Earnings Call Transcript - BNED Q3 2022

Operator, Operator

Welcome to the Barnes & Noble Education Fiscal 2022 Third Quarter Earnings Conference Call. My name is Juan and I will be coordinating your call today. I will now hand over to your host, Andy Milevoj to begin. Please, Andy, go ahead.

Andy Milevoj, Host

Good morning. And welcome to our fiscal 2022 third quarter earnings call. Joining us today are Mike Huseby, CEO and Chairman; Tom Donohue, CFO; Jonathan Shar, Executive Vice President, BNED Retail and President, Barnes & Noble College; David Henderson, President of MBS; and David Nenke, President of DSS. Before we begin the call, I'd like to remind you that the statements we 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 & 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.

Mike Huseby, CEO

Thanks, Andy. And thank you all for joining us this morning. As we entered the spring rush period, we, along with everyone else, continued to experience the ongoing effects of COVID. The Omicron variant began to spread rapidly in December and continued into January, just as schools had planned to welcome students back to campus from the start of the spring semester. Despite the continued positive momentum in our key strategic growth initiatives this quarter, COVID’s Omicron surge just before our seasonally important spring rush period negatively impacted our results compared to the expectations we had prior to the surge. In early January, while a majority of our institutional partners brought students back to campus, over 100 campuses that we serve chose to conduct classes remotely for the beginning of the semester, while others chose to delay their start dates. Some schools both delayed their start dates and began classes remotely in response to the surging Omicron virus. As we have been doing for the past two years, we worked closely with our campus partners to adapt and respond to the safety-first policy decision that many of our schools were forced to make. To support student success, we were able to quickly pivot and shift textbooks and supplies for clients that moved to virtual learning, where students weren't on campus as originally planned. The need to be flexible and adaptable is now a given. We are able to showcase the value we provide through our unique mix of digital and physical assets by customizing solutions to help both the schools and students that we serve adapt to changes on very short notice. While our teams did a great job responding nimbly to the impacts of this unwelcome Omicron surge, the reality is that this was a very suboptimal environment in which to operate efficiently, negatively impacting our business results. Notwithstanding these and related environmental challenges during the quarter, we were able to continue the significant momentum of our key growth initiatives. First Day, First Day Complete, our FLC partnership and its impact on our general merchandise business, and growing our new store footprint by adding profitable new business during the quarter were among our highlights. Our third quarter results were slightly impacted by the Omicron curveball that COVID threw at us, primarily in lost or delayed sales for most of the services we provide and the products we sell, including courseware, general merchandise, and school supplies. As a result of the necessary precautions taken by our institutional partners in response to Omicron, some of our sales were either delayed later into the quarter, pushed into the fourth quarter, or lost as store traffic underperformed expectations. As Tom will further discuss, while our third quarter gross comparable store sales increased 8.4% when factoring in the full rush period that extended into February, gross comparable store sales increased approximately 18.8% over last year's spring rush. Despite the tremendous amount of change that's occurred over the last two years, we can now say with confidence that much of the perceived value of a college education is still rooted in its basic elements. The in-person learning and social experience remains of extremely high value for students in schools. In the latest student voice survey conducted by Inside Higher Ed and College Pulse, when students were asked why the fall semester worked, 67% said in-person classes and 40% said social opportunities. Colleges are working hard and are motivated to bring vibrancy back to campus while simultaneously managing and responding to the realities of the COVID virus. In conversations with our partners, faculty, and students, it's clear that COVID has accelerated many of the changes occurring in higher education. The perspective is changing to a more flexible, student-centric model that goes beyond solely a student's academic needs and ensures that they are equipped for success beyond the classroom. This is a paradigm shift in higher education as schools transition from the traditional question of how prepared is the student to succeed in the school to a more current perspective of how prepared is a school to meet the broader needs of the student. This change in view is driven by a more competitive environment as enrollment demographics change. The ROI value of an education is subject to greater scrutiny, and other needs like mental health and career placement have moved to the forefront in supporting student success. For the non-traditional student, the greater numbers are changing the views of what defines a traditional student. The value proposition lies in both providing flexibility and offering a curriculum that provides improved opportunities to elevate their lives. Understanding student demands is critical to ensure that institutions satisfy those demands in a more personalized way. Schools need to remain focused on developing flexible learning models and utilizing technology to achieve higher success rates, which include retention and graduation rates while making degrees more relevant for success post-graduation. Our solutions and offerings are directly aligned with these key areas of focus and help institutions identify and address many of these issues linked to achieving the school's primary objectives of equitable access, affordability, and improved student outcomes. Our First Day and First Day Complete inclusive access coursework offerings are growing rapidly as institutions realize the benefits for their students and the school's ability to compete for students in this environment. In addition to the 65 campus stores that implemented First Day Complete in the fall term, an incremental 11 stores initiated First Day Complete for the spring term, bringing the total to 76 stores, representing an estimated undergraduate enrollment of over 380,000 students at these institutions benefiting from the program. Our teams have already secured commitments to launch First Day Complete for additional campuses in the fall term of 2022, and continue to work with a significant number of additional campuses to launch First Day Complete in academic years 2022 and 2023 and beyond. Given the timing of when First Day Complete contracts for the coming new fiscal year are finalized, we plan to provide more specifics on our expected fall 2022 First Day Complete enrollment growth in connection with our year-end earnings release in June. Beyond our current roster of institutional partners, our total value proposition, which includes our inclusive access offerings and ability to fulfill them using our MBS asset, our partnership with Fanatics and Lids, and our DSS suite of supplemental learning and study tools, is resonating with many new schools that have recently entered into agreements with us to manage their bookstores. For fiscal 2022, which will end on April 30, 2022, we are currently on track to generate gross new business wins of approximately $130 million, just over $100 million on a net basis after considering expected store closings. These amounts, which are based on estimated sales using historical information, include our newly formed partnership with Notre Dame. We’re excited to announce that we will begin to operate their campus bookstore system next week. Turning to our general merchandise business, we continue to experience the early benefits from our partnership with Fanatics and Lids, with gross general merchandise comparable sales growing 59% during the third quarter. The customer-facing benefits of this partnership include an unparalleled merchandise assortment, a best-in-class omnichannel customer experience for logo and emblematic products, and powerful digital marketing tools to create awareness and improve access. In addition, this truly strategic partnership also provides BNED with additional sustainable benefits to our operating model that are important to recognize, such as reduced direct investment in e-commerce system development costs, marketing spend, and payroll expenses, as we leverage the tech expertise and investments in general merchandise and workforce of Fanatics and Lids. This leverage results in lower spending and accelerated time to market for innovation. Over $58 million in liquidity was infused from the initial strategic investments paid by FLC in the second half of our last fiscal year. Working capital improvements arise as we no longer purchase and pay for the logo and emblematic product inventory, providing a unique partner to go to market with to win significant new business like Notre Dame, one of the largest NCAA brands for general merchandise sales. Finally, the supply chain benefits of scale enjoyed by FLC are advantages we would not demand on a standalone basis. This was proven during the supply chain challenges of the past 12 months as Fanatics and Lids have undoubtedly been able to more effectively procure supply for our stores than we could have on our own in such a challenged environment. We expect our FLC partnership to grow our general merchandise comparable gross sales and gross profit dollars more substantially and faster than we would be able to on our own given the benefits we just discussed and our experience today. We have already accomplished much together after only one year, but we believe that we have significant upside as we apply our learnings and progress to date to further benefit our customers, the schools, students, faculty, alums, and fans that we serve with this unique and exclusive partnership. Turning to our DSS business. Our Bartleby suite of solutions continues to exhibit solid growth. DSS revenue grew 31% to $9.4 million, with Bartleby revenue growing approximately 36% year-over-year. Bartleby generated over 97,000 Bartleby Growth subscribers during the quarter and over 285,000 Bartleby Growth subscribers year-to-date, representing year-over-year growth of 34%. During the third quarter, we were excited to announce a new partnership with Delgado Community College, wherein they implemented both our First Day Complete offerings and Bartleby suite of digital services for their students. In addition to ensuring all students have convenient, affordable access to all their course materials, every student will also receive access to personalized support through Bartleby’s 24/7 online study platform through the Delgado Course Complete offering. Many of these students are parents with busy lives, jobs, family obligations, and household responsibilities. When these students are ready to get their schoolwork done, morning, noon, or night, we want to be there to help them achieve the understanding that they need to master the material. Bartleby will be integrated seamlessly into Delgado’s learning management system. Providing students with convenient access to affordable course materials on their first day of class is a foundational step in preparing them for their best opportunity to achieve academic success. But that is just an important first step. Offering Bartleby’s digital suite of services with our First Day Complete offering ensures that students have access to the learning support they need and demand whenever and wherever is most convenient for them, learning in a much more personalized way. We look forward to keeping you apprised of our efforts to ensure all of our students are equipped for success from their first day until they complete their finals, through our First Day Complete and First Day Digital offerings. Another third quarter highlight is an important strategic partnership that we entered into with Billie Jean King Enterprises to enhance BNED’s diversity, equity, and inclusion initiatives and programming. Our newly formed partnership with this sports icon and social justice champion will advance BNED’s DEI initiatives and programming for the benefit of the employees, partner schools, students, and faculty that we serve. In addition to supporting our ongoing DEI efforts, this partnership will enable us to develop and launch new initiatives that emphasize respect, tolerance, and equity, embracing diversity within our culture and daily business practices. These values are important to our people and our customers, and this partnership aligns us squarely with them on this critical element of BNED’s core culture. While we continue to experience some ongoing COVID-related negative impacts during the third quarter, which influences our current outlook for fiscal 2023, that Tom will discuss in more detail, we have much to be positive about and to look forward to. All the current facts show that the impacts of COVID are being diluted by the proven efficacy of COVID vaccines and responses of protocols and regulatory policies that are aimed at returning us all to a more normal or at least more transparent and predictable operating environment in the near term. We believe we will have some positive comps benefiting from the return to in-person NCAA sporting events and activities, such as the Final Four, which we have come to celebrate pre-COVID. Upcoming in-person graduation celebrations, and a positive moment of our growth initiatives that are focused on as a key to completing the transformation of our business, which we have been working hard on over the past several years. I’m extremely proud and grateful to our people, our customers, and our shareholders for their ongoing support during these choppy seas. We believe we have navigated through together into what most are projecting to be a much calmer horizon in front of us. And now I’ll turn it over to Tom for the financial review.

Tom Donohue, CFO

Thanks, Mike. Please note that the third quarter of fiscal 2022 consists of 13 weeks ended on January 29, 2022. All comparisons will be to the third quarter of fiscal 2021 unless otherwise noted. As Mike highlighted earlier, our third quarter results, which include the start of our Spring Rush period, were impacted by the ongoing effects of COVID and the Omicron surge that began just as schools were preparing to welcome students back to campus for the start of the spring semester. This had the effect of delaying some rush sales into the latter part of the third quarter and into the fourth quarter. We also believe that sales within certain categories that rely on a vibrant campus atmosphere, such as school supplies and food and convenience, were lost with the disruption at the beginning of the spring semester. Total sales for the quarter were $402.8 million compared with $411.6 million in the prior year. This decrease of $8.8 million or 2.1% was comprised of a $12.9 million decrease from the retail segment, a $2.4 million decrease from the wholesale segment, and a $2.2 million increase from the DSS segment. Retail sales decreased $12.9 million or 3.3% as compared to the prior year period due to lower course material sales and lower logo and emblematic revenue recognition, which are now reflected on a net revenue commission basis as compared to the gross revenue basis in the prior year period, following our merchandising partnership agreement with Fanatics and Lids. On a gross comparable store basis in which logo and emblematic sales fulfilled by Fanatics and Lids are included on a gross revenue basis, retail sales increased 8.4% during the quarter, consisting of a 4% decline in textbook sales and a 59.1% increase in general merchandise sales. Textbook sales declined due to lower enrollments, fewer international students, and the decision of some schools to delay their spring semester start dates. This was partially offset by the growth of our First Day Complete and First Day by Course offerings, with revenue increasing 64% to $76.1 million during the quarter as compared to $46.4 million in the prior year period. As the spring term extends to April and May, rental income related to First Day Complete and First Day rental course materials are recognized over the term, and therefore, a portion of the revenue is deferred into our fiscal fourth quarter. Our general merchandise business benefited from a greater number of students returning to campus, the reopening of most of our campus stores in the current period compared to a year ago when the majority of our stores were closed in response to COVID safety protocols, coupled with an improved selection and e-commerce experience for our customers, benefiting from our partnership with Fanatics and Lids. Consistent with prior years, the Spring Rush period typically extends beyond the quarter due to later school openings and students buying course materials later in the semester. Factoring in the fiscal month of February into the third quarter, comparable store sales for the retail segment for Spring Rush increased by approximately 18.8%. Net sales for the Wholesale segment decreased $2.4 million or 6.1% to $37 million primarily due to COVID-19 related supply constraints resulting from the lack of on-campus textbook buyback opportunities during the prior fiscal year and lower customer demand resulting from a shift in buying patterns from physical textbooks to digital products, which was partially offset by lower returns and allowances. Additionally, during the prior year period, wholesale CSS model fulfilled direct-to-student course material orders for retail campus bookstores that were not fully operational due to COVID-19 campus store closures, whereas those sales shifted back to the campus bookstores in the current period. DSS sales grew $2.2 million or 30.9% to $9.4 million benefiting from an increase in subscription sales. The consolidated gross margin rate for the quarter was 21.6% compared to 17.2% in the prior year period, and our gross profit increased 23.2% to $87 million. This was primarily due to the favorable sales mix of higher general merchandise products and higher margin rates benefiting from lower inventory reserves and lower markdowns, somewhat offset by higher contract costs. Our selling and administrative expenses increased by $8.8 million or 9.4% compared with the prior year period, primarily due to the reopening of most stores and bringing employees back to serve the greater number of students on campus as compared to the prior year when we furloughed many employees in response to our COVID-related temporary store closures. During the third quarter, we evaluated our store-level long-lived assets in the retail segment for impairment. As a result of the impairment testing, we recognized a $6.4 million non-cash charge. At the end of the quarter, our cash balance was $10 million with outstanding borrowings of $200.4 million as compared to borrowings of $150.8 million in the prior year period. Much like our second quarter, this increase is mostly due to the timing of receivables associated with the significant growth of our first day offerings. Schools generally remit payments for students enrolled in courses after their student drop dates, which occurred after the third quarter ended. CapEx for the quarter was $12.1 million compared to $9.7 million in the prior year. As we look to the balance of the fiscal year and our next fiscal year, COVID-19 and its variants have had a greater than expected impact on our business in fiscal 2022. Based on our current views, which include an improved outlook for campus events and activities during the spring, the company continues to expect to generate positive non-GAAP adjusted EBITDA in fiscal year 2022. While we currently believe that non-GAAP adjusted EBITDA will significantly improve in fiscal year 2023, we now expect non-GAAP adjusted EBITDA in fiscal year 2023 to be lower than the pre-COVID levels as the direct and ancillary impacts of the pandemic, including wholesale supply issues and inflationary pressures are expected to continue. We expect to be in a position to provide additional insights on our fiscal year 2023 outlook when we report our year-end earnings in June. Currently, our retail segment operates 1,441 college, university, and K-12 school bookstores, comprised of 799 physical bookstores in their e-commerce sites, as well as 642 virtual bookstores. With that, we will open the call for questions. Operator, please provide instructions for those asking a question.

Operator, Operator

And the first question comes from Ryan McDonald from Needham. Please go ahead, Ryan, your line is now open.

Ryan McDonald, Analyst

Hi, Mike and Tom. Thanks for taking my questions. Maybe starting with Fanatics Lids. It was great to see 59% growth in comp store sales there and starting to see some of the positive impact. I’m curious as you’ve continued to roll out additional or get additional sites live on FLC, what sort of uplift are you seeing sort of as those go live for the impact on e-commerce sales just generally?

Mike Huseby, CEO

Yes. I’ll let Jon Shar address that. Thanks, Ryan.

Jonathan Shar, Executive Vice President

Yeah, Ryan, we’re really excited about the initial results that we’re seeing in the quarter. Since we launched the sites with the – as you mentioned, the 59% increase in our comp store general merchandise sales, I think that it’s both contributing factors, including our in-store assortment and experience as well as online benefits. We’re transitioning more sites in this fourth quarter over and we expected to have a really significant impact on driving increased sales going forward. So very excited about the experience, the assortment, and the offerings that we can bring to our schools and the customers that we serve.

Mike Huseby, CEO

Yes, just one general comment on the partnership itself, Ryan. It wasn’t even a year ago when we really started this by selling our inventory to FLC so they could take over the emblematic and logo clothing and goods business. The upside that we have truly lies in the improvements we’re making in just the day-to-day operations and ordering. If you think back to the supply issues that were really prevalent in all businesses last year, the timing of when we have to put orders in for the fall and that type of thing, there was a lot done very quickly when FLC established its leadership, which is now being much more refined in terms of representing each store, their brand, and the assortments and how we go to market. So just the evolution of the partnership going into its second year soon will provide, I think, substantial upside to what we saw in the last 12 months.

Ryan McDonald, Analyst

It’s really helpful. Thanks. And maybe then, as we look out at the progress you’re making on the initiatives, great traction with FLC, First Day Complete continuing to grow rapidly, and increases as a percent of the course material spend, Bartleby initiatives being really strong here. Can you talk about that in the context of some of the preliminary comments you gave around the fiscal 2023 margin profile? Maybe why we might not be seeing some of those margin-accretive businesses growing as a percent of the mix, not sort of translating as much to the profitability or adjusted EBITDA outlook as we look into next year?

Mike Huseby, CEO

Well, I think our guidance relates to the EBITDA, not margins specifically. But we’re concerned about inflation in terms of how it flows through our spend, and the need to be competitive in a digital environment by retaining and attracting talent as part of that. The other pieces of that inflation are fuel costs, and what that does to our freight and shipping. We’re spending a lot of time looking at pricing, and how much of that can be passed through in our various pricing models for our inclusive access and all of our offerings. So, the adjustment in the guidance, whereas we said we would approach pre-COVID levels for 2023 and beyond, and now we’re saying it’s going to grow substantially beyond 2022, but probably not to the level we thought. When we gave that guidance, think back to June of last year when we gave that guidance, we did not know at that time what would happen in the world to affect inflation, as well as the Delta variant, Omicron, et cetera, which does affect our jump-off point, so to speak, from 2022 to 2023, since we’re just going to end the fiscal year in April. The other big concern is wholesale. Wholesale, if you look back at our pre-COVID contributions, EBITDA by segment was fairly substantial, and that business has, as we’ve disclosed, been challenged by a lack of supply due to buyback, and also because of the inability to source books from international sources. Given the very expensive freight costs associated, it has made it prohibitive. We’re working hard, and Dave Henderson is on the line, and we’re working very hard to get wholesale more profitable next year than it was this year. While we’re not giving guidance by segment, wholesale’s another piece of that. So this is not all around margin; it’s really – it’s got a lot to do with spend and growing our digital business during a time of scale.

Ryan McDonald, Analyst

Really helpful. And then maybe just one more for me and I’ll hop back in the queue. On Bartleby, it was really great to see the first deal announced with Delgado Community College and your ability to start bundling that with FTC. Can you just talk about sort of what got Delgado comfortable with having the digital study tool integrated in? And maybe how that affects the strategy around pricing for Bartleby moving forward? Is it still going to be charged on a monthly basis in these contractual relationships? Or how that’s being sort of rolled in? Thanks.

Mike Huseby, CEO

Yes. I’ll make one general comment and then David Nenke, who’s President of DSS, can answer your questions in further depth. But just in general, as we found out with selling First Day Complete, the key to selling any new kind of revolutionary model is making sure you line up with more progressive, open-minded leadership on the campus. I think we find that at Delgado, so that was – that’s one of the key reasons. We’re very much in sync with them. They’re very excited about what the potential benefits to their students are in incorporating the Bartleby digital study suite of tools with the First Day Complete program. So that’s a big part of it, but David can answer your other questions.

David Nenke, President of DSS

Yes. Absolutely, Mike. Delgado was absolutely focused on providing the best outcomes for their students. They have a large percentage of their student population who are part-time or non-traditional students who need help and support outside of core university hours. They were very focused on trying to provide support to their students to ultimately help with student success, which absolutely aligns with our focus. Our objectives remain enhancing educational outcomes and complementing the work that happens in the classroom. With them, they were very open, and as we talked through our opportunities and the feature set, they were focused on ensuring that they could provide as many features as their students needed. I think one of the interesting things, particularly with Delgado, is they’re also interested in the reporting that comes with it and making sure that students are engaged with the tools. We’re in the process now of framing the faculty and taking them through the products; it’s an exciting time for us. They were very customer-focused in making sure their students got the benefits. From a charging perspective, which I think was the second part of your question, the charging is more around opportunity of seats if you like, or student hours aligned with the number of students they have on campus at the time, rather than that direct-to-consumer business, which is monthly subscription.

Ryan McDonald, Analyst

Thanks for taking my questions. I’ll hop back into the queue.

Operator, Operator

Thank you. The next question comes from the line of Alex Fuhrman from Craig-Hallum Capital Group. Please, Alex, your line is now open.

Alex Fuhrman, Analyst

Great. Thanks very much for taking my question. I wanted to talk a little bit more about the fiscal 2023 EBITDA guide. Can you unpack a little bit more about where that’s coming from? I think you mentioned, Michael, just the sheer notion of starting at a lower jumping-off point in the month of May, still being part of this school year. How much is that going to be a headwind versus pre-COVID and versus how much of this is supply chain issues that you’re seeing versus just inflationary pressures? And then, putting it all together, I mean, is it still the company’s goal to get back to pre-COVID profitability in the long run? Just trying to size up these different aspects of it, if you could?

Mike Huseby, CEO

Yes, let me just start off by saying, Alex, that we will be able to provide more precision around fiscal year 2023 after we close fiscal year 2022, which won't happen until the end of May. In terms of the jumping-off point, one thing I will say is that it’s influenced by the fact that COVID has lingered, and that has an impact on a lot of different things psychologically in terms of the people we do business with and the operating environment, in terms of our ability to get their attention, etc. However, there are impacts from jumping off. We’re also pretty optimistic about how we're going to start fiscal year 2023 with the FDC growth that we’ve had and the FLC partnership improvements and opening new schools like Notre Dame and going to market to capture other new, big business like that. So in unpacking that, yes, I think first off, we definitely intend to get back to that level and surpass it on a longer-term basis. So the pacing of everything we've intended, if you look back at the last two years, has been slower than we expected. We expected it to accelerate financially a little bit more quickly this coming year than it's going to, and there are a lot of different factors that enter into that. I tried to highlight some of them. I think we can be more specific as we get our year-end results closed and really start to get into fiscal year 2023 in a more surgical basis. I mean, right now we're in the middle of finalizing our budget cycle for 2023. One thing that COVID has taught us, and I'm not sending this as any kind of signal, but we do need to be cautious about our outlooks given the uncertainty it creates and the impact it's having. I mean, this situation in Ukraine and its impact has ripple effects on how we do business, both in retail and wholesale, affecting our volume in physical shipments. The inflation we see today impacts our cost structure. So we're doing a lot of different things to try to mitigate that with commissions, labor, and everything else. But labor is a big concern because we’ve been able to retain our quality workforce and add new good people. David and DSS have done a fantastic job in attracting and retaining new digital talent, which is very competitive in this environment. We’ve been able to retain our great team. To do that and be competitive, you have to assume that you're going to have increases, which puts pressure on us to move technology spend faster so that we're replacing more of our human spend with technology spend over time. The enrollment status that came out is something we didn’t know and didn’t anticipate. We recently started to see some optimism through applications, but as you know, undergraduate enrollment was hit, declining by 3% this fall from a year ago and 6.5% from two years ago, which is really what we're measuring when we talk about pre-COVID. Our job is to help schools make their communications and messages regarding the value of an education clear so they can get competitive. Those are kind of the big things—enrollments, inflation, as I mentioned, wholesale—much of which we're offsetting by the growth in First Day Complete and what we expect to happen in general merchandise.

Alex Fuhrman, Analyst

Great. That's really helpful. Thanks. And then if I could just ask a little bit more about First Day Complete. It sounds like that is progressing very nicely and is probably the most important growth vehicle for you over the next couple of years. Are there mechanisms in place to start to recoup some of those higher freight rates that you were mentioning in your prepared remarks? Does this change how you go after the next 50 or 100 schools, in terms of how you talk about pricing and the ultimate bottom line? Just wondering how you're going to be able to scale that in an environment where your freight rates and other costs are a lot higher.

Mike Huseby, CEO

Yes. That's a great question. It's something we talk about daily; we had big meetings going into this current slate of discussions around First Day Complete contractual pricing. The thing is that, there's a couple of elements that go into analyzing your costs, so you don't get upside down locking into rates. It's the pricing that you're paying for content as well as freight and other cost elements that factor into commissions and other structures. We do have an annual pricing review. We're spending a lot of time in Jon Shar and his team, working with Tom, our CFO. They actually started doing that already last semester in anticipation of what we saw in terms of freight increases in the fall and in this spring. The one thing I’d like to point out is that this First Day Complete product, which is undoubtedly our focus, in terms of reversing secular trends in textbook and courseware, whether digital or physical declines over the last 10-12 years, was only at 14 campuses, 40,000 students in the fall of 2020, then it grew to 65 campuses, about 290,000 students last fall. We expect to see that continue to scale. Keep in mind that all that growth occurred during a really tough sales period, very difficult to convince people to change models and focus on the benefits of these kinds of new revolutionary courseware pricing models while they're focused on COVID safety tracing, testing, etc. So our people in retail and supported by everyone else have done a fantastic job selling First Day Complete. I think that as I closed my remarks in the script, I mentioned that we've navigated through tricky waters. I truly believe that despite external factors we cannot control, they give me a lot of enthusiasm for what we are going to do with First Day Complete going forward. I'll turn it to Jon to talk about your pricing considerations.

Jonathan Shar, Executive Vice President

Yes, Alex, great question. The other thing, just building on what Mike is saying to factor in, is the percent of digital content that is growing each term as a percent of mix overall and within First Day Complete. Obviously, digital content offsets any increases in freight or other expenses that go into the cost of the content. We have a balance of some costs going up, but a favorable mix shifting to digital, which allows us to continue to provide great value to our campuses. I’m really optimistic about the growth of First Day Complete because we see it making a significant impact on student outcomes through three key pillars: having equitable access to content on day one, providing a concierge-like highly convenient service that eliminates a period of stress for many students at the beginning of the term as student mental health becomes more important on campuses nationwide, and then affordability, which we can achieve through the higher sell-through rates and discounts driven to students. We're making a significant impact and very optimistic that we're going to continue to grow the model for more institutions going forward.

Operator, Operator

Thank you. Our next question comes from the line of Rory Wallace from Outerbridge Capital. Please Rory, your line is now open.

Rory Wallace, Analyst

Hi Mike and Jon, I'm curious, and David, regarding the revenue deferrals that you mentioned in this quarter. I think from the comp being up 18% when including February, it implies that was a pretty big month for you. Specifically for First Day Complete and First Day revenues, what would that have looked like had the 100 schools not gone remote and had you not seen these pushouts to the right?

Tom Donohue, CFO

Yes, Rory, this is Tom, and you are correct that with the timing of school openings and the pushbacks, there was approximately $25 million of revenue that gets deferred to the fourth quarter. And that’s implicit in the 18.8% comp.

Mike Huseby, CEO

That doesn’t include activations for First Day Complete that may occur beyond then, but we tried to capture as much of the information we had in February; the fairly inclusive 18.8% growth rate should reflect a good estimate of the impact on spring rush regarding First Day and First Day Complete.

Rory Wallace, Analyst

Got it. Okay. And so that was really a large part of this quarter compared to what we thought going in a couple periods ago. With the new business at $100 million of net new, I know Notre Dame is probably a meaningful double-digit million part of that. But thinking about how the company looks structurally coming into a normal operating environment, it seems like if you can win $50 million or $100 million of net new business, you’ve got sort of an embedded single-digit tailwind to your revenue growth. On top of that, you should be getting the comp benefit of First Day Complete and DSS and Fanatics. So it would seem like the company is going to structurally become a much quicker top-line grower, compared to what it’s been in the past. I just think it’s kind of worth stating that, or do I have that vision of the company correct?

Mike Huseby, CEO

Yes. I think a couple of things; good observations in terms of top-line growth also depend over what time horizon you’re talking about, but as we enter this year with the new business we’ve disclosed, the one thing to keep in mind is our approach. We are being disciplined about the new business we take on, making sure it’s profitable. It may not be day one, but as soon as possible from day one—hopefully no later than year two, but in most cases immediately—and insisting that in many cases we don’t take on business unless it’s willing to adopt the First Day Complete model or take it on in year two. We’re doing the same with renewals for accounts that have marginal profitability. We hate to part ways with long-term customers, but if they can’t adapt—we’re very excited about the momentum we have, while we slowed down a little bit this quarter compared to January. I think the revision of our guidance for 2023 should not be viewed as anything other than the fact that many things happened between when we gave that guidance in June and today, many of which are very recent that give us pause to be a little cautious. But we’ll update that at the end of the year and be more specific.

Rory Wallace, Analyst

Yes, no. I think I’m sure most shareholders will appreciate the reasons for resetting the bar. The other thing I wanted to ask about Bartleby and DSS is that the growth rate there has stayed very strong. I think Chegg is guiding to like 8% to 10% organic growth for their study product, and it seems like that business is really hanging in and not seeing the same sort of macro impact as some of your competitors, who have decelerated a lot. So I guess my question is, what are you doing better than the competition, in your view, David? And also with this Delgado partnership, is that something that’s going to be easy to scale once you sort of have this use case better understood? It sounds like the LMS integration part of it should be pretty seamless. So it’s kind of around making sure that you have customer satisfaction and something you can really scale out to future customers.

David Nenke, President of DSS

Yes. Let me answer the second part of the question first. Certainly, with Delgado execution, what we’ve worked to achieve is a seamless ability to turn on or off features based on what the institution wants to offer. We have built in a lot of functionality to help ensure scalability. We’re currently building our playbook but also looking to integrate it relatively seamlessly. So, that’s our focus. I won’t say we’re successful yet, but that is our goal. The first part of your question regarding competitors—while I won’t comment directly, I will say we’re continuing to focus on educational outcomes and student success, and that’s what we’re building toward. Both students and institutions are resonating positively with us; we’re trusted and will continue to focus long-term on success.

Rory Wallace, Analyst

Thanks. And how much of the subscriber acquisition is linked to retail POS at this point? I know it used to be very intensive on that front and then kind of went to very little, and I’m not sure what the current state of the channel is.

Mike Huseby, CEO

What we’ve seen is that spring rush was challenging, obviously, with delays and remote learning, resulting in less people in the store. Setting a percentage was tricky. We’re continuing to do our best to get our product in front of students and build awareness, helping them when they're in-store and online.

Rory Wallace, Analyst

Yes. Yes, I understand. It sounds like that channel still has some upside as things normalize. Thank you very much for taking my questions and good luck.

Mike Huseby, CEO

Thanks, Rory. I appreciate it.

Operator, Operator

We currently have no further questions on the line. I will hand it back over to Andy Milevoj for any final remarks.

Andy Milevoj, Host

Great. Thanks, Juan. And thank you all for joining us on today’s call and your continued interest in BNED. Please note that our next scheduled financial release will be our fiscal 2022 fourth quarter earnings in late June. Thank you.

Operator, Operator

This concludes today’s call. Thank you so much for joining. You may now disconnect your lines.