Scholastic Corp Q1 '97
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Scholastic Corp Q1 '97
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(FOOL CONFERENCE CALL SYNOPSIS)* By Dale Wettlaufer (MF Raleigh)
Scholastic Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SCHL)") else Response.Write("(Nasdaq: SCHL)") end if %> ALEXANDRIA, VA., September 18, 1996/FOOLWIRE/--Scholastic Corporation reported September, 17, 1996 that revenues for the first fiscal quarter ended August 31, 1996 increased 17% to $158.6 million compared to $135.2 million in the year-ago quarter.
Domestic Book Publishing sales grew by $14.5 million or 15% due to continued strength in the children's book publishing areas of Trade and Home Continuities combined with first substantive sales of Scholastic's instructional publishing reading program, Scholastic Literacy Place(TM). Video and New Media revenues increased $5.5 million to $7.8 million from $2.3 million due to growth in Scholastic Production's merchandising and licensing revenues from Goosebumps(TM) branded product and production fees for the second season of the Goosebumps television series. International revenues increased 11% led by strong performances by the U.K. and Canada's trade businesses.
The Company's first fiscal quarter historically produces an operating loss due to higher expenses without accompanying revenues during the summer months. The net loss in the quarter was $14.0 million, or $0.88 per share, compared to $9.8 million, or $0.62 per share in the year-ago quarter, due primarily to planned increases in fiscal 1997 operating and promotional costs and last summer's revenue and profit from the Texas purchase of The Scholastic Early Childhood Workshop(R).
"We are pleased with the market reaction to the launch of Literacy Place and look forward to marketing and selling into the large revenue opportunity in California next summer," commented Richard Robinson, President, Chief Executive Officer, and Chairman of the Board. "In the children's book publishing business, Goosebumps(R), The Magic School Bus(R), and The Baby-Sitters Club(R) book series continued to sell well in trade. We're also encouraged about early sales results for Animorphs(TM), one of the Company's new series."
Executive Updates
Historically, revenues are the smallest in the first quarter since schools are not in session and losses are the norm. Revenues increased 17%, or $23 million, in the quarter. Domestic book publishing revenues increased 15% in the quarter, reflecting strength in the trade business, which increased by 50% over last year. Continued strength was seen in Club and Home Continuity, resulting in a 20% increase over Q1 1996, which came mostly from the Home Continuity side. Revenue comparisons must disinclude the sale of the Early Childhood Workshop last year, which generated revenues of $19 million. Excluding that sale, domestic book publishing increased by over 40% and total revenues increased 35%.
This is a small quarter for circulation revenue of professional and classroom magazines. The modest revenue increase was due to advertising in Home Office Computing, which was up 18%. The November issue, the revenues for which are recorded in Q2, just closed with the largest number of pages in the history of the magazine. In video and new media, revenues in the quarter were $7.8 million, compared to $2.3 million last year. The revenue increase was due to Goodbumps merchandising the second season of PD. International revenues totaled $32 million, up $3 million from Q196. The increase in international revenues was led by strong performances in the UK and the Canadian trade business, combined with the newly acquired Pages Book Fair revenues, which were recorded in the UK in June and July. Approximately one-quarter of this revenue increase was due to a favorable exchange rate with the Australian dollar.
Increased costs were incurred in launching the Scholastic Network, formerly partnered with America Online, on the world wide web. Summer losses in the Trumpet UK and Pages acquisitions added to this quarter's operating losses. Interest expense was $1 million higher than last year due to acquisitions and working capital needs.
This was the first significant quarter of Literacy Place sales, though the performance of this unit was below projections even though the unit met market share expectations of mid-teens in Florida. Florida ordering was lower than expected due to apparent irregularities with State ordering. In the Midwest, sales were better than expected, but Northeastern sales were worse. Literacy place is being adopted in various communities in Georgia, Mississippi, and New Mexico. Scholastic believes it has a program which addresses California's curricula in the following areas: phonics, skills, and literature; testing assessment by Educational Testing Service; Scholastic's Spanish program; and outstanding technology. In science, Scholastic had a good year in the adoption states and sales there will be well above last year's. There are a number of supplemental programs which help fill out the literacy product line. In April of 1997, a spelling line will be published for Texas schools. Texas is budgeted for $20 million in spelling.
At Scholastic Productions, they are building upon the media base they have built with Goosbumps and The Magic Book television programming to develop new projects in CD-ROMS and the launch of a consumer products campaign and a broad-based promotional effort. The Emmy Award winning The Magic Bus will run daily in its third season on PBS this fall, which should increase ratings. The fifth CD-ROM based on this series will be ready for sales in October. Microsoft, the co-producer and distributor of the series, has sold over 1 million copies of The Magic Bus CD-ROMs. Dreamworks SKG has worked with the company on their top-rated Goosebumps CD-ROM, which will be released soon. Goosebumps toys, clothing, school supplies, and audio books will all roll out in the fourth calendar quarter as part of the company's mass merchandising strategy. Pepsi will participate in these activities, supported by $40 million in promotional and advertising dollars.
Q&A
Bookings are higher by 8-10% going into the second quarter.
The company is looking toward curriculum building bodies in the government and schools in general to emphasize reading as the prime learning area for school-aged children and believes that there is opportunity there for Scholastic.
Goosebumps has been selling at an "incredibly fast growth rate," with the ratings the show receives. As distribution channels expand, the growth rate of the product will slow down due to sheer size and market penetration. For the time being, though, the growth rate and re-ordering patterns still look to be very strong.
Without the Early Childhood Workshop sale in last year's first quarter, EPS for last year's Q1 would have been about the same as his year's. Very little spending on the California reading push has not shown up on the income statement and will not until sampling begins there. The bulk of this spending will happen between November and February/March.
The company believes that its reading and phonics programs meet the criteria of the various evaluation processes taking place in California.
Software is offered in two ways: through the book club and through a distinct software club that has experienced significant revenue and margin growth. The mass software market in Texas is too saturated for the company to differentiate itself there -- they will maintain their focus on their traditional markets and distribution.
As distribution expands, less and less business is going through trade channels. 30-40% goes through traditional channels. 20% goes through distributors, which can either go through traditional channels or through mass merchandisers, and the rest goes through mass merchandisers. Barnes & Noble and Borders are still strong.
The company is hoping that the trend toward breaking down classrooms into smaller sizes will benefit them since much of their school product is bought on a per classroom basis. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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