Barnes & Noble Education - Earnings Call - Q4 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Barnes and Noble Education fiscal twenty twenty fourth quarter earnings conference call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer session. If you'd like to ask a question during the session, you'll need to press 1 on your telephone. If you require any further assistance, please press 0.

I would now like to hand the conference over to your speaker today, Michael Housby. You may begin.

Speaker 1

Good morning, and welcome to our fiscal twenty twenty fourth quarter and year end earnings call. Joining us today are Mike Hussey, CEO and Chairman Tom Donahue, CFO Jonathan Shar, Executive Vice President, GNED Retail and Client Solutions Lisa Mallett, President of Barnes Noble College Danuj Mehrotra, President of Digital Student Solutions and David Henderson, President of MBS. Before we begin today's call, I would remind you that the payments we will make on today's call are covered by the safe harbor disclaimer contained in our press release and public documents. The contents of this call are the property of Barnes and Noble Education and are not for rebroadcast or use by any other party without prior written consent of Barnes and Noble Education. During this call, we will be making forward looking statements with predictions, projections, and other statements about future events.

These statements are based upon current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release and public filings with the Securities and Exchange Commission. The company disclaims any obligation to update any forward looking statements that may be made or discussed during this call. At this time, I'll turn the call over to Mike Huseby.

Speaker 2

Thanks, Andy, and thank you, everyone, for joining us today. I hope that you and those close to you are all doing well and staying safe. I'll begin today's call with a quick update on the strategic review process and then turn to our fiscal twenty twenty performance. With the assistance of its financial and legal advisers, our Board of Directors continues with its previously announced review of strategic opportunities. As I'll discuss further in a few moments, we have made great progress on many of our strategic initiatives throughout fiscal twenty twenty, and this review process is designed to accelerate the execution of our strategic initiatives and enhance value for BNED shareholders.

We have not set a timetable for the conclusion of the review and do not intend to comment further unless and until the Board has approved a specific course of action or otherwise determine that further disclosure is appropriate. And now I'll provide our business overview. As with most businesses, COVID nineteen has had an unprecedented and profound impact on our industry and our company. During the onset of the pandemic, our priority was to ensure the safety of our employees and customers. I'm extremely proud of our entire organization's efforts and dedication to serve our campus partners throughout this challenging time while also focusing on their personal safety and work and life adjustments.

In the middle of a pandemic, we adapted quickly to continue serving our students and faculty while simultaneously closing our campus stores as our clients send students home to shelter in place with their families. Our response was only possible due to the strategic investments that we have made in our ecommerce platform, virtual fulfillment capabilities, digital solutions that have enabled us to offer customizable and increasingly valuable solutions to our campus partners during a period of significant disruption to the traditional learning model. We have developed customer solutions that can be quickly customized, help our schools to adapt. We've also reconfigured our cost structure and organization to be more nimble. These changes will allow us to adapt the profound environmental change accompanying COVID and, we currently believe, manage our liquidity to weather this storm.

As Tom will discuss further this morning, he led the organization's efforts to reduce our cost structure and to preserve liquidity and the strength of our balance sheet through quick and decisive actions to ensure we get through this crisis and emerge from it with a solid foundation. The education industry continues to evolve rapidly. That has never been more true than right now. Throughout the past few years, we have seen the evolution of this industry to digital products, services, and delivery, and the increased emphasis on affordability, access, and achievement at colleges and universities nationwide. We have continued to grow and adapt our solutions with this in mind, ensuring that we are evolving alongside this industry that we serve.

During fiscal twenty twenty, CNED underwent a great deal of growth and transformation as we continue to focus on the rapid execution of our strategic initiatives, which include growing our high margin ESS business by leveraging our store base to scale bartleby subscriptions, growing our share of course material adoptions through BNC First Day, BNC First Day Complete and other new digital models, stabilizing and now increasing revenue from new business wins to grow our footprint of managed stores, strengthening and improving our important general merchandise business and the ongoing optimization of MBS' virtual and wholesale assets with retail business. We have made tremendous progress in each of these areas and as we entered the fourth quarter, believe we are on target to meet our objectives, including our fiscal twenty twenty guidance. The onset of the COVID-nineteen pandemic presents unforeseen challenges for us all, including the institutions we serve. In March, as stay at home orders were implemented nationwide, we saw the majority of our college campuses closed down. Students were sent home to finish the remainder of their spring semester virtually.

In mid March, we closed the majority of our campus bookstores nationwide, in line with the actions of our partners and to protect the safety of both our employees and our customers. Our business experienced significant impacts as a result of these store closures. Although the fourth quarter is a relatively low revenue quarter for BNED, our high margin general merchandise business was severely impacted as a result of canceled and or deferred events such as March Madness and formal graduation ceremonies that traditionally drive significant merchandise sales in the quarter. Despite these significant challenges, continues to effectively and creatively serve our customers. BNED acquired and built a unique set of assets allowing us to adapt and pivot rapidly to respond to our customers' needs.

Through the combined strengths of our different businesses, we possess the ability to offer unique solutions for the many challenges COVID nineteen presents. Within DSS, for example, our Bartleby suite of solutions continues to provide students with a means to access academic support whenever and wherever they need it. This became increasingly valuable as students were sent home for the semester and left with limited resources for support. Campus tutoring and writing centers closed and traditional office hours no longer available to them. Through Bartleby, we are able to support students through the remainder of their spring semester, including finals, with free access to Bartleby's Learn, q and a service, and Bartleby Write.

As a result, Bartleby's peak spring traffic was 10 times greater than the prior year. Even prior to the pandemic, bartleby continued to prove its value as a tool to supplement in classroom learning and has seen significant improvements across all relevant metrics. Pre COVID spring traffic was over 9x higher than the prior year. We continue to grow and scale this offering throughout fiscal twenty twenty, gaining 170,000 subscribers. This represents over 200% growth over fiscal two thousand nineteen new subscribers.

Additionally, post COVID, we've seen traffic consistently increase, driving significant organic web acquisition growth, validating our SEO strategy, which we expect to become an increasingly greater contributor of user acquisition. The need and increasing demand for on demand learning platforms like bartleby is evident. We continue to actively pursue new avenues to scale and accelerate awareness and distribution of bartleby's platform to ensure that all students have access to the support they need whenever and wherever they need it. Within our retail segment, we have continued to provide unmatched service for our clients these past few months. An important factor in our ability to do so is because of the synergies achieved with our retail and wholesale segments.

When we closed our stores in March, thanks to our dedicated store managers and members of their teams, we continue to fulfill both courseware and merchandise orders placed on our school's ecommerce sites. Additionally, orders from our ecommerce sites are fulfilled by individual stores. For example, an order placed on the Rutgers bookstore website will be filled and shipped by an employee of the Rutgers bookstore. While we continue to utilize this fulfillment method, we needed a different solution that would allow us to fill larger upcoming summer term courseware orders at our schools without the risk of delays. The solution came from our Missouri based MBS team, which has continued to operate with three shifts of dedicated team members as an essential business throughout this pandemic.

Together, DNC and MBS responded very quickly, flipping the switch in a few short weeks to transition more than 300 of our stores as compared to only four stores last year to a custom store solution or CSS model. We developed the technology to seamlessly deploy the CSS model just last August in anticipation of fulfilling more student orders directly. Through the CSS model, a customer places their courseware order on a bookstore website, and that order is then directed to the MDS warehouse, which fills and ships the order directly to the customer. The check end solution is unnoticed by the customer but ensures there is no service delay. No competitor can replicate the solution.

It underscores the strength of the virtual and fulfillment capabilities that MBS provides for the company and allows us to support customers through difficult and uncertain time. We are also able to support our partners' course material needs throughout this pandemic with our BMC First Day inclusive access model. The benefits of First Day, including lower cost of digital courseware, higher sell through, increased student readiness, and seamless digital delivery were incredibly relevant prior to the pandemic. Following campus closures in the spring, with many schools uncertain if they would be reopening in time for the summer term, these benefits became even more critical for faculty and students. We saw a sizable increase in adoptions of first day by course for the summer as it allowed faculty to ensure their students would have seamless and timely access to their course materials regardless of where they were.

Fiscal twenty twenty first day revenue increased 91% on a year over year basis. We are also very focused on growing our new and very promising First Day Complete solution. While four campuses utilize the Complete access model in fiscal twenty twenty, we already have 11 campus partners planning to utilize Complete in the upcoming fall term with many more planned for calendar twenty twenty one. The Complete model is adopted by an entire institution, which drives substantially greater adoption rates for the bookstore, enhances revenue for the schools, and ensure students have access to all of their materials at a substantially reduced cost by the first day of class. In addition, publishers who supply the content have significantly higher sell through rates.

This is truly a winning solution for all who participate, which is why First Day Complete is gaining so much market traction. When our current team established DNED's current strategy not quite three years ago, we identified inclusive access courseware sales models, like First Day and First Day Complete, as one of our foundational must haves for long term success. Both First Day and First Day Complete are proving to be the right strategic path for us to have invested in and follow as they allow us to attack and, we believe, eventually reverse historical long term trends in courseware of duty clients. Importantly, the very sticky software and processes necessary to implement these exciting new models have already been developed and are rapidly being deployed into our existing clients that are major selling points with new business clients. Our AIC software, our ability to personalize our marketing and sales with each student by seamlessly relating each school's student information system, and our just released new ecommerce system for both courseware and merchandise have all been designed to work together seamlessly with an emphasis on easy to use and high value experiences.

Despite the COVID curveball we've all been thrown, we remain very encouraged about the value these new inclusive access models drive for our campus partners, faculty, and students, and we expect to see accelerated growth of these models. As schools are forced to deal with the financial fallout of the pandemic, our contractual model of sharing revenue and providing, once useful, now necessary, management tools and information for schools to better run their businesses will increase the value we bring to our relationship with them. Looking to the upcoming fall term, great deal of uncertainty still remains. Some campuses will extend their virtual learning for other semesters. Others are introducing short term shorter terms and or hybrid learning models.

With this in mind, the launch of our new ecommerce platform is incredibly timely. As we have seen these past few months, the importance of a seamless e commerce experience is critical in retail right now. We have spent this fiscal year building out the new e commerce platform, which will provide a superior hyper personal, hyper local shopping experience for our customers. In the first quarter, we are excited to begin launching these sites on schedule. We will continue to implement the new site for our customers on a rolling basis throughout fiscal year twenty twenty one.

We are confident these sites will deliver increased high margin general merchandise sales from KNED in addition to providing even greater value for our partner institutions and their students, alumni, and fans. Our ability to quickly adapt to our clients' most pressing concerns, both throughout this year and in the midst of a global pandemic, is the reason we continue to win new business. In fiscal twenty twenty, we signed $110,000,000 in new business, new physical and virtual bookstores opening in a diverse range of campuses, including Western Kentucky University, Front Range Community College, and the City Colleges of Chicago. We are pleased to join these campus communities and many others and look forward to further expanding our store footprint to serve an even greater number of students, faculty, and alumni nationwide. On a net basis, we generated approximately $45,000,000 in new business as we look to prune some underperforming stores and less profitable contracts that were awarded to competitors.

I'm very proud of all that B and G accomplished this year in executing our planned initiatives and in pivoting these past few months to ensure service to our customers went relatively uninterrupted. The implications of this pandemic still remain very uncertain, but we believe we are well positioned to continue serving our campus partners and students with an ability to adapt to the changes that COVID nineteen may bring to the education landscape. As we prepare for the safe reopening of our campus stores, our operations team has developed a comprehensive reentry program that incorporates social distancing guidelines from the CDC and the WHO to best promote safety and well-being of staff and customers at each of our campus store locations. This includes frequent sanitizing of high touch surfaces, implementing social distancing measures, including reduced occupancy, and incorporating other preventative measures such as sneeze guard, contactless payment, and curbside pickup areas. We plan to reopen our campus stores based on national, state, and local guidelines, and, of course, in partnership with school administrations and the protocols that they implement.

As it relates to our financial position, we expect COVID to continue to significantly impact our business during fiscal twenty twenty one, as Tom will review in just a moment, a number of actions throughout the fourth quarter to reduce expenses and preserve liquidity. These were incredibly difficult decisions to make, but were necessary to ensure sufficient liquidity given the impact of the pandemic. Before I turn it over to Tom, I would like to take a moment to thank each and every one of our clients who have all shown tremendous fortitude throughout this pandemic and help ensure that students nationwide are continuing their learning uninterrupted. I would like to express my unlimited appreciation to our BNED teams, from those who quickly transitioned to remote working, to those in the warehouse and field that continued showing up to work each day. I'm sincerely grateful for all of your hard work and commitment to BNED.

With that, I will turn it over to Tom for the financial review.

Speaker 3

Thanks, Mike. Please note that fiscal twenty twenty was a fifty three week year for us, consisting of fourteen weeks for the quarter and fifty three weeks for the year as compared to thirteen weeks and fifty two weeks in the prior year. All comparisons will be for the fourth quarter of fiscal twenty nineteen unless otherwise noted. Comparable sales comparisons exclude the impact of the additional week. As Mike discussed, entering the fourth quarter, in addition to executing on our strategic initiatives, we were also on plan to achieve our financial targets, including EBITDA of 80,000,000 to $85,000,000 for the year.

As I'll review in our financials momentarily, our fourth quarter sales were significantly impacted by COVID-nineteen and we took immediate actions to mitigate the impact of sales declines and preserve liquidity through expense reductions. As a result of our immediate actions, we believe we have sufficient liquidity to operate our business without a need to raise additional capital. Total sales for the quarter were $256,900,000 compared with $334,400,000 in the prior year. This decrease of $77,500,000 or 23.2% was comprised of an $81,400,000 decrease from the Retail segment, somewhat offset by a $4,700,000 increase from the Wholesale segment and a $1,100,000 increase from the

Speaker 2

TSS segment. Comparable

Speaker 3

store sales in the retail segment decreased 34.7% in the quarter as compared to a 0.9% increase a year ago. Comparable store sales declined 9.9% for the full year. Schools began to close their campuses and send students home beginning in mid March. In coordination with the schools, we closed our campus stores as schools shut their campuses. This had an impact on our ancillary textbook sales that occur post rush season and a far greater impact on our general merchandise business as many sporting events and graduations were canceled, two significant contributors to the business during the fourth quarter.

Comparable textbook sales decreased 8.3% for the quarter as compared to the prior year increase of 0.9%. For the full year, comparable textbook sales declined 8.4%. On a full year basis, textbook sales continued to be impacted by lower unit sales and lower average selling prices. General merchandise sales decreased 52.4% for the quarter and 11.9% for the full year. Wholesale segment sales were $18,800,000 for the quarter, increasing 4,700,000 Net sales for the full fiscal year were $198,400,000 declining $25,000,000 or 11.2%.

For the full year, wholesale sales were down primarily due to lower demand. ESS sales were 6,600,000 in the quarter compared to $5,500,000 in the prior year period. Sales for the full year were $23,700,000 as compared to $21,300,000 in the prior year. The consolidated gross margin rate for the quarter was 25.5%, down from 35.1% in the prior year period. This was primarily attributable to the loss of our higher margin general merchandise sales and occupancy deleveraging.

The consolidated gross margin rate for the full fiscal year was 22.9 as compared to 25.9% in the prior year period. Selling and administrative expenses in the fourth quarter decreased by $11,300,000 or 11.5% compared with the prior year period and decreased $19,400,000 or 4.6 percent for the full fiscal year. This decrease was primarily due to lower store payroll and operating expenses, partially offset by the ongoing investments we are making in developing Bartleby. We recognized 15,300,000.0 and $18,600,000 of restructuring and other charges during the fourth quarter and fiscal 'twenty, respectively. Of the $18,600,000 $12,700,000 was related to severance and non termination and benefit costs associated with several management changes and the elimination of various positions as part of our cost reduction initiatives.

2,800,000.0 was for professional service costs, and 2.7 was for a noncash actuarial loss related to a frozen retirement plan, balance related to stores and facilities. As I mentioned earlier, as we began to fully understand the unprecedented impact that COVID would have on our business, preserving cash and liquidity became paramount. We immediately reduced cost, furloughed the majority of the retail workforce, cut CapEx spend and deferred IT projects, along with a number of other initiatives to preserve liquidity. We will maintain our laser focus on managing costs throughout fiscal 'twenty one as we continue to manage in a COVID environment. We plan to take additional actions to reduce costs and operate more efficiently.

Additionally, fiscal 'twenty one will benefit from the cost reduction initiatives that were implemented in the back half of fiscal 'twenty. Due to all the uncertainty that COVID presents in the near and intermediate term, we are not providing fiscal twenty twenty one EBITDA guidance. We do expect that COVID will continue to have a significant impact on our business toward fiscal twenty twenty one. Based on our current assumptions and as a result of our cost reduction actions, we believe we have sufficient liquidity to operate our business without a need to raise additional capital. Our cash balance at the end of the fiscal year was $8,200,000 as compared to $14,000,000 in the prior year period.

There was $174,700,000 in outstanding borrowings compared with $133,500,000 in outstanding borrowings in the prior year period. This increase is primarily attributable to the lost sales resulting from COVID, coupled with the purchase of certain general merchandise that did not materialize as a result of canceled athletic events. We expect to have a net working capital benefit in fiscal twenty twenty one as we cycle through these events and sell through the merchandise. CapEx for the fourth quarter was $9,400,000 compared with $14,700,000 in the prior year. CapEx for the full fiscal year was $36,200,000 as compared to $46,400,000 in the prior year.

Decreases in CapEx were due to reduced store, systems and DSS segment spend. Currently, our retail segment operates fourteen nineteen college, university and K through 12 school bookstores comprised of seven seventy two physical bookstores and six forty seven virtual bookstores. As of today, we have contracted to open an additional 68 stores in fiscal twenty twenty one with 42 known closings. This would bring our total physical and virtual store count to fourteen forty five locations. With that, we'll open the call for questions.

Operator, please provide instructions for those interested in asking a question.

Speaker 0

First question comes from the line of Ryan MacDonald from Needham. May begin.

Speaker 4

Hey, good morning, Mike, Tom and team. Thanks for taking my questions. I guess as we're thinking about fall semester, how should we think about, one, the potential impact from perhaps reduced store foot traffic with fewer students on campus? And then I guess on the expense side,

Speaker 2

how are you sort of looking

Speaker 4

to optimize to sort of run that maybe at a breakeven level perhaps and adjust accordingly?

Speaker 2

Ryan, this is Mike. I'll take the first part of that question. If you can take the second part, the first part of Lisa, Mallett wants to jump in if she can. But in terms of the impact on the impact of reduced store traffic is something that we're very focused on, obviously, and talking about it a lot. You know, we have a preopening plan that we we discussed, and we'll discuss it more discuss it in more detail in the in the

Speaker 5

10 k. But we have

Speaker 2

a preopening plan for those stores where our campus partners have said they are opening stores. And, you know, we we expect to comply with all the local regulations. So, yes, we we do expect in those situations, even when there is a store open because the campus is open, which is probably gonna be the case in the majority of of the campuses we serve. We'll have we'll have some capacity restrictions and that type of thing. What we're doing is working very creatively with the schools, try to reach students, alumni, and and faculty that normally would be in the stores on a on a virtual basis.

As we discussed, we just started on the process. We just recently, in fact, in the last two weeks, launched the first of the new websites, the new ecommerce platform. That will help us as we continue to roll it out. But we're doing a lot of other things to be more specific in terms of reaching out to the administration of the school. I think the main one of the main points is that this COVID crisis has really affected the financial status of our campus partners.

And, you know, one of the things that we bring with the business model we have in terms of sharing a percentage of the revenue from our sales, whether it's in a in a physical or a virtual sense, ecommerce or in the stores, we share a percentage of our revenue with each of the schools. So our our interests are very, very aligned with working together with the schools very creatively to drive as much revenue through our contracts as we can because those schools are all in need of that that funding as well. So, Lisa, I don't know if you wanna comment any further on that.

Speaker 0

Tanya, I think you said it. Think we're

Speaker 6

having very productive conversations with our campus partners based on what Mike just said on how do we work together to mitigate the traffic losses and make sure that we're providing all the creative solutions we can for, you know, continuity of sales. You know, certainly, you know, the even the existing ecommerce sites have been really a workforce for us, and we're continuing to drive a lot of business through that. The expansion of our direct to consumer drop ship program is really helping us now, you know, mitigate the sales loss on general merchandise as well. And we'll continue to work with campus partners to think creatively, you know, working on putting together bulk purchasing opportunities for incoming freshmen, etcetera, where we can sell general merchandise in new and creative ways.

Speaker 7

Alright. So that's

Speaker 2

a good point.

Speaker 6

That's a

Speaker 2

good point you just made on drop ship because that's the capability we didn't have last fall. So comp on basis and looking at capabilities that are new, there's a lot of new things that we've done. That's a really important one that we put in place in the last twelve months.

Speaker 3

Got it. That's helpful.

Speaker 4

And in terms of the bartleby usage and sort of the DSS business, obviously, it's great to see some of the increased usage throughout the spring here. Can you talk a little bit about what you saw in terms of spikes in usage following campus closures going to April and May? And then perhaps what you learned from that and how you're using that for preparing for the fall launch for Bartleby as well?

Speaker 8

Hey, Ryan, this is Kanuj. We saw, there were very positive trends as we've noted pre COVID, really related to our SEO strategy and things we were doing to get outside the footprint as well as executing in the footprint. But post COVID, in particular, call it, April to March, there was a dramatic rise in traffic and usage on the order of 50% increase in traffic just for the month of April. So the trends, I mean, it's it's a very seasonally low period, as you know, in the summer, but they're still vastly above what we saw the previous year. I think it's a combination of just Bartleby getting out there more and being recognized and the value proposition being used by more students as well as, the obvious, impacts from learning at distance.

So what we're doing in terms of getting ready for the fall, you know, we continue to sharpen the SEO strategy and optimization of our content libraries as well as thinking about expanding new, content partnerships, other avenues for distribution, and just getting the value proposition, which we think is competitive and leading edge relative to the competitive set, which you know well. So it's an enormous value to use Bartleby for these students, almost half to a a third less depending on the platform you're using. So we continue just to really get it out there and create the awareness and the usage. We've continued with free offers as well. The free offers have not impacted the paid subscriptions, and we're seeing general strength across all metrics, whether it's traffic, usage, and conversion.

Speaker 4

Excellent. And just one final one for me. It's great to see the momentum with First Day and First Day Complete. Can you just talk about how the conversations with universities are beginning to change now that we are sort of moving more of a shift to digital and online with universities? Perhaps how this new deal you signed with the division two schools creates an additional opportunity for First Day overtime?

Thanks.

Speaker 7

Hey, Ryan. It's yeah. Hey. It's Jonathan Shar. Yeah.

The value proposition, as Mike said, of affordability, access, and convenience was extremely relevant for our customers pre COVID, but is now even more critical. And I think that the conversations have definitely accelerated as as that access and immediate access and driving down the cost of course materials becomes even more important. So we're having lots of discussions. We think there's lots of potential to continue the growth, which as we stated was approximately 91% year over year in fiscal twenty twenty and we expect significant growth in fiscal twenty twenty one and beyond.

Speaker 2

Yes. First Day Complete, Ryan, I mean, I think that you know, the other important thing is we've really I think it got through to the publishers on both Thursday and Thursday Complete in terms of a a common voice from the customer. Our our institution is really saying, this is these are models we want. And because of that, we're able to to go go to the publishers and, you know, convince them that when they're dealing with us in our footprint, sell throughs as publishers from from digital and first day and then first in total for First Day Complete, we're gonna be much higher if if we cooperate together together on that. And I think this environment, as John's saying, has has also improved that cooperation, which is important because, as you know, there's opportunity for us to be disintermediated by by direct pub sales.

So that's another important point. I think first day complete, we have very aggressive goals for calendar fall twenty one, which is in fiscal twenty two. The goals that we have this year, I think, what we saw is that when COVID first hit on First Day Complete and some of the new things we're doing, The initial reaction by some schools was to call back because they didn't think they had the mind share to make all the changes that needed to be made. I think that they quickly transitioned into, hey. Wait.

These are these are changes that we need to make in this new environment. So it's been it's been gaining quite a bit of momentum in the form of schools signing up for both this fall and committing recommitting them for the spring of this fiscal year, and then especially for the follow-up next year when we really expect to see First Day Complete take off.

Speaker 0

Your next question comes from the line of Alex Fuhrman from Craig Hallum. Your line is open.

Speaker 3

Hi. Thanks for taking my question. You know, I wanted to ask about bartleby.

Speaker 9

It seems like you're you're continuing to see good momentum there. What what's your outlook there for this year and your strategy for marketing that product when it might be harder to market it in store? Do feel confident that it's reached a critical mass that you can continue that momentum into the upcoming school year?

Speaker 2

So the the strategy really remains, Alex.

Speaker 8

This is Kanuj. Obviously, there's an impact from not having sort of that physical Nexus be as optimized as it was pre COVID. We don't know how much the web sales pick up for that within the footprint. The footprint, you know, so there are some headwinds in the footprint, but the SEO and the paid acquisitions outside the footprint has been far outpacing what it was. It's outpacing our results.

It's really firing on all cylinders. So it's up multiples for what it is. So we overall where I sit now, I would still expect growth. We're

Speaker 9

trying

Speaker 8

to figure out how best to get after the students in our footprint in the COVID environment, and we have some ideas. There's also some there's a lot of work being done on figuring out what I would call alternate and strategic points of distribution above and beyond. It's very clear from the traffic trends. If you look at what we got in April that we're rather taking share or we're expanding the TAM. Likely, we're taking share from the competitive set, and people are recognizing bartleby.

So what the SEO strategy, which has always been in the long run view, we think is going to be the predominant acquisition channel. That's certainly making up for some of the weakness that we may have with COVID with not having the stores fully operational.

Speaker 9

Great. That's really helpful. And then can you just talk about the normal pace of business for you in terms of winning new school agreements here? I would have to imagine the willingness for schools, certainly the economics of outsourcing are, you know, no no less appealing, you know, perhaps a lot more appealing given the given the pandemic. I mean, just in terms of the actual logistics of, you know, getting the right people together, getting these these these agreements kind of signed and moved forward.

You know, do you do you feel that the environment is conducive to to moving forward with these kind of agreements? And do you do you still think that that you're gonna be heading towards kind of net sort of growth here over the next few years?

Speaker 2

Yeah. I'll I'll answer. This is Michael answer that initially, and then Lisa can jump in who's our new business sales group to report to her. I think in this environment, as we said, our interests are are totally aligned with the increased need for schools to help out their own financial position to these 5,000 or so higher ed institutions that are out there and how they've historically operated and the impact that COVID has had on their financial picture. Many of them are taking very creative steps to solve it, but also the complexity that is being introduced by by by this environment with a much more much reliance on virtual digital.

That is driving more, I think, more schools to to move to an outsourced model like ours. And specifically to your question, we're not seeing a slowdown in magnitude in terms of being able to meet on a virtual basis and in some cases in person now. Team has done very well so far in fiscal year twenty one adding new business and has a very healthy pipeline. So I think that contrary to intuitive conclusion that schools might wanna slow down in this environment. They're doing just the opposite because they have a a sense of urgency to outfit themselves with the tools and the partners that they need and also the financial benefit that we bring to our contracts.

Lisa, do you want to add to that?

Speaker 6

No. I mean, I think you nailed it. We are still having very productive conversations even for fall reopening where we're waiting for a couple of decisions to be made. I personally have been on four or five Zoom presentations with schools. And as Mike said, it's the alignment of the revenue model, but just the, you know, our ability to pivot and adapt and support whatever might come this year.

Right? Because we all know it's very fluid. It's been a really, really important conversation as we meet with different schools.

Speaker 2

I think that's really helpful. With some of our yeah. I've seen some of our existing clients that are, what you call, top tier schools. Mhmm. I think, you know, I think that we're used to having heavy heavy store traffic, not just from students, but from from outside, from within either within the community or, in some cases, tourists, which just shines a light on the need to have, you really outstanding ecommerce and digital capabilities.

So this this conversation has really expanded Mhmm. To our entire client base. Yeah. That's terrific. Thank you.

Operator, are there any other questions?

Speaker 0

Your next question comes from the line of Rory Wallace from Outerbridge Capital. Your line is open.

Speaker 2

Hey, everyone. Thanks for being on the call, taking my question and understand very unprecedented times and appreciate everything you've been doing to help the company navigate them. My first question I want to ask is, in your earnings release, you talked about having 11 campuses signed up for fall compared to four for FirstNet Complete in the past year. And as you know, we really share your enthusiasm about the opportunity and understand that a lot of the software work in terms of getting those FIS integrations with AIP has been done. We think there might be a longer term opportunity around even plugging into that and certain LMS platforms into that as well.

But you're looking at 800 physical stores, 1,500 total school relationships. So I think given the the total market size and the product value proposition, especially as you've mentioned how COVID has actually only increased that value proposition, I think us and and all shareholders would like to see what the road map looks like as far as how you scale this product to reach hundreds of schools over time as opposed to a dozen today. And so I guess my question is, what are some of those specific steps that, you you and John, Mike, are taking around really accelerating the go to market for the first day so that this can start to really transform the company from a revenue and EBITDA standpoint? Yes. I think it's a great question.

It's something that we obviously are very focused on. You have to keep in mind that when we did the four schools in the fall of twenty nineteen last year, those were pilots. And they were very relatively small schools. Although Onondaga, which is a SUNY school, was fairly sizable with about five or 6,000 students. But this is this is still being done quite manually, and the processes and systems required to support it weren't in place.

As as you just indicated, there are different tie ins, and what John and his team have been doing and the whole retail organization have been doing with getting getting schools signed up to our adoption and insights portal to the necessary SIS, but also LMS, high ends with SIS in particular. Basically, it's just an export file of daily information that allows us to to to personalize the experience the way we need to and and understand the the course workflow. That's that's being rolled out now. And as you know, it's a very seasonal business. And, you know, just to your to your point of I made the comment that we really expect to see this pick up.

We're not disclosing the exact number of institutions or the amount of revenue in fall of next year, fall of calendar 'twenty one, fiscal 'twenty two that we expect to see. We have a very aggressive target. We're not even giving guidance on this year. I don't think we're going to look out in this kind of environment and start providing a road map or guidance. At at least in this call, we may do it later in the year, Rory, depending on how things go.

We've got to get through, you know, a little bit a little bit more time further to the fall to see what actually happens with our business before we start providing road maps and targets that are we're trying to provide as much general guidance as we can about what we think is gonna happen. But, you know, I think the the context I would give you to your question, which I said is a great question, is that so a year a little over a year ago, none of this really existed. Lot of these things didn't exist. Bartleby Bartleby really started up and was launched in January of nineteen, as you know. You know, the the new sales initiatives kicked off last year.

The First Day Complete and First Day, which, as John said, grew, you know, 91% year over year, first day by course, which is another important element of inclusive access. Getting schools to switch to a concept like First Day Complete requires examples in a market of how it's working. We started to provide those proof points and examples in our pilots last fall, and we're adding to that. It may not sound like going from four to 11 as much as have to also look at the size of the schools and the impact that's going have on being able to point to different kinds of schools that are larger than the ones that we, you know, we we accomplishes in our pilots. So yeah.

We expect to see substantial growth from multiple of of of 11, really high multiple of 11 mid mid to high level of of 11 next next fall. It's a it's a key priority for the company. It's what we're all pushing on. And, to your question, has has actually brought in some some very great outside help and go to market strategy and execution, very detailed operational execution to make sure that we're driving this internally as quickly as we can. So, John, if you want to add anything to that sort

Speaker 3

of question?

Speaker 7

Yes. I'd also yeah. It's a great question, Rory. And we we actually have schools within this fiscal year that are targeting spring term launches. So it's not just 11 for this fiscal year.

There's there are schools that are very interested, and with what's going on with their reopening plan, had to defer to a spring release as well. So we'll have more this fiscal year. And then as I said, a high multiple going out, that was we've really put a disciplined sales and marketing structure, go to market approach and resources against driving the pipeline and converting a lot of interest into signed amendments for this new model, which as we talked about during the call, the value proposition of affordability, immediate access, and then and really incredible convenience for students is more impactful and important than ever.

Speaker 2

Yes. To be clear, we obviously are very focused on our short term plan, as Tom said, in terms of managing liquidity, being responsible getting through this year, adding new business, continuing to do all the things that we're doing first thing for Complete, not to mention what David and his team are doing with MBS and just fulfilling virtually at full capacity, having run three shifts since March out in Columbia, Missouri to do that. But if you look out in our out years, we're not gonna get specific guidance, but it's to be very clear, we're we're highly aligned on these initiatives, First Day Complete and the impact on our general merchandise business of our new e commerce system to provide growth in the case of courseware actually reverse the the trend of the decline in courseware revenues over time. I'm not getting specific as to which years. But, you know, that's a trend that's been in place for many, many years over a decade, finding, you know, revenue of units and then average prices more recently.

But the state complete model, as you know, provides a substantial increase in sell through from something like 35 to 95% or so. And with it, at the same time, substantial cost savings to students, but it provides substantial increases to our margins, which we're also gonna share with the schools. But that's that's scale plan, First Day Complete, and First Day is absolutely critical to our long term future. And we probably said as much as we can say on this call about road map at this point in time. I think we'll see what happens with everything that's going on with the company in terms of the strategic process and also this fall.

And if it's appropriate, we can be more specific about the road map once we get a better footing around all the uncertainty that's affecting all of us over the next six months or so. Yes. Thank you, Mike and John. And I guess following on that with the uncertainty, you are ten weeks into your July at this point, and you saw basically a $40,000,000 negative EBITDA impact from what expectations were pre COVID in your April. So I guess as things stand now, what color can you share with investors?

You're not a particularly back end loaded business typically. So what are you able to disclose as far as EBITDA trends for this current quarter? And understanding it's always a light quarter because it's summer. Yes. I'll ask Tom to answer that.

I don't think we'll disclose much, but maybe he can provide some color.

Speaker 3

Yes. Thanks, Troy. It's difficult at this point to say the trends that we saw in the back half of the fourth quarter continued to the summer. We were able to transition for summer classes. The fulfillment out of MBS out of Missouri, that'll help mitigate some of the sales fall off that we saw in the fourth quarter for the summer.

But it is a light quarter. And really, quite honestly, it's going to be more about managing the expenses. And I think we've done what we would consider a pretty good job at this point with you know, the furloughs that took place in early April, and we're only bringing people back, you know, as needed to support the stores if there's ongoing tasks and and fulfillment that needs to be done out of stores. But more importantly, if the sales aren't saying that the the people aren't coming back. So I think it remains to be seen.

We haven't closed the books for June yet, so I wouldn't use May as much of an indicator for the quarter at this point in time.

Speaker 2

Okay. And I understand your consistent commentary around liquidity, and I see on your balance sheet that do indeed seem to have adequate liquidity. But I guess have you explored sort of different scenarios around how things shake out around fall? I think the reason your shares seem to be trading at $100,000,000 market cap with normal EBITDA of above $80,000,000 and high free cash flow is that I think there is implicit market concern in your ability to maintain liquidity. So I guess what more kind of color can you share around your level of confidence there and maybe any discussions that you've

Speaker 3

had that would lend itself to support in that view? Yeah. I mean, I think as it relates to liquidity or we you know, we're planning and it's really focused on the expense side of the equation process, really making sure that we have the right adaptive model as it relates to, you know, the stores and the retail segment as to make sure that we have enough people there, but make sure we don't have too many and don't be ahead of ahead of the sales if you think they're coming. And, really, it's it's that maniacal focus on not spending like we normally would spend, not for you know, not gearing up in terms of getting inventory in that we might normally get in on on

Speaker 4

the textbook side as well as

Speaker 3

the GM side. So it's it's a very maniacal approach as we look at the expense side, not only of of of what

Speaker 2

we spend on people, what we

Speaker 3

spend on contracts, but it really comes down to managing the inventory as well. And and we've looked at it from that perspective and and got comfortable with, you know, the outlook that we see. I mean, it's very difficult this environment, and I I don't know you know, care who you are. Nobody's gonna be able to forecast what the call is like even at this point in time. It's a very fluid situation as it relates to enrollments, but very fluid situation as it relates to how the schools are going to adapt and operate.

We think we've done a lot and we'll continue to do more in terms of the expense cutting, and that's really the toughest that we have.

Speaker 2

Okay. I appreciate that, Tom. And then I guess lastly, as we think about the future of the business and the First Day opportunity and borrower behavior and also the merchandise e commerce initiatives, which are sort of the three ways that I think about the growth towards the company.

Speaker 6

I think it would

Speaker 2

be very helpful if you would consider providing more granular information for investors quarterly. So for example, with First Day, you're basically moving from transactional b to c retail to institutional subscription sales. Obviously, those types of revenues come in at much higher multiples in the public market. So we think over time, creating, a breakout of First Day revenue and EBITDA is very logical. If you've looked at companies that have signed this internationally, it's led to significant inflection in their multiples moving from single digits into the teens.

And then around the general merchandise segment, we saw in this quarter how it's extremely high margin business for you, which cuts both ways when it's strong or when it's not. But with the next generation ecommerce initiative that you cited as being very important for that business, we think it would be appropriate to start breaking out e commerce revenues each quarter as compared to the revenues generated in store. And then finally, on bartleby, I think, obviously, the subscriber number on a gross basis is a nice thing to have, gross acquisition basis. And then the usage, were able to to track as well that it's gone significantly higher. But over time, I think Chegg does report their total subscribers and subscription revenues each quarter, which has allowed investors to sort of gauge the traction there and value the business over time.

So we think, obviously, it's very nascent. But to the extent you're able to break out any more granular metrics, whether it's, you know, even even efficiency metrics around LTV attack or gross churn, those types of things can can help the market to assign you a higher multiple because you're currently trading like a distressed retailer, and you actually have two transformational opportunities that I think you owe yourself and

Speaker 3

the shareholders to shine more light on.

Speaker 2

Yeah. Those are good those are good points. We'll take them under consideration. You know, we've we've done a lot to actually change the structure of the company within the last twelve months and going back. You know, as you know, we we actually created DSS as a separate segment to start to do that as the product started to develop.

So it's a step in the evolution to become more granular in the disclosure as as those kinds of metrics that you're citing start to scale. Breaking them out before there's there's scaling, there's some there's different considerations. Obviously, they're not material. It doesn't help give you a baseline. But as they start to scale, would agree with you that those are those are helpful things to consider.

I appreciate the comments. Okay. Yes. Well, I appreciate it, guys. Thank you.

Thanks, Roy.

Speaker 0

Your next question comes from the line of Nick Dempsey from Barclays. Your line is open.

Speaker 10

Hi. Good morning, guys. Yeah. We're seeing publishers pricing of e books and digital content coming down year after year. They try to install their units and win something back from the secondhand market, the rental market.

I got two questions in relation to that. As the mix shift towards digital, is there a risk that publishers could push students to their own sites to avoid the percentage take from from retail in in a larger way? And the second one is, as the price of e books in particular starts to come in a little bit closer to print rental pricing, is there a risk that you guys could be stuck with quite a lot of print books in the system? And could you have to start lowering your price on print rental in response to that?

Speaker 2

Hey, Nick. This is Mike Hughes. We all take the first question, and I'll probably ask Dave Henderson to take the second question, which ties into our relationship with VitalSource and couple of other points. In terms of publishers with intermediation, that's something for digital. It's something we've been dealing with for a long time.

We have contracts with the three largest publishers to ingest their digital content through First Day. Importantly, our contracts with the schools provide us with exclusivity rights for courses that are posted in the LMS, whether it's digital or also for physical sales and courseware. Now the way our business is structured is not like a typical retailer. We have contracts that we enter into that in exchange for us providing a percentage of the revenue we earn to schools. And as I mentioned, that's becoming more and more important as they deal with their financial, increased financial issues in COVID and beyond.

Contracts in exchange for the percentage of revenue we get, we also get generally, and in many cases, exclusivity, which we enforce with the publishers. So our discussion with the publishers is is not an antagonistic one. Sometimes it's sometimes it is, but most of the time, we're enforcing our contracts. But more lately, as I mentioned earlier, Nick, you know, if you were on the call, I think the the cooperation with the publishers around First Day and First Day Complete when schools give us the mandate to go to inclusive access models, our cooperation with them has been, you know, overtly very good. Because what happens is the publishers are losing adoptions just like we've been losing adoptions to competition, you know, such as other digital sources or OER or an Amazon or other marketplace even though we match those prices.

And, you know, this gives the publishers a big focus increase their sell through the first and complete scenario, for example, to work almost a 100% wherever they are. And, you know, the pricing the pricing is discounted, but the volumes are so much higher that it makes sense for the publishers to go in with us in terms of packaging for digital content because it's what the it's what the universities want too. The schools are trying to achieve affordability objectives, accessibility objectives, especially now with all the focus on socioeconomic parity. And they can't do that by allowing the faculty to just direct the the purchase of of courseware. It has to be managed.

So we're giving them the tools to manage it so they can achieve cost savings rates. They're first to complete a 40 to 50% while we and the publishers actually do much better because of the increased sell through. We also share those economics with the school, which allows them to benefit. So this is, as we've described before, really a win win win. That doesn't mean we're not gonna see, especially in the current environment, you have publishers out developing, you know, virtual courses with with schools.

But the agreements we have with the with the publishers, we deal with thousands of them, not just the top three. But in those in the footprint that we serve, you know, let's listen to the customer. Let's let's work together. Let's give them the benefits that they're asking for that benefits all of us. Otherwise, we're, you know, we're sending the we're we're doing business through lawyers, enforcing our rights, and and which we do if we have to, but that that level of activity has really subsided quite a bit since we've been able to have a much better conversation with, you know, the new leadership of a couple of the publishers and then the leadership of one of the other ones.

So that's that's a risk, no doubt. But I think we're finally using a model that brings us all together for the benefit of our mutual customer. The eBook pricing, Dave, why don't maybe let Dave handle that one?

Speaker 11

Well and and, Mike, to build on your on our inclusive access branded first day with our campus partners, what what they are in essence looking for is a single and elegant service solution for their for their students, which we provide with our with our platform, which is powered by VitalSource. And with that new that new arrangement that we came into last summer, we've seen much more cooperation with with publishers and participating with us. Again, coming to that campus desire of of a single experience for the student rather than differentiated and and multiple routes that they would have to take to keep the product. You had you had asked about the simple side and and the risk of being stuck with inventory. So I'll break that into two two components.

Obviously, when we're we're buying to our retail divisions, physical stores and virtual, any new product that we're buying from publishers, we're obviously buying for anticipated demand and what we've seen over the course of the history with that client. And, of course, product purchased from the from the publishers is returnable. So the the risk on that

Speaker 2

product is is quite low.

Speaker 11

From a wholesaling standpoint, which is dealing with off price used product, a product that is able to be acquired and sold for less than published from that pricing. That, of course, is a is a cycle to business. And to Tom's point earlier, we have been very you know, we've we've we've reviewed this day in and day out as to the demand and what we're anticipating with the impact of of COVID and enrollments and what's going on this fall. So we've been very watching our acquisition of that product very closely and have scaled it to, where we believe we're gonna see things move, not only for the fall, but, of course, for the rush period that occurs, in in January and and February of

Speaker 2

twenty one. I hope that hope that answers your question.

Speaker 10

That's great. Thank you very much.

Speaker 2

Yes. Think one of the questions that was asked earlier that we didn't really I think maybe Ryan asked a bit on agency conferences and some of the things we're doing where we're going after entire conferences, athletic conferences, and and the context we try to offer them, you know, package deals, so to speak, and represent them. That'll obviously help us in terms of aggregation. And and Rory went through, I think, pretty good job of kind of getting his view of it's consistent with ours or what our growth pillars are. We talked about an inclusive access models for CoreSquare, general merchandise and ecommerce, and, Bartleby, the the one he left out was new business, which is really the platform for all of that, and someone else asked about that earlier.

But those aren't really the four growth platforms. And the reason I bring that up is this business that we're running is nothing like the business we were running three years ago. Since then, you know, we've acquired MBS. We've acquired digital capabilities. We've we've converted from a service based to a product based company.

And, you know, we're just at that point, I think, Roy's suggesting, where we can start to present ourselves differently as we start to scale all these things we've been working on. But, I mean, I I was hoping I would never have to use the word transformation again, but we are still in the transformation. But I'm I think we're we're so we're a baseball game. I would say we're probably in the in the seventh inning of that. Maybe we would have been a little later had it not been for COVID, but I think it's also helped us accelerate it.

So either way, we're getting through this transformation, you know, investors should not look at who we were two years ago, three years ago in the trends and think that's where we're gonna be in twelve to eighteen months. It's gonna be a very different company based on the capabilities we built in for digital as some of the questions have pointed out and some of the, some of the new products that we've described uncover. And we're very confident in that. So, you know, if you look at, as Kanuj calls them, our key competitors and the multiples and the values they enjoy, I think Rory's comments about how we display information once we start to scale are very valid. We'll look at that.

And I think that if you're looking at the company, you should look at it through a lens of what has been done just the last twelve months, last eighteen months to position us as we come out of COVID, which Tom and his team and others are doing a very good job of managing this through from a liquidity perspective. So I wanted to make that point really, mister with respond in response to Nick's question about publisher decision remediation because it's always there, but it's been there for a long time. I I would say that we're dealing with that. I'm not losing sleep over that the way I was even twelve months ago. It's we still keep our eye on it.

It's still a concern. It's still a competitive threat, but we've come a long way in a lot of respects dealing with all those kind of fundamental issues.

Speaker 0

Your last question comes from the line of Ryan Vaughn from Needham. Your line is open.

Speaker 5

Hi. Thank you. I'll try to be quick here. Just to just to follow-up, it's encouraging to hear, do you have sufficient liquidity, no need to raise capital? Just to follow it up on a question a couple of callers ago.

Could you just tell us what the revolver availability is today and any sort of covenants that we need to be monitoring over the next few quarters? And then just for second part of that, the increase of the, call it, the $40,000,000 swing. You had mentioned loss of sales, totally understandable, but also you repurchased a bunch of that product that we should get back in 2021. Can you give us some sort of idea what that net working capital benefit looks like? $5,000,000 $20,000,000 just something along those lines?

Yes.

Speaker 3

Ryan, this is Tom. So the ABL is in place. It matures in 2024. $400,000,000 facility. It's an asset based lending facility.

The covenants are more driven towards the the the inventory or the assets that are available for the lending, so that's really all. It's not it's not like your typical cash flow facility where you have EBITDA and things of that. You have to meet. That's not the case here. It's all based upon availability.

And, you know, we're we probably have a slightly higher borrowing as we peak. We've always peaked in July and early August in terms of borrowings from where we were at year end, probably, you know, 30 to $40,000,000 higher than where we were at a 175 level at this point in time. So approximately half the facility is still available for use. And and my point about the working capital is, you know, we we we were geared up for these events in the spring and these graduations that didn't take place, you know, in terms of our readiness and preparedness at the retail level. And, you know, these things, for the most part, didn't get delayed.

They were just really canceled. So assuming we cycle those next spring, which which is really the point I was trying to make on the working capital, assuming we cycle those next spring and they happen, then they will have a net working capital benefit. And, you know, it's a little difficult to quantify at this point in time given the, you know, uncertainty that exists in the level, but that's really all I was trying to point out is that not only did we miss the sales, but we we were prepared for them that and then they they just didn't happen. So assuming those events cycle next year, we will have a net working capital.

Speaker 0

There are no further questions at this time. I'll turn the call over to Andy for closing remarks.

Speaker 1

Great. Thank you, and thank you all for joining us on today's call. Please note that our next scheduled earnings release will be our fiscal twenty twenty one first quarter release on or about September 4. We hope everyone remains healthy and safe. Operator, this will conclude today's call.

Speaker 0

This concludes today's conference call. You may now disconnect.