Scholastic Corporation (NASDAQ:SCHL) Q1 2025 Earnings Call Transcript

Scholastic Corporation (NASDAQ:SCHL) Q1 2025 Earnings Call Transcript September 26, 2024

Scholastic Corporation beats earnings expectations. Reported EPS is $-2.13, expectations were $-2.48.

Operator: Good day and thank you for standing by. Welcome to the Scholastic Reports Q1 Fiscal Year 2025 Results Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today’s conference is being recorded. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jeffrey Mathews.

Jeffrey Mathews: Hello and welcome everyone to Scholastic’s fiscal 2025 first quarter earnings call. Today on the call, I’m joined by Peter Warwick, our President and Chief Executive Officer; and Haji Glover, our Chief Financial Officer and Executive Vice President. As usual, we have posted the accompanying investor presentation on our IR website at investor.scholastic.com, which you may download now if you have not already done so. We would like to point out that certain statements made today will be forward-looking. These forward-looking statements, by their nature, are subject to various risks and uncertainties, and actual results may differ materially from those currently anticipated. In addition, we will be discussing some non-GAAP financial measures as defined in Regulation G.

The reconciliations of those measures to the most directly comparable GAAP measures may be found in the company’s earnings release and accompanying financial tables filed this afternoon on a Form 8-K. This earnings release has also been posted to our Investor Relations website. We encourage you to review the disclaimers in the release and investor presentation and to review the risk factors disclosed in the company’s annual and quarterly reports filed with the SEC. Should you have any questions after today’s call, please send them directly to our IR email address investor_relations@scholastic.com. And now, I’d like to turn the call over to Peter Warwick to begin this afternoon’s presentation.

Peter Warwick: Thank you, Jeff, and good afternoon everyone. Thanks for joining us. I’d like to start by congratulating Jeff on his appointment of Scholastic’s first Chief Growth Officer. In this new role, Jeff will refine and implement Scholastic’s long-term growth strategy in partnership with his peers on our management executive committee. He’ll also continue to lead the company’s investor relations and corporate development functions, as well as Scholastic’s cross-company corporate sustainability and impact program. Jeff’s deep knowledge of Scholastic and our industry, as well as 30-plus years of experience in strategy, M&A and investor relations, has already had a profound impact here since Jeff rejoined as the company has prioritized growth, capital allocation and long-term shareholder value.

I’m thrilled to have Jeff now also leading the development and implementation of growth initiatives across Scholastic, building on the long-term growth strategy and targets he’s helped us to create. With that, I’ll turn to our quarter one overview. Scholastic began fiscal 2025 preparing for the important back-to-school season, positioning the company in the school year ahead for yet another opportunity to bring the excitement of books, reading and stories to millions of kids and families while supporting schools and educators. During the first quarter, we continued to execute on our most compelling long-term growth initiatives. We invested to reinforce and build upon the unique strengths of our children’s books and education businesses while advancing our growth strategy as a global children’s media and content company with trusted and critically acclaimed publishing, a growing slate of exciting media properties in development and production, and early wins arriving from our acquisition of 9 Story Media Group.

First quarter revenue rose year-over-year on the addition of 9 Story and the seasonal operating loss improved. As a reminder, Scholastic typically records operating losses in the quiet first and third quarters, which coincide with summer and winter school breaks in the United States. During the quarter, we returned over $10 million to shareholders through a combination of open market share repurchases and our regular dividend. We remain confident in our outlook and are affirming our fiscal 2025 guidance. We continue to target modest top line and bottom line growth reflecting the partial year contribution of 9 Story Media Group. We look forward to an important year ahead as we execute on our plan and advance long-term growth initiatives. We remain committed to our capital allocation priorities, investing in our most compelling growth opportunities and returning capital to shareholders.

Now with that, I’ll turn to the highlights across our business segments. In its seasonally smallest quarter, children’s books revenue continued to grow. Our school reading events division, which combined our book fairs and book clubs channels a year ago, produces minimal revenues during the first quarter when schools are not in session, but was busy over the summer preparing for the new school year. We remain focused on delivering the joyful celebration of reading that only Scholastic Book Fairs can bring as we invest in this business for long-term growth. Continued category optimization, new case types and strategic value pricing should all contribute to our performance this year and beyond. Fall fair bookings have been strong and we remain on track to achieve our target of 90,000 fairs in fiscal 2025.

In book clubs, initial responses to this fall’s promotions indicate that the new strategies implemented for this back to school season are generating higher teacher and sponsor participation. After strategically transitioning book clubs to a smaller, more profitable core business, in fiscal 2024, we’re now in the process of re-engaging loyal customers and revitalizing the strategic channel to teachers and families. While we expect the same headwinds we saw last spring, we’re confident that school reading events, which raised approximately $200 million in cash and in-kind value last year for schools and teachers, is strongly positioned for the long term and remains as differentiated and relevant as ever. In trade publishing, we continued to execute well in a retail bookselling market that was down slightly year-over-year per Circana Bookscan.

First quarter was a relatively quiet quarter for our domestic trade publishing division versus a year ago, when sales in the quarter benefited from the release of the paperback edition of the fourth title in the Hunger Games series ahead of the title’s movie release. Importantly, Scholastic’s critically acclaimed publishing continued to successfully engage young readers last quarter, with multiple Scholastic published front and backlist titles maintaining their presence across the New York Times children’s series, picture book, middle grade, and graphic novel bestseller lists. In quarter one, newly released successes included Aaron Blabey’s latest title in The Bad Guys series, Bad Guys in the Serpent and the Beast, When We Flew Away by bestselling author, Alice Hoffman, Karen’s Sleepover, the latest graphic novel in the Baby-sitters Club Little Sisters series, and Unico: Awakening, our first title in the new kid-friendly manga series.

We also saw strong results from Pokemon Super Duper Extra Deluxe Handbook and the official Goosebumps Coloring Book ahead of the second season of the Goosebumps series for Disney+. Looking at this fall and quarter two, we’re excited to be publishing, in time for the holiday season, additional new titles from best-selling global franchises, including the final book in Aaron Blabey’s Bad Guys series and Christmas at Hogwarts, a picture book that will delight Harry Potter fans of all ages. Given the timing of this year’s publishing plan compared to a year ago, our publishing division will face another difficult year-over-year comparison in quarter two. We continue to expect the releases of highly anticipated new Dog Man and Hunger Games titles in the second half of the fiscal year to benefit full year revenues.

In our newest reportable segment, Scholastic Entertainment, the recent addition of 9 Story, which closed in June, positively contributed to revenue and EBITDA in the first quarter. Scholastic continued to advance its evolution as a global children’s media company, expanding our ability to reach more kids where they are and profitably participate in the full life cycle of our children’s franchises and IP. Development and production continue to move forward on major projects. This fall, we are taking to market the first Magic School Bus Series for preschool and an updated Clifford Animated Series. We also look forward to announcing soon the launch date of Goosebumps Season 2 airing on Disney+. These core Scholastic brands have significant upside for Scholastic as we leverage 9 Story’s licensing and merchandising sales teams.

We’re taking advantage of early opportunities to monetize and expand the reach of classic Scholastic IP on advertising-supported distribution platforms. In quarter one, we launched the Magic School Bus on Tubi, where it became one of our top-performing properties. We also stood up a new Clifford Classic channel on YouTube in the US, with viewership showing positive momentum. We look forward to updating you on upcoming developments as we prepare for growth through synergies with Scholastic’s existing print and media properties in fiscal ’26 and beyond while building on core properties in fiscal 2025. Turning to Education Solutions. First quarter sales declined year-over-year, reflecting lower curriculum and collection sales, primarily related to lower spending on supplemental curriculum products and school districts’ focus on adopting and implementing new English language core programs.

With spending on supplemental curriculum pressured in the near term, we move forward with investments in updated and new literacy programs that leverage Scholastic’s content and aligned with current literacy instruction. We continue to anticipate these new products will contribute to growth beginning in fiscal 2026. Looking ahead, we expect lower sales trends in this segment to continue in the second quarter, ahead of an anticipated larger and more profitable fourth quarter. We forecast growth in sales to state and community literacy partners in the second half of fiscal 2025, driven by expanded participation in state-sponsored programs as our partners continue investing to improve kids’ access to books outside of school. And finally, in international, revenues were in line with prior year.

We continue to expect modest growth in major markets and operational improvements in Canada to drive further improvements in operating margins and contribution relative to fiscal 2024. And with that, I’ll turn the call over to Haji to review our fiscal 2025 first quarter results.

Haji Glover: Thank you, Peter, and good afternoon, everyone. Today, I will refer to our adjusted results for the first quarter, excluding onetime items, unless otherwise indicated. Please refer to our press release tables and SEC filings for a complete discussion on onetime items. As Peter discussed earlier, revenues increased and operating loss improved from a year ago in our seasonally quiet first quarter. I’m proud of our team’s hard work and preparation ahead of back-to-school season. The investments we are making in our core businesses position us well near and long term, and we look forward to making further progress against our plan this fiscal year and beyond. Turning to our consolidated financial results. In the first quarter, revenues increased 4% to $237.2 million and profitability improved on multiple measures.

The company’s seasonal operating loss in the quarter was $85.6 million, an improvement from $92.8 million from the prior year period. Adjusted EBITDA was a loss of $60.5 million, declining from a loss of $70.6 million a year ago. Net loss improved to $60.3 million from $69.5 million in the prior year period. On a per diluted share basis, loss declined to $2.13 compared to a loss of $2.20 last year. As a reminder, Scholastic results are highly seasonal. In addition to the first quarter, we also generally record an operating loss in the third quarter, with profitable second and fourth quarters. Now turning to our segment results. In Children’s Book Publishing and Distribution, revenues for the first quarter increased 3% to $105.4 million, primarily driven by higher revenues in our trade channel.

Segment operating loss decreased $4.4 million from the prior year period to $36.6 million, primarily reflecting higher revenues in a seasonally quiet quarter for the segment. In the first quarter, our School Reading Events business revenues and profits are not meaningful as schools are largely not in session in the summer. Book Fair revenues increased 5% to $28.8 million in the quarter. Fair count is on track to achieve our target of 90,000 fairs in fiscal 2025, which we expect to contribute to modest growth in our Book Fairs this school year. Book Clubs revenue of $2.7 million were in line with prior year period revenues of $2.6 million. After strategically transitioning Book Clubs to a smaller, more profitable core business in fiscal 2024, our team has implemented new strategies to reengage teachers and customers this school year.

Overall, we remain confident that the School Reading Events business is well positioned for this year’s back-to-school season. Trade revenues were $73.9 million in the first quarter, up slightly compared to the prior year revenues of $72.5 million, reflecting higher sales of Scholastic IP and foreign rights deals. This more than offset lower frontlist revenues compared to a year ago when sales benefited from the release of the paperback edition of the fourth book in the Hunger Games series, The Ballad of Songbirds and Snakes. The company’s best-selling publishing continues to resonate with customers. We are excited about the many frontlist titles we are publishing, including major global franchise releases in the second half of our fiscal year.

Education Solutions segment revenues were down 16% to $55.7 million in the first quarter, reflecting lower spending on supplemental curriculum products. This was partly offset by growth in state-sponsored programs. As school districts focus on adopting and implementing new core programs, near-term pressures on supplemental literacy curriculum continue to impact sales of supplemental instructional materials and key product lines, including classroom libraries and collections in the first quarter. As Peter noted, our teams are developing new structured literacy programs and supplemental products for schools scheduled to launch in time for the 2025 and 2026 school year. Segment operating loss improved by $1.7 million to $17 million, primarily driven by higher state-sponsored program revenues as increased participation has a significant impact on profitability.

This, coupled with decreased operating expenses in the quarter, more than offset the impact of lower sales of supplemental instructional materials. I will now turn to our new Entertainment segment. With consolidated results from the company’s existing Scholastic Entertainment division, historically reported in the Children’s Books segment, combined with the results from 9 Story Media Group, which we acquired in June, Entertainment segment revenues were $16.6 million, and the segment operating income was $1.2 million, primarily reflecting the contribution of the 9 Story Media Group. 9 Story revenues and profits were up on a pro forma basis relative to the prior year period. We’re making progress on our integrated production and development slate and continue to execute on company-wide synergies, which should benefit this segment in fiscal ‘26 and beyond.

International segment revenues were $56.8 million in the first quarter compared to the prior year period revenues of $57.2 million. Excluding the $0.2 million year-over-year impact of unfavorable foreign currency exchange, international revenues were in line with the prior year as lower revenues in Canada were partly offset by strong backlist sales of Dog Man and Hunger Games in the U.K. The segment operating loss increased $1.3 million to $8.3 million compared to $7 million in the prior year period. Unallocated overhead cost of $24.9 million in the first quarter improved from $25.6 million in the prior year period, primarily driven by lower employee-related costs in the quarter. Now turning to cash flow and the balance sheet. Net cash used by operating activities of $41.9 million compared to $38.1 million in the prior year.

Free cash used in the first quarter was $68.7 million compared to a use of $57.8 million in the prior year period, primarily reflecting higher CapEx spending, including on new products and Education Solutions. In addition, we now include production spending and borrowing related to production loans, both within the new Entertainment segment, as part of our definition of free cash flow. Production loans are typically secured by tax and other receivables and therefore essentially an offset to working capital. Consistent with other companies in the media industry and how we view and manage the business, we include borrowing and repayment of these loans in our free cash flow definition to better reflect the overall timing and generation of free cash flow in this business.

During the quarter, the company borrowed $225 million under its existing revolving credit facility to complete the 9 Story Media Group transaction and to meet the seasonal working capital needs. We’re currently in the process of amending and extending our credit facility, increasing the revolver from $300 million to $400 million for another five years, which is unsecured. Furthermore, we’ll continue to explore opportunities to optimize our strong balance sheet. At the end of the quarter, net debt was $152.1 million compared to a net cash position of $107.7 million at the end of fiscal 2024, primarily driven by the 9 Story Media Group transaction, partly offset by positive free cash flow of $62.5 million over the last 12 months. In addition to our growth investments, we continue to deploy capital to our shareholders in the first quarter through our regular dividend and open market share repurchases.

We repurchased 163,000 shares last quarter for $5 million. Together with our regular dividend, we returned over $10 million in the first quarter, as Peter said. We will continue to pursue opportunities to leverage our balance sheet and to deploy capital by, first, investing in growth opportunities; second, maintaining a strong and efficient balance sheet; and third, returning excess cash to shareholders to enhance their returns. As we look ahead to the rest of the year, we are affirming our fiscal year 2025 guidance. We continue to expect revenue growth of 4% to 6% and adjusted EBITDA of $140 million to $150 million. The outlook for the full year free cash flow remains between $20 million and $30 million, reflecting our planned investments and working capital needs.

I would like to reinforce a note about timing that Peter discussed. We expect lower year-over-year Trade Publishing sales related to the timing of our publication plan and headwinds in our Education Solutions segment to contribute to lower results in the second quarter compared to the prior year period. Per our plan, we continue to expect increased profitability year-over-year in the second half of our fiscal 2025. Thank you for your time today. We remain positive about the remainder of the year and continue to focus on our growth investments. I will now hand the call back to Peter for his final remarks.

Peter Warwick: Thank you, Haji. As I laid out in July, Scholastic’s fiscal 2025 plan is focused on building on and accelerating the progress we made last year towards our strategic goals. In the first quarter, we continued to execute on these initiatives as planned while preparing for the new school year in our School Reading Events. We remain confident that our core fundamental businesses are well positioned for long-term growth. We look forward to continuing to pursue Scholastic’s opportunity to create value and impact this year and beyond. Thank you very much, and let me now turn the call over to Jeff.

Jeffrey Mathews: Thank you, Peter. With that, we will open the call for questions. Operator?

Q&A Session

Operator: [Operator Instructions] Our first question comes from Brendan McCarthy with Sidoti. You may proceed.

Brendan McCarthy: Hey, good afternoon, everybody.

Peter Warwick: Good afternoon.

Brendan McCarthy: Wanted to start off looking at gross margins. It looks like there was a nice improvement there year-over-year. Can you talk about what you’re seeing with gross margins and whether you see further improvement looking out the rest of the year, just given the downturn in inflation?

Haji Glover: Yes. Thank you for the question. As far as the gross margin, it’s really mix that’s driving the conversation around mix is really driving this. We do see modest growth in our gross margin throughout the rest of the year, and we planned for that already in our outlook.

Brendan McCarthy: Got it. Thanks, Haji. Yes, that’s great. I wanted to turn to the Fairs business. I know last quarter, the fourth quarter of fiscal ’24, I know you noted there was some pressure on consumer spending that impacted the Fairs business. Is that still a trend that you’re seeing, I guess, looking out to the second quarter — the second fiscal quarter?

Peter Warwick: Well, the — we’ve really only just got moving with our Fairs business. But at the moment, the fairs are pretty much operating as we expected for the fall season. And whilst those pressures, I think, probably still continue, we’ve made some good adjustments in terms of how we present the fairs. And we also have the benefit of having a really full sort of 90,000-plus fairs this year. So that’s also a mitigating factor. But I think it’s also important to say that we’re really only expecting modest revenue per-fair growth in fiscal 2025, which was not the case in fiscal 2024. And therefore, I think that gives us much more sort of sense that things will go as we are planning.

Brendan McCarthy: Got it. Thanks, Peter. And just as a follow-up question, and I know we’re only one month into the — about one month into the school year, but looking at the School Reading Events business, Clubs and then the school channels, how is that — how have those businesses been performing so far this school year relative to your expectations at the start of the fiscal year?

Peter Warwick: They’ve been — I mean, the good news is that they’ve been operating pretty much exactly as we expected. There have been no bad surprises, no good surprises. It’s pretty much as we were expecting. And so I think that’s pretty positive. I think the one area that we have been particularly pleased with, although it’s the smallest of those two businesses, has been the Clubs business, where we’ve seen quite an uptick actually in the numbers of sponsors, particularly teachers. So I think the work that we did last year to prepare for redesigning the materials and content, I think, has been — is early signs show that, that’s having — that’s been a very worthwhile thing to have done.

Brendan McCarthy: Got it. And in the Clubs business, I know you mentioned you were testing and still are testing new go-to-market strategies there. Can you provide additional color on some of those strategies and I guess how they’re resonating with customers at this point?

Peter Warwick: Yeah. I mean, one of the things that we’ve done is that we’ve redesigned our flyers, for example. And it’s been very much focused on igniting the interest of our core customers and our core — most profitable customers. So that’s one thing that we’ve done. The other thing that we’ve been doing is actually the whole process has been very much more teacher-centric than it was the year before. And therefore, I think that’s going to be very worthwhile, too.

Brendan McCarthy: Got it, that’s helpful. I wanted to ask a question on the Education Solutions business. It sounds like the outlook there is quite favorable for the state-sponsored business in the back half of this year. I guess what’s the — I guess, what are some of the prospects of getting new business from either new states or new state entities for that line of business?

Peter Warwick: Well, I think the — I mean, there’s an overall trend which is kind of happening in the marketplace, which is that there’s much greater attention being paid, particularly by education faculties, education departments but also by state legislatures in making sure that they can get books to students at home. It’s been shown very much that one’s able to do much more with kids who are striving readers as long as they have books in the home. And that’s something that we’ve worked with within — in a number of states and has been very successful. I think there’s a growing recognition that, that is what’s needed. In addition to that, we’ve also got other partnership models that we’ve been able to develop to get books into the home.

And we’re feeling that — we’re feeling quite confident that we’ll have another good year in that part of the business. I mean, one of the good things that’s happening in some ways is that whilst they’re actually selling books into schools, particularly into school districts and all the rest of it has been more difficult for us, we’ve had this opportunity to actually get more of our books into the homes through the activities of partners, state, philanthropic and parents. And so we’ve been able — we are very consciously building up that part of our business to sort of rebalance, to some extent, the business as there are changes in the marketplace.

Brendan McCarthy: Great. Thanks, Peter. One more for me and then I’ll turn it over, just on the balance sheet. Just with the new net debt position, are you comfortable with where leverage is now? Or do you see the company allocating more cash flow to pay down the revolver in the future?

Haji Glover: Currently, we are very confident in where we stand today. As we mentioned in the press — in the — in my sort of section that we are looking at other opportunities on our balance sheet, but that’s in the immediate term right now.

Brendan McCarthy: Great. That’s all from me. Thanks, everybody.

Operator: Thank you. And this concludes our Q&A. I will pass the call back to management for any closing remarks.

Peter Warwick: Thank you, everyone, for joining today’s call and for your continued support. I’d like to again thank all of Scholastic’s employees for their hard work and preparation ahead of the back-to-school season. We look forward to an important year ahead as we execute on our plan for fiscal 2025 and make progress toward realizing Scholastic’s long-term opportunities.

Operator: This concludes today’s conference call. Thank you for your participation, and you may now disconnect.