Scholastic Corp (SCHL) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the Scholastic first quarter 2010 earnings conference call.

Today's conference is being recorded.

At this time I'd like to turn the conference over to Jeffrey Mathews, Vice President of Corporate Strategy, Business Development and Investor Relations.

Please go ahead, sir.

Good morning, everyone.

Before we begin I would like to point out that the slides to this presentation are available for simultaneous viewing by going to our website, scholastic.com, and clicking on Investor Relations and following the links on that page.

I'd also like to note that this presentation contains certain forward-looking statements which are subject to various risks and uncertainties, including the conditions of the children's book and educational materials market and acceptance of the Company's products in 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.

Now I will introduce Dick Robinson, the Chairman, CEO and President of Scholastic, to begin our presentation.

Thanks, Jeff, and good morning and thank you, everyone, for joining us on our fiscal 2010 first quarter conference call.

This morning I am joined by Maureen O'Connell, Chief Administrative Officer and CFO, and Margery Mayer, President of Scholastic Education.

Other members of the executive team are available to answer questions at the end of the prepared comments.

Scholastic had a strong first quarter.

Both the top and bottom-line improved substantially from a year ago and we made progress towards our goal of the significantly increasing profits this fiscal year, which should result in 9% operating margins if we reach the top-end of the guidance.

First, good execution led to robust sales of educational technology, driven by new products' adoptions and the positive impact of federal stimulus funding, which has begun to reach school districts.

Second, in children's books trade sales increased by 25%, driven by several best sellers and we implemented plans to improve profitability and drive modest growth in clubs and fairs.

Third, we continue to manage costs, sustaining last year's reductions, implementing a major branch consolidation in fairs and improved efficiencies in our web operations.

Overall, this is an excellent start, but we are well aware that we still have three quarters to go to achieve our goal of the $30 million to $70 million increase in operating income this year to a total of $140 million to $180 million as we announced in July.

In educational publishing's most important quarter, which typically accounts for one third to one half of annual sales, educational technology sales rose over $35 million or 50%.

This contributed to a $20 million increase in segment operating income.

READ 180 and System 44 showed strong growth from higher product sales and services, with support from a California adoption, as well as the impact of federal stimulus dollars.

In a few moments Margery Mayer will detail the factors driving our very strong quarter in educational technology.

On the print side of educational publishing, sales of our core paperback collections and classroom libraries held solid, those sales to libraries declined slightly.

Overall, our print sales outperformed the supplemental materials market, which continues to be impacted by tight state and local funding.

Last quarter we also added resources to our top-down selling staff in this business, which should help sales growth in the third and fourth quarters.

Overall these are good segment results.

Even assuming that last year's quarters -- that last quarter's very strong technology growth rates moderate during the rest of the year, we are confident we can meet our growth target for education, which as announced earlier includes $50 million in additional sales from new federal stimulus funding on top of growth from new products and adoptions, a key part of our fiscal 2010 plan for higher profits and margins.

In children -- in the children's books business, our largest segment in terms of annual revenue, modest growth in sales and higher margins is an important element of our fiscal 2010 plan.

The first quarter is typically a small one because schools are out of session and school book clubs and fairs have minimal revenues.

However, Scholastic Trade Publishing had a big summer, with several best sellers in retail.

This was the primary cause of a $7 million increase in segment operating income last quarter.

There was strong demand for the paperback edition of Harry Potter and the Deathly Hallows published on July 7th, nearly two years after the release of the best selling hardcover.

Back list titles in the Harry Potter series also sold well.

The 39 Clues continues to be a New York Times best selling series.

following the successful launch of the fifth title in August.

The Hunger Games by Suzanne Collins is still a best seller, a year after its initial publication.

On September 1st, we released Catching Fire, the sequel in this trilogy, and last week it was the number one selling book, both children's and adult, in the whole country as reported by USA Today and the Wall Street Journal, as well as hitting the top of the New York Times Children's best seller list among others.

This should benefit the second quarter, as will the sixth title of The 39 Clues and a new title in our hardcover franchise How Do Dinosaurs Say I Love You.

Over the summer we also implemented plans to grow profits in clubs and fairs, which should begin to have a positive impact beginning this quarter as these businesses ramp up.

In both channels, we have modestly raised prices in select product areas and are using more Scholastic titles to improve gross margins.

To drive larger order in clubs, we have implemented a marketing campaign to encourage more parent ordering online.

We also made significant progress with new COOL, our enhanced online ordering system, which we are testing this fall with improved results and will roll out in early 2010.

In fairs, our new school incentive program, Scholastic Dollars, was launched with positive early customer response.

We also consolidated regions in our Hub and Spoke model from 14 to seven, thereby reducing costs and inventory levels.

Fair count is on plan to be level for the year.

We are confident that these actions will drive modest revenue growth and improved operating leverage.

It is too early to report on sales trends.

However, this year's late Labor Day pushed back the opening of schools in many districts, as a result there were fewer selling days in the second quarter, shifting some club and fair revenue from the second to subsequent quarters compared to last year.

Now, I will ask Maureen O'Connell to discuss the third element of our fiscal 2010 plan, cost reductions and efficiency improvements, as well as our results and outlook.

Thanks, Dick, and good morning, everyone Sustaining last year's progress, reducing cost and improving efficiency is the third element of our fiscal 2010 plan to increase operating income.

In this regard, the first quarter was successful in a number of areas.

First, salary expense was down by over $6 million, as we realized further benefit from last year's $30 million in annualized reductions.

Second, in school book fairs we implemented our Hub and Spoke plan, as Dick discussed.

Third, we've completed the consolidation of infrastructure related to e-commerce into our IT operations.

Fourth, spending on outside services and travel and entertainment was down another $4 million.

We also outsourced management of our New York facilities and are exploring other outsourcing opportunities.

Before turning to the first quarter results, I want to explain how we've changed the reporting of sales of interactive and media products in order to provide a more complete picture of sales trends and profitability in school book clubs and fairs.

Reflecting the increasing connection between print and other media in the children's books industries, all sales through school book clubs and fairs channels, including sales of media and interactive products, are now recorded in the children's book publishing and distribution segment, consistent with the Company's internal organization and management reporting.

Previously, the revenue and expense for media and interactive products sold through school book clubs and fairs were recorded in the media, licensing and advertising segment.

This segment now includes interactive products sold only through third party channels, as well as revenue from entertainment, toys and consumer magazine products.

Prior periods have reclassified accordingly.

This slide reflects this change of reporting for each quarter in fiscal 2009 for comparison purposes.

The next slide provides the same detail for fiscal 2008.

Now, turning to the first quarter results.

Revenue and earnings rose significantly relative to a year ago, reflecting strong educational technology and trade sales, as well as the benefits of cost savings.

Cost of goods sold declined as a percent of sales, reflecting higher gross margins associated with technology sales and greater fulfillment efficiencies in our distribution centers.

SG&A remained approximately flat.

Savings on salary, outside services, and T&E, as I just described, were offset, as anticipated, by higher severance, increased stock comp and higher variable costs related to the increase in educational technology sales.

Bad debt expense increased by $1 million, reflecting a higher reserve for a small remaindering vendor, with whom we no longer do business.

Overall, the loss per share from continuing operations was $0.68 compared to $1.13 a year ago.

This continued operations generated a small profit last quarter, reflecting favorable accounts receivable collections as we wind down some operations.

Looking at cash in the balance sheet, free cash flow improved last quarter by $85.2 million to a use of $77.5 million.

Scholastic typically uses cash during the summer with schools out of session and the need to build inventories before the fall.

This improvement reflected stronger operating results and tight working capital management.

Inventories were down from a year ago due to timing and more efficient purchasing.

We continue to manage our receivables very carefully.

Last quarter increase was associated with the increase in educational technology sales.

However, we successfully offset most of the impact on working capital through tight controls on payables.

As a result of improved free cash flow during last quarter and the prior three quarters, total debt and net debt continue to decline.

At quarter end, total debt was $290.6 million, including $152.1 million of public debt and $125.1 million under the amortizing term loan.

We did not draw down on our committed $325 million revolving credit agreement, which is unprecedented for this quarter end, when debt levels are typically approaching their seasonal high.

Based on the solid first quarter results, during which we made progress in all three areas of our fiscal 2010 plan, we are firming our outlook for significant earnings and free cash flow growth.

We continue to target earnings per diluted share of $1.80 to $2.30 on a continuing operations basis.

At the top end of our range, this outlook corresponds to an operating margin of 9%.

As we have discussed, this excludes severance and onetime expenses associated with anticipated cost reductions, as well as any non-cash charges for asset impairment and nonoperating items.

We now estimate the onetime expense related to the UK restructuring at $7 million to $10 million in total.

On a per share basis aftertax this is equivalent to $0.19 to $0.27, because the losses from the UK are not tax deductible.

We expect these investments to reduce UK losses in fiscal 2010, allowing the business to achieve operating breakeven in fiscal 2011 and profitability thereafter.

Scholastic continues to target free cash flee for the Company of $90 million to $120 million.

Thanks, Maureen.

I would now like to ask Margery Mayer to provide some background on the excellent results in educational technology in the quarter.

Margery?

Thank you, Dick.

Well, good morning, everyone.

We were pleased with our results this quarter.

Our achievement of $35 million of revenue growth in technology resulting in a nearly $20 million increase in operating income is the result of two key factors.

First, positive market conditions primed by federal stimulus dollars, and second, strong execution of our business model.

Let's start with the business environment.

As we've said in the past, our technology products and services align well with the stated intent of ARRA and with Title I and IDA in particular, both of which received stimulus increases and have been key funding sources for READ 180.

There is no question that the stimulus money helped our business.

This summer we saw several districts apply stimulus funds directly to purchases.

We also saw districts release funding as they breathed a sigh of relief in anticipation of stimulus funds arriving.

Additionally, the adoption of READ 180 in California gave us access to new instructional materials funding.

We grew sales in California three fold in the quarter to over $10 million.

As for execution, we have been evolving our business from one that is product centric to a true solutions business for a number of years.

We have amplified READ 180 with critical product extensions, like System 44, which targets readers who need support with phonics and word fluency before entering READ 180.

Wer have also built out our consultative and service capacity.

This summer it all came together.

Our flagship product, READ 180, grew by every measure in the quarter.

We had strong expansion of the product within our existing base and added a large number of new districts.

We grew our product sales and our service revenue.

Plus a great launch of System 44 last winter led to over $10 million in sales in the quarter, largely to READ 180 customers.

And our field organization, we dramatically improved our effectiveness and efficiency.

We streamlined our regions in senior management and pushed best practices across the organize.

As a result we increased productivity of our technology account executives by 50% in the corner.

Key to success has been the growth of our professional services organization.

We have seen a significant expansion in the number of districts purchasing our technical and consulting services.

This has not only been good for revenue, but has deepened our relationship with the customer and strengthened implementation of the product.

A good example of this came in Chicago where Mayor Daley announced expansion of READ 180 in his back to school message just this week.

We strongly believe that the expansion of the business we have see this summer offers us a long-term benefit.

We expect to build on our enlarged base in the future by further deepening the customer relationships through services and deeper penetration of our current product.

And by continuing to develop new products that fit into a comprehensive solution for literacy achievement in the 21st century.

Okay, thanks, Margery, for that great quarter and for that report.

While recognizing we still have three quarters ahead of us, we are obviously pleased with the quarter results and solid progress towards the goal for fiscal 2010, which include a substantial $30 million to $70 million increase in operating profit.

As I previously described, if we reach the higher end of this range we will achieve 9% operating margins, which is our target.

At our stockholder's meeting yesterday, an investor asked about our plans to sustain improved operating margins beyond fiscal 2010.

I think this is a good question that is worth addressing this morning.

As we have said, we have three key levers to sustainably improve profits.

First by achieving modest revenue growth in children's books combined with tight cost management, we can improve profits through strong operating leverage.

Second by driving faster growth in higher margin education sales, especially educational technology.

And third by continuing to reduce cost and improve efficiencies.

This is the outline of our plan for fiscal 2010 and for future years, when we believe we will continue to have opportunities in all three areas.

In children's books we are focused on growing sales online and with innovative publishing and new cross-platform opportunities.

The potential sale of digital e-books in 2010 also offers growth and profit opportunities.

In education we are substantially increasing our penetration among school districts this year with the help of strong execution, as well as federal stimulus funding.

That funding will continue at least through calendar 2010 and our fiscal year 2011.

As this extra funding subsides, however, we will have a larger base of customers upon which to grow through service subscriptions and by up-selling new products, as we have proven we can do in the past.

The eventual recovery of state and local budgets, which represent the majority of total education funding, should also help drive long-term growth in this area.

On the cost side, we will remain focused on improving efficiencies, reducing cost and sustaining those gains as we achieve them.

For example, as our clubs and fairs grow sales online, we can continue to improve the cost structures in these businesses.

Our plan for 2010 is to improve the operating margin substantially and the first quarter is a good step in that direction.

Once we achieve this goal, we believe it is sustainable on a larger revenue base in education and through continued operating efficiencies throughout our business.

Now I will moderate a question and answer period.

In addition to Maureen and Margery, I am joined this morning by Ellie Berger, President of Scholastic Trade Publishing, Deborah Forte, President of Scholastic Media, Judy Newman, President of Scholastic Book Clubs, and Hugh Roome, President of Scholastic International Growth Areas and Consumer Magazines.

And with that, let's open the call to questions.

(Operator Instructions) Our first question today comes from Peter Appert of Piper Jaffray.

Hi, thanks.

Margery, great results in the educational technology arena.

Is it possible for you to give us any more granularity.

You gave us a little bit, but a little more on what is driving the revenue growth and specifically I was thinking about things like maybe the portion of revenues coming from existing customers versus new customers?

Some more insight in terms of how important the newer products are to growing revenues.

And then can you comment on what portion of revenues currently are recurring versus onetime sales?

Thanks.

Thanks, Peter.

Margery is thinking about that.

But I am sure she has good answers to those good questions.

Wow, Peter.

I mean, I can't quantify exactly for you how the sales break down between existing customers and new customers.

The majority of sales were to existing customers and -- and we've -- but we know that we have added well over 100 districts this summer.

So we have a lot of new customers as well.

In terms of our new product growth -- sales, System 44 did well over $10 million in sales.

We couldn't talk about all the good things that happened because I only had a limited amount of time, but we also had good sales in our new math product called Do the Math.

This was its first real summer of sales.

That was way up.

I mean, we were -- we were up practically across the board and I think it really does reflect the fact that we were able to implement effective selling strategies in an atmosphere fueled by stimulus dollars.

In terms of recurring revenues coming out of our base, we have two categories of recurring revenues.

We have done a good job, I think, of building the sustainability of recurring revenues.

We have expansion of product within our base with 44 and new stages of READ 180.

We are also expanding FastMath in there.

I think you know that our products all run on a common management system, so that has made it is easy to go into places using our management system and adding.

And we also have recurring sales that come with renewals of hosting, tech support and consulting services.

So, that doesn't give you a lot of specific details, but I think it gives you sort of a broad picture of what we are doing.

Okay, thanks, Margery.

And then how -- can you help us understand how you think about the scale of the market opportunity and maybe one way you mentioned the 100 incremental districts.

How many districts are you guys in currently and what do you think the opportunity is?

Oh boy, I've not -- I really don't know how many total districts we are in, but we are only serving a small percentage of -- of kids that need READ 180.

And we think that there is plenty of room to grow.

In addition to System 44, which we think -- .

We had a -- we had a better first year with System 44 than we did with READ 180 in the first year it came out.

We have a lot of optimism around System 44.

We also brought out a new product this summer called Expert 21, which is for kids exiting READ 180.

We just -- honestly, we -- we believe we are building a business that is very future oriented.

It is outward looking.

And in addition to the $50 million opportunity that we are chasing this year and we feel confident about, we think we have additional opportunities in years going

Okay.

And do you have -- do you know offhand, Margery, what number of kids use the various Scholastic products currently?

You know, I really don't.

We might be able to get back to you with that later sometime.

Okay, that's fine.

Yes.

Thanks, Margery.

And --

You're welcome.

Dick, you mentioned pricing, can you give us any specifics in terms of what you are doing on average in terms of pricing this year?

Well, we've, as we said, we've raised prices modestly in children's books in all of our categories.

We are still substantially under retail, as you know, Peter, and -- and so we feel there is some flexibility in our pricing.

And in our drive to improve margins in that business, we believe our customers are willing to pay little bit more, even in tight economic environment.

And of course, it depends on if I give -- if I gave you a number it wouldn't be all that meaningful because it depends on what they buy.

In other words, the mix of products that -- and we are not -- we are not raising prices, necessarily, across the board.

Okay.

But modest means 1% or 2%, I assume.

Well, of -- of mid single digits at the highest from -- .

Okay.

Okay.

And then, Dick, do you have any, I know it is early in the season, but any early read in terms of club order patterns, average order size, et cetera.

Well, Peter, we were hoping you would ask that.

And Judy is here standing by to -- in case you did.

So I am going to ask her to answer that question.

Although, obviously it is, with the late Labor Day, it is even earlier than usual in our ordering cycle.

Hi, Peter, how are you.

Great.

Yes, obviously, it is too early to really talk specifically about what is going on in clubs, but we are really confident that the plan we put together last year really focus, as Dick said, on getting parents to order online and using our old COOL.

The new COOL systems is really well -- positioning us well for the fall.

So, we are confident with what we put together in our product and promotion.

And we are looking forward to seeing the results and talking to you about them next quarter.

Okay, great.

Thank you.

Thank you, Peter.

And our next question today comes from David Pang of Stifel Nicolaus.

Good morning, guys.

I had a question on just the competitive dynamics in the reading intervention market.

Given the influx of the federal stimulus dollars, could you guys briefly talk about that?

I will ask Margery to talk about that, David, thank you.

So, David, can you just flesh out your question a little bit.

What specifically would you like me to talk about.

Well, have you seen an influx of new entrants resulting from the federal stimulus dollars in the read -- reading intervention market.

We really haven't.

Okay.

Some of the traditional players have expanded their messaging around their products to include more of an intervention message, but -- and I think some companies are also benefiting from stimulus, but we basically have not seen a major new competitor.

And I think that READ 180 really showed how much muscle it has this summer by the -- the great reception we had of it in so many markets across the country.

Okay.

Thanks.

And staying on the same subject, I guess.

You guys provided guidance that $50 million of the federal stimulus is going to be hit on the fiscal '10 and $50 million is going to be hit in fiscal '11.

How much of that was hit in the first quarter and how much of that is going to remain for the remainder of fiscal '10.

Maureen, do you want to answer that question, please.

Sure.

David, as far as our $50 million range, it is very difficult to assign how much exactly is stimulus, because many of the deals we closed in the first quarter, we were working on last year before there was stimulus money in the market.

And so it is very hard for me to give you exact numbers, but we feel confident we are on our way to our goal and the first quarter certainly put us on that path.

So, it wasn't the case where the $50 million was -- I know it is a range and it was in your guidance, but it wasn't the case where it was just front loaded, but all in the first quarter then.

No, that was not the case.

Okay.

I mean the first quarter is our most significant quarter for education business and we were up in the first quarter by $35 million, so we are confident we are on our -- our target for $50 million for the year.

And we are very pleased with the success in the first quarter, but we cannot attribute it just to stimulus spending.

As Margery said, our sales force operated very well.

Execution was excellent.

We had new product in the market.

And we had many of these deals in the pipeline last year.

Okay.

And moving on to, I guess, the cost portion, heading into the rest of the fiscal '10, what are the plans for hiring, bonuses, travel, entertainment spend.

Well, T&E we are tightly managing, so that is our -- our goal is to continue to keep that low and so we will continue to look at that.

Salary cost will have a second quarter benefit again, because as you know we reduced our salaries in the second half of last year.

And severance turned out to be more front loaded in this quarter than we -- normally it is more even through the year.

So we think severance won't be as much in the future corners.

Okay.

Let's see.

In terms of the free cash flow guidance, are there -- can you talk about possible swing factors.

What other -- any working capital items that you might be able to discuss in terms of keeping with the $90 million to $120 million guidance.

We are -- we are clearly on the path as well.

We did very well in the first quarter.

We had a phenomenal success in managing our inventories down and I think you can see that in the numbers that our inventories are down significantly, particular in our children's book and distributions channel in the fairs specifically.

And we also managed working capital in terms of our terms with vendors.

And we initiated that effort last year in the second half of the year where we went back and extended terms with vendors.

So that benefit you will see in the beginning of the year, but it may level out in the second half of the year.

Okay.

Along the same lines with the cash flow, what are the -- can you prioritize the use of cash flows for the remainder of the year?

Will it be from repurchases or -- ?

Well, as far as what we invest our cash flow in, it's pre-pub around our educational products.

And as Margery said, we're -- we're about to launch some new products in that area and so that's what we are using for our business.

As far as our free cash flow, we are estimating $90 million to $120 million this year.

We are not drawn down on our revolver, but we do have debt outstanding.

And so we -- we -- our uses of cash has been to invest in paying down debt, as well as returning cash to our shareholders, which we do via dividend and I think you have seen that we announced yesterday --

Yes.

Another quarterly dividend.

Okay.

And the last question.

In terms of -- could you possibly quantify the -- the cost reductions that -- that resulted from the discontinued operations and how much was allocated from just improving efficiencies.

Well, the operations we exited, particularly the at home operation, was losing money and so that is out of both the current year and prior year.

So that doesn't effect your SG&A comparisons.

If anything, there were some overhead costs related to those operation that we had to further reduce in order to be as efficient without those operations.

We used to allocate some costs to those operations.

And when those operations were eliminated, that meant I had to take cost and other people in the business had to take cost out of their other areas in order to eliminate that allocated overhead.

Okay.

Thanks, guys.

Thank you.

And our next question comes from Eric Autio of Buckhead Capital.

Good morning and congratulations on a nice quarter.

Thank you.

Just to follow up on the working capital.

So when we look at it, let's say, at the end of this fiscal year, should we see it as roughly, the improvements roughly the same level they are now or is it sustainable at that level or how should we think about that.

That's a good question.

I think as far as the first quarter we -- we did very well in terms of working capital management.

Some of the inventory buys was timing related.

In our book fairs last year we bought inventory earlier in order to avoid a port strike.

So some of that is timing related.

On payables we did very well, again, in the first quarter.

In the second half of the year you won't see as much benefit from payables, because we started renegotiating terms with our vendors last year in the second half of the year.

Okay, got you.

And then just as far as D&A guidance have you talked about that at all and are there other larger non-cash charges we should think about with the free cash flow?

We haven't provided D&A guidance.

As far as non-cash charges, the one that we -- we disclosed today is the only one that we are aware of at the moment, which is our UK restructuring of $7 million to $10 million.

And that includes both some asset write-downs as well as cost to streamline those operations.

Got you.

Do you know what percentage of that is non-cash of the $7 million to $10 million.

That is very difficult to say at this point as we execute against it.

It involves some leases and leasehold.

We have to make some improvements, so it depends on the magnitude of the improvement to the leasehold.

So that's why we have a range of estimates.

Okay, great.

Thanks so much.

Thank you.

(Operator Instructions) And we will go next to Barry Lucas of Gabelli & Co.

Thank you and good morning.

Quick question just to come back at where Peter was going maybe.

If you think about $10 million in California on adoptive side, how do you think about the other big adoptions states for next year, Texas, Florida, and what might that opportunity be.

Hi, Barry, it is Margery.

There really aren't any other big adoption states for READ 180 and we don't really need big adoption states to grow our business.

We had a phenomenal year in Texas this year without an adoption.

And it is -- it's -- and the California situation was -- was very -- was a really good one for us because the California schools are under so much pressure on budgets and the fact that they had state funds that they could use to buy READ 180 just created a very good environment for us.

The budget situation in California is more extreme then in the other 49 states and so we are not finding that we need an adoption situation to have READ 180 purchased in the rest of the -- in the rest of the country.

That's great.

Could you talk about pre-pub expenses for this year and where they might be, as you try to invest in new product programs?

Maureen will answer that one, Barry.

I think we are -- obviously, we are continuing with our normal pre-pub levels in trade publishing.

We have -- we had a significant year last year in pre-pub and educational technology.

We -- but we are continuing to ramp up and develop new products, which is, of course, the life blood of that business.

And to sustain the very high gross margins in that business, the more revenue and volume you have the better.

We have significant opportunities in several subject areas which we are pursuing.

Maureen, do you want to elaborate.

Yes.

We haven't changed our guidance for that.

I don't have the fourth quarter in front of me, Barry, but I believe it was about the 60s to 70 range on pre-pub spending, which is similar to what we did last year.

Great, thanks.

One more for Dick, if I may.

I don't want to necessarily get too far ahead, but let's say we do get to that 9% operating income margin goal.

In your way of thinking is there a ceiling to that goal.

Is there -- how much more upward, I guess, is the other way?

Well, some years ago, we said 9% to 10% operating margin in '09/'10.

That was a nice thing for us to remember.

But this year we said, okay, '09/'10 is here we are going to do this and the first quarter helps us on that path.

We still have to prove that we can do it.

Once we achieve that, I think we think that that 9% to 10% is sort of a good operating level for our Company.

As we move into educational technology, which is higher margin, there's op -- and if that business out grows the rest of the Company, which it probably will or can, that gives us opportunities for higher margin.

But we -- our main goal was to get to what we thought was a decent and solid goal, operating margin goal for the Company that would generate enough cash so that we could move the Company to the digital changes that are going on in our industry and provide capital for growth in, particularly, educational technology and e-commerce, but also outside the United States in Asia and other places where we see significant opportunities for growing our core business as well as educational technology.

Barry, I have that number now.

It a 50 to 60 as discussed in our last quarter.

Terrific.

Thanks very much.

And thank you, Dick.

Thank you very much, Barry.

We will go next to [Jim McCarry] of Newberger Berman.

Good morning, all.

I had two questions.

One on the education technology side, the nice result in System 44 and we have got the Expert 21 launch, can these products lead you to new customers or are we following READ 180 primarily?

Margery will take that one, thank you.

Hi, Jim.

I think they can lead us to new customers and one of the things we are really excited about with Expert 21 is it really puts us on -- on a -- on a bridge out of intervention into -- into core, into core instruction.

And the program is exciting.

I'd love to -- I'd love to show it to you.

It is really built around helping kids develop the kind of skills that we think they are going to need to be successful in a -- in a global complex future.

And -- and people are looking at it right now.

It just -- we just finished printing it all in August.

We are just starting to show it to people.

People are looking at it right now that are new customers that are not using READ 180.

So it's -- it's a great opportunity for us.

Okay.

And -- and did System 44, has that penetrated any new customers that weren't already using READ 180.

I -- System 44 has really been go -- we've really been going to our READ 180 customers and that's just if you're -- if you're a good account executive, that's where you are going to do go, because that's the low hanging fruit.

And I think we have a lot of READ 180 that we have yet to be penetrated with System 44.

But we can definitely take 44 to some customers not using READ 180 and I think that that will happen in the future.

Okay, very good.

And then just shifting over to the International side,excluding the UK, maybe some thoughts on what might be going on, particularly in the far east.

Yes, let me ask Hugh Roome to take that question.

Jim, thank you.

Jim, hi.

We have got very good momentum in all of Asia and we've had particularly strong results in -- in Malaysia where we've launched the book club business to be a regional hub for us.

So we are expanding our Malaysia based book clubs into Singapore and now Indonesia.

We've got high growth also in Indonesia this year and I think our long-term prospects of that market are very good.

Across the region, we have been building our English as a second language programs.

And so in China we actually have Scholastic schools to teach English on a tutorial basis, as well as a franchise relationship withy a group called RYB, funded by private equity here in the United States.

But this has given us a student base of about 2,000 kids in our programs.

So that is strong.

In South Korea we are selling very successfully education products, again, focused on English.

In India we have a Company that is almost an exact replica of Scholastic here in the United States and it's building strongly in the market, but its club, trade fair, and increasingly education.

We have got a great base of business in direct selling in south Asia, particularly the Philippines and Thailand in addition to Malaysia and those businesses are growing.

They are very profitable and we are able to use them as conduits for new products into the market.

So with that we believe it will continue to be a high growth and continue to be a high profit opportunity.

Okay.

Appreciate it.

Thank you.

Thank you.

And I'd now like to turn the conference back over to Mr Dick Robinson for any additional or closing remarks.

Thank you.

Well, we appreciate your support.

We are particularly proud of the quarter, but we know that we have three quarters to go if we can achieve and are -- as we go to achieve our operating margin goals for the year.

Thank you for your support.

And we will look forward to talking to you about our important second quarter in December.

Thank you so much.

And that does conclude today's conference, ladies and gentlemen.

We appreciate everyone's participation today.