Good afternoon. Thank you for attending today’s Barnes & Noble Education Fiscal 2023 Third Quarter Earnings Conference Call. My name is Hannah, and I will be your moderator for today’s call. All lines will be muted during the presentation portion of the call, with an opportunity for questions-and-answers at the end [Operator Instructions]. I would now like to pass the conference over to our host, Hunter Blankenbaker, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to our fiscal 2023 third quarter earnings call. Joining us today are Mike Huseby, CEO; Tom Donohue, CFO; Jonathan Shar, Executive Vice President, BNED Retail and President Barnes & Noble College and David Henderson, President of MBS. Before we begin the call, I’d like to remind you that statements we make on today’s call are covered by the Safe Harbor disclaimer contained in our press release and public documents. Contents of this call are the property of Barnes & Noble Education and are not for rebroadcast or use by any other party without prior written consent of Barnes & Noble Education. During this call, we will make 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. And now, I’ll turn the call over to Mike Huseby.

Thanks, Hunter, and good morning, everyone. Thank you for joining us today. I want to start today’s call by thanking our BNED team members. When I consider our journey over the last three years, the operating environment has been anything but predictable or easy. While we are certainly seeing some green shoots, we are still well below pre-pandemic enrolment levels. Nonetheless, our teams have adapted and responded with resolve and innovation to an array of challenges and actions we have taken to meet them, including a significant reduction to our headcount in December. Despite the uncertain macro environment and specific challenges we address, our team continues to rise to the occasion every single day to deliver for the students, educators and institutions we serve. I am both grateful and proud of our people and their tremendous efforts. Through their efforts, we continue to innovate and adapt our unique platform to the rapidly changing higher education market. As we discussed with you last quarter, we did not see the expected improvements in the operating environment in the fall rush period and recognized the need to take swift and decisive actions. We began undertaking a broad set of measures to manage our cost structure and improve our execution. While some of the strategic initiatives we are implementing will take time and results won’t be linear, we're taking the appropriate actions to deliver consistent and profitable long-term growth. Our third quarter results reflect the early benefits of these actions. We delivered consolidated top line growth of 11%, expanded our gross margins and significantly grew adjusted EBITDA on a year-over-year basis. First Day Complete revenue grew 76% and we’ve made meaningful progress in the discussions with our institutional partners to accelerate market adoption of the FDC model. Before providing more detail on those discussions,…

Thanks, Mike. Please note that the third quarter of fiscal 2023 consisting of 13 weeks ended on January 28, 2023. All comparisons will be to the third quarter of fiscal 2022, unless otherwise noted. Total consolidated sales for the quarter were $447.1 million, an 11% increase. The retail and wholesale segment sales increased 12.4% and 5.2% respectively, while the DSS segment sales decreased by 4.5%. Retail gross comparable-store sales increased 5.9% during the quarter. Gross comparable course material sales were up 7.4% driven by the rapid growth of our first day offerings. BNCs inclusive and equitable access programs increased revenue by 59% to $121 million during the quarter as compared to $76.1 million in the prior year period. Within this, FDC revenues increased 76% to $67 million. Gross comparable general merchandise sales increased 2.3%. General merchandise sales benefited from strength in logo and emblematic sales as well as cafe and convenience. Net sales for the wholesale segment increased 5.2% to $38.9 million. The increase was primarily due to a slight easing of supply constraints, which improved our ability to meet customer demand. The increase was offset by higher returns in allowances as well as the continued shift from physical textbooks to digital products. DSS sales of $9 million decreased by $0.4 million or 4.5%. As Mike discussed, the DSS team has taken a more rigorous approach to profitable growth and cash generation. As a result of the operating model changes we made in December, DSS reached cash flow breakeven in January. We expect to maintain this discipline and continue to achieve free cash flow breakeven in fiscal 2024. Third quarter consolidated gross profit was $104.2 million, an increase of 19.8%. Consolidated gross margin rate was 23.3% compared to 21.6% in the prior year period. This was primarily due to higher…

Certainly. [Operator Instructions] The first question is from the line of Ryan MacDonald with Needham. You may proceed.

Hey, Mike and Tom. Thanks for taking my questions. And congrats on a nice quarter here. Great to see all the progress that's being made. And I wanted to start on First Day Complete. In the investor presentation a lot of great detail in terms of the number of potential students and sort of the market opportunity there. As you think about sort of the strategy for accelerating the adoption in the cohorts, can you talk about sort of how quickly you think you can move each of the cohorts to First Day Complete? And then if we think about that 4 million students that you’ve mentioned in the presentation that's sort of the potential opportunity, how much of that do you expect to be able to retain as you kind of make this transition?

Hey, Ryan. It’s Jonathan Shar. Thanks for the question. And we’re really excited about the progress we’re making on First Day Complete, the growth we’ve had to-date and then all of the conversations we’re having, post the launch of our acceleration strategy. I think from just highlighting where we’re at and where we’re going broadly, we’re having substantive conversations with like hundreds of institutions on First Day Complete, and it’s really exciting to see the alignment on how the model can really enhance student outcomes and support their key objectives of driving greater affordability, convenience and access for their students. So we’re excited about that. It’s really as we announced a multi-year journey. I think our focus is on driving the majority of our institutions to that model for fall term of ’24, or fiscal ’25, and we’re confident we’re making great progress against that and the cohort strategy has been really effective. So we’re excited about that, excited about where we’re going. We’ve seen many of the institutions that we're marching towards and focused on a fall ’23 launch, really excited about the model, really happy with the service and support and product assortment that we’re providing for their campus and campus community. But as Mike mentioned, ask for a bridge to be able to get through the consensus building and the governance that’s required and approvals that are required to move to this subscription-like model, or course material acquisition and distribution. And we’ve been able to do that and move over via a bridge to something that’s profitable for running the store in an acceptable level of profitability, great sort of sign of partnership and then allow us to work with those schools to implement the model for the following semester. So making really good progress on all of that and continuing to have great conversations every day with our institutions and prospective institutions about the model.

Yeah, Ryan. It’s Mike. I could just add one thing though. Your question about how many of the -- in the illustrative slide in the investor presentation, we used 4 million. And if you look at the footnote it kind of explains why that’s 4 million. And it’s a ballpark area, and we knew when we launched the strategy of requiring many schools to go to First Day Complete on a more accelerated basis, because a la carte model just wasn’t working for them or for us quite frankly that we’re going to lose some of those schools. But that’s positioning us, as I said in my comments, to have a platform of schools, whether it’s more or less students, that's much more profitable. And we anticipate that the platform will go down from where it is today, but then we expect to be able to build it back up on a different basis. And the bridge year that’s Jon’s describing is evidence that we’re not going to shoot ourselves in the foot, so to speak. And if there are situations where we can manage through one more year for some schools because they just can’t get there in a year, and have a very, very profitable relationship for a year, by for example, not paying any commission or targeted management fee or whatever it is, that we've worked out with each of the schools because there are so many discussions and they are each different. And we’re not doing this to the schools, we’re doing this with them and that requires conversation, each one of their preferences. So yeah, I don’t think we can give you a number about how many of the 4 million will be there in fall of ’23 or ’24, but very confident to be more a profitable, sustainably profitable company with this approach.

That’s super helpful color. I appreciate it. And then as we think about, I guess, the pathway to getting, in terms of the transition process, what sort of timeline are we looking at for the full transition to be reflected? I know you talked about getting schools that are interested giving them up until say fall of 2024, which is in your fiscal ’25. So there’s a bit of a runway on that. But in terms of the schools that are unwilling, how quickly do you think that those come out of the model as we start to think about over the next 12 to 24 months?

Yes. I think that there are some that are already coming out of the model that we’ve notified, exercised a communication with, as we have the right to under our contracts. So some have already moved in anticipation of going to a different solution in fall of ’23. Many went under proposal this past year and we’re still involved as part of the conversation that Jon’s talking about, are in that proposal stage.

Yeah. And Ryan, it’s Jonathan. And not all of our stores are targeted for FDC or that is the priority conversation. We have many stores within our portfolio that are performing really well or driving a high sell-through against enrolment on course materials today and driving significant GM sales as we showed in -- at least we grew our general merchandise sales, logo products, cafe and convenience were the drivers of that. And so, it’s not every school in the portfolio that is in a cohort for conversion to FDC. So I just want to make that clear, but it is the majority of our institutions.

And then new businesses, we have new business that’s coming into the company, who are using an FDC model from day one. So some of that’s happened in the spring. University of Memphis, was an example of that. They are a new client that we picked up, and they started with us from day one using First Day Complete. And that’s our objective. Our real objective is to get as many schools using this model, because it’s the best model for students, it’s the best model for the schools, it’s a best model for us and the publishers. And using a model that allows you to sustain the level of service, that you want, and gives students that improvement in access and outcomes is really what we should be all about. That’s our mission. And the fact that it benefits us financially, really just manifest that it’s the right thing for us to be doing.

That's very helpful clarification. I appreciate that. Maybe one more from me, just shifting to the DSS segment, it’s interesting to hear that you talk about how you’re sort of integrating and utilizing the ChatGPT and starting to try to like weave that into the offering. I’m curious, as you think about the Bartleby business and then the broader DSS business, we’ve obviously seen a pretty wide adoption usage amongst students of ChatGPT. Curious what you’re seeing from a competitive perspective there or if that’s driving any pressure as students sort of only using GPT versus the Bartleby study tool or other study tools? What are you seeing sort of in that segment of the business? Thanks.

Well, obviously, I think you can't turn on any kind of a media outlet without seeing some form of discussion almost every hour about OpenAI and ChatGPT-3. And so every competitor in this space, Bartleby itself, Student Brands in particular. So there’s a lot of application for OpenAI that, for example, Student Brands has been building into their product for some time. DSS is pivoting, I would say, quickly to incorporate ChatGPT and other large language models into the mix. It helps drive speed and efficiency. It also reduces cost and our subject matter experts when they are entering questions for Bartleby subscribers and Q&A. And partial answer to your question is that we did have a positive subscriber growth for Bartleby in January. We talked a lot about the direction it was taking last year and how we pivoted Bartleby to a much more, a very sharp focus on profitability, efficiency and kind of getting back to some more of the basics on pricing, proposition and that type of thing. So we’ll have some information coming out, some news coming out about some products we’ve developed for helping faculty to identify uses of OpenAI. There are plagiarism detection tools that Student Brands is actually in the process of releasing. There will be a separate discussion of that maybe in the next week. We did let it go today. We just didn't want to [indiscernible] such an important announcement. But yeah, I think that you’ll find that although AI has been around for a while, ChatGPT is a phenomenon. It’s got 100 million users in two months, and I think that’s going to affect everybody’s traffic across their websites that has competitive product for some time. But I think we feel comfortable and confident in the value proposition that we have been different enough than just kind of plain-vanilla OpenAI, ChatGPT use case for that. We see tremendous value in incorporating that technology in what we’re going to do.

Excellent. Thanks for the color. I’ll hop back into queue.

Thanks Ryan.

Thank you, Mr. MacDonald. The next question comes from the line of Alex Fuhrman with Craig-Hallum. You may proceed.

Hey guys, thanks for taking my question. As you kind of move to this all First Day Complete model, can you give us a sense of, at this point how many schools have said they’re definitely not going in that direction? And as you kind of move through this transition, is there an opportunity to maintain perhaps a scaled down relationship with some of these schools, whether that means opening a virtual bookstore or selling general merchandise or is it really more, you’re just going to be walking away from some of these less profitable relationships and really focusing on the best ones?

Hey, Alex, this is Mike. I think we’ll answer the question more specifically in June, when we have a real tally of what the efforts are in terms of how many schools we’re going to have for fall of ’23 on First Day Complete, perhaps those and the store count, so to speak, and those that didn’t go that way that have a different vision, et cetera. So I don’t think we’re going to get into that today because it’s really in process. We’re not trying to be evasive on that. It’s true that there are so many conversations that are in-process still that have to be resolved. And in terms of your other question, second part of your question, yes, there are different ways to skin the cat so to speak to achieve profitability. Quite frankly, many of the stores we try to manage our business on a portfolio basis. Many of the stores that we were requiring consider going to FDC in fall of ’23 very strongly requiring it or we exited the relationship, are probably not those stores where it’s going to make sense for us to try to carve out some kind of other partial relationship in hopes of making them profitable. It’s possible. But as Jon said, there are some that are going through a bridge here, which is a different story, where they’re going to go agree to go First Day Complete in fall of ’24. And then in the bridge year will go to some kind of an economic change that will allow us to service that and be profitable. But I don’t think, there is some possibility of some could go to virtual only, but most of these are going to be model shifts. They may not be in fall ’23, but they will be in fall of ’24, or will be exiting.

Yeah, we are out further, it’s Jonathan and I think the positives, the positive outcome of the acceleration of the conversations and hundreds of conversations we’ve had is that there’s not a lot of marketplace resistance in terms of the value proposition of equitable access in First Day Complete. There seems to be pretty universal alignment on that. It’s just about the prioritization from a campus perspective and that’s what we’re trying to help those campuses do is drive urgency and drive prioritization to be able to implement the new model. And so I’m really encouraged about the alignment impact we can make on student outcomes and supporting, providing a more affordable solution for students and institutions. It is an important topic on all campuses. So it’s really about partnering with our institutions, helping guide that discussion, moving them to a solution that ultimately is going to have a really significant impact, whether that’s a much more convenient model that supports greater student well-being, affordability or just access to materials and having materials on day one that’s driving improved academic success in an institution. So I think it’s really about partnership, driving people, supporting the process and getting to end goal where there’s a lot of sort of mutual alignment on the value proposition and ability to shift this model.

Okay. That’s really helpful. Thank you. And then if I could just ask one more, it looks like if you just kind of strip out what you’ve reported and what you’re guiding to, you’re looking for adjusted EBITDA in Q4 to be more than it has in Q3, which typically, not always but for the most part over the last 5, 10 years that has not been the case. So are we still kind of in this post-COVID reopening period where your typical seasonality maybe doesn’t apply or can we maybe interpret that to mean that maybe some of your efforts to enhance profitability are working and should carry-forward into next year?

Yeah, Alex. It’s Mike. A couple of things, first off, the FDC program has scaled quite a bit year-over-year and some of that revenue does fall into the fourth quarter, the way that that it sells and the way it gets earned and booked. And the other part of it is, as you said, the cost management measures we disclosed, the in-year benefit we estimate to be something like $10 million to $15 million, which was $7 million to $8 million this quarter. So that’s kicking-in for a full quarter for the first time in the fourth quarter. And we’re continuing to take measures beyond what we did in December that will help to impact the fourth quarter as well. And so, Tom, you might want to comment.

Yeah, no Mike, that’s right. And Alex, I think given where we are in a year, we still feel confident we’re within the range, but we might be towards the lower end of it.

Okay. That’s really helpful. Thank you, guys.

Thank you, Mr. Fuhrman. [Operator Instructions] There are no additional questions waiting at this time. So I will pass the call back to Hunter Blankenbaker for any further remarks.

Okay. Great. Thanks Hanna, and thanks everyone for joining us today. And certainly, for your continued interest in BNED. As a reminder, our fourth quarter earnings will be in late June. And thanks again for joining today.