Mcgraw Hill Inc Aktie

Good morning, and welcome to the McGraw Hill, Inc. Earnings Conference Call. [Operator Instructions] As a reminder today's call is being recorded, and a written transcript and webcast replay will be made available in the Events and Presentations section of the company's Investor Relations website.

Following the prepared remarks, we will open the call for questions. I would now like to turn the call over to your host, Danielle Kloeblen, Treasurer and Senior Vice President, Investor Relations. Please go ahead, Danielle.

Good morning. Welcome to McGraw Hill's Fiscal Fourth Quarter and Full Year Ended March 31, 2026 earnings call. Joining me today are Simon Allen, Chair of the Board of Directors; Philip Moyer, President and Chief Executive Officer; and Bob Sallmann, Executive Vice President and Chief Financial Officer.

During today's call, we will be making forward-looking statements that are based on our current expectations and the current economic environment. These statements, estimates and projections are subject to significant uncertainties beyond the control of management. As detailed in the cautionary language in our fiscal fourth quarter and full year ended March 31, 2026 earnings release, the accompanying investor presentation, our Form 10-K and other SEC filings.

We will also reference certain non-GAAP measures today, which we believe provide useful supplemental insight into our financial and operational performance though they are not a substitute for GAAP measures. Definitions and GAAP reconciliations are available in our earnings release, the appendix to the investor presentation and on our Investor Relations website.

For those listening to a recording of this call, please note that the remarks are as of today, June 11, 2026, and have not been subsequently updated.

With that, I'll turn the call over to our Chair of the Board, Simon Allen.

Good morning, everyone. Fiscal year 2026 demonstrated the strength of our business, our strategy and the enduring importance of education. Our mission to support learners and educators, build human intelligence and power the future of learning has never been more relevant. In a year marked by rapid AI advancement and global uncertainty, McGraw Hill's reinforced our position as the partner, educators and learners trust most. That foundation fuels our trajectory. As a data-driven learning company, we made significant strides in AI-powered innovation launching new tools, expanding existing solutions and deepening key partnerships that position McGraw Hill to lead the next era of AI-enabled learning.

This execution reflects the strength of our strategy and the caliber of our leadership team, led by the right person. Having worked closely with Philip over the last 120 days, the Board and I have full confidence in his vision and his ability to drive McGraw Hill's next chapter of growth. We are fully aligned and energized by what lies ahead.

I'll now turn the call over to McGraw Hill's President and CEO, Philip Moyer.

Thank you, Simon, and good morning, everyone. It's a privilege to step into the CEO role and lead McGraw Hill in this exciting moment in education and technology. My first 120 days have been filled with over 250 customer, team, industry and investor meetings, and it's clear that education is at a seminal moment. Student populations are growing, the learning landscape is increasingly complex and outcomes are more important than ever. Students, teachers and institutions are looking for an enterprise partner that they trust to ensure the next generation of students are prepared.

What is also clear to me is that McGraw Hill is uniquely positioned to be this partner. Our trusted content, our learning data and our pace of AI innovation, along with the scale of our relationships, are unmatched, and I believe we are positioned to be the global leader in this next generation.

McGraw Hill has a great financial foundation, and my focus for shareholders is to maintain our profit profile, reduce our debt and accelerate our growth in fiscal year 2027 and beyond. I see many opportunities to lead in innovation, streamline and scale our execution and profitably expand our TAM.

In fiscal year 2026, we exceeded our IPO expectations for revenue and adjusted EBITDA and achieved several important milestones. Recurring revenue grew by 6% and now represents over 73% of our total revenue. In K-12, our capture rate exceeded expectations despite the expected cyclical decline in the market. In higher education, our net dollar retention reached 114%, and our customer satisfaction reached its highest level ever. In fiscal year 2026, we also proved that we could profitably accelerate execution. We introduced a record number of curriculum offerings and AI learning tools while improving our adjusted EBITDA margin by nearly 80 basis points year-over-year.

We now have launched 8 AI learning tools, which serve more than 7.5 million users, and we have 3 additional launches planned this fiscal year. We launched our California math curriculum and a new literacy curriculum, the latter of which is our single largest investment in curriculum in our history. We also introduced a K-12 AI curriculum designed to teach AI concepts and integrate them into the classroom learning.

As we enter fiscal year 2027, we see clear opportunities for growth. The market dynamics support a multiyear acceleration of revenue growth and underpins our confidence in our medium-term framework for mid-single-digit plus revenue growth.

Now one of the most exciting areas I see that supports our growth expectations is the use of AI. While I'm frequently asked by investors if AI will disrupt our business, I've rarely been asked that question by our customers. Students, teachers, parents and institutions don't want to park a child in front of a generic LLM and hope for a good outcome. They know that AI is only as good as its data and its training. And in my past 120 days, I've deepened my excitement about the competitive moat we are building in AI, train specifically for education and the outcomes we produce.

Our proprietary content catalog includes tens of thousands of courses spanning more than 500 subjects mapped to hundreds of thousands of regulated learning objectives and academic standards across roughly 12,000 school districts and approximately 3,300 higher ed institutions. We build our tools to meet digital accessibility requirements, ensuring broad access for learners, and we have our student outcomes measured by independent third parties. We have over 100 million active licenses by students and educators of this curriculum. From this usage, we captured over 25.6 billion learning interactions and have decades of data, over 190 terabytes, on how students learn, where they struggle and how instruction must adapt in real time. This extraordinary content and data mode is what we use to build and tune our education-specific AI learning tools. It is also what we use to deliver a precision education experience, the right content and the right question at the right moment.

I'm excited about our use of AI because I'm seeing how we are expanding this precision experience and creating new opportunities for TAM expansion.

One great example is the emerging agentic AI landscape. AI is evolving from answering questions to taking actions, but customers need purpose-built agents that they trust. As a result, we are being asked to be a part of new agentic AI strategies in both education and noneducation customers. And I'm excited to announce that we are piloting our new agentic AI tool that will make our precision education experience accessible as a trusted AI agent. This represents a new business model and one of several opportunities to expand our TAM.

At the same time, we continue to enhance our core learning solutions with artificial intelligence. We are expanding our Connect platform with Learning Coach, an AI conversation, tutoring tool developed with Kiron Learning. We've added new accessibility features to AI Reader, including translations across 38 languages. And we've created new AI literacy modules. As I mentioned earlier, the education market is not just asking for better tools, it is demanding measurable outcomes.

In fiscal year 2026, McGraw Hill extended our trust with educators with meaningful improvements in student comprehension and grades, which is now validated by more than 100 independent researchers. ALEKS, for example, continue to set the benchmark for adaptive learning with math students achieving topic mastery more than 90% of the time. In Pennsylvania, elementary schools that were using ALEKS Adventure had first grad students improving nearly 25 points on math assessments and second graders improving more than 55 points over the course of the school year. AI Reader generated 57 million learning interactions across 2.4 million students, driving higher engagement with teacher assigned reading topics. And with our Sharpen tool, students engaged up to 4x more with study activities than compared to generic AI tools. at Rowan College in New Jersey, for example, students who use Sharpen achieved final exam scores 47% higher than peers who didn't use the tool.

Looking ahead, our strategy focuses on 4 priorities: strengthening the core, expanding our cross-sell opportunities, growing our addressable market and driving operational efficiencies.

In K-12, we're continuing to evolve our California math program to meet the emerging requirements of the market. This California math adoption cycle has been slower than expected, but 80% of the market remains undecided. Also, in K-12, we're entering one of the most important nationwide curriculum refresh cycles in this millennium as an unprecedented amount of schools evaluate new English language Arts programs. Since 2021, we have invested over $100 million in our new science of reading ELA program, EMERGE, Summit and SOAR. This is our largest curriculum investment to date. And we are seeing early district wins and a strong rubric of scores ahead of emerging opportunities.

In higher education, we continue to gain share as institutions adopt inclusive access, expand their use of our evergreen model and seek more integrated learning experiences.

Fiscal fourth quarter marked our 40th consecutive quarter of market share gains in higher ed, with our share approaching 31% according to NPI. Our Net Promoter Score reached a record in the spring, and we saw strong retention and volume growth. We've also seen solid adoption of our new offerings in credentialing and AI professional development.

Within our Global Professional business, medical education represents more than 75% of revenue. The World Health Organization projects a shortage of 11 million health care workers by 2030. And this year, we expanded our offerings into clinical training and AI-powered diagnostic simulations. We remain well positioned to serve this market with our innovation and trusted, high stakes learning solutions.

Internationally, we see education market conditions improving. Higher education enrollment in Canada is stabilizing and new opportunities in favorable demographic markets such as Latin America and the Middle East support a more attractive setup. ALEKS remains a key driver internationally with Calculus now available in additional markets.

Looking to fiscal year 2027, we see a clear path to revenue growth, expanding margins and strong free cash flow. We've made significant progress in reducing our gross debt, and we will remain disciplined in capital allocation, which Bob will speak through shortly. We're looking forward to sharing a broader update on our long-term strategy and capital allocation framework at our Investor Day later this calendar year. But after this first 120 days as CEO, I am more excited than ever. At McGraw Hill, we build human intelligence. Our mission has never been more important, our assets have never been stronger, and our opportunity has never been greater.

With that, I'll turn it over to Bob to review our financial results and provide guidance for fiscal year 2027.

Thank you, Philip. Fiscal year 2026 were defined by market share gains, margin expansion and accelerating digital momentum. We exited the year with a stronger balance sheet greater financial flexibility and stronger pricing power driven by deeper adoption of our AI-enabled solutions, all reinforcing our confidence in long-term value creation.

For the fiscal year, revenue was $2.1 billion, above the high end of our guided range and $2 million above prior year. Reoccurring revenue reached $1.5 billion, growing nearly 6% year-over-year, exceeding the high end of our guided range, reinforcing the durability of our model. The remaining performance obligation was $1.7 billion and will increase in the fiscal second quarter of 2027, reflecting the typical K-12 seasonality.

Fiscal year adjusted EBITDA was $744 million, up 2% year-over-year, exceeding the high end of our guided range, with margin expanding nearly 80 basis points to 35.4%. During the fiscal year, we reduced gross debt by $646 million, inclusive of the IPO proceeds. We remain focused on achieving our net leverage target of 2 to 2.5x.

Turning to the fourth quarter. Revenue was $464 million, down 2% year-over-year, reflecting a smaller K-12 market opportunity, partially offset by continued outperformance in higher education. Recurring revenue totaled $373 million, while digital revenue reached $393 million, representing 81% and 85% of total revenue, respectively. Fourth quarter gross margin increased nearly 50 basis points, driven by operational efficiency and favorable digital mix.

Adjusted EBITDA was $131 million, with margins expanding nearly 40 basis points year-over-year, reflecting operational leverage and early AI efficiency savings while we continue to invest in growth.

Turning to segment performance. In Higher Education, fiscal year revenue grew 12% year-over-year to $879 million, with recurring revenue up 10% to $734 million. Growth was largely driven by market share gains, which exceeded expectations, alongside enrollment, pricing and lower sales returns and the associated release, contributing roughly 3 points of growth. Market share is now approaching 31% according to MPI. Momentum continued in the fourth quarter with Higher Education revenue increasing nearly 2% year-over-year to $258 million despite more school starting spring semesters later in the quarter compared to last year.

Our spring selling season was a success with year-over-year activation growth and share gains supported by strong commercial execution and our Evergreen delivery model. Evergreen, a continuously updated content delivery system that improves your attention and freeze our sales teams to pursue competitive takeaways. This remains a competitive differentiator in the market and now represents 68% of Higher Education revenue. Demand by discipline was particularly strong in business and science, which represents subject areas where we over-index. Underpinning that demand is the Inclusive Access delivery model. Inclusive Access represents 56% of revenue in fiscal year 2026 and continues to expand as existing campuses adopt additional courses. As a reminder, we typically add about 100 new campuses each year with those significantly scaling over the following 2 to 3 years. At the same time, our customer success organization continues to strengthen faculty partnerships, supporting retention and driving net dollar retention of 114% in the fiscal year.

Turning to K-12. Fiscal year revenue was $884 million, down 9% year-over-year, reflecting the anticipated smaller market opportunity and difficult prior year comparison. Recurring revenue grew 3% year-over-year to $620 million in the fiscal year. Despite market decline, performance came in slightly ahead of expectations due to stronger capture rates in key adoption markets. In the fourth quarter, K-12 revenue was $126 million, down 10% year-over-year, with sequential improvements while reoccurring revenue declined 3% as prior year adoptions provided some durability. As we progress through the key selling season for the 2026 and 2027 school year, we are gaining real-time market intelligence.

In California, some districts are taking longer to finalize curriculum refresh plans amid higher volume of rubric choices, pilots and tools available. We have always expected the California math refresh cycle to take place over a handful of years. But the phasing has been recalibrated as we learn more from prospective customers. This delay has allowed us to better customize our materials to the market's rapidly evolving and fragmented needs and improve our capture rates and subsequent adoption years. Importantly, the market opportunity and opportunity to win remains intact.

In Texas, our math program has been well received while state-sponsored curriculum has seen early successes due to upfront incentives provided by the state. Contracts have been shorter, reflecting a market in an experimentation mode. Historically, districts and educators favor high-quality integrated solutions and that pattern continues, giving us confidence in our ability to serve Texas in a very meaningful way going forward. We have seen this dynamic play out clearly in higher education, where our win ratio against OER and AI-generated curriculum vendors has been 6:1. OER was often adopted through top-down institutional mandates, but poor outcomes drove educators back to us, reinforcing that education is more than information. [Indiscernible] designs built with cognitive scaffolding, domain knowledge and alignment to thousands of learning objectives and localized standards demand deep expertise, and this is where McGraw Hill excels.

In Florida ALA, the market opportunity remains attractive, and our capture rate is trending in line with expectations. Looking ahead, we have visibility into several years of potential market expansion in K-12, driven largely by a nationwide ELA refresh cycle aligned with the science of reading. McGraw Hill has been preparing for this opportunity with our ELA programs, EMERGE, Summit and [indiscernible], which integrates McGraw Hill Plus, supplemental AI capabilities and supplemental and intervention solutions. Early momentum in ELA is encouraging. Colorado's Department of Education score emerged as the highest rated curriculum and the latest instructional material review for K-3. We are also seeing early wins in urban open territory markets such as Seattle, where McGraw-Hill has historically had lower penetration. The first major state adoption opportunity for ELA will occur in California starting in fiscal year 2028, with the state expected to publish its list of approved vendors later this year.

As a reminder, ELA is our largest subject area, representing approximately 40% of our historical K-12 revenue. So early signals from our new ELA program position us well.

The Global Professional business remained steady in fiscal year 2026, with 4% year-over-year digital revenue growth supported by medical content and early traction from our AI-enabled solutions, which was partially offset by continued transition away from noncore print products. And in international, while revenue declined 7% year-over-year due to macro pressure in select markets, we are better positioned across multiple key markets heading into fiscal year 2027, supported by new commercial opportunities. Fourth quarter performance was also impacted by Middle East project delays that have shifted into the second half of fiscal year 2027.

While we recognized a $39 million impairment charge in the fourth quarter driven by geopolitical and macroeconomic factors, we remain confident in the underlying fundamentals and long-term strategic importance of the global markets we serve with the outlook improving in fiscal year 2027 as headwinds ease and positioning strengthens.

We ended the year with $254 million in cash and $704 million in total liquidity, with our revolving credit facilities remaining undrawn. During the year, we repaid $66 million of gross debt, reducing net leverage by approximately 80 basis points and lowering annualized cash interest expense by nearly $45 million.

Despite entering our seasonal cash trough through June, we reduced debt by an additional $50 million in the quarter, including buying $40 million of our highest coupon notes in the open market at a discount, and we will continue optimizing our capital structure in the future.

Cash from operations was $331 million for the year, while CapEx and product development was just over $200 million. We generated $335 million of unlevered free cash flow in the fiscal year.

Turning to fiscal year 2027 guidance. We expect revenue to be in the range of $2.115 billion to $2.175 billion, remaining consistent with the dollar expectations we established at the time of our IPO. We expect approximately 55% of the full year revenue in the first half of the fiscal year weighted towards the second quarter. Reoccurring revenue is expected to be in the range of $1.587 billion to $1.627 billion, ahead of our IPO expectations, demonstrating a growing high-quality and predictable revenue stream. Adjusted EBITDA is expected to be in the range of $750 million to $790 million, ahead of expectations set at the time of the IPO. The implied adjusted EBITDA margin of 35.9% at the midpoint represents a year-over-year increase of 50 basis points.

Unlevered free cash flow is expected to reach approximately $400 million, up roughly 20% year-over-year, with further growth anticipated in fiscal year 2028. CapEx and product development are expected to remain approximately 10% of revenue. Our capital allocation approach remains balanced and disciplined as we continue to prioritize reinvestment in the business, debt reduction and selective tuck-in acquisitions. Consistent with this approach, our Board has authorized a $50 million share repurchase plan, reflecting confidence in our sustained growth, strong profitability and meaningful cash generation.

To summarize, fiscal year 2026 performance exceeded expectations, and our fiscal year 2027 revenue outlook in dollar terms remains consistent with the trajectory we outlined at the time of our IPO. At the same time, our guidance for recurring revenue and adjusted EBITDA is above our IPO expectations, and we expect continued growth from these levels beyond fiscal year 2027.

The structural drivers of our business remain strong. In Higher Education, we expect continued share gains supported by durable pricing while taking a measured approach on enrollment assumptions ahead of the start of the academic year. In K-12, we expect improving trends as the market expands, supported by ELA momentum and the upcoming adoption cycle. In Global Professional, we will continue to prioritize growth in medical solutions. And in the International business, we are positioned more advantageously into fiscal year 2027.

Finally, a few modeling items for fiscal year 2027. Depreciation and amortization is expected to decline modestly versus fiscal year 2026, including $208 million of intangible asset amortization related to the Platinum acquisition in 2021. Stock-based compensation is expected to be approximately $15 million. Cash and GAAP taxes are expected to be in the range of $20 million to $40 million. And GAAP interest expense is expected to be below $180 million. These assumptions support GAAP net income in fiscal year 2027 increasing significantly compared to fiscal year 2026.

With that, I'll turn the call back to the operator for questions.

[Operator Instructions] Your first question comes from the line of Stephen Sheldon with William Blair.

First just on the revenue guide for fiscal 2027, can you help frame, [indiscernible] framing at a high level what you're assuming in terms of segment level revenue growth and especially as we think about K-12 and higher ed?

Sure thing. Yes. So as I think about '27, how are we sort of positioning the business. And certainly, we're going to have continued share gains and higher ad and you saw exceptional performance there. We see that continuing. You heard that I said we took a view of 1% enrollment gains in higher education for next year. We'll have to wait until we see students come on campus.

And then when we think about our K-12 business, we've established what we see as a slightly smaller than our original estimates in the overall market by about $100 million as well as we're coming in at the lower end of our historical capture rates, about 25% to 30%. We can walk through that in greater detail, but we're seeing a couple of different dynamics playing out there as well. Really strong performance in open territory. We're continuing to take share. Supplemental intervention continues to be beneficial. We're seeing some benefits in terms of retention rates. We're seeing our ability to see the funnel grow. And then we highlighted in the prepared remarks around Texas and California, both of those markets are pretty dynamic. And while we're early in that cycle, we're performing slightly below our historical average there.

So when you take that all together, you'll see that we're at the lower end of that 25% to 30% range. And then you'll see return to growth in the international segment. We talked about some of the opportunities in select markets. We feel really good about where that business is heading. And then the underlying core Medical segment in Global Professional is that mid-single-digit grower, which gets offset by the tail of that print. And we believe we're about the final year of the wind down of that nonstrategic core print business. So when I roll all that up together, Steven, that's where you get that midpoint of our guide around 2%, we feel good about it, and we think it's been a prudent guide.

Very helpful. Maybe just drilling down on the higher ed segment. Obviously, you've had phenomenal growth there as we look back over the last couple of years. Maybe as we think about bridging expectations around fiscal 2026 growth to fiscal 2027, I mean you talked about enrollment. I guess maybe how is that growth algorithm changing as you think about the next year relative to what you've been delivering over the past couple?

Yes. Yes, you're right. It's been an exceptional year and continued exceptional performance by the team. So really pleased there. That 12%, let me break it down for you. The biggest driver of that is that ongoing sustained share gains. That will continue. We also benefited from enrollment. 3% to 4% of the growth of was enrollment related. You may have seen National Student Clearinghouse called 1.3% growth. We had 3% to 4%. The reason for that is the strength of our business and science courses as well as over-indexing to the 2-year colleges. So when we look at our results, we had greater enrollment rates than the National Student Clearinghouse stated rates.

The other thing is I've historically called out about a 1% net price, which is inflationary price offset by the movement into inclusive equitable access models. This year, we actually realized closer to 2%. And that's largely given all the additional features, all the value, as a reminder, we go through our value selling process. And as we add value to our customers, we're able to realize greater price. And lastly, and this would be the component that's not reoccurring. This would be the 3% benefit we had from a sales returns. As we continue to move more digitally, we saw less returns come in. And then the corresponding reserve, we also lowered. So that had about a 3 percentage point increase year-over-year, and we don't expect that to continue. So that's where we land at that mid-single-digit growth as we think about the outlook.

Your next question comes from the line of Ryan MacDonald with Needham & Company.

Maybe shifting the conversation to the K-12 segment. Obviously, it sounds like a nice strong year there in the segment and sort of some good momentum sort of closing the year. Can you just talk about what exceeded our expectations the most within K-12 or pockets of strength? And then how is this informing your view a little bit more? Or how much of a shift change are we seeing within a few of those key states, Florida, Texas, California, as we think about how you're looking at the landscape in fiscal '27 versus maybe future years?

Sure, Ryan. Yes, '26, we did exceed our expected capture rates. And as I highlighted, we are at the high end of that 25% to 30% range. Where is it coming from, right? We have continued strength in our science program. As we talked about last year, exceptional performance in Florida and Texas in Science program. Now we saw that in other adoption states like Tennessee and Alabama as well as into the open territory. So science continues to perform above our historical rates.

We also saw success in Florida ELA and some other open territory areas. So really pleased with that performance.

Moving into sort of the '27, how do we think about it? As I mentioned, open territory continues to perform well. And I do believe we bottomed out with respect to our supplemental intervention, meaning the Aster dollars are behind us, and we're actually seeing some opportunity for meaningful growth. The pipeline is increasing in a meaningful way in supplemental intervention and our retention rates are also growing. So I think we're very well positioned there.

We're watching closely Texas math as well as California math. We did see the California math market shift a little bit while the overall size of the market remains intact. And I always knew it was a multiyear adoption cycle. The overall timing has just shifted a little bit because of a few large districts moving into fiscal year 2028. And then we just watch -- as we move through the selling season, we're watching closely our win rates. And right now, they're falling a little behind our expectations, but we're still in that selling season.

I would just add 1 thing, and it's related to both math and ELA literacy. Literacy for us is approximately 40% of our revenues, math, approximately 20%. And the 2 markets are very different right now. The way you teach math is very undecided. The pedagogy is not agreed upon by districts, by teachers and certainly not by states. It's a very fragmented market. And that's what we're seeing in California. There's a lot of confusion. We've talked about the sheer number of companies that are bidding in California, and it's because it's so fragmented, and there's such a lot of discord still how you teach math. Literacy, I don't think we've ever seen a market like this. There's now 42 states in the United States as well as a bill in the Senate that is mandating the way to teach literacy, which is the science of reading. That is an extraordinary legislative backdrop. We also think it can lead to a potential super cycle in the area of literacy.

We've made the largest single investment in our history in literacy curriculum, Emerge, Summit and SOR. And we've been bringing that curriculum out. We're kind of in year 0 of it. And the exciting thing about it is that we scored the highest score on the Colorado rubric. We won large districts like Seattle. We just won in Kansas as an example. We're winning in districts that we were not even expected to be in the literacy market and they're big districts. And so one of the areas that we're excited about that momentum is building is in, as I mentioned, 40% of our business, which is the literacy market. And so it's a big area for us that we are excited about in 2027 and some really early optimistic wins.

I appreciate all that color there, both Bob and Philip. But maybe as a following up on the literacy opportunity because it does feel like a huge opportunity over the next 3 to 5 years here. Given there's that sort of state-level mandate and almost nearly linked it across the country, how are the states viewing sort of the opportunity versus sort of companies and vendors like McGraw Hill versus maybe rolling out additional state-owned OER kind of curriculum like you saw within Texas math? Like is that potential risk as we think about how this market evolves over the next few years?

Yes. I really haven't seen a contagion or similar movements in other states as it relates to literacy as Texas and [indiscernible] math. I'll start with that, first of all. The other thing -- a few things that you should know. With our literacy program, we're one of the few programs in the entire United States that is using the science of reading and is multilingual for most of the grades. And so you have to have a commitment not just around the program, but also around multi-languages. And then the investments that we make in accessibility for these programs is pretty extraordinary. The third thing is that the balance of screen time versus paper, it's a really delicate balance. Early on, you actually -- most districts are asking for less than 20% -- 20 minutes per week of screen time, which is something that we do. And then as you get a little bit more self regulation, you can introduce more screens. But literally, the balance between a curriculum that is holistic, literally starting and kindergarten all the way up to up to 12 grade, doing it in a multilingual capacity, making sure it's accessible and then making sure that you've got the right balance of screening times, it's a really, really hard thing to do. And as mentioned, it's one of the largest investments. We've made over $100 million investment in this literacy program. And as mentioned, we're scoring the highest in the rubrics. And that Colorado rubric, by the way, something that other states actually depend on, in addition to third-party assessments. And so you have to have your program assessed by third parties. You have to have it evaluate it by state. So you have to make sure that you've built it the right way.

So we're just not seeing states move into that in the same way that we saw Texas experimenting with Blue Bonnet.

And the other thing I would just mention as it relates to [indiscernible]. One of the challenges, I think, that other states are looking at is that we just recently announced there was over 4,000 errors in that curriculum. And you just can't take that kind of risk with the literacy program.

Our next question comes from the line of Alexey Philippov with JPMorgan.

Yes, a question to Philip. Maybe a bit more to elaborate on the science of rating program and the opportunity you see has to capture that. Is there a way to quantify that? Is it like a time expansion for you? And which year do you expect this to fall?

I think it's -- we look at the TAM expansion as an international opportunity. The need for science of reading is not just here in the United States. It is global, as I would say, the previous ways of teaching literacy around the world. was highly variable. As I mentioned, it's 40% of our revenue. Our program in the past wonders actually generated over $1.5 billion for us over the course of 10 years. And so we look at it as both potential global TAM expansion and then also, I'll call it, TAM acceleration here in the United States.

I mentioned it before, I don't think we've ever seen a legislative environment like this before, where 42 states are now mandating this is the way to teach. There's been a lot -- one of the biggest challenges right now across the educational institutions across the United States is the challenge in literacy scores. And it's disappointing to see that 83% of states had moved backwards. We're at roughly about a 33% reading on grade level right now. It is, in a lot of ways, a national crisis and an international crisis. And so the fact that it has now been settled, that science of reading is the way to teach, it's really what's called a phonics based approach as opposed to a whole language approach, really important. And so we're seeing, as I mentioned, a lot of districts that quite frankly, were not in our pipeline at the start of last year come into our pipeline.

We've landed relationships that we weren't expecting to land. I was just recently up at an elementary school up in Chicago that reached out to me personally to start using our literacy program. So really extraordinary momentum that we're seeing in that space. So we see, I'll say, TAM acceleration. We're just in the early stages of quantifying it. So we'll come back to you with more details as we're able to start assessing that.

Yes. And a quick technical on this international impairment. Can you elaborate on that? It sounds like you expect international to kind of accelerate from here? How to square that is the impairment that you recognized?

We look at international, it's really important to kind of get a sense. I think that I spoke about this on the last call that we look at the education market is about a $7.3 trillion market on a global basis. The middle class is growing in areas like Latin America, the Middle East. We've got some great traction in those marketplaces. As the middle class grows, middle class tends to suspend approximately 2.5% on education. And so those markets has just recently done in Latin America, and I was just simply -- I'll just say, so impressed with the work that was going in K-12 and high school is completely dedicated to science, to universities, I spent some time with the university that had over 300,000 people enrolled in it. And so we're really excited about those opportunities internationally, and we are seeing growth in those markets.

And so internally inside of the company, we're better aligning to be able to be more reactive to local requirements, language requirements, cultural requirements, pedagogy. And we do view it as a great opportunity for growth for this company. And that's across literally our K-12 segment, our university segment and then also our medical segments.

And so you'll see us focusing on how we are part of that really exciting growth worldwide.

Our next question comes from the line of Steve Koenig Koenig with Macquarie Group.

It's Pete Koenig from Macquarie. Congratulations on the solid quarter and solid year. A question here for Philip. We noted your AI blueprint fill posted with the earnings materials, super helpful in understanding your AI strategy. Maybe can you help us understand how that strategy compares with your competitors? And maybe the second part of my question, if I may, is about open educational resources, which you mentioned in your remarks, and you did reference [indiscernible] math in your Q&A. Just curious where -- how do you think about where AI and open educational resources are headed?

Thank you very much for the question. And thanks for reading the AI blueprint. We're really excited about it. I think I mentioned that we talked about the fact that we have over 7.5 million of users of our AI solutions. And these are tools that just came out over the past 18 to 24 months. And so we're pretty excited about the early traction that we're seeing and there's a lot more ahead.

I think a lot of individuals that come into the education industry have a lot of misconceptions and they vastly underestimate what's necessary in this marketplace. And so you'll see a lot of startups that come in. You'll see some organizations that have some curriculum or some tools. And the thing that differentiates McGraw Hill is 4 things. First of all, the deep pedological curriculum. From the outside, most people don't realize that you're taking sequences of information, something like in liters, you have to weave together 1,000 separate learning requirements, in mathematics from K-12, over 4,000 learning requirements. You have to sequence this content.

So it's not just about just putting out a textbook or a piece of curriculum, you literally have to sequence it right down to the week. What are the third grader doing in their seventh week? And when they have an assembly, how do you kind of squeeze in addition and subtraction and multiplication tables. So that sequence of content is hard. We have literally hundreds of thousands of titles that we've been doing over the course of our history, tens of thousands that are sequenced across 500 different subjects where we sequence how a learner learns that's literally in many cases from -- through 12 years of their life. So that content is a huge moat versus other organizations.

The second thing is that we have these tools that do personalized delivery. Sharpen is a great example. A study guy that we use in Rowan College, a professor there analyzed it and said that the 60% of the students that were using in his class got 47% higher grade in their final exam, a 21% higher total grade. We had children and ALEKS Adventure, where we saw 25 percentage point increases in their grades and second grader is 55 percentage points. And so personalized delivery, whether or not you want to listen to a podcast, you want to see it visually or you want to gamify it. So that personalized delivery is the second thing.

The third, and this is critical in an era of outcomes is our data. we have over 190 terabytes of data. We get about 25.6 billion learning interactions per year. Now when you're training AI, you need to know when the AI is on task or off task. And we sense this at a very fine grain level. We can say for a subject like algebra, out of the 2 to the 500th power of how -- where you're at in your learning journey precisely where you're at. So that data is critical. The last is being able to integrate this into workflows, and we have one of the largest and most, I'll say, impressive, since I got here, I'm seeing it, customer success organizations and go-to-market teams, where they're actually working to integrate this into the classroom.

Every school that I visited, every teacher that I visited in K-12, they've asked, it's not just enough to produce this, show us how to use this in the class with different types of learners. So the 4 things that we have are content that is ordered pedologically, the second thing is personalized delivery, third is data and the fourth is this ability to be able to close the last mile.

Now one of the things that's most interesting, and I mentioned this in my comments, out of the dozens and dozens and dozens of schools and teachers and administrators that I met, investors have asked me, will AI disrupt our business, but like our customers are not. They're thrilled that we are adopting AI and that we're making it simple to them. And they see the value of what we produce. And this is really borne out in the OER market.

I think I've heard from a lot of people question, well, can I just take OER like a blue bonnet and couple it together with AI and boom, there's my curriculum. The reality is that we're winning almost 6x as many times as we're not with OER. So for every unit of OER that we lose to, we win in terms of our outcomes. And we're seeing a lot of organizations, in a world of AI tools in a world of OER we're actually seeing a lot of win backs where organizations and individuals are coming back to us because they're realizing the complexity of this.

You have to tie together assessment, you have to tie together pedagogy and you have to make it work inside of the workflow and how the student learns. So a really exciting time for us.

Your next question comes from the line of Marvin Fong with BTIG.

Great. Congratulations on the results. Maybe start with a bigger picture on guidance. And just sort of how you formulated that what's your philosophy behind the guidance you provided both revenue and EBITDA for not only 2027, but just structurally, how do you think about constructing your guidance?

Sure, sure. Thanks, Marvin. Consistent with how we've done this in the past and even if we rewind back to the forecast models we provided during our IPO and the road show, we've built this process, and we're consistently following that. And what we do is we understand what the information we have at this point in time. And again, we're early in the selling season with K-12. We've provided some insights around enrollment for higher ed. But based on information we have at this point in time, we provide that as our -- as the midpoint of our guide both on revenue and EBITDA. And then what we do is we provide a range. And consistent with what we've done in the past, that range provides for different outcomes, right? Should enrollments increase, should capture rates change, all of those things are reflected in that range.

And then ultimately, what we'll do is we'll revisit this as we move through that and ultimately once we start seeing students on campus, which, as you know, is after our second quarter that allow us to have greater insight as to the remainder of the year. So we're following a consistent approach that we've done in the past.

Perfect. And my follow-up, maybe just something that you mentioned, Philip, in your prepared remarks just about growing your addressable markets. I think you mentioned noneducational as well as educational markets. maybe with respect to like AI and advanced tools. Can you just kind of expand on that? That seems like an interesting point as you try to grow the top line, what are these kind of new markets you're thinking about?

One of the most impactful visits that I had was at a medical school, and I was meeting with a professor and he just come out of the American Medical Association. He talked about this concept of precision education. If a particular doctor have not studied or not worked with them a particular patient population, how do you really make sure that, that doctor, when they're walking into a situation, is able to have education just in time right at the right moment. And this is an actual is a trend across lots of organizations, just-in-time education. And so -- and one of the most interesting things with the American Association of Medicine has just given out 12 grants for the precision education for addressing this exact concept of really making sure that doctors in the medical profession is able to get the right education at the right moment, especially in a changing world of education.

I read a study recently that in both computer science and medicine, the number of medical papers is doubling every single year. So it's an extraordinary amount of knowledge that's coming out. I've talked in the past about the multitrillion dollar industries that are emerging and the sheer amount of knowledge that humans have to now learn, not just in K-12, but throughout their entire lifetime.

What we announced today that we're starting to pilot is this concept of agentic curriculum. And that is the ability to be able to consult our curriculum using agentic technologies, the MCP as an example. One of the organizations -- actually 2 of the organizations are not traditional education companies that are actually piloting that are working with us and starting to pilot our content. These are organizations that are in the health care industry that actually don't educate, but they just have professionals that are working in medicine and working in pharmaceuticals that are actually want to be able to consult our content.

And so I look at the lifelong journey of a learner, increasingly McGraw Hill wants to connect that journey from the earliest stages to any stage in your life, whether or not continuing education or whether or not it's on professional education. And agentic technologies are going to allow us to do that. One of the things I've talked about in the past is that where I expect AI to go in companies like us, so there's going to be a knowledge economy where you'll be able to plug in knowledge, you'll be able to plug in knowledge agents. Right now, we are experimenting with a knowledge agent. We view that in the same way that there's these token-based models in artificial intelligence, the prompt based business models, we view this as an opportunity to expand the accessibility and the -- I'll say, the business model for McGraw Hill over time with this new knowledge economy that's emerging.

Your next question comes from the line of George Tong with Goldman Sachs.

I wanted to dive deeper into the agentic curriculum opportunity. Can you share more color on the time line to launch as well as the pricing model and wallet opportunity?

Sure. George, Thanks very much as well for your -- the AI framework. They put out. I really enjoyed reading it. The -- and I really agree with the core concepts around the opportunity ahead. For agentic, for us, we just -- over the course of the past few months since arriving, I've spent a lot of time with the team, and the team has really moved quickly. I talked in my last call about the excitement that I have around innovation. Since I arrived, we've been able to actually build and start to internally pilot the agentic technologies, and we're just starting to move into agentic pilots with external customers. This has been something that's been asked for by lots of universities, lots of noneducation organizations. It's been asked being requested. A safe way, a, I'll call it, an auditable way of being able to deliver our content.

I think that there's been a choice up to now where either you take all of your content and throw it inside of a large AI model and you lose control of it or you don't do anything in AI. And this agentic technologies allows us to safely be able to answer any questions and be able to monitor, be able to secure it in the same way that you would with an API. I view it almost like you call it a cloud for knowledge or an app store for knowledge.

And so it's exciting technology. It's -- technology only came out over the past roughly about 12 or so, 18 months, and these standards are just starting to emerge in the AI world, MCP and agentic technologies. And so really excited about the fact that the team is able to build this this quickly and we're moving into pilot.

Now if you look at what's happening in the world of AI pricing, I think you're seeing that pricing is all over the map. I saw some stories over the past 24 hours that OpenAI may drop its token prices. We're seeing SaaS companies have a whole variety of pricing models. In some cases, it's simply an up charge, in other cases, you're actually getting charged by the token. What we're headed into pilot to do is to really understand how our customers use this. And in education, as you can imagine, they want predictability. They don't want some AI agent that's going to charge them potentially by the questions they have no control over, and certainly, that becomes an extraordinarily expensive proposition for the university, for the K-12 school, for the medical school and for the student. And I would tell you that I had mentioned before that there is a tool fatigue where you have as many of the 25 different log-ins for students, 40 log-ins for professors. They want simplicity. And so we're going to experiment with the business models over the course of between now and the end of the year to determine precisely what's the best model for education. And as a result, we think that we're going to be able to go after kind of new wallet share and as well simplify this.

So I'm seeing in the world of -- when I was in cloud, I watched a lot of organizations start adopting the cloud and then costs went out of control and they had to quickly get control of it. We're seeing the same thing in the world of AI, where costs are quickly getting out of control and now financial FinOps, as we call it, is coming to AI. And so we're going to really make this simple. We're going to make it streamlined for the user, and we're going to have a business model that is probably better than a student or a university could get on their own. And so we'll bring you more information on that as the business model emerges over the next 6 months.

Got it. That's helpful. And then in K-12, can you discuss where in the historical 25% to 30% capture rate range you expect to land in fiscal 2027?

Yes. George, we anticipate we're going to be at the low end of that range.

Any color on how that evolves over the course of the year and opportunities for improvement by state?

Yes. I think the areas that we are most focused on for upside will continue to come in the open territory and supplemental intervention, and so we'll continue to watch that. And then like I mentioned, Texas and California. As we continue to see more calls, we'll monitor that closely, but the areas that provide me the most excitement is around supplemental intervention where we have 5% share, and that represents about 15% of our overall K-12 revenues as well as open territory.

[Operator Instructions] Your next question comes from the line of Faiza Alwy with Deutsche Bank.

I just wanted to put a finer point on your messaging around K-12 because from where I sit, it seems like there's been a pretty significant backlash from parent groups around digital tools and technology in the classroom, and a lot of parents are wanting to go back to paper and pen. And is that hurting you? And is that kind of -- is that why you're kind of at the lower end of that capture rate? Or do you see that as an opportunity? Just would love to get your perspective on that.

Thank you very much for the question. It's a question I get asked a lot is screen time. And this actually is a significant strength from overall Hill because we have such a strong history of being able to deliver education in whatever way a school or a student requires. And today, we're one of the few organizations that is in the world that can deliver everything from AI to paper and vice versa. And what we're seeing, first and foremost is, yes, screens, especially for earlier learners, there's a negative correlation between screen time and comprehension. There has been a lot of studies around this topic. And what we're seeing is this idea of really self regulation. The ability to self-regulate when you're on a screen is simply lower in a lot of cases, and you don't have as much, I'll say, dwell time on the subjects. In paper, we see as much as 3 to 4x more dwell time and rereading of content. That's engagement, engagement for a learner drives comprehension.

And so that balance, I think, is something that's really people are waking up to. And over the course of the past few years, as social media has really been driving up a lot more screen time, this has become an increasing focus, and we're seeing a lot of schools that are banning screens right now in the classroom or I should say, mobile phones as an example. I think we're up to over 30 states in that space. And so distraction is real. Comprehension -- lack of comprehension is real when there's more screens.

Now with that being said, there is a place and a time for screens. When I take something like our Emerge product, as I mentioned, we are down at roughly about 7% or 20 minutes per week screen time for Emerge. It was one of the most important questions that was asked in Seattle by the Board when we were -- when they were deciding to adopt our product. What screened are really good at is actually assessment. And so you take a product like our ALEKS product for algebra and within 25 questions, we can tell you precisely out of the 500 skills that a student needs to have, how many they have with just 25 questions.

And so as an organization, we've invested -- we have third parties that assess how we do -- how we develop our curriculum and also how we deliver. We have school Boards that evaluate our outcomes, and then we also do a tremendous amount of testing. We have over 7,000 teachers in the network and over 2,000 students that we use when we are -- we use for testing that we tap into that network before we release a product. And so McGraw Hill is one of these rare companies that can start all the way at kindergarten with paper and workbooks and reading passages on paper, move into bite-size assessments and then all the way up into learning tools, study tools like Sharpen and higher education and even things like clinical reasoning where we're simulating parents in the medical field. So we have maybe one of the most -- the widest and most diverse ways of delivering reading -- I'm sorry, learning, and it really is a strength that's unmatched, I would say.

And Faiza, just to reiterate, should that movement strengthen, we see that as a benefit to us and it which should increase our capture rate over time.

Understood. And then if I could just follow up on capital allocation and your expectations for cash flow generation in 2027 that -- I know you announced a new buyback, so just any more color there would be helpful.

Sure. So I'd say we're being consistent with a disciplined approach as we think about our capital allocation. And I've always said the first place we deploy capital is on our organic internal opportunities. Those have the greatest ROI. And then we take that excess surplus cash flow and determine where do we place it. We put it into deleveraging, which we've demonstrated last year with $646 million of paydown and our commitment to the 2 to 2.5x. We remain committed to that, and we're going to continue to -- as we've demonstrated, to pay down. And then we balance that with M&A. And the funnel looks really good.

As I look at a couple of opportunities as of Philip and I just yesterday, we think there's some meaningful acceleration of our funnel, of our product development funnel. We think there's new adjacent products that we can acquire into. So I'm optimistic we'll get a couple of deals done this year.

And then ultimately, we look at the opportunity for share buyback, and we see it as a way to create value for our shareholders. We have conviction in terms of our long-term outlook, the cash generation of the business as well as our Board. So we'll balance that, and you see that with the opportunistic open market purchase of $50 million that the Board approved. So I would say it remains consistent with that disciplined and balanced approach.

And then from a free cash flow perspective, I think you should be looking at the K-12 market. That really dictates that cash conversion, 50% to 100% where we sit in that adoption cycle. And given where we see the overall size of K-12 in '27, we're at the lower end of that range.

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

As I look at Slide 27, the K-12 core purchasing schedules by year, can you give us any sense of how ELA as a percentage of mix evolved by year? And then just with the math, any initiatives or adjustments that you can talk to improve the capture rate?

Sure. ELA becomes more meaningful as we move on. And I think that also not just as we see California ELA, but if you're looking at lighter gray bar section. As we see that super-cycle being rolled out, ELA becomes a bigger component. And to highlight for us, that's been 40% of our revenue. So we see that becoming more and more important over time.

As I highlighted -- as we've said before, 80% of the California math opportunity remains. And so the overall opportunity stays about the same size, about $1 billion market, with 20% of that being called in the first year.

But what are you doing to improve your capture rate? I get that there's still a lot of opportunity, but it sounds like your capture rate for California math is also lower than you expected. So I guess what are the messaging or curriculum or tech adjustments? Or just how are you going to improve it?

In California, there's a number -- as I mentioned at the start, there's a number of techniques for teaching math. I'll give you an example, open inquiry is one technique where you can talk about walking into a pizza shop and needing to be able to serve enough people with the pieces of pizza. And then there's kind of a linear or spiral approach where you start off talking about fractions and then you really explain fractions and then you work your way into inquiry. The market is very fragmented in California. It's very fragmented around the world right now about how we teach math.

In the very first year, what we've seen is that there were approximately 26 different organizations that were bidding on California math and it really represented a wide variety of ways that you can teach math. And so districts watched a lot of districts push off decisions because there was so much confusion and there was not necessarily a consensus of the school board level or among the teachers about which tool is going to represent the way that they wanted to represent their pedagogy.

And so while seeing that, we also were able to get a lot of feedback around some of the materials that we had just rolled out. We had accelerated our California math program I think I also mentioned that over the past, I'd call it 12 to 18 months, we have produced more curriculum than we ever have in our history with some of the biggest programs rolling out, things like California math as well as our ELA program all simultaneously, also having to support multilingual.

And so with that being the case, when we rolled out the product, we've been getting feedback among the districts that have been selected us and also the districts that haven't selected us, and we're quickly responding to all of that feedback. We're really making sure we're accentuating. If a district ones open inquiry, we're accentuating it even more. If a district does not on open inquiry, we can accentuate it slightly less the way that we deliver our -- the materials. And so we're in -- and this is one of the strengths that I think that really should dwell on with McGraw Hill. We're one of the few companies in the world that can actually deliver pedagogy down to the ZIP code or down to the professor level. And our ability to be able to respond at scale multilingual offerings with pedagogy with materials, whether or not it's paper, whether or not it's screen time, we're one of the few companies that can respond at this scale. And so we're in the process of demonstrating our strength as an organization and our strength of understanding the local requirements and then also our ability to be able to produce them. And we're in that process. As 80% is still to be decided, our teams are out working with the districts that haven't decided. We're making sure that our materials are reflective of the exact pedagogy that the local districts need. And so we're excited for the next selling year.

And Jeff, I'll highlight, we've demonstrated the ability to course correct in the past. We saw that in Florida social studies a few years back, where we had our first year was slightly below expectations, and we had a nice recovery in year 2. So we're following that same playbook, and we've done this before.

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

I feel like there's a few different factors here that are leading to the lower win rates and capture rates. The California delay, the Texas Bluebonnet and then I guess -- and maybe there are others. But I guess when you think about it, which is the most meaningful, which is the one easiest to sort of see a reversal of, how long does it take for a state to maybe make a decision and then sort of turn around and say like, "Oh, well, maybe we should be trying something else instead?" Or does it just have to play out?

Well, interestingly, what we are seeing is the reaction from teachers in Texas and the response to our product has been very positive. And we're also seeing shorter duration contracts, which means that they're still in that experimentation mode. So we think that, that market can turn around in the next couple of years. Fortunately, California still has 80% of the market to be called. So we still have opportunity to course correct. So we think those are 2 areas. But I do want to highlight the strength that we are seeing in open territory. We're gaining share. We're winning there. as well as in our supplemental intervention. So I really want us to have a balanced view there and then the short-term opportunity to course correct in both Texas and California math.

I would add in one of the interesting things -- I would just add one minor thing that I think that some of the districts are starting to work with tools and very quickly realizing they've got diverse learning individuals inside of their district and the lack of accessibility in some cases, whether or not it's with OER materials or whether or not it's in particular tools. Our investment in accessibility is becoming an increasing strength in how we deliver, and so we're seeing organizations that are turning around and saying, we didn't realize this tool or this curriculum didn't have the accessibility that we required. And so, to Bob's point, we see 1- to 2-year contracts, that, to us, feels like experimentation, and we're going to continue to deliver right materials for the right types of learners.

Great. And then looking at Slide 27, we've got our rulers out trying to do the estimates of the market for the coming years just given no numbers there. So we -- my main question is, it looks like in '28, the all other states outside of the Big 3, pretty flattish with '26 and '27 and maybe even '29 a little flattish as well a little bit of improvement. But like I guess, I think we were expecting before maybe a little bit of an improvement in those other states in '28, '29. And just wondering if there's a reset of expectations for those states as well?

No, there was no meaningful reset, any meaningful change. The most notable change we highlighted was that the $100 million primarily in California math move from '27 into '28, but no major change.

Yes. The only area that we're watching closely as we head into this buying season is the ELA market, as mentioned. Literacy is greater focus than ever in the United States. And so we're watching that, and we'll convey that what we see.

And Toni, just to reiterate, we're in a growing market. We have clear visibility. This is a predictable market. We see that growth in the near and medium term, and that really excites us.

Your next question comes from the line of Shlomo Rosenbaum with Stifel.

Bob, I just want to start with the housekeeping one. I wasn't clear as to how to think about the levered free cash flow expectation for this year. I think you said something like unlevered $400 million, should I take $400 million minus $180 million to get to $220 million, which sounds a little bit light given the onetime items [indiscernible]. I thought there were a lot more like onetime items due to the IPO that we should, in theory, see better free cash flow than that in fiscal year '27. Am I thinking about that properly?

Shlomo, you are. That's consistent with how you should be thinking about it.

Okay. So $220 million is a levered free cash flow that that we should be thinking about?

Yes. Correct.

Okay. Then just a little bit broader. Just -- I just wanted to ask in the context of AI and the protections that you have around your data. There's that article where the educational curriculum providers are suing Meta for training the LLMs on your data on copyright infringement. Is that like a longer-term issue for you guys in your opinion in terms of the data actually being out there and it's actually accessible. So it's not like behind certain paywalls that other information services providers have to have a little bit more protection on that side? How should we just think about that kind of lawsuit in the context of your ability to control your data?

Great question. I want to really be clear about this, our position, first and foremost, is that great AI and copyrights are not counter to each other. You can enforce and support copyrights and respect copyrights and have great AI for the world. And the agentic technologies I talked about are really, really great examples technically of being able to do this.

Yes, our content has been and always will be behind paywalls. And the cases where it's not, it's content that's been pirated, was sitting out on pirate sites, and we are very active in litigation against pirate websites. We really protect our content. And when the content gets out there, we expect that other organizations are not going to use pirated content, basically illegal content. And so part of that lawsuit that we were really clear about is that we intend to continue to protect our content. There are many, many, many ways for organizations, large AI companies to license content. There's been great examples of Getty Images and New York Times. When I was at Vimeo, we were approached in the early days about potential delight about using all of our content, the video content, the 8 billion minutes of video we had, and we turned down the organizations originally. And then by the end of my tenure of Vimeo, people were coming back and asking just for videos of beach balls to make sure their video model bounce the beach balls right or the hands clap properly.

So there's a well-established market licensing content to train AI models. It's both technically very easy and financially well established business models for this.

One of the things that we were stating in that Meta lawsuit is that we really want AI companies to use these legal and technically simple ways of licensing content. The work we're doing with agentic, we're really excited about. And quite frankly, even if existing content might be out on pirate sites, human's knowledge and the way to teach changes every single day. And so we intend to be this great place that takes human knowledge, turns it into a pedagogy and delivers it the way you need to. And with agentic technologies, we can meter that, we can secure it, we can build an interface, we can audit to make sure that we're charging the right way. We can actually explain to every student or every professor how much content is being used at any point in time.

And so the technology models are evolving quickly. We're going to be at the forefront of that in the knowledge economy. And we're going to be really, really, I'll say, aggressive about making sure we're protecting and ensuring that AI does -- that AI companies are working with us and all publishers in the right way.

Your next question comes from the line of Henry Hayden with Rothschild & Co Redburn.

I firstly wanted to continue the conversation around kind of agentic curriculum, MCP integration and licensing agreements. This feels like a shift in kind of your philosophy around ownership of user interface, content distribution. So just curious as to any incremental color you could give around that. And then on the agentic side, as you think about kind of the ramp-up of additional partnerships, how should we think about what cost that would present to end customers and what the margin profile for McGraw Hill looks like?

Yes. We're really -- thanks very much for the question. So on the agentic side, we live in a trusted position with professors, with students, with teachers and with administrations. When we take something like Sharpen, our Sharpen tool, not just takes content and delivers podcasts or quizzes, but we also are turning around and able to tell the professor what content is being engaged with. Professors are going to be able to deliver, I'll call it, play lists of content. And so it's not just where we're serving to an AI agent. In some cases, we are the AI agent the student trusts or the professor trusts. And so we intend to really, really support that trust and be an agent of the student and the teacher from a first-party perspective users.

Now in some cases, those students or those professors want us to join a course of agents or course of knowledge. And so this ability to be MCP to provide our content via MCP is really exciting.

One of the organizations wants to use us with Notebook LM, with Google Notebook LM, but they want a trusted source because today, if you just use AI, it can hallucinate on all kinds of content or quite frankly, it can hallucinate -- it can come off -- it can bring answers out at the professor hasn't even introduced into the class. There's the right time to introduce the chemistry behind photosynthesis. And it's not the start of a class or give you the full answer before a student really truly understands biology and the chemistry behind it.

And so our ability to be able to do that in a pedagogical way is also part of MCP. And so this is an evolution. It's not a big shift from anything that we've already been doing. And what's exciting about it is, again, MCP gives us an ability to be able to monitor it to be able to interface. We're excited about the ability to be able to be a continuing source of education. I like many people actually carried my textbooks with me throughout really early years as a computer scientist. I was referring back to them for a long time. I think you'll hear that from legal scholars as well as accounting scholars, medical scholars, there's a lot of reference that you do, especially early in your career and quite frankly, in some cases, even beyond the early years.

Now when I think about kind of where this goes longer term, I do think that this is an exciting opportunity for us to, as I mentioned, to expand TAM in the marketplace. And I do think that pricing is going to evolve pretty dramatically.

The area that I'm really, really excited about, I think that there's a misnomer and I've described this to a lot of people. We are in the era of big models. These are -- I call this peak inefficiency in AI. I don't think in the history of computing, I've ever seen that we need to literally use the United States GDP to train an algorithm. It's not a good business model right now, I would tell you. And what we're able to do, I'm a big believer that we're going to move into an era of smaller models, more purpose-built models that are much more efficient, can be much more reactive, can actually hit the performance requirements that are necessary and also lower cost. As an example, we'll take our agentic technologies where we're creating vectorization of our actual content, coupled together with a small lightweight model and we'll get a fraction of the cost of having to run things through a large model. And that's where we expect it to move to. I really encourage you to look at technologies like knowledge graphs where organizations are getting much better performance, especially there's one example in the financial services industry where it's literally 1% of the cost of a large model and it's achieving way higher than expertise level than the big models.

And so this idea of cost, what we do inside of McGraw Hill is that we use the right model along with our vectorized content and that we deliver the right question, the right content at the right time at a much lower cost than throwing all the content in with, I call it, everyone at Taylor Swift songs and all the F1 drivers and the predictions for the next Spur series to have to wait through just to be able to describe what photosynthesis is. So cost is high with big models. Purpose-built lightweight models combined together with vectorized content, I think, is going to be a way more efficient delivery mechanism. And then we do the cost management on behalf of the student as well as the university. And our buying capacity for AI is much higher than most universities and certainly students. And so we also think we have an opportunity to be able to really be a, I'll say, a more effective, more cost-effective and more pedagogically effective solution.

That's very helpful. And then my follow-up question was just a quick one on K-12. Have you seen any kind of -- you mentioned that your discussions around supplemental intervention you think it's bottomed out. How is the tenor of those sales discussions going? Like as you move through the renewal cycle, are you seeing any pressure on funding kind of impacting you on a go-forward basis?

We have not seen any pressure from funding, as we've highlighted. We know that learning loss is real. What we have experienced is the connected classroom, that is resonating. There's too many tools, there's tool fatigue. And so as we're out in the market, being able to sell core and supplemental intervention solutions together is really resonating.

Your next question comes from the line of Josh Chan with UBS.

I'm just going to stick to one just for the sake of time. So I guess, I know Texas is a completely different story. So maybe set that aside. But if you look at the California math dynamic, how do you think about that issue being strictly limited to California and strictly limited to the math, I guess?

I think, I would say the fragmentation is not limited to California or just a math. When you get into teaching social studies in the United States on a global basis, extraordinarily fragmented, science as well. So there is fragmentation in the education industry. And I'll say again, one of the most exciting things since I've arrived here is understanding that we're one of the few companies in the world that can respond to this fragmentation at scale. And to respond to it, you have to understand it, first of all. You've got to understand down at the ZIP code level, the teacher level, even the professor level inside of the higher ed. In the medical industry, in some countries, we teach body parts, in other cases, we teach symptoms, in some cases, we're teaching full systems. So fragmentation in education is I'll say, it's been around as long as I would say education has been around.

What I would say is that as we look across the spectrum, our ability to be able to respond to that is unmatched. And so I look at this opportunity in California as another opportunity in the same way that we've responded and demonstrated our ability to respond to the different ways of teaching science. You're seeing us in real time, be able to respond to California with the strength of McGraw Hill [indiscernible], our tools our variety of distribution means and then also just our ability to be able to do different pedagogies for different students. So it's our strength.

We have reached the end of the Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.

Let's get started. Happy to have at the conference for the first time, McGraw Hill. And with us, we have President and CEO, Philip Moyer. Philip, thanks for being here.

Thank you, David.

Okay. So Philip, you're about 3 months into the CEO seat. Maybe can you briefly cover your background and what attracted due to the education sector in McGraw Hill specifically?

Sure. And thanks very much, David. I'm really excited to be here at the conference. Great conference. Really looking forward to meeting with all of you as we go forward. My own background, just real briefly, I spent roughly a little bit almost 25 years in big tech. So I was at Microsoft in the very early days before it was worth -- before it had about $1 billion of revenue. I was there for a number of years. I spent a lot of time at Amazon, AWS as the cloud was really coming into its own. And then most recently, I was at Google, I was Vice President of AI Engineering, the Applied AI Engineering teams. Also just prior to this, I was CEO of Vimeo, who was sold to Bending Spoons. And one of the things that attracted me about education, I kind of -- you can't kind of turn a corner today or speak to somebody without having artificial intelligence being talked about. And the reality is that today, the average child that we're educating is probably going to live -- could live to as much as 100 years old. And so I thought it was a very important time to be working to spending as much time on human intelligence as we are on artificial intelligence. Prior to my joining Microsoft, I had a small start-up of called Orion Systems. We built software for the individualized education programs and special ed. And I dump that one day, every child would have their own individualized education program. And we are literally at an inflection point right now where both technology and pedagogy are arriving between the confluence of data, between pedagogy, between content and between tools, we're now actually able to start giving every single child an individualized understanding of their proficiency.

So maybe we can unpack that a bit, right? So your background, you just noted comes from high-growth tech platforms. I guess from that lens, kind of what are your initial views of the education industry? Where do you see the big kind of unlock opportunities for McGraw Hill?

So now more than ever, in every single stage of education, data and analytics is arriving in education. Now there was a really important article this past week in the New York Times around literacy rates that now only 37% of the students in the United States are at or above proficiency in literacy. It's a crisis at this point. And over the past few years, roughly about 10 years, 87% of states have moved backwards in literacy. That's a crisis.

What we're seeing in higher education right now coming out of college without a career, with loads of debt, outcomes-based focus in every single element of education is arriving. Data and analytics have shown up in every single industry, whether it was the financial industry, the media industry, the retail industry, we have an outrageous amount of data and analytics. Data and analytics is arriving right now inside of education. So that's probably, first and foremost, one of the most important things that you should realize is that it's becoming much more focused on outcomes.

The second thing is there's a mass proliferation of tools right now. In the average K-12 school district, there's roughly about 2,400 tools, learning tools. Teachers and students have tool fatigue at this point. And they're looking for simplification. The last thing I would say is that there is an expectation of personalization. We have it on a day-to-day basis in our own lives, and I think students are expecting a personalized experience. Those 3 things are very important influences right now.

It's one of the exciting reasons why I joined McGraw Hill, is this opportunity to just rethink how we're approaching education.

Got it. Phil, you recently wrote a piece in Fortune addressing AI fears and comparing it to prior tech panics. Maybe can you walk through your framework and understanding the challenge of AI and LLMs as it relates to education.

So I've been through this far too many times at this point. And literally, this cycle is following the exact same pattern. So I was around at the birth of the software industry at Microsoft. I was there before there was a word and before there was a Microsoft office. And it follows this exact same pattern where Bill Gates, I think, famously said early on, when I was there, he said, "Boy, if my software didn't have bugs, I wouldn't need salespeople. And I think every generation, whether or not it was the original -- the software industry, the birth of the Internet, the birth of the cloud, when cloud came about, we said we're not going to need any more IT people. We have more IT people than ever.

Today inside of AI, we said we're not going to have software developers. We're not going to have salespeople. We're not going to have inside sales. We're not going to have customer support. Consultants, going away. Last week, OpenAI just started a services company. It's hard. The last mile of every technology is hard. Keeping guardrails around these things, keeping these things on task, making sure they're accurate, making sure they're not hallucinating. All of that is very hard. In education, it's extraordinarily hard.

We have to go through cycles in some cases of years to get a piece of education approved by a K-12 district. We have literally dozens and dozens of teachers in a single district. -- that have to evaluate and see whether or not it can be put into their workflow and whether or not it has efficacy. We have to send our tools through third-party assessments to really make sure that they're meeting the standards that are required -- and then literally professor by professor in higher ed, we have to help to integrate it into their syllabus, so they can teach.

And so if we bring new case studies out in the course of a particular semester, we've to actually help them integrate it into their content. And so this last mile is very human-oriented, and education. A human is the actual outcome is the thing that we're building, human intelligence. And when you get humans involved, it's very difficult.

And in artificial intelligence, I think it's a wonderful tool. We are using a significant amount. We think it's going to help us accelerate content. We think it's going to help us be better at what we call precision education, and we also think it's going to help with personalization. But there is a need for the last mile to be able to integrate it into the human workflow and into the educator workflow.

I'm going to circle back to the last mile, but in the fortunte piece you made some other great points about just sort of the uniqueness of education, the different learning states that people come in, also the energy required, right, to power AI models. Can we touch upon these points?

Yes. So I said inside of the article, the average AI model has about 1.7 terabytes that sit in it. When you train one of these models, it becomes completely static. You literally have a static model. It's like running a program. It's like running a database query. The thing is locked in memory. And you run these things, the training cycles that you have to build for these things are extraordinary.

And yes, they absorb a lot of data, but they then lock into this 1.7 terabyte to 2 terabytes worth of content that's kind of locked in. The average human brain has that in about the grain -- what's in the grain of rice on the size of your mind, has roughly that much data that sits inside of it, the synapses. And then as you learn, every single night as you're sleeping, what you're doing is you're essentially storing all your memories of that day. Even during the day, your brain actually has its own unique shape. It has its own unique understanding of education.

And so student-by-student, there is a different physical representation of everyone's knowledge in their mind because of the synapse is coil. And I joke that unlike an AI model that requires 3-mile Island, we can pretty train an 8-year-old on a cup of tomato soup and a grilled cheese, and quite frankly, we do believe that for the next 100 years, we can make sure that humans are actually better than the average AI model.

Got it. Maybe going to your point about the last model maybe you can unpack the factors that would make it difficult to replicate the value that a company like McGraw Hill brings to the classroom. Maybe touch upon that accumulated student data part of it.

So I really encourage everybody to understand what's happening right now in what we call the science of reading, and I'll spend a little bit more time on this later, but it's a foundational issue that we faced. The reason why literacy rates are collapsing is because of what and how we have taught. So the content that we've been teaching and the way that we've been teaching has turned out to be foundationally, fundamentally wrong. We've been using what's called a whole language approach, and we should have been using a clonics approach.

And it is now really well understood. Lots and lots of studies have come out and said we need to move back to phonics. And this is showing up everywhere inside of the data. So the fact that 87% states have gone backwards, in the last 10 to 15 years, everyone should take a pause and realize we have more technology. The amount of technology, the power of technology has been doubling roughly every 12 to 18 months. We have more tools inside of the classroom. We put more funding inside of the classroom. We put more content in front of the student than we ever have.

Over the past 15 years, we have thrown technology and content and funding, and we've gone backwards. One state has gone forward, and it was Mississippi. They went in from 2017 to 2024 from 47th in the country to 7th. Now that also tells you it's not a socioeconomic because Mississippi has a foundationally very diverse population. And socioeconomically, it is not one of the wealthiest states inside of the United States. The fact that we've gone forward is actually attributed to professional development and that they've made a huge commitment around what's called the science of learning, the science of reading.

And so how they were teaching and what they were teaching made more of a difference than the tools, the AI or any of the software that we throw at them. And so from 47th up to seventh by actually doing things the right way. And McGraw Hill, we have over 274,000 titles, and we order content in a pedagological manner. And so when we take something like a subject like Algebra 2, it has 586 different learning objectives. That means there's 200 to the 586 potential knowledge states when a student walks in that we have to develop.

And you don't just achieve competency in Algebra 2 by parking somebody in front of a stack of books or in front of an LLM. you actually have to have a pedagogy about how you teach each 1 of these things, how you spiral back and make sure that you're reinforcing particular concept when you recognize or weaken something, reinforcing it. With a tool like Alex, we do exactly that. We actually complement the teacher. We create pie charts, we show proficiency. This is what I mean about precision learning that understanding the 2 to the 586 learning states.

And so it's not just like do you have the content. It's have you ordered it in a way that actually is going to land. The second thing, so this pedagogical content is essential, and we've got an unmatched amount of it and history of producing it. The second thing is our precision data. We have over 190 terabytes of just learning data alone. We get about 19 billion learning interactions with our tools per year. And so as we understand what keeps the student on the path or off the path, we probably have a deeper understanding than almost any organization in the world as it relates to some of these learning journeys.

It's one of the reasons why we're so excited about McGraw Hill Plus, where we allow third-party assessments, and then we also have our own assessment. So we have an open data model to understand what we call the longitudinal learning record of the student. And we just like to have a longitudinal health record, we have this longitudinal learning record. And the last thing is we are innovating rapidly. We have put out over 12 tools just in the past 18 to 24 months alone, AI-driven tools. We have a tool called Sharpen that allows you to have podcast of content. We can present with flash cards.

I mentioned Alex Adventure is a great tool that we have for K through 5 students. And so the third leg in our stool is the idea of these personalized tools. And so between those 3, we have an extraordinary position in learning.

Philip, can I get you to maybe expand on that last point, right? So the AI tools, AI reader, writer, teacher assistant, Sharpen maybe just expand a bit on how these are shaping kind of classroom behavior or purchasing decisions? And then should we think of these products as sort of creating a tangible revenue opportunity? Or is this more about kind of enhancing the core offering?

Each of these tools, it's really interesting. -- teachers, we just we're working with a school district in the Northwest. And one of the biggest focuses was whether or not there was more than 20 minutes of class time that was dedicated to screen time. And there is a significant focus right now around the balance between screen time and human time in the classroom. And I'm really proud of the way that we've struck this balance. We have a tool like Alex Adventure. It's gamified. You get coins, you're able to buy new clothing for your avatar, you're able to decorate your space in your virtual space.

And we gamify learning of mathematics. And we saw increases of as much as 25% in first graders and then 55% in second graders, with gamification of some of the math concepts. A tool like Sharpen, really excited. We had -- which is all the way up in higher ed. This is the tool I mentioned, imagine almost like Spotify for education. You can take any of our content. We have about 185 of our titles that are already in Sharpen and the professor is able to have kind of a closed environment.

So it doesn't hallucinate, I just actually just produces its output based on our content or the content of the professor. In that tool in the study, Rowan University, they had about 60% of the students actually use this tool. And for final exam grade -- final exam grades of the 60% went up by 47% In-class quiz grades went up by 23% and and final grades went up by 21%. Now again, this is a tool that has a closed loop. When we build, we build with -- not just with the student, so we're not just a consumer company, but we also build with the enterprise. The professor in mind.

And my background is a lot of this is being able to take what were consumer products, Microsoft Windows at the time and turn it into an enterprise product. And the ability to be able to close the loop with Professor give a closed environment, a garden, if you will, to be able to say, what should be in the garden at this moment versus not for the professor and then be able to close a loop and be able to say this student is struggling with these flash cards, the students listening to this podcast multiple times. This student seems to be getting something wrong in this game.

We have one professor that's taken our Alex math up in Pittsburgh and they take what we call the pie charts, and each student has their own pie chart, and they can watch it bloom as they grow in competency. And then you put all the pie charts on the screen. And at the very beginning, there's only 1 student that had kind of a proficiency level. By the end literally the entire gamified the classroom, every one of the charts was completely filled out.

And so the exciting thing for us is that we are one of the few companies at scale that can do this across the languages, across the different cultures, across the different infrastructures of the environment to be able to land with a professor, land with a teacher, teach them how to use the tools in the classroom and also land with the student.

Great. Maybe just one more, sticking on the AI topic. So in your fortune article, you stated the industries of the next 50 years require skills we haven't thought of yet. So how does that first inform your view of the associated education opportunity. But on the flip side, how do you think about the long-term risk of AI automating certain cognitive tasks or compressing the life of some technical skills where you guys offer a curriculum currently?

Look, this is -- as humans we've learned to live with lots of machines. The generative pretrained transformer is a really beautiful algorithm, it's another machine. We've got synthetic biology coming at us. We've got nanotechnology. We've got quantum computer computing coming at us. We have a lot -- we have autonomous vehicles coming at us. We assume as humans are going to have to live with lots of machines. It is essential that we build great intelligence to be able to manage these.

When I look at what we also have to do from an education perspective is that we have to prepare the workforce of the future. Everything I just mentioned to you is multitrillion-dollar industries that have yet to really even start to come about. And so we have to build the intellect. And humans knowledge right now, I just read a paper that in computer science alone, roughly about every 9 months right now, our knowledge is doubling. And so humans have to keep up.

We, right now, we're really proud we just released a K3-12 AI curriculum. You're going to see us doing some pretty extraordinary things. We just -- there were some new nutritional guidance as it related to the medical profession. We just released new -- entirely new nutrition curriculum for the medical field. We view this as the market and the TAM is exploding in terms of humans -- the potential to be able to train people in new concepts. Very few people that I know sit down in front of an LLM today and learn.

You don't learn Piano in front of an LLM today. You don't learn -- if you've got to go off and do advanced calculus, I haven't heard anyone yet that sat down and really mastered advanced calculus. Let alone some of the professions or some of the more professional fields, even in the CPA space. We still believe that humans, teachers and students are going to be in a classroom learning 5 years from now, 10 years from now. And we believe they're going to have to learn even more. We believe the medical profession is -- you have to jam more and more into that 4 years.

We think there's going to be a really exciting opportunity to be able to rethink medical curriculum. And so all of those present amazing opportunities for us, I would say, in the next 5 years and quite frankly, over the next 100 years.

Got it. Let's pivot to our operations in-12. So the selling cycle worked against the company in fiscal '26. But in February, McGraw Hill confirmed an expectation for a TAM increase this year. There are several changes that we should cover at the state level, but just more generally, can you update on your medium-term view of the K-12 TAM.

So I have to always start because June 11, I'm releasing earnings. So we have -- Danielle is looking. So sometime beyond the horizon, is what I would say to all. Look, we were very happy of our most recent quarterly results. We really have been continuing to see great activity going on inside of the higher ed space as evidenced by the previous quarter. There are a number of states, California, in particular, that has pulled forward a number of decisions. And that's actually helping to increase the near-term TAM.

But more importantly, I would say, again, in the literacy space we're seeing a significant amount of activity around literacy. As you can imagine, post that New York Times article and just in general, what's going on, we're seeing so many school boards actually reassessing literacy. Literacy is 40% of our revenue in K-12, 40%.

And so as you see things like literally becoming more of a focus as you're seeing more and more requirements in fields of science, as I mentioned, in the Middle East, we're required to actually have curriculum around artificial intelligence, but as you see more impact around sciences and more focus on sciences and social studies and mathematics. We're seeing that marketplace, I would say, be very vibrant.

Okay. Maybe just -- you did a great job of explaining the science of reading earlier. Maybe we could tie that specifically into kind of the California opportunity. And maybe just discuss how McGraw Hill is kind of positioned into that process?

So literacy, as mentioned, 40% of our revenue inside of K-12, -- we invested in a product previously called Wonders, -- it ended up being about a $1.5 billion product for us over the course of a little bit less than a decade. Emerge Summit and SOAR which is our brand-new product. We have seen very, very good efficacy from it and a lot of excitement in the market. I think I'm allowed to talk about because it is public, Seattle just selected us. This was back in the April time period.

And so that's an urban district that is making a big shift inside of literacy, California similarly. It's one of the largest investments that we've ever made in McGraw Hill in curriculum. And so we're excited about what we're seeing in California. I'm excited about what we're seeing up in other districts as they're starting to move things forward. But we're seeing a lot, as I mentioned, a lot more districts starting to pull forward movement of decisions around literacy.

Great. And then maybe staying on California. So we estimate the current MAT cycle is the largest component of this year's K-12 TAM rebound. And I think you've noted publicly already some some early pilot wins here. There is a more complex procurement landscape to consider, though, there's more list of providers, some changing standards. Just how are you seeing that cycle currently? Any kind of risk of elongation to purchasing decisions?

In California, there have been -- and this comes back to the statement I made, there are more organizations bidding on California math than we've ever seen. And it's an extraordinarily competitive marketplace. And to the point where we had mentioned that there's over 2,400 tools in K-12, those were the incumbents. But we're seeing a lot of new organizations. And so I can't really comment on where we're at. It's a little bit too early right now. I've noted in the past that with that many participants, you're going to have some wins, you're going to have some not selected in the marketplace. But it's a little bit too early to tell right now.

Maybe just covering 1 of the large state, which is Texas. So there's a new adoption process there. It looks a bit different. There's annual purchasing. -- broader set of options. Can you just help investors understand some of the changes and how they should consider competition from open educational resources like Bluebonnet.

So open educational resources is very similar to open source in the software community. There's lots of wonderful businesses like every 1 of the cloud businesses have been built on top of open source software. Hadoop is probably the biggest Google Big Data is probably 1 of the best examples of an open source product becoming an extraordinary multibillion-dollar business. So that exists as well in the education industry.

Open education resources is exactly that set of open curriculum resources that student -- or I'm sorry, teachers can use to be able to integrate, whether or not it's in K-12 or higher ed, these are open resources like an open curriculum. Texas has chosen to produce a concept that's called Bluebonnet which is the state has actually funded the creation of curriculum on top of open education resources.

We spend hundreds of millions of dollars building curriculum. And we're kind of in that business. We spent -- I think we've heard that Texas has spent could be as much as like $80 million or so. We spent $67 million just on accessibility alone. And there are requirements that you must have accessibility. And so every curriculum now is going to require deep investment in accessibility.

Bluebonnet, we're a partner with Texas. We have a lot of really great relationships and we're getting a lot of good wins inside of the Texas pace. We're happy with our relationships in Texas. Bluebonnet, generally, what we're seeing is that schools are trialing this with 1-year contracts. We generally are cutting 3, 5 in some cases, 9-year contracts. And so right now, they're trialing.

A number of other states have looked at whether or not they want to be able to do something at Bluebonnet and recently, they've come out and definitively said no, they don't. When a couple of the states came out and said define know, it was like right after. It was right after it was discovered there were 4,000 errors in the Bluebonnet curriculum. As mentioned, we do a lot of work to curate and ensure accuracy and accessibility in our curriculum. And so when we look at Texas, we're going to be great partners with them. And I think that we're going to -- we'll -- they can work with our tools as well our software tools with their curriculum or they can work with us.

Great. So in March, you announced an integration with Renaissance to connect their Star assessments to your curriculum. Can you elaborate on the collaboration and discuss why, in general, you prefer to partner here rather than own that testing layer.

So proficiency in precision education, we think is essential. Data and analytics really should be -- should guide the pedagogical journey of a student. McGraw Hill Plus for us is that data layer. And so it's our longitudinal record of learning for a student. We've chosen to make it open. And we did that because we foundationally believe that there's lots of ways to assess a student. We believe that we've got some pretty good assessment tools, but you're going to see us just continue to be a great partner of organizations like Renaissance, Pearson, Periculum Associates and WEA, all are feeding their content. We're able to take the assessment content. And so we -- over time, we look at that data layer as a great opportunity for us.

Great. Maybe shifting to higher ed. So Ed has been a standout performer for McGraw this past year. Maybe can you unpack the recent growth algorithm between factors like inclusive access, pricing, market share gains, enrollment?

So I think that in higher ed, there is this great misconception that textbooks have become outrageously, and I mean outrageously expensive. They were when I was in college and the price kind of went up. But what we've seen happen over time, especially with our approach like inclusive access is that we brought that cost back down. And as a matter of fact, the average curriculum is roughly about $0.02 of the education dollar.

So we're a very, very small component of the education dollar. Why do I say that? It's because we do think -- we very rarely hear pricing as a challenge. Now one of the reasons for that is while we were private, we did a lot of work to be able to get the right kind of model in place, the right kind of economic model in place. So that we can go down to community colleges and we could scale up to the largest universities in the world. And quite frankly, that we could go international where pricing is very varied. Inclusive Access allows us to bundle the price of digital access for a textbook or for content into the price of the college degree.

And so today, roughly about out of the 3,500 universities in the United States, there's roughly about 2,000 that have inclusive access where they're rolling into the price of the college degree. Generally, this starts with 1 to 2 professors and quickly jumps up to 25, 30, 50 professors. We have an extraordinary penetration in the higher ed marketplace, where we're in as high as 80% of the universities with some type of curriculum. And generally, inclusive access is increasing at roughly about 100 universities or colleges per year.

And so we think there's a lot of growth in that model. The other thing that we've innovated, which we're really excited about is our Evergreen model. I have a really good friend who's a business professor. And he said to me a while back. He said, my biggest problem and using curriculum is that I don't have the most common case studies. I had some curriculum that I was using that was about hydrogen vehicles. He said in like the failure of hydrogen vehicles by a particular car manufacturer, we said, "I want to know about something today. And so professors and students the way to be able to drive engagement is having relevant current content.

And that's what Evergreen is. We're literally releasing content as it relates to some of the most important fields, whether or not it's business, whether it's medicine, economics, a whole variety of fields, engineering, we're releasing content on a regular basis. And literally, it's just like an iPhone update, where I can adopt the curriculum, like and choose to adopt the new updates. And so as we think about the future of McGraw Hill, we think about this always on publishing of content, curated content that feathers cleanly into the syllabus that fits into the tools that the professor is comfortable with and that is priced just as part of the overall education dollar.

Maybe just following up, frequent inbound we sometimes get is how sustainable are the gains from inclusive access, given your penetration into schools or from market share, which I think has been hovering a little over 30% recently. Just how much runway do you see for each of these drivers?

We see a lot of runway. When we were sort of pre-COVID, we had about 20% market share, and now we're up to roughly 30% market share. That's primarily United States. I just got back from a trip down to Latin America. You've got a very vast and growing middle class in Latin America, very massive and growing middle class in the Middle East. We're excited about what we're seeing in those markets as well. In the United States, as I mentioned, landing with inclusive access just because we're at 200 of the 3,500, we still see great run rate -- runway, both with more universities and also with existing -- with professors that have not yet adopted in their classes.

And so we really look at the opportunity both horizontal expansion and vertical expansion, both geographically and also in the United States.

Got it. And then maybe just going back to the pricing point. I think McGraw previously discussed executing that to inflationary levels. But how do you think about maintaining pricing power? And how does things like AI play a part as you put new features in. We?

Are -- as I mentioned, we took a lot of hard medicine as a company, and you have an innovator's dilemma situation when you make this kind of a pricing change over to just everyone has access because your bet is I can get more students and can get and I can be more relevant versus a higher price and fewer students because a lot of students just simply wouldn't buy the textbook. Or they didn't buy until they decide to drop out.

And so you had this dynamic where you going to get returns. You have a whole variety of problems. And so we took some hard medicine to get the pricing right. And this -- I generally -- I was meeting with a community college, I walked in and I talked to them about the pricing of our Inclusive Access and they were like, well, this isn't not a problem for the student. It's really priced significantly below what it had been when you were shipping textbooks around the world. So we feel good about that.

AI, as you can imagine, with my background, we're going to be using AI everywhere we can inside of the company be gain efficiency. We're really proud of the fact that we've got hundreds of software developers that are already developing with it. We think that it's going to allow us to produce more content to keep pace with human knowledge. We think it's going to allow us to do better accuracy checks. We think it's going to allow us to produce new tools. As I mentioned, we've got a couple of our tools where we've just launched them in the past 12 to 18 months. They jumped up to 1 million users.

We're at roughly about 65% of all of our users use our relationships or digital relationships. In the higher ed space, obviously, it's much higher in the K-12, we still have to ship textbooks and workbooks, but AI is really going to be an accelerator for us in our content tool creation.

So we spend most of our time on K-12, a little bit on higher ed. As it relates to professional international, though, it'd be great to hear where you're most focused, where you see the opportunities?

So there's 18 million open health care jobs right now. We have in the high 80s percent penetration in medical schools today of our medical curriculum. If you're not familiar with a textbook called Harrisons, it's one of like the bibles in the medical industry with just a who's who, it's about a 4,000 page book of medicine. Most doctors still have it on their shelf, really excited about that. We have Boards & Beyond, which is one of the most watched sets to prepare you. It's 800-plus videos.

My son just graduated medical school a little bit over a year ago. He was like, "Oh my God." He lived in Boards and Beyond as he prepped for medical. And then we also have some pretty extraordinary things like we've access medicine. And one of our excess medicine professors has millions of followers. She's an internist and she does prostrate cancer podcast, and it drives a huge amount of efficacy of our access medicine. And so we're really experimenting and not just experimenting. We're running a business that has videos, it has podcasts, that has deep content, respected content, and we're doing some really exciting things.

Some of the -- our customers for that technology are not medical schools. They're actually pharmaceutical companies, they're hospitals. And so when we look at that field, we really think we come from this amazing position as 1 of the most respected providers of curriculum and we see an opportunity, again, to go horizontal internationally. As an example, there's a number of large countries that are making big decisions around medical and then also vertically to be able to go into more and more specialties in that space.

And so we're excited about that. And as I mentioned, Latin America, we're seeing some really great wins in Latin America just across the board, and we've got a great set of relationships in Latin America. And certainly, in the Middle East, we're also seeing some really exciting -- we've got some great relationships as we've talked about in the past, with Kingdom of Saudi Arabia with United Arab Emirates. And we're doing some cutting-edge things. As I mentioned, one of the drivers of us releasing an artificial intelligence curriculum was that the Middle East, UAE and KSA are asking for AI curriculum from K-12.

And you want to be in those places where middle -- we're basically -- the middle is really growing in the economy because the very first thing you do is you start to get yourself into the middle class is you either educate yourself or you educate your children. And we're seeing that dynamic really take off.

All right. We are exactly out of time. Thank you.

Thank you.

Hello, and welcome to the McGraw Hill Fiscal Third Quarter 2026 Earnings Conference Call for the quarter ended December 31, 2025. [Operator Instructions] As a reminder, today's call is being recorded, and a written transcript will be made available in the Events and Presentations section of the company's Investor Relations website. A webcast replay of today's call will also be made available on the company's Investor Relations website. [Operator Instructions]

I would now like to turn the call over to your host, Danielle Kloeblen, Treasurer and Senior Vice President, Investor Relations. Please go ahead, Danielle.

Good evening, and welcome to McGraw Hills Fiscal third quarter 2026 earnings call.

Joining me today are Simon Allen, Chair of the Board of Directors; Philip Moyer, President and Chief Executive Officer; and Bob Sallmann, Executive Vice President and Chief Financial Officer. As announced on January 6, 2026, Simon retired as President and CEO on February 9 and remains Chair of the Board.

During today's call, we'll be making forward-looking statements about the company. These statements are based on our current expectations and the current economic environment. Forward-looking statements, estimates and projections are inherently subject to significant economic, competitive, regulatory and other uncertainties and contingencies, many of which are beyond the control of management. These forward-looking statements are also subject to the cautionary statement that is included in our fiscal third quarter 2026 earnings release, the accompanying investor presentation and our Form 10-Q for the fiscal third quarter 2026 and other filings with the SEC. Important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified in our earnings release issued day as well as in our SEC filings.

We will also refer to certain non-GAAP measures today. We believe that these measures provide useful supplemental data that, while not a substitute for GAAP measures, allow for greater transparency in the review of our financial and operational performance. In the earnings press release, the appendix of the accompanying investor presentation and as a supplemental file on our Investor Relations website, you can find a definition of these non-GAAP measures and reconciliations to their most directly comparable GAAP measures. For those who listen to the recording of this call, we remind you that the remarks made herein are as of today, February 11, 2026, and have not been subsequently updated.

With that, I'll turn the call over to the Chair of the Board of Directors, Simon Allen.

Thank you, Danielle, and good morning, everyone. It's an exciting time for McGraw Hill as we continue to build momentum, deliver strong quarterly results and position ourselves for a return to growth in fiscal year 2027.

Revenue for the third quarter increased 4.2% year-over-year, driven by our higher education business, which continues to outperform the market. Reoccurring revenue grew 14.8% over prior year, representing 82% of total revenue, while digital revenue expanded 11%, representing 84% of total revenue.

Adjusted EBITDA increased 7.7% versus prior year, yielding a margin of 31.3%. These fiscal Q3 results reflect strong execution and ongoing momentum, giving us the confidence to raise fiscal year 2026 guidance, which Bob will discuss shortly.

Education is fundamental to society and our mission serves as our foundation fueling our resilient high-margin, cash-generative business model. Our trusted content and innovative technology doesn't just deliver information, it empowers educators to engage learners with personalized experiences that enrich understanding and growth.

Our multilayered mode built on intellectual property, first-party data fueled by billions of learning interactions each year and domain expertise across the learning life cycle creates what we believe is a distinct competitive advantage at scale.

Unlike generic AI, McGraw applies AI thoughtfully to improve learning outcomes, leveraging our multilayered moat to deliver evidence-based impact while saving educators valuable time. This approach is resonating A recent study conducted by Morning Consult ranked us as the top education company for effectively utilizing AI recognized by both students and instructors.

Before moving forward, I want to acknowledge my decision to retire as CEO and President. Leading this team of over 4,000 mission-driven 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 from McGraw Hill.

We led a comprehensive search, and I can say with absolute confidence that we found the right leader in Philip. Philip brings a wealth of experience from senior technology-focused roles at 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.

From his creation of the 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 2.5x net leverage target. Philip, I'm extremely excited about our partnership. Welcome to 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 that 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. 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. 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 are 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, 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.

Thank you, Philip. Let's dive into some more details underpinning our exceptional third quarter performance. In higher education, we continued 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 telatuals. 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. 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 access medicine 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. Sharpen Advantage, a new AI-powered enterprise solution exemplifies this through an attractive TAM extension that leverages our existing content and capability to offer unique content.

Redefining our traditional professor focused high registration approach sharpened 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. 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.

And 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 4x more monthly student users than last year, McGraw Hill Plus and AI capabilities like teacher assistant and writing assistance, enhance our capabilities to fuel growth beyond the core.

To this end, we have secured an early win with our K-5 literacy curriculum emerge and launched Summit and saw 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.

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 lapped 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.

Now on to 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.

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%. 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 multiyear growth visibility as accounts typically scale within 2 to 3 years. And we expect the activations for accounts landed in fiscal year 2026 to increase by 15 to 20x 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.

Our exposure to resilient enrollment pockets also remains favorable. 1/3 of our higher education business is tied to 2-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 1.6%, benefiting from strong prior year sales. As Simon mentioned, this year, we continued to gain market share, and we took a 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 [indiscernible] cycle. California math pilots continue as we enter the key selling season.

In addition, we have seen initial success in ELA with an early K-5 emerge when 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 noncore print exit. Additionally, early momentum from our AI-powered clinical reasoning solution further strengthens our confidence in future opportunities.

International revenue declined 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. We ended the quarter with $514 million in cash and $964 million in liquidity with our revolving credit facility remaining undrawn.

Net leverage was 2.9x 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 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 2.5x and pursuing strategic tuck-in M&A.

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 a range of $2.067 billion to $2.087 billion. Reoccurring revenue ranging from $1.516 billion to $1.526 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 EBITDA 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.

[Operator Instructions] Your first question comes from the line of George Tong with Goldman Sachs.

Can you help unpack the growth drivers that you're seeing in higher ed and how you're thinking about fiscal 4Q perhaps talk a bit about Evergreen as a differentiator?

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, 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, 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 most up-to-date information, meeting our reps need to spend really far less time working with the faculty and making much more -- 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 a learning specialists, you name it. ALEKS specials 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 higher ed than 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. It's just a very pleasing picture, George.

And Simon, maybe let me quantify some of that 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 is coming from enrollment. You may have seen enrollments quoted at a lower number from the National Student Clearinghouse.

Obviously, as we over-index into 2-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 with inclusive access. So on a net basis, we're getting over 1% of price in higher education.

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 fourth quarter, 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. 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, what 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.

Your next question comes from the line of Ryan MacDonald with Needham & Company.

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 '27, 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 3 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 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 '27?

Ryan. That's a lot of questions in that one. And let me take them piece by piece, if I may. And you're quite right. We're very pleased with our K-12 performance as well. And you know that FY '26 was -- is a smaller market size and yet we've continued 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 #1 or #2 in the top -- and really in 10 of the top 11 adoption opportunities this year. And that's driven a lot by our ongoing success in science and ELA and as Bob indicated in our earlier comments. And in states like Alabama and Tennessee, we're very, very pleased with our performance there.

I would -- and also looking ahead, I mean, to your question, Florida ELA, we've got a good start there in year 0. 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 '27. 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. And 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 K-6 literacy program. As you know, we've launched also our 6 to 9, 9 to 12 Summits 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 6 or so 100 reps very excited about what they're seeing, which is marvelous.

So we feel very good about that. Very briefly on Texas. Your point is a good one. I mean they're changing the style in a way, but we've got great relationships. They're really great market and a fine knowledge of how that state operates. We welcome new competitors. It may change. You mentioned the delay. We're not sure about that.

The way decisions are made are extremely effective. They're very strong as they 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 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.

Really appreciate all the color there, Simon. And 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, would love to get your view, particularly as a technologist, sort of McGraw's AI strategy and how you think you can continue to evolve that in the role moving forward?

Ryan, thank you very much for the question. I would -- I have to start by saying AI is 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 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 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 with simply unmatched assets in the education industry. We've got one of the largest vetted localized content platform or tones 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 developed tens of -- tens of thousands of discrete skills along the way at every single age.

We have billions of data points an algorithm that understands when somebody is on the pathway and someone is 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 in the past 5 years, there's been a really significant investment in technology and AI and you're seeing that. 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 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.

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

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?

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-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. 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 what I -- 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, for the administrator of where we're going in 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 teams. They're world-class. They're world renowned. They have incredible relationships. And so I also want to hear to them how we can empower them more to 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 the return to growth in K-12 for next year, and you gave some hopeful 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. So 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 the high level, I know you're not giving guidance or anything at this point, but just -- yes, how are you thinking about growth heading into next year? And how much visibility do you have into it at this point?

Yes, 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 fast 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.

Your next question comes from the line of Steven Koenig with Macquarie Group.

It's Steven Koenig with Macquarie. Nice to be on the call. Congratulations is 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 -- really good position here for Philip to build on and welcome to Philip.

Let me just say thank you.

Yes. You're quite welcome. Good. Yes, it's pretty clear what your contributions have been and it puts you in great [indiscernible].

On the -- I wanted to ask Yes, I wanted to ask maybe kind of a 2-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 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 like 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, you integrate them with the data, processes, workflows, et cetera.

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.

Thank you very much, Steve. And again, thank you very much for your very kind comments. And I'll kick off a little on Sharpen and thank you for asking. It's -- 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. And that's how so many of students learn in their first and second year, particularly at University and ecologist.

What we've done with Sharpen and 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. And then what we discovered is that the market increasingly asked us to look at this in a more broader sense on 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 educator to include their own content, for example, making the institution at that level, use sharpened materials across the entire network, every single class, every single sector and department where we operate, which is pretty much everywhere.

So 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. And 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 and now we're looking forward very much to seeing that expand exponentially at the institutional level.

And I'll pass it over to Philip now for the additional questions that you had on AI.

Sure. I get asked a lot about LLMs 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, every one -- 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, that we -- it was a very vibrant ecosystem of software companies, services companies. It's become a massive industry to bridge that last mile.

This error 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 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 LLM may know what you're asking, but we know why you're asking it. We are able to build security and trust and psychological safety into what we're building. We have the ability of 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 work.

And we're able to do really engaging learning experiences that just a standard LOM 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 LOM technology.

That's super helpful.

Your next question comes from the line of Marvin Fong with BTIG.

Congratulations on the great results as well as Philip for the new role and Simon I didn't have that long a time to work with you, but certainly hope to continue the relationship there and best of luck.

Just a couple of questions. Again, on AI, biopic, 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 also [indiscernible] some internal metrics on time to 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?

Thank you very much, Marvin. It's Allen. I'll kick off and then pass it over to our new CEO, Philip and 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 and the focus of a lot of our AI tools, if I think of writing a system, teaching assistant.

The focus there is providing the educator more time to spend face-to-face with the student. That's got to be really emphasized all the time. And 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.

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 and higher education we're allowing the students to really understand more complicated materials in ways, repetitive ways, in fact, it 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 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. 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 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 will -- shall continue to be but it's wonderful to have the opportunity to do this with the technology now that and the advancements in AI, we've been operating with machine learning, as you know, for over 20 years with ALEKS. But now we really can stretch your head with AI.

But I'll pass it over to Philip. He may have other comments as well.

Coming at this as technologies, I always look at user engagement. 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 and kind of 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. Imagine AI tools sitting inside of a local district or a local university. And so enterprise adoption is going to be a really good 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 it's not from a safety or security perspective. So enterprise adoption is 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 these markets, entering new markets.

When you look at the overall education industry on a worldwide basis is about $7.3 trillion, 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 really going to be driven by our harnessing of AI.

Got it. That's terrific. And second question, maybe Bob can [indiscernible] here as well. In terms of like -- and I know you mentioned we'll be discussing your outlook for next fiscal year in the upcoming quarter.

But just as 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 the great field sales. Just kind of elaborate a little bit more on what your pending clarity [indiscernible]?

Yes. And thanks. We definitely have our road map laid out. And as we execute against that road map, 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 in 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 on that road map, 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 and scale and expand our margins.

That's great.

Your next question comes from the line of Jeff Silber with BMO Capital Markets.

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 the fourth quarter that we should be aware about?

No, I'd just come back to as we think about the comp that we have in [indiscernible], I just want to reiterate that, that we do have a difficult comp as we think about the fourth quarter. But we're all doing this while we're 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 RPO, also looking at the early activations that we saw on higher ad positions us 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 mention it was about 400 basis points of benefit to us in the quarter. I just want to come back, that is not onetime, if that's what you're alluding to. I mean, we have a mechanical process that we do every quarter, and we disclosed 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. The reason for it being higher is just because of the smaller reserves that we -- returns we experienced in the quarter. And that's why it was notable for us this quarter, and I wanted to call it out.

Really appreciate that.

You bet.

Your next question comes from the line of Henry Hayden with Rothschild & Co Redburn.

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.

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, which -- our guidance for next year as well as our strategic plans. 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 2.9x leverage at the end of the quarter. And we have a seasonal cash flow, which will result, and that's slightly picking up as we think about both the fourth quarter into Q1. And then ultimately, as we enter the fall, you'll 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 million we paid down in the third quarter, we will be paying down another $50 million 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 they sit in all of our BUs. We're looking at things internationally in the global professional space, higher ad in 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. But again, we have -- 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 it for modeling purposes, as a reminder, Q4 and Q1 represent our cash trough, and then it will continue to cycle back up as we build the RPO in Q2.

That's very helpful. 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?

That's a good one. And it's an encouraging answer. I think, Henry. We Teacher Assistance is designed for exactly what is described -- and it really has been well received to just enable the K-12 teaching community that they're feeling pretty beat enough in many situations. It's been a pretty tumultuous time for a lot of the teachers that 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 and 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. And it's really important that for us, it's a very competitive tool for us. No one else has anything like this. We're very proud of how it integrates with our materials, our content. And we're very, very pleased with how it's been launched. As you say, it's only recently launched, but the early signals are extremely encouraging for us.

That's very clear.

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

Simon. Welcome, Philip. This question is for Philip. So I hear you on being well positioned with a lot of assets to leverage for the AI opportunity and hear you a lot of clear on the related boats. 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?

Well, I've been here for 3 days. This is my third day. So I got the confidence of 3 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 ourselves and we have a culture of learning internally around the use of these tools.

And I could not be more happy to be following Simon and Bob and the work that's been done over these past 5 years to really get, I'll say, the cost structure in line with where it should be. 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 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, and really evident to me that we've got a technology and digital-first culture here.

Appreciate the perspective 3 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 like federal student at 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 risk related to the changes around Department of Education are not going to impact you?

Yes, 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 of what's happening and that you mentioned the formative [indiscernible], 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 institutions 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. Where we describe ourselves, as you remember, it's a 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 universities and 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.

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

Your next question comes from the line of Josh Chan with UBS.

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?

That's a good question. What I would say is -- and I've done this for 40 years in August, actually, Josh, 40 years on August [ 16 ], if you want to be precise. And I can tell you that since I've been in higher education and the momentum that you get is a joyful situation because you -- it really does success breeds success.

And the reason is that you have, for example, the growth we've seen in inclusive access. And 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. 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. And we're very proud of our higher ed business, and we're taking substantial market share as you've seen.

Congrats on your accomplishments, Simon.

Thank you very much, Josh. That's very kind.

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

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 is it -- I know in the past, like 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.

That's a very thoughtful question, Toni. And let me start -- the latter statement, I think, is what you've hit on is so crucial for us. 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 dozen, I think going forward.

The reason that we're so excited about this product and you 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 the 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 your class is performing is by continuing to use our products 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 map 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-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 is very attractive to the schools themselves.

So 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 provided will really be very difficult to live without once you've integrated them in.

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 -- like any update on it? Should we not be thinking about Scribe as sort of 1 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.

Yes. And Tony, yes, so we didn't specifically call it out. We continue to lean in to Scribe. We continue to find new use cases every day. And so we were gathered today and meeting Scribe as 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 will 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.

Perfect. Congrats gain.

Thank you.

Your next question comes from the line of David Karnovsky with JPM.

Maybe just following up on supplemental within K-12. Can you just update on the ongoing crossing opportunity there? And what the uptake has looked like recently for products like ALEKS?

Yes. It's a good one. I mean, David, 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 year 2000 and it is a tremendous tool that provides students in math and now chemistry, the ability to 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, that 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. And it really is the -- it's the backbone, frankly, of our supplemental business for that.

But -- let's not forget what we've accomplished with Achieve3000 for literacy and the reason that we made that acquisition some 5 years ago now, was really to augment our position in the supplemental there. and give us strength, not just in math, but then also in literacy and with Achieve3000 and actively loan, 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 as 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 focused a lot of attention on. We see a lot of growth coming from that sector, David.

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

And I'll add, that's where we saw us expanding our portfolio ahead of the larger market opportunities in Math. 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 the coming years.

Your next question comes from the line of Faiza Alwy with Deutsche Bank.

I was also going to ask actually about the supplemental. And I think you addressed it on 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, like, 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 that the opportunity seems quite compelling.

Yes. That's -- you're exactly right. We too, frankly, Pfizer, we were also surprised. I mean, it's a bit of an outrageous statistic to be honest. And you imagine for 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 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, Pfizer, you know this, the moats that we have is very deep and very wide. 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, the 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.

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.

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. So -- but if I look at the numbers and not to get into the modeling details, but -- if I look at what you did in 4Q last year and what you did this quarter, it's not that different, you're 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 sort of you talking about tougher comps.

Sure. And I think 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 is 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 said, okay, it's double-digit growth both in the billing and in revenue, which will -- reflect more of a normalized basis, right? And I'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.

I think -- Faiza, I think 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. And I think when you try and analyze quarter-by-quarter, it can be unhelpful, frankly. And I think Bob is saying we're not going to end the year at 24% up. I don't think that would surprise anybody.

But we look at our annual performance, it's how we operate. The quarter is important for you to understand, and that's why we try and explain the way issues as Bob has in their reserve case in this situation right now. But in terms of our higher performance, we will continually outperform our competitors, and we will absolutely show growth far higher than any other competitor once again.

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.

Thank you very much, and thank you all for dialing and I know it's very late for some of you. And I appreciate very much you so many kind comments. And retirement is going to be interesting for me. I've got 3 -- 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. And many of you that have young children know that, but any [indiscernible] grandchildren.

And my escape part 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 invested in this company, and I'm looking forward very much to being -- having the honor, frankly, of being Chair of the Board. And I look forward to further interactions.

But if I may, I'm going to pass over to Philip Moyer, our CEO, to close this out.

Thank you, Simon. And before you're completely comfortable with 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, and 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, 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 can be more honored to be following you, and thank you for staying on as Chair.

Thank you, Moyer.

And thank you, everyone. Back to you, 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.

Good morning, everybody. I'm Josh Chan, a business services analyst here at UBS. Very pleased today to have McGraw Hill join us.

They are a leading global provider of educational content and software for higher ed and K-12 markets. With us from the company today are Bob Sallmann, CFO; and Danielle Kloeblen with IR.

We're going to do a fireside chat. So if anybody has any questions, feel free to raise your hand. You can also find a way to send me questions up here to the iPad, and I'll pass them along. But Bob and Danielle, great to have both of you join us.

Thanks for having us.

Thank you.

So I guess it's been a busy year given the IPO. So for investors who may not be as familiar with the story, could you start off by giving a brief background about McGraw Hill and then we can go from there.

Sure. McGraw Hill, you probably know the Red Cube, our brand. It's been around 137 years supporting learners and educators across the globe. What has really evolved over the last 10 years is how the business has become very digital. Today, over 2/3 of our revenue is being digitally delivered. And the key for us of what has happened in that evolution is now we're moving towards the holy grail of education, which is and will always be personalized learning.

And it wasn't until we could start to digitally deliver to allow this to happen because you can imagine the scenario of one teacher in a classroom trying to serve 25 students, not happening.

We've been utilizing machine learning for 10 years, which is predictive analytics helping us move towards true personalized learning. Now we're seeing it evolve even further with the use of AI.

So for us, AI is a clear tailwind, and we'll talk about how we're differentiated. But you're seeing that we're able to use it to improve learner outcomes, personalized learning, remove the administrative burden for educators and ultimately reduce our time and cost to develop content.

Well, yes, very different company from....

Completely different from textbooks. If you were to walk into a higher education institution today, you will not see a textbook, right? So the businesses have evolved from when that certainly was in school.

And the financial model has also strengthened, very predictable, very high quality, strong margin profile, and we've been able to continue to invest in innovation while still expanding margins.

Yes. And I think it's important to highlight that is so as the business has evolved more and more digitally, we have about 1,500 to 2,000 basis point margin expansion, but again, allowing us to further innovate and continue to invest. And so scale matters in our business, and we'll talk about that in more depth, but we serve K through life. And again, that's differentiated from others in this space, and that allows us to have consistent platforms, leveraging our cost structure, leveraging our innovation across a broader portfolio.

Great. That's a great overview. So I guess as you look across your market, particularly within the U.S., what do you think is the addressable opportunity? And how do you think about the pace of market growth?

Yes. Well, let me talk through a couple of those segments individually. So in higher education, when we think about the market, we are expanding our TAM. We have launched new calculus programs. We are expanding into different workforce readiness. We serve -- and again, it's important to understand where we serve. So 30% to 35% of our revenue is coming from 2-year community colleges.

So where we have lots of courses that transcend both 2-year and 4-year schools, we're also seeing a lot of that workforce readiness and workforce improvement. So we serve that, and that market is absolutely growing. Overall, enrollments will be relatively moderating.

We talked about in our second quarter, we grew 14%. In that business, we had published data that said 2.4% student enrollment. We experienced something a little bit higher, maybe 3.5% to 4% based on the mix, serving those to 2-year schools at a higher percentage of our overall revenues.

So we'll continue to expand through both innovating new products, expanding our TAM. We launched a product Sharpen, which is also a new product that we've introduced to expand overall TAM in serving students and providing more study aids.

Ultimately, what you'll see is we are growing through share. And we're doing that through lots of innovation, having the best go-to-market in the industry. And because of that financial profile we talked about, we're able to leverage our investments across our entire portfolio, bringing new products faster.

Again, we're happy to go into some of the technology and advancements. I will highlight one of the things we think about that overall market. It's interesting to think about our ability to take share.

Today, we have 30% share in higher education. We were at 21% just a few years back. So we're doing that by innovating at a greater pace. When I talk about the K-12 business, about 50 million learners in the U.S., that's a relatively stable number.

And we don't get too hung up on enrollment the way that we actually monetize our revenue streams. And that's because we sell to a district. If you have 920 students, we will sell a license for 1,000 students. So 1 or 2 percentage points up or down doesn't really impact our revenue stream.

But what does is our ability to expand the TAM, and that's by having more offering.

So within that 50 million students, there is core materials. And today, that's about 85% of our revenue. And that is English, Math, Science, Social Studies core product offering. 15% of our revenue stream is supplemental intervention. And today, we only have 5% market share. If you look at our share in core, it's 25% to 30%.

We've expanded our portfolio in core. We've recognized the value to the institutions, to the educators to have a connected classroom. What we mean by that is having both supplemental and intervention and core, and there's benefits to the learning outcome.

So as we've now added a more comprehensive portfolio, it positions us well when we go to sell into those districts. So again, that's the TAM expansion. We realized price, and we're getting price because we continue to add value to our offerings.

And again, we'll talk about some of those innovative solutions we've added. All of that is allowing us to continue to grow and take share.

Great. So one of your advantages has always been the ability to develop trusted content.

Correct.

And so what content development capabilities that you have that maybe your competitors may not and then, yes, basically, how does McGraw Hill differentiate itself on the content side?

Yes. Well, so we talked about the brand and the reputation. We've been doing this for a very, very long time. And so when we think about the content, it is 2 things that we're getting. It's delivering the best content, and that is the pedagogy, the science of learning and having hundreds of employees dedicated to the science of learning.

And so it's the content compounding that with how do students learn and how do we improve that outcome. But it's really the data that now is coming off of our platforms that moves this to a personalized learning experience.

So it's the combination really of having the best content, working with Nobel laureates, developing our content and having our reputation, but combining it with the platforms to give us all that data.

And that's where we're getting 19 billion learning interactions annually on 25 million paid digital users. All of that is what really makes the power of our content is combining it with all the data.

Maybe it's a good segue into the AI -- usage of AI in the business. So can you talk about how you're using AI, both to develop content but also the other uses that you can talk about.

I'll even give you a couple of use cases as well. But primarily, it's in 3 ways we're using AI, right? And that is that personalized learning journey now enabled by AI. It is reducing the administrative burden upon educators.

And that is absolutely a challenge, right, utilizing teachers more effectively in the classroom spending more one-on-one time with students. So that is something that we're focused on as well as content and platform cost reduction and time to market.

So let me give you a couple of examples of each of those. So just a couple of weeks ago, we launched Teacher Assistant. And that really is a tool allowing them to lesson plan directly tied to what the students' needs are in their classroom.

So getting insights as to where their students are falling behind, tailoring their lesson planning for educators, right? And why that was so important is we're getting feedback from the districts saying, yes, we had curriculum coaches, but when our budgets are under pressure, we're removing curriculum coaches.

Well, now we've created tools to help them improve those lesson planning specifically for the needs of those students. Similarly, we launched something called Writing Assistant. And so this one is something that is impactful to me.

My wife was a classroom ELA teacher, 12 years in the high school setting. And the scenario would be my wife, 25 students, 50 minutes to write that essay. She walk around and have 2 minutes per student. What the tool is doing is prompting the students, helping them get started on their essay writing.

So it's like who is the main character in the paragraph that you read. Once they understand that, it would say, okay, write about Johnny. Now okay, what did -- what was the conflict that Simon or Johnny faced?

So it's helping them get moving. Now the key to that is preserving the productive struggle in education, and that is so critical. And we understand that deeply. And so that's how we infuse that sort of process. So when I showed my wife, this tool, she was blown away.

She's like, wow, if I had that when I was in the classroom, I probably would still be there, right? So it allows them to have that more personalized learning experience. Similarly, in higher education, we launched something called our AI Reader, which is effectively you read a passage, really complicated chemistry passage.

I don't get it, highlight it, explain it to me in a different way. And we've all used those types of tools. And so, okay, great. I still don't get it. Explain it to me in another way. Okay, I think I got it, quiz me on it, right? So that's embedded into our platforms.

And what we're seeing is that the time on platform is increasing, and that is one of the most single important metrics to see the learner outcome. So we're measuring that. We're seeing that have -- it's been very driving efficacy and improvement in students.

Lastly is around that content creation. And again, we spend meaningful dollars every year on content. We've launched something called Scribe, which is a tool that helps us create content in a very streamlined fashion. And so the use cases would be things like in our medical business.

So if you're a medical student in the U.S., you're going to be using AccessMedicine if you want to become a doctor. And we used to pay lots of money to doctors to create question banks. And so those question banks now can be created through AI using our content in a walled garden, creating all those questions.

And then we have a human in the loop, a doctor then to review it. So you can see the cost and time reduction. Similar with summary passages that we have at the end of every chapter. You can imagine writing a content for a fifth grade. You can imagine that now we can say make that seventh grade, make that third grade.

So all of that content and then using a human in the loop to drive meaningful efficiencies. So those are the areas that we're seeing AI. And again, we have a big benefit. Let me explain why we have a benefit relative to other competitors. And it's really 4 pillars I think about.

One is the brand you've heard me talk about. Red Cube, it's well known everywhere. So it gives us the right to go talk about our products. Second is the IP. We talked about that. The content, 137 years, well trusted, well known, combined with the platform. The platform is now extracting the third most meaningful data point for me is all the data coming off the platform.

So now combining with the IP, we have all of the data to move towards that improved personalized learning insight. And the final differentiation we have around using AI is really around the go-to-market. And this still remains a very relationship-based selling process. There's 15,000 districts in America, 4,000 higher education institutions. We sell to all of them. We have our staff, most tenured, most knowledgeable.

But what we really get from that is they deeply understand the challenges facing educators. So we get all that insight. We help them solve their problems, and we're creating tools that really are meaningful for them. So that really differentiates us. And ultimately, scale matters, right? And so to have sort of all that access to data, having access to all of those educators and institutions, you really need scale.

So are you making the case that even if smaller competitors can also use AI on their own, these are some of the protective factors like allows you to use AI in a bigger way?

Correct. And like I said, scale really matters. It's that distribution channel, it's the trusted brand. I had heard from our teams that they were at ed tech conferences recently, and they were saying, well, if we just had that Red Cube, it would allow us to go in and sell. Okay. Well, if you had the Red Cube plus you have 1,500 sales staff. And then you have access of that longitudinal data. So yes, the Red Cube really matters, but it's all of those 4 items that really gives us that protected moat.

And Josh, I think the one thing that's often overlooked is we've been using machine learning for over a decade in our solution. So we have a strong history here, very deliberate use, very responsible use, which is very important when you're dealing with higher education and K-12 schools.

Sure, sure, absolutely. And then I guess one talking point has been that if AI is able to take out so much cost with content development, does that ultimately reduce the price? Or does that benefit ultimately get passed on to consumers? Like how do you think about that?

Yes. We've got a very disciplined model around pricing, and it's a value-based pricing model. And so it's interesting when we talk about all these AI enhancements that we have, are they revenue generating or are they revenue enhancing? And so what I'll tell you is, high level, we go out to a district and say, here's the value we're delivering.

Here's how we're making teachers more efficient. We go out with price, it sticks. When we think about pricing in both K-12 and higher ed, it's not in a decision matrix, it's not in the top 5 ever. It's always lower and it's saying, look, we want to understand the efficacy, driving efficiency.

All of those things we're going to continue to further enhance. So when we go out and sell, we've added features, we've added capabilities that allow us to continue to drive price. So while we can take cost out, we don't see there being pressure because we're going to be adding so much more value to the institution, to the educator, providing them more time to actually teach.

Any questions from the audience? Okay. I guess maybe moving on to your sales force. So that's another advantage that you have. Do you have a sense for how big your sales force is compared to your competition? And how important is it to have a sales force that enables you to gain share?

Well, let me explain one differentiation, and this one is really, again, a personal story. I was at my own alma mater last year, and we're going around with a rep and selling our product.

And it was really interesting is we have our go-to-market is different in higher education. What we have is customer success. We invested in 80 customer success professionals. And what that individual does is help the professor set up their courseware. And again, this is a software tool where they're adding all of their videos or adding a lot of materials, spending a lot of time to set this up.

Well, we've got a dedicated team that makes it a bit unique to us. So I'm walking around and we're knocking on doors of professors telling them about our great products and how we're differentiated, the new AI tools we're bringing, Professors would open the door and come out and hug the customer success. You've made my life so much easier. And I was blown away.

So it was a meaningful investment we made. And I knew at that moment, I saw it firsthand, it pays dividends, right? That has been something that we were -- when we invested in it, we knew it would resonate, but I had no idea how powerful it would be.

So the way we go to market is slightly different than our competition. So sheer numbers, if you said there's 500 higher education reps, 80 dedicated customer success. By numbers, I don't have an exact -- how does that compare to Pearson, but I can tell you our go-to-market is differentiated, and we made a meaningful investment.

Our financial profile being different than some of our competitors allows for us to make these investments while continuing to expand margins.

So we made that investment, and that is then showing in the share gains that we demonstrated. So in the -- our second quarter, which we just reported our results, we took 160 basis point share gains. That is partially driven -- and that's on an LTM basis. That's partially driven by the fact that we made this investment over the last couple of years in customer success, very differentiated.

It's allowing us to win. So again, it may be partially having numbers that we can actually go out and see in the field, but the tenure of our sales reps are greater than those in the industry, and we've looked at that and have proven that tenure really matters, understanding the challenges of educators today.

And Josh, these customer success reps are focused on data, right, usage of the digital solutions, which obviously helps. They want to make sure that they're being optimized and used as effectively as possible.

Yes. So it's then using those insights to then say, "Hey, here's your dashboards." Are you using those insights to educate those students to ensure that they're actually comprehending and truly learning the information.

That makes sense. Maybe pivoting to your financial algorithm. So you've laid out some financial targets, including 5% plus growth over the medium to longer term. So could you talk about what it takes for you to grow 5% plus growth over time?

Yes. Well, let me walk through it by sort of our segments. So first, I'll address in our higher education space. So again, you may hear about enrollment headwinds that we would face over time.

And what I will tell you is we experienced 3.5%, 4%. That will moderate over time, but we don't lose any sleep, as I mentioned, about enrollment. So what you'll see is those 2-year community colleges, workforce training, workforce readiness that will continue to offset sort of that 18-year-old demographic first year student that would be declining.

So as we think about enrollment, it's relatively neutral to us over time. Our ability to continue to get share is going to be the biggest single driver of that. And we've demonstrated that we've done this for the last decade. We're innovating at a greater pace. We're making greater investments, not just in the technology, but in our go-to-market, allowing us to take share.

And then the price that we go out with sticks. And so that could be that inflationary level price. And then lastly, I would say what's driving share gain. We're also expanding in our SAM within the TAM we're adding.

So again, those are all the factors. If I come on to K-12, enrollment is not a factor as we think about the 50 million students. So what is it? It's really our ability to continue to take share as well.

And we do that by adding through TAM. And I want to highlight when we think about 15% of our revenue in K-12 is the supplemental intervention space, which is a larger overall market than the core market.

Our ability to move today our core, and we're well known as a core provider, 25% to 30% market share leader today, but being able to take that supplemental intervention space where we have 5% share and growing that more in line, more consistent with our overall core. And there is efficacy, there's lots of reason and we talk to educators, they want to have that connected classroom.

So as a third grade student, they have a character in their math curriculum that transfers then into supplemental intervention. It allows them to sort of move seamlessly between core offering in the classroom and then you're addressing state standards in a similar fashion.

That is one area that we know we will continue to grow. And so as we do that, again, it's more digital. So as we talk about overall margin, having a more digital profile in our K-12 business, that is margin accretive. Internationally, let me just come back to that. Internationally, we haven't talked a whole lot about it, 10% of our business.

We are operating in some very attractive end markets in LatAm, the Middle East. Those are areas of strength for us, and they'll continue to grow. So we like those end markets, which have a different sort of demographic data than the U.S. And then in our Global Professional business, maybe 8% of our overall revenue, today, we serve medical education, growing end market.

What you'll see if you actually deconstruct and look at our financials, you'll see that Global Professional has been relatively flat over the last couple of years. That's because we've discontinued nonstrategic print titles that were consumer-facing.

As that tail unwinds, what you'll be left within our Global Professional is that critically enabling mid- to high single-digit growing business serving medical and scientific students primarily globally. So it's not just a U.S. business.

Great. Great. And then on the margin front, you put out the 37% EBITDA target. So what are the levers there?

Sure. Let me start on the gross margin side. Again, moving more and more digitally. And all 4 segments will continue to move more digitally, and we're still in the earlier innings. Higher education is 92% digital today and growing. So we expect that to exceed 95% digital.

And again, as that digital mix grows, you'll see a higher flow-through, higher margin expansion. You'll see the same thing happening and playing out in K-12, where we move into supplemental intervention. That's an all-digital offering regardless of grade level.

And it's important to recognize K-5 is largely print 6-12 is largely digital, but the supplemental intervention regardless of grade level is digital. So you'll see margin expansion.

International markets are 3 to 5 years behind the U.S. in terms of their digital penetration. That will help us. And as I mentioned, we'll roll off the print components in a Global Professional. So all of our segments will become more and more digital over time. Gross margin expansion. We will scale the business.

Today, we serve those critical markets in the U.S. We have full representation for our sales and go-to-market. Don't need further expansion to sell into the supplemental intervention space, for example. And our back office and all of our support functions are already there.

So we will scale the business. The last piece in the 37%, I put the asterisks there, and I call this out every time I have an opportunity to tell people, the cherry on top is that Scribe.

We have not factored that in, in our near-term guidance of 37% going from the 35%. And that is our ability to take cost out of the content creation. So as we develop the content, we reduce meaningful cost, yet we know that we can continue to value sell that will be margin accretive over time as well. And that goes beyond the 37%.

Okay. Okay. Great. I want to give some time to the higher ed business because you've had some strong success there recently. Could you talk about what's contributing to the share gains and kind of how durable those dynamics, those drivers are?

Yes, yes. So we've been demonstrating that share gain for the last decade. We've been consistently taking share. And the drivers are the level of investments that we are making relative to our competition.

So we're investing at a greater level. And then that becomes a virtuous cycle where we continuously have more cash flow to continue to further reinvest. And so we're making greater investments, not just in technology, and that's all the technology enablement around AI.

It also includes that go-to-market. So as we've invested in go-to-market, we know that our platforms consistently rank #1 in any of the surveys. So as you can stack all of it and you say, okay, content, how do we rank? Well, it's the content and platform, and that's that delivery with the insights going back to the professors, consistently highest ranked in the industry, that allow us to continue to grow.

But I do want to highlight one more feature that we've launched is called Evergreen. And this is unique to us. Evergreen is really important because that's going to be the next fuel for this share gain.

And what effectively Evergreen is would be an iPhone update for your courseware. The way the cycle works today is you have additions, 3 to 4 years, a new addition comes out professor has then an inflection point. Do I stay with McGraw Hill? Do I go to Pearson? Do I move to Cengage or vice versa? And that's the point in which you actually have some turnover.

In that cycle, you generally have a pretty high level of retention. What we've done now is remove the addition cycle. We're first to the market to do this. I suspect others will follow, but we've got a couple of year head start. It took us a few years to develop this.

But essentially, what you're doing is you remove this addition cycle. Now the professor saves 40 to 80 hours of uploading their syllabus and their course materials and everything into the courseware, you've removed that pain point.

And then the other thing we've done is ensure that students have the most relevant data, and this becomes more and more important as you think about workforce readiness, having all the most relevant materials. You can imagine studying economics and not talking about current tariffs would be crazy.

Similarly on any sort of workforce readiness. So having that materials available for students is helpful. But for us and why it's going to drive share gains is today, our workforce spends half their time defending the backyard.

What I mean by that is new addition is coming out, we spend time discussing it with the professor, what the benefits of the new addition are, why they should stay with us and not giving them the opportunity to look at something else.

And we're now giving our sales force a time machine. We're basically saying, go spend your time getting those takeaways. You know the addition cycles from our competitors, go out and win share. Today, 2/3 of our revenue is delivered through the Evergreen model and growing, but it really is allowing our sales force to really focus on takeaways. And that's going to be the next fueling level of accelerated share gains.

Yes. And Josh, it's also like more deeply penetrating the institutions we already serve. We think that there's lots of runway left ahead of us on that.

That's great. And maybe touching on the K-12 business, you also recently have had good capture rate success there. Could you talk about what's driving the improvement -- improved share?

Well, last year, we launched a new science program, and that program went into Florida and Texas. And we discussed publicly saying that we had 2 to 3x our normal share capture, phenomenal, right?

So we performed exceptionally well. Question is how come? We've created a new program that had the right mix of digital library assets, meaning that, that educator in the classroom wants to personalize the learning, wants to bring digital video attributes, different sort of digital content into the classroom. That was really well received.

All of the planning tools that we embedded inside that program was hugely successful. And again, this still remains a relationship business. So we have those deep relationships. We understand the needs of the educators. That allowed us to be hugely successful. So that example and what we've learned, we continue to deploy that into our next cycle will be math followed by ELA.

And interestingly, if you look at McGraw Hill in our history, the strength of our core first ELA and that is the next cycle and math.

Those are our 2 strengths of our content areas. And that's the next cycle that we're seeing as we look out in the next several years. And the thing that is really attractive about that K-12 business is the predictability. So you get insights from state boards of education 4 or 5 years in advance when they're planning to have sort of these bigger adoption cycles.

So we have clarity around what products we need to bring to market, when they will be needed. And we just are delivering them with the right balance of materials to allow teachers to be more efficient, digital capabilities and then now partnering that with all the -- with all of our supplemental and intervention tools is just fueling it.

The last part I will highlight is that we now are bringing McGraw Hill Plus, which is now akin to a medical record, but a longitudinal learning student profile. And so now what you've done is now as we think about how this will play out is we have fourth grade students going into fifth grade. We have individualized learnings of how that student learns, how they best perform.

We can do it across multiple subject areas as we've launched this with the ELA, it's patent pending, but allows teachers to personalize and further personalize that learning experience. So all those features are really differentiating us and allowing us to continue to take share at a greater pace.

Great. Maybe one more with this. So you're a couple of months after IPO. If McGraw Hill is successful over the next 3, 4 years, what will be the main reasons kind of driving that?

We will be successful, and it's going to be that continued share gain, right? And we know that we are innovating at a greater pace than our competition. We can utilize AI and our -- the moat in which we use AI is deepening and widening every day.

Those are the features that are going to allow us to be successful. Share gains across all of our segments, and then ultimately, you'll see that, that's improving outcomes for learners and educators being more efficient and reducing the burnout on administrators. So all of those are the factors that are going to allow us to be successful.

We're deeply committed to the mission. When you talk to over 4,000 of our employees, everyone is former educators, passionate about our mission. And so ultimately, you'll see the financial profile expanding, taking share and growing, but ultimately improving the learner outcome and education burnout reducing that as well.

Great. With that, I think we're out of time. Bob, Danielle, thanks for joining us. Great to have you.

Thanks, Josh. Yes. I'm glad to be here. Thank you.

Thank you for joining us. My name is Marlane Pereiro. I'm the High Yield cable and media analyst at Bank of America. I'm pleased to have with us today from McGraw Hill, Bob Sallmann and Danielle Kloeblen. Thank you for joining us today.

Thank you.

Thank you. So just to start at a high level, you know, obviously McGraw has been around for 137 plus years. So those who are not, as you know, close to the story, can you share some key highlights from the company's evolution over the past decade?

Yeah. And maybe I’'ll even go back a little further So over the last 20 years, you can see the evolution where we've moved to very digital-oriented business. Today, we're nearly -- 2/3 of our business is delivered digitally. And just 10 years ago it would have been half of that. So you can see that it's really accelerated to a digitally delivered content material. And so what you'll see is that there's a platform in which we deliver our content.

So rewind when I was in school, I was lugging books around and professors and educators would use those books and you have workbooks. All of that now is digitally delivered. And so what we've started to see evolution towards is we've been leaning into machine learning for the last decade. And what that allows us to do is move towards a personalized learning experience for students. And now let's fast forward to where we are today as that's evolving to utilizing AI. So we're leaning into AI, and AI is really enabling the personalized learning.

And that's been the holy grail for education for the last 100 years. How can you do that? Because we can imagine the scenario, classroom filled with 25 students and all those students have different learning capabilities, right? So we teach to the mean today, but all the students are in a different place. And so now because they're using AI as a tool to help enable personalized learning, the outcomes will be radically improved. Additionally, what you're seeing is that the administrative burden on teachers today is overwhelming.

And so we're utilizing technology to reduce the administrative burden on teachers as well to allow them to have more time directly with students. So those are the areas that we continue to invest in, and we'll see further investment over time leaning into AI to help us. And then I would say the last place that we are leaning into AI, like other companies you hear from today is, of course, driving efficiency in our organization. We spend significant money on content creation, and you can imagine our ability to use AI to reduce the cost of content creation. So those are the 3 areas that you'll see us continuing to lean into over the future.

Great. And looking ahead, what new capabilities will customers, i.e., students have on your platform next year, even 3 years from now that they don't have today?

Sure. Three weeks ago, we just announced launching some new products. And again, this will be a flavor of what you'll hear that McGraw Hill will continue to deliver over the next several years. But the two new features we launched 2 weeks ago, 3 weeks ago was in our K-12 business. And so we had an educator assistant, right? And think about a teacher creating lesson plans. So we had tools to help them enable lesson planning, which, again, is that administrative burden on the teachers. We also launched Writing Assistant.

And so the Writing Assistant, think about this, for example, my wife is a high school English teacher, I demoed this product with her and we walk through it. But you can imagine the scenario. The same 25 students, you have 50 minutes where the teacher is trying to help write assays with those students. And the teacher, my wife, will be running around in the classroom trying to have that individualized education with those students. So that's 2 minutes per student. What we've launched in our Writing Assistant is helping queue up those students. So while they may not get that personalized teacher experience, they're actually having some personalized learning to help them continue.

And most importantly, as we've developed this, and again, our company has been around for 137 years improving education is embracing a productive struggle. And so by doing that, students still are challenged and queued in terms of not giving answers, but ultimately helping them think through like how do I move to the next phase of my assay writing. So these are the kind of things that you'll see, again, great examples of reducing the administrative burden for educators as well as personalizing learning for students.

And Bob, I'll just add, the strength of the partnership with the educators and the institutions, having that strong pulse read on exactly what they need and what they want is really critical and a strength of ours as well.

Great. And how do you see AI transforming the competitive landscape in education over the next 3 to 5 years?

Yes. And what I would start with is really our strength. Brand is really, really important, as you can imagine. So we have a trusted brand. Our Red Cube is known all over the world. And so we have that trusted brand that we can lean into. And so that is a differentiator when we think about -- as you hear all these start-ups and emergence of AI and education, well, what is our differentiation? The Red Cube, the brand goes so far, allows us to walk into any institution, any school district and start having those conversations. Our IP, right, and our IP isn't just that content we've been creating for 137 years. It's really the platforms as well.

So it's the combination of having the great content, delivering it with platforms. But the key about the platforms is the data that we can come off of that. So that's the third benefit is really thinking about, we have 25 million paid digital users that are generating over 19 billion learning interactions every single year. So using all of that learning interaction and all those data points is starting to inform that personalized learning that we'd already talked about.

And lastly, we remain a very relationship-based business. So we have the longest tenure, the best reps in the industry, and they deeply understand the educators' challenges, right? So what we're able to do is understand those educational challenges, use that insight and help us really further improve our product.

So while we'll hear about small ad tech start-ups, creating AI platforms, they lack sort of that brand, that reputation, the IP, all the data. And really, it becomes almost an arms race where scale matters. And because of our scale, we're in every district in America and talking to all of the institutions, that scale really matters. And so I think we're really well positioned to improve and win in an ongoing AI advancing environment.

Great. You've also talked about in the higher education market, your share has recently hit around 30%. That's up from about 21% a decade ago. What have been the biggest drivers of that growth? Is it investment in digital, some of the products that you mentioned? And also taking a step back, how sustainable are these share gains, given competition and emerging AI entrants -- AI-first entrants?

I think, yes, we've grown the 21% to 30% over the last several years. We're actually seeing our share gain accelerate. So we grew 14% in the quarter year-over-year. Majority of that is through share gains. So we're continuing and taking share. And so why the question is, how come? What are we doing so great, right? So obviously, our content, we believe, is differentiated. There's really 3 large players in the higher education space. All of us have great content. Again, very relationship based. So we have deep relationships.

But some of the innovation, and I think this is probably the bigger catalyst for what's changing it, we started introducing new tools, our platforms. I think on every sort of survey we've tested out in the marketplace, our platforms support both the educator as well as the student, you always score the highest. We continue to invest in that. We've recently launched something called Evergreen. And this, to me, is really game changing and will further accelerate those share gains in the future. So let me describe this for a moment.

So think about your iPhone, every day, every month, whatever it is, you get your iOS update. No big deal you accept. Well, what's different about the education space is you used to in higher education have an edition cycle. Every 3 to 4 years, you would have a new edition. And so what makes that important is you go out and McGraw Hill, is the new edition will come up, we go out and tell the professor how great the content is, how we're addressing the relevant materials. But again, it might be 2 or 3 years old at that point. But that was also an inflection point for the professor.

And the professor is now selecting different content. So they'd say, "Oh, great. I really appreciate it, but I want to go look and see what the competition has out there. And at that point was when we would actually see turnover. And we knew it both when our competitors would be launching a new edition, we would target those opportunities to go out and win. So the reason why this is so important is now, first to market with this offering, our Evergreen, which is effectively that professor over 95% of the time hitting accept, meaning the latest and greatest content.

So if it's an economics professor teaching about tariffs, it will have relevant real-time information. But the beauty of what we've done is we've removed the edition cycle. And so the importance of this now is we no longer have to defend keeping that professor when we provide the new edition, but we're giving our sales force a time machine in the sense that they get to go out and instead of focusing on retaining that professor and selling our latest edition, they get to go out and target takeaways.

So to me, that is really what's going to be the next accelerant for our further share gains going from 30 and well beyond. And I think that gives us a long runway for the next several years to further capture share.

Great. And Inclusive Access sales grew 30% year-over-year in the quarter. They're now roughly half of the revenue in the higher education. How does this model strengthen retention and share gains?

Yes. Yes, exactly right. Inclusive Access is a delivery model that's available to all of our competitors. We've embraced it before others did. We saw the economic benefit of Inclusive Access. And effectively, what that is, is it's a channel in which students now get to purchase their courseware material through the university. So at the bursar bill, they get invoiced just like they would their tuition statement. But what's really happening, it allows the students to have materials day 1. So obviously, there's a benefit to the professor knowing that all the students have the exact same materials. It's available on day 1.

And for us, -- and the benefit we see is that we have much higher sell-through. So when I was a student, and we go back a long time ago at the university level, you'd maybe have 1/3 of students purchasing a new textbook. Now through the Inclusive Access model, that's over 98%. So you're having the high sell-through. And the way the economics of that works is we have higher retention, greater sell-through, but we're also offering a lower price point to the student. So Inclusive Access rolled out by the Department of Education requires us to have the lowest price point available to the student.

So while we lower the price, we're getting greater sell-through and greater retention. So for us, the economics make lots of sense. What -- so we've embraced this. We're growing at a much higher rate than our competition because we see the merits and benefits for -- it's a win-win-win for the institution, for the student and the professor. And the way the model works, and I'll just share with you sort of how we're growing our land and expand approach is we have about 2,000 universities of the 4,500 higher education institutions today using Inclusive Access. We're gaining about 100 institutions per year. Now I don't think that we're ever going to say of the 4,500 institutions, will they all be on Inclusive Access? Probably not.

But there's a clear path that it could be 2,500, 3,000, somewhere up to the 3,500 that we serve today. So when you gain the 100 institutions, the first sale is actually a single professor. And so as we talk to that professor and say, "Hey, here's the merits of this program, would you like to join? We actually will have a single professor at an institution come on board. That professor over time will tell his peers in the Department of Accounting and next thing you know, they're talking to their finance colleagues and then maybe economics professors. And so it grows.

And so after the second to third and fourth year, you go from one professor to 20 professors. And again, that is an accelerant for higher sell-through. And then, of course, once they're in that program, it's easier to have all their students on it. We see much higher retention. All of those things will continue to fuel growth. So we think there's a long runway there with Inclusive Access, and we're excited to continue to deliver through that model.

Great. And which subject areas do you consider your strongest categories today? And where are you most focused on gaining...

I can start. So I think we play everywhere, but some of our strength is really the business economics and computing and in particular, the business classes and the business schools. Top to bottom, we cover all subjects and disciplines, and that has shown over time to be really favorable in terms of enrolled students. Social sciences as well. And then we have some really interesting things that we're doing with science, anatomy and physiology, a digital lab, which is really compelling. So lots of opportunities there as well as some new offerings, calculus being one of them, an area that we see as an opportunity to further expand our TAM.

One interesting point. When I go back to using AI in terms of driving efficiency in our organization, not only does it -- when we're using AI and use cases, we're seeing often times 60% cost reduction, 50% faster time to market. That calculus example, we were able to bring a calculus program, which everyone knows the McGraw brand. We didn't actually have a calculus offering. We did pre-calculus, very different math courses didn't have calculus. We were able to bring that to market 50% faster than we would have without using AI tools, and that was something we launched this year.

Yes. Federal funding has obviously been a big topic. How have recent federal education policy changes impacted your business thus far?

Good news is we haven't seen any impact. So first, let me say, whether or not the Department of Education, what that may look like doesn't really impact our business. So a couple of different things is while there is funding at different levels, the Department of Education, while that funding will just move to a different organization. When I think about where funding comes in, and let's just talk through starting in K-12, and that's where the questions often come in. We have not seen any impact and a relatively small portion, and I mean single digit of a district's budgets in K-12 is actually for course materials.

So if you think about their overall budget, a very small portion. And that means that the federal budget is 2%, 3%, while you have state and local driving the remainder of it, majority of their budgets are going to staff. Now what's really important also, and I've talked about it several times and what we really focus on is driving efficiency for the educator. Our ability to do that allows those dollars that the district is funding to be more efficient, right? So as they know, it's a small portion of their budget, but we're driving efficiency for the educators.

So when they're looking at budget constraints, budget dollars, it's not an area that they typically look at because they acknowledge the fact that our tools are allowing those classroom teachers to be more efficient. So as we reflected back on sort of any sort of budget challenges, we have not seen any impact. The federal government, small portion and whether funding comes from the DOE or elsewhere in higher ed, it still will remain intact.

Great. And then given that most K-12 funding is state and local, have you seen any indirect effects from federal initiatives? Is there some hesitancy, uncertainty that could be affecting decisions?

Yes. Certainly, when we talk about core and core ELA, math science, social studies, and that's our -- biggest portion of our business. Today, 85% of our revenue is supporting the core in K-12. There's been absolutely no funding delays, challenges or anything around that. I think students need to have those materials. They need to support their courseware. So we have not seen any impact. And the remaining percentage supplemental and intervention space, there has been some hesitation, let's say, a little bit more thoughtfulness. Now would I say it's more widespread. I'd say it's pretty consistent with years past, where they're very deliberate with their spend and how they are utilizing their budgets. But we haven't seen anything widespread that would tell us that funding is being withheld.

And the shutdown, any impact on the business thus far? Anything that you could anticipate or we should look out?

No. And similarly, when we talked about any shutdown, any impacts to our business, none. The other one I do like to call out is, obviously, we don't have impact from tariffs. So as you've walked around and heard different impacts from other businesses, we have no tariff impact either. So we've been fortunate in that regard.

And then obviously, state adoption is a big -- another big topic, California Math, Florida ELA, obviously, major opportunities in '27, '28 cal in those years. How are you positioning now to capture those wins?

Sure. And just to sort of level set, in our K-12 business, we have market opportunity that is variable, right? So it's predictably variable. So the way we think about it, and there's 3 large states, and that's really driven by population of those states, California, Florida, Texas. They operate a little bit different than other states. And what they do is they'll have a statewide procurement cycle. And so what you're describing is how we look out into the next several years. And so this year was a predictably smaller market opportunity than last year. We had the benefit of Florida, Texas and Florida and Texas science programs last year. And this year, the market is relatively smaller.

And as we look out into our fiscal '27, that's next year and then into '28, the market opportunity that you described, first being math, followed by ELA is accelerating and growing. That's really important as well. Not only is it the market opportunity is bigger, which gives us the right to go out and compete and win. We've already been put on the California list, which means like you have to make a short list to go out and compete district by district. So we've been put on the list. And we -- as our strategy, we play everywhere. We fully intend to be on all of those.

So we've made the list, we're out. We also highlighted in our last earnings call that we've been awarded two significant districts in California. That's important because momentum, like anything, is real. And so as the superintendents are going around the state at conferences just like this, talking about their business, what they've selected, the fact that these two influential districts have selected McGraw Hill for the new math curriculum is very helpful.

So it plays to our strengths. If we look at our relative revenue composition in our K-12 business is more heavily weighted, first being ELA is our biggest, followed by math. And those are the next cycles that we're walking into. So bringing new products in the market always plays out very favorably for us. And then the next cycle being math and ELA driven is also very beneficial for us.

I'll just add on the math side. We have a really comprehensive offering in market, right, with the core program, ALEKS Adventure, our new supplemental offering for K-5 and then McGraw Hill Plus, which goes over the top and integrates with third-party assessment.

And maybe just to double-click on that just a second. So in our supplemental intervention, again, remember, 15% of our business. The key on that is today, we have about 25% to 30% share in the core, that's ELA, math, science, social studies. Supplemental intervention, we have 5% share. So why relatively smaller? We believe we have the right to win there and compete. We have opportunity to grow that share to be more like our core, but we also didn't have a full portfolio of offerings.

So as we've now launched the younger grade math supplemental intervention. That happens to coincide with this new cycle that we're mentioning. So again, not only will our core -- our ability to win and compete in core, but having a more comprehensive solution in supplemental intervention will definitely play out in our favor.

Has there ever been a scenario where adoption cycles are unexpectedly delayed? Has that ever happened?

Yes. We just experienced an ELA cycle pull forward. And so what you'll generally see is moving things forward. And again, the state boards of education will give 3- to 5-year visibility out. That's why I said it's a variable, but very predictable business that we operate in our K-12 business. So in that cycle, California ELA was going to be a '29 move forward. So as they move it forward a year, you'll start to see the benefits. They're more likely to pull it in because they see the merits and benefits of having the new program. And again, they have their state standards that they want to be addressed.

And so the state is motivated, but they have to work with McGraw Hill and other our competitors to ensure that we can meet those deadlines. So we're having discussions with the Boards of Education and yes, we can deliver in time. So they actually moved it forward. I'd say that, that's more common than actually a delay because they're motivated to actually get product in the market. So from launching, say 5 years out, you might see a year pull forward. But typically, they build those milestones and targets to ensure that the providers can all be ready for those delivery dates.

Great. And then following the IPO this year, obviously, a large portion of debt reduction as well. How are you prioritizing capital allocation between reinvestment, delevering, M&A? And then on the topic of M&A, where are your focus areas?

The first place we always invest, we fully fund all of our organic growth opportunities. So that's always in our budget. They always have the best ROI, and they're fully funded. So then what we're left with is -- and the fortunate part of our business, we generate lots of cash. And so in October, we paid down an incremental $150 million in addition to the IPO proceeds to pay down debt. So then it's really balancing the right balance between M&A and debt repayment.

Today, as we look at that funnel, and this will help sort of figure out where that balance sits as there's nothing transformational. As we think about what we're going to do, M&A is really going to accelerate our product road map or it could be an adjacency or small tuck-in bolt-on. So if you look at sort of what ZIP code those are in, we're going to use cash on the balance sheet and get those things done to accelerate our growth or accelerate our technology road map. We just closed a little while back on Essaypop.

And again, that's a prime example of the make versus buy. We canvassed the marketplace. We knew there was great technology out there that we incorporated now in our next-generation ELA program that we talked about just a moment ago. And so we were really torn saying, do we make it or do we just buy it? And so we went out and bought it. So those are the kind of things that I think you'll see us continue to do on the M&A side. Nothing transformational, nothing that would ever lever up the business and then ultimately balancing debt paydown over time. We've stayed at our target leverage of 2 to 2.5x. We remain committed as evidenced by our October repayment.

Great. And then right now, if I look at Moody's and S&P, you have positive outlooks on debt. Just from a longer-term perspective, kind of an investment-grade rating something you aspire to or just kind of...

Yes. No, I mean we have great dialogue with the rating agencies, very constructive. And as you noted, we're both on positive outlook, and we recently got upgraded by S&P, which is great to see. As Bob mentioned, we're committed to our leverage target of 2 to 2.5x. And when we think about M&A, nothing that would require us to lever up the business in any way.

And then from an industry consolidation perspective, do you think it will favor diversified players, mostly tuck-ins, assessment, supplemental providers? Obviously, we touched on AI-first entrants, but from an industry perspective, how do you see that playing out?

From a broader industry, I really think scale matters. Data is what's going to drive that personalized learning. And that goes K through life, right? Personalized learning is the holy grail. Everybody has been moving towards that direction, but without really that rich data. And again, our data runs K through life. So Part of that, we talked about McGraw Hill Plus, that's longitudinal student learning record. So it's akin to a medical record, but it would be your learning record.

And so if you have children, you could think about your student going from third to fourth grade, then fourth to fifth, those teachers are inheriting those students. They now understand how they learn, what's their best outcomes for them, how to teach to them. So that data becomes really, really critical. And so I mentioned it before, I think scale in this industry really matters. We get lots of calls from ed tech start-ups and, hey, we just don't have the scale. We don't have the channel to enter the market. We don't have the data to ultimately drive these really cool tools we've created.

So I think scale is going to matter. You're going to see -- there's big 3 players in both K-12 and in higher ed. I suspect you'll see both growing in terms of adding more capabilities in supplemental intervention as we are a core player. Core is very difficult to get into. There's a high moat, barrier of entry, very expensive. So I don't see there being tons of new core providers. And I can see there being consolidation and supplemental intervention, lower barrier of entry, a lot of really cool technology they're creating, but without the underlying data, I think they're missing a big element. So I can imagine there would be some consolidation in that space.

Yes. I mean, for the right opportunity, given the dynamic nature of the space right now, would McGraw Hill entertain a transaction that might temporarily bring you out of your leverage profile?

I think we have all the attributes that we look for today. There isn't anything that we've looked at our portfolio and said, we're missing this. We made a large acquisition of A3K in 2020, and it was really saying, we were missing a part of our portfolio, and that was a supplemental intervention product in ELA. But if we look at our portfolio today, there isn't anything that we're missing. And so I don't think it makes sense for us right now. We have all the tools and all the equipment we need. We may make small tuck-ins just because it accelerates our road map. But I don't really see anything of scale being needed to that tomorrow.

And the other thing that we have that no one else has is the Red Cube, the logo, the brand, that brand and the power of the trust that goes along with that brand is something that really differentiates us in the market, especially getting us in the door, having conversations with educator, being that partner that Bob mentioned. So that along with our moat, right, our IP, our data and that domain expertise is really a differentiating factor for McGraw Hill.

You recently reported a strong quarter. We've touched on higher education, market share gains. Can you remind us of some of the other key drivers in the quarter? And ultimately, what led you to raising your full year guide for the year?

And one of the nice attributes of our business is that predictability of it. So in our K-12 business, we have the back-to-school selling season. We get multiyear revenue related to those contracts, the way school districts work and those who don't know our space is the most incredible thing, we get 5 to 8 years' cash upfront. That allows us then to have clear visibility of the revenue recognition over time. So that predictability and visibility has been very helpful.

So we've built our RPO or our deferred revenue. And then the other really strong indicator is higher ed. And so what you have a tendency to see the fall semester and spring semester, there's a direct correlation. So for us, really big, really important second quarter. And because of the success in the quarter, we executed really well, that gives us that confidence and conviction to go out and raise our guidance for the full year.

Great. And as we think about next year, what are you most excited about for McGraw Hill?

Well, the things that really excite me is that we're continuing to take share across all of our businesses, right? So if you look at all four of our segments, we are winning in all of them. We're continuing to win, and that allows us to innovate and continue to build and innovate at a greater pace than our competition. So we are well positioned not just for next year, but for the next 10 years and beyond. So really excited about our ability to keep winning and taking share.

Great. We have very few moments left, but if anyone has a question, we can squeeze one in super quick.

Obviously, there was a big acceleration during the pandemic with digital in the classroom. I guess -- where do you see -- like, I guess, what inning are we in, in terms of digital adoption, particularly in core? And over the next couple of adoption cycles, where is the biggest opportunity, like in which grade ranges?

Yes. So K through 5 still remains largely print, and parents and educators want the younger learners to stay in a print format. So I don't know that you'll see a ton of a change. Now for us, supplemental intervention is digital at all grade levels, and we're seeing that. And so as we, as McGraw Hill moves to have more supplemental intervention, as Danielle mentioned, we have a new math offering, our relative digital mix will continue to increase.

So for us as an organization, I would say that we're still in the middle innings in terms of our ability to grow in K-12. Now in higher ed, we're 92-plus percent digital today. Yes, I do think it's going to continue to grow, 98%. And I can tell you, if you go on campus, you can see the professors are still teaching from a textbook. They're not going to always be there, and they probably won't be teaching that much longer. The younger professors have all moved digitally.

So I think there's still some room to grow. Certainly, internationally, they're lagging 3 to 4 years behind the North American U.S. market. So that's why I put us in the middle innings. So there's still more to go. And obviously, the great part about digital is it's a higher margin profile business as well. So again, we like the attractive and predictable nature of that recurring model, and it will continue to grow for the next foreseeable future.

Great. Well, Bob, Danielle, thank you so much. It's a pleasure.

Good morning, and welcome to the McGraw Hill, Inc., Fiscal Second Quarter 2026 Earnings Conference Call for the Quarter ended September 30, 2025. [Operator Instructions] As a reminder, today's call is being recorded, and a written transcript will be made available in the Events and Presentations section of the company's Investor Relations website. A webcast replay of today's call will also be made available on the company's Investor Relations website. Following the prepared remarks, we will open the call for questions.

I would now like to turn the call over to your host, Danielle Kloeblen, Treasurer and Senior Vice President, Investor Relations. Please go ahead, Danielle.

Good morning, everyone. Welcome to McGraw-Hill's Fiscal Second Quarter 2026 Results. Joining me today are Simon Allen, Chairman, President and Chief Executive Officer; and Bob Sallmann, Executive Vice President and Chief Financial Officer.

During this call, we will be making forward-looking statements about the company. These statements are based on our current expectations and the current economic environment. Forward-looking statements, estimates and projections are inherently subject to significant economic, competitive, regulatory and other uncertainties and contingencies, many of which are beyond the control of management. These forward-looking statements are also subject to the cautionary statement that is included in our earnings release and the investor presentation. These are further detailed in our 10-Q and other filings with the SEC. Important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified in our earnings release issued today as well as in our SEC filings.

We will also refer to certain non-GAAP measures today. We believe that these measures provide useful supplemental data that, while not a substitute for GAAP measures, allow for greater transparency in the review of our financial and operational performance. In the earnings press release and the appendix of the investor presentation as well as supplemental files on the Investor Relations website, you can find a definition of these non-GAAP measures and reconciliations to the most directly comparable GAAP measures. For those who listen to the recording of this call, we remind you that the remarks made herein are as of today, November 12, 2025, and have not been subsequently updated.

With that, I'll turn the call over to our Chairman, President and Chief Executive Officer, Simon Allen.

Thank you, Danielle, and good morning, everyone. McGraw Hill continues to shape education through innovation and AI-driven technology that personalizes learning experiences at scale, driving deeper engagement and better outcomes. Fiscal second quarter results exceeded expectations, showcasing strength, resilience and the scale of our diverse portfolio, which serves the learning life cycle during the pivotal back-to-school season. This strength was underscored by fiscal Q2 revenue, which reached $669 million, our second best performance for this quarter in a decade despite a 2.8% year-over-year decline due to the anticipated smaller K-12 market.

Reoccurring revenue grew 6.5% year-over-year to $422 million or 63% of total revenue, underscoring the strength of our subscription-based model. Digital revenue increased 7.6% year-over-year to $352 million, representing 53% of total revenue. In particular, our Higher Education business delivered exceptional results. Revenue expanded 14% year-over-year, while digital revenue grew 18.4% due to continued market share gains, Inclusive Access growth, enrollment favorability and realizing value-based pricing. Our trailing 12-month market share rose 160 basis points to 30% according to MPI data.

The Evergreen content delivery model now available across more than 700 leading titles continues to resonate, reflected in a record high NPS score during the fall semester. The K-12 selling season met our expectations with continued solid performance despite the smaller market opportunity. Reoccurring revenue grew 3% year-over-year with share gains in Core Science, ELA and Math. Early momentum is building for ALEKS Adventure, our Supplemental Math offering for K3 students, positioning us for growth beyond the Core ahead of the major California Math opportunity in fiscal year 2027. We're already seeing positive early indicators for California Math with 2 large deals booked in fiscal year 2026.

Our team also continued to deliver compelling profitability. Adjusted EBITDA reached $286 million in Q2, yielding a margin of 43%, up 60 basis points year-over-year. This reflects strong operating leverage and an expanding digital mix amid reinvestments that is enabling an exceptional pace of innovation. Our strategy, combined with our execution and forward visibility, gives us confidence to raise fiscal year 2026 guidance across the board, which Bob will detail shortly.

At McGraw Hill, we focus on solutions that demonstrate proven efficacy. By integrating high-quality proprietary content with actionable student data and thoughtful pedagogy, we deliver meaningful learner outcomes. Having leveraged machine learning for over 2 decades, our AI philosophy centers on saving educators' time, strengthening student teacher relationships and personalizing learning.

Our multilayered moat is built upon 3 elements. Firstly, our intellectual property. With 137 years of trusted content developed alongside our authors and more than 50 Nobel Laureates, our pedagogical-driven approach is held to the highest standards. Secondly, our proprietary data. We possess a deep understanding of the learning journey fueled by billions of student interactions across millions of digital users annually. Our solutions deliver structured learning progression through real-time insights and feedback built on evidence rather than prediction alone.

And thirdly, our domain expertise. We have decades of experience helping educators and institutions integrate digital tools into curriculum. Our workforce, including former educators and technology experts, ensures solutions are grounded in pedagogy and structured learning methods that reflect classroom realities. Along with strong relationships, a trusted brand and a robust distribution network, this moat forms the foundation that allows us to deploy AI effectively across learning environments. While large language models serve as valuable information tools, education demands a structured learning progression supported by continuous student interaction and data to ensure true comprehension over memorization.

Educators see us as a trusted partner, reflected in a recent survey we commissioned through Morning Consult with K-12 teachers and administrators ranking McGraw Hill as the education company using AI most effectively in its products. Helping teachers harness the power of AI to address specific student needs differentiates McGraw Hill from emerging AI-first entrants. Consider the student who is falling behind in math. Our AI-powered Supplemental solution, ALEKS, which spans K-12 through Higher Education, uses machine learning to pinpoint knowledge gaps and deliver targeted content. It helps improve pass rates by 20% according to a recent Clemson University case study. ALEKS Adventure is our recent addition for K3 Math, which is gaining traction. We are also optimistic about the global launch of ALEKS Calculus, unlocking $100 million in TAM.

Now consider the fifth grade teacher struggling with administrative tasks and lesson plans. McGraw Hill Plus simplifies workloads and provides real-time insights into student proficiency, enabling targeted instruction. Available in math in 10 states with 2 more states coming online next fiscal year, we experienced a 67% increase in the number of districts that accessed McGraw Hill Plus this school year alone, along with rising utilization rates. ALEKS and McGraw Hill Plus are primed to expand in the multibillion-dollar Supplemental and Intervention market, where we hold only 5% share today. We remain very enthusiastic about Gen AI and continue embedding it into our solutions to enhance learning experiences and to support educators.

AI Reader is a prime example of how we scaled a proven tool across our portfolio. Launched last spring, AI Reader encourages Higher Education students to actively engage with content until concepts are fully understood. 1 million students are engaging with the tool and 11 million learning interactions were generated in Q2 alone and accelerating. During back-to-school 2025, we expanded AI Reader, embedding the tool in 600-plus Connect titles as well as within our First Aid Forward solution for medical students.

Additionally, we recently introduced 4 exciting new AI-powered solutions to enhance our portfolio. Firstly, Sharpen Advantage transforms our popular college student study app into an AI-powered enterprise solution focused on academic success through real-time faculty dashboards to track progress, address learning gaps and create personalized learning study experiences. Underpinned by our content, Sharpen Advantage offers a responsible alternative to generic chatbots institutions can trust, unlocking significant growth opportunities beyond our Core.

Secondly, clinical reasoning leverages our evidence-based content and introduces virtual patient interactions to prepare medical students for real-world clinical care, positioning us for incremental digital growth. Thirdly, Writing Assistant provides real-time personalized feedback to students, fostering skill development through self-checking and self-correction. We recorded over 130,000 interactions across 877 unique school districts nationwide in October alone.

Fourthly and finally, Teacher Assistant gives K-12 teachers instant planning support, reducing prep time. It's currently available for California Math with the nationwide rollout to follow. We believe our writing and teaching assistant capabilities will enhance market share and retention, particularly in the larger upcoming K-12 market opportunity.

In closing, we believe that our momentum is undeniable. Our market share is growing, user engagement is accelerating and our reoccurring revenue mix is expanding. Our business remains resilient with no significant impact from tariffs or proposed federal education policy changes. As you know, the vast majority of funding comes at the state and local levels with an immaterial portion of K-12 budgets tied to course materials.

Now I'll turn the call over to Bob to discuss our financial performance.

Thank you, Simon. Good morning, everyone. Our fiscal second quarter results demonstrate the strength, scale and diversity of our business. We are delivering on our financial priorities, which are disciplined execution, reinvestment to fuel growth and continued gross debt reduction.

Now let's take a closer look at our fiscal Q2 financial performance. Total revenue reached $669 million, down 2.8% year-over-year due to the anticipated smaller K-12 market opportunity, which was largely offset by the strength in Higher Education. First half revenue declined just 0.5% to $1.2 billion. Reoccurring revenue increased 6.5% year-over-year to $422 million, representing 63% of our total revenue in the quarter, primarily driven by digital revenue growth of 7.6% to $352 million. Higher-margin digital contracts continue to enhance revenue quality and predictability. Our remaining performance obligation, or RPO, surpassed $1.9 billion at the end of the quarter, which provides valuable forward visibility.

Gross profit margin increased nearly 150 basis points year-over-year to 79.2%, supported by efficient operations, favorable digital revenue mix and outperformance in Higher Education. Adjusted EBITDA was $286 million with a 43% margin, up 60 basis points year-over-year, driven by gross margin strength and disciplined expense management amid continued growth reinvestment. AI implementation is enhancing internal efficiency and customer experience, reducing K-12 order processing times by 27% and automating 25% of service checks while our AI-powered content creation tools delivered strong ROI, recouping its initial investment in a year with use cases expanding, which should unlock incremental margin expansion over time.

Now let's dive into our business segments. In Q2, Higher Education revenue grew 14% year-over-year to $213 million in the quarter. On a year-to-date basis, revenue was $395 million, also up 14% year-over-year. Reoccurring revenue grew 13.8% to $162 million, while digital revenue expanded 18.4% to $186 million. This exceptional performance was led by market share gains of 160 basis points, reaching 30% on a trailing 12-month basis. Inclusive Access sales grew a notable 37% year-over-year. It represents over 50% of our Higher Education sales and has been adopted by nearly 2,000 campuses.

The majority of Inclusive Access growth continues to come from existing customers adding new courses, demonstrating the effectiveness of cross-sell within accounts and significant expansion opportunities within the 82% of institutions served. This is supplemented by the annual onboarding of approximately 100 new universities into the program, which becomes more impactful to growth in the coming years.

These new Inclusive Access relationships typically take at least 2 years to fully scale. In other words, based on recent performance, we expect the activations for accounts landed in fiscal year 2026 to increase by 15 to 20x by fiscal year 2028. This is key to supporting visibility into our future growth runway. And when combined with innovations such as Evergreen, we unlock more avenues to support retention and drive takeaway opportunities to enable incremental market share gains. This performance reflects our successful execution of investment initiatives in recent years. In addition, we captured benefits from healthy enrollment trends and value-based pricing realization. I am incredibly proud of the team's outstanding performance with their innovation and dedication yielding differentiated results.

In K-12, revenue was $359 million in the quarter, down 11.2% year-over-year due to the anticipated smaller market opportunity and lapping of exceptional capture rates in the prior year. First half revenue was $630 million, down 7.3% versus prior year. Reoccurring revenue increased 2.8% to $216 million with RPO of $1.4 billion, supported by multiyear procurement cycles and upfront payments, which provide strong forward visibility and the foundation for our return to growth in K-12 in fiscal year 2027.

We continue to outperform the market and retain our leadership position in Florida science. Our National Science program is driving share gains in other states, along with investments that have bolstered our go-to-market coverage, which reinforces our optimism moving forward. While the Supplemental and Intervention market is also smaller, our integration with the Core and early success with ALEKS Adventure is encouraging. Pilots generated strong momentum in South Carolina's Math adoption, showcasing share gains in the K5 market.

It's worth reiterating, we anticipated the smaller market in fiscal year 2026 due to the predictable school purchasing cycles. Proposed federal education policy changes have had no material impact on our business as 90% of district revenue is funded by state and local budgets. We believe we are well positioned for fiscal year 2027 opportunities in California Math and Florida ELA, among others. And our nationwide Emerge! pilot is progressing well ahead of the large California ELA opportunity in fiscal year 2028.

Global Professional revenue was $40 million in the quarter, relatively flat year-over-year, while reoccurring revenue grew 5.4% to $25 million. Strength in medical and engineering offset the exit of nonstrategic print with ongoing innovation such as the launch of clinical reasoning expected to drive incremental digital growth over time. Finally, International revenue decreased 8.8% year-over-year to $50 million in Q2, a relative improvement from the double-digit year-over-year decline in Q1. The decline in reoccurring revenue also narrowed sequentially year-over-year to 4.8%. Digital growth in select K-12 markets has partially offset softness in Canada and timing in Spain.

Moving on to our balance sheet and cash flow. We ended Q2 with $463 million in cash and $913 million of liquidity with our revolving credit facility undrawn. Net leverage was 3.3x as of September 30. We generated $265 million in cash flow from operating activities in the quarter. Working capital was largely impacted by the K-12 market opportunity and prior year expense timing. In October, we prepaid $150 million in term loan principal following September's repricing that reduced our interest rate spread by 50 basis points. Year-to-date, we've prepaid $542 million in term loan debt, resulting in over $40 million in annualized cash interest savings.

Our disciplined capital allocation strategy prioritizes reinvestment and debt reduction. We remain committed to a net leverage target of 2 to 2.5x and to strategic tuck-in M&A. We will pursue incremental debt reduction over the remainder of the fiscal year, leveraging cash flow from the business, which has been bolstered by cash tax savings from new tax legislation, and we'll remain opportunistic on the capital structure.

Looking ahead, based on our strong first half performance, RPO visibility, sustained share gains and favorable enrollment trends, we are raising our full year guidance. We now anticipate total revenue for fiscal year 2026 in the range of $2.031 billion and $2.061 billion, reoccurring revenue ranging from $1.504 billion to $1.524 billion and adjusted EBITDA between $702 million and $722 million.

Unlevered free cash flow is expected 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 remains unchanged. Our Q2 tax provision was positively impacted by recent changes to federal tax policy and is expected to lower our fiscal year 2026 tax liability below the previous $30 million to $50 million range, both on a cash and GAAP basis.

Finally, a few modeling items. We expect revenue seasonality trends in the back half of fiscal year 2026 to be relatively consistent with our historical average. Stock-based compensation expense is expected to be $1 million to $2 million in both the third and fourth quarters. Total interest savings are expected to be approximately $5 million in the second half of the fiscal year, and we expect approximately $6 million of debt extinguishment in Q3. For the fiscal year 2026, we expect our GAAP effective tax rate to be approximately 15% to 20% and our marginal non-GAAP cash income tax rate for the incremental changes to book income to be around 18%. We are proud of our performance and confident in our strategy. Higher Education's outperformance is notable, and we are well positioned for K-12 growth in fiscal year 2027 and beyond.

Operator, let's open the call up for questions.

[Operator Instructions]

Your first question today comes from the line of Ryan MacDonald from Needham.

On a great quarter. Simon, I wanted to start with Higher Ed. Clearly, an excellent performance within that segment of the business. Can you just kind of break down a little bit further for us sort of the mix of benefit from sort of enrollments? I think the data is showing about 2.4% enrollment growth for the current fall semester versus sort of execution and share gains? And then on the Inclusive Access component of that, impressive growth there. Can you just give us a sense of sort of the durability and runway for growth within Inclusive Access still?

Yes. Thank you, Ryan. It's good to hear from you, and thanks for a great question. And yes, we are incredibly pleased about our Higher Ed performance this quarter. I think 14% growth comes primarily in a big time way actually from taking market share. We've taken it from all our competitors. You mentioned the enrollment. I think enrollment is predicted right now. It's very early, but maybe 2%, 2.5%. We've grown massively more than that. And we're taking share from everybody. It's all around our execution.

You've heard me say this so many times on these calls, but it really is true. The quality of our execution is why we win out. The product delivery, the fact that we understand what our customers need to see, how we can utilize AI and what we deliver and prove in a very efficacious way why we've done well. And then also our go-to-market teams are truly the best in the industry, in my view. And I think the performance justifies that comment when you look at, again, retention rates that are growing substantially through what we've done with our market share gains. All of the competitors that we're taking share from across every discipline on the college campus, we're seeing record NPS scores through this back-to-school period, and I think best of all, for us to now get to 30% market share.

And if you remember, if you go back a decade, we were at barely 21%, 21.5%, Ryan. I mean it was way lower. We've grown now to 30%, 160 basis point growth year-on-year. And we're very proud of that. The last thing I'd say is that when we look at innovations like AI Reader, this is the product, if you remember, we launched a couple of quarters ago. And it's really proven a tremendous retention tool for us. We're seeing over -- it's actually -- I think we quoted 11 million interactions at the end of Q2. I can tell you through October, it's about 20 million now in terms of reader interactions. And we're just growing that month by month as students see the value and professors see the value of what that can give students to really help them in their class and help them succeed.

So the last thing I'll say is, well, you mentioned Inclusive Access. Again, we've been telling our investors about that for the longest time. It's open to everybody. We recognize the value of it first. We continually grow every quarter our business through IA. It's a wonderful business model. And the land and expand that Bob talked about earlier is really true. This is where we're seeing the huge benefit of that. And I think when I look at the new solutions that we're creating with products like ALEKS Calculus, that's going to give us another $100 million in untapped TAM, what we've done with Sharpen and Sharpen Advantage as we look at building an institutional AI-driven product. We really are understanding what faculty want to see, how we can help them utilize AI for benefit and for absolute gain in student performance and outcomes.

So let me -- Bob, let me pass on to you a bit because I know you love the Inclusive Access modeling when you look at the land and expand. So maybe you can help the final part of Ryan's question.

Sure thing. Thanks, Simon. Ryan, I also -- before I jump into that, I do want to highlight the National Student Clearinghouse data you quoted as preliminary, we've seen changes from that from our initial print to subsequent prints. So I just want to caution you that, that 2.4% you quoted is preliminary -- but within that, you should also note that the 2-year and community colleges has higher growth rates. We over-index there relative to the general market. So we're seeing enrollment slightly higher than that 2.4%, but it's worth noting that it is preliminary.

And then jumping into the Inclusive Access model, we highlighted this, just the sustainability of that. We have added 100 new logos, new institutions annually. So clearly, there's a lot of runway for us to continue to land, but more impactful is that expansion. So as we land those institutions, we see 15 to 20x growth over the first couple of years. And then you'll get continuation of growth. So when we think about sustainability, lots of runway there. We're very excited about it, and we're looking forward to continuing to talk through that.

Awesome. I really appreciate that. And maybe just a follow-up in terms of K-12. Kind of great to hear some of the commentary around California Math and in Florida as well. Can you just remind us what you're seeing with California Math and Florida ELA right now in terms of performance? And then how that -- or what sort of level of confidence that gives you as we go into, I think they call it year 1, but the second sort of tranche of that funding in fiscal '27?

Yes. Good question. And Ryan, apologies for the longest answer you've ever heard to Higher Ed. But thank you for bringing us into K-12, where we are equally excited about our potential. And you know and everyone knows that this year is a smaller year in K-12. What is really encouraging about FY '27 as we look ahead, and we're obviously not going to give any guidance just yet. We'll wait until the end of our fiscal year to do that. But what is really encouraging is the well-known fact of an additional $300 million TAM in that market. It's roughly 10% more in '27 than '26.

And as you say, that's driven by California Math. It's also driven by Florida ELA and Texas Math. There are a bunch of different opportunities coming out for FY '27. Where we are encouraged is that we've already had good successes in California at the very earlier stages. And it's all about the suitability of our product. We have to make sure that as we create our material, we understand completely the state standards required. We make sure our pedagogical delivery of our products just fits at the right learning age range that is there. And then, of course, we're supplementing all of our Core material with McGraw Hill and of course, ALEKS that you know very well.

So we're very, very bullish indeed about next year. Bob, do you have anything to add on specifically on California or Texas, for Ryan?

Yes. I think the one thing that we are excited about is being able to supplement in Supplemental/Intervention and having bundled solutions as we enter into that market. So again, as we think about that portion of our business, which represents about 15% of the K-12 revenue, we really see a nice opportunity to bundle those offerings as we walk into those opportunities next year.

Your next question comes from the line of Henry Hayden from Rothschild.

We've seen kind of lots of concern across the sector around AI disintermediation, and we were hoping just to get some incremental color on how you would describe the competitive moats around the business or kind of in other words, what uniquely differentiates McGraw Hill's capabilities from Gen AI native new entrants?

Henry, thank you for the question. And just lovely to hear a familiar accent. And it's a good question because -- when you think of the issue around AI, I think there's been an enormous amount that's been underappreciated. We're just not yet recognized about McGraw Hill and our abilities to really make a difference and see AI as a massive real tailwind for our business. And we're only in -- of course, this is our second quarter earnings call, so it's new to everybody.

But my hope is over the coming quarters, people recognize the real value and strength that AI gives to our business. And again, the tailwind that we're seeing, and we're seeing it across the entire part of our entire structure. When you think about what we're doing in Higher Education, we've talked a great deal about our products around AI Reader. We've talked a lot about what we've done with Sharpen Advantage, when you think about the institutional opportunity. We've talked about the ability for clinical reasoning in our medical business. And that is a significant upside for when you think about potential students learning and what they need to understand when they're going through their medical programs.

And then there's ALEKS, and you've known for years that we've worked with ALEKS for now well -- really over 2 decades. And when you think about the ability for machine learning now to focus on Generative AI delivery for our Adventure for K5 as well now at the other end for ALEKS Calculus, all of these factors give us a substantial confidence. And we're seeing that in our customer reactions. We're seeing it in our financial performance, as you've heard. We're seeing it from our customers saying to us, we are using Sharpen and it is helping our students. We are seeing a massive increase in student learning and spending time on your great platform with AI Reader. Medical students are benefiting from clinical reasoning.

So these are functional, efficacious products that we deliver. And because of our moat, Henry, we've got the strength of our 137 years, the trusted position that we have in the education community and really the reliability that we provide our customers with that level of trust. And they want to work with us and they want to understand how we can enhance the materials the way they teach through AI integration.

So again, a long answer, but it's important to me and to all of us that I think the world at large understands just how beneficial this is for McGraw Hill because we can absolutely improve learning outcomes the way we've integrated AI.

Yes. It's very helpful. And then just as a follow-up to that, we've heard from some of your peers around kind of the increased cost to store and leverage data, which has been made AI ready. How would you think about the margin outlook as data becomes a more substantial part of your offering?

Good question. We're beginning to measure compute cost right now. In fact, we've done that for a while. Bob, I'll pass that one over to you if you've got some additional. I know we don't exactly give too much detail, but we do have an answer, I think, to Henry.

Yes. And Henry, as we think about AI, we ultimately see this as margin expansion over time. When we've talked about the use of Scribe, which reduces our cost in certain use cases by 60% and time to market by 50%, we're able to reduce our overall cost to build product. So as we think about that cost to serve AI, we're able to offset that by driving cost reductions in our product and platform development. So we ultimately see this as margin expansion over time.

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

Nice results here. Maybe I wanted to dig in a little bit more on the K-12 side. I guess, can you just provide some more color on underlying trends there and specifically how newer product traction is progressing relative to expectations as we think about ALEKS Adventure, MH Plus other things. And then just as we think about the benefit of some of these newer products, I know some are incremental revenue opportunities, but how much could they help you as you pursue some of these larger Core contracts? How much could these new product capabilities and bundling help with positioning to win those large contracts?

Yes, it's a good question. I'll kick off and then Bob, I'll pass to you as well to add any information that I've forgotten. But what I would say, Stephen, is that the -- and you mentioned a couple of them. The products that are making the big difference, ALEKS Adventure will give us new growth going forward. It's already beginning. It's been out about a year, give or take. McGraw Hill Plus, we've extended. It's been in 10 states. We've extended it and we're about to get into 2 more. Each one of those show substantial increase in teacher intervention and teacher activity.

And the reason is that it's giving such a great level of data and detail on the student performance that teachers find very helpful. But a key part of your question is what does this do to the Core? Because you know that we're a very, very successful player in Core. The market opportunity is much bigger next year.

But it isn't just that for us, the Supplemental/Intervention space where it's really 15% of our business, but we have less -- around 5% market share. That's where the real opportunity for growth comes. It's really building on the Core successes that we've enjoyed, building on with ALEKS with our Math Core adoptions, building on the ELA adoptions with Actively Learn and Achieve3000. These are the tools and then all of them integrating McGraw Hill Plus. These are the tools that give us great confidence for growth going forward to enable the market share growth to continue.

Bob, you may have something else to say to that as well.

Yes. Let me add a little bit more color. So we have talked about in our prior quarter, winning in 8 of 9 markets. And so we've demonstrated that and what we're suggesting is that you'll see that over the next several years. And so what that means is while we're winning, we provide forward visibility in the next several years. These are multiyear contracts. One of the things I'll highlight is if you exclude the 3 large states, particularly Florida and Texas, where we had strong performance last year, if we exclude that and look at the remainder of the districts that we operate in, we're expanding share. We grew 200 bps. So we're winning at a greater rate. So we're winning across the market.

A couple of other things that excites us. We've talked about being in 10 states for McGraw Hill Plus. Let me double-click on that and provide you some more insights as we talked about being in 10 states growing into 12, what does that really mean for our K-12 business? Again, McGraw Hill Plus is going to allow us to be very sticky over time. And so we look at it and 25% of our teachers using our Core Math products, Reveal, now have access to McGraw Hill Plus. That's nearly a 50% increase year-over-year.

We've seen 4x increase in the unique users in McGraw Hill Plus year-over-year. And now we're serving over 10% districts have access to McGraw Hill Plus. So again, the importance of that is really driving that stickiness and retention over time. And then ultimately, the other big innovation we're driving is our new ELA product, Emerge! that will be coming into market, again, addressing California ELA in 2028.

So again, really well positioned. The business performed and met our expectations in the period. We're really excited about how it positions us for a return to growth.

Very helpful and good to hear. And then just as a follow-up, as we think about incremental spending plans, I guess, just given what you've seen so far this year, have your priorities changed at all where you're pushing the pedal more in certain areas of the business than others, especially as we think about product development and sales capacity across different segments. I guess just at a high level, where are you pushing the investment pedal more?

Yes. So first, let me -- at a high level, we're not going to be changing sort of the level of investment. We've highlighted that it's been 8% to 9% of our revenue. We'll continue to be at that level. Now of course, we reevaluate and redeploy where we're putting our dollars. And given some of the efficiencies that we are driving in product development, it's allowing us to accelerate the pace of investment in other areas such as some of the AI tools that we've recently released.

Simon mentioned the 4 new products we brought to market. Again, the pace in which we're releasing things is allowing us to bring new products to market. But most critically, I just want to remind you that we do believe that all of this innovation will still allow us to continue to expand our margin.

Your next question comes from the line of Steve Koenig from Macquarie Group.

And I'll offer my congratulations as well on a really good quarter. First question would be, in thinking about your outlook for the second half, maybe preface this question by asking, how did you all do kind of relative to your internal expectations in the quarter? And in terms of raising that full year guide, how much of that is related to the Q2 performance? And how much of it is related to your outlook for the back half? And any changes in your method or assumptions on your guidance?

Sure. I'll take this one, Simon. With respect to our guide in the quarter, first, noting that Q2 is the most significant quarter for our business, it provides us visibility into both enrollments, share gains and otherwise. And most importantly, in our K-12 business, it provides us the RPO that gives us that clear visibility to the rest of the year.

So when we put together our guide, I'll walk you through some of the BUs that how we're thinking about it, but it's also important to note that we've narrowed the guide from prior quarter to current, meaning the revenue guide we had from high to low $60 million range, we've now narrowed that to $30 million. And then on the reoccurring and EBITDA, we were at $40 million in the prior guide. We've taken that down and narrowed our guidance to $20 million. And again, that is driven by the fact that we've moved through that seasonally important Q2 and now have greater visibility.

With respect to the portions of the business that met expectations, I would say that K-12 was certainly in line with our expectations. We noted that we were having share gains. Our products are well positioned. We anticipated some of those share gains that we delivered and the overall market size being smaller is coming to in line with expectations. Where we performed slightly better, and I'll highlight that would be in Higher Education. Obviously, the share gains, we're very pleased with the continued share gains and the magnitude of those share gains and enrollment was slightly higher. And again, we talked about it on Ryan's first question about what the Clearinghouse is providing. We see it slightly above that, which is providing us a little bit of a tailwind.

When I walk through for the full year, I think it's important to recognize that we have seasonality in our business. So first half being seasonally important, second half is smaller. That will then translate into a lower EBITDA margin on the lower revenue base. And then ultimately, I also think it's important to recognize that, that seasonality from first half to second half will also present itself more like fiscal year 2024 than fiscal year 2025. And it's important that I highlight that so your modeling considerations thinking about Q3 and Q4 phasing as 2025 had an outsized performance in K-12. So really anchor yourself back to 2024.

And I think then as we think about that overall guide, we are very pleased with how we positioned the business and it's built on the success that we've had in forward visibility.

Terrific. And if I may get in one follow-up, maybe building on the earlier question about internal investment, maybe expanding that to ask for your color more generally on your thinking on capital allocation here moving forward?

Yes. Sure. The first place that we always invest in is our organic investments. Those will always provide us with the greatest ROI. And then we remain very committed to delevering and our target of 2 to 2.5x, and that's demonstrated our commitment to this by the $150 million we paid down in October. Based on cash flow and where we see the business, there will remain an opportunity for us to further delever in the remainder of the year. We also balance that with tuck-in M&A., and the funnel today is very full. We're looking at smaller opportunities that we consider make versus buy, expanding the addressable market. We look at these opportunities. And so we think that there's a chance for us to continue to explore that, but nothing transformational at this point is in the funnel.

Your next question comes from the line of George Tong from Goldman Sachs.

You highlighted a strong capture rate performance in K-12 so far this adoption cycle. Can you share what capture rates are so far this year and how they compare to last year at the same time?

Yes. George, we're not going to provide visibility exactly on what those capture rates are. As you recall, that's coming off of our internal sales force data. But I will highlight when we look at that market, it's 200 bps higher than prior year, which is in line with our expectations.

Got it. That's helpful. And then you talked about strong visibility into the K-12 TAM years in advance. Based on what you see today, how much do you see the K-12 TAM growing in 2027?

Yes. So that -- we've highlighted that the overall market is $300 million that we see as growing. And again, we're really well positioned as we think about the largest opportunity being that California Math. We're excited about the opportunity for us. Simon, I'm not sure if there's anything else you want to add on that.

No, just exactly. And we've mentioned this earlier on, George, that the extent of the market growth next year is very encouraging for us. And you've seen it in prior years where the TAM is at a much higher level, we've done very well. And of course, we would expect to have the same level of growth and performance in the out years. And FY '26, as we've communicated very clearly, has always been a low year and you look at the '27, '28. And as you look forward, you can see the opportunity then, and we're excited about that looking ahead.

Your next question comes from the line of Marvin Fong from BTIG.

Congratulations as well on a great quarter. First question, I'd just like to follow up again on that enrollment data that we all are looking at. And I would like to attack it from the subject matter standpoint since that seems to be the other major change. Can you just talk about your -- do you over-index, under-index in subject matters like health and business are seeing strength, computer science a bit lower for understandable reasons. But anything in the subject matter trends that are beneficial to you?

Yes. It's a great insightful question. We certainly see that we have those disciplines that we see the highest growth rates, that is very favorable to us, business and other curriculum and science-related subject matter. So it does play out favorably to us. And again, I think that bodes well for how we're seeing our enrollment slightly higher than that 2.4% as advertised as a headline for undergraduate growth. Simon, I know you had something to add.

Yes, let me add a little bit to that because it's a good question, Marvin. We -- one of the big benefits, and I've been operating in, as you know, the Higher Ed sector for that will be 40 years in August. And the reason that we do so well is that we cover everywhere. So you look at the business economics disciplines, you look at the sciences, you look at math, you look at the humanities, social sciences, all of these areas, we're seeing growth across everything. And when you look at the tools that we create, AI Reader covers every single discipline, every title, every subject. You think about what we've done with Sharpen, we focus on every single subject again.

And that's why it's the breadth and the scale that we have that give us so many advantages, particularly compared to some of the smaller start-up type companies. And that breadth of coverage is really -- it means that we're seeing very strong double-digit growth across all of those subject areas. Some are higher than others. But when we look ahead, it's the scale and the breadth of product that we have that gives us such a strong advantage.

Fantastic. And a follow-up question, if I may. On international, we don't talk about it as much, but the trends are improving. You called out Spain as well as Canada, some moving parts there. Could you just kind of discuss what you're seeing there? And how should we be thinking about trends both in the back half and maybe even next year?

Yes. And it's a good one. I mean when you look at, as Bob indicated earlier, the decline, we expected to decline this year. And I think in areas like Spain, where we've got a good K-12 business, it has a similar cycle coincidentally this year to the U.S. So that's clearly a lower year for us in Spain. That's timing purely. Things will change next year.

When I look at what's happening in Canada, we benefited from the enrollment surge in Canada over the last few years. And now, of course, enrollments in Canada have significantly reduced. But what I look at there more than anything is our market share growth. It's [Technical Difficulty] if the overall market is in decline, but how are we doing? And this is what makes me very happy because Canada, our share, we've grown over 3.5% this year. We're looking at about a 27%, 27.5% market share position in Canada. It was barely 15% in 2019 before COVID.

So you're seeing really good growth in share, again, where the opportunity is for excellent product and great go-to-market. We succeed, and we've done that very well in Canada. We've also seen the upside in Latin America. We continue to do well there with our School and Higher Ed business. And also the GCC market in the Middle East is very, very strong for us. So it's a good position that we're in. We're looking forward to continuing growth as we go forward. And I think it's important that we focus on those markets where we know growth can occur.

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

I wanted to ask another question on Higher Ed. Really strong performance this quarter there. You talked about the share gains getting to 30%. And obviously, this is off the back of Evergreen being launched. And I imagine that, that is helping contribute to that stronger retention and perhaps salespeople being able to focus more on new business. And so I was wondering if the success you're seeing is related to that platform shift or if there are other -- is there anything content-wise or otherwise that is contributing to that as well? Just wanted to understand the sustainability essentially of the Higher Ed share gains?

That's a very insightful question, Toni. Thank you. I would say it's across the board is the reason that we're doing very, very well in Higher Ed. Yes, Evergreen, and that's unique to us, as you know, that we launched about a year ago. Now it's over 600 titles. We're seeing tremendous retention with that and faculty are just appreciating the ability to be kept completely up to date as they're thinking about their courses. And it's also new products that we launch. It's products that we're looking at with ALEKS Calculus, which is a tremendous additional TAM opportunity for us in Higher Education. What we've done with Sharpen at the consumer level, but then particularly now Sharpen Advantage at the institutional level gives us a great deal of excitement.

Then there are new content. Of course, we always look at our authors in higher education, and we commission new content and new material. That's something we're very, very proud of. We have various new courses and titles that we launch and we release through our Connect platform. It's very, very significant. And I think the sustainability for us is proven by the last number of years of our growth in Higher Ed, up now, as you say, to that 30% market share. And we feel extremely bullish about our potential in Higher Ed, and we appreciate the question. Actually, it's a very good way to pose it.

Great. And then wanted to ask about pricing. Typically, I think you're getting more of your growth through share gains, maybe some from enrollment, et cetera, and price has been less of a factor. And so I think last quarter, you mentioned you were taking price increases at a higher rate than originally planned. I was hoping you could talk about if that's still the case and if you're seeing pushback from customers to that or with your new content and platforms, maybe they're not pushing back because of the value add that you're providing. And so I wanted to understand the pricing dynamics going forward?

Sure. Thanks, Toni. Yes, from a pricing dynamic, as we've mentioned before, we apply a value-based pricing model. You highlighted some of the value adds that we've been putting in place. We have not been seeing any pushback around our pricing. The price realization has been inflationary levels, which is now in line with what we planned for in the quarter. So we're realizing the price that we planned.

Your next question comes from the line of Jeff Meuler from Baird.

How are you viewing the mix of K-12 opportunities in 2027 by state and subject? I guess, for you, do they play to your strength to an increasing degree at all?

Bob, I'll let you run into the detail there. But I mean, state by state, as you know, Jeff, we've got substantial opportunity as we look at FY '27. I don't know if we want to get within California, we've talked about that. We've talked about Texas and Florida ELA. Bob, I don't know if you want to get into any more detail. It may be a bit early as we think about that. I know you want to give guidance there as we get to the end of the fiscal year, but you may have comments to make?

No. And I think we -- in our prepared remarks, we highlighted the fact that we're preparing for the larger opportunities in ELA in '28 and then in '27 being Math. So we're well positioned to play to our strengths as we think about the market opportunities in the next several years. And again, from a subject mix, strengths reside in ELA and Math and our new Emerge! products. So we're well positioned, and I think that will benefit us over the next several years, that overall mix in the K-12 market.

Got it. And then lots of good AI anecdotes and how it's positively impacting your business and you continue to take share. On the emerging AI-first entrants that you mentioned, Simon, where are you predominantly seeing them? Is it more on the Supplemental or Intervention side? Or are they starting to come into the RFP process for Core curriculum or not?

Good one. I would say it's coming at the -- more at the RFP, yes, but I think increasingly, as we talk to teachers and we talk to school districts, that they understand the added value that we can provide through our Supplemental/Interventional tools. Some of them, though, are now requiring that they want that continuity. If they're using Reveal Math, let's look at a math tool that captures those students that may be underperforming. So of course, we have ALEKS. When we look at our ELA business with Emerge! that we just launched. And as we think about '27, '28 and beyond, that's when teachers are saying, "Well, listen, we need writing tools and writing instruction tools to aid in our ability to assess students." Then we provide what we've just launched with Writing Assistant.

And I think it's now becoming an opportunity for us to really extend our potential with that growth by providing complete solutions, not just in the Core, but also in Supplemental.

Your next question comes from the line of Faiza Alwy from Deutsche Bank.

A follow-up on the Higher Education segment. There are some concerns around future enrollment trends as we look ahead over the next, call it, 3 years because of what's been called the demographic cliff. And you alluded to just the fact that you've seen higher enrollment relative to what we might be hearing from the industry. So hoping you could expand a bit more around that, just taking a step back around where you have higher exposure and how you're thinking about just outside of the market share gains, how you're thinking about enrollment as we look ahead and how that might impact your business, whether you think there's opportunity for greater pricing in the future? Or just any color there would be helpful.

That's a good question, Faiza. And I know we're running low on time, but I'll start, Bob, and if there's any more you want to add. I would say, Faiza, that there is always pricing opportunity, of course. The enrollment issue is -- and I think the demographic cliff is somewhat overstated as it relates to our business because the average age of our student customer is in the mid- to late 20s. When you look at the amount of business we have at the community college level, those students are often very often in their 30s and 40s.

So I would say we're less concerned about enrollment issues in that way. The key element for us is this TAM expansion in the products that we are now offering and the solutions that we provide. So we see growth that way. We don't see enrollment decline being a big issue for us because of the expansion and the market share opportunities that we've seen. And our ability to really serve customers, particularly with AI, that's what they genuinely need and they need our help. So we're seeing very strong growth. That will continue going forward. We need to keep innovating with new products, new solutions to enhance the TAM that we operate within.

And bottom line is we'll continue to grow regardless of enrollment. I think that's an important takeaway.

Understood. And then just a follow-up on the K-12 segment. You alluded to market share gains in that segment. And just to put a finer point on that, are you really referencing market share gains in Supplemental and Intervention? Or are you seeing market share gains in the Core relative to more established players?

My comment on the 200 basis points was largely around the Core. And keep in mind that, that represents 85% of our business. But we are seeing gains in Supplemental/Intervention, particularly as you think how we connect to the Core. And again, I just want to reiterate how well that positions us as we move into California Math into next year.

Your next question comes from the line of Jeff Silber from BMO Capital Markets.

I know it's late. I'll just ask one. I know you're not talking about fiscal '27 yet, but generally, what are you hearing about state budgets going into next year?

Jeff, it's a good question. And we're happy to run over. It's lovely to have so many questions. But we're hearing good things about state budgets. We're not concerned about decline. As you know, when you look at the budgeting process in K-12, it's very much a local and state-run activity. When you think about the overall percentage that -- of any budget, education budget that's given over to courseware and course materials, it's probably less than 1%. It's a tiny fraction of the overall number. So we're not seeing any concern around budgeting for next year and the years forward. And that's one of the reasons, one of the many that gives us so much confidence.

Your next question comes from the line of Josh Chan from UBS.

I'll keep it to one as well due to the time. I guess, could you talk about the runway that you see in Inclusive Access in Higher Ed and then kind of how that and share gains may both contribute to your kind of ongoing growth kind of beyond this year?

Yes. It's a great question. Bob, you go right ahead. You love Inclusive Access. It's become your favorite...

I do. I know we all do. Yes. And again, just that runway is significant for us in terms of Inclusive Access. And obviously, we're very impressed with the growth that we experienced in the quarter. But more importantly is that dynamic where we're adding 100 institutions per year, we're at 2,000. You can see long runway to continue to add over the years, more and more institutions and then that several year path where we continue to grow. So it is sustainable. It's going to continue to grow, long runway there, and we're excited about Inclusive Access.

Your next question comes from the line of David Karnovsky from JPMorgan.

Maybe just one on K-12. I think there's been some investor concern recently about federal funding and what impact that might have to the procurement process for Core or Supplemental. So maybe just can you speak to what you saw in the recent selling season or what you're hearing from districts on this?

Yes. The one thing I'll highlight is that we're not seeing any widespread delays or any changes in purchasing patterns. It's been consistent with our expectations. And I just want to highlight that we walked into the year with our expectation of share gain in overall market size, and it's played out as we've seen. So there are always pockets where districts are being cautious and controlled in their spend. That's no change, but we're not seeing anything widespread that would indicate that federal funding is an issue at the district level.

And that concludes our question-and-answer session. I will now turn the call back over to Simon Allen for some final closing remarks.

Thank you, Rob, and thank you, everyone, for dialing in and bearing with us and allowing us to go over the hour. We do appreciate the questions. It makes our lives much more enjoyable. And I hope you get a sense from myself and from Bob and Danielle, whom you all speak to regularly, just how enthusiastic we are about our performance and how optimistic we are. It's a pleasure to beat and raise, and it's a lovely feeling to look at our performance and our market share growth across the businesses. And we really do feel very, very good about upcoming conversations with you.

Thank you for your attention always, and thank you for your interest in McGraw Hill. We deeply appreciate your commitment to us, and we look forward to serving you and particularly our customers going forward. So thank you for dialing in, and we look forward to talking to you again in a few months. Bye-bye.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Good morning, and welcome to the McGraw Hill Fiscal First Quarter 2026 Earnings Conference Call for the quarter ended June 30, 2025, via webcast. [Operator Instructions] As a reminder, today's call is being recorded, and a written transcript will be made available in the Investor Information section of the company's website tomorrow. A webcast replay will also be made available on the company's website. Following the prepared remarks, we will open the call for questions. I would now like to turn the call over to your host, Danielle Kloeblen, Senior Vice President, Investor Relations. Please go ahead, Danielle.

Good morning, everyone. Thank you for joining us today as we review McGraw Hill's fiscal Q1 2026 results, which will be followed by a question-and-answer session. Joining me today are Simon Allen, Chairman, President and Chief Executive Officer; and Bob Sallmann, Executive Vice President and Chief Financial Officer.

During this call, we will be making forward-looking statements about the company. These statements are based on current expectations and the current economic environment. Forward-looking statements, estimates and projections are inherently subject to significant economic, competitive, regulatory and other uncertainties and contingencies, many of which are beyond the control of management.

These forward-looking statements are also subject to the cautionary statement that is included in our earnings release and the slide presentation. These are further detailed in our 10-Q and other filings with the SEC. Important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified in our earnings release issued today as well as in our SEC filings.

We will also refer to certain non-GAAP measures. We believe these measures provide useful supplemental data that, while not a substitute for GAAP measures, allow for greater transparency in the review of financial and operational performance. In the press release, appendix of the slide presentation and supplemental files on our website, you can find a definition of terms and a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures.

For those who listen to the recording of this presentation, we remind you that the remarks made herein are as of today, August 14, 2025, and have not been subsequently updated. With that, I'll turn the call over to our Chairman, President and Chief Executive Officer, Simon Allen.

Thank you, Danielle, and good morning, everyone. It's an honor to address you today after achieving what was a very significant milestone for McGraw Hill with our July IPO. For those who might be new or reconnecting with our story, I'll provide a brief business overview before turning it over to Bob to discuss fiscal Q1 results.

You're all likely familiar with the McGraw Hill brand. For over 137 years, our resilient and innovative company has been a trusted global leader in education, supporting the evolving needs of over 60 million learners and educators worldwide. Spread across more than 100 countries, our dedicated and skilled workforce of 4,200 employees, including over 700 technology experts and data scientists are united by our mission, which serves as a key differentiator and cornerstone of our culture.

We operate a scaled B2B model that uniquely supports the entire learning life cycle. From preK to higher education and through to professional learning, we serve 99% of K-12 school districts, 82% of U.S. higher education institutions and 94% of U.S. medical libraries.

Demand for our high-quality content and digital solutions has increased as we employ data-driven insights and learning science to adapt to individual student needs while solving critical educator pain points. This competitive advantage has manifested in market share gains built on 3 distinct moats: our IP, our data and our people. We operate a scaled digital ecosystem, having invested over $2 billion in technology over the past decade, including in artificial intelligence long before it became mainstream in education.

This enables us to serve over 26 million paid digital users and curate over 19 billion learning interactions annually. This wealth of data creates a powerful feedback loop that fuels our growth and product development. Through disciplined execution, responsible and impactful use of technology and our wealth of scaled data and insights, we have transformed McGraw Hill into a leading global provider of information solutions in education.

While information is abundant in today's world, we create true learning experiences that go beyond technology-enabled point solutions. AI is a tailwind for our business as it enables us to tailor our content to the unique needs of individual students and educators, fostering knowledge building. We have integrated machine learning and GenAI capabilities into our learning solutions that sit above our deep content and data moat.

This enhances our ability to drive personalized learning, leveraging AI and our assets at a differentiated scale. Our pedagogically driven approach and ongoing assessment using artificial intelligence strengthens the vital social element of the student-teacher relationship. By focusing on clearly defined strategic priorities, we consistently drive sustainable growth and innovation by increasing our market share, expanding our addressable market and investing in new digital capabilities, all while improving operational efficiency.

We continue to invest ambitiously in new solutions and capabilities to benefit our core business and enable growth within new market opportunities. To that end, in fiscal Q1, we delivered $536 million in total revenue, $388 million in reoccurring revenue and $191 million in adjusted EBITDA. All of these metrics were at the upper end of the disclosed ranges in our July S-1 filing.

Digital growth continued with $325 million in revenue in the quarter. Our significant outperformance in higher education was on display yet again, with our market share reaching nearly 29% based on trailing 12-month data from MPI. In addition, we once again realized strong capture rates within K-12.

We also launched new solutions across the business, bolstering our portfolio with personalized-driven instruction. Key fiscal Q1 highlights included ALEKS Calculus, a new program for K-12 and higher education, which addresses a critical need in STEM learning and expands our addressable market opportunity. ALEKS Adventure, on the other end of the spectrum, our K-5 solution, which expanded into 2 new grade levels, enabling further supplemental market penetration. McGraw Hill Plus, our proprietary tool that tracks student proficiency and builds longitudinal learner profiles, now includes a new third-party math assessment partnership with Propel. McGraw Hill Plus won the prestigious Baker Learning Analytics Prize, recognizing our innovation and progress through the use of data to transform education.

Evergreen, we are leveraging our first-mover advantage, delivering continuous content updates across more and more titles and within our higher education business while saving educators' valuable time. In August, we launched Emerge!, our next-generation core literacy program for K through fifth grade. Deeply rooted in the science of literacy, our nationwide pilot is available across the full digital spectrum and enables a full data dictionary.

Emerge! reinforces our confidence for continued K-12 leadership in the larger market opportunity that is expected in fiscal years 2027 and '28. As well as building these AI native learning solutions, we are also actively infusing GenAI capabilities into our existing products. For example, AI Reader empowers students with personalized learning and has boosted time on platform within Connect by more than 30%.

We recently expanded AI Reader into our First Aid Forward medical solution, setting up more promising usage trends in global professional. We are making great progress driving efficiency with Scribe, our internally developed GenAI tool, which helps reduce content generation time and cost while preserving a human-in-the-loop approach. Use cases are expanding across all business units and presents an opportunity for incremental margin expansion over time.

Before I conclude, I want to reiterate the inherent stability in our business, driven by our long-standing presence, knowledge and education, predictable academic cycles, multiyear institutional contracts and advantageous scale. Macro trends around our core business remain positive. We have not experienced a material impact from recent federal education policy changes or from tariffs.

We are confident in the enduring importance of education globally and the resiliency of our business. I'm incredibly proud of what we have accomplished as we lead the evolving landscape with increasingly more opportunity ahead. I'll now turn the call over to Bob to walk you through our financials.

Thank you, Simon, and good morning, everyone. The IPO last month was significant for McGraw Hill and a reflection of our operational and financial excellence. With the net proceeds from the IPO, we have strengthened the balance sheet, reducing gross debt by $386 million and annualized cash interest expense by approximately $30 million.

Looking ahead, we believe we will benefit from greater flexibility to invest in strategic priorities and drive future growth as we deepen our market leadership position. Before diving into our fiscal Q1 results, I want to reiterate the attractive nature of our business and ability to perform well through the economic cycles. As Simon mentioned, we serve preK-12, higher education and professional learning around the world.

Our visibility into these markets allows us to predictably forecast our business, while our diversification enables resiliency. Higher education and professional monetize through annual contracts, while K-12 is principally driven by multiyear procurement cycles with upfront cash payments. We have strong forward visibility into these cycles, which is most pronounced in the 3 states with the largest K-12 populations, California, Florida and Texas.

The seasonality of our business aligns with the academic calendar across K-12 and higher education. Because of this, we focus on first half versus second half results internally with approximately 60% of our revenue and 65% of our adjusted EBITDA typically realized in the first half of our fiscal year.

Returning to our fiscal Q1 results. The quarter was solid, albeit seasonally small, with results hitting the upper end of our expectations previewed in our July S-1 filing. We delivered $536 million in revenue, an increase of 2% year-over-year, driven by continued market share gains in Higher Education, which more than offset the smaller market opportunity in K-12.

We generated $325 million in digital revenue in Q1, an increase of 7% year-over-year. Our quality reoccurring revenue, inclusive of digital subscriptions and K-12 multiyear contracts comprised 72% of our total revenue at $388 million, up 7% year-over-year. The balance was transactional revenue, specifically print and eBooks, which declined as expected to $148 million, down 8% year-over-year.

The remaining performance obligation or RPO, was $1.65 billion at the end of June, which gives us visibility and confidence as we look ahead. Our gross profit margin was 77%, up more than 90 basis points year-over-year, driven by digital mix.

Adjusted EBITDA was $191 million, up 7% year-over-year, representing a 36% margin and 150 basis point improvement. Our operating expenses reflect continued strategic investments in sales, marketing and R&D to drive innovation, along with ongoing efficiencies in general and administrative functions.

Turning to our business segments. In K-12, fiscal Q1 recurring revenue of $184 million grew 10% year-over-year due to robust prior year Texas and Florida science signed sales, which was offset by lower transactional revenue. Total revenue was $271 million, a decrease of 1% year-over-year as expected.

The year-over-year revenue decline in K-12 is anticipated to deepen in the seasonally larger fiscal Q2 due to a more challenging comparison. As I noted, our business is structured around a first half, second half focus as district purchases for the upcoming school year can shift between fiscal Q1 and Q2.

I will note we are performing very well in the early part of our selling season with capture rates trending favorable to our expectations as we are taking the lead in nearly all key market opportunities. Looking ahead, in addition to the new literacy nationwide pilot, we also secured our position for the large California math opportunity in fiscal year 2027, and we believe we are well positioned for this expanded market opportunity.

We feel confident in our position as evidenced by the strength of our RPO at the end of June, which provides multiyear visibility. This was primarily driven by K-12, which exceeded our expectations. In Higher Education, fiscal Q1 revenue was $182 million, an increase of 14% year-over-year, largely driven by continued share gains.

Reoccurring revenue increased 7% versus prior year to $160 million due to digital growth. In addition to favorable U.S. summer enrollment, Inclusive Access momentum continues with sales of $55 million, up more than 30% year-over-year.

Inclusive Access program provides students with affordability, day 1 access to digital course materials, supporting higher sell-through. It remains a significant growth driver with plenty of runway. Evergreen is a recent innovation and key differentiator as it provides continuous content updates and saves educators time with 95% of professors accepting the latest product release.

Over 30% of our Higher Education revenue is tied to titles on Evergreen, a number that continues to move higher, further strengthening retention and share gains. In Global Professional, fiscal Q1 revenue was relatively flat at $35 million. Reoccurring revenue grew 4% year-over-year as medical and engineering strength was offset by the exit of nonstrategic print, a headwind that will continue to moderate over time.

In International, fiscal Q1 revenue declined 12% year-over-year to $51 million, with roughly half due to order timing, along with the digital transition. Now regarding cash performance and the balance sheet. We ended fiscal Q1 with $247 million in cash and $697 million in total liquidity with our revolving credit facility undrawn.

Net leverage was 4.1x on an adjusted EBITDA basis at June 30. In July, we used the net IPO proceeds to pay down term loan, bringing our pro forma net leverage ratio to 3.6x. S&P also moved us to positive outlook. Cash flow from operations was a seasonal use in the quarter, further impacted by deferred revenue.

Turning to our fiscal year 2026 financial guidance. We expect revenue to be in the range of $1.986 billion to $2.046 billion, which represents a year-over-year decrease of 5% to 3%. We anticipate reoccurring revenue in the range of $1.477 billion to $1.517 billion, which represents year-over-year growth of 1% to 4%. We anticipate adjusted EBITDA in the range of $663 million to $703 million. This guidance is based on predictable trends in the K-12 market, where the fiscal year 2026 decline is tied to the timing of major state procurement cycles, a well-established pattern consistent with historical norms.

Excluding K-12, we expect modest revenue growth this year, underscoring the resilience of our diversified portfolio. While we are early in the K-12 selling season, I am very pleased with the leading indicators. We are taking share at a greater rate than originally planned and realizing the benefits of our pricing strategy.

Early successes are also evidenced by the strength of our RPO, which is trending better than anticipated. Higher Education is also seeing early favorable signs with share gains and competitive takeaways. These positive developments across key segments position us exceptionally well for fiscal year 2026, reinforcing confidence in our outlook. Our intention in each successive quarter is to narrow our full year guidance range.

As a reminder, we typically have a higher level of visibility into full year results by the end of our second quarter, given we have moved through the primary K-12 selling season and have insights into the spring semester within Higher Education based on the fall results. For modeling purposes for fiscal year 2026, we expect total capital expenditures, inclusive of product development to be consistent with prior years at 8% to 9% of revenue, a significant reduction in our tax liability and cash taxes by approximately $45 million versus our internal assumptions due to recent changes to federal tax policy.

Based on our updated analysis, we are now estimating our tax liability to fall between $30 million and $50 million on both a cash and GAAP basis, unlocking substantial benefit for the business, roughly $30 million in annualized cash interest savings due to the debt paydown with the proceeds from our IPO and negligible foreign currency impact to revenue. We expect fiscal year 2026 unlevered free cash flow to be at the lower end of the 50% to 100% conversion cycle range.

Lower cash interest will strengthen our free cash flow generation as we continue to prioritize business reinvestment with gross debt reduction and as we potentially pursue strategic tuck-in M&A. We will remain opportunistic on the capital structure in the near term and are committed to delevering to 2 to 2.5x net debt to adjusted EBITDA over the medium term. We remain very confident in our ability to achieve our 2026 guidance, and we believe we are well positioned for a return to growth in fiscal year 2027 and beyond.

Operator, now let's open the call for questions.

[Operator Instructions] Your first question today comes from the line of Adam Bojanowski from Macquarie.

This is Adam on for Steve Koenig. I wanted to touch on the various ways GenAI might transform the learning experience, both in terms of benefits and new challenges it poses for learning outcomes and how educators are engaging with the technology and addressing challenges. Additionally, as a follow-up, what are the risks and opportunities that McGraw Hill -- opportunities to McGraw Hill posed by GenAI in terms of impact on the competitive dynamics or enhancements on your solutions and value to educators?

Adam, it's Simon. Thank you. That's a great question, and it's a very topical one. We get asked a great deal, as you can imagine, about GenAI. And it's a long question, so I would give you, hopefully, what is a useful answer. But by all means, come back if you've got any follow-up or if you want to interject. But the first and the most important thing to reemphasize is what we said in the prepared remarks that this is a significant tailwind for the company, and I think for our industry generally.

At McGraw Hill, we believe that AI is really most effectively used to improve education and the experience for students and teachers when it achieves 3 things. And these 3 things, number one, Adam, it's got to help remove the administrative burden for educators. They have a huge amount they're working with. They need to spend more time with students. And what we must do is make sure we remove that burden with everything that we create for them through AI.

The second element is that it's got to -- and related, it's got to enhance the human interaction and that ability for the student-teacher relationship to really cement because that's what's critical to learning, to make sure that the struggle of learning is achieved. And then lastly, the third point is that it must provide support for students to help them with their personalized learning journey, how they think individually and how they proceed through their classes.

That's the context. Those 3 elements are critical for why we're confident that it's a tailwind. But if I may, let me give you a couple of specific examples related to McGraw Hill because -- and Adam, you may know this, but we've been using AI and machine learning for well over a decade now, particularly with products like ALEKS. And you may be familiar that this is a wonderful mathematic algorithmic tool that really allows to have adaptive learning or personalized learning process.

And the platform is incredibly powerful in how it guides students in real time, and that's very key. The second element that what we've really developed significantly and what we know that faculty want particularly, we've researched a lot of teaching community and faculty with the needs that they must receive with AI. And what they want us to do is embed AI into the various and huge amount of material that we have already, the trusted content, well over 270,000 course materials and titles that we have. How do we engage with that content through products like AI Reader that we launched recently in Higher Ed?

Again, what that does is enhance the personalized learning journey and make sure that we're really showing students how they can develop their skills. And because we're such a trusted company and institutions know us and trust us very, very well, we make sure that we're making ethical use and really helping faculty understand the proper usage of AI to make sure that they can develop their own tools alongside us with AI to enhance their own assessments and how they personalize their classes across the group.

So it's a long answer, but essentially, for us, it is a really excellent opportunity to increase our ability to personalize learning. And from an operational perspective, we have products like Scribe, which is really allowing us to make sure that we're streamlining all of our content creation and development and reducing the time it takes and the cost it takes to do that. So we see wins all around with AI.

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

I'll start with a quick congrats on the whole team on completing the IPO. So first question here, I wanted to ask about Higher Education trends. And maybe for Bob, can you talk more about the different factors that drove the strong start to the year in that segment? I think you talked about market share gains and enrollment trend, Inclusive Access. And just how are you thinking about the growth trajectory over the coming quarters, especially with any visibility you have on both, again, the fall enrollment picture and changing adoption of Inclusive Access across the system? Is Inclusive Access continuing to kind of permeate across Higher Ed?

Sure. Thanks, Stephen. Yes, I would start, in the quarter, we had lots of success, but I'll remind you that that's the seasonally smaller quarter. The wins that we're talking about, and the share gains are from our summer semester. And oftentimes, you'll see that there are 2 elements to enrollments within the summer semester. So we're in the early parts of that. But we did see some share gains. We had some really nice performance, as you saw, the 14% growth. What's driving that? Again, share gains.

And as we think about where we are going forward, we've got a couple of things that are helping us. Continued share gains, we've talked about Evergreen and the benefits of what that will provide us. We think that will continue to drive ongoing share gains. There are some other early indicators that we're seeing. Those include high school graduation rates. We're seeing some FAFSA application information. All of those are trending very favorably. However, until the students actually show up on campus, will we actually know how we're performing.

So we're very optimistic about how the remainder of the year looks for us, but we're cautious until the students are in the door. With respect to IA, and Simon has mentioned it, we've talked about in the past, it's been an extremely -- it's an effective program for us, driving the sell-through rates. We have seen that growth over 30%. And we know that, that channel has allowed us to continue to grow and take share. So with the combination of all those things, I think we're very well positioned for the remainder of the year and going forward.

Got it. Yes, that's helpful. Then just as a follow-up, I wanted to ask about Scribe. It seems like there could be a lot of efficiency gains and potential margin uplift, I think if you start to leverage those capabilities with AI more broadly in content creation. Can you talk about that, how the organization is currently leveraging those capabilities? And any sense for the timing for when Scribe could be even more impactful?

Yes. Yes. And we've mentioned we're in the early days. And what we're seeing in certain cases, we're seeing a 60% time reduction and a 50% reduction in overall cost to create content. The areas that we're seeing that would be in question banks, chapter summaries, things of that nature. We've now deployed that across the entire business. So we're seeing it in all of our segments. And so while we're in the early days, we remain optimistic that, that will continue to grow. And as we've mentioned, there's meaningful spend here for us to go out and get at, but we're still relatively early.

The good news is we've now deployed it across all of our segments. So as we come into the next quarters and into next year, you'll hear us talking more heavily around the financial impacts that we're seeing.

Stephen, it's Simon. Just real quick, just to add on a couple of points that Bob made, particularly on your first question because we shouldn't underestimate the real strength of our Higher Education performance. We -- as you've seen, we've grown -- although it's a small quarter, to grow 14% revenue is really a spectacular performance for the group. And over -- when I look back over the last 5 years, we've grown market share 40% now in Higher Education.

And we stand today, LTM June at just under 29% market share, which is significant growth. So we are feeling very, very bullish indeed. That's the word of the day. We're feeling very, very bullish indeed about how Higher Education is performing. We continue to take share. We're very, very proud of that business because it executes so well. So we appreciate your question on that, and thanks for the opportunity.

Your next question comes from the line of Jeff Meuler from Baird.

You mentioned that K-12 selling season is off to a good start and you're [ taking ] share at a greater rate than expected. Can you just put the bone around that [indiscernible] just if you can give us any more detail on 2026? And then looking out [indiscernible] the market opportunity grows, the most important innovation or other factors we should be looking to for additional share gain opportunity.

Sure. And you broke up a little bit there, Jeff, but I think the question is what's really driving '26? How are we getting confidence around that? And then how are we being positioned as we go out into '27 and beyond in the broader market? Did I get that directionally correct?

Got it. Yes.

Okay. Very good. Yes. So where we sit and as you mentioned, we feel very confident about the '26 year. We're seeing some early indicators. One, the first thing that we can point to is the strength of the RPO. So you saw that, you could see that on the balance sheet, and we're performing really well with the orders that are coming in. A couple of areas, as we mentioned, we're taking share at a greater rate than we initially planned. And we're doing that across the board. So obviously, we have science program that's rolled out and that science program in districts and states in Tennessee and Alabama. But in addition to that, we're also seeing some strength in math and ELA as well.

One of the things that we're really proud of is as we looked at the largest market opportunities in K-12 for the year, we're leading 8 out of 9 of those. And remember, we have about 25% to 30% share in those markets. So as we think about how we're positioned, we generally get 1/3 of those opportunities to take the lead. But we're leading in 8 out of 9 of the largest opportunities.

So really pleased with that, continuing to capture rate above our expectations. But what we mentioned is it's early in the selling season, right? So as we think about that selling season as it goes through August, we're still early there. So while it gives us confidence in the year, we're just a little bit cautious until we actually see the year close out.

And then I'd tell you some of the other things that we're really happy about within our supplemental/intervention. Simon mentioned ALEKS Adventure. We're seeing some early successes there as we can expand the TAM within our supplemental/intervention space.

So all of those things are giving us a lot of confidence as we look through '26. Other things that we're seeing, we were on the list. Simon mentioned, I had mentioned on the list for California math. That is another area that, again, gives us a little bit of confidence as we move forward. As we think about the market opportunity and the confidence about it growing, as we -- Simon mentioned, we're 99% of every district.

We have great relationships with the state boards of education. We understand that dynamic. So what we see as we think about '27, '28, '29, understand the market opportunity, knowing that, that's growing, and we're well positioned because of the share gains, because of the innovation that we're driving with new supplemental/intervention tools. We're adding success with McGraw Hill Plus. All of those things are really positioning us well for the remainder of the year and then as we look out '27, '28, '29.

Got it. And then I know International is a smaller business for you, but you called out regional-specific contract timing [ factors ]. What are those? And are those quarter-to-quarter timing factors? Or is there an annual headwind this year for you?

Yes. It's Simon. I would say it's definitely a quarter-by-quarter issue, and we're not the sort of company that decides to move natural orders from July, for example, into June. That's not how we operate. It's very much a timing behavior quarter-by-quarter. And from a regional perspective, we've got a lot of excitement in our international group across all of our Professional Business, Higher Education, K-12. And there are particularly in regions where there is a great sympathetic view to the U.S. style of education.

So think about markets like the GCC and the Middle East, markets like Mexico, like Canada, where they're looking at ways of delivering curriculum materials through technology and improved technology infrastructure. That's where we really shine. And we see real opportunity there. And again, the international community is a little bit behind the U.S. when it comes to adopting a very strict courseware digital delivery model, including not just content, but all the assessment materials. So as the market accelerates its interest, I think in that mechanism, you're going to see further growth from us continuing. So it's an exciting potential opportunity for us for sure going forward.

Your next question comes from the line of Russell Quelch from Rothschild.

Congratulations on the IPO process, first of all. I just wanted to ask a couple of questions here. Firstly, around federal policy and the impact that might be having on your business. Is there any updates, new insights that you can share with us around recent developments?

And maybe just a follow-up actually on what you've been talking about in relation to the supplemental and intervention solutions in K-12. You mentioned the progress you made on the ALEKS Adventure sales. I wonder if you're seeing a better or improving environment for cross-selling of these additional solutions into the core customers.

Russell, it's Simon. It's lovely to hear you again, and thank you for your questions. Let me take each in turn. Certainly, when it comes to the recent policy activity from the federal government in the U.S., there really are no implications for our business at all, primarily because -- and you may know this already, but in K-12, it really is a market where the funding is driven by state and local activity. And in the case of Higher Education, there really is nothing that has been announced in any change that affects our business at all because all of the funding issues that has been mentioned in Higher Ed, one month, it may disappear, the next month, it may come back.

But regardless, the funding is going to be delivered through perhaps different federal agencies. If it's not the Department of Education anymore, it may be the Treasury or the Small Business Administration. So importantly, there are no indications of reduced funding, and that is really backed up and borne by -- when you look at enrollment statistics, although they're early, the summer school enrollment is pretty high, the FAFSA applications, I think, are at a record high for the fall. So I think we're going to see a good macro environment for Higher Education. And if it comes to international students, Russell, as you well know, we're a global company. So we will serve students wherever they are in the world, and we're very, very happy to do that. So we really don't see any specific elements at all.

We're a very resilient company and proud to be that way. Now your second question on supplemental/intervention. We're seeing great success with ALEKS Adventure for K5, as you mentioned. It's lovely to see ALEKS that genuinely AI-driven knowledge algorithmic program that really does help students in their personalized learning. It's really good to see that come down into K5.

And generally, in supplemental/intervention, we're seeing continued interest. As you know, that's an annual purchase. We're having tremendous relationships across schools and school districts around the country. And we're seeing noted interest in intervention tools that we provide, supplementary material to keep students engaged and to really enhance the learning process. So it's good news in that regard. You may remember, we have only 5% of that market, and we are very keen, and we fully expect to get significant market share in the years ahead. So it's a very, very good area and a very good avenue for us.

And Simon, if I were to add on that upsell, cross-sell opportunity, it's so critical for us as we've added the K-5 opportunity. Now we have a broader breadth of opportunity to sell into those districts. It's resonating really well. And then as we look forward into the larger opportunities as we think about that market growing in '27, '28, having a full suite of product to sell, that's where we get really excited to continue to drive that upsell, cross-sell.

Your next question comes from the line of Jeff Silber from BMO Capital Markets.

I wanted to start off with a question for Bob. Bob, this is the first opportunity for you to provide annual guidance, at least for equity investors. And I'm just wondering maybe you can tell us a little bit about your approach or your philosophy, what's driving your guidance? Do you think you're being overly conservative, et cetera?

Yes. Thanks, Jeff. The way we go about it is, of course, we do our bottoms-up build. We revise our forecasting every month and every quarter. And we really look at some of the leading indicators to provide us some insights into the remainder of the year. So as you know, the midpoint of our guide on the top line is down 4%, primarily driven by the K-12 market, a smaller market opportunity. Now while we're early, as we think about Q1, it's early in our process. So I'll walk through the 2 largest segments, K-12, Higher Ed. K-12, we look at the improving capture rates.

I mentioned our share in the large opportunities where we're taking the lead in 8 out of 9 opportunities. All of those things are giving us confidence. And while it's a little bit early for us to really start calling things up, it just gives us that confidence around our K-12 business and how we've called that. We know we're going to outperform. The overall market, we've highlighted, could be down 15% to 20%. Certainly, because of our performance, our share gain, we won't see those levels.

So we're very pleased with that. Now on to Higher Ed, I mentioned the early indicators, and it's really too early for us until we actually see the students show up. But those indicators are also very positive. And I think it's all underpinned by the continued share gain. So while the question is, are we being overly conservative, I'd say we're being very prudent at this juncture as we think about the landscape we're operating in.

And when we come back next quarter, I think it will be a good question as we'll have greater insight not only into the remainder of the year in K-12, but after the fall semester, we'll have great insight into the spring. So while we're being prudent at this point, I think there's some very nice early indicators that gives us confidence in our outlook.

All right. Great. Your answer was actually very thorough, and you answered my second question before I got a chance to ask it. So I'll jump off.

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

You talked a lot in the prepared remarks and in the first question about how you're using AI in your business. And I was hoping you could talk about what you're seeing with regard to competitors utilizing GenAI in the marketplace, what kind of products they're creating, just given that most don't have the same kind of scale of data from student interactions, I was wondering if there are more maybe niche areas that they're attacking. That would be great.

That's a very interesting question, Toni. And I appreciate the way you've asked it as well because it is -- this is an area where scale matters. And if you think about the 19 billion points of data, the learning data that we get from students every year, that allows us to create material that we know is going to be efficacious. We know it's going to help students learn and be very, very directed to that individual process of learning.

The more data we have around that, frankly, the better products that we can create. And I think we're less concerned about niche products, to be honest with you. And we're really only concerned in providing those products and enhancing the products in a way that we know will benefit the teacher and the student.

We're not about PR campaigns of different partnerships that may actually add [indiscernible] if any value. We are much more about focusing on what we know the teaching community need. And we -- I'm privileged that on Saturday, I'll be 39 years in this business since I began as a rep in Texas all those years ago. And we, to this day, continue to spend a lot of time focusing on understanding teaching and faculty needs to make sure that we're providing the right material.

That continues to be our focus. So when I started off by saying it's such a tailwind, it really is, but it is especially -- AI is especially beneficial for those companies at scale like McGraw Hill, where we can utilize those points of data, creating products, either new completely stand-alone products like ALEKS or embed more information and AI tools to improve the solutions that we deliver like AI Reader across all of our Higher Education products. So we're excited by the opportunity. We take it very carefully to make sure that we are only providing value to the students and the educator that we serve. And it's a key goal for us.

And Simon, maybe I'll add this, Toni. I'd also like to highlight the fact that we've got a very active M&A team. We're out in the market. We look at those point solutions to see what innovations they're building, what they're developing. And really, that's where the synergy would come in if we were to bring in those smaller point solutions that are building innovative products and using our wealth of data and insights and scale to allow us to really accelerate those. So we've got a team. We look at and evaluate opportunities. We're not too proud to go out and see what else people are doing. And so we're every day evaluating different opportunities of those point solutions.

Great. And just as my follow-up, I was hoping that you could talk about any sort of key dates or time frames that we should be aware of with regard to meaningful capability changes within your products, either within Higher Ed or K-12. And I know you mentioned Evergreen having sort of 30% already on that. Like there's any milestones, penetration milestones that you're looking for going forward?

Yes. And we are, Toni, as you know, a cyclical business. So Evergreen is a great example. And as you correctly say it, now just a little bit over 30% of our revenue is delivered with that automated update, if you like, there's no longer a need for a new addition in Higher Education. All of our materials now will be enabled through the Evergreen delivery system, and that keeps faculty extremely happy because they're always up to date as, of course, are the students with all the materials that they use.

You're going to see -- each summer, you'll see a significant milestone. And obviously, I can't tell you what that will be, although I have a very good idea. Going forward, you'll see that develop as the releases increase over the coming months.

So you'll see significant increases in that number. Similarly, with Inclusive Access, again, within Higher Education, you may have noticed that we grew over 30% this past quarter. I think it was 33% with our Inclusive Access revenue. That's something that we will report upon every quarter. And you will see that method of our landing that particular distribution mechanism and then expanding it throughout the college campus. That's what we'll be reporting on consistently. And as I would say, watch this space, you're going to see some very good metrics coming forward in both of those areas.

And Toni, maybe I'll add one other point, Simon. The other big milestone for us as we think about piloting our [ NewLit ] program this fall. As you recall, our Reading Wonders program has been our largest program, ELA being our largest subject matter. We'll be launching and piloting that program this fall. A lot of excitement there. We'll continue to provide updates as how that progresses and that market opportunity as you see '27, '28, '29 and further out is really being driven by ELA. So we're really excited to bring that into market.

Your next question comes from the line of Rob Levins from HSBC.

Congrats on the quarter. Just my first one, just following the IPO and the debt reduction, can you just provide a bit more color on your capital allocation priorities and leverage target?

Yes. Sure thing. It really is unchanged, right? We benefit, obviously, from the deleveraging, the interest rate reduction benefit that we'll have. But as we think about our allocation going forward, it stays consistent. First place we always will deploy capital is for internal projects. They always have the greatest ROI. So that will be the first place we go. Those are always fully funded in our budget.

Second, we will continually delever and looking to get to that leverage target of the 2x to 2.5x in the medium term. And then opportunistically, deploying M&A. And so as I mentioned earlier in Toni's comment, the question around what's out there, we look at small tuck-ins of things that we could bolt on very quickly drive synergies and utilize our scale. So we're looking at those every day. And so it's a nice balance of debt reduction and balancing that with opportunistic M&A.

Very helpful. And if I could squeeze in just one more. Thanks again for the full year guidance. Is there anything you would call out that might push you to the top end in the sense of any trend to look at or monitor? Or would it just be kind of a number of the things you mentioned earlier just coming in stronger than expected, again, realizing its earlier in the season, but would it be just kind of just exceeding expectations on market share or like enrollments or something?

Yes. I think those are the 2 items, right? And so all early indications, both in Higher and K-12, even takeaways that we're seeing for the fall semester, those items are going to drive the share. But we also -- I do want to highlight that we are watching enrollments. I would ask you to pay close attention to what we're seeing in early enrollments that market data will come out.

And the other element is just to highlight that we have a pricing strategy, and we're realizing that. It's sticking. So all of those things are what gives us confidence. And as we move through back-to-school and the fall semester, we'll provide some updates as to where we're sitting. But again, all of the indications are very positive, and we feel confident about our year.

And that concludes our question-and-answer session. I will now turn the call back over to Simon Allen, CEO, for closing remarks.

Thank you very much, and we appreciate very much all of your attention. And hopefully, you've recognized that we've achieved significant financial milestones over this past decade. And I think our business is now very well positioned for the future in the public markets, and we appreciate your very kind gestures and congratulations around that. I think the brand that we have, the impact of our brand is huge, and it's really built on trust and recognition globally.

This is such a key element around the world of education, especially now in such a fast-moving technology landscape. We've talked a lot about AI and the tailwind that, that provides us, but also the responsibilities that we have to make sure that we utilize all of this technology effectively. And we're confident in our ability to execute on our strategy. We're driving sustainable growth, and we're creating long-term value for you, for our investors.

And we see this as just the beginning of our journey, and we are really enthusiastic about all of the opportunities ahead. And I would simply finally say enjoy what remains of the summer, and I look forward again to speaking to you in a few months. Thank you very much.

This concludes today's conference call. Thank you for your participation. You may now disconnect.