MH

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, 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.