FISCAL 2013 THIRD QUARTER INVESTOR CALL REMARKS May 10, 2013 MODERATOR: Good morning and welcome

to Cengage Learning's Fiscal 2013 Third Quarter investor conference call. Participating on the call will be Michael Hansen, Chief Executive Officer, Dean Durbin, Chief Financial Officer and Dave Faiman, Chief Accounting Officer. All participants are in a listen-only mode for the duration of this call. This conference call is being recorded and a replay as well as a copy of the prepared remarks for the call will be posted to the investor relations section of the companys website. It is now my pleasure to introduce Dave Faiman, Chief Accounting Officer for Cengage Learning. DAVE FAIMAN: Good morning and welcome to Cengage Learnings fiscal 2013 third quarter investor conference call. This morning, Michael Hansen, Cengage Learnings Chief Executive Officer, will provide an overview of the business, market conditions and our growth strategy. Dean Durbin, Chief Financial Officer, will present the financial results for the third quarter and year to date, and then Michael will conclude todays call with some closing remarks. In light of our ongoing review of potential restructuring options we will not be holding a Q&A session after our remarks this morning. For the same reason we will not conduct follow-up meetings or calls with investors and analysts after this call either. However, we have made a substantial amount of information available within the investor relations section of our website, including the press release and our Third Quarter Report for the period ended March 31, 2013. We would encourage you to rely upon these resources. The slides we will be referencing during the presentation for todays call have been posted to www.cengage.com/investor and they are also accessible at www.investorcalendar.com by clicking on the list of todays events. We will be posting a replay and the prepared remarks for todays call, as well. Please note that the following discussion may contain forward-looking statements, including statements about the outlook and 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 Learnings current expectations and assumptions and are subject to risks and uncertainties which may cause our actual results in future periods to differ materially from those currently expected because of risks discussed in
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FISCAL 2013 THIRD QUARTER INVESTOR CALL REMARKS May 10, 2013 this presentation, our Third Quarter Report for the Three and Nine Months ended March 31, 2013 and the Risk Factors section of our Annual Report for the Year Ended June 30, 2012. Please consult these documents for a more complete understanding of these risks and uncertainties. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. With that, let me now introduce Cengage Learnings CEO Michael Hansen. MICHAEL HANSEN: Thanks, Dave. Good morning, everyone, and thank you for joining us for our discussion of our performance in the third quarter. We also want to update you on the progress of our strategic initiatives, which are critical to the transformation and long-term success of our business. As you have seen from our quarterly report this morning, our total revenues for the three months ended March 31, 2013 increased by 4.8% to $353.4 million. Our Adjusted EBITDA for the period increased by 30% to $91 million. To give you a better sense for the like-for-like performance of our business compared to last year, we would encourage you to look at the past two quarters in aggregate, which constitutes largely our winter sales season. Over the past two quarters, our total revenue is down 4.2% and our Adjusted EBITDA is down 3.7%. Looking ahead to the next sales season, to better align our selling practices with underlying demand in the marketplace, management has made a decision to discontinue certain customer incentive programs which incentivized customers to place orders early. As a result of this decision, the Company anticipates significantly weaker sales in the fourth quarter of fiscal 2013 versus the prior year. We anticipate that at least some portion of the sales not realized during the fourth quarter will be realized during the remainder of the sales season in the first half of fiscal 2014. Dean Durbin, our Chief Financial Officer, will walk you through our financial results in further detail in a few moments. Before we get into the detailed financials, I would like to describe the market conditions and competitive landscape as we currently see them. Currently, our industry is in the midst of a shift to digital education and study materials. This is being accompanied by significant pressure on the sales of traditional print materials.
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FISCAL 2013 THIRD QUARTER INVESTOR CALL REMARKS May 10, 2013 In higher education, we are seeing declining enrollments both in the not-for-profit sector and in career schools, a phenomenon which we have not seen in more than a decade. In addition, we continue to see an industry-wide decline in new textbook purchases amongst post-secondary students driven by the ability to buy cheaper new book substitutes, such as rental and used books. Separately, we are addressing the impact of the U.S. Supreme Court decision in Wiley v. Kirtsaeng. In this case, John Wiley & Sons filed suit over the import of their copyrighted textbooks which were customarily sold by John Wiley at lower prices abroad back into the U.S. market. The Supreme Court reversed lower court rulings and determined that Kirtsaeng's sale of lawfully-made copies purchased overseas was protected by the first-sale doctrine. As a result, it is now entirely legal under copyright law to import textbooks which were lawfully purchased abroad into the U.S. for resale. We are revising our international pricing strategy to make it complementary to our pricing approach in the United States which may have significant volume implications on our sale of U.S. textbooks abroad going forward. Our library customers continue to face funding pressures aggravated by the automatic federal budget cuts that went into effect on March 1st. It will take time before we know the full effects of sequestration on library budgets. As you know well, and weve talked about it in prior calls, state and local government cut back on education budgets and that impacts our K-12 market, and this has resulted in less spend on books and materials in this market. Despite the challenges Ive described in terms of the market trends, I want to provide you with highlights of the actions we are taking to establish Cengage Learning as the company that faculty, students and institutions look to first for improving engagement and learning outcomes around the world. When I spoke with you following the last two quarters, I outlined several strategic initiatives that are part of transforming Cengage for the future. These include improving the performance of existing solutions, refocusing and accelerating our MindTap product development, refining our digital roadmap and implementing key performance indicators, KPIs, across the organization. Over the past three months, my newly formed management team and I have leveraged these initiatives to develop a comprehensive strategic plan for the Company. Today Id like to share with you the highlights of our strategy for transforming Cengage Learning: First, we will increase product innovation.
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FISCAL 2013 THIRD QUARTER INVESTOR CALL REMARKS May 10, 2013 Second, we will drive incremental growth in Global Research & ELT. Third, we will drive Go To Market Excellence. And, fourth, we will make targeted cost reductions aligned with our revised revenue, operating profit and cash flow expectations. I will now discuss each of these priorities and our progress against them. First about increasing product innovation: We have begun to transform Cengage into a fully-integrated digital education company. Our future growth starts with our ability to consistently deliver the best course materials, with content, digital solutions and services to better engage students in learning. Led by Jim Donohue, Chief Product Officer, and George Moore, Chief Technology Officer, we have just completed a major organizational realignment that creates more customer-centric and accountable product and technology teams, and processes. Our new product creation and development process involves deepening our customer insight, ideation, market testing, to ultimately address user pain points. We are embracing a team approach by discipline and market segment, with dedicated editorial, technology and production resources assigned to each product group. This will increase our customer focus, encourage greater collaboration within the company and between market-aligned teams, and it will increase our speed to market. We continue to make progress on the delivery of MindTap a fully integrated, highly interactive suite of digital learning solutions designed to engage students and offer instructors choice in content, platforms, devices and learning tools. We have some early products in the market that continue to receive very positive customer reviews. In fact, just this week MindTap was named a Software Information Industry Association 2013 CODiE Award Winner in the Best Postsecondary Personalized Learning Solution category. Our future efforts will be focused on delivering fully integrated course solutions for all our major course areas. Next I want to talk about focused growth in Global Research & ELT: In our library and research market segments, we are working to position Gale as the vehicle through which large, cultural institutions vast knowledge base can be made more accessible to researchers. We continue to develop digital platforms that enable easier
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FISCAL 2013 THIRD QUARTER INVESTOR CALL REMARKS May 10, 2013 discovery and use of this content. This past quarter we announced several new exciting relationships. Gale signed a large scale partnership with the Smithsonian Institution to distribute Smithsonian assets into the library and academic space. More recently, Gale announced a partnership with the Associated Press to digitize their corporate archives, including millions of pages of news copy some never before published bureau records, correspondence, the personal papers of reporters and more. These partnerships with worldrenowned organizations allow us to leverage our extensive distribution channels around the world, in classrooms as well as in libraries, and put a universe of materials into the hands of students, teachers and researchers, in ways that havent been possible before. We believe that Gale has significant additional commercial opportunity both domestically as well as internationally. In addition to our research segment, we also are focusing efforts to take advantage of global trends in English Language Teaching. English Language Teaching is one of the major growth sectors in the education market, particularly in larger emerging economies, like China and Brazil. We intend to take a more focused approach to exploit these opportunities and we will be announcing a new leader for our international business next week. Next, I want to talk about driving Go-To-Market Excellence: As we shared last quarter, we are optimizing our go-to-market approach for our current print and digital solutions. We are placing greater emphasis on customer care and we will use data to take consultative selling to a new level. Our sales and marketing efforts are squarely focused on our digital solutions and the conversion of our business to a subscription model. We have seen some early successes in attracting top talent in our industry and are determined to build the most high-performing go-to-market organization. We are driving a performance-based culture through increased focus and deeper collaboration internally with an emphasis on removing barriers to closing business. We will accelerate the move to digital solutions and we will shift the focus to highly personalized products and services to serve faculty, students, and institutions to achieve their respective objectives. Finally, let me talk about our Targeted Cost Reductions: In light of our reduced revenues, operating profit and cash flow expectations, we have decided to take action to align our operating expenses. We have identified the major areas for cost reduction and have already begun to take action. We will, however, not cut investment in product development to ensure the long term success of the company.

FISCAL 2013 THIRD QUARTER INVESTOR CALL REMARKS May 10, 2013 Our four strategic priorities will lay the foundation for turning around the business. We feel good about the progress already made but realize that much work still needs to be done. We will keep you apprised of our progress. Before I turn the call over to Dean to share details of our financial performance in the quarter, I would like to address our ongoing efforts regarding our balance sheet. As you know, in March of this year, we retained restructuring, financial and legal advisors to assist the company as we review a range of options to strengthen our balance sheet and position our company for long-term growth and success. We are preparing to engage in discussions with our major financial stakeholders about constructive ways to reduce Cengage Learnings debt obligations and improve its capital structure. Our goal is to put the Company on a stronger financial footing that allows us to support our strategic plan and invest in our future growth. We will seek to negotiate the terms of a comprehensive restructuring transaction with our key creditor constituents and quickly implement the restructuring plan. We may need to utilize the Chapter 11 process to help us implement such a plan. As numerous companies have demonstrated, the Chapter 11 process can be an effective way of achieving a fast and efficient debt restructuring with minimal disruption to the business, particularly where agreement is reached with key financial stakeholders on a plan, or the outlines of a plan, prior to the filing. No decision has been made yet. We are confident that whatever path we take with respect to our capital structure, it will not impact the quality and reliability of our product offerings and our high level of service. Now I would like to turn the call over to Dean so that he may walk you through our financial performance in the quarter. DEAN DURBIN: Thanks, Michael, and good morning everyone. Lets turn to slide 13. Consolidated Revenue for the quarter was $353 million, which represents an increase of nearly 5 percent over the prior year, and reflects growth within both our Domestic and International segments. Adjusted EBITDA of $91.3 million increased $21 million, or nearly 30 percent, from the prior year due to the higher revenues and lower employee-related costs.
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FISCAL 2013 THIRD QUARTER INVESTOR CALL REMARKS May 10, 2013 Our Domestic segment revenues for the quarter were $282 million which represents an increase of 2.5 percent, or $6.8 million, from the prior year. Revenue from the two- and fouryear college market increased primarily due to incremental recognition of revenue from our deferred revenue balance, increased sales of ebooks and a shift in the timing of sales due to the later start of the winter semester. This was partially offset by a decline in our professional market as well as our career market, primarily due to unfavorable enrollment trends. Research revenue declined, reflecting the impact of continued funding challenges on our customers. Domestic Adjusted EBITDA for the quarter increased $16.2 million, or 24.2 percent, and Adjusted EBITDA Margin improved to 29.5 percent reflecting lower employee-related costs, most notably accrued incentive compensation, and higher revenues. Revenue in our International segment increased $9.4 million, or 15.2 percent, including a $1.7 million unfavorable impact from foreign currency translation. The increase reflects higher sales of ELT products in China and Latin America, coupled with higher sales of school products primarily due to the timing of export orders in Australia. Adjusted EBITDA in the International segment increased by $6.6 million, reflecting the flow through of the higher revenues. Adjusted Cash Revenues, which is a metric that we introduced last year and represents Revenues excluding the impact of the deferred revenue accounting associated with our transition to digital, increased by 3.0 percent from the prior year. Adjusted Cash EBITDA, also excluding the impact of deferred revenue accounting, increased 23.7 percent from the prior year. Turning our attention to the year to date results, Consolidated Revenue was $1.3 billion which represents a decline of 12.6 percent from the prior year. The decline was primarily in the Domestic segment, and to a lesser extent in our International segment. Consolidated Adjusted EBITDA of $469.5 million decreased $124.7 million, or 21 percent, from the prior year due to the lower revenues partially offset by lower employeerelated costs, primarily accrued incentive compensation. Our Domestic segment revenues for the year-to-date were $1.1 billion which represents a decline of 14.3 percent, or $184.6 million, from the prior year. The 2- and 4-year college market, career market and professional markets declined due to a combination of factors, including unfavorable enrollment trends and lower inventory levels being held by bookstores and online retailers.
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FISCAL 2013 THIRD QUARTER INVESTOR CALL REMARKS May 10, 2013 In addition, the significant reduction in the level of purchases by one channel partner in the first quarter contributed to the decline. It is also worth noting that the prior year comparison was impacted by changes in customer ordering patterns that shifted approximately $38 million of revenue from the fourth quarter of fiscal 2011 to the first quarter of fiscal 2012. Sales in the school market declined as a result of the cyclical nature of this market and the large Texas adoption in the prior year. Finally, Research revenue declined reflecting the impact of continued funding challenges on libraries. Domestic Adjusted EBITDA for the year to date decreased $119 million, or 20.7 percent, and Adjusted EBITDA Margin declined to 41.3 percent due to the lower revenues and the higher costs associated with merger and acquisition related activities, partially offset by lower employee-related costs. Revenue in our International segment decreased $2.1 million, or 1.1 percent, including a $2.9 million unfavorable impact from foreign currency. Excluding the currency impact, revenue increased $800,000. Adjusted EBITDA in the International segment decreased by $6.1 million, reflecting the lower revenues, higher general operating expenses, higher employee-related costs and the absence of an early lease cancellation benefit received in December 2011. Adjusted Cash Revenues declined by 13.7 percent from the prior year and Adjusted Cash EBITDA declined 23.4 percent from the prior year. Moving on to slide 15, I want to highlight two other charges that we recorded during the quarter: an Operational Restructuring Charge of $12.7 million, and an estimated impairment to goodwill of $2.8 billion. First, in line with our strategic priorities that Michael outlined earlier, we recorded a $12.7 million restructuring charge during the third quarter, which is comprised of employee severance and related costs in the U.S. We intend to redirect most, if not all, cost savings associated with this charge into other strategic initiatives and anticipate incurring additional costs in the future as we continue to identify ways to enhance the efficiency and cost effectiveness of our operations.

FISCAL 2013 THIRD QUARTER INVESTOR CALL REMARKS May 10, 2013 Second, in connection with the development of our strategic plan we performed a comprehensive revision of our short- and long-term operating projections, including, but not limited to, key assumptions associated with forecasted industry trends and Company-specific forecasted revenue growth rates and operating margins. The revised forecast was completed and approved by our Board of Directors on April 18, 2013. The plan indicated a substantial reduction in projected revenues, operating profit and cash flows. Consequently, we determined that this constituted a trigger event for goodwill impairment purposes, and we initiated the test pursuant to generally accepted accounting principles (GAAP). Given the timing of the revised projections and the complexity of the required impairment test, we have not yet finalized our analysis. However, we recorded a preliminary goodwill impairment estimate of $2.8 billion during the third quarter. We expect to finalize the analysis during the fourth quarter of fiscal 2013, and any adjustment to the estimated impairment charge will be recorded during that period. As slide 16 indicates, our Capital Expenditures decreased $9.3 million, which is primarily from lower spending on our ERP, as well as timing of product development spending. Turning to slide 17, our net indebtedness declined $64.6 million from the prior year to $5.4 billion as a result of debt buybacks we have completed in the open market, principal amortization, the mandatory AHYDO payments, all of that partially offset by the $200 million over subscription of our 11.50% First Lien Notes in April 2012 and our additional borrowings under the revolving credit facilities, net of additional cash on hand. LTM Bank EBITDA at March 31, 2013 is $700.4 million which represents a decline from the prior year due to the decreased year to date revenue. With respect to our leverage ratios on slide 18, as of March 31, 2013, our Last Twelve Months Bank EBITDA of $700.4 million yields a Senior Secured Leverage Ratio of 7.35 times and a Total Leverage Ratio of 7.68 times. On slide 19, you can see that we have cash and cash equivalents of $417.5 million. As reported previously, on March 20, 2013, Cengage Learning Acquisitions, Inc. borrowed $430 million, virtually the entire remaining available amount, under its revolving credit facilities. The outstanding balance on the July 2013 revolver and July 2017 revolver are $222 million and $296 million as of March 31, 2013, respectively. Consequently, we had $421.5 million of total liquidity versus $302.4 million as of the same time last year.
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FISCAL 2013 THIRD QUARTER INVESTOR CALL REMARKS May 10, 2013 Unlevered Free Cash Flow declined by $208.4 million to $360.2 million primarily due to decreased operating income, excluding the impact of the goodwill impairment and restructuring charges, and net unfavorable working capital movements. The movements in working capital primarily reflected $82 million in net unfavorable changes in accounts receivable and accounts payable commensurate with the results of operations for the nine months ended March 31, 2013, partially offset by a $19.5 million favorable change in accrued interest payable. As a reminder, we have posted our Third Quarter Report for the period ended March 31, 2013, the accompanying slides, as well as a press release on the investor section of our website. We will post our prepared remarks after this call. We would encourage you to rely upon these resources. With that, Im going to turn the call back over to Michael for some closing remarks. MICHAEL HANSEN: Thank you, Dean. As you heard, were building the foundations for turning around our business performance. Every month we are becoming a leaner and stronger organization and will continue to execute on our strategic priorities to position Cengage Learning as the company customers look to first for improving learning engagement and outcomes around the world. You can expect to see a real shift to a user-and sales-led culture that is focused on delivering innovative customer solutions. We have placed an emphasis on coordinated speed across the organization to accelerate innovation. We will begin to measure success based on student outcomes, activations, attach rates and usage which will give us more valuable metrics for performance via our KPI dashboard. We have a lot more work to do, but I am confident that we are on the right track and we have the people in place to be an education solutions industry leader. We look forward to an exciting road ahead in close collaboration with our customers, colleagues, partners and investors. You can expect to hear more about our progress in the future. Thank you for joining us today. MODERATOR: That concludes todays call. A replay and a copy of the prepared remarks will be made available via the Cengage Learning investor relations website at www.cengage.com/investor. Thank you.
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FISCAL 2013 THIRD QUARTER INVESTOR CALL REMARKS May 10, 2013

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