Scholastic Corp (SCHL) 2002 Q3 法說會逐字稿

Hello, and welcome to the Scholastic third quarter earnings release teleconference.

Following today's presentation will be a formal question-and-answer session.

Instructions will be given at that time.

Until that time, all lines remain in a listen-only.

At the request of Scholastic, this conference is being recorded.

Should you have any objections, you may disconnect at this time.

I would now like to turn the conference over to Mr. Ray Marchuk, Senior Vice President of Finance and Investor Relations.

Sir, you may begin.

Thank you.

Welcome to Scholastic's third quarter conference call.

Before we begin, I'd like to read the following statement.

This conference contains certain forward-looking statements which are subject to various risks and uncertainties, including the conditions of the children's book and instructional material markets, and acceptance of the company's products within those markets, and other risks and factors identified from time to time in the company's filings with the Securities and Exchange Commission.

Actual results could differ materially from those currently anticipated.

For those of you who want to follow our slides on the Internet, log on to the following Web address: Netone.worldcom.com .

And the conference name is 2907373 and the password is SCHOLASTIC - all capital letters.

The slides and the audio will also be available on the site until April 13th, and a telephone replay will be available from eleven o'clock today until the 13th.

Now I'd like to introduce Dick Robinson, the Chairman, President and CEO of Scholastic, to review our third quarter results.

Thank you and good morning.

With me today are Kevin McEnery, CFO;

Barbara Marcus, President of children's book publishing and distribution, Margery Mayer, President of Scholastic Education; and Donna Iucolano, President of Scholastic Internet Group.

I'm pleased to report we delivered financial results right on plan in the third quarter.

Seasonally, our second smallest.

Earnings per share tripled to a record $0.31, as we continued to focus on cost reduction to increase profitability on flat revenue.

We generated solid revenue growth in school book clubs and fairs and supplemental educational publishing, offsetting declines in Home Continuities, "Harry Potter" Trade and Literacy Place.

We also strengthened our capital structure by increasing our equity, while reducing debt through conversion of $110 million in convertible debt and successfully replaced short-term debt with a $300 million five-year note at a favorable interest rate.

We remain on track to achieve our fiscal '02 goals and generate 245 to 255 per share in earnings, excluding our first quarter charge.

We're pleased to be on plan in a year in which we expect to have about $120 million less than "Harry Potter" revenues as compared to fiscal '01.

As we start our budgeting process for fiscal '03, we are focusing on achieving 15 to 20 percent EPS growth on more than 10 percent revenue growth.

Key to our plan is, one, resume revenue growth through our distribution channels.

We expect continued revenue gains in clubs and fairs and new growth in trade and home continuities, with the successful launch of club ordering on line and the teacher store.

In a few moments, Donna Iucolano will tell you how Scholastic.com has become our newest channel of distribution.

Two, continue the aggressive cost reductions.

As I've said before, we're excited about our ability to reduce costs throughout our organization.

We are building cost reduction into our corporate strategy as a key tenet of our drive to improve margins and increase the financial strength of the company.

Kevin will talk more about this in a few moments.

Three, building new sources of hit content.

We will move further into the books plus category through our pending acquisition Klutz, which provides us with a real opportunity to enhance our trade business and to offer this premium brand through our clubs and fairs around the world.

We also are excited about the strength of "Captain Underpants" and other strong properties, as well as the continued success of "Clifford" on TV, which received five Emmy nominations this week.

Barbara Marcus will talk about Klutz, our other strong properties and, of course, "Harry Potter," in a few moments.

More continued improvements in our education business.

As you know, Margery Mayer is now leading Scholastic Education and she will talk about our strategy to drive our profitable education business to strong success in a growing market.

First, here's Kevin McEnery, CFO, for more detail on our solid third quarter performance.

Thanks, Dick.

For the quarter ending February 28th, 2002, net income increased to 11.9 million as compared to 3.7 million last year, resulting in an earnings per share of 31 cents as compared to 10 cents last year on flat revenue of 40 - of 433 million.

We achieved this improvement by reducing operating costs by nearly 11 million, in large part due to the benefits of our ongoing cost reduction program.

Now, looking to the individual operating segments, in Children's Book Publishing and Distribution, revenue in the quarter increased slightly to 269 million from 266 million.

Operating income was up nine percent to 43 million as compared to 39 million last year, with a resulting margin of 16 percent as compared to last year's 14.8 percent.

In school-based distribution, Book Club and Book Fair revenues were up approximately 28 million with increased profits.

Continuity revenues decreased by approximately 17 million, primarily due to the continued implementation of the company's plan to reduce less profitable programs and to improve the margin in its direct-to-home business.

Continuity profit grew modestly, aided by these actions and the reductions in bad debt expense from current and prior sales.

And in our "Harry Potter" trade business, revenue declined by eight million as compared to last year.

Barbara will provide you with more detail on all this in a few minutes.

In Educational Publishing, revenue was up three percent to 61 million, as compared to last year's 59.6 million.

In the quarter, the operating results improved by 6.2 million, to a loss of 1.6 million, as compared to last year's loss of 7.6 million.

These results reflected increased sales of supplemental materials, in particular, classroom book collections, as well as Scholastic's innovative reading solution programs.

Such as Reading Counts, Read Excel , and Read 180.

All of these increases more than offset the revenue decline that was anticipated in Literacy Place.

Looking at the other segments, international revenue declined slightly by 1.2 million to 70.4, due to lower value of foreign currencies, as well as some softness in the UK, partly offset by good growth in Canada and Australia.

Segment operating income was off by 700,000 to 2.3 million.

As anticipated, media licensee and advertising revenue was 32 million, as compared to last year's 35 million, due to fewer new shows being delivered for the hit TV series, "Clifford," on PBS Kids.

Segment operating loss, which includes our Internet investment, was unchanged at three million.

The company's total operating income increased 63 percent, from 16.3 million, to 26.6 million, with margin expanding to 6.2 percent in the quarter, as compared to last year's 3.8 percent.

The growth in operating income benefited from our cost reduction program.

This lowered expenses by approximately $7 million in the quarter, primarily from manufacturing and promotion costs, as well as the process re-engineering efforts in our national service organization.

Year-to-date, we've saved more than $35 million from these efforts.

Interest expense in the quarter dropped 24 percent to eight million, as compared to 10.5 last year, due to lower rates and the conversion of the $110 million that Dick referred to in debt-to-equity.

Now, moving to the balance sheet.

Inventory was equal to last year's level, and our receivables were lower.

Total debt at the end of the quarter was 547 million, reflecting the conversion to equity of the subordinated notes.

As noted, that conversion, combined with the refinancing of $300 million on the Grolier bridge loan, has strengthened our capital structure.

And, as a result, we expect that our debt-to-capitalization ration at the end of they year will be approximately 42 percent.

During the quarter, we acquired Tom Snyder Productions for $9 million, and agreed earlier this month to acquire Klutz for 43 million, with additional payments possible, based on its performance over the next three years.

The Klutz acquisition's expected to take place following the expiration of the waiting period under the Hart-Scott-Rodino Act, and both acquisitions will enhance Scholastic's distribution strength, as well as its content offerings.

For fiscal '03, we are expecting needs to be earnings neutral and accretive after that.

For fiscal '02, we are on track to exceed $1.9 billion in revenue, save more than $45 million in costs and improve our operating margin to approximately 9.5 percent.

In addition, we now expect to exceed $80 million in trade sales for "Harry Potter."

For fiscal '03, subject, of course, to the finalization of our budgeting process, the revenue assumptions that Dick noted before include growth in our core businesses, revenue from our recently announced acquisitions.

And although we have no new news to announce right now, our plan includes the publication of the next "Harry Potter" novel.

With regards to cost reduction, we've already identified $25 million for next year, and fully expect to exceed that once we complete our budgeting process.

As for operating margin, we are looking to improve it by another percentage point to approximately 10.5 percent.

Now, here's Barbara Marcus to provide you with more detail on children's publishing and distribution.

Thanks, Kevin.

We had a strong quarter in school-based distribution.

In book clubs, orders increased eight percent, as specials for holiday giving and additional offers for the [Inaudible] Lucky and Arrow clubs were well received.

In book fairs, revenue per fair was up a healthy seven percent, and fair count grew by nine percent.

We benefited from more parent involvement through family nights, expanded training for organizers and the addition of the [Inaudible] fairs which we acquired in July.

Fourth quarter bookings are strong, and we should do about 11,000 more fairs this fiscal year than last year.

We had a mixed quarter in our continuity businesses, but the outlook is good.

In school-based continuities, which are promoted through Scholastic book clubs, our promotions were not as effective as we had planned.

We know what went wrong and have a plan to resume revenue and profit growth next year.

In direct to home continuities - which is based on the original Grolier home business - as we mentioned last quarter, we had been refining promotional programs and credit policies to improve profitability.

As expected, during the quarter, this resulted in lower, but more profitable revenue; lower promotional costs; and reduced bad-debt expense.

Based on the progress we're making, we expect this business to also experience favorable trends next year.

In trade publishing and distribution we had a good quarter and did particularly well going into Christmas.

In addition to distribution through all major book stores, we have an established channel through mass merchandises, such as Wal-Mart, Target, and warehouse clubs, such as B.J.'s, Sam's and Costco.

"Harry Potter" sales, aided by a strong box office for the "Sorcerer's Stone" movie, exceeded expectations, at 17 million.

This compares to 25 million in the year ago quarter, which included 12 million from the initial release of two "Harry Potter" companion books.

These books had no profit contribution as the net proceeds were donated to charity at the author's request.

Year to date, "Harry Potter" sales total 74 million compared to 190 million in the year ago nine-month period.

We also maintained a high level of sales with franchise and license properties and hard covers.

Strong sellers included "Captain Underpants," "Clifford," "Scooby Doo" and "Star Wars," "I Spy" photographer Walter Wick's "Can You See What I See," and the Caldecott honor winner, "Dinosaurs of Waterhouse Hawkins."

The newest "Captain Underpants," the "Adventures of Super Diaper Baby," appeared on the top 10 of "USA Today's" best seller list, with more than one million copies in print.

Looking ahead, we will continue the strength in distribution and content.

First, "Star Wars."

This spring, we launch our publishing program tied into the next move, "Attack of the Clones," which premiers May 15th.

Our program features a tie-in movie novel, a new series and a novel based on the new character.

With distribution in both book stores and mass merchandisers, we expect these books to be strong sellers.

Next, "Harry Potter."

As Kevin said, we're including book five in our plan for next year.

Meanwhile, we have a great program, taking advantage of the May 28th Warner Brothers' video release of the "Sorcerer's Stone" and building up to and through the new feature film "Harry Potter and the Chamber of Secrets," due out November 15th.

Again, we've got good distribution in book stores and mass merchandisers.

Wal-Mart, Barnes & Noble, as well as other retailers, are planning massive video and DVD promotions for "Sorcerer's Stone."

Our book will be featured right alongside that.

In July, we release our "Goblet of Fire" trade paperback.

In October, we publish our "Chamber of Secrets" movie tie-in products, collector's hard cover and mass market paperback.

We're also very excited about Klutz.

Klutz has a marvelous reputation publishing great books with accompanying products, from nail art to braids and bow.

It has a leading position in the specialty market.

And it fits perfectly with our trade publishing and distribution business.

We plan to expand international distribution and create Klutz products for school-based clubs and fairs.

I'll have more to talk about in July.

Now, here's Margery Mayer, who will tell you about the Scholastic's Educational strategy.

Thanks, Barbara.

Educational Publishing is an important part of Scholastic's business.

Not only does it represent 18 percent of total domestic revenue, but it has become a more than 10-percent margin business.

To make it an even stronger and more profitable segment, we've been moving forward with four clear objectives.

First, we will continue to build our business through new reading solution programs, supplemental publishing and paperback collections for classrooms.

We've already established a leading position with our classroom supplemental materials and magazines.

We will expand from there to focus on developing readers across all grades.

That could mean a child who, at age four, is sounding out the alphabet for the first time; an 11-year-old wrestling with a chapter book; or an average student looking for books that are just good to read.

And to this market, we have a growing array of products proven to work, leading solution programs, such as Read 180, Read Excel , and Reading Counts.

We've just launched a new summer school reading program, and new book collections grouped by subject and reading level.

Second, we will continue to build our education technology business.

The acquisition of Tom Snyder Productions, with its leading position in K-12 classroom software in social studies, science, math, and language arts, complements our offerings.

Tom Snyder Productions also provides us with a strong development team and sales channel to expand our position.

Third, we will continue to build our professional resources business for educators.

We're well known for our magazines and books that help teachers do a better job.

We intend to expand our fine reputation for helping teachers to professional development.

From the federal government, down to the districts, there is a universal call for better-trained teachers, especially in reading.

Thus, we have created a new proprietary online professional development program, which can be used alone or in tandem with in-person training.

Results from pilot tests around the country have been positive, and we are developing a small but powerful set of courses to help teachers better teach reading skills to their students.

Fourth, we are strengthening our marketing structure to drive sales of our existing educational products.

We've already achieved initial success, utilizing our unique array of channels for better targeting.

Effective coordination of the field with outbound calling and prospecting through the mail and Internet are important components of our longer term strategy.

The new Leave No Child Behind federal legislation, and the unstoppable trend toward increased accountability, have resulted in considerable dollars and focus behind the drive to improve reading scores.

Specifically, the legislation provides roughly a billion dollars in new spending for pre-K through three reading improvement programs.

We believe this will also enable schools to spend more on reading improvement for upper grades.

With our portfolio of products and services, we are well-positioned to take advantage of this new educational environment.

Read 180 is our prime example of this strategy at work.

Read 180 is revolutionary in its ability to turn around low achieving readers at grades four to eight, and momentum is building for the product.

More than 1,200 schools are now using Read 180.

Our customers include many of the largest districts in the country, where the results are terrific, and we are seeing many of these districts come back for more installations.

For example, Las Vegas started with 10 classrooms; now they're up to more than 50.

Jacksonville, Florida started with 15 classrooms; now, they're up to almost 100.

And we are seeing similar trends in Boston, Miami, Atlanta and other important districts.

And a major endorsement just last month, Read 180 became the first program of its kind adopted by the state of California, expanding the potential market.

One of our key marketing strategies has been holding intervention conventions where educators present strategies for improving reading scores with Read 180 and we demonstrate the product.

The response has been excellent, with wonderful leads.

And just now, we have more than 100 educational leaders at our current intervention convention.

Based on the interest in Read 180 at 48 , we're launching a new version for high school, including new content, but utilizing our existing technology.

With so many kids having difficulty passing new high school exit exams, Read 180 is a needed solution for kids in grades nine through 12.

We believe that we can continue to grow our Read 180 base and use it as a platform to market additional intervention programs.

And now here's Donna Iucolano, who will talk about Scholastic's newest channel of distribution.

Thank you, Margery.

Scholastic.com became the company's newest channel of distribution, with the launch of club ordering online - COOL - in the fall, and the teacher's store in the past quarter.

COOL is already producing more than seven percent of school-based book and software clubs' revenues on an annualized basis.

In the weeks since we soft launched The Teacher's Store, we have received an encouraging number of orders and are preparing for an aggressive marketing and promotional campaign to our teachers.

This will begin with our participation at school conferences this spring and for back to school.

Our current plans for launching the Scholastic Family Store by the end of the fiscal year.

Together, COOL , The Teacher's Store and The Family Store will be the company's e-commerce anchors on Scholastic.com and core to developing the Internet into another major distribution channel for Scholastic.

Meanwhile, our traffic involvement levels at the site continue to grow steadily.

We have more than 20 million unique page views a month, split almost evenly between school and home.

More than 10 percent of our teacher customers have become registered users, and more than 45,000 of them are using our site to create their own classroom home pages.

Today, Scholastic.com features content and community building activities for classroom teachers and children, parents and families and electronic commerce.

Our e-commerce efforts are fully integrated into the company's order processing and fulfillment operations, and we are leveraging customer information already on file.

For teachers, this includes their school, grade level, Scholastic products bought, Scholastic products their school has bought and other purchase information.

New information gained online is being added all the time and essentially helping to build a very robust customer profile.

This is critical, as it will enable us to provide highly relevant personalized products and services our customers say they want and need.

Club kits, direct mail campaigns and live associate communication are all promoting the benefits of online shopping, including 24-hour-a-day, seven-day a-week access and convenience and timesaving personalized service.

Our biggest opportunity is clearly to present the best of Scholastic, past, present and future, to customers in a manner that is unique and very efficient.

As such, we will continue to streamline the site, making it easier to navigate and to use, use a membership model to encourage registration that will enable us to provide teachers and parents with personalized information and merchandise recommendations, including state standard-based information.

Be timely, relevant and high-value orienting are presenting all of our content, community building and merchandising activities around themes, events and holidays that support both the school and home calendars.

Our ultimate goal for Scholastic.com is to be an essential tool for building and maintaining strong relationships with teachers and parents and to have it become a significant new channel of profitable distribution for the company.

Industry research indicates there will be a dramatic change in the teacher landscape over the next 10 years.

With more than 200,000 new teachers joining the profession each year, many of them will work with a PC on their desk, a high-speed connection to the Internet and may move from one school to another throughout their career.

In this type of environment, Scholastic.com becomes a key vehicle enabling Scholastic to stay connect to them and for teachers to continue to look to us for important resources and materials they need.

Now, I'd like to turn the call back to Dick Robinson to wrap up.

Thank you, Donna.

First, a word about Scholastic Entertainment on behalf of Deborah Forte, its President.

We are significantly expanding our level of support for our brands, books and multimedia sales around the world through Scholastic Entertainment.

In the U.S., we're in production on 26 episodes of an "I Spy" TV series for HBO Family, which will debut next winter.

And we've just completed production of 25 new episodes of "Clifford" for PBS Kids, for a total of 65 "Cliffords," which continues to be the number one show for young children.

U.S. video sales for Clifford have reached two million units.

And as I have said, the show just received five 2002 Emmy nominations, which we're very proud of.

Internationally, "Clifford" is not only doing well in Canada but the spring, it launches on the BBC.

We've just sold it to Australia's number one kids network and more sales are pending building "Clifford" as a global franchise.

Our "Horrible History" TV series, based on a best-selling series we publish in the UK, has been sold into seven countries, with more to come.

During the third quarter, we also announced that Scholastic Entertainment and Newline Cinema have joined forces to bring Phillip Pullman's award-winning -- his "Dark Materials" trilogy -- to the screen.

His "Dark Materials" is another best-selling series that we publish in the UK.

To sum up what we've talked about this morning, we've made significant progress in six key areas.

Cost control: Our aggressive, continuing cost reduction plans have helped us to more than triple earnings per share this quarter on flat revenue, helping to keep us on tract to deliver our fiscal '02 EPS target in a year of lower revenues, because of lower "Harry Potter" sales.

Distribution strength, While clubs and fairs continue to grow, trade has successfully expanded in the mass market, and we are focusing on improving the profitability and reach of our continuity business.

Third, the Internet.

As our newest distribution channel, Scholastic.com has now processing book club orders, generating sales for our teachers store, and soon will be creating more sales through the family store.

The Internet also serves as the connection point in the communication medium for our three audiences of teachers, kids, and parents.

Even stronger content, we are continuing our ability to build hit properties and books, as well as building out these properties further through the media.

We are adding "Klutz" and the new strength of "Captain Underpants" to our tried and true constellation of "Clifford," "Harry Potter," "Star Wars" and "I Spy."

Fifth, educational profitability.

Now that we're no longer in the basal textbook business, we have a path to increase profitability and a clear mission in supplementary and technology publishing mission to help enhance students' ability to read, and teachers ability to help them.

We're significantly more profitable this year than last, and will continue that trend in the areas where we are the market leaders.

Sixth, our growing financial strength.

Through converting debt to equity, and refinancing the bulk of the Grolier bridge loan, we have significantly increased our capital structure and balance sheet.

At this point, after nine months of our fiscal year, our results are right on plan.

We've been focusing on operating efficiency, and we are achieving that objective.

Our continued drive to reduce Scholastic's cost base places us in a good position to make further advances and create additional shareholder value.

We are confident that this strategy is working well, and will continue to work.

Therefore, our fiscal '03 budget targets are for 15 to 20 percent EPS growth on more than 10 percent revenue growth.

And we expect improved margin, not only next year, but in subsequent years.

This concludes our formal remarks.

Operator, we'd be glad to take questions at this time.

Thank you.

If you would like to ask a question, please press star, one on your telephone touch pad.

Once again, that is star, one to ask a question.

One moment while the questions register.

Our first question comes from Peter Eppert with Deutsche Bank.

This is for Barbara, I guess.

On the club business, Barbara, you spoke a little bit about the strength in the third quarter.

It was a dramatic sequential improvement from what we saw in the first half of the year, and I was just wondering if you could maybe dig a little deeper in terms of what drove that and the sustainability of the kind of revenue growth you saw in the third quarter.

You know, Peter, I think we had a - you know, we've been steadily - on a steady course this year with our club business.

And we did see some strong - you know, strong sustainable growth this quarter, and that has been due to the continued performance of our core clubs, plus some - you know, the eight percent increase in orders due, in part, to some interesting additional specials that we mailed.

One was our holiday offer, which we actually did a little later mailing due to what happened in the fall and had a wonderful response to that.

And then had some additional offers addressing our core clubs, and the teachers really responded to them.

And so there were more specials this year than a year ago, basically?

A few more, and that was partially based on the - sort of interruptions in mail in the fall that we felt that this was an opportunity, classes were back to normal and they indeed responded.

OK.

And how about average order size?

It is up a little bit.

It has increased a little bit.

But what I can say is that we have increased student participation, and that is one of our goals moving forward.

And so due to a mix of pricing and items, we have been very focused on increasing the response from the number of students participating in our clubs this year.

And we have done that.

Great.

And then maybe for Kevin or Donna, I was hoping they could talk a bit about the economics of online ordering, and specifically, the advantage - if there is an advantage - of the cost per order.

Maybe if you've seen any evidence early on of order frequency improving.

And if there's any financial implication associated with maybe higher receivables associated with online ordering versus the traditional pattern.

Peter, I think there are a number of advantages with the online ordering.

Of course, we introduced it this past fall.

And as Donna said, we are at about a seven percent run rate now.

You know, what we have seen is that it's easier for the teachers to fill out the orders; they certainly appreciate that.

We're hoping that we will see that in increased frequency.

We have seen that there is - it's more timely in terms of getting the orders out.

That's certainly helpful as well.

From a per-transaction basis, it is less expensive, to be sure, because it goes immediately into our order pool without going through the customer service rep.

We think that over time, you know, we'll get incremental cost savings from that as volume picks up.

But clearly, there is a significant fixed cost associated with that.

In terms of receivables, as I mentioned, overall, our receivables are fine to the extent that this encourages a little bit more.

I don't see that as an issue.

Our pay-up rates on the club receivables has been --has been good.

OK.

Great.

Thank you.

The following question comes Brandon Dobell, of Credit Suisse First Boston.

Good morning.

One, kind of, general first question to start with.

This, on a call, seemed to appear in the first time, a little bit of a change.

Maybe it's in focus or attitude or whatever it is - talking about going into the high school market, talking about going into new subjects with the Tom Snyder acquisition, a little bit more in terms of new products beyond the book market, kind of, books plus.

Is this, kind of, a general strategy where there's an opportunity to do more in the - kind of, the [Inaudible] school market or the high school or, kind of, K-12 market or is it just - these are just, kind of, isolated incidents where you see an opportunity to extend one product family into a different subject or a different grade area?

I think they're all - each of those is a little bit different.

The Klutz is a new, kind of, product category.

We have been doing some of it in our book fairs of book plus.

And it's obviously a book marketing extension and it's got into certain new outlets that we are not in as much and with our pure book business.

Tom Snyder is in a variety of educational software business in a variety of subject matters.

But I don't think that changes the way we approach teachers.

We've always - in our magazines, for example, we offer a wide variety of math, science, art and a variety of topics, as well as high school material in our magazine.

I think you correctly spoke about the high school version of Read 180 as a - as a line extension based on need.

We're selling this to a combination of associate - superintendents, associate superintendents for curriculum and technology coordinators for the district.

So to - so we're already talking to the marketplace that covers K-12.

And they're asking us to meet a need that they have for high school product.

So I would not say that this means that we are going into a whole new business at the high school, but rather that we're responding as a line extension to a marketplace that we're already calling on.

Does that cover those questions?

Yes, maybe I could ask you a little bit of a tie-on question.

Yes.

Can we expect you guys to be kind of proactive in going after that opportunity?

Or, more kind of reactive [Inaudible] .

If you talk to an assistant superintendent, and they ask for -- or they tell you, hey, we're seeing these problems, and these subjects.

Do you have anything like your Read 180 that addresses those issues?

Or, is it more of a hey, this is an opportunity, let's go develop some products, or find some kind of target acquisitions to create some demand on the part of the superintendents who have historically not thought of us as a math company, or as a social studies company?

Well, Tom Snyder is supplementary materials -- it's educational software sold primarily to the building level, and less to the curriculum superintendents.

Although, there is an increasing wish to tie all their technology together.

Read 180, on the other hand, is a high level sell, and I would say that Scholastic is normally in proactive in trying to find new opportunities.

But in this case, we're really following the market by responding to what they need and what we see.

So I would say it's sort of a combination of both, but more a response to a demand, rather than our having a push into the high school market.

OK, that makes sense.

And on a different here, can you give a little more color about the process with the continuity programs?

How far along you are, kind of going through and reevaluating which programs make sense, or figuring out ways to change the marketing to make it more profitable?

If we were to put it on a scale of kind of one-to-ten, where do you guys think you are in that process, and what kind of timeframe can we expect to kind of get to the end of that process?

Barbara, you want to talk to that one?

Sure, I think we feel we're in a great place.

I think, on the school continuities, we are confident that next year we will back to our levels of revenue.

And in our originally Grolier business, I think we are also feeling very, very good about our desire to, this year, to focus on profitable revenue.

And we're going to continue to guild on that.

And I think we feel very good about that plan.

So we see it as going forward, and have a sense of the market, and know what we're doing.

OK, I'll jump out.

Thanks.

And our next question comes from Stephen Barlowe with Prudential Securities.

Good morning.

On the education side, Margery, Read 180 is looking very good.

A lot of prospects with the California money that's available.

Can you give us an idea of revenue growth potentially for next year?

I would think the overall division would do better than the company average of 10 percent that you're looking at.

If you would comment on that.

Kevin, since I'm fresh to this, how do we - do we talk about revenue growth by individual ...

It's a little premature, since we are just getting into our budgeting process.

We think that we've got some - you know, some good opportunities going forward.

Obviously, we're speaking without the continued impact of literacy place.

But I think that we've - we've targeted about a 10 percent area of growth for ...

That's right.

... the education group.

That's right.

OK.

On the media licensing sort of - to me, has been sort of up and down.

You're up in revenue in the first quarter, down the second, down the third.

I guess, more importantly, the profitability - you mentioned that "I Spy" has been - you're producing that.

How are those "I Spy" costs being dealt with?

Are those costs going into the current '02 net year?

And the revenue that will come in '03?

And just maybe a general comment of how that subject area, the whole line item media licensing should look as we look at '03?

Let me talk specifically about - you know, the "I Spy".

The costs we're incurring the "I Spy" - for the "I Spy" productions are being capitalized pending delivery.

And that delivery is - has not occurred yet.

That will be later on in this calendar year for running next season.

There is a little more volatility, given that this year, for example, we were delivering 25 "Clifford" and last year we delivered 40.

And even on a quarter-to-quarter basis, the delivery schedule changes.

I think that's what I was trying to state in my presentation.

So, you know, sometimes just given the timing, they'll clump up a little bit in one quarter.

OK.

And, lastly, on "Harry" Five, we're presuming we're going to get the book - you're going to get the book.

Are the discussions going on to say, "We'll just do Five, Six and Seven simultaneously?

Do we have to go through this again two years from now?

In my view, if you could get book five - and we're presuming you are - you know, she's not going to change for six and seven.

So is there going to be sort of a deal for all three and get this over with?

Steve, I think our assumption is that we are working on book five at the present time, and we'll then handle six and seven.

But I think your assumption is accurate.

Thanks.

The next question comes from Bill Byrd of Salomon Smith Barney.

Thanks a lot.

Let's see - once again, on "Harry," I was wondering if you could give us kind of any sense of timing on "Harry Potter, Book Five"?

Also, I was wondering if you could address the issue of risk of overpaying?

And then, secondly, Barbara, I was just wondering if you could discuss other new titles behind it in the pipeline that you're particularly excited about?

Thank you.

Well let me take the first question, Bill, in terms of the timing.

We obviously anticipate that this will be in the fiscal '03.

We're planning on that.

The actual specifics are not yet able to be released or we're not aware of the specifics at this point in time.

It's still being written.

And I think that what we will obviously do is work out an arrangement that's beneficial both to the company and to the author.

As far as - I assume you're talking about new - brand new.

You know, we've continued to develop "Captain Underpants."

We've continued to develop "I Spy" and "Clifford."

So those are, sort of, our strong properties.

We are again, as we do every summer, launching some new series.

We're especially excited about "Outernet" .

We also are - "Outernet" , which is a new, sort of, funny series about outer space and the Internet.

And we are looking at some new series that are going to come along midyear.

And we do feel that there is great strength in the "Star Wars" series that we are launching against the movie, that we will be continuing, as we have done previously through the year.

And then, we have some wonderful new un-proven novels and hard covers, as we did several years ago with "Harry Potter," which will be not very meaningful to talk about to you.

But we are quite excited about.

And you will hear more about them as they get awards and reviews.

But - so we feel we have a very strong content list moving forward and a few more licenses that we are also - that are just about to break that we are also, sort of, very interested in.

But I don't know that they would mean anything at this point.

They will next year.

OK.

Great.

Also, I was just wondering if you'd taken a - you know, a recent cut at '03 cost efficiency opportunities?

We can, obviously, sort of, back into it based on what you've given out for guidance.

But I'm just curious is there's any, kind of, new avenues that you find interesting for better efficiency?

Bill, I think that you're going to find as we - as we go through the budgeting process, we'll probably be able to speak more specifically about this in our July conference.

But you will find that the opportunities that we're developing now are relatively consistent with what you've seen in the past.

As I've said, we've already identified at least 25 million and fully expect that that's going to expand as we complete the budgeting process.

So I think that's going to be -- you know, it's pretty much in the areas, the categories, in terms of operating efficiency, consolidation of purchasing, and the like.

Thank you.

I have a question from Dr. Levy of Geneva Capital Management.

Yes, with the budget problems at the state level, I know in the state of Wisconsin here, we're under the gun.

Have you seen, because of lower funding for the school districts, that they're beginning to look closely at their buying patterns for your books, for the libraries?

Well, you know, offsetting some of the constraints at the state level, there's new federal spending in the Leave No Child Behind Act, which Margery referred to.

And in the categories that we serve, we're expecting a boost from the federal spending, because we're heavily focused on intervention and the improving reader -- the struggling reader.

So I think that we'll see some offsetting there, and we're not particularly concerned about some of the problems at the state levels in budgets.

But of course, as we are expanding our marketshare at this time, so I think in our 10 percent growth plan for next year, we've factored in some state issues and problems, balanced by the new federal spending initiatives.

OK, thank you.

And our final question comes from Neal Godsey of Think Equity Partners .

Hi, good morning, just a few quick questions.

The first one for Donna.

On the seven percent of club orders coming from the new COOL program, where do you see that number, that percentage going over time?

I mean, is it something you think that'll maybe get to 20 percent, or something could get more up to 75 or 80 percent?

Neal , the original launch of COOL that we did in the second quarter, I would pretty much right now consider a soft launch.

Given the lead time in some of our direct marketing efforts, we've just caught up with our Club Kit promotions, and are starting to promote it now in March.

So the next school year is really the first full year where COOL will be up and running and supported with all of our marketing strength that we have.

So up until this point, it's been word of mouth, e-mail participation at conferences.

So the ramp over the next year should be in the 10 to 20 percent range.

Hitting 10 or 20 percent of orders in '03?

Is that your goal?

Well, given that we're on a seven percent run rate this year, the expectation is for next year would be between a 10 to 20 percent run rate.

OK, OK, thanks.

Question for Margery.

I think you mentioned Read 180 is in 1,200 schools now.

Is that correct?

Yeah.

That's right.

Do you have a comparable number for schools, say, a quarter ago or a year ago for that product?

No, I don't have a comparable number, but the program is going well.

And I think what's especially important to state again is the fact that where we've put the program in and supported it, districts are coming back for more.

And that's because the program is really working with their kids.

OK.

And are you seeing, you know, tangible results at this point from the new federal education legislation?

Or is that something that's going to roll out more strongly throughout the year and on to next year?

You know, I don't know exactly what you mean by tangible.

I will see this to you, there's so much pressure on schools to improve reading scores that - and math scores - that the - that the shortfalls that are in state budgets and local budgets, the last thing that's going to be cut is reading and math improvement.

And we do not see any material softening of interest in helping kids read better and helping teach - teach kids to read better.

You know, the federal legislation, of course, will begin in the fiscal year beginning October 1.

And given the problems of the federal government and getting its budget approved on a timely basis, normally you probably won't see much until the spring of '03 in terms of effect.

But already, they're thinking about it and they're applying for the grants and so forth and so on.

So there will be some effect in the next year's fiscal for us.

OK.

Thanks very much.

OK.

Thank you all for listening.

I'd like to remind you that the week of July 15, we'll announce our fourth quarter and yearend results.

We'll present our plan after the completion of our budget process for '03.

And we'll hold our annual meeting for analysts and institutional investors, and we welcome all who are listening to come.

We've got a good growth plan for fiscal '03 and we look forward to telling you more about it.

Thanks for your attention today.

Bye.

Bye.

That ends today's conference call.

Have a great day.