Scholastic Corporation (SCHL) Q1 2027 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Scholastic Reports First Quarter Fiscal Year 2027 Results. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jeffrey Mathews, Executive Vice President, Chief Growth Officer and President, Scholastic Education.

Hello, and welcome, everyone, to Scholastic's Fiscal 2027 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've 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 e-mail address, investor_relations@scholastic.com. And now I'd like to turn the call over to Peter Warwick to begin this afternoon's presentation.

Thank you, Jeff, and good afternoon, everyone. Scholastic continued to advance its fiscal 2027 priorities over the summer, while positioning our businesses for an important and promising second quarter. Our first quarter is typically Scholastic's smallest revenue quarter with schools largely out of session and sales particularly light for our Children's Books and Education divisions. For reference, last year's first quarter represented only 14% of full year revenue. Consistent with the expectations we outlined in July, we recorded an operating loss in the quarter, reflecting the seasonality of the business as well as the full period impact of the sale-leaseback transactions completed last December. During the quarter, we continued to invest in our growth priorities and advance strategic transformation across the company. We remain 100% focused on driving stronger top and bottom line performance this year and beyond. Our fiscal 2027 priorities remain unchanged, translating the strategic and operating progress we achieved last fiscal year to drive stronger performance gains. We remain confident in the trajectory we outlined in July and are affirming our full year fiscal 2027 guidance. So with that, let me turn to our Children's Book Publishing and Distribution segment. Our Book Fairs business is now entering its important fall season and early performance indicators are strong. Bookings and fair count are ahead of the prior year, and we continue to see traction in Christian schools and other extended formats as we expand the total addressable market for fairs by reaching new school communities. These leading indicators echo the momentum we saw in fiscal 2026 and reinforce our confidence in Book Fairs as a core growth and earnings engine for our Children's Book Group. We're bullish about sustainable and profitable growth in fairs for 3 key reasons. First, the unique competitive advantages provided by our scale, brand, content and operations. Second, the significant growth opportunities serving new kinds of schools and offering new types of fairs. And third, the strong operating leverage in this business. Our focus now is on execution through the fall while continuing to expand the reach of this highly differentiated business. In Book Clubs, we remain focused on simplifying the program and innovating our promotions and incentives to better engage teachers and families. Together with fairs, Book Clubs remains an important part of Scholastic's direct connection to schools and classrooms as well as an important channel for our publishing. Turning to our Trade Publishing business. We're entering a very exciting second quarter and holiday selling season with a strong publishing schedule across our portfolio of global franchises, best-selling series and new titles. We have an extraordinary Harry Potter publishing program this fall, ahead of the new HBO series premiering this Christmas. As a reminder, HBO's epic adaptation of the series currently planned to roll out over 10 years will introduce our beloved books to a new generation of American readers. Earlier this month, we launched a major Back to Hogwarts campaign with coordinated publishing, bookseller, school channel and marketing activity continuing through the fall and holiday season. This includes a Read It Before You See It campaign around the first book in the Harry Potter series, connecting our publishing with growing anticipation for the upcoming television series. In October, we will publish the full-color illustrated edition of Harry Potter and the Half-Blood Prince alongside a robust range of new titles, including a paperback Philosopher's Stone tie-in with an iconic cover from the HBO show, a continuation of Pocket Potters and additional licensed titles centered around creativity and crafting. Looking further ahead, we also see opportunities to build on the Harry Potter franchise around major publishing milestones, including the 30th anniversary of its U.S. publication in 2028. Another reason for excitement in quarter 2 will be the November release of Dav Pilkey's Dog Man: A Sprinkle in Time as we celebrate 10 years of Dog Man, now with more than 70 million books in print worldwide. We're also looking beyond this fall with new Pilkey publishing planned in 2027 and 2028, including the recently announced interactive book, Dog Man Dynamite, continuing the momentum of one of Scholastic's most important global franchises and the publishing relationship with Dav spanning nearly 3 decades. November also brings another major moment for The Hunger Games with the film adaptation of Sunrise on the Reaping supported by tie-in publishing and renewed activity around the franchise. And importantly, our fall publishing slate includes much more. In July, Heartstopper 6 (sic) [ Heartstopper: Volume 6 ] became the first young adult title to debut at #1 this year and was the #1 selling book across adult and children's titles during the month, according to Circana. We've also got new titles ahead across best-selling series, including The Baby-Sitters Club, Wings of Fire and I Survived. So together, the breadth of our publishing program and the major franchise activity ahead give us confidence in Trade's positioning for the year. Our focus is on executing against that slate and increasing coordination across our publishing, marketing and diverse channels to extend the reach of our books and franchises across the Children's Book group and Scholastic. Turning now to Scholastic Entertainment. Building on the momentum and visibility we discussed in July, the business delivered a strong first quarter. Production activity increased significantly year-over-year, driving substantial revenue growth and improved profitability. Just as importantly, our pipeline for fiscal 2027 remains strong and continues to build with additional contracted projects and opportunities, supporting our expectation for accelerating growth in the business. Meanwhile, Scholastic Entertainment's digital platforms continue to extend the reach of Scholastic IP. Clifford remains one of the leading franchises across our digital portfolio with YouTube views increasing 52% year-over-year in the first quarter. We're building on that audience engagement ahead of the new Clifford the Big Red Dog animated series expected to premiere on PBS KIDS in 2027. Together, the growth in production activity, continued visibility into the pipeline, and expanding engagement with Scholastic's IP reinforce our confidence in Entertainment's growth and profitability opportunity in fiscal 2027. Turning to Scholastic Education. During that business's smallest quarter, we continue to take significant actions to reposition it. The go-to-market transformation that accelerated this spring under our new Chief Revenue Officer is focused on improving sales productivity and execution. Further actions to restructure our products and operations are helping us diversify the customer base and better align the cost structure with current pressured market conditions. We believe the actions underway are creating a more streamlined and diversified education business with stronger commercial execution and a cost base better aligned with the opportunities ahead. Finally, our International business continues to benefit from Scholastic's global franchises, local publishing and operating discipline across key markets. We began to see early benefits from renewed Hunger Games activity ahead of the film this fall, building on the franchise's strong performance across our international markets last year. The new Dog Man title publishing in November provides another important franchise moment across our international markets in the second quarter. We also recently announced a publishing and distribution partnership with Mattel in India, bringing brands, including Barbie, Hot Wheels and Masters of the Universe to young readers across the subcontinent through Scholastic's local publishing expertise and reach. More broadly, as we move through the important fall selling season, our focus remains on execution. With the first quarter behind us, we remain confident in our plan and full year outlook. So with that, I'll turn the call over to Haji to discuss our first quarter financial results and outlook in more detail.

Thank you, Peter, and good afternoon, everyone. Please refer to the tables in today's earnings release and our SEC filings for a complete discussion of onetime items and reconciliations of all non-GAAP measures discussed today, including adjusted operating income or loss, segment adjusted operating income or loss, unallocated adjusted overhead costs, adjusted EBITDA, adjusted net income or loss, adjusted net income or loss per share, free cash flow and results presented on a comparable basis to the most directly comparable GAAP measures. I'll identify our adjusted results and other non-GAAP measures as I discuss them. As Peter noted, the first quarter is typically Scholastic's smallest revenue quarter, reflecting the summer period when schools are largely out of session and activity in our school-based businesses is limited. Let me begin with our consolidated financial results. In the first quarter, revenues decreased 4% to $216.8 million compared to $225.6 million in the prior year period, primarily reflecting lower revenues in Education and Children's Book Publishing and Distribution as well as the elimination of rental income following the sale-leaseback transactions, partly offset by higher entertainment revenues. Operating loss was $92.2 million, in line with the prior year period. Adjusted operating loss, excluding onetime items in both periods, was $88.7 million compared to $81.9 million in the prior year period, primarily reflecting higher overhead costs, partly offset by improvement in Entertainment and International. To facilitate consistent year-over-year comparisons and provide a clearer view of operating performance given the impact of the sale-leaseback transactions, I'll discuss certain results on a comparable basis after reflecting the full period impact of the sale-leaseback transactions in the prior year period. Please refer to today's release or the table in the appendix to this call's presentation, where you will find a reconciliation of adjusted operating income and adjusted EBITDA by segment on this comparable basis. On a comparable basis, as I just described, the year-over-year increase in adjusted operating loss was $2 million. Adjusted EBITDA was a loss of $63.6 million compared to a loss of $55.7 million in the prior year period. On the same comparable basis, adjusted EBITDA improved $0.6 million. The underlying year-over-year performance primarily reflected improvement in Entertainment and International, partly offset by timing of overhead costs. Net loss was $71.2 million or $3.77 per diluted share compared to $71.1 million or $2.83 per diluted share in the prior year period. Adjusted net loss was $68.6 million or $3.63 per diluted share compared to adjusted net loss of $63.3 million or $2.52 per diluted share last year. The increase in adjusted loss per share reflected the higher adjusted net loss and fewer shares outstanding following our significant share repurchase activity in fiscal 2026. Turning to our segment results. In Children's Book Publishing and Distribution, revenue for the first quarter decreased $3.6 million to $105.8 million compared to $109.4 million last year. As a reminder, activity in our proprietary school-based channels is minimal during the first quarter, while U.S. schools are out of session. Book Fair revenues were $33.2 million compared to $34.1 million in the prior year period, primarily reflecting timing-related impacts. We continue to expect higher fair count and modest revenue per fair growth to contribute to revenue growth in our Book Fairs business this fiscal year, with the operating leverage in this business expected to support improved profitability. Book Clubs revenue were $2.1 million in the quarter compared to $1.8 million a year ago. Consolidated trade revenues decreased $3 million to $70.5 million in the first quarter compared to $73.5 million in the prior year, primarily reflecting higher international co-edition sales in the prior year period that did not reoccur. Within consolidated trade, U.S. trade revenues increased 4% year-over-year, supported by strong performance across our publishing, including Dav Pilkey's titles. Looking ahead, we continue to expect stronger trade revenues in the second quarter and for the full year, supported by the robust publishing pipeline and major franchise activities, which Peter discussed. Segment adjusted operating loss increased to $37.8 million from $34.3 million in the prior year period. On a comparable basis, adjusted operating loss increased $0.6 million. Turning to our Entertainment segment. Revenues increased $6.5 million to $20.1 million compared to $13.6 million in the prior year, driven by higher production revenues. Segment adjusted operating loss improved $2.4 million to $1.6 million compared to $4 million a year ago, primarily reflecting higher revenues. Production activity and pipeline visibility remains strong. We continue to expect growth and improved profitability for the full year, supported by increased production activity and growing slate of greenlit projects. Turning to our Education segment. Revenues were $30.4 million in the first quarter compared to $40.1 million a year ago, a decrease of $9.7 million during the segment's seasonally smallest quarter. School and district spending on curriculum and supplemental materials remained under pressure this summer as districts managed higher staffing and fixed costs, expanding unfunded mandates and the conclusion of ESSER funding in March. Segment adjusted operating loss increased to $23.3 million compared to a loss of $21.2 million in the prior year period. On a comparable basis, adjusted operating loss increased $1.3 million. The decline primarily reflected lower revenues, largely offset by the benefits from the segment's improved cost structure. Looking ahead, we continue to target an improved performance for the full year. We expect revenue trends to improve as the year progresses based on the timing of key opportunities and recognition of subscriptions, particularly in the second half, with improved profitability. Turning to our International segment. Revenues were $60.5 million in the first quarter compared to $59.4 million a year ago. Excluding the $1.2 million favorable year-over-year impact of foreign currency exchange, revenues were approximately in line with prior year period. Segment adjusted operating loss improved to $2.7 million compared to $4.1 million in the prior year period, primarily reflecting continued cost management and operational efficiencies. Looking ahead, we continue to expect full year revenue growth supported by our publishing and franchise activity across key markets, while operating income is expected to be modestly lower, partly reflecting inflation and higher fuel and freight costs in some markets. We remain focused on operating discipline and continued efficiency improvements across the business. Finally, unallocated adjusted overhead costs increased $5 million to $23.3 million in the quarter compared to $18.3 million in the prior year period. On a comparable basis, adjusted overhead costs increased $3.9 million, primarily reflecting higher costs related to corporate strategic initiatives as well as the timing of employee-related expenses. As discussed in July, overhead will continue to reflect full year impact of the sale-leaseback transactions, including the loss of rental income and a portion of additional lease expense. We continue to manage corporate costs with discipline while making targeted investments to support our fiscal 2027 growth priorities. Now turning to cash flow and the balance sheet. In the first quarter, net cash used by operating activities was $94.6 million compared to $81.8 million in the prior year period, primarily reflecting working capital requirements, lower cash remittance as well as higher rent expense and loss of rental income related to the sale-leaseback transactions, partly offset by lower inventory and royalty advance payments. Free cash use was $110.8 million compared to a free cash use of $100.2 million last year, reflecting higher cash used in operating activities and higher capital expenditures, partly offset by net borrowings of film-related obligations. At quarter end, net debt was $86.8 million compared to net debt of $242.8 million in the prior year period, primarily reflecting net proceeds from the sale-leaseback transactions completed last December, partly offset by capital return to shareholders. During the first quarter, we returned approximately $29.6 million to shareholders, including $25.8 million through share repurchases and $3.8 million in dividends. As of August 31, approximately $157 million remained authorized for future repurchases under our share repurchase program. We expect to continue purchasing shares from time to time as conditions allow. Now turning to our outlook for the full year. We are affirming our fiscal 2027 outlook for revenue growth of approximately 2% to 4% and adjusted EBITDA of approximately $135 million to $145 million. The adjusted EBITDA range represents growth compared to fiscal 2026 on a comparable basis, reflecting the full year impact of the sale-leaseback transactions in both periods. As we outlined in July, we expect year-over-year revenue growth to begin in the second quarter and continue through the balance of the year with the important back-to-school and fall season now underway. We also continue to expect full year free cash flow of approximately $35 million to $40 million. Overall, our first quarter results and current outlook remain consistent with our full year plan we outlined in July. We remain focused on executing against our growth priorities while maintaining cost discipline and financial flexibility. Thank you for your time today. And now I'll turn the call back to Peter for his final remarks.

Thank you, Haji. As we continue to execute during the important back-to-school and fall period, our priorities are clear. We remain focused on the plan we laid out in July and on translating that work into stronger performance through the balance of fiscal 2027. We're particularly excited about the next 3 months. It's not every quarter that there's a Hunger Games movie. It's not every year that Harry Potter begins a 10-year reimagining for a new generation. And on top of that, we have another Dog Man title in November, excellent early performance metrics for our Book Fairs and a strongly growing Entertainment business. I'd like to thank our employees, authors and illustrators, educators, customers and shareholders for their continued support. Now let me turn the call back to Jeff.

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

[Operator Instructions] And our first question comes from the line of Brendan McCarthy with Sidoti & Company.

Haji, I wanted to circle back to your statement on the fiscal 2027 guidance. I think you mentioned you're expecting operating income to be modestly lower this year, and that's due to higher fuel costs weighing on certain markets. Is that a new development? And has that been, I guess, factored into the reaffirmed 2027 adjusted EBITDA guidance?

Yes, Brendan. This is Haji. Can you hear me?

Yes, Haji, can you -- hear you well.

Yes. So just to be clear on that point, I was actually referring specifically to the international markets where we're seeing the fuel cost because of the war causing us to have a little bit more cost. But some of the stuff we've already anticipated within our forecast, our full year forecast. So we're in line with everything right now, and that's the reason why we're reaffirming our guidance.

Understood. Turning to the Entertainment segment. It looks like it was a really strong quarter, profitable on an adjusted EBITDA basis. And it sounds like you're seeing contracted revenue really support the outlook for the year. Can you touch on the adjusted EBITDA margin? It looks like it expanded to 28% from mid-single digits last fiscal quarter. I know that scheduled entertainment revenue can really vary based off the production schedule, but just wondering if you could give more detail on the margin profile there.

Yes. It's all based on the operating leverage and the mix of the business in which we do. We have fixed depreciation from the acquisition itself within our EBITDA calculation. So those are the things that really drive that. And as you remember, the reason why we got into this business was because of a lot of operating leverage in it. So we're excited to see the change and looking forward to the future.

Great. Great. And on the Book Fairs business, it sounds like early indicators have been strong. Has that growth rate exceeded your expectations? And how are some of the newer models been selling?

It's Peter here. No, we -- I mean, the metrics that we have in anticipation of the fall season for Book Fairs are really strong. I mean, we are feeling very confident about it. The number of book fairs that we have has been at or above what we were expecting and is at and is certainly above last year. The number of book fairs that we have, which are in larger schools, which are really what we want, is also greater. And we're expecting our revenue per fair to be good. I mean, at the moment, we can't really give an accurate validation of that in the sense that you really need to see some more of our -- we need to see some more of our book fairs before we can be totally confident about that. But what we do know is that we're getting very strong response with our new models. I mean, what we're basically doing is expanding the market for book fairs in a way that nobody has ever done that before. We're in a very unique position. It's an incredible business model, as you know, with a lot of leverage within it. And we're feeling very, very bullish about it. We've had good engagement with hosts. Our Scholastic Dollars are in very good shape. So we're feeling very confident about that, Brendan, very confident.

And has that really driven an increase in the number of schools engaging in fairs? Or has it really been more returning schools engaging in a second fair for the school year, or maybe a mix of both?

It's basically both. I mean, the number of schools returning is good, and we've also got new schools and new places for the new formats as well. So we're feeling good about that. I mean, the overall fair count is very, very promising. So there's very good feelings all around about that.

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

Well, thank you all for joining today's call. I mean, we really appreciate your support, and we look forward to updating you on our progress through this very exciting and important fall season that we have in front of us when we report our second quarter results in December. So with that, thank you all very much, and goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.