Children's educational publisher Scholastic Corp (Nasdaq:SCHL) showed that the still sluggish economy has reached even into the schools, as the company posted a larger loss than expected for its third quarter. With states uncertain about funding levels for schools, the company's overall revenue dipped.

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Third Quarter Norm
Scholastic's fiscal third quarter is traditionally its lowest revenue quarter, one which usually results in a loss. The consolidated loss per share was 81 cents, compared to 15 cents in last year's quarter. The pressure on school funding as well as higher spending contributed to this. Revenue was $393.7 million versus $398.8 million in the year ago quarter.

The educational segment brought in $81.3 million, versus $88 million in last year's quarter, while the children's book segment saw a slight sales increase to $193 million, compared to $192.1 million a year ago. Strong sales of Harry Potter in trade publishing contributed. Book club sales and spending on digital initiatives, however, were reflected in an operating loss.

Changing Nature of Educational Publishing
Scholastic's digital initiatives are a large part of its overall future strategy. The company raised its full-year spending for ebooks and ecommerce to $30 million from $20 million. A recent team-up by McGraw-Hill Companies (NYSE:MHP) and Pearson PLO (NYSE:PSO) to invest in a super-interactive iPad app (called Inkling) highlights the direction of educational publishing. The proliferation of tablets, e-readers and other mobile devices are not only offering mobility for students in the learning process, but increased inter-activity as the Inkling features promise.

Pearson also has developed a new homework and tutorial app for iPad. Traditional publishers are bulking up their e-offerings, with everyone from the New York Times (NYSE:NYT) and its Epsilen, LLC, hosted online educational solution, to John Wiley & Sons (NYSE:JW.A). Wiley had a great quarter recently, and pointed out its ebooks, as a growing adjunct, are contributing to the bottom line. Educational technology is a high-margin area, so Scholastic's strengthened focus on its digital initiatives is more than understandable - it's a business necessity.

Industry Challenges
The ongoing trend of state and local budget tightening has had an effect on Scholastic's business for the short term. The lessening of federal stimulus funds for schools has also impacted educational publishing. While the company mentioned that the funding is right now an "uncertainty", rather than an assured ongoing reduction, Scholastic did revise its outlook downward again. It projects full fiscal year earnings per share from $1.25 to $1.40, on revenue of $1.9 billion.

Long-Term Prospects
Scholastic is banking on its solid fundamentals for its business future, as it continues to develop in the new educational publishing landscape. The company has a strong balance sheet, with relatively low debt. Although cash and equivalents are down compared to a year ago, this reflects stock repurchase. The use of free cash flow for a stock buyback is another aspect of the company's style, which takes the long view.

The Bottom Line
While there will be some short-term shifts in Scholastic's business, due to the changing nature of educational publishing, long-term this company is strongly positioned with its unique products and approach, so it should still see a highly profitable future. (For related reading, take a look at 4 Industry-Changing Tech Trends.)

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