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Edited Transcript of CNGO.PK earnings conference call or presentation 7-Aug-19 12:30pm GMT

Q1 2020 Cengage Learning Holdings II Inc Earnings Call

STAMFORD Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Cengage Learning Holdings II Inc earnings conference call or presentation Wednesday, August 7, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bob Munro

Cengage Learning Holdings II, Inc. - CFO & Executive VP

* Michael E. Hansen

Cengage Learning Holdings II, Inc. - CEO & Director

* Richard Veith

Cengage Learning Holdings II, Inc. - Senior VP & Treasurer

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Conference Call Participants

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* David Scott Farber

Crédit Suisse AG, Research Division - Research Analyst

* Mary Ross Gilbert

Imperial Capital, LLC, Research Division - MD of Institutional Research Group

* Nicholas Michael Edward Dempsey

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Cengage Fiscal 2020 First Quarter Investor Update. Participating on the call will be Michael Hansen, Chief Executive Officer; Bob Munro, Chief Financial Officer; and Richard Veith, Senior Vice President and Treasurer. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce Richard Veith.

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Richard Veith, Cengage Learning Holdings II, Inc. - Senior VP & Treasurer [2]

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Good morning, and welcome to Cengage's Fiscal 2020 First Quarter Investor Update. A copy of the slide presentation for today's call has been posted to the company's website at cengage.com/investors.

The following discussion may contain forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to future results and events, and they are based on Cengage's current expectations and assumption. Actual results may differ materially from those currently expected and are subject to the risks and uncertainties discussed in the Risk Factors section of our fiscal 2019 annual report for the year ended March 31, 2019, the special note regarding forward-looking statements section of the same report and the Risk Factors section of our fiscal 2020 first quarter report for the 3 months ended June 30, 2019, which will be publicly posted to Cengage's website later today. The company disclaims any duty or intention to update or revise any forward-looking statement.

This presentation, including the appendix, contains disclosures on a 3-month basis of adjusted revenue, adjusted cash revenue, adjusted EBITDA, adjusted cash EBITDA, adjusted EBITDA less prepub, adjusted cash EBITDA less prepub, free cash flow and levered cash flow, all of which are non-GAAP financial measures. Adjusted revenues and adjusted EBITDA measures on a constant currency basis. Definitions, rationale for the use of these measures and reconciliations of each, to its most directly comparable GAAP, financial measure is providing in the appendix to today's slide deck.

We may also discuss digital product sales, which represents gross sales, less actual return of digital standalone products and bundled print and digital products.

And now we can turn to Slide 3 for today's agenda. Michael Hansen, Chief Executive Officer, will provide an update on the business; followed by Bob Munro, Chief Financial Officer, who will take you through the details of our financial results before we open the call for questions.

Let me now introduce the Chief Executive Officer of Cengage, Michael Hansen.

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Michael E. Hansen, Cengage Learning Holdings II, Inc. - CEO & Director [3]

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Good morning, everyone, and thank you, Richard. I will briefly recap our priorities for the year, provide an overview of the Q1 business performance and share an update on the merger with McGraw-Hill. After this, Bob will take you through the financials in some more detail.

As you know, fiscal '19 represented a critical and pivotal year for Cengage, most notably in higher education with the launch and first full year of Cengage Unlimited, our groundbreaking subscription offering. Having successfully completed 2019 and finishing with strong momentum in the fourth quarter, our focus turns to fiscal '20. This year, our key objective is to build on that success and drive continued momentum, both in higher education and our other business units. We are equally focused on delivering strong growth in adjusted cash EBITDA measures in fiscal year '20. We have eliminated onetime investments for the launch of Unlimited and are driving structural cost savings by transitioning to a simpler operating model in Higher Ed.

Let me share some more detail on each of our businesses. In higher education, as we advance through the second full academic year with Unlimited in market, we are making educated refinements to our go-to-market approach based on our experience last year. These initiatives aim to accelerate takeaways, increase digital conversion and drives the powerful network effect by increasing awareness of unlimited

In parallel, we are also focused on expanding the value of Unlimited through extended partnerships such as Dashlane, which we recently signed. Dashlane is a password management and personal information security company that help students manage and protect their digital identity. The key area of opportunity is optimizing digital conversion once an adoption has been secured. At this point in the season, we are working closely with both new adoption customers we secured in the last 5 months and those from prior year to drive the migration to digital.

We have continued to improve our comprehensive faculty support, covering setup and configuration of digital courses to their specific requirements, training to ensure tools and materials are fully understood and supporting student and classroom implementation. This is a tightly orchestrated process, and we are significantly more advanced than at the same time last year. We expect these initiatives to accelerate the momentum we had with Unlimited coming into the year, and as a result, outperformed the industry and return the higher education, nonprofit business to revenue growth on an underlying cash adjusted basis, despite continued significant headwinds for the industry overall. Our expectations and priorities in Higher Ed reflect our overarching focus on student affordability, choice and delivering high-quality solutions to meet their needs and improve outcome.

The momentum we see with Unlimited is expected to continue to significantly lower the cost of course materials for students. In fiscal year '19 alone, we estimate that Unlimited saves students over $60 million on the cost of course materials. For fiscal '20, we expect those annual savings to increase to around $100 million, which will take total savings to $160 million over the 2 years since the launch of Unlimited.

In International, we see good continued growth in English language teaching, and we're investing in products and go-to-market capabilities to sustain this momentum. This includes introducing new products into the English-as-a-medium instruction segment, where students take courses in English language rather than the native language. We have -- we've had early success with this program. In international higher education, we faced headwinds in many markets, and we are focused on stabilizing the business, whilst pursuing digital and commercial model innovation.

In School, we are focused on capturing the growth opportunities presented by a cyclically better adoption year and further driving our advanced placement and skills career training offerings into high school.

At Gale, in the U.S., our library customers face ongoing budgetary pressures, and our focus is to sustain our customer base through service innovation and content expansion, while driving growth in international markets, where we see more opportunities evidenced by a strong sales pipeline.

We've recently released an updated platform, which incorporates all of our flagship databases into a significantly enhanced user interface, which has been well received by our customers.

Turning now to the first quarter performance. In summary, Cengage has started the year well. The year-to-date financial performance, strong takeaways through the fall adoption season and progress on other key initiatives are consistent with our expectations, which is reflected in our guidance for the full year.

Adjusted cash revenues were $237 million for the first quarter, 2% behind the prior period. Adjusted cash EBITDA less prepub was a loss of $25 million, a $7 million improvement over the prior year. With Q1 revenues marginally down year-on-year, the improvement in adjusted cash, ELPP is driven by the delivery of cost savings we promised coming into the year.

As you will be aware, the normal cyclicality of the business renders the first quarter a small quarter, representing a little over 15% of annual adjusted cash revenue. This cyclicality is becoming more pronounced in higher education as the increasing penetration of Unlimited, standalone digital product, Inclusive Access and print rentals shift sales from Q1 to Q2 and Q3 to Q4, as we have illustrated previously. This reflects the purchase shifting to the student or institution at course commencement rather than pre-stocking of physical product by bookstores and channel partner. This trend has continued in Q1 and together with a drag from timing of returns drives the decline in learning adjusted cash revenues compared to the prior year.

The School business has got off to a solid start with adjusted cash revenues marginally ahead of the prior year. The business has done well in the California Social Studies Adoption, securing the Los Angeles Unified School District, a significant win. School is around 50% through the adoption season. Closed business to date and the remaining sales pipeline underpin our outlook for a solid year.

The performance of the international business was buoyed by a large repeat order in the Australia School business related to the Texas state reading adoption, which follows on from the initial order, which fell in the final quarter of last year. Excluding this phasing benefit, the business is flat year-on-year with growth in ELT offsetting pressures in higher education.

Gale adjusted cash revenue were broadly flat against the prior period. The U.S. domestic business grew in the first quarter with strong renewals, offsetting library budget pressures, which impacted transactional sales.

The international business had a slower start but is expected to recover on the back of strong demand and a solid sales pipeline.

To recap, we're off to a good start. As mentioned, Q1 is a small quarter financially, but the key quarter for the fall adoption fees, which in turn is critical to full year performance for the higher education business.

So let me give you an update on the upcoming 4 season and trends in digital to illustrate the strong momentum in the business.

Turning to Slide 6. We are now over 90% through the fall adoption season. We have built significantly upon last year's success and are on track to deliver strong double-digit growth in digital unit takeaways on top of the strong fall adoption season last year. The momentum of Unlimited and digital product is reflected in the continuing strong progression in courseware activations and the proportion of the higher education business represented by recurring unit.

Against a rebased Q1 '19 comparative, recurring unit comprising rental, core digital and eBooks were up 4 percentage points to 83% of the total in Q1 compared to 79% in the same period last year.

Courseware activations were up 28%, which reflects the rollout of unlimited in fiscal year '19, together with strong sales of unlimited to support summer courses.

Having given an overview of the Q1 financial performance and key fall adoption season in Higher Ed, let's turn to our guidance for fiscal year '20 on Slide 7.

On the back of a good start in Q1, strong adoption takeaways in higher education and overall good start of the year, which is very much in line with our expectation, our full year guidance remains unchanged from when we announced the fiscal year '19 results 2 months ago.

To recap the key points. Against the backdrop of largely unchanged adverse market conditions, we expect another year of broadly stable adjusted cash revenue, underpinned by another year of underlying market outperformance in higher education and solid performances in the other businesses. We expect a strong recovery in our adjusted cash EBITDA less prepub, as we significantly reduced our cost base through the elimination of onetime investments and through operational efficiencies and savings as we have restructured our business. Our performance in Q1, notably, the strong progress in higher education through the fall adoption season and the reduction in our costs and run rate for the quarter further underpinned this outlook.

In terms of liquidity, we expect positive and improved level of free cash flow and a leverage ratio of around 6x by March 31, 2020, both before taking account of merger-related costs.

Finally, it is worth restating that whilst we are progressing the merger work streams at pace, we continue to operate as an independent company, competing vigorously with McGraw-Hill, and we are committed and focused on delivering these operational and financial plan in fiscal year '20.

With that said, let me conclude with an update on our progress with the merger, which is on Slide 8. The merger remains on track across all key work streams. Our views of time lines are unchanged, and we are continuing to work towards an anticipated closing in early 2020. We continue to monitor market reaction and listen closely to students and the full breadth of our customers, including professors, institutions and channel partners. We remain of the view that the case for the merger is very strong. We fundamentally believe the merger and its core objectives to drive affordability, broaden choice and provide high-quality products and services aligns our interests strongly with all customers, especially students and will bring significant benefits to these key stakeholders.

In parallel, with the regulatory process and within the regulatory framework, we have continued to develop our post-merger integration plan, which are being driven by a combined dedicated team supported by experienced professional advisers. The integration plans address all businesses and functions. We are developing our plans with a few simple guiding principles. The combined company will enhance the customer and student experience. We will do so partly by creating efficiencies through synergies, which we estimate to be in the $285 million to $370 million range. Our work to date supports this range.

On the financing amendment, as you will be aware, Cengage and McGraw decided to postpone the amend and extend process for the first lien credit agreement based on debt holder feedback to align this more closely with the transaction close. We do not expect the financing amendment to affect the timing of the merger closing.

Let me now hand over to Bob to take you through the first quarter financial performance in more detail, including covering the cash flow performance and liquidity positions of the business.

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Bob Munro, Cengage Learning Holdings II, Inc. - CFO & Executive VP [4]

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Thank you, Michael, and good morning, everyone. If we turn to Slide 10. This sets out the adjusted cash revenue and adjusted cash EBITDA less prepub or ELPP by business division. Slide 11, which follows, provides a summary commentary on performance for your reference.

To echo Michael, fiscal year '20 is off to a good start. The business is tracking to our expectations and this underpins our unchanged guidance for the full year. Adjusted cash revenues for the quarter reached $237 million, $4 million lower than the prior period. Q1 operating costs, excluding CapEx, have been reduced by $8 million to $197 million through the elimination of onetime costs and restructuring initiatives. It is this rebasing of costs that drives a $7 million improvement in the adjusted cash EBITDA less prepub and results in a Q1 loss of $25 million. This also puts the business on a trajectory to deliver the targeted full year cost saving. The lower adjusted cash revenue is driven by learning, which, in turn, affects the structural shifts in purchasing pattern and the timing of returns in higher education. I will come on to learning and higher education performance on the next slide but turning first, let's discuss Gale and international.

Gale adjusted cash revenue was broadly flat against the prior period. In the U.S. domestic market, which accounted for around 80% of revenues in fiscal '19, the business grew 2%. This reflects higher subscription renewals, which outweigh the impact of lower transactional sales. Transactional demand purchases tend to be funded from discretionary budget. And with U.S. library budgets under continuing pressure, we expect growth opportunities in the domestic market to be constrained.

In the international Gale business, sales slippage resulted in a Q1 decline, which offset the U.S. growth. This timing difference related to archive sales in the U.K. moving from Q1 to Q2, and a number of these deals have successfully closed in July.

In contrast to the U.S. business, the sales pipeline in international is over 20% higher than at the same stage last year, and we anticipate another good year for Gale internationally.

In the international business, adjusted cash revenues was $59 million in the first quarter, up $5 million or 9% from the prior period. The overall growth of international is driven by the Australia school business with growth in English language teaching, offsetting the softer start in higher education. The Australia school business benefits from a $5 million follow-on order in relation to the Texas English language adoption. This drives overall growth as the original and larger order was in Q4 of fiscal '19.

The English Language Teaching business is off to a strong start, up 5% year-to-date, driven by continuing momentum in Asia and Latin America. The ELT business generated almost $100 million of revenues in fiscal '19 and has a strong track record of mid-single-digit growth.

In higher education, a small year-to-date revenue decline reflects the combination of continuing headwinds in certain markets in the EMEA region and temporary adverse timing of orders in Australia and Asia, which are expected to reverse as we progress through the year. The adjusted cash EBITDA less prepub by division reflects the relative revenue development and spread of saving initiative. The impact of savings is most pronounced in Learning with the elimination of Cengage Unlimited launch costs and benefits from the related operating model restructuring more than offsetting the lower sales in Q1.

If we turn to the next slide, the adjusted cash revenue bridge. The bridge shows that the overall reduction in Learning revenues reflects the combination of a $1 million growth impact in School, partly offsetting a $9 million reduction in the higher education and skills business.

In School, the business has started the year well, getting great traction in the California social studies adoption, and as Michael mentioned, winning the Los Angeles Unified School District. Orders from the California social studies adoption amounted to around $5 million in Q1 and are expected to more than double in the full year.

We are generally seeing good momentum in the K-8 sector. This reflects the success in the social studies adoption, where we expect our adoption share to be over 10%, strong growth in our math program in which we partner with big ideas Learning and good progress in open territory. The growth in K-8 in Q1 is being moderated by a strong comparative, which included a large reading order in Alaska in Q1 2019 and the performance of advanced placement and career skills training programs, which remain under pressure and are down compared to the prior period.

The revenue performance in higher education and skills was driven principally by the changing patterns in the higher education, nonprofit business, which Michael commented on earlier. In the appendix to the presentation, we include an analysis of gross sales and net sales to the Learning segment. This shows that Q1 gross sales of print and core digital products, which excludes School, declined by around 5% or $6 million. This was driven by the nonprofit business. Book stores and channel partners have been progressively adapting to the increasing penetration of Unlimited and other digital products and the resulting changes in purchasing patterns by reducing their orders and adjusting stockholdings earlier in the cycle. Aside from these clearly established trends and our own analysis, this is also very much borne out by our interactions with the channel partner.

In addition to this pronounced shift in purchasing patterns, Q1 adjusted cash revenues were impacted by the decision of a customer to exit the wholesale distribution market. This resulted in around $2 million of returns, depressing Q1 revenues. We expect to make this up through the remainder of the year across other channels and customers. It is worth reiterating before we leave higher education, that with the fall adoption season now over 90% complete, we are on track to deliver strong double-digit growth in digital unit takeaways and further improve on the performance through the fall adoption season compared to last year.

With Q1 revenues, adoptions and sales pipelines, trending in line with our full year guidance, I will now turn to progress in reducing our cost base, which drives the $7 million improvement in adjusted cash ELPP and the anticipated strong margin expansion for the full year.

Turning to Slide 13. This sets out the drivers of the $7 million improvement in adjusted cash ELPP. The $4 million decline in adjusted cash revenues in the quarter had a $2 million gross margin impact, which was outweighed by $9 million of net cost reductions in the quarter. The cost reductions reflect the elimination of $5 million of onetime costs incurred in 2019. These largely related to the launch of Cengage Unlimited, ahead of the first fall season following its introduction. In addition, $4 million of run rate savings were generated in quarter from restructuring initiatives and transition to a simplified operating model in higher education. These actions and ongoing cost management have resulted in a step change in the cost trajectory of the business, which underpins our EBITDA growth expectation.

Slide 14 sets out the quarterly trajectory of these costs. This covers fiscal year '18 and '19, together with the trajectory for 2020. To recap, the increase in annual costs from $812 million in fiscal '18 to $828 million in fiscal '19 was effectively driven by onetime investments of $15 million around Cengage Unlimited and fund other key initiatives. The elimination of these onetime investments, combined with other cost-saving initiatives, are expected to lower the total cost around $800 million in fiscal '20, a net reduction of $28 million. This reduction is after taking account of inflationary pressures and certain cost increases, notably in relation to our labor force, which is a major source of competitive advantage and our largest cost component. As illustrated on the previous slide, in Q1, we reduced our cost on a net basis by $8 million over the first quarter. With our cost rate under tight management, we are formally on track to deliver the projected full year cost savings. In addition, we expect to generate further savings in CapEx, excluding the Boston office and through a wide range of direct cost initiatives, which we expect to drive gross margin improvement.

Turning to Slide 15 and our forecast for cash flows of the business. As we covered earlier, the business is highly seasonal, driven principally by higher education, with the first quarter of the fiscal year representing a little over 15% of annual adjusted cash revenue. This revenue cyclicality is mirrored in the quarterly cash cycle of the business, with the end of the first quarter representing a low point in the annual cash cycle. This is consistent with patterns in prior years. This reflects both the revenue cycle and the payment of sales commissions and annual bonus payment relating to the prior fiscal year. These performance-related payments are paid out in the first quarter, following the finalization of the prior year fiscal results.

The business saw a levered free cash outflow of $158 million in the first quarter, which translated into a total cash outflow of $166 million after $7 million of debt repayment and dividend. As we will see on the next slide, the business remains in a position of strong liquidity, which will be further bolstered by the strong cash inflows we expect over the current quarter.

The levered free cash outflow was $35 million higher than the first quarter last year. This reflects 3 factors. Firstly, higher capital expenditures, which were $12 million higher at $26 million, wholly related to the fit out of the new Boston office. The Boston office move was completed in June as expected, and will add onetime additions to CapEx of $20 million in the current fiscal year. Secondly, spending on restructuring and merger-related expenditures drove a $14 million increase in other operating costs. And the third factor was adverse working capital movements, which were principally driven by the incentive compensation payments, I referred to earlier. We expect to leverage free cash flow before merger-related costs progressively recover from the Q1 low point over the coming quarters and to improve year-over-year for the full year. This expectation is underpinned by working capital initiatives and the shift to digital and subscription model. Before we leave cash flows, a couple of other comments. With regard to taxation, payments made related to non-U. S. businesses are expected to remain low going forward. The U.S. business is not a taxpayer and has significant accumulated federal and state tax losses to shield future profit. The debt repayment of $4.275 million is the first of 4 quarterly payments, totaling $17 million for the year, which are required under our debt arrangements.

Turning to Slide 16 and our strong liquidity position. In addition to total liquidity net debt, we also set out here the net leverage ratio of the business during June 3 -- June 30 and at the end of the prior fiscal year. As a result of the normal annual cash cycle and first quarter cash outflows, the total liquidity reduced to $264 million at the quarter end with net debt standing at approximately $2.08 billion. The liquidity position remains strong and is expected to further strengthen progressively from this point. The business has not drawn on the revolving credit facility in fiscal '19 or prior years and does not anticipate requiring to do so in fiscal year '20.

Net leverage at June 30 increased to 7.1x from 6.7x at March 31, driven by the seasonal increase in net debt. Michael mentioned in reconfirming our existing guidance for 2020, that we expect the net leverage at March 31, 2020, to be around 6x before taking account of merger-related costs. We would expect our share of merger costs up to the point of closing to increase leverage by 0.1 to 0.2 turns.

The anticipated deleveraging from 6.7x at the end of fiscal '19 will principally be driven by the strong growth in adjusted cash EBITDA less prepub over 2020 on the broadly stable revenue outlook, which as we have discussed, is underpinned by the cost reductions which we are very much on track to deliver.

Let me hand back briefly to Michael for concluding remarks before we turn to questions.

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Michael E. Hansen, Cengage Learning Holdings II, Inc. - CEO & Director [5]

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Thank you, Bob. The strong start to the beginning of the year has further increased our confidence in delivering the anticipated results for fiscal year 2020. In addition, we remain optimistic that we can close the merger with McGraw-Hill in the time frame that we have indicated.

With that, let me turn over the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question today comes from the line of Mary Gilbert with Imperial Capital.

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Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [2]

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Based on 90% of the adoptions being complete, what do you anticipate subscriptions to be in fiscal '20, given that fiscal '19, it was over $1 million. How should we think about that?

And then with regard to savings for course material piling to $100 million in fiscal '20, I'm not sure, but did you say that inferred something like $180 million in revenues associated with CU in fiscal '20? I wasn't sure if those were correlated.

And then finally, with regard to the FTC process, is there any more granularity you can provide us in terms of timing, any likelihood of selling titles?

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Michael E. Hansen, Cengage Learning Holdings II, Inc. - CEO & Director [3]

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Mary, it's Michael. Let me take the last question first, and then I'll hand it over to Bob for the other 2 questions.

So with regard to the process. First of all, it's not the FTC who is reviewing it, it's the DOJ. And in terms of further granularity of the process, what we can share is that we are in very active and very constructive discussions with the DOJ. But -- and it is going according to plan as we had expected. But it is too early to -- and we are not at the stage yet that we're talking about specific remedy that the DOJ would require to approve the transaction. So it's probably a couple of months too early for that -- to answer that question, but overall, we are very encouraged by the progress that we have made and the collaborative nature of our discussions with the DOJ.

Bob, on the subscriptions?

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Bob Munro, Cengage Learning Holdings II, Inc. - CFO & Executive VP [4]

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So on subscriptions, I mean, just to level set, first of all, Mary. As you said, last year, we generated over $1 million subscriptions, we delivered savings on course material of over $60 million. And you may recall when we talked about the full year result, we disclosed that we had around $130 million of subscription revenue in FY '19 on an adjusted cash basis from Cengage Unlimited. So with that baseline, and caveat that whilst we've done very, very well in adoptions, and we expect to drive conversion, we are midstream and very busy, making sure we optimize the business. And there is still some uncertainty how the activations play out. But with that said, yes, I think you can take the estimation of $100 million of savings in this fiscal year and use that as a guide to correlate how we're thinking about subscription generation in fiscal year '20, based upon that baseline data for fiscal year '19.

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Operator [5]

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Our next question is from the line of David Farber with Crédit Suisse.

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David Scott Farber, Crédit Suisse AG, Research Division - Research Analyst [6]

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I just wanted to touch upon just, I guess, 3 quick things. The quarter, the Unlimited and then the merger. So just on the quarter, can you guys talk about how you see the cadence perhaps for the upcoming year and cash EBITDA there, given I guess, what's underpinning your 6x leverage guide? And then I had just 2 quick follow-ups.

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Bob Munro, Cengage Learning Holdings II, Inc. - CFO & Executive VP [7]

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So I think -- just going back to the cyclicality of the business. So the key point, which it has been promising this year, is very much a shift in higher education from Q1 to Q2. But Q2 is an even more important quarter, financially, than it has been in previous years. I think as you saw in Q3, Q4 last year, we also anticipate revenues moving between those 2 quarters at the same sort of rate. So that's -- yes, we are seeing those shifts, that renders due to very significant quarter; Q4, a very significant quarter as well.

We will see, from a cash standpoint, cash come back very, very strongly in Q2. That follows normal patterns with the shift to direct-to-consumer and sales to our e-commerce channels that benefits to the cash flow. So we expect those sort of bumps as we go.

In terms of the cost base, the other key consideration as you think about this year, we generated $8 million of savings in Q1. We expect to see the onetime costs sort of come out, sort of, progressively over the remaining quarters, and we have reduced our run rate. So we would expect the cost benefits to come through reasonably evenly over the remaining quarters of the year, which builds that overall expectation of strong margin expansion and growth.

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David Scott Farber, Crédit Suisse AG, Research Division - Research Analyst [8]

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Okay. Very good. And then perhaps just any incremental color you can share with us on Cengage Unlimited. You touched upon it briefly but I'm curious given the seasonally slow first quarter, if there's anything else you could share with us on how that's progressing?

And then to the extent you can on the merger, maybe anything in particular that's giving you confidence since the last we caught up with you on maintaining the first quarter close? Both of those things would be helpful. And that's it for me.

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Michael E. Hansen, Cengage Learning Holdings II, Inc. - CEO & Director [9]

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I'm sorry, can you just repeat the last question, I was not quite sure I got that on the merger in the first quarter.

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David Scott Farber, Crédit Suisse AG, Research Division - Research Analyst [10]

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So on the merger, is there anything incremental or anything in particular that's giving you confidence in the first quarter close from the last time we all caught up? And then the other question was just on Cengage Unlimited.

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Michael E. Hansen, Cengage Learning Holdings II, Inc. - CEO & Director [11]

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Got it. Okay. Let me take those both in order. So first of all on Unlimited, what we are seeing is continued momentum in the adoption season. As you all know, over the last 5 months or so, we have been out in the field, actively talking to faculty about our products, the quality of our product but also about the Unlimited offering and how much that can help their students save money. And we are seeing that the awareness of Unlimited after the first year of introduction is increasing steadily. And it is increasing importantly because of word of mouth between faculty, amongst each other and faculty and students as well, so it's terms of growing network effect that we described there. And that is resulting in a second year in a row where we are seeing double-digit growth in takeaways. In other words, significant market share gains in the market, based on this offering, which at this point has not been matched by any one of the competitor. So we feel very confident about the continued momentum that we're seeing. At the same time, as we alluded to, we are focusing very strongly on the digital conversion of faculty. In other words, that the faculty doesn't only use Cengage Unlimited as a way to save students cost by allowing them to essentially access our full library of digital books, but also actively using the platform features, which improves the learning experience of the student, and at the same time, improves for us as a business that sells through in any given cash flow. So that was the major learnings from our initial introduction, and we are making good progress. We have continued momentum on the adoption, and we feel confident about the conversion of these adoptions into truly digital adoptions in the fall as we had illustrated before.

And then the last question on the DOJ. It is, as I said, too early in the process to be definitive on a lot of those elements that our confidence and our increased confidence really comes from the fact that we have been actively engaged with the DOJ and with the staff on the ground around aligning on the view of the market, aligning on what we think the facts are around competition and market shares in this market. And we found our discussions with them very constructive. And that gives us increased confidence. But we are still at best in the middle of the process, and we will continue to engage with them in a similar constructive way over the next few months.

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Operator [12]

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(Operator Instructions)

The next question today comes from the line of Nick Dempsey with Barclays.

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Nicholas Michael Edward Dempsey, Barclays Bank PLC, Research Division - Research Analyst [13]

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First of all, you referred to the fact that you're on track for strong double-digit growth in digital unit takeaways, the fall adoptions. Going back to your full year results, you are pointing towards an estimated more than 1% overall adoption share gain this year. Can we assume from the slightly different choice of words here that you've not taken share in overall adoptions across print and digital in the 90-ish percent of adoptions that we've seen so far. And just another one for me. You referred to a customer exiting the wholesale distribution market and that's a one-off negative impact. Given the changes in this market from yourselves and others on digital, isn't it likely that we'll see other similar impacts from people exiting that market over the next few years, so that, that kind of behavior might be less exceptional?

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Michael E. Hansen, Cengage Learning Holdings II, Inc. - CEO & Director [14]

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Yes. Let me answer the first question first, Nick. No, you should not infer anything from the choice of words there. I think we're just trying to vary it a little. But the fundamental -- or the fundamental numbers are very much the same. In other words, we saw double-digit takeaway unit growth last year. We saw the market share gain that you have referred to. And without being able to be that precise at this stage of the year, we expect something broadly similar in terms of market share gain for this year. So that would be a wrong yes from me than anything else into the choice of words there.

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Bob Munro, Cengage Learning Holdings II, Inc. - CFO & Executive VP [15]

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And I think on your second point, Nick, that, that's fair. But with -- again, I think that the same pattern, we expect that demand to be taken up elsewhere. It is as a result of the progress that's being made with Cengage Unlimited, with digital generally. And so whilst that may result in some lumpiness quarter-to-quarter, one, we're not anticipating further effects like that this year; and secondly, we expect to be able to manage them.

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Operator [16]

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(Operator Instructions)

The next question is from the line of [Curtis Alburger] with (inaudible).

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Unidentified Analyst, [17]

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Michael, there's just one thing I wanted to clarify. And that is, you said in the slide on May 31, you filed a Hart-Scott-Rodino with the DOJ and the FTC. It's now being reviewed by the DOJ, which suggests you'd have gotten a second request at some point. Can you say when you got the second request? It must have been a while back.

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Michael E. Hansen, Cengage Learning Holdings II, Inc. - CEO & Director [18]

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Yes. We got the second request, Curtis, on July 1. Okay? And it was pretty much as we expected, just to add to that.

All right. No, I was just saying I think we have no more questions in the queue. So I just wanted to thank everybody for participating in the call, for your questions, and we're looking forward to updating you on our Q2 results in the fall.

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Operator [19]

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Thank you. Please. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.