you seeing in the market for teacher assistance from the customer side and how should we think about the relative growth uplift from that product as it gets a broader rollout in kind of in the next year.

That's a good one and I made some encouraging answer I think Henry we teacher assistant is designed for exactly what is described.

And it really has been well received to just enable that K 12 teaching community that.

Robert Sallmann: When you provide products like Evergreen or solutions like Evergreen that allow our professors to immediately continue with our product, it frees up time for our reps to go after new business. That, again, creates momentum. And we're seeing that already when we look at the pipeline very early in the selling season. But we see that already as we think about the year ahead. And then with higher education, when you start to get a greater presence on the college campus in any discipline, in any department, it just grows. And you find that you almost flower as you go through the selling season. And you get to a level of maturity that's quite joyful to see. And really, success breeds success. It's why we've had continued market share growth every quarter I've spoken to you and why that will continue.

Simon Allen: When you provide products like Evergreen or solutions like Evergreen that allow our professors to immediately continue with our product, it frees up time for our reps to go after new business. That, again, creates momentum. And we're seeing that already when we look at the pipeline very early in the selling season. But we see that already as we think about the year ahead. And then with higher education, when you start to get a greater presence on the college campus in any discipline, in any department, it just grows. And you find that you almost flower as you go through the selling season. And you get to a level of maturity that's quite joyful to see. And really, success breeds success. It's why we've had continued market share growth every quarter I've spoken to you and why that will continue.

They're feeling pretty beaten up in many situations it's.

It's been a pretty tumultuous time for a lot of the teachers that particularly since COVID-19, they're looking for tools that that whatever we can provide them that allow them the chance to do classroom preparation activities and are far more straightforward way in a more enthusiastic way for their students and just a chance to read.

Build cost material that they can teach width and utilize external materials as well, but we can link towards just helping them find the right use at that time and it's really important that you know for us. It's a very competitive told for US no. One else has anything like this with very proud.

How it integrates without materials that content.

And we're very very pleased with how it's been launched as you say, it's only recently launched but they the early signals are extremely encouraging for us.

Robert Sallmann: We're very proud of our higher ed business. We're taking substantial market share, as you've seen.

Simon Allen: We're very proud of our higher ed business. We're taking substantial market share, as you've seen.

Okay. Thank you.

Henry Hayden: Thanks for the color there. Congrats on your accomplishments, Simon.

Josh Chan: Thanks for the color there. Congrats on your accomplishments, Simon.

Thank you.

Robert Sallmann: Thank you very much, Josh. That's very kind.

Simon Allen: Thank you very much, Josh. That's very kind.

Your next question comes from the line of Jeff Mueller with Baird.

Your line is open. Please proceed with your question.

Operator: Your next question comes from the line of Toni Kaplan with Morgan Stanley. Your line is open. Please proceed with your question.

Yes. Thank you congratulations Simon welcome Phil.

For Philip So I hear you on being well positioned with a lot of assets.

[Analyst] (Morgan Stanley & Co. LLC): Thanks so much. Congrats on the quarter and also on, Simon, on your retirement. It's been great working with you. You mentioned the strong stats on McGraw Hill Plus with the 86% increase in district access and 40% increase in average time spent. Just to get maybe a little bit of additional context, hoping to understand what the penetration rate is across the business from the school districts for that and how the forward pipeline looks for the platform. And I know in the past, when you're signing new K-12 districts and trying to retain old ones, I think largely, the retention hasn't necessarily been a big thing. But could this change that dynamic where you do start to see more retention of old districts because they like that personalization? Thanks.

Toni Kaplan: Thanks so much. Congrats on the quarter and also on, Simon, on your retirement. It's been great working with you. You mentioned the strong stats on McGraw Hill Plus with the 86% increase in district access and 40% increase in average time spent. Just to get maybe a little bit of additional context, hoping to understand what the penetration rate is across the business from the school districts for that and how the forward pipeline looks for the platform. And I know in the past, when you're signing new K-12 districts and trying to retain old ones, I think largely, the retention hasn't necessarily been a big thing. But could this change that dynamic where you do start to see more retention of old districts because they like that personalization? Thanks.

The leverage for the AI opportunity and hear you loud and clear on the related boats.

On the comments about continued margin expansion for the enterprise.

Wanted to gauge what gives you confidence that you're spending at the appropriate level.

To fully harness the opportunities.

Well I've been here for three days. This is my third day so.

Evidence of <unk>.

Three days, so [laughter] artificially.

Officially started on Monday.

But what I would say to you is that already my exposure around the efficiency and also the effectiveness of the development teams.

<unk> before we've been able to release a record number of AI tools over about the past 12 months to 24 months and these are good tools, they're tackling really difficult problems and so I'm excited first and foremost around the talent that's inside of the organization. The second thing is that we're not just talking about building AI. We're also using AI ourself and we're also using.

Robert Sallmann: That's a very thoughtful question, Tony. Let me start with the latter statement I think is what you've hit on that's so crucial for us.

Simon Allen: That's a very thoughtful question, Tony. Let me start with the latter statement I think is what you've hit on that's so crucial for us.

Cutting edge tools, we're using processes, we are educating ourselves and.

Robert Sallmann: When you think about why we created McGraw Hill Plus initially in mathematics, as you know, and now extending into ELA and other disciplines quickly and going from just a handful of states now to more than getting on for a dozen, I think, going forward, the reason that we're so excited about this product, and you've touched on it, is that once you get integrated with McGraw Hill Plus and you utilize the data and you can see just how your students in the classroom are performing and you can look at that knowledge graph and recognize every component of the education system that students have succeeded with and where there may be gaps, that data becomes very, in a positive way, very addictive. And the only way that you can continue to understand how your class is performing is by continuing to use our products.

Simon Allen: When you think about why we created McGraw Hill Plus initially in mathematics, as you know, and now extending into ELA and other disciplines quickly and going from just a handful of states now to more than getting on for a dozen, I think, going forward, the reason that we're so excited about this product, and you've touched on it, is that once you get integrated with McGraw Hill Plus and you utilize the data and you can see just how your students in the classroom are performing and you can look at that knowledge graph and recognize every component of the education system that students have succeeded with and where there may be gaps, that data becomes very, in a positive way, very addictive. And the only way that you can continue to understand how your class is performing is by continuing to use our products.

We have a we have a culture of learning internally around the use of these tools.

And.

I could not be more <unk>.

Happy to be following.

Simon and Bob and the work that's been done over these past five years to really get I'll say the cost structure in line with where it should be there.

This is when you really look at our gross margins and you also look at our overall margins. We are set up to be a next generation company, probably better than most of our most of our peers in the industry based on the cost that we've taken out and also the innovation and the increases in the development teams and also the improvements in development processes that we've already built it really <unk>.

Evident to me that we've got a technology and digital first culture here.

I appreciate the perspective three days.

And then just there was a comment about no material impact from proposed federal education policy changes.

Robert Sallmann: And particularly with McGraw Hill Plus, the integration with that data-driven tool alongside our core product, alongside our supplemental if you think of math, you've got Reveal Math or Everyday Math. And then you've got ALEKS as a supplementary product. And then you've got all of the data provided with those tools on McGraw Hill Plus. Then you start to utilize that year-over-year. It's very difficult to leave because you rely on the data. You rely on what it tells you about your students performing. And as you move a student from second grade to third grade to fourth grade, you can track their progress in a wonderful way. This longitudinal student record is very attractive to the schools themselves. So you hit the nail on the head.

Simon Allen: And particularly with McGraw Hill Plus, the integration with that data-driven tool alongside our core product, alongside our supplemental if you think of math, you've got Reveal Math or Everyday Math. And then you've got ALEKS as a supplementary product. And then you've got all of the data provided with those tools on McGraw Hill Plus. Then you start to utilize that year-over-year. It's very difficult to leave because you rely on the data. You rely on what it tells you about your students performing. And as you move a student from second grade to third grade to fourth grade, you can track their progress in a wonderful way. This longitudinal student record is very attractive to the schools themselves. So you hit the nail on the head.

There's also about some government shutdowns and there's been some headlines around like federal student aid disbursement around those things just I guess, what are you still watching for potential impact or I guess similar question level of confidence.

The risks related to that and risks related to the changes around department of education, our market impact you. Thank you.

Yeah, but I mean.

Without being naive it really is true that we've seen no damage to our business.

We obviously look with great interest of what's happening in that you mentioned that pharma is a very education that is a good example, but honestly it's make no difference to our business whatsoever, because how we operate is very much directly with with the school districts or with the states in the case of Kate <unk>.

Robert Sallmann: It is that ability for us to truly integrate the products that will increase retention, because the products and the solutions we provided will really be very difficult to live without once you've integrated them in.

Simon Allen: It is that ability for us to truly integrate the products that will increase retention, because the products and the solutions we provided will really be very difficult to live without once you've integrated them in.

<unk> directly with instructors.

And institutions in higher education, and this is true around the world.

[Analyst] (Morgan Stanley & Co. LLC): Great. And then just as my follow-up, I think in past quarters, we've sort of talked a lot about the ability to use AI across the business through Scribe. I sort of noticed that Scribe hasn't really been mentioned. I know you've talked about margin expansion, so not trying to sort of imply that you're not seeing margin expansion. But I guess, trying to understand if Scribe is going to be a big driver, is it still going? Any update on it? Should we not be thinking about Scribe as sort of one of the biggest levers for margin expansion? Or maybe we're just talking about it in a different way. So just want to understand that. Thanks.

Toni Kaplan: Great. And then just as my follow-up, I think in past quarters, we've sort of talked a lot about the ability to use AI across the business through Scribe. I sort of noticed that Scribe hasn't really been mentioned. I know you've talked about margin expansion, so not trying to sort of imply that you're not seeing margin expansion. But I guess, trying to understand if Scribe is going to be a big driver, is it still going? Any update on it? Should we not be thinking about Scribe as sort of one of the biggest levers for margin expansion? Or maybe we're just talking about it in a different way. So just want to understand that. Thanks.

And clearly that there is no desire for any government or any any federal governmental institution to want to remove them.

The focus on education that would never get reelected again, so we don't see the effect on our business whatsoever, we describe ourselves as to your members are very defensible company because the resiliency that we have so the defense that we have is simply that our products are needed by school by students by universe.

Different colleges globally medical schools, and while that happens there is no government intervention that will damage our business because the core of what we offer is so important to every aspect of society.

Philip Moyer: Yeah. And Tony, yeah. So we didn't specifically call it out. We continue to lean into Scribe. We continue to define new use cases every day. And so we were gathered today in meetings. And Scribe was a big portion of our discussion. So we see it as a meaningful opportunity for us to continue to reduce cost and accelerate time to market. It'll be something you'll continue to hear us talk about as we move forward. But we're still in the early days of the use cases and actually seeing the cost savings. But we still are very excited about that opportunity. And we'll continue to talk about it going forward because it is a meaningful opportunity for the business.

Simon Allen: Yeah. And Tony, yeah. So we didn't specifically call it out. We continue to lean into Scribe. We continue to define new use cases every day. And so we were gathered today in meetings. And Scribe was a big portion of our discussion. So we see it as a meaningful opportunity for us to continue to reduce cost and accelerate time to market. It'll be something you'll continue to hear us talk about as we move forward. But we're still in the early days of the use cases and actually seeing the cost savings. But we still are very excited about that opportunity. And we'll continue to talk about it going forward because it is a meaningful opportunity for the business.

And as a reminder, Jeff Theyre very small amount of a strict budgets come from the federal government as well.

Yeah.

Got it thank you.

Your next question comes from the line of Josh Chan with UBS. Your line is open. Please proceed with your question.

Hi, good afternoon, and congrats Simon and welcome Phil I'll, just ask one to Simon.

Yes, historically in your experience as you gained share in higher Ed does it become easier or harder to keep gaining share I guess im just asking kind of a momentum question and then what does it take to kind of keep up the momentum. Thank you.

[Analyst] (Morgan Stanley & Co. LLC): Terrific. Thanks a lot, guys. And congrats again.

Toni Kaplan: Terrific. Thanks a lot, guys. And congrats again.

Simon Allen: Thank you.

That is that's a good question what I would say is that I've done. This for 40 years in August actually Josh 40 years on August 16th if you want to be precise and I can tell you. The most since I've been in higher education and the momentum that you get is a joyful situation because you.

Operator: Your next question comes from the line of David Karnovsky with JPM. Your line is open. Please proceed with your question.

[Analyst] (JPMorgan Securities LLC): All right. Thanks. Maybe just following up on supplemental within K-12. Can you just update on the ongoing cross-selling opportunity there and what the uptake has looked like recently for products like ALEKS? Thanks.

David Karnovsky: All right. Thanks. Maybe just following up on supplemental within K-12. Can you just update on the ongoing cross-selling opportunity there and what the uptake has looked like recently for products like ALEKS? Thanks.

It really does success breeds success and the reason is that you have for example that the growth we've seen in inclusive access and you had thought earlier talked about continued growth well beyond 20% yet again. This quarter you look at what that does as you you do realize that the law.

Robert Sallmann: Yeah. It's a good one. I mean, David, and again, ALEKS is a very good example for the supplemental intervention sector. I mean, for us, ALEKS is we've owned it since 2013. It's been around since the year 2000. And it is a tremendous tool that provides students in math and now chemistry the ability to really either with their teacher or really self-directed understand how they're progressing as they learn math, having directive question-and-answer processes to really enhance their learning and focus them in ways that's very personal because it can tell you exactly where you've made a mistake as you go through the workings of any answer. And ALEKS, for us, not just in K-12 but also very much in higher education, the placement tool that we use, the placement program, it allows instructors to understand the level of performance they can expect out of their students.

Simon Allen: Yeah. It's a good one. I mean, David, and again, ALEKS is a very good example for the supplemental intervention sector. I mean, for us, ALEKS is we've owned it since 2013. It's been around since the year 2000. And it is a tremendous tool that provides students in math and now chemistry the ability to really either with their teacher or really self-directed understand how they're progressing as they learn math, having directive question-and-answer processes to really enhance their learning and focus them in ways that's very personal because it can tell you exactly where you've made a mistake as you go through the workings of any answer. And ALEKS, for us, not just in K-12 but also very much in higher education, the placement tool that we use, the placement program, it allows instructors to understand the level of performance they can expect out of their students.

Land and expand strategy with inclusive access it gives you a far greater number in the second and third year of the institutions use of inclusive access that momentum just continues and continues into wonderful way when you provide products like evergreen or solutions like evergreen that along.

Low hour professes to immediately continue with our product it frees up time for our reps to go after new business that again creates momentum and we're seeing that already when we look at the pipeline very early and to sit in the selling season, but we see that already as we think about the year ahead, and then with higher.

<unk> when you start to get a greater presence on the college campus in any discipline in any department. It just grows and and you find that that you almost flower as you go through the selling season and you get to a level of maturity, that's quite joyful to see and really success breeds success. Its one.

Robert Sallmann: And it really is the backbone, frankly, of our supplemental business for math. But let's not forget what we've accomplished with Achieve 3000 for literacy. And the reason that we made that acquisition some five years ago now was really to augment our position in the supplemental sphere and give us strength not just in math but then also in literacy. And with Achieve 3000 and Actively Learn, we've done exactly that. And we're very pleased with the growth that we've seen and the ability to serve all of our customers. It's not just about being the leading core provider in K-12, as you know McGraw Hill already is. But it's also about providing supplemental material to help students beyond the core. And that's something that we've focused a lot of attention on. We see a lot of growth coming from that sector, David.

Simon Allen: And it really is the backbone, frankly, of our supplemental business for math. But let's not forget what we've accomplished with Achieve 3000 for literacy. And the reason that we made that acquisition some five years ago now was really to augment our position in the supplemental sphere and give us strength not just in math but then also in literacy. And with Achieve 3000 and Actively Learn, we've done exactly that. And we're very pleased with the growth that we've seen and the ability to serve all of our customers. It's not just about being the leading core provider in K-12, as you know McGraw Hill already is. But it's also about providing supplemental material to help students beyond the core. And that's something that we've focused a lot of attention on. We see a lot of growth coming from that sector, David.

We've had continued market share growth every quarter I've spoken to you and why that will continue and we're very proud of our high rate business and we're taking substantial market share as you've seen.

Thanks for the color there and congrats on your accomplishments Simon.

Thank you very much that's very kind.

Your next question comes from the line of Toni Kaplan with Morgan Stanley.

Line is open. Please proceed with your question.

Robert Sallmann: I think it's exciting for us. Core is still the majority of our K-12 business. We definitely see serious growth opportunities ahead in supplemental and intervention.

Simon Allen: I think it's exciting for us. Core is still the majority of our K-12 business. We definitely see serious growth opportunities ahead in supplemental and intervention.

Thanks, so much and congrats on the corner and also on Simon on your retirement, it's been great working with you.

You mentioned the strong stats on Mcgraw Hill, plus with the 86% increase in district access and 40% increase in average time spent.

Philip Moyer: I'll add, that's where we saw us expanding our portfolio ahead of the larger market opportunities in math. We have a full portfolio to address that opportunity, which is exciting for us. I think we're very well positioned as we think about the coming years.

Robert Sallmann: I'll add, that's where we saw us expanding our portfolio ahead of the larger market opportunities in math. We have a full portfolio to address that opportunity, which is exciting for us. I think we're very well positioned as we think about the coming years.

To get maybe a little bit of additional context, I'm, hoping to understand what the penetration rate is across the business from the school districts for that and how does the forward pipeline looks for the platform and is it I know in the past like when you are signing new K 12 districts.

[Analyst] (JPMorgan Securities LLC): Thank you.

David Karnovsky: Thank you.

Simon Allen: Thank you.

Operator: Your next question comes from the line of Faiza Alwi with Deutsche Bank. Your line is open. Please proceed with your question.

And trying to retain old ones I think I think largely the retention hasn't necessarily been a big thing, but could this change that.

[Analyst] (Deutsche Bank Securities): Yes. Hi. Thank you. I was also going to ask, actually, about the supplemental. I think you addressed it in the prior question. But just specifically, I was curious. You mentioned the stat around 1,000 different tools that sit inside the average district. And I was curious, what do you think the real limitation is to kind of moving that or integrating that within the McGraw Hill offering? And I guess I'm just surprised that we still have that many tools. So I'm just curious if there is a limiting factor there. The opportunity seems quite compelling.

Faiza Alwy: Yes. Hi. Thank you. I was also going to ask, actually, about the supplemental. I think you addressed it in the prior question. But just specifically, I was curious. You mentioned the stat around 1,000 different tools that sit inside the average district. And I was curious, what do you think the real limitation is to kind of moving that or integrating that within the McGraw Hill offering? And I guess I'm just surprised that we still have that many tools. So I'm just curious if there is a limiting factor there. The opportunity seems quite compelling.

No matter, where you do start to see more retention of all districts because they like that personalization.

That's a very thoughtful question, Tony and let me start with the latter statements I think is what you've hit on it so crucial for US when you think about why we created Mcgraw Hill plus initially in mathematics, as you know and now extending into L. A and and other disciplines quickly and going from just a handful of states now.

For a more than getting on for it doesn't I think going forward.

The reason that we're so excited about this product and you've touched on it is that once you get into integrated with Mcgraw Hill, plus and you utilize the data and you can see just how your students in the classroom are performing and you can look at that knowledge graph and recognize every component of the education system.

Robert Sallmann: Yeah. You're exactly right. We too, frankly, Faiza, we were also surprised. I mean, it's a bit of an outrageous statistic, to be honest. And you imagine the schools, just how do they cope with that level of supplementary material or tools that they are expected to review? I mean, it's impossible to think about. I think like we do with a lot of the AI material that we've provided, and you know this, the focus is on providing teacher relief. It's support for the teacher, giving them more time to be with their students directly. And that's never more evident than right now when you look at the number of applications they have to work through. It's become unwieldy. I think you could say that the core market in K-12, Faiza, you know this, the moat that we have is very deep and very wide.

Simon Allen: Yeah. You're exactly right. We too, frankly, Faiza, we were also surprised. I mean, it's a bit of an outrageous statistic, to be honest. And you imagine the schools, just how do they cope with that level of supplementary material or tools that they are expected to review? I mean, it's impossible to think about. I think like we do with a lot of the AI material that we've provided, and you know this, the focus is on providing teacher relief. It's support for the teacher, giving them more time to be with their students directly. And that's never more evident than right now when you look at the number of applications they have to work through. It's become unwieldy. I think you could say that the core market in K-12, Faiza, you know this, the moat that we have is very deep and very wide.

Students have succeeded with and where there may be gaps that data becomes very in a positive way very addictive and the only way that you continue to you can continue to understand how you are classes performing is by continuing to use our products and particularly with Mcgraw Hill plus the integral.

<unk> with that data driven tool alongside our core product alongside our supplemental if you think of math, you've got reveal math or everyday math and then you've got Alex as a supplementary product and then you've got all of the data provided with those tools on Mcgraw Hill, plus then you start.

Robert Sallmann: And it's a very difficult segment for any company just to enter. When you look at supplemental intervention, there are dozens and dozens and, frankly, hundreds of different companies. And I think that's where you get the overload of applications that may be where the school districts are going to struggle. There's just too much to review. Our job is to make sense of the chaos, quite frankly. And I think we can do that very effectively because no one understands the teaching community better than McGraw Hill. No one understands the product needs that they have that are genuinely helpful in how they teach. And it's all about the efficacious delivery of materials in a simplified way to help the teacher get through the day and really flourish with their students.

Simon Allen: And it's a very difficult segment for any company just to enter. When you look at supplemental intervention, there are dozens and dozens and, frankly, hundreds of different companies. And I think that's where you get the overload of applications that may be where the school districts are going to struggle. There's just too much to review. Our job is to make sense of the chaos, quite frankly. And I think we can do that very effectively because no one understands the teaching community better than McGraw Hill. No one understands the product needs that they have that are genuinely helpful in how they teach. And it's all about the efficacious delivery of materials in a simplified way to help the teacher get through the day and really flourish with their students.

To utilize that year on year, it's very difficult to leave because you rely on the data you rely on what it tells you about your students performing and as you move a student from second grade to third grade to fourth grade you can track their progress in a wonderful way this longitudinal student record it's very attractive.

The schools themselves. So I you you hit the nail on the head it is that ability for us to truly integrate the products that will increase retention because the products and the solutions. We provide it will really be very difficult to live without once you've integrated demand.

Great and then just as my follow up I think in past quarters, we've sort of talked a lot about the ability to use AI across the business through scribe I I sort of noticed that scribe hasn't really been mentioned I know you've.

Robert Sallmann: That's why we're very optimistic as we think about simplifying the choices and making them better and easier for the teachers going forward.

Simon Allen: That's why we're very optimistic as we think about simplifying the choices and making them better and easier for the teachers going forward.

[Analyst] (Deutsche Bank Securities): Great. That makes sense. And just I wanted to also ask about higher ed, right? I'm trying to reconcile some of your comments. And I know, Bob, you talked about a decline in revenue because of the tough comp. But if I look at the numbers and not to get into the modeling details, but if I look at what you did in Q4 last year and what you did this quarter, it's not that different. You're still growing 24-something%. And I know you sound really good about the higher ed opportunity. So really just trying to reconcile sort of your optimism around the ability to continue to gain share versus sort of you talking about tougher comps.

Faiza Alwy: Great. That makes sense. And just I wanted to also ask about higher ed, right? I'm trying to reconcile some of your comments. And I know, Bob, you talked about a decline in revenue because of the tough comp. But if I look at the numbers and not to get into the modeling details, but if I look at what you did in Q4 last year and what you did this quarter, it's not that different. You're still growing 24-something%. And I know you sound really good about the higher ed opportunity. So really just trying to reconcile sort of your optimism around the ability to continue to gain share versus sort of you talking about tougher comps.

Talking about margin expansion, so not trying to sort of imply that youre not seeing margin expansion, but I guess trying to understand if it's scribe. This is going to be a big driver or is it still you know like any update on it should we not be thinking about scribe is fair.

One of the biggest levers for margin expansion or maybe we were just talking about it in a different way. So just wanted to understand that thanks.

Yeah and Tony.

Yes, so we didn't specifically call. It out we continue to lean in described we continue to find new use cases every day and so we were gathered today and meeting subscribers a big portion of our discussion. So we see it as a meaningful opportunity for us to continue to reduce cost and accelerate time to market.

Philip Moyer: Sure. And I think we are very confident about the takeaways that we've seen, our ability to continue to take share. So we're unwavering around that. There are some nuances. As you think about our billings versus our revenue, you have contract duration and some mix. All of those things sort of result in some of these different comps that you're seeing. That's why I think it's important when you reflect on the full year when we're sitting having this conversation in June, and you'll reflect on that and say, "Okay. It's double-digit growth both in the billing and in revenue," which will reflect more of a normalized basis, right? And it'll take some of that noise of the contract duration out of that equation. But again, we feel very confident in our ability to continue to take share and our ability to continue to grow regardless of enrollment.

Robert Sallmann: Sure. And I think we are very confident about the takeaways that we've seen, our ability to continue to take share. So we're unwavering around that. There are some nuances. As you think about our billings versus our revenue, you have contract duration and some mix. All of those things sort of result in some of these different comps that you're seeing. That's why I think it's important when you reflect on the full year when we're sitting having this conversation in June, and you'll reflect on that and say, "Okay. It's double-digit growth both in the billing and in revenue," which will reflect more of a normalized basis, right? And it'll take some of that noise of the contract duration out of that equation. But again, we feel very confident in our ability to continue to take share and our ability to continue to grow regardless of enrollment.

It would be something you'll continue to hear us talk about as we move forward, but we're still in the early days of the use cases and actually seeing the cost savings, but we still are very excited about that opportunity and we'll continue to talk about it going forward because it is a meaningful opportunity for the for the business.

Terrific. Thanks, a lot guys and congrats again.

Thank you.

Your next question comes from the line of David Karnofsky with J P M.

Your line is open. Please proceed with your question.

Alright, Thanks, maybe just following up on supplemental within K 12 can you just update on the ongoing cross selling opportunity there and what the uptake has looked like recently for products like Alex. Thanks.

Yeah, it's a good one.

Robert Sallmann: Faiza, just to be clear, I think some of the confusion may be we look at all of our business on an annual perspective, as you know. I think when you try and analyze quarter by quarter, it can be unhelpful, frankly. I think Bob's saying we're not going to end the year at 24% up. I don't think that would surprise anybody. We look at our annual performance. It's how we operate. The quarter is important for you to understand. That's why we try and explain away issues as Bob has in their reserve case in this situation right now. In terms of our higher ed performance, we will continually outperform our competitors. We will absolutely show growth far higher than any other competitor, once again.

Simon Allen: Faiza, just to be clear, I think some of the confusion may be we look at all of our business on an annual perspective, as you know. I think when you try and analyze quarter by quarter, it can be unhelpful, frankly. I think Bob's saying we're not going to end the year at 24% up. I don't think that would surprise anybody. We look at our annual performance. It's how we operate. The quarter is important for you to understand. That's why we try and explain away issues as Bob has in their reserve case in this situation right now. In terms of our higher ed performance, we will continually outperform our competitors. We will absolutely show growth far higher than any other competitor, once again.

David.

And Alex it's a very good example for the supplemental intervention sector I mean for US. Alex is you know we've owned it since 2013, it's been around since the year 2000, and it is a tremendous tool that provides students in math and now chemistry and the ability to read either with.

That teacher or really self directed understand how they are progressing as they learn math.

Having directive question and answer processes to it to really enhance that learning and focus them in ways. That's very personal because it can tell you exactly where you've made a mistake because you go through the workings of any answer on Alex for US not just in K 12, but also.

Much in higher education that the placement tool that we use a placement program. It allows instructors to understand the level of performance. They can expect how did that students and it really is the it's the backbone frankly of a supplemental business for math, but let's not forget what we've accomplished with achieved 3000 for literacy.

[Analyst] (Deutsche Bank Securities): Understood. Thank you so much.

Faiza Alwy: Understood. Thank you so much.

Robert Sallmann: Thank you.

Simon Allen: Thank you.

Operator: There are no further questions at this time. I'll now pass it back to Simon Allen, chair of the board of directors, for closing remarks.

Robert Sallmann: Thank you very much. Thank you all for dialing in. I know it's very late for some of you. I appreciate very much your so many kind comments. Retirement is going to be interesting for me. I've got three. I just had my third grandchild a couple of months ago. I've got a fourth coming in May. I am swimming in grandchildren. So I need an escape path. Many of you that have young children know that, and certainly grandchildren. My escape path is going to be a joyful Chair of this wonderful company. I will look forward very much to working very closely to Philip ongoing. I've got so much vested in this company. I'm looking forward very much to having the honor, frankly, of being Chair of the Board. I look forward to further interactions.

Simon Allen: Thank you very much. Thank you all for dialing in. I know it's very late for some of you. I appreciate very much your so many kind comments. Retirement is going to be interesting for me. I've got three. I just had my third grandchild a couple of months ago. I've got a fourth coming in May. I am swimming in grandchildren. So I need an escape path. Many of you that have young children know that, and certainly grandchildren. My escape path is going to be a joyful Chair of this wonderful company. I will look forward very much to working very closely to Philip ongoing. I've got so much vested in this company. I'm looking forward very much to having the honor, frankly, of being Chair of the Board. I look forward to further interactions.

And the reason that we made that acquisition. Some five years ago now was really to augment our position in the supplemental there and give us strength not just the math, but then also in literacy and with achieved 3000 and actively learn we've done exactly that and we're very pleased with the growth that we've seen in the ability.

To serve all of our customers, it's not just about being the leading core provide as in K 12, as you know Mcgraw Hill already is but it's also about providing supplemental materials to help students beyond the cool and that's something that we focused a lot of attention on we see a lot of growth coming from that sector David.

Robert Sallmann: If I may, I'm going to pass over to Philip Moyer, our CEO, to close us out.

Simon Allen: If I may, I'm going to pass over to Philip Moyer, our CEO, to close us out.

I think it's exciting.

Philip Moyer: Thank you, Simon. Before you're completely comfortable in that chair seat, I have to just say a very, very big thank you to you. You have impacted hundreds of millions of students and teachers' lives over your career. We're incredibly grateful for that. You've impacted tens of thousands of McGraw Hill employees. Your friendship, your leadership is just simply stellar. Finally, on behalf of shareholders and the board, I want to thank you for being such an incredible steward of the Red Cube and of this company and setting us up for the next generation. It couldn't be more honored to be following you. Thank you for staying on as chair.

Fighting for US core is still the majority of our K 12 business, but we definitely see serious growth opportunities ahead, and supplemental and intervention.

And I'll add that's where we you saw us expanding our portfolio ahead of the larger market opportunities and map. So we have a full portfolio to address that opportunity, which is exciting for us I think we're very well positioned as we think about it in the coming years.

Yeah.

Okay.

Thank you.

Your next question comes from the line of Faiza <unk> with Deutsche Bank.

Robert Sallmann: Thank you very much.

Simon Allen: Thank you very much.

Philip Moyer: Thank you, everyone. Back to you, moderator. Thank you.

Operator: Thank you. That concludes the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.

Your line is open. Please proceed with your question.

Yes, hi, Thank you I was also going to ask actually about the supplemental and I think you addressed it in the prior question, but just specifically I was curious you mentioned the stat around a thousand different tools that sit inside the average and that is tracked and and I was curious like what do you think.

The real limitation as to move.

Moving that are integrating that.

And within the Mcgraw Hill, offering and I guess I'm, just surprised but we still have that many tools. So I'm. Just curious if there is a limiting factor that opportunity theme seemed quite compelling.

Yeah, that's you're exactly how we to frankly Pfizer. We were also surprised I mean, it's a it's a bit of an outrageous statistic to be honest and you imagine the schools.

Just how do they cope with that level.

<unk> of <unk>.

Our supplementary material or tools that they are expected to review I mean, it's impossible to think about I think like we do with a lot of the AI material that we've provided and you know this the focus is on providing teacher relief at its support for the teacher, giving them more time to be with the students.

Directly and that's never more evident than right now when you look at the number of applications. They have to work through it. It's become unwieldy I think you know you could say that the core marketing K 12, Pfizer you know this the moat that we have is very deep and very wide and it's a very difficult segment for any color.

And he just to enter.

When you look at supplemental intervention, there are dozens and dozens and frankly hundreds of different companies and I think that's way you get the overload of of applications that maybe where the school districts are going to struggle. There's just too much to review our job is to make sense of the chaos.

Quite frankly, and I think we can do that very effectively because no one understands the teaching community the community better the Mcgraw Hill no one understands the product needs that they have that they genuinely helpful. In how they teach and it's all about the efficacious delivery of materials and a simplified.

Way to help the teacher get through the day and really flourish with desk students. That's why we're very optimistic as we think about simplifying the choices and making them better and easier for the teachers going forward.

Yeah.

Okay that makes sense and that's what I wanted to also ask about the higher AD right I'm trying to reconcile.

Some of your comments and I know, Bob you talked about a decline in revenue because of the tough comp so, but if I look at the numbers and not to get too into the modeling details, but if I look at what you did in pork you out there and what you did.

This quarter, it's not that the front youre still growing 24 something percent, so and I know you sound really good about the higher Ed opportunity. So really just trying to reconcile sort of your optimism around the ability to continue to gain share versus the sort of you're talking about tougher comps.

Sure.

We are very confident about the takeaways that we've seen our ability to continue to take share. So that we're unwavering around that there.

There are some nuances as you think about our billings versus our revenue you have contract duration and some mix all of those things sort of.

Result in some of these different comps that you're seeing that's why I think it's important when you reflect on the full year when were sitting.

Having this conversation in June and you reflect on that and say, okay. It's double digit growth both into the billing and in revenue which will.

Reflect more of a normalized basis right now it takes some of that noise of the contract duration out of that equation, but again, we feel very confident in our ability to continue to take share.

And our ability to continue to grow regardless of enrollment.

I think Pfizer I think just to be clear I think some of the confusion may be you know we look at.

All of our business on an annual perspective, as you know and I think when you try and analyze quarter by quarter. It can be unhelpful, frankly, and you know I think bolt, saying, we're not going to end the year at 24% up I don't think that would surprise anybody.

But you know we look at our annual performance. It's how we operate the quarter is important for you to understand and that's why we tried to explain away issues as Bob has in their reserve case in this situation right now, but in terms of in a higher rate performance, we will continually outperform our competitors and we will.

Absolutely show growth far higher than any other competitor once again.

Understood. Thank you so much.

Thank you.

There are no further questions at this time I will now pass it back to Simon Allen Chair of the board of directors for closing remarks.

Thank you very much and thank you all for dialing in I know, it's very late for some of you and I. Appreciate very much you. So many kind comments and yeah. I retirement is going to be interesting for me I've got three I took up my third grandchild, a couple of months ago Ive got a forthcoming in may I am swimming and grandchildren. So I need an escape hatch.

And many of you that have young children know that but any absurdly grandchildren and my escape policy is gonna be a joyful chair of this wonderful company I will look forward very much to working very closely to Phillip ongoing I I've got so much vested in this company and I'm looking forward very much to being having the honor frankly are being chair of the board.

And I look forward to further interactions, but if I may I'm going to pass over to Filip Moira CEO to close us out.

Simon and before you're completely comfortable in that chair seat I have to just say a very very big Thank you to you.

You have impacted hundreds of millions of students and teachers lives over your career.

We're incredibly grateful for that you've impacted tens of thousands of Mcgraw Hill employees. Your friendship your leadership is just simply.

Stellar and finally.

Half of shareholders and the board I want to thank you for being such an incredible steward of the Red Cube.

This company and setting us up for the next generation and I couldn't be more honored to be following you and thank you for staying honest here. Thank you Bob and thank you everyone back to your moderator. Thank you.

Thank you that concludes the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your line have a great day everyone.

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