Cengage Full Fiscal Year Results Disappoint

Cengage Learning, the large privately held educational publisher, recently announced (PDF) disappointing full year 2011 financial results; but in their presentation, the company did endeavor to communicate how material their transition from a print centric to an electronic publishing will be for the company.

Leading with the good news, management focused on how much additional value Cengage will be able to extract from students purchasing their content once the material is available online. The company suggests that while prices for electronic content may be reduced, the penetration rate into the typical class will be significantly higher once that content is delivered electronically. For example, in a class size of 600 (over three years) the publisher may currently only sell to about 33% of students but, in the online scenario, the penetration rate could be 90%. As noted, while revenue is potentially higher, gross margin is markedly higher by about 10 percentage points (75% versus 85%) according to their example (slide 6).

Since Cengage was purchased from Thomson Reuters the company has been in a race to migrate and/or convert their content into electronic form. In this presentation management underscored some important milestones in that effort. Over 70% of their products now have an electronic component which is expected to rise to 75% by the end of fiscal 2012. Both sessions and activations are up in percentage terms but these stats are harder to place in context. The company also noted the recent acquisition of National Geographic School Publishing which now makes Cengage a leading English language provider in the US.

However, the discussion of the financial results was less positive. A weak third and fourth quarter resulted in a significant drop in top line revenue which has been attributed to timing of orders and the loss of some adoptions. Interestingly, the company also noted that the increase in textbook rental programs may also have adversely impacted their revenue. Cengage launched their own textbook rental program recently but Chegg will be the prime offender in this category.

Other areas of concern included lower gross sales in their career segment (reflecting sales made to career and vocational schools) and Research (Gale) which declined $25mm due to lower print and online sales.

In summary, the financial results were as follows:

Fourth Quarter:

($ Millions)	2011	2010	Change
Revenue	472.9 $	$ 553.4	(14.5)%
Adjusted EBITDA	$ 201.5	$ 234.0	(13.9)%
Margin	42.6%	42.3%

Full Year:

($ Millions)	2011	2010	Change
Revenue	$ 1,875.9	$ 2,017.6	(7.0)%
Adjusted EBITDA	$ 780.4	$ 840.1	(7.1)%
Margin	41.6%	41.6%
Capital Expenditures	252.5	203.0	24.4%
Unlevered Free Cash Flow	$506.7	$596.7	(15.1)%

For a full explanation of the results check the Cengage investor presentation here.