Barnes & Noble Education Inc (BNED) 2017 Q3 法說會逐字稿

Good day and welcome to the Barnes & Noble Education third-quarter 2017 earnings conference call. Today's conference is being recorded. And at this time I would like to turn the conference over to Mr. Thomas Donohue. Please go ahead, sir.

Thank you. Good morning and welcome to the call. As you have seen, in addition to our third-quarter 2017 earnings, today we also announced the acquisition of MBS Textbook Exchange LLC. On today's call we will be referring to a presentation that has been posted to our Investor Relations website at BNED.com/investor. At the end of the presentation we'll be happy to take your questions.

Joining us today are Mike Huseby, our Executive Chairman; Max Roberts, our CEO; Patrick Maloney, our Chief Operating Officer of Barnes & Noble Education and President of Barnes & Noble College; Barry Brover, our CFO; Kanuj Malhotra, our Chief Operating Officer of Digital Education; as well as other members of senior management.

Before we begin, I would remind you that the statements we will make on today's call are covered by our Safe Harbor disclaimer contained in our press release, presentation and public documents. The contents of this call are for the property of Barnes & Noble Education and are not for rebroadcast or use by any other party without written consent of Barnes & Noble Education.

During this call, we will be making forward-looking statements with predictions, projections and other statements about future events. These statements are based upon current expectations and assumptions that are subject to risks and uncertainties including those contained in our press release and public filings with the Securities and Exchange Commission.

The Company disclaims any obligation to update any forward-looking statements that may be made or discussed during this call. We will also be presenting certain non-GAAP measures including EBITDA from both MBS and the Company. Please refer to the information and reconciliation of non-GAAP measures included in the investor presentation. At this time, I'd like to turn the call over to Mike Huseby.

Thanks, Tom, and good morning, everyone. To us, this is a very good morning as we are very pleased to have consummated our acquisition of MBS Textbook Exchange LLC yesterday. With this combination we gain substantial operating scale and capabilities that should result in improved outcomes for our customers, shareholders, employees and our other stakeholders. MBS is truly a unique asset that we were very fortunate to be able to acquire.

When we became an independent public Company in August of 2015, we talked about our plans to grow both organically and through strategic actions. Despite the challenging retail environment, we have grown our total sales steadily through the addition of quality new partner schools.

We have also thoroughly examined a variety of strategic acquisitions and other opportunities in order to expand our offering and enhance our platform for growth. We expanded our digital platform with the acquisition of LoudCloud, then enhanced our merchandise offering through the acquisition of Promoversity. While both are relatively recent acquisitions, thus far, we are very pleased with their performance.

With the acquisition of MBS, we are significantly enhancing our competitive positioning, we are expanding our addressable market, broadening our reach and deepening our institutional partnerships.

Barnes & Noble Education has worked closely with MBS for over 30 years. As the largest contract operator of virtual bookstores in the higher end space, MBS' scale and competency in the virtual world immediately fills one of our highest strategic imperatives. Additionally, MBS is one of our largest sources for used textbooks with supply and now integrated management of which are also crucial to our long-term success.

Our close working relationship with MBS over the past three decades gives us a high level of confidence in the competitive effectiveness of our new integrated business model. This complementary acquisition provides us with the opportunity to accelerate our strategy and, after much study of the opportunities available to us, gives us the best opportunity to serve our markets and deliver meaningful shareholder value over time.

When we examine strategic opportunities, we emphasize as a key qualifying factor their ability to be accretive quickly to earnings and cash flow. MBS is expected to be accretive to EBITDA, net income and cash flow in fiscal 2018, which is a compelling benefit to this transaction, in addition to the longer-term strategic benefits we expect to realize.

As some of you may know, MBS was majority-owned by affiliates of Leonard Riggio. Although Mr. Riggio is not a director or an officer of BNED, he does own approximately 16% of BNED's outstanding common shares. And given his historical relationship with our Company, our Board implemented a detailed process to assure that the transaction was evaluated, negotiated and consummated on an arm's length basis.

A special committee of our Board, which was comprised solely of independent and disinterested directors, retain independent legal and financial advisors, including Evercore, who delivered a fairness opinion on the MBS transaction. Together they evaluated the acquisition opportunity, negotiated its terms and made a recommendation to the full Board of Directors. The transaction was unanimously approved by the full Board and closed yesterday on February 27.

Along with the entire Board and management team, we are extremely pleased to have MBS and its people join the BNED family. I am highly confident that this combination will create significant value for shareholders. With that, I'll turn the call over to Max Roberts to discuss the compelling strategic value of this transaction in more detail as well as our results for the quarter. Max.

Thank you, Mike. Let me begin by saying I share Mike's and the entire BNED and MBS teams' enthusiasm for this transaction. Combining these industry leaders will enhance our ability to deliver on our mission of providing affordable, complete solutions that empower students and faculty and drive success in the classroom and beyond. It is clear to me that MBS shares the same passion for this mission.

For those of you unfamiliar with MBS, they are the largest contract operator of virtual bookstores and one of the largest used book wholesalers in the US. Through its MBS Direct business, MBS serves more than 700 virtual bookstores with a comprehensive e-commerce experience and a broad sweep of affordable new, used and digital course materials.

MBS sources and sells new and used textbooks to over 3,700 physical college bookstores, including colleges' 770 campus bookstores and provides inventory management, hardware, and point-of-sale software to approximately 485 college bookstores.

This acquisition of MBS will enable us: one, to generate more value from the textbook marketplace; two, increase our addressable market for products and services; and three, expand revenue opportunities for our digital courseware and LoudCloud products.

This transaction will also deliver scale benefits and improved cash flow generation, which will provide flexibility to explore future growth opportunities. In today's dynamic market this improved competitive positioning lowers cost of supply and an improved platform are critical for growth.

Now let me discuss our third quarter. As reported this morning, our total sales for the third quarter increased 0.6% to $521.6 million and comparable store sales declined 4.9%. Of third-quarter results reflect the new business we signed in 2016 and 2017 and the partial results of the spring rush, which, consistent with last year, extended into the fourth quarter.

Our results also reflect a continuation of trends that we saw in the second quarter -- lower enrollment, a competitive marketplace for textbook sales and a soft retail environment. As a result, we are taking action to address these headwinds. We have completed the rollout of our price match program, our pilot programs for courseware solutions were completed and we now have plans to grow the programs in the fall.

We are excited that this offering now includes a print companion so that students can learn in either format. This flexibility has been requested by both students and educators. We will continue to leverage our existing campus relationships to expand this program. And we were encouraged by the customer response in our promotional and digital marketing efforts for general merchandise, especially as it relates to web orders.

We remain confident in our ability to offer products and services needed long-term by the education market by increasing our focus on affordable and the evolution toward digital solutions that provide analytics and successful outcomes. Moreover, with MBS, we are even better positioned to broaden our reach and deepen our institutional partnerships.

Turning now to slide 3 in our presentation, by combining Barnes & Noble College and MBS into BNED we are creating a leading education Company that operates more than 1,490 physical and virtual locations and serves more than 6 million students enrolled in higher education. MBS' capabilities enable us to expand our addressable market to include higher education in K-12 schools that need virtual and hybrid solutions.

Virtual bookstores are a comprehensive e-commerce experience with a broad selection of affordable course materials and operate as the official source of college course materials with exclusive rights to book lists. Virtual bookstores serve online programs and often operate as hybrid models in tandem with the physical bookstores. They continue to be a growing market and a key element of our competitive strategy to compete with other virtual and digital solutions in the market. We now have the complete solutions that our schools are demanding.

Through MBS' marketplace, we will be able to generate more value, broaden our textbook selection and lower course material acquisition costs, all of which have the end purpose of allowing us to offer more affordable course materials to a larger base of students. MBS' broad wholesale distribution channel and warehousing systems will drive the inventory efficiencies, allowing us to optimize our textbook sourcing, purchasing and liquidation process.

The MBS virtual and wholesale customer base immediately expands our customer base and revenue opportunities for digital products including courseware and LoudCloud products. We plan to continue to enhance and grow our digital content and services in an efficient, low-cost, high-value manner to complement our printed textbook business.

Finally, the transaction will deliver compelling financial benefits, including increased scale and cash flow generation, which will provide us with the flexibility to explore growth opportunities in this rapid changing industry.

Now turning to slide 4, which covers the specific details of the transaction. The total purchase price is $174.2 million in cash and the transaction was structured in a manner that will provide a net tax benefit due to step up in the value of MBS' assets. This is expected to result in substantial future cash tax benefits.

This transaction is expected to be accretive to EBITDA, net income, cash flow in the fiscal year 2018 and deliver operational synergies over time. The synergies come largely from the textbook inventory optimization and procurement savings. We have financed the transaction by amending our facility with our current lenders and we borrowed $55 million to complete the transaction. We included further detail on the financing in the appendix of the presentation.

David Henderson has been named President of MBS and will report to Patrick Maloney. Bob Pugh, CEO of MBS, and Dan Schuppan, President of MBS, have announced their plans to retire on March 31, but will make themselves available throughout the transition. We have been working closely together for decades and we expect that relationship to help with the seamless transition and integration.

Turning to slide 5, let me now take a few minutes to talk a little bit more about MBS. As one of the largest used book wholesalers and largest contract virtual bookstore operator in the US, MBS has developed extraordinarily deep relationships with their large customer base.

Our leadership team knows from working together with MBS over the years that the MBS team is talented, motivated and dedicated. They have a deep understanding of their customers and their sophisticated database systems and process.

MBS Direct is the largest US online distributor of new, used and digital course materials directly to students at contracted schools. Simply put, MBS Direct offers the most complete range of cost-effective options to students available in the industry today. They offer college bookstore customers a virtual solution and they operate more than 700 virtual bookstores that sell new textbooks directly from publishers, used textbook sourced from MBS, as well as digital course materials.

And through textbooks.com, an e-commerce site for textbooks, they offer new, used and digital textbooks directly to any student anywhere in the US.

MBS' warehouse automation drives operational efficiency and provides a competitive advantage with virtual customers. In its wholesale business MBS built its leading position as a result of its robust inventory and comprehensive catalog of used textbooks and digital course material solutions along with its superior service and system support.

For example, MBS has more than 330,000 textbook titles in stock at any one time and processes more than 13 million textbooks annually in its distribution facility. The MBS database and buying guide is a key asset for MBS and now Barnes & Noble Education. This proprietary database is the best maintained, most accurate and most complete source of college textbook information available and will now allow us to develop superior supply and demand insights and risk management capabilities for our inventory.

MBS Systems is another important element of the MBS business. It provides inventory management, hardware, software and services to more than 485 college bookstores. Importantly, this expertise helps to sustain long-term relationships.

Now turning to slide 6, we will be the leading provider of virtual and hybrid bookstores for institutions. Customers will have more choice and we will expand our addressable market to include schools that need virtual solutions. Our significantly expanded customer base will provide scale and more revenue opportunities for our digital courseware and LoudCloud services, including highly demanded analytics.

With the MBS wholesale distribution and warehouse expertise we can provide an expanded selection of new and used textbooks to lower the cost of supply to our customers. MBS customers will also now benefit from our in-depth textbook rental offerings. In summary, we will be able to provide unmatched access to affordable course materials and significantly expand our footprint.

While MBS' fiscal year ends in August, we provided certain combined financials for the company for our fiscal year ending April 30, 2016 on slide 7. MBS revenue was $487.1 million and EBITDA was $55.3 million. Capital expenditures were $1.5 million, and importantly EBITDA less CapEx was $53.8 million. You can see here that BNED will benefit from increased cash flow generation as a result of MBS' relatively low CapEx needs.

Slide 8 shows MBS' result for their fiscal year ended August 31, 2016. Since MBS is a private company, we wanted to provide you with some more insight into their historical financial performance, which we have carefully vetted and discussed at length with our management team.

Notably, performance was affected over the last few years by three factors. First, their supply of used textbooks was reduced because of an increase in rentals. second, there was a decline in virtual sales primarily related to the for-profit segment, which currently represents 5% of fiscal year 2016 sales. And lastly, MBS hasn't invested in the marketplace purchasing and rental solution as significantly as its competitors, which did not allow for the opportunity to replace the decreased supply of used textbooks as a result of rental.

We believe the financial performance has stabilized and we believe there is an opportunity to increase volume and broaden the MBS customer base in the future as a part of BNED, particularly as it relates to rental solutions.

Before I turn over to Barry for the review of the financials, I want to reiterate the many benefits for each one of our key stakeholders. For our campus partners, students, faculty and administration the combination provides access to the widest selection of affordable course materials in all formats.

And for our investors the acquisition is expected to be accretive to EBITDA, net income and cash flow in fiscal 2018 and drives new revenue growth through increased scale, diversification and operational efficiencies, all of which will help deliver significant value to shareholders for many years to come.

Now with that I'll turn the call over to Barry for a review of our financials for the quarter.

Thank you, Max. Please note that the third quarter ended January 28, 2017, consisted of 13 weeks and is presented on a standalone basis. All comparisons will be to the third quarter of fiscal 2016, which is also presented on a standalone basis.

Total sales for the quarter were $521.6 million compared with $518.4 million from the prior year. This increase of $3.2 million, or 0.6%, was driven by an increase in sales from new stores of $34.2 million and partially offset by a decrease in sales from closed stores of $8 million, along with a comparable store sales decrease of $25 million or 4.9% for the quarter.

The third quarter includes our spring back-to-school rush sales. We continue to see the students purchasing their textbooks later in the semester, thus extending the rush sales period past the end of the quarter and into February. After factoring in the first three weeks of February that contributed to the spring rush, the comp sales decline for the period was 4% and 3.3% for fiscal year to date.

In addition, during the quarter, sales at comparable community colleges decreased by approximately 8.9% with continued enrollment decreases and funding issues impacting sales. Excluding community colleges, comparable-store sales decreased by 3.3% for the quarter. Comparable-store textbook sales declined 6.1% or $23.1 million in the quarter compared with a 5.4% decline in the same period last year.

Textbook sales were impacted by the delayed rush and the community college trends, as well as increased consumer purchases directly from publishers and other online providers. We rolled out our price match program to the majority of our campuses and received positive feedback from our customers.

For the quarter, our general merchandise sales were $134 million, which includes new stores. General merchandise accounted for approximately 25% of comparable sales for the quarter and declined on a comparable basis by 0.5% or $0.5 million compared with a 0.5% increase in the same period last year. General merchandise sales were impacted by the community college trends, the extended rush period and the overall negative retail trends.

Our collegiate apparel and gift sales increased during the quarter fueled by the strength of our e-commerce channel. We aggressively marketed through mobile, email and social to our engaged digital community of over 7 million customers.

Our rental income for the quarter was $64.5 million, an increase of $3.2 million or 5.2%, demonstrating that rentals continue to be the student's first choice. There was a $2.3 million increase in recognition of previously deferred rental revenue compared with last year. This takes into account the higher recognition in the fall, partially offset by a higher deferral as of the end of January.

Gross margin decreased by $4.7 million or 3.9% to $115.9 million. The 110 basis point product and other margin decrease was primarily the result of lower margin rates of 95 basis points due to increased markdowns on textbooks and general merchandise, including 20 basis points related to our price matching program, increased costs related to our college and university contracts of 35 basis points, partially offset by a favorable sales mix of 15 basis points resulting from an increase in higher-margin general merchandise sales.

Our rental margins declined 130 basis points with 125 basis points coming from contract renewals and new store contracts, lower rental margin of 25 basis points including 75 basis points from price matching, partially offset by an increase in the recognition of previously deferred rental revenue of 55 basis points.

Selling and administrative expenses increased by $0.6 million or 0.7% to $97.1 million and remain flat as a percentage of sales. The increase in dollars was primarily due to higher payroll and operating expenses related to net new stores of $4.2 million and $0.9 million of costs incurred for corporate payroll and infrastructure including increased costs of the acquired businesses.

These increases were partially offset by lower net digital expenses of $3.1 million, lower comp store payroll and operating expenses of $1.4 million. Our focus on expense management continues as we experience declining comp sales.

The fiscal third-quarter net income was $3.8 million, or $0.08 per diluted share, compared with a net loss of $3.6 million or $0.07 per diluted share in the prior year. As a result of these factors, our adjusted EBITDA decreased by $5.4 million to $18.8 million for the quarter compared to $24.2 million in the prior year.

The effective tax rate for the fiscal third quarter was 16.8% compared with minus 14.4% in the prior year. The tax rate for the fiscal quarter and fiscal year to date reflects the impact of the state net operating losses benefiting the Company as a result of the spin from Barnes & Noble, partially offset by certain nondeductible expenses.

At the end of the quarter, we had a cash balance of $132 million and no debt outstanding. During the quarter, our borrowings peaked at $48.9 million in December and were quickly paid down in January. Our strong cash position continued and was the major source of funding for the acquisition.

Concurrent with the signing of the acquisition agreement, we amended our credit facility. We amended the existing agreement to add a new $100 million incremental first in last out seasonal loan facility, or the FILO. Loans under the FILO will bear interest at a rate equal to the LIBOR rate plus 3%.

The FILO will be available solely during the draw period each year from April 1 through July 31. The commitment under the FILO will step down from $100 million to $25 million over the life of the facility. We will pay a commitment fee of 0.375% on the daily unused portion of the FILO.

At closing, as Max mentioned, we borrowed $55 million to fund the acquisition. For the 9 months ended January 28, cash flow from operating activities were $145 million, a $25 million increase over the prior period. At the end of the fiscal third quarter our inventory levels were below last year as we continue to put greater emphasis on improved text book purchasing and inventory management.

Capital expenditures for the third quarter were $9 million compared with $13.2 million in the prior year. The decrease of $4.2 million was primarily due to delayed timing of store renovations related to both new store contracts and renewals of existing stores. Currently at the end of the quarter our store count is 770 having opened 36 new stores and closing 17 in this fiscal year. We continue to be awarded new contracts which will result in opening two additional stores expected to open before the end of the fiscal year.

In addition, as of now, we plan on closing six stores in the first quarter for fiscal 2018. Four are satellite locations where the students will be serviced out of our main store on the campus and two are locations that choose to go with a virtual bookstore instead of a physical store. The overall sales impact from these closings is expected to be below $2.5 million.

Turning to fiscal 2017 outlook, we now expect total sales to increase by approximately 2.5% and we expect comparable-store sales to decrease by approximately 3% compared to the prior year. We continue to expect adjusted EBITDA to increase on a percentage basis in the mid-single-digits compared with the prior year and capital expenditures to be approximately $40 million.

These expected results for fiscal 2017 exclude the financial results of MBS from the date of acquisition to April 29, 2017 and any transaction and integration costs. The pro forma and historical ordered financial statements will be filed with the SEC within the 71 day requirement which is on or before May 10. With that, I'll turn the call back to Max for brief closing remarks before we begin to take questions.

Thanks, Barry. In summary, the combination of MBS and Barnes & Noble Education will create a true powerhouse in higher education. We will be the leader in the delivery of affordable books and course materials and driving student academic success. Looking ahead, our new business pipeline continues to be very strong driven by the continuing trend of outsourcing bookstores, a focus on affordability and the evolution toward digital solutions.

We also expect general merchandise sales to improve as the general retail environment rebounds. We remain confident in our ability to expand our market share as also we focus on expense management. Our two companies will remain intently focused on being a true strategic partner to the colleges and universities we serve.

We are uniquely able to provide new products and services to the schools through complete solutions of affordable, accessible textbooks and course materials including digital content and through our ability to serve as an academic and social hub on campuses nationwide.

We will now open up the call for questions. Operator, please provide the instructions to those interested in asking a question.

(Operator Instructions).

Thanks for taking my questions, guys. This is Alex Fuhrman with Craig-Hallum. Wanted to ask a few just sort of clarifications on the MBS acquisition. It looks like from the slides, given some of the debt you're going to be paying down and some closing fees, that the total enterprise value of the transaction is $205 million. Is there any other debt that's being acquired on the balance sheet as part of this transaction or any other substantial assets like inventory that we should be aware of?

And then thinking about the EBITDA that MBS has generated over the last couple years, is there any reason to think -- I know, Max, that you indicated that the business, in your opinion, is largely stabilized here. Is there any reason to think that MBS wouldn't be contributing somewhere in that ballpark of $50 million to $60 million of EBITDA once it's folded into Barnes & Noble?

I'll respond to the first half of your questions. So MBS has seasonal credit lines that were approximately $24 million of borrowings that were repaid as part of the closing process. That was the only debt that they had were seasonal working capital lines that they dip into during the year. As you would expect, one of their largest assets is inventory and we'll provide, as part of their [ordered] financial statements and the pro formas, you'll be able to see a complete view of their historical balance sheets.

With respect to your second half -- this is Mike -- with respect to the second half of your question on the EBITDA contribution and what you should expect going forward, what we've said is that MBS' contribution will be accretive to cash flow earnings and EBITDA in fiscal 2018. We have also laid out the level of CapEx they have, which is fairly nominal relative to their revenue and EBITDA base.

We also talked about the fact that we had a tax step up as it was structured as a purchase of assets and that we will have some operating synergy. So if you throw those things in as an impact to the transaction in terms of contributing cash flow and in some of those instances EBITDA -- we're not going to give guidance on their EBITDA number, but the fact that we said we think the business has stabilized should give you that answer.

Great, that's very helpful. Thank you very much.

Caller, please go ahead.

Vahid Khorsand, BWS Financial. A question on store count. It looks like the trend is going down. Is that something to expect going into next year as well?

No, the opening of stores is very seasonal in nature and, as we talked about, we have signed contracts, opened two additional stores expected to open during the fourth quarter. In addition to that, we continue to have a strong pipeline of proposals and people that we are talking to.

We are confident that the product offering of outsourcing to institutional schools will remain strong, as I said in part of my closing remarks.

Okay. And on the MBS acquisition, what is their employee count and do you expect to retain all of that employee count or can you provide some guidance on what that's going to look like?

They have currently 1,100 employees -- this is Patrick --. And we plan to operate them as a stand-alone subsidiary. So we don't anticipate any changes there.

Okay. And on the school side for them, is there any overlap with competition for you on the wholesale side?

No.

No? Okay. So, (multiple speakers).

As I said in my remarks, they operate virtual bookstores and hybrid bookstores. This will give us the enhanced ability to go to schools and offer the hybrid solution that we don't currently have the capability of. We're not competing -- there is not a competition in contract managed bookstores by MBS.

Okay. What I meant was on the wholesale side, are they providing books to your competition?

Yes.

Yes, they do and we continue to do business as usual, yes.

Okay. And then another question I had with regards to the for-profit schools, is that going to be an area that you are going to look to have physical stores in, or are you just going to leave it as a standalone and let them run the virtual stores for those schools?

That will be determined by how the institution wants to operate. But as I said, for-profits are approximately 5% of total sales. The decision of hybrid versus online solely is really how the institution wants to operate depending on size, scale and their actual existing physical locations.

Okay. And finally, on gross margins, will this help pause the decline in gross margin or is that something with more of a price match element, something to be more -- just be more present going forward I mean?

We are not going to make any guidance on future of gross margin, but it provides us scale and opportunities and expansion of, for example, Promoversity into the MBS schools and other opportunities that we'll be able to grow our margins over time. But other than the synergies we are not making a comment as to the ability of acquisition of inventory at this point in time or forecasting it.

Okay, thank you.

(Operator Instructions).

It's Nick Dempsey from Barclays. I've got two questions please. So, you've talked about inventory optimization and procurement savings as benefits of this deal. I wonder if you can drill down a bit there. Specifically do you expect your increased scale to allow you to negotiate clearly better wholesale prices with the textbook publishers?

And then separately I guess, do you expect to be able to make your stock management considerably more efficient in the way that perhaps you and (inaudible) have done the last couple of years leading to more destocking and less inventory hanging around? And then just a final part, will MBS allow you to expand or change your print rental programs?

We've always been partners with the publishers and deals that have been achieved through MBS and other wholesalers have always been worked out mutually favorable terms. Also this gives us a better -- we now have a better ability to manage our inventories as one virtual -- [eventually] one virtual inventory for all of our stores and MBS wholesale and procure and cycle the used books through both companies.

But do you think you'll be able to get a better wholesale price, to go back to that question?

MBS has always worked with the publishers and determined their wholesale price together. So what the publishers have offered based on their availability of inventory.

I think to answer the question another way is that we built our business model off which was not in the discounted cash flow [arrived] the valuation. We are not assuming that. As was said, the synergies that were built into the model were primarily those that were described having to do with procurement, inventory management and that type of thing. So we are not building in large volume leverage price declines in our wholesale business is another way of answering your question.

Yes, perfect. Thank you.

(Operator Instructions).

Hi, it is Greg Pendy at Sidoti. Thanks for taking my call. Just from a modeling perspective, can you guys -- should we expect to be thinking about MBS Textbook probably the same type of seasonality that we see in product sales?

No, their seasonality is actually different than ours. As you would expect, their largest selling seasons are prior to our selling season. To give you a sense, for this fiscal year March and April are their lowest sales periods and represent less than 10% of the year. Their largest selling periods are June through August before the traditional college retail selling season and December and January. You'll see it's complementary as it feeds into the channel.

Got it. That's helpful. And then also could you guys just comment -- not to lose sight on the stuff you're doing on the digital front, I believe you've piloted about 10 digital courses at select universities. Is there any update on how that is going? What type of traction you are seeing and kind of what the feedback from some of the universities such as Penn State might be?

Yes, we have had great response. We currently have some adoptions for the fall, but we'll make no comment as to the level. I will also ask Kanuj to add any comments and color.

We are in the midst of selling season. We see increased demand for affordable solutions like OER. So the general trend in demand is more vocal out there. But we are in the midst of the selling season. The pilot (inaudible) are largely expected to continue into the fall, so we are pleased thus far but it's premature to remark fully.

Okay, thank you. That's helpful. Thanks a lot.

(Operator Instructions). And there appear to be no other questions at this time.

Thank you for joining today's call. As a reminder, our next scheduled financial release will be our fourth-quarter and full-year results which will be on or about July 12. Thank you.

And asked us conclude today's presentation. Thank you for your participation. You may disconnect.