SCHOLASTIC CORP Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Scholastic performed solidly in Q3 with modest revenue growth and improved operating results. Strong Children's Books segment and 9 Story acquisition contributed, despite family and school spending pressure on books/educational materials.
• Maintained strong balance sheet, returned over $35 million to shareholders via repurchases and dividends. Forecast full year adjusted EBITDA ~$140 million, consistent with low end of guidance.
• Macro environment headwinds: Consumer cautious spending on children's books, federal education policy uncertainty delaying instructional material purchases, and trade policy/tariffs impacting non-book products.
• Trade Publishing: Success with Dog Man and Hunger Games titles; 13th Dog Man book 'Big Jim Begins' was top seller globally. Upcoming 14th Dog Man book and 'Sunrise on the Reaping' expected to drive sales.
• Entertainment: Benefit from 9 Story acquisition, with progress on streaming platforms and new YouTube channel 'we believe kids' launching soon.
• Education Solutions: Sales declined due to lower school/district spending on supplemental curriculum; strategic review underway to optimize long-term potential.
• International: Revenues and profits increased, driven by major markets like Canada, UK, and NZ, with success in print/digital education products.

Segment Performance

• Children's Book Publishing and Distribution: Revenues increased 5% to $203.3 million in the third quarter. Book Fairs revenues were $110.7 million, up 8% due to a larger number of fairs held, with revenue per fair in line with prior year. Book Club revenues were $15.2 million, up 14% with higher order volumes and revenue per sponsor. Segment adjusted operating income was $7.6 million, up from $2.8 million prior year.
• Trade Publishing: Revenues were $77.4 million in the third quarter, in line with prior year. Expected new releases in the fourth quarter, including 'Sunrise on the Reaping', to positively impact results despite retail market softness.
• Entertainment: Revenues were $12.8 million, reflecting the contribution of 9 Story Media Group. Segment adjusted operating loss was $2.4 million, including $2.3 million in incremental amortization from the acquisition. On a pro forma basis, 9 Story revenues were down due to production green light delays.
• Education Solutions: Segment revenues were down 16% to $57.2 million in the third quarter, primarily due to lower spending on supplemental curriculum. Segment adjusted operating loss was $6.9 million.
• International: Revenues were $59.3 million in the third quarter. Excluding unfavorable foreign currency exchange impact, revenues were up. Segment adjusted operating results improved to a loss of $2 million from $5.9 million prior year.

Guidance

• Full year adjusted EBITDA forecasted at approximately $140 million, consistent with low end of fiscal 2025 guidance.
• Revenue expected to grow modestly year-over-year, with fourth quarter expecting modest revenue growth supported by 'Sunrise on the Reaping' and solid School Reading Events, though Education Solutions faces spending pressures.
• Anticipate cost-saving actions to benefit fiscal 2026.

Risks

• Consumer Spending: Families and schools are being more cautious with discretionary spending on books and educational materials.
• Federal Education Policy: Uncertainty around federal education policy and funding mechanisms causing schools/districts to delay/pause purchases of instructional materials.
• Tariffs: Minimal tariff-related exposure for fiscal 2025 and first half of 2026, but exposure on non-book products like novelty items and paper from Canada, with incremental impact expected in mid-single-digit millions next year.

Question and Answer

Q: How to think about backlist sales in the Trade channel given consumer pressure and frontlist titles driving backlist sales?

A: Successful frontlist titles like Dav Pilkey's Dog Man and Suzanne Collins' Hunger Games drive backlist sales. Upcoming frontlist releases will continue to help boost backlist performance.

Q: Education Solutions impacted by slowdown in school and state sales; any change in funding level?

A: Schools/districts are more cautious, with federal funding expected to continue but schools holding funds temporarily. Focus on core curriculum needs also affecting supplemental purchases.

Q: Expectations on federal funding changes?

A: Federal funding is congressionally mandated and not likely to suddenly turn off, but more spending is at state and local level, with parent choice in funding leading to opportunities in charter/private schools.

Q: Details on strategic review of Education Solutions?

A: Internally led review to ensure resources are allocated correctly, leveraging Scholastic's brand and commitment to literacy in core markets.

Q: Fair value of Missouri warehouse and NYC headquarters buildings?

A: Cannot provide an estimate, but rental income from NYC headquarters' retail space and information on asset base is provided for investors to assess valuation based on rental income and cap rates.