McGraw Hill, Inc. Q2 FY2026 Earnings Call

Good morning, and welcome to the McGraw Hill, Inc., Fiscal Second Quarter 2026 Earnings Conference Call for the Quarter ended September 30, 2025. 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 two 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 are 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 two decades, our AI philosophy centers on saving educators' time, strengthening student-teacher relationships and personalizing learning. Our multilayered moat is built upon three 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 ten states, with two 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. One 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 over 600 Connect titles as well as within our First Aid Forward solution for medical students. Additionally, we recently introduced four 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 two 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 20 times 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 that 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.

Your first question today comes from 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?

Thank you, Ryan. I'm glad to hear from you and appreciate your question. We are very happy with our Higher Ed performance this quarter. The 14% growth is largely due to gaining market share from our competitors. Although enrollment is currently predicted to be around 2% to 2.5%, we have experienced significantly higher growth, primarily due to our strong execution. The quality of our execution is what sets us apart. Our product delivery meets customer needs, and we effectively utilize AI to demonstrate our success. Additionally, I believe our go-to-market teams are the best in the industry, as evidenced by our substantial increases in retention rates stemming from our market share gains. We're capturing share from all competitors across various disciplines on college campuses and achieving record NPS scores as the back-to-school season progresses. We've now reached 30% market share, a notable increase from just over 21% a decade ago. We're proud of this 160 basis point growth year-on-year. Regarding innovations like AI Reader, launched a couple of quarters ago, it has proven to be a great retention tool. We reported 11 million interactions by the end of Q2, and that number has grown to about 20 million by October, as both students and professors recognize its value in supporting student success. On the topic of Inclusive Access, we've been highlighting its benefits for a long time. This model is open to everyone, and we continue to grow our business through it each quarter. It's a strong business model, and the land and expand strategy is proving effective. Looking at new solutions like ALEKS Calculus, we expect to tap into an additional $100 million opportunity. Our initiatives with Sharpen and Sharpen Advantage aim to develop an AI-driven institutional product that effectively meets faculty needs and enhances student outcomes. Now, let me hand it over to Bob, who can elaborate on the Inclusive Access model and the land and expand strategy.

Sure thing. Thanks, Simon. Ryan, I want to highlight that the National Student Clearinghouse data you mentioned is preliminary. We've seen changes from our initial print to subsequent prints. So I want to caution you that the 2.4% you quoted is preliminary. However, it's important to note that the growth rates for 2-year and community colleges are higher. We are seeing enrollment slightly above that 2.4%, but remember that it is preliminary. Now regarding the Inclusive Access model, we're excited about its sustainability. We've added 100 new institutions annually, which shows there's a lot of potential for us to grow. More importantly, as we partner with these institutions, we see growth rates of 15 to 20 times in the first couple of years and expect continued growth afterwards. When considering sustainability, there's plenty of opportunity, and we're eager to keep discussing it.

I really appreciate that. As a follow-up regarding K-12, it's great to hear some insights about California Math and Florida. Can you update us on the current performance of California Math and Florida ELA? Additionally, how confident do you feel as we approach what they refer to as year 1, which is actually the second phase 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.

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?

Thank you for the question, Henry. It's nice to hear a familiar accent. This is an important topic because there’s a lot about AI that hasn't been fully appreciated. McGraw Hill has significant potential to leverage AI as a major advantage for our business. Although this is only our second quarter earnings call, I hope that in the upcoming quarters, people will begin to recognize the true value and strength that AI brings to us. We're experiencing a positive impact across our entire organization. In Higher Education, we've discussed our AI Reader products and Sharpen Advantage for institutions. We've also highlighted the role of clinical reasoning in our medical offerings, which is crucial for helping prospective students in their medical training. Additionally, we've worked with ALEKS for over two decades, and now machine learning is enhancing our Generative AI delivery for both K5 and ALEKS Calculus. All these factors provide us with strong confidence, which is evident in our customers' responses and our financial results. Customers are telling us that Sharpen is benefiting their students, and we’re seeing significant increases in student engagement with AI Reader. Medical students are gaining from our clinical reasoning tools. Our products are effective and functional. With our longstanding reputation of 137 years, we maintain a trusted position in education, ensuring that our customers rely on us. They are eager to explore how we can integrate AI into their teaching materials. It’s important for me and for all of us to convey just how advantageous this integration is for McGraw Hill, as it allows us to greatly enhance learning outcomes through 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.

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, that's a great question. I'll start and then Bob can add any additional insights. What I want to highlight, Stephen, is the significant impact of products like ALEKS Adventure, which we expect to drive new growth moving forward. It has been available for about a year now. We've also expanded McGraw Hill Plus, which has been operating in 10 states, and we are set to roll it out in 2 more. These initiatives have resulted in a notable increase in teacher engagement and activity because they provide valuable data on student performance that teachers find very useful. A crucial aspect of your question is how this relates to our Core business, where we have been quite successful. The market potential is much larger next year. However, beyond that, the Supplemental/Intervention segment makes up around 15% of our business, and we currently hold about a 5% market share in that area. This is where we see significant growth potential. We are building on our Core successes with ALEKS alongside our Math Core adoptions and enhancing our ELA offerings with Actively Learn and Achieve3000. All these resources, along with the integration of McGraw Hill Plus, provide us with strong confidence in continued growth and market share expansion. Bob, do you have anything else to add?

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 at a high level, we will not be changing the level of investment, which has been 8% to 9% of our revenue. We will maintain that level. Of course, we will reassess and adjust where we allocate our funds. The efficiencies we are achieving in product development allow us to increase investments in other areas, such as the new AI tools we have recently launched. Simon mentioned the four new products we introduced to the market. The speed at which we are releasing products enables us to bring more offerings to market. Most importantly, I want to emphasize that we believe all of this innovation will help us 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. We have noted that the overall market is projected to be $300 million, and we anticipate it will continue to grow. We feel very well positioned, particularly with the significant opportunity in California Math. We are enthusiastic about this potential. Simon, do you have anything else 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 on a great quarter. I want to follow up on the enrollment data we are all reviewing. Specifically, I'd like to address it from the perspective of subject matters since that appears to be a significant change. Can you discuss whether you have strong or weak representation in subjects like health and business, which are performing well, while computer science is seeing a decline for understandable reasons? Are there any subject matter trends that are advantageous for you?

Yes. It's a great insightful question. We certainly see that we have those disciplines that we see the highest growth rates that are 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 elaborate on that because it's a good question, Marvin. One of the significant advantages we have is our extensive coverage across various sectors. With almost 40 years in the Higher Ed sector, we've seen growth in numerous areas such as business, sciences, math, humanities, and social sciences. Our tools, including AI Reader, encompass every discipline and subject. Similarly, with Sharpen, we address each subject comprehensively. This broad coverage gives us a considerable advantage over smaller start-ups. Consequently, we are experiencing robust double-digit growth across all subject areas, some more than others. Looking forward, our scale and product variety continue to provide us with a strong edge.

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, that's accurate. When considering the decline we anticipated this year, as Bob pointed out earlier, it’s particularly evident in Spain where our K-12 business is affected by a similar cycle to the U.S. This year represents a lower performance for us in Spain, but it's purely a matter of timing. Next year, I expect changes. In Canada, we've enjoyed a surge in enrollments over the past few years, but now we’re witnessing a significant drop in enrollments. However, what stands out to me is our growth in market share. Even if the overall market is declining, it’s crucial to evaluate our performance. I’m pleased to report that we've increased our market share in Canada by over 3.5% this year, positioning us at about 27% to 27.5%, compared to just under 15% in 2019 before COVID. This growth in share highlights the potential for our excellent products and effective go-to-market strategies, which we've successfully executed in Canada. Additionally, we continue to see strong performance in Latin America with our School and Higher Ed business, along with robust results in the GCC market in the Middle East. We're in a solid position and look forward to sustained growth, focusing on regions where we know growth is possible.

I wanted to ask another question about Higher Ed. There has been strong performance this quarter, and you mentioned achieving 30% market share gains, which seems to be driven by the launch of Evergreen. I assume this is contributing to improved retention and allowing salespeople to concentrate more on new business. Can you clarify if the success you're experiencing is tied to this platform transition, or are there other factors, such as content, that are also playing a role? I'm interested in understanding the sustainability of the Higher Ed market 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 in our prepared remarks, we highlighted that we are getting ready for the larger opportunities in English Language Arts in 2028, and in 2027 for Math. We are well positioned to leverage our strengths as we consider the market opportunities in the coming years. Our strengths lie in English Language Arts and Math, along with our new Emerge! products. Therefore, we are well positioned, and this overall mix in the K-12 market will benefit us over the next several years.

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 more at the RFP stage, yes, but I think increasingly, as we communicate with teachers and school districts, they recognize the added value we can provide through our Supplemental and Interventional tools. Some of them are now insisting on continuity. If they're using Reveal Math, we should consider a math tool that supports students who may be underperforming. We have ALEKS for that. When we examine our ELA business with Emerge!, which we just launched, we see that as we look ahead to '27, '28 and beyond, teachers are expressing a need for writing tools and instruction to help assess students. That's where we introduce what we've just launched with Writing Assistant. I believe this opens up an opportunity for us to significantly enhance our growth by offering 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. I'll start, Bob, and you can add if you'd like. There is always potential for pricing opportunities. I believe the concerns around enrollment and the demographic cliff are somewhat exaggerated in relation to our business because the average age of our student customers is in their mid to late 20s. Many of our community college students are often in their 30s and 40s. Therefore, we're not overly worried about enrollment issues in that respect. The key factor for us is the expansion of total addressable market (TAM) through the products and solutions we are now offering. We anticipate growth in that area. We don't see enrollment decline as a significant concern due to the opportunities for market share expansion we have identified. Our ability to serve customers, especially with AI, is crucial, and they need our assistance. We're experiencing strong growth, and this trend will continue. We must keep innovating with new products and solutions to enhance our market presence.

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?

It's a good question, and we're glad to have so many inquiries. We're receiving positive feedback about state budgets and are not worried about any decline. The budgeting process in K-12 education is primarily managed at the local and state levels. Education budgets typically allocate less than 1% to courseware and course materials, which is a small fraction of the total budget. Therefore, we don't foresee any issues with budgeting for the coming year and beyond. This certainty is one of the many reasons we remain confident.

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.