Educational Technology and Services Drives Scholastic Revenue in First Quarter

Revenue at Scholastic was down in the first quarter but a sharp increase in sales at the company’s educational technology and services division helped offset unfavorable comparisons with last year in which sales of The Hunger Games were still running strong.

Overall, revenue was down to $276.3 million from $293.4 million a year ago. But in the educational technology and services division, which creates and sells digital educational products like Math 180, revenue was $94.8 million, compared to $80 million last year. The division also has a healthy profit margin, $36.2 million this quarter.

Scholastic overall suffered a loss in the first quarter, which the company said is typical as schools are not in session and its profitable book club business generates little revenue. More below.

[Press Release]

SCHOLASTIC REPORTS FISCAL 2014 FIRST QUARTER RESULTS

Robust Sales of New Education Technology Programs as Districts Seek
Common Core-Ready Materials

New York – September 19, 2013 – Scholastic Corporation (NASDAQ: SCHL), the global children’s publishing, education and media company, today reported results for the fiscal 2014 first quarter ended August 31, 2013.

Revenue in the first quarter was $276.3 million, compared to $293.4 million a year ago.  The Company reported first quarter loss per share from continuing operations of $0.94, versus $1.01 in the prior year period.  Results for the first quarter include one-time expenses of $0.04 per share related to cost reduction and restructuring programs.  Consolidated loss per share was $0.94 in the quarter, compared to a loss of $1.02 a year ago.

First quarter results were largely driven by strong sales of Scholastic’s new education technology programs and guided reading programs.  Successful product launches in Educational Technology and Services drove segment revenue and operating profit growth of 19% and 46%, respectively.  These results were offset by first quarter sales of The Hunger Games trilogy, which decreased in domestic and international markets compared to the prior period’s levels, but were within expectations.  Scholastic typically records a loss in its fiscal first quarter, when most U.S. schools are not in session and its school book club and book fair businesses generate minimal revenue.

Free cash use for the quarter was $93.8 million, compared to free cash flow of $4.0 million a year ago, when the Company collected over $90 million from sales of The Hunger Games.  This cash flow use in the current period resulted in seasonal net borrowings at quarter end of $13.4 million.

“We are off to a great start this year, as schools continue to turn to Scholastic for broad-scale instruction solutions to raise student achievement in the Common Core era.  First quarter results were driven by robust, high-margin sales of our new education technology programs and our guided reading programs, as well as the related support services,” said Richard Robinson, Chairman, President and Chief Executive Officer.  “Our successful launch of five new products, System 44® Next Generation, MATH 180TM, iReadTM, Common Core Code XTM and READ 180® for iPad, demonstrates our ability to build on a decade of success with READ 180 to offer more products across grade levels and subject areas to our installed customer base and to expand our reach into more schools.  At the same time, we continue to see significant demand for our professional development and school improvement services.  Given the timing of our recent product releases, we expect to see increasing sales of our instructional programs and services over the course of the year.”

Mr. Robinson continued, “First quarter sales of The Hunger Games were within our expectations, and we expect sales to build in anticipation of the Catching Fire film release later this fall.  Common Core driven opportunities extend into our children’s book business, and market research shows that families depend on our clubs and fairs to find the right books at the right level for their children’s independent reading, which also helps them meet the more challenging Common Core requirements.  Our book fair bookings are on track and, in preparation for the new school year, we redesigned our book club flyers to feature grade-specific selections and more non-fiction content for children from pre-K to eighth grade.”

Mr. Robinson concluded, “We continue to execute our strategy to grow profitable sales by providing schools proven, effective print and digital instructional packages and ongoing professional development programs to help with Common Core implementation and by helping teachers and families find and purchase the very best children’s book titles to support children’s independent reading, as we drive efficiencies across our businesses.”
Scholastic affirmed its fiscal 2014 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.  The Company continues to expect free cash flow in the range of $60 to $80 million.

First Quarter Results

Children’s Book Publishing and Distribution.
Segment revenue in the first quarter was $54.6 million, compared to $70.9 million in the prior year period.  Strong frontlist titles, including the Harry Potter trade paperback collection, which was released with new cover illustrations in August, and The New York Times best-selling Star Wars: Jedi Academy by Jeffrey Brown, partially offset the anticipated lower sales of The Hunger Games trilogy.  Because most U.S. schools are not in session, revenues from book fairs and book clubs, the segment’s school channels, are 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, with the impact of the anticipated decline in The Hunger Games sales being partially offset by lower book clubs costs.

Educational Technology and Services.
Segment revenue for the first quarter was $94.8 million, compared to $80.0 million in the prior year period, a 19% increase, reflecting robust sales of new products in the current year period, including System 44 Next Generation, MATH 180, Common Core Code X and iRead. Segment operating income increased 46% to $36.2 million, compared to $24.8 million in the prior year period, due to higher revenues from higher margin education technology programs in the current year period.

Classroom and Supplemental Materials Publishing.
Segment revenue was $37.8 million, approximately equivalent to the $37.9 million recorded in the prior year period.  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 higher-margin guided reading programs and classroom books in the current quarter.

International.
Segment revenue in the first quarter decreased to $78.7 million, from $90.2 million in the prior year period, as higher sales in Asia were partially offset by lower sales of The Hunger Games in the UK and Canada.  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 in the prior year period.

Media, Licensing and Advertising.
Segment revenue in the first quarter was $10.4 million, down from $14.4 million in the prior year period, primarily as a result of 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.

Other Financial Results.
Corporate overhead was $16.4 million, compared to $17.3 million in the prior year period, reflecting a decline in employee-related expenses from cost reduction programs.  Free cash use (as defined) in the first quarter was $93.8 million, compared to free cash flow of $4.0 million in the prior year period, due to higher cash collections from sales of The Hunger Games in the first quarter of fiscal 2013. During the quarter, the Company repurchased 21,034 shares in open market transactions and had $19.0 million remaining under its current board authorization for share repurchases.

As previously announced, the Company’s Board of Directors approved a 20% increase in its regular quarterly cash dividend, to $0.15 per share from $0.125 per share, on the Company’s Class A and Common Stock for the second quarter of fiscal 2014. The dividend is payable on December 16, 2013 to shareholders of record as of the close of business on October 31, 2013.
About Scholastic
Scholastic Corporation (NASDAQ: SCHL) is the world’s largest publisher and distributor of children’s books and a leader in educational technology and related services and children’s media. Scholastic creates quality books, print and technology-based learning materials and programs, magazines, multi-media and other products that help children learn both at school and at home.  The Company distributes its products and services worldwide through a variety of channels, including school-based book clubs and book fairs, retail stores, schools, libraries, on-air, and online at www.scholastic.com.
Forward-Looking Statements

This news release contains certain forward-looking statements.  Such forward-looking statements are subject to various risks and uncertainties, including the conditions of the children’s book and educational materials markets and acceptance of the Company’s products within 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.

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