Cengage fourth quarter revenue up 10% but authors sue over subscription service

Cengage fourth quarter revenue up 10% but authors sue over subscription service

Cengage's adjusted revenue has risen 10% ($30.3m) in the fourth quarter, the educational publisher has told investors.

The adjusted revenue grew from from $288.8m to $319.1m while its Learning revenue soared by 14% in the quarter ending 31st March, benefiting from its "sustainable unit" strategy, including contribution from rental partnerships, lower returns and growth in standalone digital.

Earnings before interest, tax, depreciation and amortization (EBITDA) for the quarter was flat. However, (EBITDA) less capital expenditure for the full fiscal year was down 15% ($52m) to $298m, due primarily to investments to drive digital growth in higher education including its controversial new subscription service, Cengage Unlimited, launched in December, expansion of rental partnerships and the normalisation of bonus and commissions compared to the previous year. Revenue for the full fiscal year was flat.

The results follow the news that two authors are suing the publisher over subscription service Cengage Unlimited, saying it will negatively affect their sales and royalty payments.

The suit, which was filed in New York by authors David Knox and Caroline Schact, claims that the introduction of the subscription service “is systematically dismantling and frustrating the business of selling Plaintiffs’ work" in favor of selling subscriptions to Cengage’s digital products, according to Publishers Weekly.

Due to this, the authors "expect their royalties to decline substantially". The suit seeks class action status on behalf of Cengage authors.

According to reports, Cengage Unlimited will give students access to over 20,000 products across 70 disciplines at a cost of $119.99 a semester, or $179.99 for 12 months, offering potentially sizeable savings over buying or renting individual products.

However, the suit claims that in pivoting to its digital subscription service the publisher has “wrongfully” implemented “a unilateral change to the compensation structure for its authors,” switching from “the contractual royalty-on-sale” compensation model, to a “relative use” model, which pays authors a “fractional percentage of Cengage’s subscription fees, based on the relative use of the work.”

The suit also claims that Cengage is not properly compensating authors for its distribution of "digital courseware" and other add-ons such as "multimedia displays, homework, quizzes, tests and other supplements" derived from their authors' work.

The authors add that Cengage is refusing to share the royalty and sales data that would allow them to audit their payments. "Over the past year, Plaintiffs have experienced marked declines in their per-unit royalty payments, and have sought access to underlying sales data and royalty calculations, so that they can determine how their royalties are being calculated. [But] Cengage has adopted a policy of refusing to provide the requested data."

The suit seeks individual and collective damages for Cengage’s alleged breach of the contract, injunctive relief to prohibit Cengage from including authors in Cengage Unlimited without permission, the ability of authors to terminate their contracts if they do not wish to be included in Cengage Unlimited, and a declaratory judgement that Cengage must provide authors with the data needed to audit their payments.

In a statement to PW regarding the suit, Cengage officials said: “We have communicated clearly with our authors that the subscription service is consistent with the terms of their contracts, which we continue to honor. In addition, we have outlined for them the rationale behind the new business model: it is designed to address the decades-old problem of affordability in higher education.

"While we are disappointed that this complaint was filed, as it seeks to perpetuate a broken model of high costs and less access, we are grateful for the support we have received from the majority of our authors, as well as students, faculty and administrators. We remain steadfast in our commitment to proceeding down the path that will ultimately save students hundreds of dollars a year.”

In January the publisher posted a "successful" fiscal year for 2017 on Companies House, citing growth in turnover of 11.1% to £54.5m ​for the year ended March 2017 while profit dipped from £3.8m to £2.8m.