Good morning, and welcome to the McGraw-Hill, Inc. Earnings Conference Call. All participants are in a listen-only mode. As a reminder, today's call is being recorded, and a written transcript and webcast replay will be made available in the Events and Presentations section of the company's Investor Relations website. Following the prepared remarks, we will open the call for questions. I would now like to turn the call over to your host, Danielle Kloblin, Treasurer and Senior Vice President, Investor Relations. Please go ahead, Danielle.

Good morning. Welcome to McGraw-Hill's Fiscal Fourth Quarter and Full Year-Ended March 31, 2026 Earnings Call. Joining me today are Simon Allen, Chair of the Board of Directors, Philip Moyer, President and Chief Executive Officer, and Bob Salmon, Executive Vice President and Chief Financial Officer. During today's call, we will be making forward-looking statements that are based on our current expectations and the current economic environment. These statements, estimates, and projections are subject to significant uncertainties beyond the control of management, as detailed in the cautionary language in our fiscal fourth quarter and full year-ended March 31, 2026 earnings release, the accompanying investor presentation, our Form 10-K, and other SEC filings. We will also reference certain non-GAAP measures today, which we believe provides useful supplemental insight into our financial and operational performance, though they are not a substitute for gap measures. Definitions and gap reconciliations are available in our earnings release, the appendix to the investor presentation, and on our investor relations website. For those listening to a recording of this call, please note that the remarks are as of today, June 11, 2026, and have not been subsequently updated. With that, I'll turn the call over to our Chair of the Board, Simon Allen.

Good morning, everyone. Fiscal Year 2026 demonstrated the strength of our business, our strategy, and the enduring importance of education. Our mission to support learners and educators, build human intelligence, and power the future of learning has never been more relevant. In a year marked by rapid AI advancement and global uncertainty, McGraw-Hill reinforced our position as the partner educators and learners trust most. That foundation fuels our trajectory. As a data-driven learning company, we made significant strides in AI-powered innovation, launching new tools, expanding existing solutions, and deepening key partnerships that position McGraw-Hill to lead the next era of AI-enabled learning. This execution reflects the strength of our strategy and the calibre of our leadership team, led by the right person. Having worked closely with Philip over the last 120 days, the board and I have full confidence in his vision and his ability to drive McGraw-Hill's next chapter of growth. We are fully aligned and energised by what lies ahead. I'll now turn the call over to McGraw-Hill's President and CEO, Philip Moyer.

Thank you, Simon, and good morning, everyone. It's a privilege to step into the CEO role and lead McGraw-Hill in this exciting moment in education and technology. My first 120 days have been filled with over 250 customer, team, industry, and investor meetings. and it's clear that education is at a seminal moment student populations are growing the learning landscape is increasingly complex and outcomes are more important than ever students teachers and institutions are looking for an enterprise partner they trust to ensure the next generation of students are prepared what is also clear to me is that McGraw-Hill is uniquely positioned to be this partner. Our trusted content, our learning data, and our pace of AI innovation, along with the scale of our relationships, are unmatched, and I believe we are positioned to be the global leader in this next generation. McGraw-Hill has a great financial foundation, and my focus for shareholders is to maintain our profit profile, reduce our debt, and accelerate our growth in fiscal year 2027 and beyond. I see many opportunities to lead in innovation, streamline and scale our execution, and profitably expand our TAM. In fiscal year 2026, we exceeded our IPO expectations for revenue and adjusted EBITDA, and achieved several important milestones. Recurring revenue grew by 6% and now represents over 73% of our total revenue. In K-12, our capture rate exceeded expectations, despite the expected cyclical decline in the market. In higher education, our net dollar retention reached 114%, and our customer satisfaction reached its highest level ever. In fiscal year 2026, we also proved that we could profitably accelerate execution. We introduced a record number of curriculum offerings and AI learning tools while improving our adjusted EBITDA margin by nearly 80 basis points year over year. We now have launched eight AI learning tools, which served more than 7.5 million users, and we have three additional launches planned this fiscal year. We launched our California math curriculum and a new literacy curriculum, the latter of which is our single largest investment in curriculum in our history. We also introduced a K-12 AI curriculum designed to teach AI concepts and integrate them into the classroom learning. As we enter fiscal year 2027, we see clear opportunities for growth. The market dynamics support a multi-year acceleration of revenue growth and underpins our confidence in our medium-term framework for mid-single-digit-plus revenue growth. Now, one of the most exciting areas I see that supports our growth expectations is the use of AI. While I'm frequently asked by investors if AI will disrupt our business, I've rarely been asked that question by our customers. Students, teachers, parents, and institutions don't want to park a child in front of a generic LLM and hope for a good outcome. They know that AI is only as good as its data and its training. And in my past 120 days, I've deepened my excitement about the competitive mode we are building in AI, trained specifically for education and the outcomes we produce. Our proprietary content catalog includes tens of thousands of courses spanning more than 500 subjects mapped to hundreds of thousands of regulated learning objectives and academic standards across roughly 12,000 school districts and approximately 3,300 higher ed institutions. We build our tools to meet digital accessibility requirements, ensuring broad access for learners, and we have our student outcomes measured by independent third parties. We have over 100 million active licenses by students and educators of this curriculum. From this usage, we captured over 25.6 billion learning interactions and have decades of data, over 190 terabytes, on how students learn, where they struggle, and how instruction must adapt in real time. This extraordinary content and data mode is what we use to build and tune our education-specific AI learning tools. It is also what we use to deliver a precision education experience, the right content and the right question at the right moment. I'm excited about our use of AI because I'm seeing how we are expanding this precision experience and creating new opportunities for TAM expansion. One great example is the emerging agentic AI landscape. AI is evolving from answering questions to taking actions, but customers need purpose-built agents that they trust. As a result, we are being asked to be a part of new agentic AI strategies in both education and non-education customers. And I'm excited to announce that we are piloting our new agentic AI tool that will make our precision education experience accessible as a trusted AI agent. This represents a new business model and one of several opportunities to expand our TAN. At the same time, we continue to enhance our core learning solutions with artificial intelligence. We are expanding our Connect platform with Learning Coach, an AI conversation tutoring tool developed with Chiron Learning. We've added new accessibility features to AI Reader, including translations across 38 languages. And we've created new AI literacy modules. As I mentioned earlier, the education market is not just asking for better tools. it is demanding measurable outcomes. In fiscal year 2026, McGraw-Hill extended our trust with educators with meaningful improvements in student comprehension and grades, which is now validated by more than 100 independent researchers. Alex, for example, continued to set the benchmark for adaptive learning, with math students achieving topic mastery more than 90% of the time. in pennsylvania elementary schools that were using alex adventure had first grade students improving nearly 25 points on math assessments and second graders improving more than 55 points over the course of the school year ai reader generated 57 million learning interactions across 2.4 million students driving a higher engagement with teacher assigned reading topics And with our Sharpen tool, students engaged up to four times more with study activities than compared to generic AI tools. At Rowan College in New Jersey, for example, students who use Sharpen achieve final exam scores 47% higher than peers who didn't use the tool. Looking ahead, our strategy focuses on four priorities. Strengthening the core, expanding our cross-sell opportunities, growing our addressable market, and driving operational efficiencies. In K-12, we're continuing to evolve our California math program to meet the emerging requirements of the market. This California math adoption cycle has been slower than expected, but 80% of the market remains undecided. This California math adoption cycle has been slower than expected, but 80% of the market remains undecided. Also, in K-12, we're entering one of the most important nationwide curriculum refresh cycles in this millennium, as an unprecedented amount of schools evaluate new English language arts programs. Since 2021, we've invested over $100 million in our new Science of Reading ELA program, Emerge, Summit, and SOAR. This is our largest curriculum investment to date, And we are seeing early district wins and a strong rubric of scores ahead of emerging opportunities. In higher education, we continue to gain share as institutions adopt inclusive access, expand their use of our Evergreen model, and seek more integrated learning experiences. Fiscal fourth quarter marked our 40th consecutive quarter of market share gains in higher ed, with our share approaching 31%, according to MPI. Our Net Promoter Score reached a record in the spring, and we saw strong retention and volume growth. We've also seen solid adoption of our new offerings in credentialing and AI professional development. Within our global professional business, medical education represents more than 75% of revenue. The World Health Organization projects a shortage of 11 million healthcare workers by 2030. And this year, we expanded our offerings into clinical training and AI-powered diagnostic simulations. We remain well-positioned to serve this market with our innovation and trusted high-stakes learning solutions. Internationally, we see education market conditions improving. Higher education enrollment in Canada is stabilizing, and new opportunities in favorable demographic markets such as Latin America and the Middle East support a more attractive setup. ALEKS remains a key driver internationally, with calculus now available in additional markets. Looking to fiscal year 2027, we see a clear path to revenue growth, expanding margins, and strong free cash flow. We've made significant progress in reducing our gross debt, and we will remain disciplined in capital allocation, which Bob will speak to shortly. We're looking forward to sharing a broader update on our long-term strategy and capital allocation framework at our investor day later this calendar year. But after this first 120 days as CEO, I am more excited than ever. At McGraw-Hill, we build human intelligence. Our mission has never been more important. Our assets have never been stronger. And our opportunity has never been greater. With that, I'll turn it over to Bob to review our financial results and provide guidance for fiscal year 2027.

Thank you, Philip. Well, fiscal year 2026 was defined by market share gains, margin expansion, and accelerating digital momentum. We exited the year with a stronger balance sheet, greater financial flexibility, and stronger pricing power, driven by deeper adoption of our AI-enabled solutions, all reinforcing our confidence in long-term value creation. For the fiscal year, revenue was $2.1 billion above the high end of our guided range and $2 million above prior year. Reoccurring revenue reached $1.5 billion, growing nearly 6% year-over-year, exceeding the high end of our guided range, reinforcing the durability of our model. The remaining performance obligation was $1.7 billion and will increase in the fiscal second quarter of 2027, reflecting the typical K-12 seasonality. Fiscal year, adjusted EBITDA was $744 million, up 2% year-over-year, exceeding the high end of our guided range, with margin expanding nearly 80 basis points to 35.4%. During the fiscal year, we reduced gross debt by $646 million, inclusive of the IPO proceeds. We remained focused on achieving our net leverage target of two to two-and-a-half times. Turning to the fourth quarter, revenue was $464 million, down 2% year-over-year, reflecting a smaller take-home market opportunity, partially offset by continued outperformance in higher education. Reoccurring revenue totaled $373 million, while digital revenue reached $393 million, representing 81% and 85% of total revenue, respectively. Fourth quarter gross margin increased nearly 50 basis points, driven by operational efficiency and favorable digital mix. Adjusted EBITDA was $131 million, with margins expanding nearly 40 basis points year-over-year, reflecting operational leverage and early AI efficiency savings while we continue to invest in growth. Turning to segment performance, in higher education, fiscal year revenue grew 12% year-over-year to $879 million, with reoccurring revenue up 10% to $734 million. Growth was largely driven by market share gains, which exceeded expectations, alongside enrollment, pricing, and lower sales returns and the associated release, contributing roughly three points of growth. Market share is now approaching 31% according to MPI. Momentum continued in the fourth quarter with higher education revenue increasing nearly 2% year-over-year to $258 million, despite more schools starting spring semesters later in the quarter compared to last year. Our spring selling season was a success, with year-over-year activation growth and share gains supported by strong commercial execution and our Evergreen delivery model. Evergreen, a continuously updated content delivery system that improves retention and frees our sales teams to pursue competitive takeaways. This remains a competitive differentiator in the market and now represents 68% of higher education revenue. Demand by discipline was particularly strong in business and science, which represents subject areas where we over-index. Underpinning that demand is the inclusive access delivery model. Inclusive access represents 56% of revenue in fiscal year 2026 and continues to expand as existing campuses adopt additional courses. As a reminder, we typically add about 100 new campuses each year, with those significantly scaling over the following two to three years. At the same time, our customer success organization continues to strengthen faculty partnerships, supporting retention, and driving net dollar retention of 114% in the fiscal year. Turning to K-12, fiscal year revenue was $884 million, down 9% year-over-year, reflecting the anticipated smaller market opportunity and difficult prior-year comparison. Reoccurring revenue grew 3% year-over-year to $620 million in the fiscal year. Despite market decline, performance came in slightly ahead of expectations due to stronger capture rates in key adoption markets. In the fourth quarter, K-12 revenue was $126 million, down 10% year-over-year, with sequential improvements while reoccurring revenue declined 3% as prior year adoptions provided some durability. As we progress through the key selling season for the 2026 and 2027 school year, we are gaining real-time market intelligence. In California, some districts are taking longer to finalize curriculum refresh plans amid higher volume of rubric choices, pilots, and tools available. We have always expected the California math refresh cycle to take place over a handful of years, but the phasing has been recalibrated as we learn more from prospective customers. This delay has allowed us to better customize our materials to the market's rapidly evolving and fragmented needs and improve our capture rates and subsequent adoption years. Importantly, the market opportunity and opportunity to win remains intact. In Texas, our MAP program has been well-received, while state-sponsored curriculum has seen early successes due to upfront incentives provided by the state. Contracts have been shorter, reflecting a market in experimentation mode. Historically, districts and educators favor high-quality integrated solutions. And that pattern continues, giving us confidence in our ability to serve Texas in a very meaningful way going forward. We have seen this dynamic play out clearly in higher education, where our win ratio against OER and AI-generated curriculum vendors has been 6 to 1. OER was often adopted through top-down institutional mandates, but poor outcomes drove educators back to us, reinforcing that education is more than information. information. Pedagogical designs built with cognitive scaffolding, domain knowledge, and alignment to thousands of learning objectives and localized standards demand deep expertise. And this is where McGraw-Hill excels. In Florida ELA, the market opportunity remains attractive, and our capture rate is trending in line with expectations. Looking ahead, we have visibility into several years of potential market expansion in K-12, driven largely by a nationwide ELA refresh cycle aligned with the science of reading. McGraw-Hill has been preparing for this opportunity with our ELA programs, Emerge, Summit, and SOAR, which integrates McGraw-Hill Plus, AI-enabled capabilities, and supplemental and intervention solutions. Early momentum in ELA is encouraging. Colorado's Department of Education escort emerged as the highest-rated curriculum in the latest instructional material review for K3. We are also seeing early wins in urban open territory markets such as Seattle, where McGraw-Hill has historically had lower penetration. The first major state adoption opportunity for ELA will occur in California starting in fiscal year 2028, with the state expected to publish its list of approved vendors later this year. As a reminder, ELA is our largest subject area, representing approximately 40% of our historical K-12 revenue. So early signals from our new ELA program position us well. The global professional business remains steady in fiscal year 2026, with 4% year-over-year digital revenue growth supported by medical content and early traction from our AI-enabled solutions, which was partially offset by continued transition away from non-corporate print products. And in international, while revenue declines 7% year-over-year due to macro pressure in select markets, we are better positioned across multiple key markets heading into fiscal year 2027, supported by new commercial opportunities. Fourth quarter performance was also impacted by Middle East project delays that have shifted into the second half of fiscal year for 2027. While we recognize that $39 million impairment charge in the fourth quarter is driven by geopolitical and macroeconomic factors, we remain confident in the underlying fundamentals and long-term strategic importance of the global markets we serve. With the outlook improving in fiscal year 2027, as headwinds ease and positioning strengthens. We ended the year with $254 million in cash and $704 million in total liquidity, with our revolving credit facilities remaining undrawn. During the year, we were paid $646 million of gross debt, reducing net leverage by approximately 80 basis points and lowering annualized cash interest expense by nearly $45 million. Despite entering our seasonal cash trough through June, We reduced that by an additional $50 million in the quarter, including buying $40 million of our highest coupon notes in the open market at a discount. And we will continue optimizing our capital structure in the future. Cash from operations was $331 million for the year, while CapEx and product development was just over $200 million. We generated $335 million of unlevered free cash flow in the fiscal year. Turning to fiscal year 2027 guidance, we expect revenue to be in the range of $2.115 to $2.175 billion, remaining consistent with the dollar expectations we established at the time of our IPO. We expect approximately 55% of the full-year revenue in the first half of the fiscal year weighted towards the second quarter. Reoccurring revenue is expected to be in the range of $1.587 to $1.627 billion ahead of our IPO expectations, demonstrating a growing high-quality and predictable revenue stream. Adjusted EBITDA is expected to be in the range of $750 million to $790 million ahead of expectations set at the time of the IPO. The implied adjusted EBITDA margin of 35.9% at the midpoint represents a year-over-year increase of 50 basis points. Unlevered free cash flow is expected to reach approximately $400 million, up roughly 20% year-over-year, with further growth anticipated in fiscal year 2028. CapEx and product development are expected to remain approximately 10% of revenue. Our capital allocation approach remains balanced and disciplined as we continue to prioritize reinvestment in the business, debt reduction, and selective tuck-in acquisitions. Consistent with this approach, our board has authorized a $50 million share repurchase plan, reflecting confidence in our sustained growth, strong profitability, and meaningful cash generation. To summarize, fiscal year 2020's fixed performance exceeded expectations, and our fiscal year 2027 revenue outlook in dollar terms remains consistent with the trajectory we outlined at the time of our IPO. At the same time, our guidance for reoccurring revenue and adjusted EBITDA is above our IPO expectations, and we expect continued growth from these levels beyond fiscal year 2027. The structural drivers of our business remain strong. In higher education, we expect continued share gains supported by durable pricing while taking a measured approach on enrollment assumptions ahead of the start of the academic year. In K-12, we expect improving trends as the market expands, supported by ELA momentum and the upcoming adoption cycle. In global professional, we will continue to prioritize growth in medical solutions. and in the international business, we are positioned more advantageously into fiscal year 2027. Finally, a few modeling items for fiscal year 2027. Depreciation and amortization is expected to decline modestly versus fiscal year 2026, including $208 million of intangible asset amortization related to the platinum acquisition in 2021. Stock-based compensation is expected to be approximately $15 million, cash and GAAP taxes are expected to be in the range of $20 to $40 million, and GAAP interest expense is expected to be below $180 million. These assumptions support GAAP net income in fiscal year 2027, increasing significantly compared to fiscal year 2026. With that, I'll turn the call back to the operator for questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Stephen Sheldon with William Blair. Your line is unmuted. Please go ahead.

Hey, good morning. Thanks. As far as you're just on the revenue guide for fiscal 2027, can you help brain, I think that's probably for Bob, brain at a high level what you're assuming in terms of segment-level revenue growth, and especially as you think about K-12 and higher ed?

Sure thing. Yeah, so as I think about, you know, 27, how are we sort of positioning the business? And, you know, certainly we're going to have continued share gains in higher ed, and you saw exceptional performance there. We see that continuing. you heard that I said we took a view of 1% enrollment gains in higher education for next year. We'll have to wait until we see students come on campus. And then when we think about our K-12 business, you know, we've established, you know, what we see as a slightly smaller than our original estimates in the overall market by about $100 million, as well as, you know, We're coming in at the lower end of our historical capture rates, about 25% to 30%. We could walk through that in greater detail, but we're seeing a couple of different dynamics playing out there as well. Really strong performance in open territory. We're continuing to take share. Supplemental intervention continues to be beneficial. We're seeing some benefits in terms of retention rates. We're seeing our ability to see the funnel grow. And then we highlighted in the prepared remarks around Texas and California. Both of those markets are pretty dynamic. And while we're early in that cycle, we're performing slightly below our historical average there. So when you take that all together, you'll see that we're at the lower end of that 25% to 30% range. And then nicely, you'll see return to growth in the international segment. We talked about some of the opportunities in select markets. We feel really good about where that business is heading. And then the underlying core medical segment in Global Professional is that mid-single-digit grower, which gets offset by the tail of that print. And we believe we're at about the final year of the wind-down of that non-strategic core print business. So when I roll all that up together, Stephen, that's where you get that midpoint of our guide around 2%. We feel good about it, and we think it's been a prudent guide.

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

Yeah, yeah, you're right. It's been an exceptional year and continued exceptional performance by the team, so really pleased there. That 12%, let me break it down for you. The biggest driver of that is that ongoing sustained share gains. That will continue. We also benefited from enrollment. Three to four percent of the growth was enrollment-related. You may have seen National Student Clearinghouse called 1.3% growth. We had three to four. The reason for that is the strength of our business and science courses as well as over-indexing to the two-year colleges. So, when we look at our results, we had greater enrollment rates than the National Student Clearinghouse. The other thing is that historically called out about a 1% net price, which is inflationary price offset by the movement into inclusive equitable access models. This year, we actually realized closer to 2%, and that's largely given, you know, all the additional features, all the value. As a reminder, we go through a value selling process, and as we add value to our customers, we're able to realize greater price. And lastly, and this would be the component that's not reoccurring, this would be the 3% benefit we have from a sales returns. As we continue to move more digitally, we saw less returns come in, and then the corresponding reserve we also lower. So that had about a 3% point continue. So that's where we land at that mid-single-digit growth as we think about the outlook.

Very helpful. You bet.

Your next question comes from the line of Ryan McDonald with Needham & Company. Your line is open. Please go ahead.

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

Brian, yeah, 26, we did exceed our expected capture rates. And as I highlighted, you know, we are at the high end of that 25% to 30% range. Where is it coming from, right? We have continued strength in our science program. As we talked about last year, exceptional performance in Florida and Texas in science program. Now we saw that in other adoption states like Tennessee and Alabama, as well as into the open territory. So science continues to perform above our historical rates. We also saw success in Florida, ELA, and some other open territory areas. So, really pleased with that performance. Moving into sort of the 27, how do we think about it? As I mentioned, open territory continues to perform well, and I do believe we've bottomed out with respect to our supplemental intervention, meaning the ESSER dollars are behind us, and we're actually seeing some opportunity for meaningful growth. The pipeline's increasing in a meaningful way in supplemental intervention, and our retention rates are also growing. So, I think we're very well positioned there. You know, we're watching closely Texas math as well as California math. We did see the California math market shift a little bit, while the overall size of the market remains intact. And I always knew it was a multi-year adoption cycle. The overall timing has just shifted a little bit because of a few large districts moving into fiscal year 2028. And then we just watch as we move through the selling season, we're watching closely our win rates. And right now they're falling a little behind our expectations, but, you know, we're still in that selling season.

I would just add one thing, and it's related to both math and to ELA, literacy. You know, literacy for us is approximately 40% of our revenues, math approximately 20%. And the two markets are very different right now. The way you teach math is very undecided. The pedagogy is not agreed upon by districts, by teachers, and certainly not by states. It's a very fragmented market, and that's what we're seeing in California. There's a lot of confusion. We've talked about the sheer number of companies that are bidding in California, and it's because it's so fragmented, and there's such a lot of discourse still on how you teach math. Literacy, I don't think we've ever seen a market like this. There's now 42 states in the United States, as well as a bill in the Senate, that is mandating the way to teach literacy, which is the science of reading. That is an extraordinary legislative backdrop. We also think it can lead to a potential super cycle in the area of literacy. We've made the largest single investment in our history in literacy curriculum, Emerge, Summit, and SOAR. And we've been bringing that curriculum out. We're kind of in year zero of it. And the exciting thing about it is that we scored the highest score on the Colorado rubric. We won large districts, like Seattle. We just won in Kansas, as an example. We're winning in districts that we were not even expected to be in the literacy market and the big districts. And so one of the areas that we're excited about, that momentum is building, is in, as I mentioned, 40% of our business, which is the literacy market. And so it's a big area for us that we are excited about in 2027 and some really early optimism.

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

You know, I really haven't seen a contagion, you know, or similar movements in other states as it relates to literacy as Texas in Blue Bonnet You know, I'll start with that, first of all. The other thing, a few things that you should know, you know, with our literacy program, we're one of the few programs in the entire United States that is using the science of reading and is multilingual for most of the grades, and so you have to have a commitment not just around the program, but also around multi-languages, and then the investment that we make in accessibility for these programs is pretty extraordinary. The third thing is that, you know, the balance of screen time versus paper, it's a really delicate balance. Early on, you actually, most districts are asking for less than 20%, 20 minutes per week of screen time, which is something that we do, and then as you get a little bit more self-regulation, you can introduce more screens. But literally the balance between, you know, a curriculum that is holistic, literally starting and kindergarten all the way up to 12th, up to 12th grade, doing it in a multilingual capacity, making sure it's accessible, and then making sure that you've got the right balance of screen times, it's a really, really hard thing to do. And as mentioned, it's one of the largest investments. We've made over $100 million investment in this literacy program. And as mentioned, you know, we're scoring the highest in the rubrics. And that Colorado rubric, by the way, states actually depend on, in addition to third-party assessments. you have to have it evaluated by states, you have to make sure that you've built it the right way. So we're just not seeing the states move into that in the same way that we saw Texas experiment. What I just mentioned is related to LeBrona. One of the challenges I think that other states are looking at is that, you know, it was just recently announced that there was over 4,000 errors in that curriculum, and you just can't take that kind of risk with the literacy program.

Our next question comes from the line of Alexey Filippov with J.P. Morgan. Your line is open. Please go ahead.

Hi, thank you. Yeah, a question to Philip, maybe a bit more to elaborate on the science of reading program and the opportunities you had to capture that. Is there a way to quantify that? Is it like a TAM expansion for you and which years do you expect this to fall?

You know, I think it's, we look at the TAM expansion as an international opportunity. You know, the need for science of reading is not just here in the United States. It is global. As I would say, the previous ways of teaching literacy around the world, you know, was highly variable. As I mentioned, you know, it's 40% of our revenue. Our program in the past, Wonders, actually generated over $1.5 billion for us over the course of 10 years. And so we looked at it as both potential global TAM expansion and then also I'll call it TAM acceleration here in the United States. I mentioned before, I don't think we've ever seen a legislative environment like this before where 42 states are now mandating this is the way to teach. There's been a lot of – one of the biggest challenges right now across the educational, across the United States, is the challenge in literacy scores. And, you know, it's disappointing to see that, you know, 83% of states have moved backwards. We're at roughly about a 33% reading on grade level right now. It is, in a lot of ways, a national crisis and an international crisis. And so the fact that it has now been settled that science of reading is the way to teach, it's really what's called a phonics-based approach as opposed to a whole language approach, really important. And so we're seeing, as I mentioned, a lot of districts that, quite frankly, were not in our pipeline at the start of last year come into our pipeline. We've landed relationships that we weren't expecting to land. You know, I was just recently up at an elementary school up in Chicago that reached out to me personally to start using our literacy program. So, really extraordinary momentum that we're seeing in that space. So, we see, I'll say, TAM acceleration. We're just in the early stages of quantifying it. So, we'll come back to you with more details as we're able to start assessing that.

Yeah, thank you very much. And a quick technical on this international impairment. Can you elaborate on that? You sound like you expect international to kind of accelerate from here. How to square that's actually the impairment that you recognize? Thank you.

You know, we look at international. It's really important to kind of get a sense. I think that I spoke about this on the last call, that we look at the education market as about a $7.3 trillion market on a global basis. The middle class is growing in areas like Latin America, the Middle East. We've got some great traction in those marketplaces. As the middle class grows, you know, middle class tends to spend approximately 2.5% on education. And so those markets, you know, I was just recently down in Latin America, and I was just simply, I'll just say, so impressed with the work that was going in K through 12. In high schools, completely dedicated to science, to universities. I spent some time with the university that had over 300,000 people enrolled in it. And so we're really excited about those opportunities internationally, and we are seeing growth in those markets. And so, you know, internally inside of the company, we're better aligning to be able to be more reactive to local requirements, language requirements, cultural requirements, pedagogy, and we do view it as a great opportunity for growth for this company. And that's across literally our K-12 segment, our university segment, and then also our medical segments. And so you'll see us focus on how we are a part of that really exciting growth.

Our next question comes from the line of Steve Koenig with the Macri Group. Your line is open. Please go ahead.

Hi there. Thank you. It's Steve Koenig from McQuarrie.

Congratulations on the solid quarter and solid year. A question here for Phillip.

We noted your AI blueprint, Phillip, posted with the earnings materials. Super helpful in understanding your AI strategy. Maybe can you help us understand how that strategy compares with your competitors? And maybe the second part of my question, if I may, is about open educational resources, which you mentioned in your remarks, and you did reference Blue Vionic Math in your Q&A. Just curious, how do you think about where AI and open educational resources are headed? Thanks very much. Thank you very much for the question, and thanks for reading the AI blueprint. We're really excited about it. I think I mentioned that we talked about the fact that we have over 7.5 million users of our AI solutions, and these are tools that just came out over the past 18 to 24 months. So we're pretty excited about the early traction that we're seeing, and there's a lot more ahead. You know, I think a lot of individuals that come into the education industry have a lot of misconceptions, and they vastly underestimate what's necessary in this marketplace. And so you'll see a lot of startups that come in. you'll see some organizations that have some curriculum or some tools you know the thing that difference the deep pedagological curriculum from the outside most people don't realize that you're taking sequences of information something like in literacy you have to weave together a thousand separate learning requirements in mathematics from K through 12 over 4,000 learning requirements you could sequence sequence this content so it's not just about just putting out a textbook or a piece of curriculum you literally have to sequence it right down to the week. What is a third grader doing in their seventh week? And, you know, when they have an assembly, how do you kind of squeeze in, you know, addition and subtraction and multiplication tables? So that sequence of content, literally hundreds of thousands of titles that we've been doing over the course of our history, tens of thousands that are sequenced across 500 different subjects where we sequence how a learner learns. That's literally in many cases through 12 years of their life. So that content is a huge moat versus other organizations. The second thing is that we have these tools that do personalized delivery. Sharpen's a great example, you know, that we use Rowan College. A professor there analyzed it and said that the 60% of the students that were using it in his class got paid in their final exam with 21% higher total grade. We had children in Alex Adventure, you know, where we saw 25 percentage point increases in their grades and second graders 55 percentage points. And so personalized delivery, whether or not you want to listen to a podcast, you want to gamify it. So that personalized delivery is the second thing. The third, and this is critical in an era of outcomes, 190 terabytes of data, we get about 25.6 billion learning interactions per year. Now, when you're training AI, you need to know when the AI is on task or off task. And we sense this at a very fine-grained level. We can say for a subject like algebra, out of the 2 to the 500th power of where you're at in your learning journey, precisely where you're at. So that data is credit into workflows. And most, I'll say impressive, since I got here, seeing it, customer success organizations and go-to-market teams where they're actually working to integrate this into the three schools that I visited. Every teacher that I visited in K through 12, they've asked, you know, it's not just enough to produce this, show us how to use this in the class with different types of So the four things that we have are content that is ordered pedagogically, the second thing is personalized delivery, third is data, and the fourth is this ability. And one of the things that's most interesting, and I mentioned this in my comments, out of the dozens and dozens and dozens of schools and teachers and administrators that I met, investors have asked me, you know, will AI disrupt our business? But our customers are not, and that we're making it simple to them. And they see the value of what we produce. And this is really borne out in the OER market. I think, you know, I've heard from a lot of people question, well, can I just take OER, like a blue bonnet, and couple it together with AI, and boom, there's my curriculum. The reality is that we're winning almost six times as many times as we're not with OER. So for every, you know, unit of OER that we lose to, we win six in terms of our outcomes. And we're seeing a lot of organizations in a world of AI tools and a world of OER, we're actually seeing a lot of win-backs, where organizations and individuals are coming back to us because they're realizing the complexity of this. You have to tie together assessment, you have to guide together pedagogy, and you have to make it work inside of the workflow and how the student learns.

Oh, fantastic. Thank you for that color, Philip. I appreciate it.

Your next question comes from the line of Marvin Fong with BTIG. Your line is open. Please go ahead.

Great. Thanks for taking my questions and congratulations on the results. So maybe start with a bigger picture on guidance and just sort of how you formulated that, which is the philosophy behind the guidance you provided, both revenue and EBITDA for not only 27, but just structurally, how do you think about constructing the guidance?

Sure, sure. Thanks, Marvin. Consistent with how we've done this in the past, And even if we rewind back to the forecast models we provided during the IPO and the roadshow, we built this process and we're consistently following that. And what we do is we understand what information we have at this point in time. And, again, we're early in the selling season with K-12. We've provided some insights around enrollment for higher ed. But based on information we have at this point in time, we provide that as the midpoint of our guide, both on revenue and EBITDA, and then what we do is we provide a range, and consistent with what we've done in the past, that range provides for different outcomes, right, should enrollments increase, should cash flow rates change, all of those things are reflected in that range, and then ultimately what we'll do is we'll revisit this as we move through that, and ultimately once we start seeing students on campus, which as you know is after our second quarter, that'll allow us to have greater insight as to the remainder of the year, so we're following a consistent approach, that we've done in the past.

Perfect. And my follow-up, maybe just something that you mentioned, Philip, in your preparing work, just about growing your addressable markets. I think you mentioned non-educational as well as educational markets, maybe with respect to, like, AI and inventive tools. You just kind of expand on that. That does seem like an interesting point. You know, as you try to, you know, grow the top line, you know, what are these kind of new markets you're thinking about?

One of the most impactful visits that I had was at a medical school, and I was meeting with a professor, and he had just come out of the American Medical Association. He talked about this concept of precision education. You know, if a particular doctor had not studied or not worked with a particular patient population, how do you really make sure that that doctor, when they're walking into a situation, is able to have education just in time, right at the right moment? And this is an actual, this is a trend across lots of organizations, just in time education. And so, and one of the most interesting things with the American Association of Medicine has just given out 12 grants for precision education, for addressing this exact concept of really making sure that doctors in the medical profession is able to get the right education at the right moment, especially in the changing world of education. You know, I read a study recently that, in both computer science and medicine, that the number of medical papers is doubling every single year. So there's an extraordinary amount of knowledge that's coming out. You know, I've talked in the past about the multi-trillion-dollar industries that are emerging and the sheer amount of knowledge that humans have to now learn, not just in K-12, but throughout their entire lifetime. What we announced today that we're starting to pilot is this concept of a Gentic curriculum, and that is the ability to be able to consult our curriculum using a Gentic technology, the MCP, as an example. One of the organizations, actually two of the organizations are not traditional education companies that are actually piloting, you know, that are working with us and starting to pilot our content. These are organizations that are in the healthcare industry that actually don't educate, but They just have professionals that are working in medicine and working in pharmaceuticals that actually want to be able to consult our content. And so I look at the lifelong journey of a learner. Increasingly McGraw-Hill wants to connect that journey from the earliest stages to any stage in your life, whether or not it's continuing education or whether or not it's professional education. And agentic technologies are going to allow us to do that. One of the things I've talked about in the past is that where I expect AI to go in companies like us is that there's going to be a knowledge economy where you'll be able to plug in knowledge. You'll be able to plug in knowledge agents. Right now, we are experimenting with a knowledge agent. We view that in the same way that there's these token-based models in artificial intelligence, the prompt-based business models. We view this as an opportunity to expand the accessibility and the, I'll say, the business model for McGraw-Hill over time with this new knowledge economy that's emerging.

That's terrific. Thanks so much, Guy.

Your next question comes to the line of George Tong with Goldman Sachs. Your line is open. Please go ahead.

Hi, thanks. Good morning. I wanted to dive deeper into the agentic curriculum opportunity. Can you share more color on the timeline to launch as well as the pricing model and wallet opportunity?

George, thanks very much. Thanks very much as well for the AI framework you put out. I really enjoyed reading it and really agree with the core concepts around the opportunity ahead. For Gentec, for us, you know, we just over the course of the past few months since arriving, you know, I've spent a lot of time with the team, and the team has really moved quickly. I talked in my last call about the excitement I have around innovation. Since I arrived, we've been able to actually build and start to internally pilot the agentic technologies, and we're just starting to move into agentic pilots with external customers. This has been something that's been asked for by lots of universities, lots of non-education organizations. It's being requested, you know, a safe way of being able to deliver our content. You know, I think that there's been a choice up to now where either you take all of your content and throw it inside of a large AI model and you lose control of it, or you don't do anything in AI. And this agentic technologies allows us to safely be able to answer any question and be able to monitor, be able to secure it in the same way that you would with an API. You know, I view it almost like you call it a cloud for knowledge or an app store for knowledge. And so it's exciting technology. It's a technology that only came out over the past roughly about 12 or so, 18 months. And these standards are just starting to emerge in the AI world, MCP and agentic technologies. And so really excited about the fact that the team is able to build this this quickly and we're moving into pilot. Now, if you look at what's happening in the world of AI pricing, I think you're seeing that pricing is all over the map. I saw some stories over the past 24 hours that OpenAI may drop its token prices. We're seeing SaaS companies have a whole variety of pricing models. In some cases, it's simply an upcharge. In other cases, you're actually getting charged by the token. What we're headed into pilot to do is to really understand how our customers use this. And in education, as you can imagine, AI agents is going to charge them, you know, potentially by the question they have no control over. And certainly, that becomes an extraordinarily expensive proposition for the university, for the K-12 school, for the medical school. mentioned before that there's tool fatigue where you have as many as 25 different logins for students, 40 logins for professors in warm simplicity over the course between now and the end of the year to determine precisely what's the best model for education. And as a result, you know, we think that we're going to be able to go after kind of new wallet share and, you know, as well simplify this. So I'm seeing, you know, in the world when I was in cloud, I watched a lot of organizations start adopting the cloud and then costs went out of control, and they had to quickly get control of it. We're seeing the same thing in the world of AI, where costs are quickly getting out of control, and now financial fin-off, as we call it, is coming to AI. And so we're going to really make this simple. We're going to make it streamlined for the user, and we're going to have a business model that is probably to get on our own. So we'll bring you more information on that as the business model emerges over the course of the next six months.

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

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

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

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

Careful. Thank you.

Just a reminder to analysts to please limit themselves to one question. Your next question comes from the line of Faiza Alway with Deutsche Bank. Your line is open. Please go ahead.

Yes. Thank you. I just wanted to put a finer point on, you know, your messaging around K-12, because from where I sit, it seems like there's been a pretty, you know, significant backlash from parent groups around digital tools and, you know, technology in the classroom, and a lot of parents are, you know, wanting to go back to paper and pen. and you know is that is that hurting you and is that kind of is that why you're kind of at the lower end of that capture rate or do you see that as an opportunity just would love to get your perspective on that um thank you very much for the question um it's questioning that you'd ask a lot is um screen time and um this actually is a significant strength from the raw hill you know

Because we have to have such a strong history of being able to deliver education in whatever way a school or student requires. And today, we're one of the few organizations that is in the world that can deliver everything from AI to paper and vice versa. And what we're seeing, first and foremost, is there's a negative correlation between screen time and comprehension. There has been this idea of really self-reaching in a lot of cases. and you don't have as much, I'll say, dwell time rereading. I think it's something that's really people are waking up to. And, you know, over the course of the past few years, the social media has really, you know, been driving up a lot more screen time. This has become an increasing focus, and we're seeing a lot of schools that are banning screens right now, you know, in the classroom or, I should say, mobile phones, as an example. I think we're up to over 30 states in that space. And so, distraction is real, lack of comprehension is real when there's more screens. Now, with that being said, there is a place and a time for screens. You know, when I take something like our Emerge product, as I mentioned, you know, we are down at roughly about 7% or 20 minutes per week of screen time for Emerge. It was one of the most important questions that was asked in Seattle by the board when we were deciding to adopt our product. What screens are really good at is actually assessment. And so you take a product like our Alex product for algebra, within 25 questions we can tell you precisely the 500 skills that a student needs to have, how many they have with just 25 questions. And so as an organization, we've invested, we have third parties that assess how we do, you know, how we develop our curriculum and also how we deliver. We have school board tremendous amount of testing. We have over 7,000 teachers in the network and over 2,000 students that we use when we are, you know, that we use for testing that we tap into that network before we release a product. And so McGraw-Hill is one of these rare companies that can start all the way at kindergarten with paper and workbooks and reading passages on paper, like Sharp and up in higher education, and even things like clinical reasoning where we're simulating parents up in the medical field. So we have maybe one of the widest and most diverse reading, and it really is a strength that's unmatched, I would say.

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

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

You know, so I'd say we're being consistent with a disciplined approach as we think about our capital allocation. And I've always said the first place we deploy capital is on our organic internal opportunities, those have the greatest ROI. And then we take that excess surplus cash flow and determine where do we place it. We put it into deleveraging, which we've demonstrated in last year with 646 million of pay down and our commitment to the two to two and a half times. We remain committed to that and we're gonna continue to, as we've demonstrated, to pay down. And then we balance that with M&A and the funnel looks really good. As I look at a couple opportunities as of Philip and I just yesterday, We think there's some meaningful acceleration of our funnel, of our product development funnel. We think there's near-adjacent products that we can acquire into. So I'm optimistic we'll get a couple deals done this year. And then, you know, ultimately we look at the opportunity for a share buyback, and we see it as a way to create value for our shareholders. We have conviction in terms of our long-term outlook, the cash generation of the business, as well as our board. So we'll balance that, and you see that with the opportunistic open market purchase of $50 million that the board approved. So I would say it remains consistent with that disciplined and balanced approach. And then from a free cash flow perspective, you know, I think you should be looking at the K-12 market. That really dictates that, you know, cash conversion, you know, 50% to 100% where we sit in that adoption cycle, and given where we see the overall size of K-12 and 27, we're the lower end of that range.

All right thank you very much.

Our next question comes from the line of Jeff Mueller with Baird. Your line is open please go ahead.

Yeah thank you good morning. As I look at slide 27 the K-12 cold purchasing schedules by year can you give us any sense of how ELA as a percentage of mix evolves by year and then just within math any initiatives or adjustments that you can talk to to improve the capture rate? Thank you.

Sure. ELA becomes more meaningful as we move on. And I think that also not just as we see California ELA, but if you look in that lighter gray bar section, as we see that super cycle being rolled out, ELA becomes a bigger component. And to highlight for us, that's 80, you know, that's been 40% of our revenue. So, So, you know, we see that becoming more and more important over time. And as I highlighted, you know, as we've said before, 80% of the California math opportunity remains. And so the overall opportunity stays about the same size, about a billion-dollar market, with 20% of that being called in the first year.

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

In California, there's a number of, as I mentioned at the start, there's a number of techniques for teaching math. Let me give you an example. Open inquiry is one technique where you can talk about walking into a pizza shop and needing to be able to serve enough people with pieces of pizza. And then there's, you know, kind of a linear or spiral approach where you start off talking about fractions, and then you really explain fractions, and then you work your way into inquiry. The market is very fragmented in California. It's very fragmented around the world right now about how we teach math. In the very first year, what we've seen is that there were approximately 26 different organizations that were bidding on California math, and it really represented a wide variety of ways that you can teach math. And so districts, we watched a lot of districts push off decisions because there was so much confusion and there was not necessarily consensus at the school board level or among the teachers about which tool was going to represent the way that they wanted to represent their pedagogy. And so while seeing that, we also were able to get a lot of feedback around, you know, some of the materials that we had just rolled out. We had accelerated our California math program. I think I also mentioned that over the past, I'd call it 12 to 18 months, we have produced more curriculum than we ever have in our history. Now, things like California math, as well as our ELA program, all simultaneously. Also having to support multilingual. And so with that being the case, when we rolled out the product, we've been getting feedback among the districts that haven't selected us and also the districts that haven't selected And we're quickly responding to all of that feedback. We're really making sure we're accentuating, you know, if a district wants open inquiry, we're accentuating it even more. If a district does not want open inquiry, we can accentuate it slightly less. the way that we deliver our you know the we're in and this is one of the strengths that i think that really should dwell on with McGraw-Hill we're one of the few companies in the world that can actually deliver pedagogy down to the zip code or down to the professor level and our ability to be able to respond at scale multilingual offerings with pedagogy with materials whether or not it's paper whether or not it's screen time we're one of the few companies that can respond at this scale And so we're in the process of demonstrating our strength as an organization and our strength of understanding the local requirements and then also our ability to be able to produce them. And we're in that process as 80% is still to be decided. You know, our teams are out working with the districts that haven't decided. You know, we're making sure that our materials are reflective of the exact pedagogy that the local districts need, and so we're excited for the next selling year.

And, Jeff, I'll highlight, we've demonstrated the ability to course correct in the past. we saw that in Florida social studies a few years back where we had our first year was slightly below expectations and we had a nice recovery in year two so we're following that playbook same playbook and we've done this before but thank you your next question comes from the line of Tony Kaplan with Morgan Stanley your line is open please go ahead thanks so much you know I feel like there's a few different factors here that are leading to the lower win rates and capture rates the California delay the Texas blue bonnet and then you

know I guess and maybe there are others but I guess when you think about it which which is the most meaningful which is the one easiest to sort of see a reversal of how long does it take you know for a state to maybe make a decision and then sort of, you know, turn around and say, like, oh, well, maybe we should be trying something else instead, you know, or does it just have to play out? Thanks.

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

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

Great. And then looking at slide 27, we've got our rulers out trying to do the estimates of the market for the coming years, just given no number there so um we my main question is is it looks like in 28 the all other states outside of the big three pretty flattish with 26 and 27 um and maybe even 29 a little flattish as well a little bit of improvement but like i guess i think we were expecting before maybe a little bit of an improvement in those other states in 28 29 and just wondering if there's a reset of expectation

for it no there was no meaningful uh reset any meaningful change um the most notable change we highlighted was that the hundred million primarily in california math moved from 27 into 28 but no major change yeah the only area that we're watching closely as we head into this buying season is the ELA market, as mentioned.

Literacy is a greater focus than ever in the United States, and so we're watching that, and we'll convey that, what we see.

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

Thank you. Your next question comes from the line of Shlomo Rosenbaum with Stiefel. Your line is open. Please go ahead.

Hi, good morning. Thank you for taking my questions. Hey, Bob, I just want to start with the housekeeping one. I would say clear as to how to think about the levered free cash flow expectations of this year. I think you said something like unlevered $400 million. Should I take $400 minus $180 to get to $220, which sounds a little bit light given the lack of one-time items? but I thought there were a lot more like one-time items due to the IPO that we should in theory see a better free cash flow than that in in fiscal year 27 am I not thinking about that properly?

So if you are that that's consistent with how you should be thinking about it.

Okay so 220 is a levered free cash flow that we should be thinking about? Yes correct. Okay then just just a little bit broader, I just wanted to ask in the context of, you know, AI and the protections that you have around your data. You know, there's that article where the educational curriculum providers are suing Meta for training the LLMs on, you know, on your data and copyright infringement. Is that like a longer term issue for you guys in your opinion in terms of the data actually being out there and it's actually accessible so it's not like behind certain paywalls that other you know other information services providers have to you know have a little bit more protection on that side how should we just think about that kind of lawsuit in the context of um you know your ability to control your data great question um you know i want to really be clear about this our position first and foremost is that great AI and copyrights are not counter to each other.

You can enforce and support copyrights and respect copyrights and have great AI for the world. And, you know, the agentic technologies I talked about are really, really great examples technically of being able to do this. Our content has been and always will be behind paywalls. And the cases where it's not, it's content that's been pirated. You know, we're sitting out on pirate sites, nation against pirate web sector content. And when the content gets out there, we expect that other organizations are not going to use pirate content, basically illegal content. And so part of that lawsuit, you know, we have content. There are many, many, many ways. License the Getty Images and New York Times. When I was at Vimeo, we were approached in the early days about potentially license, about using all of our content, the video content, 8 billion minutes of video we had, and we turned down the organizations originally, and then by the end of my tenure at Vimeo, people were coming back and asking just for videos of beach balls to make sure their video model bounced the beach balls right or the hands clapped properly. So this is a well-established market for licensing content to train AI models. It's both technically very easy and financially, being in that meta lawsuit, is that we really want AI companies to use these legal and technically simple ways of licensing content. The work we're doing with Agentec, we're really excited about. And quite frankly, even if existing content might be out on pirate sites, humans' knowledge and the way to teach changes every single day, and so we intend to be this great place that takes human knowledge, turns it into a pedagogy, and delivers it the way you need And with agentic technologies, we can meter that, we can secure it, we can build an interface, we can audit to make sure that we're charging the right way, we can actually explain, you know, to every student or every professor how much content is being used at any point And so the technology models are evolving quickly. We're going to be at the forefront of that in the knowledge economy, and we're going to be really, really, I'll say, aggressive about making sure we're protecting, ensuring that AI does, that AI comes with us and all publishers in the right way.

Your next question comes from the line of Henry Hayden with Rothschild & Co. Redbird. Your line is open. Please go ahead.

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

Yeah, you know, we're really – thanks very much for the question. So on the agentic side, we live in a trusted position with professors, with students, with teachers, and with administrations. You know, when we take something like Sharpen, our Sharpen tool not just takes content and delivers podcasts or quizzes, but we also are turning around and able to tell the professor what content is being, you know, engaged with. Professors are going to be able to deliver what I'll call a playlist of content. And so it's not just the one-sided where we're serving to an AI agent. In some cases, we are the AI agent of the student trusts or the professor trusts. And so we intend to really, really support that trust and be an agent that the student and the teacher from a first-party perspective uses. Now, in some cases, those students or those professors want us to join, you know, a course of agents or a course of knowledge. And so this ability to be MCP, to provide our content via MCP is really exciting. You know, one of the organizations wants to use us with Notebook LM, with Google Notebook LM, but they want a trusted source. Because today, if you just use AI, it can hallucinate on all kinds of content, or quite frankly, it can hallucinate, it can bring answers out that the professor hasn't even introduced into the class. You know, there's a right time to introduce the chemistry behind photosynthesis or give you the full answer before a student really truly understands biology and the chemistry behind it. And so our ability to be able to do that in a pedagogical way is also part of MCP. What's exciting about it is, again, MCP gives us an ability to be able to monitor, to be able to interface. We're excited about the ability to be able to be a continuing source of education, you I, like many people, actually carried my textbooks with me throughout, you know, really early years as computer scientists. I was referring back to them for a long time. I think you'll hear that from, you know, legal scholars as well as accounting scholars, medical scholars. There's a lot of reference that you do, especially early in your career and, quite frankly, in in some cases even beyond your early years. Now, when I think about kind of where this goes longer term, you know, I do think that this is an exciting opportunity for us to, as I mentioned, to expand TAM in the marketplace. And I do think that, you know, pricing is going to evolve pretty dramatically. The area that I'm really, really excited about, I think that there's a misnomer and I described this to a lot of people. We are in the era of big models. These are, I call this peak inefficiency in AI. I don't think in the history of computing I've ever seen that we need to literally use the United States GDP to train an algorithm. It's not a good business model right now, I would tell you. And what we're able to do, you know, I'm a big believer that we're going to move into an era of smaller models, more purpose-built models that are much more efficient, can be much more reactive, can actually hit the performance requirements that are necessary, and also lower cost. You know, as an example, we'll take our agentic technologies where we're creating vectorizations of our actual content, coupled together with a small and lightweight model, and we'll get a fraction of the cost of having to run things through a large model. And that's where we expect it to move to. You know, I really encourage you to look at technologies like knowledge graphs getting much better performance in the financial services industry where it's literally 1% of the cost of a large model, and it's achieving way higher than, you know, expertise level than the big models. And so this idea of cost, what we do inside of McGraw-Hill is that we use the right model alongside our vectorized content and that we deliver the right question, the right content at the right time at a much lower cost and throwing all the content in with, I call it, every one of the Taylor Swift songs and all the F1 drivers and the predictions for the next, you know, to have to wade through just to be able to describe what photosynthesis is. So cost is high with big models, purpose-built, lightweight models, combined together with vectorized content, I think is going to be a way more efficient delivery mechanism. And then we do the cost management on behalf of the student as well as the university. And our buying capacity for AI is much higher than most universities and certainly students. And so we also think we have an opportunity to be able to really be a, you know, I'll say a more effective, more cost-effective, and more pedagogically effective solution.

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

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

Very helpful.

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

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

You know, I think I would say the fragmentation is not limited to California or just the mass. When you get into teaching social studies in the United States and on a global basis, you know, extraordinarily fragmented. Science as well. So there is fragmentation in the education industry. And I'll say again, you know, one of the most exciting things since I've arrived here is understanding that we're one of the few companies in the world that can respond to this fragmentation at scale. And to respond to it, you have to understand it, first of all. You've got to understand down at the zip code level, the teacher level, even the professor level inside of the higher ed. You know, in the medical industry, you know, in some countries we teach body parts. In other cases, we teach symptoms. In some cases, we're teaching full systems. So fragmentation in education is, as I would say, education has been around. What I would say, you know, is that as we look across the spectrum, our ability to be able to respond to that is unmatched. And so I look at this opportunity in California as another opportunity the same way that we've responded and you know demonstrated our ability to respond to the different ways of teaching science you're seeing us in real time be able to respond to California with the strength distribution means and then also just our ability to be able to do the end of the Q&A session this concludes today's call thank you for attending you may now disconnect