John Wiley & Sons Inc (WLY) 2004 Q2 法說會逐字稿

Good day everyone and welcome to the John Wiley & Sons conference call.

Today's conference is being recorded.

Before introducing Will Pesce, President and Chief Executive Officer, I would like to remind you that this discussion contains forward-looking statements.

You should not rely on such statements as actual results may differ materially and are subject to factors that are discussed in detail in the company's 10-K and 10-Q filings with the SEC.

The Company does not undertake any obligation to update or revise forward-looking statements to reflect subsequent events or circumstances.

Mr. Pesce, please go ahead.

Good morning.

Welcome to Wiley's second-quarter conference call;

I am with Ellis Cousens, Executive Vice President and Chief Financial and Operations Officer.

I will begin today's conference call with an overview of Wiley's second-quarter performance then Ellis and I will respond to your questions.

As noted in the press release issued earlier today, second-quarter revenue of 229 million increased 3 percent.

As a result of foreign exchange translation effects journal performance globally and higher education results, EPS of 41 cents was up 5 cents per share or 13 percent excluding the onetime tax benefit of 19 cents per share reported in the second quarter of last year.

A favorable gross margin, lower interest expense and a lower effective tax rate contributed to the earnings increase.

Year-to-date revenue of 449 million increased 4 percent or 2 percent excluding foreign exchange translation effects, year-on-year revenue growth was driven primarily by higher education and Wiley VCH in Germany.

Year-to-date EPS of 75 cents increased 8 percent excluding unusual charges related to the Company's relocation, and the aforementioned one time tax benefit both of which were reported in the prior year.

A solid gross margin and lower interest expense contributed to the year-to-date growth over prior year.

Year-to-date expenses were 6 percent higher than prior year, but up only 3 percent excluding the negative effects of foreign exchange.

Shared services were up 5 percent excluding currency, with most of that increase driven by technology investments.

Regarding the balance sheet, Accounts Receivable increased by 17 percent primarily due to accelerated invoicing of enhanced access licenses which is a positive development, and the effects of foreign exchange.

This is also reflected in the growth in deferred subscription revenue.

The 4 percent increase in inventories was mainly due to foreign exchange translation effects, the decrease in accounts payable resulted from the payment of relocation costs after the second quarter of last year.

As noted in the press release, second quarter and year-to-date results were essentially as expected assuming gradual improvement in market conditions throughout the balance of this year, we expect growth in fiscal year 2004 of approximately 4 to 6 percent for revenue, and in the mid to high single digits for EPS, excluding the unusual items reported in fiscal year 2003.

The Company received some favorable publicity during the quarter.

Kiplinger.com chose Wiley as its pick-of-the-day on October 17th, describing the Company as a textbook profitmaker, in the article Kiplinger noted and I quote, "Wiley was founded in 1807, and has demonstrated its ability to survive in good times and bad over nearly two centuries.

It boasts superb cash flow placing itself in a good position to make acquisitions or fund new projects without overextending itself."

The article also referenced comments previously made by Morningstar including the following and I quote "Wiley holds one of the best reputations in the publishing business giving it a competitive advantage over its rivals."

CNN's the Money Gang selected Wiley as its-pick-of-the day on September 22nd.

My colleague Ellis Cousens was invited to appear on that program.

Wiley was named one of the 100 best companies for working mothers by Working Mother magazine, in addition the New Jersey Business and Industry Association honored the company with its Enterprise Award for the positive effect Wiley has had on the New Jersey economy by relocating to Hoboken.

We believe these awards represent tangible evidence that Wiley is not only financially strong and performance driven, but is also an organization that values and appreciates the relationship it has formed with our colleagues and the community.

I would like to provide some additional information regarding the performance of our core businesses.

The U.S.

Professional/Trade business reported second quarter revenue of 87 million, which was 3 percent below prior year.

After a sluggish start to the quarter, revenue recovered nicely in October.

Year-to-date revenue of 163 million was 2 percent higher than prior year.

PT's gross margin is tracking well, while operating expenses were only 3 percent higher than prior year.

Five business titles appeared on major bestseller lists and there is considerable advance interest in Wiley's market leading tax titles.

The first Wiley edition of the highly regarded Stock Traders Almanac 2004 was published in the quarter.

After a solid first quarter the consumer technology program was sluggish early in the second quarter, but then rebounded in October and professional segment showed some initial signs of recovery.

Consumer titles performed well after a slow start to the year.

Our strong general interest list began releasing with promising results.

Dershowitz/The Case for Israel hit numerous bestseller lists.

Kinzer/All the Shah's Men: An American Coup and the Roots of Middle East Terror and Armey's Axioms by the former majority leader of the U.S.

House of Representatives performed particularly well.

The company recently signed an agreement with Target Inc. to create a For Dummies brand extension series.

And three one-hour television specials featuring the For Dummies brand premiered on the Discovery Health Channel in September.

The Cooking Program featured some strong titles during the quarter.

Wiley is supporting the development of a 13-part television series featuring Mark Bittman, author of Wiley's How to Cook Everything.

The series which will air in the Fall of next year, will include 30-second spot ads featuring Wiley books.

A book tie-in is being developed for simultaneous publication.

Although still below expectations on a year-to-date basis, the Frommer’s Travel guide exhibited some strength in the second quarter.

Market feedback indicates that travel guide sales while not nearly at pre-September 11th levels are in the midst of an upswing particularly guides on U.S. destinations.

Our major trade accounts, Barnes & Noble, Borders and Amazon have reported increased sales recently.

Obviously they are all counting on a healthy holiday season.

In the states, STM revenue was 43 million in the quarter and 84 million for the six months, which was essentially flat with prior year for both periods.

STM's results reflect the combined effects of increased journal revenue despite the adverse impact of the Rowecom bankruptcy, and higher online sales of our current protocols program partially offset by lower advertising revenue and continued weakness in the STM book market.

Globally, STM journal revenue increased approximately 6 percent in the second quarter and approximately 5 percent for the six months.

Once again, including the negative affect of the Rowecom bankruptcy.

The calendar year 2004 license renewal process is proceeding pretty much as expected.

Fourteen more universities joined the Chinese Academic Libraries Information Service consortium agreement which is Wiley's first major license in China.

The major pharmaceutical company renewed its Wiley InterScience license with a significant increase in value including online access to major reference works, books, journal backfiles, and additional journals.

Wiley has built upon its reputation for innovation in online publishing and for long-standing publishing service to learned societies and their members by forming new partnerships with numerous prominent national, regional, and international societies, including the recently announced agreement with the American Institute of Chemical Engineers.

We also renewed our agreement with the International Union of Cancer.

During the quarter, we phased in a new electronic journal production management system, a key component of our integrated online publishing program that will accelerate delivery of journal content to our customers.

We also continued to add enhanced functionality to our Wiley interest line of service as reflected in the recent launch of a comprehensive redesign of the underlying information architecture and graphical interface.

Wiley took a leadership role in the October launch of an initiative which includes the United Nations Food and Agricultural organization, the Rockefeller Foundation, Cornell University, and other STM publishers.

This initiative will provide researchers in developing countries with free access to journal content about food, agriculture and water resources.

This program builds on the success of a similar initiative started by the World Health Organization and STM publishers including Wiley that brings medical research information to the developing world.

U.S.

Higher Education revenue of 38 million in the quarter was 3 percent ahead of last year.

As a reminder, Wiley's second quarter does not include July.

Which is historically the highest sales month in the Higher Education business.

Year-to-date revenue of 85 million was 5 percent higher than prior year.

Globally, Higher Education revenue increased over prior year by approximately 6 percent in the quarter, and approximately 7 percent for the year-to-date period.

Top-line growth was primarily attributable to strong results for the sciences, social sciences and business partially offset by continued softness in engineering.

In addition sales into the high school market were off plan as a result of tight state budgets.

In the press release, we noted several key points regarding textbook prices that I believe are worth repeating.

Textbooks are widely regarded by professors and students as crucial to effective teaching and learning.

Particularly in the market served by Wiley.

Wiley is as committed as ever to delivering the highest quality materials and services to customers in the states and abroad.

The company is employing technology to deliver value added products and services to professors and students.

For example, we offer educational packages that include brief core concept textbooks with online and customized components.

The company is helping professors integrate technology into the classroom through its investment in Wiley's faculty resource network.

So with virtual seminars and one-on-one collaborations, the faculty research network is providing training and support for hundreds of professors across the U.S.

Outside the states, the picture in Europe is mixed.

Wiley's UK operation reported revenue shortfalls for prior year excluding the positive effects of foreign exchange.

The top-line results reflect sluggish book sales and soft advertising revenue mitigated somewhat by the performance of journals.

Results were better in October as reflected in the record sales performance.

In Germany, Wiley-VCH revenue exceeded prior year for the quarter and six months.

Solid results for journals and books were partially offset by soft advertising revenue.

The strength of Wiley-VCH's journal portfolio is reflected in its high-profile on our Wiley interest line service.

Six of the top ten journals on Wiley InterScience are published by Wiley-VCH including the number one and number two journals, (indiscernible) and advanced materials.

Wiley's Asia performance reflects solid results in India, Hong Kong and Malaysia.

India is now Wiley's second-largest book market in Asia, behind Taiwan.

Results in Japan are showing signs of a recovery.

Journal revenue in China is up significantly.

Wiley Australia reported solid year-on-year growth.

After a strong start to the year Wiley Canada had a somewhat disappointing second quarter excluding the positive effects of foreign exchange.

In closing at the midpoint of fiscal year 2004 we are positioned well to achieve our financial targets.

We are focusing on the forthcoming holiday season in Professional/Trade, journal renewals and STM and the second semester business in Higher Education.

In addition, we will continue to manage expenses and free cash flow very carefully while making investments in our future.

With all of that as background, we welcome your questions and comments.

Today's question and answer secession will be conducted electronically. (OPERATOR INSTRUCTIONS) Peter Appert of Goldman Sachs.

Good morning.

I'm wondering just as a follow-on to your comments on the college market, could you give us a sense of the unit volume trends in your college business and average selling prices?

Peter, that depends on a few things.

In terms of what traditionally happens with Higher Education publishing is when your front list is published you get significant year-on-year growth from the prior year because usually the additions that you are comparing against are in there anywhere from their third to maybe fourth, in some remote cases fifth year publication.

So, a lot of the unit growth that you get from a one-year to the next is driven by the new books that you are publishing.

And in fact, we are indeed experiencing that within Wiley's list.

The other thing that I would say in terms of pricing, there is a lot of information out there about the total cost to students in a particular semester and you will hear numbers ranging from $700 to $800.

Of course that depends very much on where a student is in the curriculum, that depends upon the major areas of study.

Obviously if they are buying some major introductory books that have a lot of ancillaries and computer test banks and things of that nature the prices are higher than if they are buying one paperback book and maybe reading some articles in a library.

There are some textbook packages that when you take into account the book and all of the related ancillary materials, and when I mention ancillary materials I am talking about materials that are provided to faculty to help teach the course, I am talking about access to websites that students have, and study guides and things of that nature.

In the major course area, for example when you're studying accounting, let's say intermediate accounting or something like that, you could spend $100 for that particular course.

The thing that I think people sometimes miss with this when they're looking at reading headlines and things of that nature, is we talk about the cost of the textbook.

We're not really talking just about the cost of the textbook.

We're talking about an investment for a student and a professor in teaching and learning that goes on in a particular course and it happens to include a textbook and print material as well as a whole bunch of other ancillary material in print and electronic formats.

Right.

How about anything new or interesting this year in terms of the used book market, are you seeing further inroads there in the context of pushback related to these issues that you mentioned?

I think for the last few years, the percentage of the total market for used books has been or let's say their market share has been pretty steady.

My sense over the last semester or maybe two is that in some markets, the used book percentage has gone up a little bit.

What I would say about that, also, is when one is looking at that, it varies significantly depending upon which course areas you're talking about and at what level.

What I mean by that, on average used books could be anywhere from 25 to let's say approximately 35 percent of the market.

It would be at the higher end in the softer side disciplines and at the introductory levels, and at the lower end in kind of a high content more advanced areas.

So again that fluctuates.

But I would say after probably a period of about three years where the market share was flat, I would say that during the last semester or two some pickup in the percentage and anecdotal it is a very difficult thing to get hard data about.

And frankly I think it reflects a few things.

The tight economy, our businesses are somewhat resistant to changes in the economic cycle.

The reality is, the parents of college students, many of them are running on tighter budgets.

Because of increased unemployment, investments underperforming, all sorts of reasons and so, I think there is some pressure on discretionary income and discretionary here I would say how a student might use that word.

So, there is more pressure on them there.

I would also say that there is certainly an effect on public institutions where tuition increases were on average higher this year because of state budget gaps, and people are paying more in tuition.

They are obviously looking more carefully at what they are spending their money on.

I think that environment is a bit tighter right now.

Having said all that, I am very pleased with Wiley's performance in the Higher Education sector.

The numbers that I reported to you are holding up very, very nicely to our own expectations and also to the market.

Great.

Thank you.

Alan Ziegler (ph) of First Manhattan.

Good morning.

Two questions related to journals.

One is, have you raised your prices for journals beginning in January?

Yes.

What percentage would you say on average?

It varies, but I would say on average mid to maybe high single digits.

There may be some journals based upon the amount of content or new issues or expanded services that we are providing that might be in the higher single digit, but somewhere in that range.

Did I hear you right saying that the German journals when you talked about -- you said six of your top ten journals now are in Germany -- did you mean Europe, did you mean Germany, did you mean the whole world?

I was not clear about what that six out of ten meant?

The specific comment that I made was that six of the top ten journals on Wiley InterScience are published by Wiley-VCH.

That is based on usage data over the last quarter.

It is just an indication of that I have often said that when it's all said and done, it is quality of contents and obviously the quality of the service in terms of use of accessibility that affects this business.

And when we acquired Wiley-VCH several years ago, what we knew we were acquiring is terrific content.

We at that time acquired it in print form basically.

This is just a point that now that we are providing both print and electronic, the strength of those journals is holding up exceedingly well.

I should also point out to you that these are English language, although they are published in Germany, many of those journals are available both in German and in the English language.

These are English language versions that are ranking on the highest in terms of usage on the Wiley InterScience service.

Okay.

Thank you.

I have some others but I will let others ask.

(OPERATOR INSTRUCTIONS) Chris Stein with A.G. Edwards.

Could you just walk me through the increase in accounts receivable quickly, I know you covered that earlier in the call, but could you just expand on that please?

Sure, I will ask Ellis Cousens to do that.

Chris, it is two pieces primarily.

We had a higher level of invoicing on our EAL business, that is our STM EAL business.

We specifically look to accelerate the process of invoicing and collecting as well quite frankly which is why you see an increase in cash as well coming out of that.

That was about 12 or so million dollars, the increase and there is about another $7 million dollars in effect on foreign exchange, by far the two biggest pieces.

And it is just growth in the business.

(OPERATOR INSTRUCTIONS) Luna Hahn (ph) of John Wiley & Sons.

Hello.

I was wondering what is the long-range vision for the STM book program, and whether when you talk about journals, is there really a distinction between scientific medical and technical content, the essential content we deliver to our customers?

The packaging traditionally was in print as distinct journals or books, and now with online delivery, is there any plan to harness technologies to Wiley InterScience for the STM book program?

Our STM business has actually been the one that has moved the fastest to the so-called digital world and that is not so much because Wiley's leadership team or frankly individual authors or contributors felt that was the right thing to do.

It's because our customers told us that is where the technology would allow them or enable them to do things that print formats were not quite as efficient at.

So, as many of you know, going back now about six years, we started making investments in what started out as a technology platform called Wiley InterScience and now has evolved into several different business models all intended to serve customers better.

We are in a phase where we are providing both print and electronic in our STM business.

Again because that is what our customers are asking for.

They have the ability to subscribe to just a print journal, to just an electronic through our various licenses on Wiley InterScience or through some combination of both.

Most still request both.

That was the kind of early stages if you will of our development.

We continue to do that.

As many of you know, we also have an investment in STM books.

They are a combination of books on a particular topic, but also encyclopedias which we would refer to as major reference works.

We are increasingly digitizing that content and making it available again in both formats, and in a print version which you can buy or also through Wiley InterScience and have a subscription.

I made a comment earlier that a major pharmaceutical company renewed a license to Wiley InterScience license and I mention they did that at a significant increase over the value of the license that existed before.

One of the ways in which that went up was that they subscribed to more content and some of the content that they subscribed to were through our major reference works and books being online.

So, increasingly, we are moving away from the limitations in physicality if you will, of print material.

Whether that's a book or a journal or an encyclopedia to providing access to content that has been digitized which gives us more flexibility in terms of delivering to the customer how they want it, when they want it and where they want it.

I am speaking specifically about STM because that was the focus of the question.

Some of our other areas, people still prefer to read print on paper and so, the technology has not had as significant effect there.

Specifically here referring to our Professional/Trade business.

So, that is basically how that is (indiscernible) and we seek a robust strategy for Wiley's STM business is to continue to develop, acquire and disseminate high-quality content and to make it more accessible, more flexible, anywhere, at any time that the customer ultimately needs it.

And that is frankly what the Wiley InterScience business has evolved to be.

Carl Gardner (ph) of Harper Arch Capital (ph).

In the press release you elaborated on some of the strengths in Professional/Trade area in the quarter and I was wondering if you can actually provide more detail into some of the areas of weakness?

It sounds like October showed a pickup and I'm wondering how that has carried over into November?

And if you could remind us of the importance of October versus November December in terms of the holiday selling season?

Finally a question for Ellis on the interest and other expense line seemed lower than what I expected, and if you could provide some details as to what is going on there?

Sure, in terms of overall the professional and trade business, there are a few important seasons if you will that usually include more than one month.

October is the very, very early stage of the so-called holiday season.

Obviously, the second part of November into the early part of December are the biggest parts of the so-called holiday season.

Last year, Barnes & Noble and Borders and other major trade channels as well-documented reported disappointing sales for the holiday season.

There are some early indications from our trade accounts through -- we started seeing the trend in October, and we're seeing more of it in the early days of November that there seems to be some pickup in activity.

It is still early days in this business.

The next few weeks are certainly important in terms of deeming this a successful holiday season, but the early indications are good.

That is obviously good for us and the industry.

In terms of the various categories I really don't have too much to add other than what I have already said and that is from quarter-to-quarter, you could certain categories could perform better than others depending upon the strength of the front lists, or whether there is some particular softness in a particular category.

For example, reported back a couple of years now, right after September 11th the Frommer's Travel Guide series suddenly was negatively affected by that.

That is for obvious reasons.

People were not traveling as much.

I pointed out that we are beginning to see a bit of a rebound there in the last few weeks.

So, that helped drive some of the performance at the end of the second quarter.

It looks like it is carrying forward into the third-quarter.

Consumer technology is one of those categories that depending upon the front lists, we have a major release in one of the For Dummies titles which we actually have releases in recent weeks.

That could have a positive effect.

There is really from quarter to quarter, I would not put too much emphasis on one category versus another.

What I would say to you overall, is in our professional and trade business, our expectation all along has been that the second half of the year would be stronger than the first half of the year.

We were assuming that the holiday season will be better but we were also assuming into next spring postholiday season, we continue to assume that.

On the question on other income and expense it's actually a few things contributing to that.

As you know the first half of the year is a period of cash usage for us so we typically tap into our revolver.

We did have a $35 million repayment in October, so our average debt over the second quarter, was about 257 or so million dollars versus about 314 million or so last year.

That in combination with about 100 basis point lower than average interest rate over the quarter -- those are the primary drivers.

We also sold a piece of property that you recall we relocated some of our facilities in Germany in VCH to a new facility last year, and we had a little bit of difficulty in terms of unloading the profit that we had previously been in occupant in, but we did own that property as we do the property that we moved into as well.

So, we sold that property in the second quarter as well.

That was a few hundred thousand dollars, most of it though was essentially the lower interest rate on lower debt.

Great.

Thanks guys.

Alan Ziegler from Manhattan.

Do you disclose how large Wiley InterScience is global or in the U.S. as a percentage of either STM or corporate?

Have not done that, what we have provided is a sense of how much of our global STM journal revenue is covered by Wiley InterScience licenses.

Let me mention the number and then explain that a little bit more.

Now, well over 60 percent of global STM journal revenue is under license through the Wiley InterScience service.

When I say under license, that means an individual institution or through an agreement with the consortium, and that includes print and online access.

So, if someone signs a license with us and says we want it in both forms, that is included in that 60 percent.

Okay?

That percentage has obviously grown very rapidly over the last few years as we started signing up more and more licenses with corporate and academic customers.

We continue to expect that 60 percent to continue to grow into the future.

So, 60 percent of the global STM journal revenue is under license?

Did you not have -- aren't these customers, weren't they under license when you had print as well?

I'm not sure what the significance of that is?

The significance is the distinction is a print subscription, which is what we did before versus a Wiley InterScience license, which included -- if it's print alone it's not in that number -- this means that we have gone from what was 100 percent print business to something that is 60 percent print and electronic and it's moving more heavily to electronic.

That is all it indicates.

So 60 percent of the journal revenue now is under license and sold by Wiley InterScience, is that (indiscernible) category and 40 percent is prints?

Is that what this amounts to?

It's just confusing to me.

That is what that means.

So now only 40 percent of STM revenues come from print?

No.

I'm sorry to be dumb, but I'm not clear.

I don't know if there are others who feel the same way but I don't know the relevance as I said of that 60 percent number.

First is, we are just talking about journals.

Not books so it is not all STM revenue, it is journal revenue.

I understand.

The second thing is the significance of it is before we had this Wiley InterScience service.

What is Wiley InterScience?

It provides basically online access to our STM journals and increasingly our books.

But let's just deal with journals for now.

Before we had the Wiley InterScience service and you would have to go back about five years now, we were basically 100 percent print annual subscription business.

All the 60 percent means is from going from 100 percent print, we now have 60 percent of global STM journal revenue, if you took our total global STM journal revenue, 60 percent of it is represented by licenses we have the Wiley InterScience service with customers around the world.

And it also is a number that just indicates that it includes a combination, there is some print in there because the licenses -- some customers have said give us both -- it is a covered license that says you will get a print subscription and you will get an electronic subscription.

It's just a way of trying to indicate over time the migration of the Company's business from 100 percent print, to an effective combination of print and electronic.

Nothing more or less than that.

Whereas before they had an annual subscription now they have a license?

Is that the difference?

The customer in the old days had a subscription; today they have a license?

That is correct, although some people not in a legal sense would say well a subscription is really a license to use the material, the difference here with a license is there is an electronic component to it.

Is the length of a license similar to the length of a subscription?

To understand, I'm sorry to burden you here, but I just what to understand how the business is evolving?

No, not a burden, I love talking about our business so it's not a problem at all.

We have gone from an annual print subscription, that's the way we used to do business to what we call enhanced access licenses, and they could be anywhere from one year to two years, to three years, depending upon the customer and what suits their needs.

Most, I would say, the highest percentage are still annual subscriptions, in this case licenses, but there are also some that are two and three years in terms of the term of the agreement for the license.

Okay, and the pharmaceutical company that you referenced, where they a subscription before, a license?

Some of the above?

None of the above?

You spoke about what is the significance of that meaning did they renew?

Is it new?

Was it one?

Was it the other?

Could you tell us that?

Actually, that is a good example because they were four years or so ago, approximately four years ago, they were entirely print, annual print subscriptions.

So, they would go through their, this is a corporate library of a major pharmaceutical company so their corporate librarian would determine their needs, go through the renewal process and they would get in return print subscriptions.

They went to about three years ago, they went to a Wiley InterScience enhanced access license which means that they took on a combination of print and electronic access, and they paid some increment -- I don't know exactly what that is meaning they paid more for print and electronic above and beyond what they paid before for print alone.

Now, just recently, they renewed that license so they went from 100 percent print; they went to a license on Wiley InterScience; they now have renewed their license agreement.

I believe this is -- I could be off a little bit -- I think it is a three-year, it is more than one year, I believe it's three, and the total value of this license has gone up significantly from what it was in the previous license, reflecting ordering more material and having more access to more content.

So, this is a very good thing in my head.

We have been basically a typical example of how we migrated from a customer going exclusively print to one that went through a combination of print and electronic for a period of time, to one that is going more heavily to electronics, still some print but ordering more.

From the ridiculous to the sublime, the tax rate going forward was this just a one quarter issue or is the rate going down for the year?

Full year rate is forecast at about 31 percent maybe a shade below that.

Thank you on that.

That does conclude the question-and-answer session at this time.

We turn the conference back over to Mr. Pesce for any additional or closing remarks.

Thank you all very much for your continued interest and support.

We look forward to speaking with you again in March after we report our third-quarter results.

Best wishes to you, your family and friends for a happy and healthy holiday season.

Thank you.

That does conclude today's conference.

Thank you for your participation.