Scholastic Corp (SCHL) 2015 Q1 法說會逐字稿

Welcome to Scholastic report's FY15 first-quarter results conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Gil Dickoff, Senior Vice President, Treasurer and Head of Investor Relations. You may begin.

Thank you very much, Nicole. Good morning, everyone. Before we begin, I would like to point out that the slides for this presentation are available for simultaneous viewing on our Investor Relations website at investor.scholastic.com.

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

Thank you, Gil. Good morning. Thank you for joining our first-quarter FY15 conference call. For this morning's prepared remarks, I'm joined by Maureen O'Connell, CFO and CAO.

Before I begin with today's remarks, I would like to extend our warm wishes for those who are celebrating Rosh Hashanah today. The timing of our earnings announcement is tied to our Board meetings and we apologize for any inconvenience caused by this scheduling conflict.

Scholastic reported first quarter revenue of $283.8 million, a 3% growth versus last year and a loss per share of $1.05 versus a loss per share of $0.94 in the prior year period. As you know, we typically record a loss in our fiscal first quarter, which is normally our smallest quarter of the year when most US schools are closed.

Education revenues are important to our first quarter. Between our two education business segments, we offer a comprehensive, diversified portfolio of products that include innovative technology programs, classroom support and other professional services as well as engaging classroom books and magazines.

Overall, our education business is performing well, as our offering is aligned with the broader trends in education. We continue to be strongly positioned for reading and math intervention, where schools focus attention and resources and where we lead the market.

Although revenues were down in ed tech versus last year, which included the launch of five new products including the significant adoption of Code X by the New York City Board of Education for over $4 million.

We saw some encouraging trends in the quarter as follows. Stronger math sales in the quarter, which demonstrated that we are continuing to gain traction and build a leadership position in math through our consultative selling model. Our team is also on track to release MATH 180 Course 2, which is concentrated on algebra readiness, in the second half of this fiscal year.

Increased READ 180 sales occurred in the adoption states including Florida, California and Georgia. During the quarter, the US Department of Defense also renewed its commitment to READ 180 with a significant purchase, which is reflected in our international segments results. But including this DOD engagement, READ 180 revenues were equal to last year's sales.

Gross sales of services to support our literacy products were up in the quarter. We believe we are the leader in supporting technology solutions with over 1,300 districts contracted for product dependent support.

Our consultants are frequently embedded within districts to support implementations. We currently have team members positioned in Tulsa; Orange County, Florida; Miami; Hillsborough County, Florida; and Washington DC just for example. These experienced consultants support the professional growth of the teacher, while reinforcing best practices around implementation of our programs.

We have strengthened our educational technology field sales team with critical new hires in regional sales management as well as in our solution, architect and marketing teams and are adding new analytics capabilities to place a greater focus on developing new accounts and value-added services. We are committed to expanding the user base for all of our core intervention programs, especially our higher-margin digital offerings such as READ 180. While our headway on these initiatives is not yet reflected in our revenues, we are pleased with the progress we have made to date.

In classroom books, we see the increased focus on independent reading as a way to build vocabulary, content knowledge and higher level reading skills, driving sales of our dynamic personalized libraries and classroom paperbacks and collections. For example, this quarter, the city of Houston executed the second phase of a significant purchase of customized reading programs along with other districts that have significantly expanded their classroom libraries in order to encourage independent reading and the use of children's literature programs, which are the hallmark of Scholastic.

We have also seen education sales growth in our international operations, including and especially the UK, Asia and the Middle East, driven by new products including our digital reading assessment program, LiteracyPro and strong initial sales of PR1ME Mathematics, our elementary math series published from Singapore.

In our children's book business, the first quarter is our smallest revenue quarter. Even so, this quarter showed continued growth in revenue per fair and a higher volume of orders and higher revenue per order in our book clubs. While this is, of course, a relatively small sample of data for these businesses based on the schools that were open in August, it builds on the strong finish for this business in the second half of the last fiscal year. These trends are continuing in September, which is a positive indication for this school year.

There is new energy and a broad consensus that independent reading drives success in school and in life. This is leading to more receptivity and support for books and reading, both schools and at home. We have strengthened our channels of distribution in order to take advantage of this renewed focus.

As part of this effort, we have launched a new reading initiative called, Open a World of Possible, to increase support for independent reading and to drive home the importance of reading to the parents, school leaders, teachers and children who make up our marketplace and audience. We expect these initiatives to lead to more club sponsorships, increase traffic at book fairs and more purchases of our classroom book collections.

Because Scholastic is the company that parents, teachers and kids turn to for books children love to read, we can help them discover the joy and power of reading, which can profoundly benefit their lives and change their profile and trajectory, both in schools and in later life.

With that, I'll turn the call over to Maureen to provide more detail on our financial results and outlook.

Thank you, Dick, and good morning, everyone. Our first quarter revenue was $283.8 million, an increase of 3% over last year and cost of goods sold was $150.2 million. Excluding one-time items, our operating loss was $52.2 million, which results in a loss per share of $1.03. This compares to an operating loss of $43.9 million and a loss per share of $0.90 last year, which also excludes one-time items.

We reported one-time expenses of $0.02 per share this quarter from our cost-reduction programs, which mainly relates to Klutz's relocation from Palo Alto to New York, an action that will realize cost savings in future periods. As a reminder, the prior period included one-time expenses of $0.04 per share.

Now, turning to our segment results. In children's book publishing and distribution, revenues were $54.7 million, essentially even with last year. The operating loss for this segment improved to $60.5 million, mostly due to lower operating costs for book clubs.

Our trade frontlist performed very well, led by Minecraft: Combat Handbook, which was recently released. Our next Minecraft Handbook will be released next month. A box set will be available in November for the holiday season.

Although this is a smaller revenue quarter for segment school channels, we reported a 35% year-over-year increase in book clubs, driven by higher orders and higher revenue per order. In book fairs, revenues increased 10%, driven by higher revenue per fair.

In educational technology and services, revenue was $89.4 million, a 6% decrease compared to last year. Operating income declined 16% to $30.3 million. As Dick said earlier, we faced a tough comparison to our launch period last year and are implementing a number of initiatives among our sales team to improve performance over the course of the year.

Classroom and supplemental material publishing revenue was $42.8 million, an increase of 13% over last year. Segment operating loss improved to $0.5 million. Our results here demonstrate the strength in demand for our guided reading programs and classroom books.

International segment revenue in the first quarter was $86.3 million, a 10% increase over last year, driven by higher media and technology sales into Australia, improved performance in the UK and higher direct sales in Malaysia and Thailand.

In international trade publishing, Maze Runner by James Dashner is a best-seller in many of our international markets. The new Julia Donaldson picture book, the Scarecrows' Wedding, has been a best-selling children's book in the UK.

In India, we experienced a fire in one of our warehouses in August that impeded our ability to ship product at the end of the quarter. We do not expect this to have any impact going forward, as we are insured for losses.

Operating loss in our international segment was $1.9 million compared to a loss of $0.7 million in the prior year period. This increase is from higher costs associated with the one-time write-off of certain inventory and higher bad debt reserves as well as a higher investment including amortization expense related to our international education publishing program expansion. The comparison is also impacted by a large literacy place sale in Canada last year.

Media licensing and advertising revenue was $10.6 million, up slightly from last year, while operating loss was $3.9 million compared to a loss of $1.9 million last year. In this quarter, we grew sales of our original animated program and audio books and increased advertising in our consumer magazines. The operating expense increase was due to higher costs in our consumer magazine group, which is mostly a matter of timing and higher amortization of production expenses related to new programming.

Corporate overhead was $16.9 million, roughly in line with $16.4 million last year. Free cash use for the quarter was $76.9 million, compared to a use of $93.8 million last year. We improved collections throughout the organization and negotiated more favorable terms with our suppliers. At quarter end, net debt was $183.5 million versus $13.4 million a year ago, largely the result of our strategic purchase of our New York City headquarters earlier in 2014.

Yesterday, we announced that our Board of Directors declared a quarterly cash dividend of $0.15 per share for the second quarter of FY15. The dividend will be paid on December 15, 2014 to shareholders of record as of the close of business on October 31, 2014.

I know many of you are interested in an update on our real estate activities in respect to our headquarters building. We have been working with architects to reconfigure certain parts of the ground and second floor, the highest and best use for retail space. There is a premium placed on retail space in this neighborhood, which has become a major shopping destination for teens and young adults. We will, of course, keep you abreast of any developments in future quarters.

Turning to the outlook, we are reaffirming our FY15 outlook for total revenue of approximately $1.9 billion and earnings per diluted share from continuing operations in the range of $1.80 to $2 before the impact of any one-time items. We continue to expect free cash flow in the range of $65 million to $85 million.

In summary, for FY15, we continue to expect revenue growth and enhanced profitability across the majority of our businesses as we begin to see revenue benefits from the reenergized ed tech sales organization and continue to benefit from our successful new marketing strategy in our clubs and fairs school channels. Now, I will turn the call back to Gil to moderate a question-and-answer session.

Thank you. Now, Nicole, we are ready to take our first question.

(Operator Instructions)

Drew Crum, Stifel.

I have a couple questions on the ed tech business to start. First of all, could you comment on MATH 180 in the quarter? Was it up year on year? What you are seeing in terms of penetration for that product at this point in the product's release relative to some of your other marquee products like READ 180 and System 44.

Then, longer-term, when you think about the expenditures on instruction materials by category, reading has generally outpaced math by a fairly wide margin. But I just want to get a sense as to how you guys think about the opportunity with mathematics in ed tech for your business, relative to what you've experienced with reading? Thanks.

Thank you, Drew. We will have Margery turn to both of those questions. We can supplement her comments if needed. But I think she can answer them adequately and well for you.

Drew, it's Margery. So, MATH 180 was up in the quarter. We've sold it into 48 states, which we think is a great success in 12 months. That was not true with READ 180. We were not able to penetrate so much.

So, we've been really pleased with the fact that our sales force has embraced math the way they have. I think it speaks to that strategy that we've laid out of Math Solutions, Do the Math. Math Solutions, of course, is our PD company that we bought that's located in Sausalito. Do the Math was an intervention program for K-5. All of this became a ramp for our sales force for the introduction of MATH 180.

As Dick mentioned in his comments, Course 2 for MATH 180 will be coming out towards the end of this fiscal year. In addition, we are also making Course 1 mobile and tablet-ready and that will be coming out in the middle of the year.

So in terms of the mass-market, the reading market -- we use a rule of thumb here that the reading market is 50% to 60% of the total instructional material market for intervention and that math is another 30%. So, that gets you to close to 90%. It's not as big as reading, but there's enormous demand for math intervention.

We think we are making really great progress there. We have a lot of customers that started with us last year and upped and increased their position with us this summer. So, our momentum is strong.

Great. Very helpful, Margery. Then, just continuing with ed tech. For Maureen, do you still expect ed tech to be up for the entire FY15? I think you alluded to the fact that you're expecting improvement over the balance of the year but does that translate to growth year-on-year, both in terms of sales and profits for this segment?

Yes. We are expecting growth throughout the remainder of the year. It's really, as we have put in place the people in the right regions and the districts, we've expanded the sales force. We've filled open positions, we have greater analytic capabilities and we're building our pipeline. I think Margery can talk about, we just came off a very successful educational sales meeting. We think the sales force is really energized and will result in growth through the remainder of the year.

Yes. Everything Maureen said is how we are feeling about things. We reorganized the sales force last November. We've had some growing pains for that, but we've refined it.

We've strengthened -- the biggest thing we've done is we've really strengthened our management team throughout all levels of management. We've totally clarified what each account executive's role is. We've put best practices in place across the sales organization.

So, we had a fantastic sales meeting. People left there, a couple of weeks ago, highly energized, excited about what we're doing. Yes, we are feeling like we are doing all the right things.

Then just shifting gears to the clubs business. Dick, could you expound on your commentary concerning the early trends you are seeing with the clubs business, as you start a new school year? Maybe some commentary around number of orders or revenue per order? Talk about what you are doing to tweak the model? Or are you keeping it consistent with what worked in the fiscal fourth quarter last year?

I'll ask Judy to answer that, Drew. I will add anything if necessary.

As Dick said, we are seeing this renewed energy in independent reading. Clubs are perfectly positioned to take advantage and capitalize on that.

So, as we've been saying, we revamped our product strategy. We made it more kid friendly. We've reached out to teachers with a very exciting promotion program. They've been responding to it last spring and this first quarter, as you can see.

So, our budget predicts that continued growth for this year. We're very excited and optimistic that we are going to be meeting those goals. So, it's all looking very good. Teachers are responding well and kids and parents. So, it's a really nice resurgence for clubs right now.

Okay. Last question then I'll jump back into the queue. You noted that Hunger Games and Harry Potter were a negative on the comp. When did that stop becoming an issue in terms of sales and/or profits for the trade business?

Well, Harry Potter sells well, consistently, as does the Hunger Games. So both of them continue to be major revenue producers and the staple of our business.

Last August, in 2013, we launched an amazing new set of paperbacks with new covers that were wonderful and sold extremely well during the year. But, the revenue for that was in the August period last year. So, even though Harry Potter did fine over the summer, it didn't match that particular jump in the August 2013 period from these great new covers.

Hunger Games, generally, tends to ramp up closer to the movie date, which is in November, as you know. We are expecting to see activity there.

But I think the main thing here, Drew, is these are both classics. They are amazingly well-adopted all around the world. People continue to read them. The print sales have continued to be very strong. They are also strong digital performers.

So, there's nothing -- it's more of a blip in the sales pattern that caused the Harry Potter to be so strong August 2013. But it continues to be good throughout the year and throughout the years, and will continue to be.

We are finding new ways to market Harry Potter to new eight-year-olds to get them introduced to the first book in the Harry Potter series. We have a school-based program to make that happen and that seems to be working well. So we're confident that both of these series will continue to sell for many years.

Got it. Okay. Thanks, guys.

Thank you, Drew.

Thank you. I'm showing no further questions at this time. I'd like to hand the call over to Mr. Robinson for any closing remarks.

Well, thank you all for your continued support. We are confident that both our educational technology sales will pick up in the balance of the year. As we said, our initial metrics on book clubs and book fairs are strong.

We are confident it's going to be a good year. We appreciate your continued support. We'll be back in December to follow-up. Thank you so much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.