Scholastic Corp (SCHL) 2014 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Scholastic Q1 fiscal year 2014 earnings call.

At this time, all presidents 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 is being recorded.

And now, I would like to turn the offense over to your host, Mr. Gil Dickoff, SVP of Treasury and Investor Relations.

Please go ahead.

Thank you very much, Ali, and good morning, everyone.

Before we begin, I would like to point out that the slides for this presentation are available for simultaneous viewing at our investor relations website, and that can be found at investor.

Scholastic.com.

I would also like to note that this presentation contains certain forward-looking statements, which are subject to various risks and uncertainties, including the condition of the children's book and educational materials markets, 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.

Our comments today include references to certain non-GAAP financial measures, as defined in Regulation G. The reconciliation of these non-GAAP financial measures with the relevant GAAP financial information and other information required by Regulation G is provided in the Company's earnings release, which is posted on the investor relations website, again at investor.

Scholastic.com.

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

Thank you, Gil.

Good morning, and thank you for joining our first-quarter 2014 analyst and investor conference call.

For this morning's prepared comments, I am joined by Maureen O'Connell, CFO and CAO.

With revenue in the first quarter of $276 million, we are off to a great start, especially because of the strong launch of five major new education technology products, all working well, all on plan, all on budget, with very exciting levels of customer acceptance.

This is a testament to the strength of our strategy of providing comprehensive solutions to schools, as well as our team's superb execution.

These products are extremely well positioned to meet the growing demand for instructional materials in the Common Core era, and we expect the market for these new programs to remain strong for the foreseeable future.

Education technology and services segment revenue and operating profit grew by 19% and 46% respectively.

Our technology programs and guided reading programs are high-margin products for Scholastic, so the robust sales in the quarter helped to improve net loss on a consolidated basis to $0.94 in the first quarter, compared to $1.02 a year ago.

Excluding one-time items and discontinued apps, our seasonal net loss improved to $0.90 versus $1.01 a year ago.

This is a pivotal time for K-12 education, as the new Common Core state standards and increasing use of tablets in the classroom drive change in schools throughout the country.

Schools are increasingly turning to us for comprehensive solutions, including both materials and services, to help students reach the higher levels of thinking required by Common Core.

In our club and fair businesses, we have new opportunities to encourage more independent reading, which is critical if children are to achieve the higher standards, which will be tested starting in 2015.

Schools are seeking broad scale instructional solutions, linking instructional materials, assessments, professional development, tech support, coaching, and consulting, which in the past were typically purchased separately from different companies.

Scholastic is able to provide all of these components of a comprehensive solution through a single touch point for our customers.

As a result, we are helping districts meet a wider range of needs than ever before.

Our education groups are collaborating on marketing, development, and field sales to capitalize on an increasing number of opportunities available to us.

Our success to date demonstrates our ability to deepen our partnerships with schools, with existing customers, and also to expand our customer base.

For example, iRead, our new technology program which teaches children in grades K-2 how to read, expands the reach of our technology programs into the early grades.

Code X, our new Common Core middle-school English language arts program was first developed for New York City, and has now been adopted in many other districts.

And our System 44 next-gen launch is supporting READ 180 sales, as many schools are buying these programs together.

We also began to offer READ 180 for iPad this summer, providing a READ 180 tablet experience that captures the individualization of the desktop version, and we are very excited about how students are engaging with this program.

Our teams are also working on making other programs tablet-ready.

We leveraged our READ 180 experience in the content and consulting expertise of our mass solutions subsidiary, to build MATH 180, the first intervention program designed to build the math foundations students need to meet the rigors of the Common Core.

Working with a leading set of math educators, several of whom were involved with developing the Common Core standards, we designed MATH 180 to support the two-thirds of middle school students who need math intervention.

Many of these students have become hard to reach, believing that they are quote, bad at math, hate math, or both.

And their teachers often lack the instructional programs and professional development to help these students learn math basics, much less prepare them for Common Core.

MATH 180 helps to rebuild middle students' growth mindsets right from the beginning, making math relevant important to their lives, through real-life problems and simulations set up with engaging video.

Students work in MATH 180 's revolutionary software on essential principles of the Common Core, supported by video, modeling, and experience with next-gen assessment-type problems.

They also have the opportunity to practice problem solving and fluency, and a exciting set of games, which are served up according to each student's individual progress.

All data is captured and organized for their teachers, so they can provide individualized instruction in smaller learning settings.

It's early, but we are off to a strong start, and teachers and students are very excited about how well they are learning Common Core math principles through MATH 180.

We expect our new products to bring revenue and earnings benefits over the course of this year and beyond, as Common Core implementations progress and we continue to broaden and deepen our customer engagement.

Remember, our school customers turn to us for more than technology products and curriculum materials.

We also perform program installation, implementation, maintenance, and upgrades, and we provide professional development and school improvement services to support our customers' drive to improve student achievement.

Scholastic's Common Core driven opportunities extend beyond our education businesses.

In Clubs, our new grade-level specific flyers are designed to help parents find the right books for their child's grade level.

This is crucial, because children need to read more, and at a higher level to meet the new standards.

With features and products to support objectives linked to the Common Core, Storia, which just won a Parents Choice Award, continues to be an important vehicle for making e-books more exciting and accessible for children in classrooms and at home.

Usage continues to grow, as the children's e-book market expands.

First-quarter results in trade were also on track.

Sales of The Hunger Games did decrease in domestic and international markets compared to last year's level, but were within our expectations for this quarter.

We are looking forward to the Catching Fire film in November, which many have named the most anticipated film of the year, and we expect that new fans will be drawn to the books around the film release.

The trade paperback editions of the Harry Potter series have just been reissued, with beautiful new cover art, sparking renewed interest in the series.

We just launched the first book in our innovative new multi-platform series, Spirit Animals, which in just 10 days, has already reached the bestseller list, and we are looking forward also to publishing a new David Baldacci fantasy novel for middle grade readers this spring.

Due to growing Common Core-related interest in the breadth of our non-fiction publishing, our back list is also performing well.

We are leveraging our content and brands across digital platforms.

For example, we recently announced an agreement with Netflix to make a selection of our television series and videos available to Netflix subscribers.

Partnerships like this will extend the reach of our library of TV shows and key brands, with new groups of readers.

We are affirming our fiscal 2014 guidance and continue to expect to improve profitability, and maintain strong free cash flow in fiscal 2014.

Sales growth this year will be driven by our education business, as a result of our new product introductions and increased demand for customized learning solutions.

And we continue to expect our collaborative marketing sales and publishing efforts in both our education and children's book businesses to improve our operating efficiency, and our ability to serve our customers.

Now, I'd like to turn the call over to Maureen to discuss our first-quarter financial results in more detail.

Thanks, Dick, and good morning, everyone.

I will begin with the income statement.

Looking at first-quarter results, revenues declined by 6% to $276.3 million, compared to $293.4 million a year ago, driven by lower US and international sales of The Hunger Games trilogy.

This was partially offset by strong sales of Scholastic's new education technology products.

Cost of goods sold as a percent of sales decreased by approximately 2% this quarter.

A larger portion of the Company's revenues came from our high-margin education technology products, which resulted in improved gross margins.

SG&A declined by $6 million, which includes $2 million in one-time severance costs compared to the prior year, primarily due to lower employee-related expenses from cost reduction programs.

Salaries and benefits were down $5.7 million in the quarter, as a result of the cost savings initiative.

Loss per share from continuing operations was $0.94, compared to $1.01 a year ago.

The consolidated loss per share was $0.94, compared to $1.02 last year, which included a loss per share of $0.01 related to discontinued operations.

Excluding one-time expenses of the $0.04 per share related to cost reduction programs, first-quarter 2014 loss per share from continuing operations was $0.90, versus $1.01 a year ago.

In the Children's Book Publishing and Distribution segment, revenues were $54.6 million, compared to $70.9 million last year.

Strong front list titles, including the new Harry Potter paperback collection, and Star Wars Jedi Academy, both released in August, partially offset the anticipated lower sales of The Hunger Games trilogy.

Because most US schools are not in session, revenue from book fairs and book clubs is minimal in the first quarter, and year over year differences are not meaningful.

The seasonal operating loss for the segment was $61.5 million, compared to $54.9 million a year ago, as lower book clubs costs partially offset the impact of the anticipated decline in The Hunger Games sales.

In Educational Technology and Service, segment revenue was $94.8 million compared to $80 million last year, a 19% increase, reflecting robust sales of new products.

We expect the increase to our installed customer base to lead to ongoing revenue from our implementation support services, including technology services, hosting, and professional development.

Segment operating income increased 46% to $36.2 million, due to higher revenues from high-margin educational technology programs in the current year period.

Segment revenue in classroom and supplemental materials publishing was $37.8 million, approximately equivalent to $37.9 million recorded last year.

However, segment operating loss improved to $1.6 million, compared to the prior-year operating loss of $2.6 million, due to increased sales of the Company's high-margin guided reading programs and classroom books in the current quarter.

In our international segment, revenues decreased to $78.7 million from $90.2 million last year, as higher direct sales in Asia were partially offset by lower sales of The Hunger Games in the UK and Canada.

India continues to be a great story for Scholastic, with strong growth in our traditional businesses, and the added success of new education products.

As we continue to expand and deliver our region-specific products and English language learning programs, we are well positioned for growth throughout Asia and the emerging markets in 2014.

Foreign currency exchange rates adversely impacted revenue by $4.3 million in the quarter.

Segment operating loss was $0.7 million, compared to income of $2.8 million last year.

In media licensing and advertising, revenue was $10.4 million, down from $14.4 million last year, primarily due to lower sales of The Hunger Games audio books.

As a result, segment operating loss was $1.9 million, compared to operating income of $0.2 million last year.

Corporate overhead was $16.4 million, compared to $17.3 million last year.

Reflecting lower employee-related expenses in the current period, as a result of cost-saving programs implemented by management, as well as severance costs.

Turning to the balance sheet, free cash use in the quarter was $93.8 million, compared to free cash flow of $4 million last year.

As you will recall, we had over $90 million in cash collections from the sales of The Hunger Games in the first quarter of fiscal 2013, which make up the year over year difference.

We maintained a strong balance sheet, with only $13.4 million in net debt, due to seasonal working capital needs.

The Company has ample headroom for borrowings under its $425 million committed credit facility due in 2017.

The Company's net debt to total capital ratio, excluding capitalized leases, was 1.6% at August 31.

During the quarter, the Company repurchased approximately 21,000 shares in the open market, and had $19 million remaining under its current Board authorization for share repurchases.

On September 18, the Board of Directors raised our quarterly cash dividend to $0.15 per share in the Company's Class a and common stock for the second quarter of fiscal 2014, an increase of 20%.

This dividend is payable on December 16, 2013, to stockholders of record as of the close of business on October 31, 2013.

The annualized dividend will now be $0.60 per share.

In conclusion, as Dick said, we are off to a strong start to the year, and we are affirming our 2014 fiscal outlook for total revenue of approximately $1.8 billion, and earnings per diluted share from continuing operations in the range of $1.40 to $1.80, before the impact of any one-time items associated with cost reduction programs or non-cash, non-operating items.

We continue to expect free cash flow in the range of $60 million to $80 million.

This outlook includes capital expenditures between $55 million and $65 million, and pre-publication and production spending of approximately $65 million to $75 million.

And now, I will turn the call over to Gil to moderate a question-and-answer session.

Thanks, Maureen.

Before our operator provides queuing instructions for the Q&A session, I wanted to address a few questions that we have received from investors and analysts over the quarter.

The first question is on Harry Potter and the impact that we expect from JK Rowling's new film inspired by the Harry Potter Fantastic Beasts and Where To Find Them book.

Ellie, is that something you can answer?

A strong interest in Harry Potter continues today, 15 years after we originally published the first book in the series.

We published Fantastic Beasts and Where to Find Them in February of 2001, and are excited to have a new paperboard edition of the book available in the Hogwarts library that we're releasing next month.

This question also includes Quidditch Through the Ages and the Tales of Beedle the Bard.

The new Warner Brothers movies will continue to generate excitement around the Harry Potter franchise, and bring news readers to the Harry Potter series of books, as have the newly-covered 15th anniversary trade paperbacks of the Harry Potter series, which we recently released, and are once again on the New York Times best seller list.

Like Harry Potter fans everywhere, we are also looking forward to the planned films.

Thanks very much, Ellie.

The second question is on our new ed tech products.

Specifically, do we expect our typical sales patterns and revenue model to change with the new product introductions.

Margery, can I turn that over to you for an answer?

Thanks, Gil.

First of all, I want to just say how thrilled we are with our new products and the feedback we are receiving from teachers, and of course, the response we're getting from kids.

I will just use MATH 180 as an example.

We're hearing the same kind of feedback on MATH 180 that we heard when we launched READ 180.

Comments like, I now have to kick my students out of math class, something I never thought would happen.

Our team did a great job in the field with our launches, and as Dick said earlier, we were able to pull this off beautifully, on budget, and in line with our objectives.

These programs were just introduced in our July and August, and we had a fabulous month in August, and so far September is looking great, too.

We expect continued demand for our products and services throughout the year.

Now, on the revenue side, I want to talk a little bit about our typical sales patterns, which carry over to our new products, as well.

What we usually see as schools start with a partial implementation to get a feel for the product.

Almost all the time, this initial implementation is successful and it is, converted to subsequent product sales.

Along with products, teachers discuss our assets for hosting solutions and technical support, which are recurring revenue for Scholastic, and we have a very high renewal rate on these services.

Teachers also come to us for renewable components, such as consumable books and replacement teaching guides, and almost all of our programs are sold with professional development services.

So you can see that we typically engage our customers on more than just their program sale and implementation.

These are long-term partnerships, and customers are asking us to help them with broad scale instructional solutions.

Margery, thanks very much.

Operator, we're now ready for you to provide instructions for the Q&A session.

I will turn the call back to Dick Robinson.

Thank you.

(Operator Instructions)

Our first question comes from Drew Crum of Stifel.

Please go ahead.

I just want to -- I guess a point of clarification with respect to the ed publishing business.

In the press release, you indicated that you expect to see increasing sales of instructional programs and services over the course of the year.

Is that for ed publishing or ed tech?

And is that a year-on-year increase, or is that a sequential increase from the fiscal first quarter?

We think it's going to be in all of the education businesses, but mainly focusing on ed tech, Drew.

Margery can follow-up on that question.

Yes.

Hi, Drew.

We're already seeing September get off to a good start, and we believe that our new programs can be implemented during the course of the year.

And we are seeing so much demand for help with Common Core, that we expect that we will have implementations of iRead, MATH 180 especially, during the school year.

So, we're expecting the second quarter, the third quarter, the fourth quarter, all to be above last year.

Got it.

Okay.

And on MATH 180, Margery, can you talk about -- maybe contrast that with the reading intervention products that you have in the market?

What is the market opportunity for a MATH-180 type product?

Yes.

So, about the same percentage of kids are struggling in math as struggle in reading.

And the data says that there's a few less kids in math than there are in reading, but it's not material.

And with Common Core assessment coming along -- next-generation assessments, as Dick mentioned, we expect that schools are going to see that kids who seem like they were doing okay really aren't doing okay on these new rigorous assessments.

So, right now, we brought MATH 180 out.

It's targeted at middle school.

We have a few places that are looking at it for upper elementary, but as you know, with READ 180, we have a version of READ 180 for elementary, middle and high.

Over the next 18 months, we are going to bring out the second year of MATH 180, which we think will, again, expand our market for it.

We believe there's tremendous opportunity for our math program.

And what we're seeing -- with our acquisition of Math Solutions, which is doing extremely well, and our other math products that we have been publishing over the past few years, we are seeing that our field is getting very comfortable selling math, even though they've been traditionally selling reading.

We have math sales in virtually every state in the United States now, not just MATH 180, but our math line.

And we think math is an important growth area for our Company.

Very helpful.

Thank you, Margery.

And I want to shift gears to clubs and fairs.

Can you offer any updated thoughts on growth, or your expectations for those two businesses in fiscal 2014?

And the follow-on to that is -- in the fiscal second-quarter last year, both the clubs and fairs businesses were impacted by Hurricane Sandy.

Can you quantify the amount of business you expect to recoup in this year's fiscal second quarter, absent storm-related issues?

Revenue per fair is budgeted to be up at fairs, Drew.

We are also moving people who are below certain revenue levels from our case fairs, where we deliver the books to the schools, through our trucks and set them up in the schools, to our mail fairs, which are basically sent through UPS to the schools, and the schools operate them themselves and open the boxes and so forth.

So, we believe that that will -- that's going to improve our revenue per fair as we switch more people to higher-level fairs.

In terms of Sandy, it did affect our clubs and fairs last year, but we would say it was about -- maybe two to three days of revenue.

So, I don't think it is going to have a significant differential this year.

But we are seeing -- our early fairs are seeing good revenue per fair.

On the clubs, I will ask Judy to answer that question.

So, the big news about clubs that we can report on, because obviously it's still early in the school year, is that we've redesigned the flyers to be grade-specific.

And this has the benefit of really helping teachers connect to the Common Core needs that their kids have.

And also, for the parents who can clearly identify and say -- my child is in first grade, and here's a first-grade flyer to help them really get the books that they need right for the child.

So, having very good early qualitative feedback from teachers and parents.

And we are very excited, and it also really helps us position books well right for the kids at that grade level -- right at their sweet spot when they need those books, particularly now to help at independent reading to support their Common Core.

Okay.

Last question -- was there any contribution from the Netflix deal in the quarter?

Is that something we should expect later in fiscal 2014?

Yes, we recognized revenue from Netflix in the quarter, and we deferred a very small amount that will go into the second quarter.

So, most of that revenue was recognized in the quarter, and was recognized in our MLA segment.

But in the prior year, we also had revenue recognition related to residuals from PBS, which was about the same amount.

So, you don't see a year-over-year change in the segment for that.

Got it.

Okay.

Thanks, guys.

(Operator Instructions)

Barry Lucas, Gabelli & Co.

I have a couple of items, Dick, and I'd like to come back to the issue of the take-up rate of new products.

I'm just looking back across first- and second-quarter results for a couple of years.

The relaunch of READ 180 two years ago, and the stimulus impact over earlier years.

And I'm just wondering -- given the fact that you have so many new products in the market -- revenues are still below some of those peak numbers.

And again, understanding that some of that was stimulus related, but I'm just -- to follow on to Drew's question, what is the market potential, or the addressable market that you think we are talking about here?

Thanks for the question, Barry, and I will ask Margery to also answer this.

Remember that most of these products were actually only available in the first quarter this year.

So, customers didn't really get a chance to preview them and see them and test them and so forth.

They were buying because they wanted the product now, and they trusted us to deliver something that they would want to use, starting in September.

So, these are really preliminary sales.

They are outstandingly good, so we are not apologizing for that.

And compared -- and we did get a big impact from stimulus several years ago.

But this is what I would refer to as our own stimulus here, where we've -- through our new products, we've gotten off to a great start in this quarter.

But these are long-term products.

We've been selling READ 180 now for 15 years, and it's still going strong.

And MATH 180, I think, is going to have a remarkable career over a similar period of time.

It's, in some cases, even more difficult to teach these math concepts that are so beautifully carried out by MATH 180.

So, I think we're going to see a very strong response to that, and to our iRead program in grades K-2.

But this is just the very, very, very beginning of it, and we are delighted that the response has been so strong so far.

So, Margery, would you add some thoughts to that?

So, Barry, I know you know that stimulus was kind of like this amazing moment.

We had so much pent-up demand for READ 180, and in the year before stimulus, it was a little bit tight because people were worried about funding.

And then stimulus came along, and then we had school districts who said they had been waiting to buy READ 180, and now that they had it, they could buy it.

But we are really, really excited about the kind of results that we are seeing out there because when Common Core first started, there was some confusion in the market about what should be done with intervention students?

Should they be put into on-level classrooms with higher reading demands?

And people were trying to figure out how to schedule kids.

We have seen that really evaporate now, and System 44 and READ 180 have had -- both of them have had strong results at the end of the prior year and over the summer.

As Dick said, we are just at the beginning of MATH 180 and iRead.

We are delighted with how Code X did.

It did extremely well, which is our middle school Common Core program.

So, we are feeling very optimistic.

I was with our field organizations the past two weeks.

They are seeing a lot of demand for our products.

And by the way, I should also mention that our services business is doing extremely well, too.

There's a lot -- we're all over the country helping schools with school improvement -- with getting teachers ready for Common Core.

We are doing a lot of math and literacy training around Common Core.

So, as you know, K-12 business is a little bit bumpy, and we're feeling like we are riding a high bump right now.

I think Barry, as you, I think, believe, we are in for a period now of investment in education.

The states are stronger in terms of their financing.

California devoted $1.2 billion to be -- which is just coming into the market this month, to support Common Core programs.

And I think the focus on Common Core and the digital -- and the use of tablets in the classroom is going to usher in a period of prolonged growth in education.

And we are just at the beginning of that.

And the launch of these programs in the first quarter is just the initial impact of what will be a very long trend, in my view.

Dick, that's great.

Could you or Margery identify any other districts, particularly for Code X, which was developed for the New York City school system -- is it being accepted readily by other areas, whether they're other urban areas, or large districts or small districts -- maybe a little color there would be terrific.

Barry, we don't have any large district to announce to you right now, but we have sold it in other districts outside of New York.

We published that program fast.

We got the agreement with New York that we were a chosen publisher for this in December, and we had the program in New York City warehouses in July.

We didn't have a lot of time to show it to a lot of other districts, and where we have shown it to other districts, we've had great interest.

And there are some large districts considering it right now that I just can't talk about.

Great.

If we just switch gears, Maureen, capital allocation, nice increase in the dividends would suggest to me that the Board has a fair degree of confidence and optimism in what's happening.

Anything else we can look forward to as the share repurchase program winds down?

I think you said we are down to $19 million authorization.

You are absolutely right, Barry.

The Board has ultimate confidence in our ability to return capital to investors, as well as invest in our Business.

We launched this dividend less than two years ago, and this is our second increase in that time period.

So, we continue to look for ways to increase the dividend, and return it to investors.

As you know, we still have $19 million under our authorization for our share repurchase program, and bought back 21,000 shares in the quarter.

This is our peak borrowing quarter, so this is a quarter when we use cash to build inventories, and prepare for school openings.

So, our cash is at a low point now.

Around mid-October we will start going cash positive, and then the balance sheet would be even in a stronger position.

And we would continue ongoing discussions with our Board about how to allocate capital and what's the best use of our cash.

Great.

Thank you so much, Maureen.

Thank you, Barry.

(Operator Instructions)

Well, thank you, everybody.

We appreciate your support.

We had a great first quarter, and we are looking forward to an excellent year.

Thank you for listening, and we will talk to you in December.

Ladies and gentlemen, this does conclude today's conference.

You may now disconnect, and have a wonderful day.