Fiscal 2012 Third Quarter Investor Call - D- Cengage
Fiscal 2012Third Quarter Investor CallMay 4, 2012
Investor CallSafe Harbor/Forward-Looking StatementsThe following discussion may contain forward-looking statements, including statements about the outlook andprospects for Cengage Learning.Forward-looking statements are those which are not historical facts. These and other statements that relate tofuture results and events are based on Cengage Learning’s current expectations and assumptions and aresubject to risks and uncertainties which may cause our actual results in future periods to differ materially fromthose currently expected because of risk factors discussed in this presentation and the “Risk Factors” section ofour Third Quarter Report for the Three and Nine Months Ended March 31, 2012. Please consult thesedocuments for a more complete understanding of these risks and uncertainties. We disclaim any intention orobligation to update or revise any forward-looking statements, whether as a result of new information, futureevents or otherwise.Non-GAAP and Other Financial MeasuresThis presentation contains disclosures of Adjusted EBITDA, Unlevered Free Cash Flow and Bank EBITDAwhich are non-GAAP financial measures.This presentation also contains discussions of gross sales by markets, which represents amounts invoiced toour customers. Consequently, gross sales exclude any adjustments for sales returns provision or revenuedeferral. We believe this measure provides investors with a more comprehensive understanding of ourunderlying revenue results and trends by presenting amounts invoiced on a consistent basis. In addition, wediscuss ‘digital product sales’ which represents (i) revenue recognized on the sale of digital products that arenot packaged with printed materials and (ii) gross sales, less actual returns, of bundled print and digital productswhere, we believe, that the value proposition to our customer is driven by the digital offering.2
AgendaWelcome / IntroductionsDave FaimanBusiness UpdateRon DunnFinancial ResultsDean DurbinQuestions & Answers3
Business UpdateRon Dunn
Business UpdateNCCONational Geographic LearningInternational HighlightsDigital Progress Report5
Business UpdateNineteenth Century Collections Online (NCCO)Gale launched the first two Archives ofNineteenth Century Collections Online(NCCO)Resource is built on an innovative technologyplatform with tools to support advancedresearchNCCO builds on the success of ECCO(Eighteenth Century Collections Online), thesingle best selling product in Gale’s history2012 NCCO Archives include nearly10 millionpages of contentLeading institutions across North Americahave already acquired all four 2012 Archives6
Business UpdateNational Geographic LearningNational Geographic Learning (NGL)enters Higher Ed and Career marketswith the release of the NationalGeographic Learning Reader SeriesPlans to integrate National Geographiccontent more broadly into Higher Edproducts through:Revisions of existing, best-sellingtextbooksThe creation of new, co-brandedNGL core textbooksStrong National Geographic brandrecognition among Higher Edcustomers7
Business UpdateInternational HighlightsChinaLatin AmericaEMEA8
Business UpdateDigital Progress ReportEarly Adopter Program ContinuesMore than 500 new MindTap solutions,scheduled for 2012, will start releasing thissummer across a range of disciplines.On track for an advanced level of third partyLMS integrationsMore information available at:www.cengage.com/mindtap9
Business UpdateDigital Progress ReportMore than 10M unique visitors this fiscal year,reflecting more than 150% growthMore than 40M of revenue (TTM), which is morethan 103% growth over previous yearDigital makes up more than 75% of CengageBrainrevenueMore than 28% of CengageBrain customers arerepeat customers (up from 20% last year)Approximately 70% of CengageBrain customersreport that they would be likely to recommendCengageBrain to others10
Business UpdateDigital Progress ReportFor the twelve months ended March 31, 2012:Revenue from digital solutions represented 35.4% of total revenueRevenue from curriculum solutions grew 33.6%Revenue from custom digital solutions grew 28.0%3.3 million students activated a Curriculum Solution (up 24.0%)Students conducted 91.3 million sessions (up 29.5%)11
Financial UpdateDean Durbin
Financial UpdateConsolidatedThree Months Ended March 31Margin2011: 28.1%2012: 20.9%( Millions) 400 337.2 300 319.0 200 100 89.7 70.4 0RevenueAdjusted EBITDA20112012The aggregate of our two segments’ Adjusted EBITDA does not equal our total Adjusted EBITDA because our segment profit measure of Adjusted EBITDA excludesequity-based compensation, fees paid to our Sponsors under advisory agreements and other corporate-related expenses.13
Financial UpdateConsolidatedNine Months Ended March 31Margin2011: 41.3%2012: 40.0%( Millions) 1,500.0 1,485.3 1,250.0 1,403.0 1,000.0 750.0 594.2 500.0 578.9 250.0 0.0RevenueAdjusted EBITDA20112012The aggregate of our two segments’ Adjusted EBITDA does not equal our total Adjusted EBITDA because our segment profit measure of Adjusted EBITDA excludesequity-based compensation, fees paid to our Sponsors under advisory agreements and other corporate-related expenses.14
Financial UpdateDomesticThree Months Ended March 31Margin2011: 33.6%2012: 24.3%( Millions) 300.0 275.2 250.0 254.4 200.0 150.0 100.0 85.4 50.0 66.9 0.0RevenueAdjusted EBITDA2011201215
Financial UpdateDomesticNine Months Ended March 31Margin2011: 46.7%2012: 44.6%( Millions) 1,400.0 1,200.0 1,213.3 1,288.2 1,000.0 800.0 600.0 566.7 574.5 400.0 200.0 0.0RevenueAdjusted EBITDA2011201216
Financial UpdateInternationalThree Months Ended March 31Margin2011: 13.9%2012: 11.1%( Millions) 80.0 60.0 64.6 62.0 40.0 20.0 9.0 6.9 0.0RevenueAdjusted EBITDA2011201217
Financial UpdateInternationalNine Months Ended March 31Margin2011: 14.0%2012: 15.9%( Millions) 200.0 197.1 175.0 189.7 150.0 125.0 100.0 75.0 50.0 26.6 25.0 31.4 0.0RevenueAdjusted EBITDA2011201218
Financial UpdateCapital ExpendituresNine Months EndedMarch 31,20122011( Millions)Pre-Publication Costs Property, Equipment and Capitalized Software for Internal UseCapital Expenditures130.7 45.6 176.3 Change118.610.2%50.7(10.1%)169.34.1%19
Financial UpdateNet IndebtednessMarch 31,2012( Millions)2011Senior Secured Credit Facilities:Term Loan Due 2014 Incremental Term Loan Due 2014Revolving Credit Facility (Maturity 2013)10.50% Senior Notes Due 20153,285.2 3,319.6596.1599.918.0-1,209.91,207.813.25% Senior Subordinated Discount Notes Due 2015233.6407.713.75% Senior PIK Notes Due 2015127.0136.05,469.85,671.0IndebtednessCash and Cash Equivalents(23.0)(69.2)Net Indebtedness 5,446.8 5,601.8Last Twelve Months Bank EBITDA 1 843.1 843.21We calculate Bank EBITDA pursuant to the terms of our Credit Agreement.20
Financial UpdateLeverage RatiosMarch 31,20122011Credit Agreement Threshold7.757.75Senior Secured Leverage Ratio14.564.55Total Leverage Ratio26.466.641We calculate Senior Secured Leverage Ratio pursuant to the terms of our Credit Agreement.2Total Leverage Ratio is determined as a ratio of Net Indebtedness to Last Twelve Months Bank EBITDA (i.e., 5,446.8/ 843.1 and 5,601.8/ 843.2 for March 31, 2012 and2011, respectively.)21
Financial UpdateLiquidityMarch 31,2012( Millions)2011Cash and Cash Equivalents 23.0 69.2Revolving Credit Facility 300.0 300.0Outstanding Letters of Credit(2.6)Outstanding BorrowingsAvailable under the Revolving Credit Facility(3.3)(18.0) 279.4 296.7Nine Months EndedMarch 31,2012Unlevered Free Cash Flow 568.62011 506.422
Financial UpdateRefinancing Transactions – April 10, 2012We completed the previously announced amendment and extension of our Credit Agreementwhereby we:Extended the maturity of 1.3 billion of our existing Term Loan, net of a partial pay down, toJuly 2017Provided for new commitments to maintain the existing 300 million of revolving creditfacility availability until April 2017 resulting in a total extended and non-extended revolvingcredit facility of up to 525 million until July 2013, 300 million thereafter.We also completed our previously announced private placement of 725 million seniorsecured notes due in April 2020. These notes bear interest at a coupon rate of 11.5% andwere issued at par. We used a portion of the proceeds from these notes to pay down 489million of the extended term loan.23
Financial UpdatePro Forma DebtPro FormaMarch 31, 2012( Millions)Senior Secured Credit Facilities:Term Loan Due 2014 Incremental Term Loan Due 20141,539.2550.4Term Loan Due 20171,303.6Revolving Credit Facility (Maturity 2013)18.011.50% Senior Secured Notes Due 2020725.010.50% Senior Notes Due 20151,209.913.25% Senior Subordinated Discount Notes Due 2015233.613.75% Senior PIK Notes Due 2015127.0Indebtedness5,706.7Cash and Cash EquivalentsNet IndebtednessDebt and cash information has been presented on a pro forma basis to reflect transactions occurring on April 10, 2012.(220.7) 5,486.024
Financial UpdatePro Forma LiquidityMarch 31, 2012ActualPro Forma( Millions)Cash and Cash Equivalents 23.0 220.7Revolving Credit Facility (Maturity 2013) 300.0 225.0Revolving Credit Facility (Maturity 2017)-Outstanding Letters of CreditOutstanding Borrowings300.0(2.6)(2.6)(18.0)(18.0)Available Under the Revolving Credit Facility 279.4 504.4Total Available Liquidity 302.4 725.1Debt and cash information has been presented on a pro forma basis to reflect transactions occurring on April 10, 2012.25
Questions & Answers
Appendix
AppendixNon-GAAP Financial MeasuresWe believe that certain non-GAAP financial measures provide additional means of analyzing the current period’s resultsagainst the corresponding prior period’s results. However, these non-GAAP measures should be viewed in addition to, andnot as a substitute for, the Company’s reported results prepared in accordance with GAAP.“Adjusted EBITDA”: Defined as Net income (loss) before: income (loss) from discontinued operations, net of tax; equitylosses of affiliates, net of taxes; benefit from (provision for) income taxes; interest expense, net; mark-to-market of derivativeinstruments; gain on early extinguishment of debt; other (income) expense, net; amortization and impairment of identifiableintangible assets; impairment of goodwill; depreciation; restructuring charges and the amortization of pre-publication costs.We believe that this performance measure provides a meaningful basis for reviewing the results of our operations byeliminating the effects of financing and investing decisions, as well as excluding the impact of activities not related to ourongoing operating business. Adjusted EBITDA is presented pursuant to the requirements of GAAP as a measure of profit orloss for each reportable segment in Note 15, “Segment Information” of our Third Quarter Report for the Three and NineMonths Ended March 31, 2012.“Unlevered Free Cash Flow”: Calculated as net cash provided by operating activities of continuing operations excluding netcash paid for interest and debt repayments in lieu of interest, reduced for cash expenditures relating to additions to prepublication costs and additions to property, equipment and capitalized software for internal use, which we view asinvestments required to ensure the sustainability and continued growth of our business. We believe that this liquiditymeasure provides a clearer picture of the cash flow produced and reinvested by the ongoing business, before debt service.“Bank EBITDA”: In order to evaluate the results of operating activities excluding the effect of significant non-recurringtransactions and giving effect to the run rate impact of cost saving initiatives, acquisitions and disposals, we calculate BankEBITDA pursuant to the terms of our Credit Agreement.28
AppendixAdjusted EBITDA ReconciliationThree Months EndedMarch 31,20122011( Millions)Adjusted EBITDA 70.4 89.7Nine Months EndedMarch 31,20122011 594.2 14.6)(12.3)(40.7)(34.0)Amortization of Identifiable Intangible Assets(41.1)(41.9)(123.2)(125.8)Gain on Early Extinguishment of Debt--42.21.9Mark-to-Market of Derivative on of Pre-Publication CostsRestructuring ChargesInterest Expense, Net(102.9)Benefit from (Provision for) Income TaxesEquity Losses of Affiliates, Net of TaxesLoss from Discontinued Operations, Net of TaxNet (Loss) Income )---(3.8)(108.2) (95.5) 50.0 (13.9)Non-GAAP measures should be viewed in addition to, and not as a substitute for, the Company's reported results prepared in accordance with GAAP and presented in our ThirdQuarter Report for the Three and Nine Months Ended March 31, 2012.29
AppendixComparable Adjusted EBITDA Reconciliation( Millions)Adjusted EBITDA, as Reported 1Adjusted EBITDA MarginThree Months EndedMarch 31, 2012ConsolidatedDomestic 70.420.9% 66.924.3%Three Months EndedMarch 31, 2011ConsolidatedDomesticAdjusted EBITDA, as Reported 1 89.7 85.4Reversal of Net Domestic Incentives Credit 2(12.2)(12.2)Domestic Incentive Compensation Expense, Net 3Adjusted EBITDA - Comparable BasisAdjusted EBITDA Margin(13.5)64.020.1%(13.5)59.723.5%% Growth123 10.0% 12.1%The aggregate of our two segments’ Adjusted EBITDA does not equal our total Adjusted EBITDA because our segment profit measure of Adjusted EBITDA excludes equity-basedcompensation, fees paid to our Sponsors under advisory agreements and other corporate-related expenses.Comprised of 15.5 million credit associated with domestic management and sales force annual incentive plans, less 3.3 million expense for other discrete and role-basedincentive arrangements.Amount matched to third quarter 2012 actual expense to illustrate comparable results.30
AppendixUnlevered Free Cash Flow ReconciliationNine Months EndedMarch 31,20122011( Millions)Net Cash Provided by Operating Activities of Continuing Operations 391.9 330.2Add Back:Net Cash Interest PaidRepayments of Long-Term Debt, in Lieu of InterestAdditions to Pre-Publication CostsAdditions to Property, Equipment and Capitalized Software for Internal UseUnlevered Free Cash Flow 318.0341.135.04.4(130.7)(118.6)(45.6)(50.7)568.6 Non-GAAP measures should be viewed in addition to, and not as a substitute for, the Company's reported results prepared in accordance with GAAP and presented in our ThirdQuarter Report for the Three and Nine Months Ended March 31, 2012.506.431
AppendixBank EBITDA ReconciliationTwelve Months EndedMarch 31, 2012Net income 27.2Adjustments:Provision for Income Taxes43.5Interest Expense424.1Interest Income(0.5)Mark-to-Market of Derivative Instruments(34.3)Gain on Early Extinguishment of Debt(42.2)Amortization of Identifiable Intangible Assets164.9Depreciation54.0Amortization of Pre-Publication Costs157.3Non-Cash Equity-Based Compensation5.3Sponsor Management Fee10.7Pro Forma Run Rate Cost Savings4.2Pro Forma EBITDA from Acquisitions14.7Restructuring, Integration and Business Optimization Expenses7.9Other6.3Bank EBITDA 843.1Non-GAAP measures should be viewed in addition to, and not as a substitute for, the Company's reported results prepared in accordance with GAAP and presented in our ThirdQuarter Report for the Three and Nine Months Ended March 31, 2012.32
prospects for Cengage Learning. Forward-looking statements are those which are not historical facts. These and other statements that relate to future results and events are based on Cengage
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