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Scholastic Corporation (NASDAQ:SCHL)

F1Q10 Earnings Call

September 24, 2009 8:30 am ET

Executives

Jeff Matthews - IR

Dick Robinson - Chairman, CEO and President

Maureen O'Connell - EVP, Chief Administrative Officer and CFO

Margery Mayer - EVP and President, Scholastic Education

Hugh Roome – Scholastic International

Ellie Berger – Scholastic Trade Publishing

Judy Newman – President, Scholastic Book Clubs

Analysts

Peter Appert – Piper Jaffray

David [Ping] – Stifel Nicolaus & Co.

Eric Autio – Buckhead Capital

Barry Lucas – Gabelli & Co.

Jim [McGarry] – Neuberger Berman

Operator

Welcome to the Scholastic first quarter 2010 earnings conference call. Today’s call is being recorded. At this time I would like to turn the conference over to Mr. Jeff Matthews, Vice President of Corporate Strategy, Business Development and Investor Relations. Please go ahead, sir.

Jeff Matthews

Good morning, everyone. Before we begin, I would like to point out that the slides for this presentation are available for simultaneous viewing by going to our Web site, scholastic.com, clicking on Investor Relations, and following the link from that page.

I would also like to note that this presentation contains certain forward-looking statements, which are subject to various risks and uncertainties, including the conditions of the children’s book and educational materials market, the acceptance of the company’s products in 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.

Now, I will introduce Dick Robinson, the Chairman, CEO and President of Scholastic to begin our presentation.

Dick Robinson

Thanks, Jeff. Good morning, and thank you everyone for joining us on our fiscal 2010 first quarter conference call. This morning I am joined by Maureen O'Connell, Chief Administrative Officer and CFO and Margery Mayer, President of Scholastic Education. Other members of the executive team will be available to answer questions at the end of the prepared comments.

Scholastic had a strong first quarter. Both the top and bottom line improved substantially from a year ago and we made progress towards our goal of significantly increasing profits this fiscal year which would result in 9% operating margin if we reach the top end of the guidance. First, good execution led to robust sales of educational technology driven by new products, adoptions and the positive impact of federal stimulus funding which has begun to reach school districts.

Second, in Children’s Books, trade sales increased by 25% driven by several best sellers and we implemented plans to improve profitability and drive modest growth in clubs and fairs. Third, we continued to manage costs, sustaining last year’s reductions, implementing a major branch consolidation in Fairs and improved efficiencies in our web operations.

Overall, this is an excellent start but we are well aware that we still have three quarters to go to achieve our goal of a $30-70 million increase in operating income this year to a total of $140-180 million as we announced in July.

In Educational Publishing’s most important quarter which typically accounts for 1/3 to ½ of annual sales, Educational Technology sales rose over $35 million or 50%. This contributed to a $20 million increase in segment operating income. Read 180 and System 44 showed strong growth from higher product sales and services with support from the California adoption as well as the impact of federal stimulus dollars. In a few moments Margery Mayer will detail the factors driving our very strong quarter in Educational Technology.

On the print side of Educational Publishing, sales of our core paperback collections and classroom libraries held solid though sales to libraries declined slightly. Overall our print sales outperformed the supplemental materials market which continues to be impacted by tight state and local funding. Last quarter we also added resources to our top down selling staff in this business which could help sales growth in the third and fourth quarters. Overall, these are good segment results. Even assuming that last quarter’s very strong technology growth rates moderate during the rest of the year we are confident we can meet our target for Education which as announced earlier includes $50 million in additional sales from new federal stimulus funding on top of growth from new products and adoptions, a key part of our fiscal 2010 plan for higher profits and margins.

In the Children’s Book business, our largest segment in terms of annual revenue, modest growth in sales and higher margin is an important element of our fiscal 2010 plan. The first quarter is typically a small one because schools are out of session and school book clubs and fairs have minimal revenues. However, Scholastic Trade Publishing had a big summer with several best sellers in retail. This was a primary cause of the $7 million increase in segment operating income last quarter.

There was strong demand for the paperback edition of Harry Potter and the Deadly Hallows published on July 7th, nearly two years after the release of the best selling hard cover. Back list titles in the Harry Potter series also sold well. The 39 Clues continues to be a New York Times best selling series following the successful launch of the fifth title in August. The Hunger Games by Suzanne Collins is still a best seller a year after its initial publication. On September 1 we released Catching Fire, the sequel in this trilogy, and last week it was the number one selling book of both children’s and adults in the whole country as reported by USA Today and the Wall Street Journal as well as hitting the top of the New York Times Children’s Bestseller List among others. This should benefit the second quarter as will the sixth title of the 39 Clues and a new title in our hardcover franchise, How do Dinosaurs Say I Love You?

Over the summer we also implemented plans to grow profits in clubs and fairs which should begin to have a positive impact beginning this quarter as these businesses ramp up. In both channels we have modestly raised prices in select product areas and are using more Scholastic titles to improve gross margin. To drive larger orders in clubs, we have implemented a marketing campaign to encourage more parents ordering online. We also made significant progress with New Cool, our enhanced online ordering system, which we are testing this fall with improved results and will roll out in early 2010.

In fairs, our new school incentive program Scholastic Dollars was launched with positive early customer response. We also consolidated regions in our Hub and Spoke model from 14 to 7, thereby reducing costs and inventory levels. Fair count is on plan to be level for the year. We are confident that these actions will drive modest revenue growth at improved operating leverage. It is too early to report on sales trends. However, this year’s late Labor Day pushed back the opening of schools in many districts. As a result, there were fewer selling days in the second quarter shifting some club and fair revenue from the second to subsequent quarters compared to last year.

Now I will ask Maureen O'Connell to discuss the third element of our fiscal 2010 plan, cost reductions and efficiency improvements, as well as our results and outlook.

Maureen O'Connell

Thanks Dick and good morning everyone. Sustaining last year’s progress reducing costs and improving efficiency is the third element of our fiscal 2010 plan to increase operating income. In this regard the first quarter was successful in a number of areas. First, salary expense was down by over $6 million as we realized further benefits from last year’s $30 million in annualized reductions.

Second, in school book fairs we implemented our Hub and Spoke plan as Dick discussed. Third, we completed the consolidation of infrastructure related to ecommerce into our IT operations. Fourth, spending on outside services and travel and entertainment was down another $4 million. We also outsourced management of our New York facilities and are exploring other outsourcing opportunities.

Before turning to the first quarter results, I want to explain how we have changed the reporting of sales in interactive and media products in order to provide a more complete picture of sales trends and profitability in school book clubs and fairs. Reflecting the increasing connection between print and other media in the children’s book industry, all sales through both school book clubs and fairs channels including sales of media and interactive products are now recorded in the children’s book publishing and distribution segment consistent with the company’s internal organization and management reporting.

Previously, the revenue and expense for media and interactive products sold through school book clubs and fairs were recorded in the media, licensing and advertising segment. This segment now includes interactive products sold only through third party channels as well as revenue from entertainment, toys and consumer magazine products. Prior periods have been reclassified accordingly. This slide reflects the change of reporting for each quarter in fiscal 2009 for comparison purposes. The next slide provides the same detail for fiscal 2008.

Now turning to the first quarter results. Revenue and earnings rose significantly relative to a year ago, reflecting strong educational technology and trade sales as well as the benefit of cost savings. Cost of goods sold declined as a percent of sales, reflecting higher gross margins associated with technology sales and greater fulfillment efficiencies in our distribution centers.

SG&A remained approximately flat. Savings on salary, outside services and T&E as I just described were offset as anticipated by higher severance, increased stock comp and higher variable costs related to the increase in educational technology sales.

Bad debt expense increased by $1 million reflecting a higher reserve for a small [remaindering] vendor with whom we no longer do business. Overall the loss per share from continuing operations was $0.68 compared to $1.13 a year ago. Discontinued operations generated a small profit last quarter reflecting favorable accounts receivable collections as we wind down some operations.

Looking at cash and the balance sheet, free cash flow improved last quarter by $85.2 million to a use of $77.5 million. Scholastic typically uses cash during the summer with schools out of session and the need to build inventories before the fall. This improvement reflected stronger operating results and tight working capital management. Inventories were down from a year ago due to timing and more efficient purchasing. We continue to manage our receivables very carefully.

Last quarter’s increase was associated with the increase in educational technology sales. However, we have successfully offset most of the impact on working capital through tight controls on payables. As a result of improved free cash flow during last quarter and the prior three quarters, total debt and net debt continue to decline.

At quarter end total debt was $290.6 million including $152.1 million of public debt and $125.1 million under the amortizing term loan. We did not draw down on our committed $325 million revolving credit agreement which is unprecedented for this quarter end when debt levels are typically approaching their seasonal high.

Based on the solid first quarter results during which we made progress in all three areas of our fiscal 2010 plan we are affirming our outlook for significant earnings and free cash flow growth. We continue to target earnings per diluted share of $1.80 to $2.30 on a continuing operations basis. At the top end of our range, this outlook corresponds to an operating margin of 9%.

As we have discussed, this excludes severance and one-time expenses associated with anticipated cost reductions as well as any non-cash charges for asset impairment and non-operating items. We now estimate the one-time expense related to the U.K. restructuring is $7-10 million in total. On a per share basis, after tax, this is equivalent to $0.19 to $0.27 because the losses in the U.K. are not tax deductible.

We expect these investments to reduce U.K. losses in fiscal 2010 allowing the business to achieve operating break-even in fiscal 2011 and profitability thereafter. Scholastic continues to target free cash flow for the company of $90-120 million.

Dick Robinson

Thanks Maureen. I would now like to ask Margery Mayer to provide some background on the excellent results in educational technology in the quarter. Margery?

Margery Mayer

Thank you Dick. Well good morning everyone. We were pleased with our results this quarter. Our achievement of $35 million of revenue growth in technology resulting in a nearly $20 million increase in operating income is a result of two key factors. First, positive market conditions primed by federal stimulus dollars and second, strong execution of our business model. Let’s start with the business environment.

As we have said in the past our technology products and services align well with the state of intent of ARRA and with Title I and IBA in particular, both of which received stimulus increases and have been key funding sources for Read 180. There is no question that the stimulus money helped our business. This summer we saw several districts apply stimulus funds directly to purchases. We also saw districts release funding as they breathed a sigh of relief in anticipation of stimulus funds arriving.

Additionally, the adoption of Read 180 in California gave us access to new instruction materials funding. We grew sales in California three fold in the quarter to over $10 million. As for execution, we have been evolving our business from one that is product centered to a true solutions business for a number of years. We have amplified Read 180 with critical product extensions like System 44 which targets readers who need support with phonics and word fluency before entering Read 180. We have also filled out our consultative and service capacity.

This summer it all came together. Our flagship product, Read 180, grew by every measure in the quarter. We had strong expansion of the product within our existing base and added a large number of new districts. We grew our product sales and our service revenues plus the great launch of System 44 last winter led to over $10 million in sales in the quarter largely from Read 180 customers.

In our field organization we have dramatically increased our effectiveness and efficiency. We have streamlined our regions and senior management to push best practices across the organization. As a result we increased productivity of our technology account executives by 50% in the quarter. The key to success has been the growth of our professional services organization. We have seen a significant expansion in the number of districts purchasing our technical and consulting services which has not only been good for revenue but has deepened our relationship with the customer and strengthened the implementation of the product.

A good example of this came in Chicago where Mayor Daley announced the expansion of Read 180 in his Back to School message just this week. We strongly believe the expansion of the business we have seen this summer offers us a long-term benefit. We expect to build on our large base in the future by further deepening our customer relationships through services and deeper penetration of our current products and by continuing to develop new products that fit into a comprehensive solution for literacy achievement in the 21st century.

Dick Robinson

Thanks Margery for that great quarter and for that report. While recognizing we still have three quarters ahead of us, we are obviously pleased with our quarter results and solid progress towards our goal for fiscal 2010 which include a substantial $30-70 million increase in operating profit. As I previously described, if we reach the higher end of this range we will achieve 9% operating margins which is our target.

At our stockholder’s meeting yesterday, an investor asked about our plans to sustain improved operating margins beyond fiscal 2010. I think this is a good question that is worth addressing this morning. As we have said, we have three key levers to sustainably improve profits. First, by achieving modest revenue growth in children’s books combined with tight cost management we can improve profits through strong operating leverage. Second, by driving faster growth in higher margin education sales, especially educational technology. Third, by continuing to reduce costs and improve efficiencies.

This is the outline of our plan for fiscal 2010 and for future years when we believe we will continue to have opportunities in all three areas. In children’s books we are focused on growing sales online and with innovative new publishing and cross-platform opportunities. The potential sale of digital e-books in 2010 also offers growth and profit opportunities.

In education we are substantially increasing our penetration among school districts this year with the help of strong execution as well as federal stimulus funding. That funding will continue at least through calendar 2010 and our fiscal year 2011. As this extra funding subsides, however, we will have a larger base of customers upon which to grow through service subscriptions and by up selling new products as we have proven we can do in the past. The eventual recovery of state and local budgets which represent the majority of total education funding should also help drive long-term growth in this area.

On the cost side, we will remain focused on improving efficiencies, reducing costs and sustaining those gains as we achieve them. For example, as our clubs and fairs grow sales online we can continue to improve the cost structures in these businesses. Our plan for 2010 is to improve our operating margins substantially and the first quarter is a good step in that direction. Once we achieve this goal, we believe it is sustainable on a larger revenue base in education and through continued operating efficiencies throughout our business.

Now I will moderate a question and answer period. In addition to Maureen and Margery I am joined this morning by Ellie Berger, President of Scholastic Trade Publishing; Deborah Forte, President of Scholastic Media; Judy Newman, President of Scholastic Book Clubs and Hugh Roome, President of Scholastic International Growth areas and Consumer Magazines.

With that let’s open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Peter Appert – Piper Jaffray.

Peter Appert – Piper Jaffray

Is it possible for you to give us any more granularity? You gave us a little bit but a little more on what is driving the revenue growth? Specifically I was thinking about things like maybe the portion of revenues coming from existing customers versus new customers. Some more insight in how important the newer products are to growing revenues. Then can you comment on what portion of revenues currently are recurring versus one-time sales?

Dick Robinson

Margery is thinking about that but I am sure she has good answers to those good questions.

Margery Mayer

I can’t quantify exactly for you how the sales breakdown between existing customers and new customers. The majority of sales were to existing customers but we know that we have added well over 100 districts this summer so we have a lot of new customers as well. In terms of our new product sales, System 44 did well over $10 million in sales. We couldn’t talk about all of the good things that happened because I only had a limited amount of time but we also had good sales in our new math product called Do The Math. This was its first real summer of sales. That was way up. We were up practically across the board. I think it really does reflect the fact we were able to implement effective selling strategies in an atmosphere fueled by stimulus dollars.

In terms of recurring revenues coming out of our base, we have two categories of recurring revenues. We have done a good job I think of building the sustainability of recurring revenues. We have expansion of product within our base with 44 and new stages of Read 180. We are also expanding Fast Math in there. I think you know our products all run on a common management system so that has made it easy to go into places using our management and adding. We also have recurring sales that come with renewals of hosting, tech support and consulting services. That doesn’t give you a lot of specific details but I think it gives you sort of a broad picture of what we are doing.

Peter Appert – Piper Jaffray

Can you help us understand how you think of the scale of the market opportunity? Maybe one way, you mentioned 100 incremental districts. How many districts are you in currently and what do you think the opportunity is?

Margery Mayer

I really don’t know how many total districts we are in but we are only serving a small percentage of kids that need Read 180 and we think there is plenty of room to grow. In addition to System 44, we had a better first year in System 44 than we did with Read 180 in the first year it came out. We have a lot of optimism around System 44. We also brought out a new product this summer called Expert 21 which is for kids exiting Read 180. Honestly we believe we are building a business that is very future oriented. It is outward looking. In addition to the $50 million opportunity we are chasing this year and we feel confident about we think we have additional opportunities in years going out.

Peter Appert – Piper Jaffray

Do you know off hand what number of kids use the various Scholastic products currently?

Margery Mayer

I really don’t. We might be able to get back to you with that later sometime.

Peter Appert – Piper Jaffray

You mentioned pricing. Can you give us any specifics in terms of what you are doing on average in terms of pricing this year?

Dick Robinson

As we said we have raised prices modestly in children’s books in all of our categories. We are still substantially under retail as you know so we feel there is some flexibility in our pricing and in our drive to improve margins in that business we believe that customers are willing to pay a little bit more even in a tight economic environment. Of course, it depends, if I gave you a number it wouldn’t be all that meaningful because it depends on what they buy. In other words the mix of products. We are not raising prices necessarily across the board.

Peter Appert – Piper Jaffray

Modest means a percent or two?

Dick Robinson

Mid single digits at the highest.

Peter Appert – Piper Jaffray

I know it is early in the season but any early reads in terms of Club order patterns, average order size, etc.?

Dick Robinson

We were hoping you would ask that and Judy is here standing by in case you did. So I am going to ask her to answer that question although obviously with Labor Day it is even earlier than usual in our ordering cycle.

Judy Newman

Obviously it is too early to really talk specifically about what is going on in Clubs but we are really confident that the plan we put together last year really focuses as Dick said on getting parents to order online and using our Old Cool, New Cool systems. It is really positioning us well for the fall. We are confident with what we have put together and our products and promotion and we are looking forward to seeing the results and talking to you about them next quarter.

Operator

The next question comes from the line of David [Ping] – Stifel Nicolaus & Co.

David [Ping] – Stifel Nicolaus & Co.

I had a question on the competitive dynamics in the reading intervention market. Given the influx of the federal stimulus dollars could you briefly talk about that?

Margery Mayer

Can you just flesh out your question a little bit? What specifically would you like for me to talk about?

David [Ping] – Stifel Nicolaus & Co.

Have you seen an influx of new entrants resulting from the federal stimulus dollars in the reading intervention market?

Margery Mayer

We really haven’t. Some of the traditional players have expanded their messaging around their products to include more of an intervention message. I think some companies are also benefiting from stimulus but we basically have not seen a major new competitor. I think Read 180 showed how much muscle it has this summer by the great reception we had of it in so many markets across the country.

David [Ping] – Stifel Nicolaus & Co.

Staying on the same subject I guess, you provided guidance that $50 million of the federal stimulus is going to hit in fiscal 2010 and $50 million is going to hit in fiscal 2011. How much of that hit the first quarter and how much of it will be for the remainder of fiscal 2010?

Maureen O'Connell

As far as our $50 million range it is very difficult to assign how much exactly is stimulus because many of the deals we were working on last quarter we were working on last year before there was stimulus money in the market. It is very hard for me to give you exact numbers. We feel confident we are on our way to our goal. The first quarter certainly put us on that path.

David [Ping] – Stifel Nicolaus & Co.

So it wasn’t the case where the $50 million…I know it is a range and it was in the guidance but it wasn’t the case where it was front loaded all in the first quarter then?

Maureen O'Connell

No that was not the case. The first quarter is the most significant quarter for our education business and we were up in the first quarter by $35 million so we are confident we are on our target for $50 million for the year and we are very pleased with the success in the first quarter but we cannot attribute it just to stimulus spending. As Margery said, our sales force operated very well. Execution was excellent. There was a new product in the market and we had many of these deals in the pipeline last year.

David [Ping] – Stifel Nicolaus & Co.

Moving on to the cost portion, heading into the rest of fiscal 2010 what are the plans for hiring, bonuses, travel and entertainment spend?

Maureen O'Connell

T&A we are tightly managing so our goal is to continue to keep that low. We will continue to look at that. Salary costs will have a second quarter benefit again because as you know we reduced our salaries in the second half of last year. Severance turned out to be more front-loaded in this quarter. Normally it is more even through the year so we think severance won’t be as much in the future quarters.

David [Ping] – Stifel Nicolaus & Co.

In terms of the free cash flow guidance can you talk about possible swing factors? What other working capital items you might be able to discuss in terms of keeping with the $90-120 million guidance?

Maureen O'Connell

We are clearly on that path as well. We did very well in the first quarter. We had phenomenal success in keeping our inventories down. I think you can see that in the numbers that our inventories are down significantly particularly in our Children’s Book and distributions channel and the fairs specifically. We also managed working capital in terms of our terms with vendors. We initiated that effort last year in the second half of the year when we went back and suspended terms with vendors. So that benefit you will see in the beginning of the year but it may level out the second half of the year.

David [Ping] – Stifel Nicolaus & Co.

Along the same lines as the cash flow, can you prioritize the use of cash flow for the remainder of the year? Will it be for repurchases?

Maureen O'Connell

As far as what we invest our cash flow in, it is pre-pub around our educational products. As Margery said, we are about to launch some new products in that area. So that is what we are using for our business. As far as our free cash flow we are estimating $90-120 million this year. We have not drawn down on our revolver but we do have debt outstanding so our uses of cash has been to invest in paying down debt as well as returning cash to our shareholders which we do via dividend and I think you have seen we announced yesterday another quarter dividend.

David [Ping] – Stifel Nicolaus & Co.

Could you possibly quantify the cost reductions that resulted from the discontinued operations and how much was allocated just from improving efficiencies?

Maureen O'Connell

The operations we exited, particularly the At Home operation, was losing money so that is out of both the current year and the prior year. So that doesn’t affect your SG&A comparison. If anything there were some overhead costs related to those operations that we had to further reduce in order to be as efficient without those operations. We used to allocate some costs from those operations and when those operations were eliminated that meant I had to take cost and other people in the business had to take costs out of their other areas in order to eliminate that allocated overhead.

Operator

The next question comes from the line of Eric Autio – Buckhead Capital.

Eric Autio – Buckhead Capital

A follow-up on the working capital, when we look at it at the end of this fiscal year should we see it as the improvements roughly the same level they are now or is it sustainable at that level? How should we think about that?

Maureen O'Connell

That is a good question. I think as far as the first quarter I think we did very well in terms of working capital management. Some of the inventory buy was timing related. In our book fairs last year we bought inventory earlier in order to avoid a port strike. Some of that is timing related. On payables, we did very well again in the first quarter. In the second half of the year you won’t see as much benefit from payables because we started renegotiating terms with our vendors last year in the second half of the year.

Eric Autio – Buckhead Capital

As far as D&A guidance have you talked about that at all and are there other large, non-cash charges we should think about with free cash flow?

Maureen O'Connell

We haven’t provided D&A guidance. As far as non-cash charges the one that we disclosed today is the only one that we are aware of at the moment which is our U.K. restructuring of $7-10 million and that includes both the massive write downs as well as the costs to streamline those operations.

Eric Autio – Buckhead Capital

Do you know what percentage of that is non-cash of the $7-10 million?

Maureen O'Connell

That is very difficult to say at this point as we execute against it as it involves some leases and leaseholds and we have to make some improvements and it depends on the magnitude of improvements of the leaseholds. That is why we have a range of estimates.

Operator

The next question comes from the line of Barry Lucas – Gabelli & Co.

Barry Lucas – Gabelli & Co.

A come back where Peter was going, maybe think about $10 million in California on the Adoptive side. How do you think about the other big adoptions for next year? Texas, Florida and what might that opportunity be?

Margery Mayer

There really aren’t any other big adoption states for Read 180 and we don’t really need big adoption states to grow our business. We had a phenomenal year in Texas this year without an adoption. The California situation was a really good one for us because the California schools are under so much pressure on budgets and the fact that they had state funds they could use to buy Read 180 just created a very good environment for us. The budget situation in California is more extreme than in the other 49 states so we are not finding that we need an adoption situation to have Read 180 purchased in the rest of the country.

Barry Lucas – Gabelli & Co.

Can you talk about pre-pub expenses for this year? What that might be as you try to invest in new products and programs?

Dick Robinson

Maureen will answer that one but I think we are obviously continuing with our normal pre-pub levels. In Trade Publishing we had a significant year last year in pre-pub in Educational Technology. We are continuing to ramp up and develop new products which is of course the lifeblood of that business and to sustain the very high gross margins in that business, the more revenue and volume you have the better. We have significant opportunities in several subject areas which we are pursuing. Maureen do you want to elaborate?

Maureen O'Connell

We have changed our guidance for that. I don’t have the fourth quarter in front of me but I believe it was announced in the 60-70 range on pre-pub spending which was similar to what we did last year.

Barry Lucas – Gabelli & Co.

I don’t want to necessarily get too far ahead but let’s say we do get to that 9% operating income margin goal. In your way of thinking is there a ceiling to that goal? How much more upside is there?

Dick Robinson

Some years ago we said 9-10 operating margin in 2009/2010. That was a nice thing for us to remember. This year we said 2009/2010 is here and we are going to do this and the first quarter helps us on that path. We still have to prove that we can do it. Once we achieve that I think that 9-10 is a good operating level for our company. As we move into educational technology which is higher margin and if that business outgrows the rest of the company which it probably will or can that gives us opportunities for higher margin. Our main goal is to get to what we thought was a decent and solid operating margin goal for the company that would generate enough cash so that we could move the company to the digital changes that are going on in our industry and provide capital for growth in particularly educational technology and e-commerce but also outside the United States in Asia and other places where we see significant opportunity for growing our core business as well as educational technology.

Margery Mayer

I have that number now. It is 50-60 as discussed in our last quarter.

Operator

The next question comes from the line of Jim [McGarry] – Neuberger Berman.

Jim [McGarry] – Neuberger Berman

On the education technology side, the nice result in the System 44 and we have the Expert 21 launch, can these products lead you to new customers or are we following Read 180 primarily?

Margery Mayer

I think they can lead us to new customers. One of the things we are really excited about with Expert 21 is it really puts us on a bridge out of intervention into core instruction. The program is exciting. I would love to show it to you. It is really built around helping kids develop skills that we think they are going to need to be successful in the global complex future. People are looking at it right now. We just finished printing it in August. We are just starting to show it to people. People are looking at it right now that are new customers that are not using Read 180. It is a great opportunity for us.

Jim [McGarry] – Neuberger Berman

Did System 44 penetrate any new customers that weren’t already using Read 180?

Margery Mayer

System 44 we have really been going to our Read 180 customers and if you are a good account executive that is where you are going to go because that is the low hanging fruit. I think we have a lot of Read 180 that we have yet to be penetrated with System 44. We can definitely take 44 to some customers not using Read 180 and I think that will happen in the future.

Jim [McGarry] – Neuberger Berman

Shifting over to the international side, excluding the U.K., maybe some thoughts on what might be going on particularly in the Far East?

Hugh Roome

We have got very good momentum in all of Asia and we have had particularly strong results in Malaysia where we have launched the book club business to be a regional club for us so we are expanding our Malaysia based book clubs into Singapore and now into Indonesia. We have high growth also in Indonesia this year and I think our long-term prospects in that market are very good. Across the region we have been building our English as a Second Language Programs. So in China we actually have Scholastic Schools teach English on a tutorial basis as well as a franchise relationship with a group called RYB, funded by private equity here in the United States. This has given us a student base of about 2,000 kids in our programs so that is strong.

In South Korea we are selling very successfully education products again focused on English. In India we have a company that is almost an exact replica of Scholastic here in the United States and it is building strongly in the market but it is clubs, trades, fairs and increasingly education. We have got a great base of business in direct selling in South Asia, particularly in the Philippines and Thailand in addition to Malaysia and those businesses are growing. They are very profitable and we are able to use them as conduits for new products into the market.

With that we believe it will continue to be a high growth and continue to be a high profit opportunity.

Operator

I would now like to turn the conference back over to Mr. Dick Robinson for any additional or closing remarks.

Dick Robinson

Thank you. We appreciate your support. We are particularly proud of the quarter but we know that we have three quarters to go as we go to achieve our operating margin goals for the year. Thank you for your support. We will look forward to talking to you about our important second quarter in December. Thank you so much.

Operator

That does conclude today’s conference ladies and gentlemen. We appreciate everyone’s participation today.

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Source: Scholastic Corporation F1Q10 (Qtr End 08/31/09) Earnings Call Transcript
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