McGraw Hill Inc (MH) 2026 Q1 法說會逐字稿

Good morning, and welcome to the McGraw Hill fiscal first-quarter 2026 earnings conference call for the quarter ended June 30, 2025, via webcast. (Operator Instructions)

As a reminder, today's call is being recorded, and a written transcript will be made available in the Investor Information section of the company's website tomorrow. A webcast replay will also be made available on the company's website. Following the prepared remarks, we will open the call for questions. I would now like to turn the call over to your host, Danielle Kloeblen, Senior Vice President, Investor Relations.

Please go ahead, Danielle.

Good morning, everyone. Thank you for joining us today as we review McGraw Hill's fiscal Q1 2026 results, which will be followed by a question-and-answer session. Joining me today are Simon Allen, Chairman, President, and Chief Executive Officer; and Bob Sallmann, Executive Vice President, and Chief Financial Officer. During this call, we will be making forward-looking statements about the company. These statements are based on current expectations and the current economic environment.

Forward-looking statements, estimates and projections are inherently subject to significant economic, competitive, regulatory, and other uncertainties and contingencies, many of which are beyond the control of management. These forward-looking statements are also subject to the cautionary statement that is included in our earnings release and the slide presentation.

These are further detailed in our 10-Q and other filings with the SEC. Important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified in our earnings release issued today as well as in our SEC filings. We will also refer to certain non-GAAP measures.

We believe these measures provide useful supplemental data that, while not a substitute for GAAP measures, allow for greater transparency in the review of financial and operational performance. In the press release, appendix of the slide presentation and supplemental files on our website, you can find a definition of terms and a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. For those who listen to the recording of this presentation, we remind you that the remarks made herein are as of today, August 14, 2025, and have not been subsequently updated.

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

Thank you, Danielle, and good morning, everyone. It's an honor to address you today after achieving what was a very significant milestone for McGraw Hill with our July IPO. For those who might be new or reconnecting with our story, I'll provide a brief business overview before turning it over to Bob to discuss fiscal Q1 results. You're all likely familiar with the McGraw Hill brand. For over 137 years, our resilient and innovative company has been a trusted global leader in education, supporting the evolving needs of over 60 million learners and educators worldwide.

Spread across more than 100 countries, our dedicated and skilled workforce of 4,200 employees, including over 700 technology experts and data scientists are united by our mission, which serves as a key differentiator and cornerstone of our culture. We operate a scaled B2B model that uniquely supports the entire learning life cycle. From preK to higher education and through to professional learning, we serve 99% of K-12 school districts, 82% of US higher education institutions and 94% of US medical libraries.

Demand for our high-quality content and digital solutions has increased as we employ data-driven insights and learning science to adapt to individual student needs while solving critical educator pain points. This competitive advantage has manifested in market share gains built on three distinct moats.

Our IP, our data, and our people. We operate a scaled digital ecosystem, having invested over $2 billion in technology over the past decade, including in artificial intelligence long before it became mainstream in education. This enables us to serve over 26 million paid digital users and curate over 19 billion learning interactions annually. This wealth of data creates a powerful feedback loop that fuels our growth and product development.

Through disciplined execution, responsible and impactful use of technology and our wealth of scaled data and insights, we have transformed McGraw Hill into a leading global provider of information solutions in education. While information is abundant in today's world, we create true learning experiences that go beyond technology-enabled point solutions.

AI is a tailwind for our business as it enables us to tailor our content to the unique needs of individual students and educators, fostering knowledge building. We have integrated machine learning and GenAI capabilities into our learning solutions that sit above our deep content and data moat. This enhances our ability to drive personalized learning, leveraging AI and our assets at a differentiated scale.

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

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

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

We also launched new solutions across the business, bolstering our portfolio with personalized-driven instruction. Key fiscal Q1 highlights included ALEKS Calculus, a new program for K-12 and higher education, which addresses a critical need in STEM learning and expands our addressable market opportunity.

ALEKS Adventure, on the other end of the spectrum, our K-5 solution, which expanded into two new grade levels, enabling further supplemental market penetration. McGraw Hill Plus, our proprietary tool that tracks student proficiency and builds longitudinal learner profiles, now includes a new third-party math assessment partnership with Propel. McGraw Hill Plus won the prestigious Baker Learning Analytics Prize, recognizing our innovation and progress through the use of data to transform education.

Evergreen, we are leveraging our first-mover advantage, delivering continuous content updates across more and more titles and within our higher education business while saving educators' valuable time. In August, we launched Emerge!, our next-generation core literacy program for K through fifth grade.

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

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

Before I conclude, I want to reiterate the inherent stability in our business, driven by our long-standing presence, knowledge and education, predictable academic cycles, multiyear institutional contracts, and advantageous scale. Macro trends around our core business remain positive.

We have not experienced a material impact from recent federal education policy changes or from tariffs. We are confident in the enduring importance of education globally and the resiliency of our business. I'm incredibly proud of what we have accomplished as we lead the evolving landscape with increasingly more opportunity ahead. I'll now turn the call over to Bob to walk you through our financials.

Thank you, Simon, and good morning, everyone. The IPO last month was significant for McGraw Hill and a reflection of our operational and financial excellence. With the net proceeds from the IPO, we have strengthened the balance sheet, reducing gross debt by $386 million and annualized cash interest expense by approximately $30 million. Looking ahead, we believe we will benefit from greater flexibility to invest in strategic priorities and drive future growth as we deepen our market leadership position. Before diving into our fiscal Q1 results, I want to reiterate the attractive nature of our business and ability to perform well through the economic cycles.

As Simon mentioned, we serve preK-12, higher education and professional learning around the world. Our visibility into these markets allows us to predictably forecast our business, while our diversification enables resiliency. Higher education and professional monetize through annual contracts, while K-12 is principally driven by multiyear procurement cycles with upfront cash payments. We have strong forward visibility into these cycles, which is most pronounced in the three states with the largest K-12 populations, California, Florida, and Texas. The seasonality of our business aligns with the academic calendar across K-12 and higher education.

Because of this, we focus on first half versus second half results internally with approximately 60% of our revenue and 65% of our adjusted EBITDA typically realized in the first half of our fiscal year. Returning to our fiscal Q1 results. The quarter was solid, albeit seasonally small, with results hitting the upper end of our expectations previewed in our July S-1 filing. We delivered $536 million in revenue, an increase of 2% year-over-year, driven by continued market share gains in Higher Education, which more than offset the smaller market opportunity in K-12. We generated $325 million in digital revenue in Q1, an increase of 7% year-over-year.

Our quality reoccurring revenue, inclusive of digital subscriptions and K-12 multiyear contracts comprised 72% of our total revenue at $388 million, up 7% year-over-year. The balance was transactional revenue, specifically print and eBooks, which declined as expected to $148 million, down 8% year-over-year. The remaining performance obligation or RPO, was $1.65 billion at the end of June, which gives us visibility and confidence as we look ahead. Our gross profit margin was 77%, up more than 90 basis points year-over-year, driven by digital mix. Adjusted EBITDA was $191 million, up 7% year-over-year, representing a 36% margin and 150 basis point improvement.

Our operating expenses reflect continued strategic investments in sales, marketing, and R&D to drive innovation, along with ongoing efficiencies in general and administrative functions. Turning to our business segments. In K-12, fiscal Q1 recurring revenue of $184 million grew 10% year-over-year due to robust prior year Texas and Florida science signed sales, which was offset by lower transactional revenue. Total revenue was $271 million, a decrease of 1% year-over-year as expected. The year-over-year revenue decline in K-12 is anticipated to deepen in the seasonally larger fiscal Q2 due to a more challenging comparison.

As I noted, our business is structured around a first half, second half focus as district purchases for the upcoming school year can shift between fiscal Q1 and Q2. I will note we are performing very well in the early part of our selling season with capture rates trending favorable to our expectations as we are taking the lead in nearly all key market opportunities.

Looking ahead, in addition to the new literacy nationwide pilot, we also secured our position for the large California math opportunity in fiscal year 2027, and we believe we are well positioned for this expanded market opportunity. We feel confident in our position as evidenced by the strength of our RPO at the end of June, which provides multiyear visibility. This was primarily driven by K-12, which exceeded our expectations.

In Higher Education, fiscal Q1 revenue was $182 million, an increase of 14% year-over-year, largely driven by continued share gains. Reoccurring revenue increased 7% versus prior year to $160 million due to digital growth. In addition to favorable US summer enrollment, Inclusive Access momentum continues with sales of $55 million, up more than 30% year-over-year. Inclusive Access program provides students with affordability, day one access to digital course materials, supporting higher sell-through. It remains a significant growth driver with plenty of runway.

Evergreen is a recent innovation and key differentiator as it provides continuous content updates and saves educators time with 95% of professors accepting the latest product release. Over 30% of our Higher Education revenue is tied to titles on Evergreen, a number that continues to move higher, further strengthening retention and share gains.

In Global Professional, fiscal Q1 revenue was relatively flat at $35 million. Reoccurring revenue grew 4% year-over-year as medical and engineering strength was offset by the exit of nonstrategic print, a headwind that will continue to moderate over time. In International, fiscal Q1 revenue declined 12% year-over-year to $51 million, with roughly half due to order timing, along with the digital transition.

Now regarding cash performance and the balance sheet. We ended fiscal Q1 with $247 million in cash and $697 million in total liquidity with our revolving credit facility undrawn. Net leverage was 4.1 times on an adjusted EBITDA basis at June 30. In July, we used the net IPO proceeds to pay down term loan, bringing our pro forma net leverage ratio to 3.6 times. S&P also moved us to positive outlook. Cash flow from operations was a seasonal use in the quarter, further impacted by deferred revenue.

Turning to our fiscal year 2026 financial guidance. We expect revenue to be in the range of $1.986 billion to $2.046 billion, which represents a year-over-year decrease of 5% to 3%. We anticipate reoccurring revenue in the range of $1.477 billion to $1.517 billion, which represents year-over-year growth of 1% to 4%. We anticipate adjusted EBITDA in the range of $663 million to $703 million.

This guidance is based on predictable trends in the K-12 market, where the fiscal year 2026 decline is tied to the timing of major state procurement cycles, a well-established pattern consistent with historical norms. Excluding K-12, we expect modest revenue growth this year, underscoring the resilience of our diversified portfolio. While we are early in the K-12 selling season, I am very pleased with the leading indicators.

We are taking share at a greater rate than originally planned and realizing the benefits of our pricing strategy. Early successes are also evidenced by the strength of our RPO, which is trending better than anticipated. Higher Education is also seeing early favorable signs with share gains and competitive takeaways. These positive developments across key segments position us exceptionally well for fiscal year 2026, reinforcing confidence in our outlook.

Our intention in each successive quarter is to narrow our full year guidance range. As a reminder, we typically have a higher level of visibility into full year results by the end of our second-quarter, given we have moved through the primary K-12 selling season and have insights into the spring semester within Higher Education based on the fall results.

For modeling purposes for fiscal year 2026, we expect total capital expenditures, inclusive of product development to be consistent with prior years at 8% to 9% of revenue, a significant reduction in our tax liability and cash taxes by approximately $45 million versus our internal assumptions due to recent changes to federal tax policy.

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

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

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

(Operator Instructions)

Adam Bojanowski, Macquarie.

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

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

At McGraw Hill, we believe that AI is really most effectively used to improve education and the experience for students and teachers when it achieves three things. And these three things, number one, Adam, it's got to help remove the administrative burden for educators. They have a huge amount they're working with.

They need to spend more time with students. And what we must do is make sure we remove that burden with everything that we create for them through AI. The second element is that it's got to -- and related, it's got to enhance the human interaction and that ability for the student-teacher relationship to really cement because that's what's critical to learning, to make sure that the struggle of learning is achieved.

And then lastly, the third point is that it must provide support for students to help them with their personalized learning journey, how they think individually and how they proceed through their classes. That's the context.

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

And the platform is incredibly powerful in how it guides students in real time, and that's very key. The second element that what we've really developed significantly and what we know that faculty want particularly, we've researched a lot of teaching community and faculty with the needs that they must receive with AI.

And what they want us to do is embed AI into the various and huge amount of material that we have already, the trusted content, well over 270,000 course materials and titles that we have. How do we engage with that content through products like AI Reader that we launched recently in Higher Ed?

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

And from an operational perspective, we have products like Scribe, which is really allowing us to make sure that we're streamlining all of our content creation and development and reducing the time it takes and the cost it takes to do that. So we see wins all around with AI.

Stephen Sheldon, William Blair.

I'll start with a quick congrats on the whole team on completing the IPO. So first question here, I wanted to ask about Higher Education trends. And maybe for Bob, can you talk more about the different factors that drove the strong start to the year in that segment? I think you talked about market share gains and enrollment trend, Inclusive Access.

And just how are you thinking about the growth trajectory over the coming quarters, especially with any visibility you have on both, again, the fall enrollment picture and changing adoption of Inclusive Access across the system? Is Inclusive Access continuing to kind of permeate across Higher Ed?

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

What's driving that? Again, share gains. And as we think about where we are going forward, we've got a couple of things that are helping us. Continued share gains, we've talked about Evergreen and the benefits of what that will provide us. We think that will continue to drive ongoing share gains. There are some other early indicators that we're seeing. Those include high school graduation rates. We're seeing some FAFSA application information. All of those are trending very favorably.

However, until the students actually show up on campus, will we actually know how we're performing. So we're very optimistic about how the remainder of the year looks for us, but we're cautious until the students are in the door. With respect to IA, and Simon has mentioned it, we've talked about in the past, it's been an extremely -- it's an effective program for us, driving the sell-through rates.

We have seen that growth over 30%. And we know that channel has allowed us to continue to grow and take share. So with the combination of all those things, I think we're very well positioned for the remainder of the year and going forward.

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

Yes. Yes. And we've mentioned we're in the early days. And what we're seeing in certain cases, we're seeing a 60% time reduction and a 50% reduction in overall cost to create content. The areas that we're seeing that would be in question banks, chapter summaries, things of that nature.

We've now deployed that across the entire business. So we're seeing it in all of our segments. And so while we're in the early days, we remain optimistic that, that will continue to grow. And as we've mentioned, there's meaningful spend here for us to go out and get at, but we're still relatively early. The good news is we've now deployed it across all of our segments.

So as we come into the next quarters and into next year, you'll hear us talking more heavily around the financial impacts that we're seeing.

Stephen, it's Simon. Just real quick, just to add on a couple of points that Bob made, particularly on your first question because we shouldn't underestimate the real strength of our Higher Education performance. We -- as you've seen, we've grown -- although it's a small quarter, to grow 14% revenue is really a spectacular performance for the group. And over -- when I look back over the last five years, we've grown market share 40% now in Higher Education. And we stand today, LTM June at just under 29% market share, which is significant growth.

So we are feeling very, very bullish indeed. That's the word of the day. We're feeling very, very bullish indeed about how Higher Education is performing. We continue to take share. We're very, very proud of that business because it executes so well. So we appreciate your question on that, and thanks for the opportunity.

Jeff Meuler, Baird.

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

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

Got it. Yes.

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

But in addition to that, we're also seeing some strength in math and ELA as well. One of the things that we're really proud of is as we looked at the largest market opportunities in K-12 for the year, we're leading eight out of nine of those. And remember, we have about 25% to 30% share in those markets. So as we think about how we're positioned, we generally get a third of those opportunities to take the lead. But we're leading in eight out of nine of the largest opportunities.

So really pleased with that, continuing to capture rate above our expectations. But what we mentioned is it's early in the selling season, right? So as we think about that selling season as it goes through August, we're still early there. So while it gives us confidence in the year, we're just a little bit cautious until we actually see the year close out. And then I'd tell you some of the other things that we're really happy about within our supplemental/intervention.

Simon mentioned ALEKS Adventure. We're seeing some early successes there as we can expand the TAM within our supplemental/intervention space. So all of those things are giving us a lot of confidence as we look through '26. Other things that we're seeing, we were on the list. Simon mentioned, I had mentioned on the list for California math. That is another area that, again, gives us a little bit of confidence as we move forward.

As we think about the market opportunity and the confidence about it growing, as we -- Simon mentioned, we're 99% of every district. We have great relationships with the state boards of education. We understand that dynamic. So what we see as we think about '27, '28, '29, understand the market opportunity, knowing that, that's growing, and we're well positioned because of the share gains, because of the innovation that we're driving with new supplemental/intervention tools.

We're adding success with McGraw Hill Plus. All of those things are really positioning us well for the remainder of the year and then as we look out '27, '28, '29.

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

Yes. It's Simon. I would say it's definitely a quarter-by-quarter issue, and we're not the sort of company that decides to move natural orders from July, for example, into June. That's not how we operate. It's very much a timing behavior quarter-by-quarter.

And from a regional perspective, we've got a lot of excitement in our international group across all of our Professional Business, Higher Education, K-12. And there are particularly in regions where there is a great sympathetic view to the US style of education. So think about markets like the GCC and the Middle East, markets like Mexico, like Canada, where they're looking at ways of delivering curriculum materials through technology and improved technology infrastructure. That's where we really shine.

And we see real opportunity there. And again, the international community is a little bit behind the US when it comes to adopting a very strict courseware digital delivery model, including not just content, but all the assessment materials. So as the market accelerates its interest, I think in that mechanism, you're going to see further growth from us continuing. So it's an exciting potential opportunity for us for sure going forward.

Russell Quelch, Rothschild.

Congratulations on the IPO process, first of all. I just wanted to ask a couple of questions here. Firstly, around federal policy and the impact that might be having on your business. Is there any updates, new insights that you can share with us around recent developments? And maybe just a follow-up actually on what you've been talking about in relation to the supplemental and intervention solutions in K-12.

You mentioned the progress you made on the ALEKS Adventure sales. I wonder if you're seeing a better or improving environment for cross-selling of these additional solutions into the core customers.

Russell, it's Simon. It's lovely to hear you again, and thank you for your questions. Let me take each in turn. Certainly, when it comes to the recent policy activity from the federal government in the US, there really are no implications for our business at all, primarily because -- and you may know this already, but in K-12, it really is a market where the funding is driven by state and local activity.

And in the case of Higher Education, there really is nothing that has been announced in any change that affects our business at all because all of the funding issues that has been mentioned in Higher Ed, one month, it may disappear, the next month, it may come back.

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

So we will serve students wherever they are in the world, and we're very, very happy to do that. So we really don't see any specific elements at all. We're a very resilient company and proud to be that way. Now your second question on supplemental/intervention. We're seeing great success with ALEKS Adventure for K5, as you mentioned.

It's lovely to see ALEKS that genuinely AI-driven knowledge algorithmic program that really does help students in their personalized learning. It's really good to see that come down into K5. And generally, in supplemental/intervention, we're seeing continued interest. As you know, that's an annual purchase. We're having tremendous relationships across schools and school districts around the country.

And we're seeing noted interest in intervention tools that we provide, supplementary material to keep students engaged and to really enhance the learning process. So it's good news in that regard. You may remember, we have only 5% of that market, and we are very keen, and we fully expect to get significant market share in the years ahead. So it's a very, very good area and a very good avenue for us.

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

Jeff Silber, BMO Capital Markets.

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

Yes. Thanks, Jeff. The way we go about it is, of course, we do our bottoms-up build. We revise our forecasting every month and every quarter and we really look at some of the leading indicators to provide us some insights into the remainder of the year.

So as you know, the midpoint of our guide on the top line is down 4%, primarily driven by the K-12 market, a smaller market opportunity. Now while we're early, as we think about Q1, it's early in our process. So I'll walk through the two largest segments, K-12, Higher Ed. K-12, we look at the improving capture rates. I mentioned our share in the large opportunities where we're taking the lead in eight out of nine opportunities.

All of those things are giving us confidence. And while it's a little bit early for us to really start calling things up, it just gives us that confidence around our K-12 business and how we've called that. We know we're going to outperform. The overall market, we've highlighted, could be down 15% to 20%. Certainly, because of our performance, our share gain, we won't see those levels. So we're very pleased with that.

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

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

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

Toni Kaplan, Morgan Stanley.

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

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

And I think we're less concerned about niche products, to be honest with you. And we're really only concerned in providing those products and enhancing the products in a way that we know will benefit the teacher and the student. We're not about PR campaigns of different partnerships that may actually add spurious if any value. We are much more about focusing on what we know the teaching community need. And we -- I'm privileged that on Saturday, I'll be 39 years in this business since I began as a rep in Texas all those years ago.

And we, to this day, continue to spend a lot of time focusing on understanding teaching and faculty needs to make sure that we're providing the right material. That continues to be our focus. So when I started off by saying it's such a tailwind, it really is, but it is especially -- AI is especially beneficial for those companies at scale like McGraw Hill, where we can utilize those points of data, creating products, either new completely stand-alone products like ALEKS or embed more information and AI tools to improve the solutions that we deliver like AI Reader across all of our Higher Education products.

So we're excited by the opportunity. We take it very carefully to make sure that we are only providing value to the students and the educator that we serve. And it's a key goal for us.

And Simon, maybe I'll add this, Toni. I'd also like to highlight the fact that we've got a very active M&A team. We're out in the market. We look at those point solutions to see what innovations they're building, what they're developing. And really, that's where the synergy would come in if we were to bring in those smaller point solutions that are building innovative products and using our wealth of data and insights and scale to allow us to really accelerate those.

So we've got a team. We look at and evaluate opportunities. We're not too proud to go out and see what else people are doing. And so we're every day evaluating different opportunities of those point solutions.

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

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

You're going to see -- each summer, you'll see a significant milestone. And obviously, I can't tell you what that will be, although I have a very good idea. Going forward, you'll see that develop as the releases increase over the coming months. So you'll see significant increases in that number. Similarly, with Inclusive Access, again, within Higher Education, you may have noticed that we grew over 30% this past quarter.

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

And Toni, maybe I'll add one other point, Simon. The other big milestone for us as we think about piloting our [NewLit] program this fall. As you recall, our Reading Wonders program has been our largest program, ELA being our largest subject matter. We'll be launching and piloting that program this fall. A lot of excitement there.

We'll continue to provide updates as how that progresses and that market opportunity as you see '27, '28, '29 and further out is really being driven by ELA. So we're really excited to bring that into market.

Rob Levins, HSBC.

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

Yes. Sure thing. It really is unchanged, right? We benefit, obviously, from the deleveraging, the interest rate reduction benefit that we'll have. But as we think about our allocation going forward, it stays consistent.

First place we always will deploy capital is for internal projects. They always have the greatest ROI. So that will be the first place we go. Those are always fully funded in our budget. Second, we will continually deliver and looking to get to that leverage target of the 2 times to 2.5 times in the medium term.

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

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

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

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

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

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

We've talked a lot about AI and the tailwind that provides us, but also the responsibilities that we have to make sure that we utilize all of this technology effectively. And we're confident in our ability to execute on our strategy. We're driving sustainable growth, and we're creating long-term value for you, for our investors. And we see this as just the beginning of our journey, and we are really enthusiastic about all of the opportunities ahead. And I would simply finally say enjoy what remains of the summer, and I look forward again to speaking to you in a few months.

Thank you very much.

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