Cengage Learning Holdings II Inc :CNGO-US: Earnings Analysis: Q2, 2018 By the Numbers : June 14, 2018

Cengage Learning Holdings II Inc reports financial results for the quarter ended September 29, 2017.


  • Summary numbers: Revenues of USD 522.40 million, Net Earnings of USD 55.40 million.
  • Gross margins widened from 52.51% to 53.22% compared to the same period last year, operating (EBITDA) margins now 40.28% from 42.00%.
  • Change in operating cash flow of 3.52% compared to same period last year is about the same as change in earnings, likely no significant movement in accruals or reserves.
  • Narrowing of operating margins contributed to decline in earnings.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-09-29 2017-06-29 2017-03-30 2016-12-30 2016-09-29
Relevant Numbers (Quarterly)
Revenues (mil) 522.4 296 287.6 322.5 542.9
Revenue Growth (%YOY) -3.78 -3.58 -14.81 -11.16 -7.37
Earnings (mil) 55.4 -29.1 -48 -12 58.9
Earnings Growth (%YOY) -5.94 30.71 -166.67 47.37 275.16
Net Margin (%) 10.6 -9.83 -16.69 -3.72 10.85
EPS 0.91 -0.48 -0.7 -0.18 0.87
Return on Equity (%) 6.15 -3.19 -4.93 -1.2 5.43
Return on Assets (%) 5.7 -3.04 -4.84 -1.18 5.76

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Market Share Versus Profits

Revenues History
Earnings History

Compared to the same period last year, CNGO-US’s change in revenue was close to the amount of its change in earnings. It remains to be seen how the rest of its peer group’s results will turn out and if CNGO-US’s performance is a sign of any major shift in the composition of market share in this sector. Also, for comparison purposes, revenues changed by 76.49% and earnings by 290.38% compared to the previous period.

Earnings Growth Analysis

The company’s earnings declined year-on-year largely because of the increases in operating costs. Its operating margins (EBITDA margins) went from 42.00% to 40.28%. This decline in earnings would have been worse except for the fact that the company showed improvement in gross margins, from 52.51% to 53.22%. For comparison, gross margins were 43.61% and EBITDA margins 17.97% in the immediate last period.

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

CNGO-US’s improvement in gross margin has been accompanied by an improvement in its balance sheet as well. This suggests that gross margin improvements are likely from operating decisions and not accounting gimmicks. Its working capital days are now 38.09 days compared to 57.22 days for the same period last year.

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company’s cash versus earnings numbers to gauge whether its performance is sustainable.

CNGO-US’s year-on-year change in operating cash flow of 3.52% is around its change in earnings. This suggests that there are likely no significant movement in accruals or reserves for managing earnings this period.


The company’s decline in earnings has been influenced by the following factors: (1) Decline in operating margins (EBIT margins) from 25.03% to 23.83% and (2) one-time items that contributed to a decrease in pretax margins from 17.92% to 15.95%

EBIT Margin History
PreTax Margin History

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Company Profile

Cengage Learning Holdings II, Inc., formerly Cengage Learning Holdings II, L.P., is a provider of content and digital learning solutions for the global academic, skills, school and research markets. The Company is a publisher of course materials in the United States higher education segment of the academic market. It operates through two business segments: Domestic and International. Its Domestic segment produces a range of digital and print educational solutions and associated services for the academic, skills and school markets, and research markets in the United States. Its International segment distributes educational and research solutions across all academic disciplines, provides English language teaching (ELT) products and adapts its Domestic offerings for use in multiple countries and territories around the world. Its offerings to customers include technology and academic services, including digital homework solutions and support services for use of its digital products.

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