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Operator
Good day, ladies and gentlemen and welcome to the Scholastic fourth quarter 2010 earnings conference call.
At this time all participants are in a listen-only mode.
Later we will conduct a question and answer session and instructions will be given at that time.
(Operator Instructions.) As a reminder, today's conference call is being recorded.
I would now like to introduce your host for today's conference, Mr.
Jeff Matthews, Vice-President of corporate strategy, business development and investor relations.
Please go ahead.
Jeff Mathews - VP or Corporate Strategy
Thanks, Eileen.
Good morning, everyone.
Before we begin I would like to point out that the slides for this presentation are available for simultaneous viewing by going to our website scholastic.com, clicking on investor relations and following the link from that page.
I would 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 this market.
And other risks and factors identified from time to time in the Company's filings with the Securities Exchange Commission.
Actual results may differ materially from this currently .
Now I would like to introduce Dick Robinson, the Chairman, CEO and president of
Dick Robinson - Chairman, President and CEO
Thank you, Jeff.
Good morning and thank you, everyone, for joining us on our fiscal 2010 year end analyst and investor conference call.
For this morning's prepared comments I'm joined by Maureen O'Connell, CFO and CAO, Judy Newman, President of Scholastic Book Clubs and Margery Mayer, President of Scholastic Education.
Other members of the executive team will also be available to answer questions at the ends of this call.
Today I'm pleased to report that we exceeded the key three financial goals we laid out for fiscal 2010 a year ago.
We grew adjusted operating income by $75 million to almost $185 million.
We achieved long stated goal by expanding our adjusted operating margins to 9.6% and we generated $172 million in free cash flow well above our goal of $92 million to $120 million with which we reduced net debt to $9 million and funded a total of $22 million in dividends and stock buybacks.
In addition, we achieved key strategic goals in fiscal 2010.
We dramatically grew Scholastic Education reflecting strong execution, new products and adoptions as well as the significant benefit of federal stimulus funding.
We had a strong close to the year in Children's books with the 6% sales increase in the quarter and higher profits for the quarter in the year and finally, we tightly managed costs and cash while reducing our cost base.
These accomplishments placed Scholastic in an excellent position to maintain strong performance in fiscal 2011 as we focused on key digital initiatives in Children's book of e-commerce and e-Books reflecting the fast growing opportunities in these areas while consolidating our dramatic gains in education.
In fiscal 2010, Scholastic Education our educational technology services and curriculum division grew by a record 54% to $270 million.
Overall education publishing segment revenue rose 24% and operating income rose over 80% to $103 million for the year excluding one time non-cash charges.
A number of factors supported the expansion of Scholastic Education, which is now firing on all cylinders with a strong team and strategy.
First we executed well, particularly in sales and marketing following significant investments in these functions over the past two years.
We also gained especially in the first half of the year from the successful introduction of System 44, the prequel to READ 180 and an adoption of both products in California.
Second, stimulus funding accelerated our growth unprecedented ejection of federal money into local school districts helped offset budget deficits.
A significant amount of this funding was channeled through the federal Title I and special ed programs which are already important drivers of our sales further benefiting the business.
When this legislation was signed into law in early 2009, we anticipated $100 million in incremental sales over two years.
Based on the speed with which school district spent the stimulus funds and the sales growth we experienced in fiscal 2010, we estimate that we captured about two thirds of our originally anticipated benefit in fiscal 2010 with the rest to come in fiscal '11.
Together these factors drove unprecedented expansion of Scholastic education business in fiscal 2010 resulting in significant gains in the installed base of school district's using Scholastic programs and in the depth of our partnerships with those districts.
The business also became much are diversified in terms of the breath of products contributing significant revenue and in terms of the mix of products in the service revenue.
Scholastic's classroom and library group, the company's prints and supplement at division, was up 6% in the fourth quarter finishing the year approximately flat.
This market, especially the library channel, continues to be impacted by tight state and local budgets.
In our experience it has not seen the same benefits from stimulus funds which have been used mostly to keep schools open and teachers employed or to address high priority needs such as reading intervention.
In this environment our strategy has been to build market share while carefully managing costs.
We are digitizing many of our products for use on the web and interactive white boards see good growth opportunities as well as building new supplementary programs in reading and language arts.
In Children's book last year we achieved solid sales especially in the fourth quarter in spite of a challenging economic environment for teachers and families.
For the year, sales held level with the prior year excluding approximately $25 million in sales from Tales of Beetle the Bard which we published on behalf of J.K.
Rowling's charity in 2009.
These results reflect gains in book fairs where sales grew 7% in the fourth quarter and 4% for the year partly due to the success of Scholastic's new incentive programs for school, which led to strong participation and higher revenue per fare.
We also had numerous New York Times best sellers in trade, including the Company's multi-platform series The 39 Clues, the first two titles in The Hunger Games trilogy by Suzanne Collins and the first tile in Maggie Stiefvater's.
Shiver trilogy.
Book Clubs also had a stronger fourth quarter with revenues approximately flat as targeted spring promotions help restore teacher order volumes.
In addition to sustaining sales we also improved efficiencies across the segment.
As a result segment profits rose 16% to $118 million, reflecting savings from last year's consolidation of operating regions and fairs and effective returns management and trade.
In summary, Scholastic's Children's book business ended fiscal 2010 on a strong and more profitable note with teachers, kids and families continuing to be deeply engaged with our unique channels of publishing franchises.
In fiscal 2011 which, we of course have just begun, Scholastic's plan is to sustain last year's strong operating income before spending incremental $20 million on our key digital initiatives in children's book where we have a unique opportunity to leverage our position as the world's largest children's book publisher and distributor.
Scholastic is already a major online book seller to teachers and students in their classroom through book clubs and we have an opportunity to expand these sales by further engaging teachers and parents.
And while sales of children's e-Books are small compared to the vast growing adult e-Book market, we have an opportunity to leverage clubs online ordering in our unique strength as a publisher and distributor to stake out a position in this emerging market, which we think will grow substantially in up coming years.
In a moment, Judy Newman will discuss our plans to launch important new on-line and e-Book initiatives in fiscal 2011.
In education, we have already successfully made the digital transition, which is driven tremendous growth over the past ten years.
Following last year's record expansion our plan for fiscal 2011 is to consolidate our growth.
We also are investing insignificant pipeline reading and math products and services, which should drive robust sales beyond 2011.
Despite an anticipated decline in federal stimulus funds, fewer product introductions and adoptions, we expect to hold revenue in fiscal 2011 in line with last year with a high percentage of renewals in services and follow on product sales to our significantly larger base of existing customers as well as by reaching new customers with our market leading technology based programs.
We believe that holding onto our nearly $100 million gain in revenues in 2010 will be a good performance in a market where new funding is swelling.
Margery Mayer will lay out the strategy in product development plans in a moment.
Finally, we expect that our continued cost saving effort will offset increases in some areas as Maureen O'Connell will discuss when she presents the full fiscal 2011 plan.
We also expect to continue to generate free cash flow in excess of net income by aggressively managing working capital offsetting higher spending on product development.
I'll now ask Judy Newman, President of Scholastic Book Clubs to address our e-commerce and digital opportunities for children's books.
Judy Newman - Executive VP and President, Book Clubs
Thanks, Dick.
Good morning, everyone.
As a seller or publisher of approximately half of all the children's books sold in the United States, Scholastic has unmatched relationships with teachers, kids and families and a unique understanding of the needs of young readers.
So as at market for children's books open up on the web and in digital format we intend to maintain this reading position in two ways.
First, by providing easiest most compelling way for parents, kids and teachers to buy children's books and e-Books online and second, by creating the best experience for kids and families to read and enjoy e-Books.
In fiscal 2011 we launched a major initiative to do both.
First, we're fully rolling out Cool, the new clubs online ordering platform, this August.
This move will make Scholastic's unique school days distribution model and value proposition accessible directly to parent and kids online as well as of course to teachers.
New Cool will make it much easier for parent and their children to directly order competitively priced high quality books online and pay for them with a credit card and even buy books for student in other classes, siblings and so on.
New Cool will maintain all the benefits of engaging teachers who will still earn bonus points and manage their students' orders.
Also, we will continue shipping orders to the classroom.
These key points differentiate our value proposition and economics from other online book sellers.
Second, employing the extensive reach and strength of our school channels and in particular New Cool to teachers, parents and kids across the country, we will launch a uniquely Scholastic children's e-book offering for kids and families, which we believe will be the first of its kind.
It will include a large carefully curated selection of quality children's titles from Scholastic and other publishers.
They will be delivered through a downloaded e-reader application for multiple platforms that is specifically designed for young readers.
As Dick described, these initiatives will involve $20 million in increased operating expense in 2011.
We're confident that this investment will generate growth for Scholastic in terms of greater market share and incremental demand for children's books in print and digital forms over the next several years.
Now I'll pass the call over to Margery Mayer, President of Scholastic Education.
Margery Mayer - Executive VP and President, Scholastic Education
Thanks Judy, and good morning everyone.
As Dick described, we're coming off of a transformational year for our education business, a year which gives us a base for continuing our strong performance in 2011 and for driving growth in 2012 and beyond.
As you know, our business model is not that of a traditional textbook publisher.
Rather we work with districts as a true solution provider, providing consultative support, data analysis, effective programs and professional development.
This model allows us to develop our relationships with our customers and help them drive achievement.
By so doing we can typically expand our programs and licenses, renewal services and technical support and introduce new solutions.
Our business model delivered extraordinarily well in 2010.
This has positioned us for 2011 as a more diversified business with READ 180 continuing as our flagship, but also with a robust service business with about $50 million in revenues and expanding math business, which is already about 15% of our product sales and a significant business in its own right with System 44.
Our plan is to continue to drive our business in 2012 and beyond with new products and services that address education's most pressing need, raising student achievement in reading and math and making sure they succeed with the new common course standards.
To this end we are working on a series of significant enhancements to READ 180 and System 44 which we look forward to announcing later this year.
Additionally, we're moving ahead aggressively in math.
We have a real hit on our hands with Marilyn Burns, Do the Math an intervention program for grades two thru six.
We just launched Fraction Nation, an innovative new software program to address the challenge students face with fractions and we are a week away from shipping a new math assessment called the Scholastic Math Inventory.
The results for American students in math are only marginally better than those in reading, according to NAPE about two thirds of our eighth graders are not proficient in math.
We plan to take on the challenge of math intervention just as we have done in reading and we are well along on a math 180 sweep of products which are scheduled to begin release in 2012.
We are also optimistic about near and longer term opportunities for our service business, a very real benefit is how this business strengthens our relationship with our customers.
Through our education consultant team and through the International Center For Leadership and Education, which we acquired two years ago, we are providing an expanding set of services both a line door products and product agnostic .
At $50 million this business is at once a recurring revenue stream, a differentiator relative to much of our competition and a growth opportunity.
As Dick pointed out, Scholastic Education significantly strengthened, expanded and diversified in 2010.
We also emerged as a key component of the company's earnings.
In 2011 we need to capitalize on ongoing federal support for improving our most challenged schools and on our strong diversified business model.
And looking beyond we believe we can continue to grow our business building on our effective programs, create sales and marketing and the Scholastic brands which continues to strengthen in meaning to our customers.
Now I'm going to turn it back to
Dick Robinson - Chairman, President and CEO
Thank you, Margery.
Maureen O'Connell will now review our strong financial results for the fourth quarter and full year and lay out our financial goals for fiscal 2011.
Maureen O'Connell - Executive VP, CFO, and CAO
Thank you, Dick, and good morning, everyone.
Before I review our financial results I would like to address the mostly non-cash one time items incurred in fiscal 2009 and 2010.
The majority of these one time items in both years have been non-cash impairments and write downs of investments.
These account for $45 million in fiscal 2010 and $32 million in fiscal 2009.
The remaining cash portion of one time items have been focused on reducing the Company's cost base and liabilities.
In fiscal 2009 $20 million in severance was incurred related tot he reduction of our work force by over 500 people and the corresponding $30 million reduction in salaries.
In fiscal 2010 we incurred approximately $5 million in cash expenses restructuring UK operations in order to make this business profitable.
And an additional $7.5 million associated with the settlement of a sales tax negotiation.
Although, these one time items have impacted our GAAP earnings the ongoing operating result of the business have improved as evidenced by our strong free cash flow growth.
Now I would like to review the income statement adjusted to excluded the one time items I just described.
For the full year revenue increased 3%, primarily as a result of strong education results as well as the benefit from foreign exchange.
This is partly offset by a modest decline in children's books related to sales of Beetle the Bard in the prior year.
Cost of goods sold declined by nearly 3 percentage points, primary merely due to strong growth in higher margin education technology sales in the current year and the prior year Beetle the Bard sales.
In addition, improved fulfillment efficiencies and better buying also contributed to higher gross margin.
Selling general and administrative expenses held level for the year.
This reflects the benefits the prior years' s headcount reduction, which offset increases the sales commission and field staff costs related to higher educational sales as well as higher bonus benefit and stock compensation expense, primarily in the fourth quarter.
The effective tax rate for fiscal 2010 was 47%.
In addition, the federal taxes the key components are state and local taxes and foreign tax without tax benefit.
Earnings per diluted share from continuing operations, excluding one time items, was $2.60 double $1.28 a year ago.
This exceeded the Company's most recent guidance of $2.00 to $2.30 per diluted share.
Better than expected earnings for the year in the quarter reflected strong performance in children's books with both book clubs and book fair sales improved versus prior quarter and trade experience favorable returns.
Strong performance in education also contributed to positive end of the year.
This slide provides segment results on adjusted basis excluding one time items.
In fiscal 2010 we also generated significantly higher free cash flow due to both strong cash earnings and working capital improvements.
A key focus in 2010 was on reducing inventory, especially in book fairs which we successfully achieved through more efficient and better coordinated purchasing across channels.
At year end inventories were down by $29 million or 8% compared to the prior year.
Higher accounts receivables are the result of higher educational sales while lower accounts payable reflect lower spending.
Higher free cash flow for the year reduce the Company's total debt and net debt.
As of May 31, 2010 net debt was $9 million, down from $160 million a year ago.
This reflected significantly higher cash on hand as well as debt repayments and repurchase the over the past 12 months.
We remain undrawn on our committed $325 million revolving credit agreement, we continue to pursue efficient needs of returning cash to shareholders.
And the fourth quarter we required approximately 341 thousand shares of common stock for $9.3 million.
During fiscal 2010 we brought back approximately 412 shares in total for $10.8 million.
Since the beginning of fiscal 2011 we've repurchased an addition 124 thousand shares for $3.1 million and have $7.1 million remaining on our current board authorization.
In addition, to share buy backs we returned $10.9 million directly to shareholders in the form of dividends in fiscal 2010 and yesterday we declared our first quarterly dividends for fiscal 2011.
Now I would like to turn to our out look for 2011.
As Dick stated at the beginning of the call, our plan is to sustain the strong operating results of 2010 before incurring an incremental $20 million in operating expenses to implement and promote our key digital initiatives in the children's book segment.
Following last year's strong finish in the segment we expect solid growth in fiscal 2011 overall and in particular in clubs with New Cool.
Fairs are also expected to maintain modest growth.
Trade sales are anticipated to be down slightly next year, a strong summer and full front list with much anticipated releases of Suzanne Collins, Mocking Jay, the final book in the Hunger Game series and a new Captain Underpants from Dav Pilkey among others should mostly offset the impact of fewer new titles and in the 39 Clues series.
In education, our plan is to sustain sales of approximately the same level as fiscal 2010 as Margery discussed.
Renewal of services and other recurring revenue streams are expected to comprise a modestly larger portion of sales reflecting the larger customer install base.
In International, we expect solid top line growth driven primarily by Asian exports and continued improvement across the International business.
In overhead areas, we continue to control head count while improving efficiencies across the Company.
This should help offset expected increase in commodity pricing, manufacturing and medical expenses as well as merit pay increases.
Pre publication and production spending is expected to increase, reflecting increased product development in the education segment.
This factor should off -- be offset by further working capital improvements, allowing us to generate free cash flow in excess of net income for another year.
On a consolidated basis we expect total revenues of approximately $1.9 billion to $2 billion in earnings per diluted share from continuing operations of a $1.95 to $2.20.
This outlook corresponds to operating income of $150 million to $165 million.
Our outlook for EPS and operating income excludes the impact of one time items associated with non-cash none operating item .
Excluding $20 million of strategic spending and digital initiatives this is in line with fiscal 2010 results and an operating margin in excess of 9 % at the top end of the range.
The bottom end of this range contemplates a scenario in which education fields are softer than expected because of a worsening in state and local budgets or in which book clubs and fairs do not achieve growth in spite an increase in investments in school and promotions.
Stock based compensation expenses is expected to be approximately $14 million or $0.23 per diluted share in line with fiscal 2010.
Our current outlook for tax is for it to improve from to 47% to 46% based on lower UK losses.
We expect free cash flow of $90 million to $100 million in fiscal 2011.
Capital expenditures will be between $50 million and $60 million while production spending is expected to increase modestly to $65 million to $75 million.
With that I will turn the call back over to
Dick Robinson - Chairman, President and CEO
Thank you, Maureen.
Fiscal 2010 was a strong year for Scholastic financially and strategically and we are a committed to hold on to those gains in fiscal 2011.
In education, we're determined to maintain the revenues we achieved in 2010 despite declining stimulus funds and to increase the face of new product development momentum for sales in 2012 and beyond.
In children's books we are focused on achieving solid sales increases in line with the last quarter.
At the same time we will increase our investments in digital and e-commerce initiatives to transform and grow the business and across the Company we've taken steps to hold our cost base and maintain our strong free cash flow conversion.
Together we feel that these three elements will deliver strong results in fiscal 2011 and position Scholastic well for the long term growth.
Mean while we're proud of having over achieved the goals we laid out a year ago for 2010.
This performance gives us renewed confidence that we can continue to grow solidly while maintaining our new higher levels of profitability.
Now I would moderate a question and answer period in addition to Maureen, Margery and Judy.
I'm joined this morning by division President Ellie Berger of Trade, Deborah Forte of Scholastic Media and Hugh Roome of Consumer and Professional Publishing.
With that let's open the call to questions.
Operator
(Operator Instructions).
Our first question comes from Drew Crum of Stifel Nicolaus.
Please go ahead.
Drew Crum - Analyst
Good morning, everyone.
Thanks.
Just -- I have a couple questions on your e-Book strategy.
Can you give us a little more detail on the nature of the investments you're going to be making?
Were there any made in 2010 and then from an accounting perspective are these investments you'll be capitalizing and amortizing or is this something you're going to run straight through the P & L?
And finally, what is the plan as far as use of platforms?
Are you going to be partnering with Apple and Amazon the like or other providers you can fill us in on?
Thanks.
Dick Robinson - Chairman, President and CEO
Thank you, Drew.
I think we'll ask Maureen to answer the questions about the spending, which is operating costs expense in the $20 million and is in addition to what we've already been spending in the preceding years.
Maureen O'Connell - Executive VP, CFO, and CAO
Yes.
As Dick mentioned, we are expected to spend $20 million in our digital initiatives this year and that really includes technology, infrastructure as well as a marketing costs and people associated with this collaborative effort which includes or E Scholastic group, our I.T group, our book club group and our media group.
As far as the accounting, the accounting only allows you to start capitalizing when you have a viable product that's on the market with marked revenues that you can ascertain and so our expectation is through our prototyping phase and our testing phase we will be expensing the spend.
Dick Robinson - Chairman, President and CEO
Drew, we'll turn to Judy to talk a little bit about the E book strategy and e-commerce strategy.
Judy Newman - Executive VP and President, Book Clubs
Hi, Drew.
How are you?
Drew Crum - Analyst
Hi, Judy.
Judy Newman - Executive VP and President, Book Clubs
We're getting ready for our market pilot of our e-Book program at the end of this calendar year and our goal is to have our proprietary Scholastic e-reader really ultimately available on any device that anybody want to reads it on but were going to be starting with PC and then moving on to Mac and rolling out subsequent from there.
Drew Crum - Analyst
Got it.
Okay.
And, Maureen, real quickly were there any -- can you quantify what the investments were in 2010?
Maureen O'Connell - Executive VP, CFO, and CAO
There was some minor staffing added in 2010 and we began to spend a little bit with outside vendors as we are building the Digital initiative.
I would say it was under single digits, low single digits.
Drew Crum - Analyst
Okay.
And then just moving to clubs you guys provided some guidance there.
Can you just can you give us some additional color on expectations around revenue given that you are rolling out the New Cool?
Against that you have unemployment still elevated and I think well documented concerns around teacher layoffs and then on the cost side, if I remember correctly, you're going to be running the dual platform and I guess, also I would also like to know how the promotional spends plays into your overall strategy given that you've got this new digital initiative.
Dick Robinson - Chairman, President and CEO
Judy will tackle those questions, Drew.
Thank you.
Judy Newman - Executive VP and President, Book Clubs
So we had some great results in the fourth quarter and we learned a lot about targeted promotion and we were able to reverse some of the lag in sales we have seen in the prior quarters.
So with that knowledge of how to target our promotion spending we will are approaching the new fiscal year with good energy and good strategies to try to find the teachers where they are.
We're very mindful of what's going on in the schools and classrooms and we know that it will vary by state, where there are teacher issues.
We have good intelligence and good programs really targeted to get our catalogs to where the teachers are when they need them.
We've also learned a lot about promotion and we know we have to make exciting programs to teachers to get them involved in clubs and bring them into the club system so that we can be moving them onto New Cool and we have some really great exciting stuff ready for back to school which launches in just a couple of weeks.
Drew Crum - Analyst
Okay.
And then my last questions are on educational publishing.
I guess for Margery if you take out federal stimulus, how would you characterize the funding environment today relative to a year ago?
Have things gotten better, worse or are they kind of the same for your business?
And I think looking at longer term with common course standards looking to make their way into the system you see that as a catalyst for your business or is it a head wind?
Margery Mayer - Executive VP and President, Scholastic Education
Hi, Drew.
Drew Crum - Analyst
Hi.
Margery Mayer - Executive VP and President, Scholastic Education
So the funding environment outside of federal funding, I don't think it's great, but it doesn't affect us as much as it does -- as it would affect other educational publishers because so much of our business is linked to federal funding and -- and there's no question that school districts are feeling the pinch of state budgets right now, but we're optimistic about -- about our business going into this coming year.
In terms of the common core, we think it's an opportunity for us.
We think it's going to be great for our country and good for our business.
We've never been a company that's linked a lot of individual programs to individual -- individual state standard.
We -- we have a more universal approach.
We like to drive our products based on efficacy and research rather than meeting individual state standards.
So we think this is going to be great.
If anything, we feel that our products are -- it's very well designed for the common core and it's going to be a driver of our business.
Drew Crum - Analyst
And I apologize if I missed this but did you guys talk about the digital revenues for educational publishing's in the fourth quarter?
I know you guys gave a 2010 number.
Is there something you can share on the fourth quarter?
Margery Mayer - Executive VP and President, Scholastic Education
Well, our revenues were up 25 % overall on -- on educational technology in the fourth quarter.
Drew Crum - Analyst
Okay.
Margery Mayer - Executive VP and President, Scholastic Education
I think that's pretty much what we do.
Drew Crum - Analyst
Okay.
Dick Robinson - Chairman, President and CEO
Drew on behalf of Judy, I would like to say that I think the promotion program for clubs in the Fall is really great.
We'll engage teachers even though teachers are in a complicated frame of mind because of all the financial pressures on the school districts.
Additionally, we will be spending some amounts of promotion to move parents to New Cool and as Judy described working directly in the system with their credit cards we believe that we can double the number of parents that are in New Cool?
Drew Crum - Analyst
I guess my last question given that use of credit cards are you anticipating any change in your bad debt expense profile?
Dick Robinson - Chairman, President and CEO
No.
Drew Crum - Analyst
Okay.
Okay.
Guys.
Thank you.
Dick Robinson - Chairman, President and CEO
Thank you, Drew.
Operator
(Operator Instructions) Our next question comes from Peter Appert of Piper Jaffray.
Please go ahead.
Peter Appert - Analyst
Thanks.
Good morning.
Maureen, the $20 million of e-Books spending, is that all operating cost or is a portion of that capitalized?
Maureen O'Connell - Executive VP, CFO, and CAO
No.
That is the operating costs because that is through the pilot stage it's not through a marketing stage where we have the product completely rolled out and so at that point we have to -- we can begin capitalizing.
Peter Appert - Analyst
Okay.
And then do you have -- for Judy I guess, an estimate of the number of titles you will be doing in the e-Book channel and are you thinking about product e-Books only or is everything going to be hybrid?
Dick Robinson - Chairman, President and CEO
Some will be hybrid?
I think Judy is the best person to answer that one.
Thank you.
Judy Newman - Executive VP and President, Book Clubs
We'll be kicking off the pilot with about 2000 titles from Scholastic as well as from all publishers and our strategy in the e-Book market is to have it carefully curated selection of titles and bring our expertise to bare just like we do in our regular prints businesses.
We think that's a big differentiating point for us and so we'll be kicking off with those vary carefully curated 2000 titles and than continue to roll out from there.
We will be working on some enhanced books, e-Books as well as eventually some books that will be conceived originally with the trade department for e-Book publication at the same time they're being published and print?
Peter Appert - Analyst
And what kind of price points are you thinking about?
Judy Newman - Executive VP and President, Book Clubs
We're experimenting with different price points.
We are a talking to all publishers, we are working on our pricing strategy.
I don't think we are quite ready to talk about that yet, but looking at different models and making sure that we can ensure good revenue and profitability's as well as royalties to authors and so on?
Peter Appert - Analyst
Following the same model that you would follow in the club channels and the price points would be to discount to what would normally be price point for similar kind of product in the trade channel?
Judy Newman - Executive VP and President, Book Clubs
Yeah.
I think our goal in the school market e-Book business as with the print business is value and so we really price each title individually.
We want to sure there is enough value.
I don't think we see ourselves undercutting our own physical books in our e-Book formats.
And we're looking at a set of different model to make sure we're getting the same great value for e-Books and as we enhance titles there may be some other opportunities for some incremental pricing there as well?
Peter Appert - Analyst
I just have a thought in terms of just preliminarily what the revenue for this initiative could like this in the first year.
Judy Newman - Executive VP and President, Book Clubs
I think I'll give that to Maureen to answer.
Maureen O'Connell - Executive VP, CFO, and CAO
Peter, we haven't budgeted any revenue really in the first year because right now we're working on our testing and experimenting with different price models as Judy said and a pilot.
So we haven't really budgeted revenue for this year.
Peter Appert - Analyst
Okay.
Thank you.
And Margery you guys continue to do a great job from a competitive perspective in the remediation market.
I am wondering if you can just talk a little about how you see the competitive dynamics involving in this market?
And also, I'm wondering if you have any metrics you can share with us in terms of what kind of renewal percentages you see from existing users?
Is there anything you can talk about in terms of proportion of sales coming from upgrades that might help us understand better the revenue outlook going forward?
Margery Mayer - Executive VP and President, Scholastic Education
Yes.
Okay.
So Peter, thank you for those nice words.
Really what's -- I think what's been going on an part of what why we had such a fantastic year is we've been really -- our strategy has just -- I think we were good on taking a look at what schools are going to need and what direction they were going in and that's part of why we've been able to solidify our position so well.
So for the past -- this isn't something that just overnight we had a magic wand and we made it all happen.
We've been working on building our services business for years.
We've been working on the idea that when we go into a school district and we sell READ 180 we don't walk away, we try to help make the implementation work.
We try to -- we work with them to take a look at the results, how's it going and all of these things came together to position us in a different way than other companies have been able to position themselves.
In terms of competition, we do run into competitors, but honestly, not as often as you would expect.
And for System 44 where there is a set of competitors that have been selling phonics programs for a long time, we feel like we're getting great results and we're seeing our customers willingly move to System 44 from other programs that they've been using for a long time with not very much success.
In terms of -- in terms of our -- our base, Maureen do you want to talk about how much of it is selling to our existing customer and how much is new, because you've got the numbers right in front of her.
Maureen O'Connell - Executive VP, CFO, and CAO
Yes.
I would be happy to, Margery.
Peter, this year has been an extremely successful on both fronts.
Our renewal rates have increased as well as our new business rates.
The majority of our income and revenue still come from our existing based customers but the revenues from our new customers has increased and we are very happy with the number of new districts that we added this year that we had not previously had any business with and -- and then, again our renewal rates or stronger than they've ever been.
Peter Appert - Analyst
Can you share what the number is in terms of renewal rate?
Maureen O'Connell - Executive VP, CFO, and CAO
We don't break down that number but it's quite high.
Peter Appert - Analyst
Okay.
Great.
Thank you.
Dick Robinson - Chairman, President and CEO
Thank you, Peter.
Operator
Our next question comes from Barry Lucas of Gabelli & Company.
Please go ahead.
Barry Lucas - Analyst
Thanks.
Good morning.
A couple of quick items on the visional initiative is any of the funds that you are talking about spending, is any of that in support of a physical product of a new e-Reader the Apple product or the kit.
Dick Robinson - Chairman, President and CEO
No portion of that is related to an e-Reader device.
Some of it is related to the development of an e-Reader some piece of software of front end that will enable children and parents to access the system.
Barry Lucas - Analyst
Okay.
Dick, how do you -- how do you regard current price points of the product or the declined in the Amazon announcement kindle?
Do you think that you still need a kids version -- we've talked a Fisher Price type product out there to drive on-line?
Dick Robinson - Chairman, President and CEO
Back to the question of a device, Barry?
Barry Lucas - Analyst
Yeah.
Dick Robinson - Chairman, President and CEO
Well, a device could be he helpful, but we're focusing primarily on the e-reader software front ends that we can use in our existing cool delivery platform and that is our book club online ordering system in which we can utilize in other people's devices.
So that's our focus.
Barry Lucas - Analyst
Just coming to the guidance's trying -- trying to play with the numbers of incremental $20 million in digital spend and a shift in stimulus dollars that could have been, if you would split the difference in $50 million in each year, so maybe you picked up, what do you think $10 million to $20 million in revenues for the year just ended as opposed to -- maybe we borrowed a little bit?
Anyway to normalize the two years because that's 0.25 a share or something like that?
Do you think about that or is that the guidance that's being offered is certain hope?
Dick Robinson - Chairman, President and CEO
We think we indicated in the call that we think about 75 % of the stimulus money was -- was received.
That is the 75 of the initial $100 million estimate was received in 2010 fiscal year.
Barry there's still some left to go, but at the same time there's a reduction in overall spending that has to be made up for.
So we're -- we're -- despite that the fact that we have a higher base we believe that we're -- we would do well to hang onto the dramatic revenue increase that we experienced in 2010.
Looking at a two year number from 2009 to 2011 that would equate to more than 25 % sales increase in each of the two years if we look at it that way, as you so indicated in your comment.
We focused on getting an operating income level that is parallel to this year, but we realize that $20 million of investments that we're going to have to be making, and that we want to make, in the digital consumer book area is -- is important for the Company's future.
That is, we don't want to sit and wait for the digital market to unfold only to see that we're not in it.
We want to maintain our leadership position and the $20 million of operating costs we're devoting to both e-commerce and e-Book digital transformation we think is critical to the Company's future.
Barry Lucas - Analyst
I hate to look in the rear view mirror, but it looks like there's a product hold or your working on the math products but some of those don't hit till 2012.
So if I look back -- do you feel you were constrained in investments because of what was happening in the financial world in described the gap that you have back fill?
Dick Robinson - Chairman, President and CEO
Well, we certainly weren't constrained in our investment in this business which we've feel is remarkable fast growing business that's delivering tremendous value to the Company and to the shareholders.
What you're constrained by is just the ability of people to develop the product as fast as we can.
There's a finite number of people focused op this unique skill in terms of developing intervention product .
And so it's more of a -- if there's a constraint, it's in that area.
We have a tremendous pipeline Barry, and we -- a lot of that is going to be affected in future fiscal years as you point out.
Margery, perhaps you can talk a little bit more about some of the details involved in our
Margery Mayer - Executive VP and President, Scholastic Education
Well, we have -- right now we just launched these two new software programs outs of our Boston office, Tom Snyder that I mentioned, Fraction Nation and the Scholastic map inventory.
We also have just published a new early childhood program which we just had approved by the adoption committee in the state of Texas a couple of weeks ago so we're going to be going into an early childhood campaign in Texas in the Fall.
Those revenues will be in our following fiscal year but we've done very well in those adoptions in the past.
Our big investment right now is going into READ 180 where we're going to be announcing some really exciting enhancements very soon, you'll hear about them and we have a lot of investment going on in math additional new reading programs that we're not ready to talk about.
We feel that the company is making a big investment in this business going forward and we're extremely optimistic about what kind of growth we can get in the market.
The -- our strategy of focusing on intervention and helping our most challenged students seems to be extremely well aligned with where the Obama administration is directing the reauthorization of ESEA.
Our service business is growing by leaps and bounds and we -- we're hopeful that we can make some strategic acquisition or two in the service realm that can enhance that business.
We -- we feel we're -- we feel great about this.
Dick Robinson - Chairman, President and CEO
In terms of the out look, Barry, obviously, we have a choice of trying to maintain the records that we've just established in this year where we over achieved our goals.
We do not want to go back to where we're putting out goals that we don't make and we're particularly proud of ourselves, if that sounds boastful not trying to be, but of having over achieved a really big goal we set for ourselves in this past year.
We recognize that there were several options, one is we could not make the investments in the digital world which we -- which we did not want to do.
We wanted to make those investments and we wanted to be -- acknowledge those investments to everybody who is following the Company.
So we feel that we're -- we're consolidating the year that we have had.
We've had a tremendous gain this past year of more than $70 million in operating income improvements, excluding one time items and we want to consolidate that and build a new platform for digital expansion in the children's book area which we feel is -- is going to be to becoming relatively quickly.
So that's our -- that's our philosophy.
We hope to come to the top end of these goals of course, but we absolutely don't want to disappoint on the one hand and we don't want to fail to make the important investments that we're all very excited about, about extending the reach of our business and finding new customers and children who are excited about using digital versions of books.
That's our -- that's really our position for the coming year.
We have been very happy to say we could do all that and add another dollar per share, but we don't think that's achievable.
Barry Lucas - Analyst
The authorization, given the (inaudible) is flat and I think Margery just mentioned looking for some strategic opportunities so how do you (inaudible)?
Dick Robinson - Chairman, President and CEO
Well, I think certainly we would be looking for acquisitions that would fit our style in the education area.
Those were -- not many of them but we're certainly on the look out for those.
Our board has shown willingness to look at different options for returning cash to shareholders and constantly evaluating that question.
We have made no decisions about that and we're really kind of consolidating our position here.
We've had a great year.
We are optimistic about the future.
We see very good growth opportunities in the digital area and we want to conserve our resources to be able to be sure we can take advantage of those?
Barry Lucas - Analyst
Terrific.
Thanks very much Dick.
That's it for me.
Dick Robinson - Chairman, President and CEO
Thanks, Barry.
Operator
Our next question is a follow up from Drew Crum of Stifel Nicolaus.
Please go ahead.
Drew Crum - Analyst
Okay.
Thanks.
Just two quick follow ups.
Can you give us a sense as to how the timing of the federal stimulus monies, revenue you recognize the flow in fiscal '11?
And than my second question is just an update on UK business, you've gone through some restructuring there, are anticipating any additional charges in fiscal '11 or is this a business that should be profitable this year?
Thanks.
Dick Robinson - Chairman, President and CEO
Drew, starting with the UK we reduced our losses in the UK this past year by quite a bit.
We completely re-engineered the foot print there which will lead to further reduction of losses.
There is some tail which Maureen will describe in terms of the one time costs, because not all of it got spent in the current fiscal year.
So Maureen could you deal with that one?
Maureen O'Connell - Executive VP, CFO, and CAO
Sure.
Our estimate was to spend between $7 million and $10 million and we spent $8.5 million through the fiscal 2010.
We do expect to reach the $10 million spending that we had anticipated and it will come in the first quarter of the one time item of $1.5 million and that really was due to the timing of when we could move our fair operations.
We couldn't move them when they were busy shipping to their customers.
So we weren't able to make the fiscal timing so that will spill into the first quarter.
Drew Crum - Analyst
Okay.
That's not contemplated in the guidance you've given?
Maureen O'Connell - Executive VP, CFO, and CAO
No.
Drew Crum - Analyst
Correct?
Okay
Maureen O'Connell - Executive VP, CFO, and CAO
No.
But it's about a $1.5 million.
Drew Crum - Analyst
Okay.
Dick Robinson - Chairman, President and CEO
And Drew, Margery will talk about the timing of the fiscal stimulus spending.
Margery Mayer - Executive VP and President, Scholastic Education
So, Drew, hi.
We expect to see stimulus money this summer and also continuing into future quarters we think there still be spending and especially in the second quarter.
In addition to the federal stimulus funds, there's something called school improvement grants which is earmarked money that is being competitively awarded to the very lowest schools and we expect to see some school improvement money as well as the stimulus funds coming in, mostly we hope in this quarter, but possibly some bleeding into the seconds quarter.
Drew Crum - Analyst
What about Race to the Top?
Is that an opportunity for the Company?
Margery Mayer - Executive VP and President, Scholastic Education
Yeah.
I think it can be.
I mean we've got to see what's award and how it's awarded.
It's -- there's going to be more announcements coming up soon.
We have -- we think we're well positioned with our -- our consulting arm which is called ICLE, the International Center for Leadership and Education, and states for literacy is -- is part of their Race to the Top drive we think that -- that we're the go to company for that.
Drew Crum - Analyst
Okay.
Thanks, you guys.
Operator
(Operator Instructions) Our next question comes from Jim McCarry of Newberger Berman.
Please go ahead.
Jim McCarry - Analyst
Hey hey.
Good morning Dick and everyone at Scholastic and congratulations on -- by my calculation I think you've got to your multi year operating margin target.
Dick Robinson - Chairman, President and CEO
We did.
Thank you?
Jim McCarry - Analyst
That was about 9 % so that's -- that's wonderful to see.
I know it was a big efforts.
Dick Robinson - Chairman, President and CEO
Thank you.
Jim McCarry - Analyst
And so I wanted to -- to just ask the sustain ability of that, are there anymore levers to pull?
Dick Robinson - Chairman, President and CEO
Well, we think that we've obviously in the current year we're trying to maintain our operating profits for the -- for the investment, the $20 million operating cost investment in digital initiatives in the children's book area, and as we noted in the script the -- that would keep us at the 9% operating margin level.
As the -- as the education business with its higher margins becomes a larger portion of the Company's overall total revenues, that will be some natural impact on our operating margins favorable and so that's an opportunity for us.
I do believe as we look at the changing nature of the book market and we move to digital purchase, particularly in the younger children's area where there is a lot of interest in digital app's and so forth and so on, we will -- we need to figure out where that market is going and how we can maintain our market share, expand our market share, get more units sold and still maintain our profitability.
That's -- no one has a crystal ball on that.
It's just a lot of hard work and figuring out exactly where the market is going and maintaining the investments and the -- making it easy and wonderful for children to experience children's books in these new medias.
That's going to be a skilled matter in addition to a money matter and we're really focused on it and looking forward to it.
It's hard to predict the impact on margins but it's our determination to maintain our operating margins where it is.
Jim McCarry - Analyst
Very good.
And also I wanted to talk about -- you had such a strong free cash flow year.
It was really pretty -- pretty staggering and you've now got the Company in a -- in a very good position in terms of financial flexibility.
So I think Margery started talking a little bit about, you might -- you might look at some service acquisitions and there was a prior conversation -- a little bit of a prior conversation on the board looking at what to do and I just wanted to open up if you had any further thoughts on cash deployment.
Dick Robinson - Chairman, President and CEO
No.
I think that's about -- I think I stated where the position of the Company is and we continue to look at this, but we also recognize that we -- we paid off debt over a period of time.
We're now close to a net debt free position, but we still aren't sitting there with -- with hundreds of millions of dollars in cash in addition to the -- over and above the money that we owe.
So we'll -- I think we'll take this cautiously and just keep looking at what our opportunities are.
We do look forward to having around $100 million free cash flow in the current year and that will -- in the fiscal '11 period and that will give us further opportunity?
Jim McCarry - Analyst
Great.
Thanks.
Thanks so much and wonderful results this year.
Dick Robinson - Chairman, President and CEO
Thank you so much Jim.
Operator
I would now like to turn the call back over to Dick Robinson for closing remarks.
Dick Robinson - Chairman, President and CEO
Well, thank you very much for listening to our year end story.
As you know we're excited about what we achieved in 2010.
We're very future directed for 2011 and beyond.
We're making our digital investments, were continuing to expand our remarkable educational technology business.
We're very confident about our ability to run the Company efficiently and effectively and we're really looking forward to the new digital opportunities and how we can take advantage of those to make sure that we maintain our leadership position in children's books as well as in educational technology.
So for your support, we thank you and we'll look forward to reporting on progress and our digital investments and our education expansion as the year goes on.
Thank you very much for -- we're happy about our fiscal 2010 numbers.
Thanks a lot.
Operator
Ladies and gentlemen, this does concludes today's conference.
You may now disconnect, and have a wonderful day.