Good morning. My name is Adam, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Barnes & Noble Education Second Quarter 2019 Earnings Call. [Operator Instructions] Thank you. Tom Donahue, Senior Vice President, Treasurer and Investor Relations, you may begin your conference.

Thank you, and good morning, and welcome to our second quarter fiscal 2019 earnings call. Joining us today are Mike Huseby, Chairman and CEO; Patrick Maloney, President of Barnes & Noble College; Barry Brover, CFO; and Kanuj Malhotra, President of Digital Students Solutions; as well as other members of our senior management team. Before we begin, I would remind you that the statements we will make on today's call are covered by the safe harbor disclaimer contained in our press release and public documents. The content of this call are for the copy of Barnes & Noble Education, and they're not for rebroadcast or use by any other party without prior written consent of Barnes & 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 risk 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.

Thanks, Tom. Good morning, everyone, and thanks for joining us today. In our second quarter, our seasonally largest sales quarter, we saw the pace of higher ed industry change accelerating. In order to maintain our position as a leader in serving our institutional customers, while simultaneously developing high-value direct to student offerings, BNED's transformational pace is also accelerating as it must. We've built a solid foundation for this transformation and we are adding to it each day. We acquired and are successfully integrating MBS to expand our capabilities and offerings, including unique virtual distribution capabilities. Student Brands, LoudCloud and PaperRater, other important acquisitions, provide us with a platform and people to deliver and develop advanced digital services and products. These units linked to BNC's unique distribution platform of millions of students, faculty and alumni, give us a unique opportunity to scale our new digital offerings. Evidence of our shift to digital offerings by all our segments is underscored by our results for the quarter. Despite declines in revenue, we're beginning to see increasing and broader acceptance of our digital and other new services and products in all of our segments. The level of change our company has been through since - just last year when we purchased MBS is truly profound. From the time of our spinoff from Barnes & Noble in 2015 through the end of fiscal year 2017, virtually 100% of our revenue and adjusted EBITDA came from our BNC bookstore management contracts. The impact of both our acquisitions and the development of DSS offerings has created a more diversified BNED with substantial growth opportunities. Before intercompany eliminations in corporate expenses, BNC currently accounts for approximately 78% of revenue and 51% of adjusted EBITDA. MBS accounts for approximately 21% of revenue and 44% of adjusted EBITDA, and DSS…

Thank you, Mike. Please note that the second quarter ended on October 27, 2018, and consisted of 13 weeks. All comparisons will be to the second quarter of fiscal 2018 unless otherwise noted. Total sales for the quarter were $814.8 million compared with $886.9 million from the prior year. This decrease of $72.1 million or 8.1% was comprised of $54.4 million decrease from the BNC segment, a $15.9 million decrease from the MBS segment and a higher elimination of intercompany sales of $2.2 million, reflecting increased sales from MBS to BNC, partially offset by an increase of $0.4 million from the DSS segment. Comparable store sales at BNC decreased 5.6% for the quarter as compared to a 4.4% decline in the prior year period. Comparable store textbook sales for the quarter decreased by 8.1% as compared to a prior year decrease of 5%. Textbook sales continue to be impacted by the lower average selling prices of course materials, enrollment declines, specifically at community colleges and student purchases from publishers directly and other online providers. General merchandise comparable store sales for the quarter increased by 1.8% compared with a 1.9% decrease in the prior year driven by the strong growth of graduation products, computer and supply products and improvements in cafe and convenience product sales brands. Net sales for MBS in the first quarter were $119 million compared with $134.9 million in the prior year period, a decrease of $15.9 million or 11.8%. MBS's wholesale net sales were $37.9 million, a decrease of $9.6 million or 20.2%. MBS wholesale sales decreased as compared to the prior year period due to lower net sales impacted by higher returns reserves. For the fall wholesale selling season, the largest portion of which occurred in the first quarter, gross sales declined by approximately 1%. But…

Certainly. [Operator Instructions] And we do have our first question already from Mark Rosenkranz of Craig-Hallum. Mark, your line is open.

Hey. Good morning, everyone. Thanks for taking my questions.

Morning, Mark.

Hey. Good morning. In the quarter, you had a couple of larger initiatives launched between the First Day initiative and the first quarter with Bartleby. Just wondering if you could give a little more color on some of the interactions you've seen with students with regard to the semester? Any learnings on how things have gone on the Bartleby side in terms of how they've been studying through the semester and just how the First Day customers if you've seen any differences between this year and last year and typical customers that are not on the First Day program?

This is Michael Huseby, Mark. I think, first off, Bartleby, as we said, the soft launch was launched kind of in the middle of rush, the front end but really is a developing product. I think it's kind of early to share any kind of detailed feedback on that. I think, like I said in the comments, we're encouraged by it, but I think we disclosed we have about 250 titles that we ingested into Bartleby in the fall. We haven't planned any real marketing dollars behind it and we're being careful about that until we have a product that we feel is at a level that we want to put the money behind it to really to blast it out there. So there's not a lot to say about - Kanuj is here, Malhotra, in DSS, he can comment on what we're seeing in terms of learnings, but it's very, very early.

Yes. I think, that's right, Mark. The only additional comment I would make is we track the initial user engagement, and it's been very positive. There's a lot of time spent on site by the students and they're very deeply invested in the content that we do have. So as Mike said, we're looking forward to expanding the additional capabilities as well as the Q&A, which we will have in the spring. So we're very excited about what it's going to be.

I'll let Patrick talk about inclusive access.

Yes. Mark, it's Patrick. We had a significant growth, very large growth in our First Day initiatives, which is our platform for inclusive access. We're at approximately 100 campuses to the fall semester. We increased our sales over the previous quarter by - last year's quarter by over 80% and the feedback has been extremely positive from the students, to faculties and the institutions. We developed very strong relationships with the major publishing partners in supplying their content and we look to continue to grow that in the spring semester with more schools joining the program. So very positive, continue to see more than 90% sell through, through the program, meaning that 90% of the students are getting the materials and are we to - build through their tuition or build post-program to their accounts, a very positive result.

Okay. Great. That's very helpful. Thank you. And then just a sort of housekeeping question. The net impact to EBITDA for the first half of the year from intercompany eliminations was about a $2 million loss for Q1 and Q2. Do you expect that to come back in the second half of the year?

Yes. Mark, this is Barry. That's really just a function of the movement of inventory and how much inventory that BNC retains at the end of the quarter, but there's a continuous ebb and flow of the inventory where BNC will ultimately return back the unsold inventory through MBS, which will work through that elimination.

Okay, great. Thanks for taking my questions and good luck going in the holidays and next semester.

Thank you.

Thank you.

And your next question comes from Greg Pendy of Sidoti. Greg, your line is open.

Hey, guys. Thanks for taking my questions. I just wanted to zero in a little bit on the DDS [ph]. I guess, the longer term growth target, you mentioned around 25% of EBITDA. I just kind of wanted to understand, what were the thoughts behind that? I mean, the division kind of grew around 10%, I guess, year-over-year in the quarter. And then just assuming, do you expect as you're putting in more services in DDS [ph] for those margins to sort of maintain what you're getting out of Student Brand?

This is Mike. Yes, definitely. I think DSS is being designed as a SaaS-type margin business. And right now, the only thing that's in student - in DSS is Student Brands and - the only thing really earning revenue in terms of a company, and then the development cost behind the development of Bartleby, which is a direct-to-student product. But as I said in my comments, we don't view DSS in isolation. We view DSS as also being a supplier into a bundle for the institutional offerings, it is something we, obviously, get going on and start testing. But we can't really do that effectively until we have a quality of product, which means that we have to ingest more content, which is why the CapEx guidelines are where they are this year, they are a little higher than they were last year. So just from a context perspective, Greg, looking at DSS and where the growth will come from in two years, we're not assuming that's coming from any acquisitions. We're assuming that's coming from the growth of what we're developing now. In other words, Bartleby and Bartleby Writing, which is, in essence, a Student Brands product, augmented by the acquisition of PaperRater. So that's all occurred within the last - less than 9 months to a year, and it requires patience both on our part, which we don't have a lot of and, obviously, our investors have even less of. But it's trying to paint a picture that this company is changing, it's not changing overnight. It's changing very, very rapidly though in profound changes. And that, as it relates to your question in DSS, that revenue contribution on a relative basis isn't going to change much. But the EBITDA is going to change substantially as we start to scale the DSS product, both by selling inside the footprint, outside the footprint, and then starting to bundle it on such a seasonal basis that the scale of this - and its success will really start to, I think, become apparent in the next fiscal year - fiscal year, next fall, which sounds like a long way up, but it really isn't. We're starting to plan for that right after the spring rush ends in February.

Okay. That's helpful. And then, I guess, just from a subscribers and the Student Brands existing platform, are you starting to see - I think when you acquired it, it had a lot of non-U.S. subscribers, maybe in Latin America. Are you starting to see, as you're marketing it, towards your college campuses, is the mix of U.S. increasing?

Yes. It's definitely increasing. Like we said, we launched it in the spring primarily online. But going forward, we're going to be marketing both Student Brands and Bartleby in-store, as well as through our e-commerce channel. So you'll definitely see it for the Student Brands products an increase. The early results were very encouraging this past rush and we're very excited about the spring and our ability to penetrate the millions of students we serve. Also, we're very comfortable about the fundamental demand for students needing help with writing and the writing journey. So we think the contents of those things lends itself very well to - continued subscriber growth as we go forward.

Okay. That's helpful. And then, I guess, just one final one. I assume the guidance where you are putting tax this year, is it still, I think, it was 28% for the year?

Yes. This is Barry, Greg. It'll probably be a little lower with the discrete items that we picked up and the benefits that we picked up in the quarter.

Okay, all right. That’s helpful. Thanks a lot.

[Operator Instructions] And we have no further questions at this time. So I'll turn the call back over to Mr. Donahue.

Thank you, and thank you for joining today's call. Please note that our next scheduled financial release will be our fiscal 2019 third quarter earnings, which will be on or about March 6th. Thank you.

And this does conclude today's conference call. You may now disconnect.