John Wiley & Sons Inc (WLY) 2004 Q3 法說會逐字稿

Welcome to the John Wiley & Sons third quarter earnings conference call. (OPERATOR INSTRUCTIONS).

Before introducing Will Pesce, President and Chief Executive Officer, I would like to remind you that this discussion will contain 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 obligations to update or revise forward-looking statements to reflect subsequent events or circumstances.

Mr. Pesce, please go ahead, sir.

Good morning, and welcome to Wiley's third quarter conference call -- I'm with Ellis Cousens, Executive Vice President and Chief Financial Officer.

I will begin today's conference call with an overview of Wiley's third quarter and year-to-date results.

Then Ellis and I will respond to your questions.

I am pleased to report that the third quarter was relatively strong.

Revenue of 242 million was up 10 percent, or five percent excluding foreign exchange, translation gains.

EPS of 45 cents advanced 16 percent, excluding a net benefit recorded during the quarter.

Including that tax benefit, EPS increased 28 percent to 50 cents.

Year-to-date revenue of 691 million increased 6 percent, or 3 percent excluding foreign currency translation gains.

EPS of $1.20 increased 11 percent, excluding charges reported in the prior year, related to the Company's relocation to Hoboken, and tax benefits in both years.

All of Wiley's core businesses contributed these results, professional trade experience, the good holiday season.

Scientific, technical, and medical generate solid growth in our journal business, globally.

And, reported healthy renewals of licenses for Wiley Interscience.

Our higher education business outpaced the industry in the third quarter, and for the nine months.

Operating and administrative expenses of 114 million in the third quarter, and 337 million for the nine months increased over prior year, by 4 percent and 6 percent, respectively.

Excluding a negative effect of currency, these expenses were essentially flat in the third quarter, and up only 2 percent for the 9 months.

The shared services component of these expenses increased only 5 percent for the quarter and nine months, excluding the negative effect of currency.

It is noteworthy that most of that increase was technology-related, in support of the Company's ongoing migration to the digital world.

Regarding the balance sheet, accounts receivable increased by 13 percent, reflecting the revenue growth and the effect of foreign exchange.

Day sales outstanding was the same as prior year.

Inventory was essentially flat with prior year.

The increase in deferred subscription revenue reflects the combined effects of accelerating invoicing of enhanced access licenses, and increased collections of calendar year 2004 subscriptions, both positive developments.

The increase in accrued pension liability was principally due to a decrease in the annual discount rate applied to to calculate the present value of the future liability, and lower earnings on pension plan assets.

Cash flow, after normal investing activities of 112 million, which represents cash provided by operating activities, less cash used for investing activities, excluding acquisitions, exceeded prior year by $30 million, adjusted for last year's capital expenditures of $32 million, related to the Company's relocation.

Stated another way, normal operating cash flow was up approximately 37 percent.

The strong year-on-year growth was due to improved operating results, effective working capital management, enhanced access licensed collections, and a tax refund.

As stated in the press release, based on year-to-date results and expectations for the fourth quarter, which is seasonally Wiley's least significant quarter in financial terms, we anticipate full-year revenue growth near the high-end of our four to six percent guidance and EPS growth at the high-end of our mid-to-high single digits guidance, excluding the unusual items reported in fiscal year 2003, and the tax benefits reported in this year's third quarter.

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

Our professional trade business had a solid order, the result of a healthy holiday season.

Revenue of $85 million increased 3 percent during the quarter with the business, architecture, culinary, education, and consumer programs exhibiting strength.

Year-to-date revenue of 247 million was up 2 percent over prior year.

The business program rebounded nicely in a slowly improving market, building momentum throughout the quarter.

Several business titles appeared on major best-seller lists.

Although market conditions continue to be challenging, Wiley's computer books program gained some momentum during the quarter.

Frommer's, Wiley's market-leading travel program, experience significant reordering by major U.S. accounts, and strong sales of European travel titles.

Our travel program was behind prior year, through October.

But, the strong third quarter propelled it ahead of prior year through January.

Wiley is number one in the travel category, with a market share more than double that of our nearest competitors.

We signed a new edition of the Hagstrom: The Warren Buffect Way (ph), the first edition sold 750,000 companies.

We also signed two books with Lou Anne Johnson, the teacher whose life was the basis of the movie -- Dangerous Minds.

After three years of planning and negotiations, we signed a contract with the Harvard Law School program on negotiation for a definitive reference entitled Handbook of Dispute Resolution.

Harvard is one of the most respected teaching and research institutions in the country on conflict resolution.

The Company also announced a partnership with VantageMed Corporation, a leading provider of healthcare information systems to jointly develop a software interface that will allow Wiley's TheraScribe 4.0 and VantageMed's Therapist Helper to work together as a seamless practice management solution for mental health providers.

Wiley U.S.

STM revenue of 42 million, advanced 7 percent during the third quarter.

Contributing to this growth were new society journals, the polymer backfile collection, article select, and online books.

U.S.

STM revenue for the 9 months of 127 million increased 2 percent, reflecting in part, the adverse effect of the Rowecom bankruptcy, and lower-than-anticipated advertising revenue.

Globally, STM journal revenue increased approximately 13 percent in the quarter, and approximately 8 percent for the 9 months.

Wiley Interscience renewals are proceeding as anticipated.

Recently renewals were completed with the California digital library, the University of South Florida, the University of Kansas, University of Tampa and Procter & Gamble, among others.

Wiley Interscience extended his pay-per-view and article select options to include access to its extensive range of online reference works.

Previously available only for access to online books and journal content, these services allow librarians, scientists, and other researchers to obtain individual articles and chapters from publications for which they do not hold subscriptions.

Providing a wide range of access options is part of our strategy to offer customers greater flexibility and choice.

Wiley continued to extend its services to learned societies and their members by forming partnerships with prominent national, regional and international societies.

We formed a partnership with the Society of Plastics Engineers, and we renewed our agreement with the society for Bioelectromagnetics to publish its journal for an additional five years.

Although the STM book market continues to be soft, sales of online major reference works and online books were strong.

Wiley recently signed a six-year agreement to distribute MERCS for professional manuals and United States.

The MERC manual, the MERC veterinary manual, the MERC manual geriatrics and the MERC index.

While initially a distribution agreement, this partnership has the potential to expand to other initiatives.

Wiley's reputation and long history were important factors in MERC's decision-making process.

Higher education revenue for the third quarter of 47 million, and year-to-date revenue of 132 million increased over the comparable prior year periods by 7 percent and 6 percent, respectively, outpacing the industry during both periods.

Programs in business, the sciences, and social sciences drove these results, and offset continued soft results for engineering, mathematics, and computer science.

We signed a strategically important contract with Paul M. Rommer, of Stanford University's Graduate School of Business.

Dr. Rommer is one of the nation's leading economists.

He was a recipient of Stanford's Distinguished Teaching Award.

He will author a textbook -- Intermediate Macroeconomics -- which will serve as a catalyst for growth in our economics program.

As important as the textbook, Wiley also signed an agreement with APLI, the software company that Dr. Rommer founded.

APLI uses Web technology to create educational tools for students.

At the end of the quarter, Higher Education announced the partnership with the Society of Manufacturing Engineers, a leading professional society supporting manufacturing education, to develop content that brings real-world manufacturing into the academic classroom.

After a disappointing first half of the year, our UK operation rebounded in the third quarter.

Strong journal performance and good results for indigenous STM, and professional trade books, mitigated the effects of sluggish advertising.

In spite of the Rowecom bankruptcy, Wiley's UK journal program exhibited strong growth, benefiting from new businesses such as the Cochran Library database, the British Journal of Surgery, and ultrasound in obstetrics and gynecology.

In addition, licenses were signed with the UK Academic Consortium, and the Italian Consortium.

Incremental revenue was generated by a record reprint order from a company for 250,000 copies of an article from one of our UK journals.

The indigenous book programs performed well, driven primarily by improvements in the UK, BENELUX, Eastern Europe and Greece, and through online booksellers.

The For Dummies list in the UK got off to a very good start.

In Germany, Wiley-VCH is having a solid year on the strength of its journal and indigenous book programs.

Building on the success of the release of the polymer back file collection in the U.S., Wiley-VCH released the Angewandte Chemie backfile collection late in the third quarter.

Early market response is very encouraging.

Wiley Canada's performance during the quarter was somewhat disappointing, as growth in higher education could not compensate for soft professional and trade sales.

Wiley Canada signed an agreement with Fox Sports World to co-market the North American edition of Rugby For Dummies.

Wiley Asia's revenue, excluding journals, was essentially flat with prior year for the quarter, but up slightly for the 9 months.

Strong college results improved library sales.

Book fair orders in Taiwan and India, and education and library projects in Malaysia offset continued weakness in retail channels.

Revenue from Wiley Asia's translation business continued to grow at a rapid rate.

Sales in India continued above expectations.

India is now Wiley's second-largest book market in Asia behind Taiwan, which also exhibited strength in the quarter.

Wiley Australia had a good quarter.

For the nine months the high school business was up 7 percent in a market that grew less than 4 percent.

Higher education revenue was flat, as was the industry.

Professional trade reported year-on-year growth of 10 percent, with particularly strong results from the Wright Books lists, which we acquired a couple of years ago.

Wiley Australia won Tertiary Publisher of the Year, a prestigious award given by the Australian Campus Booksellers Association for excellence and service.

Wiley has won this award consistently during the past several years.

Wiley Australia also was awarded the employer of choice citation for the third consecutive year.

Companies receiving this highly coveted award were required to meet stringent criteria, particularly regarding the working environment for women.

Six Wiley publications received awards at the Association of American Publishers, professional and (indiscernible) publishing annual meeting.

In closing, I would characterize this year as challenging, but, as we approach the end of fiscal year 2004, we are positioned well to meet or exceed the guidance we provided at the very beginning of the year.

Given market conditions around the world, we believe the achievement of this guidance will be a very respectable performance and tangible evidence of the strength of Wiley's highly regarded global brands, the competitive advantages resulting from our strategic focus, the positive effects of our financial discipline, and the commitment, professionalism and resiliency of our colleagues around the world.

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

(OPERATOR INSTRUCTIONS).

Brandon Dobel, Credit Suisse First Boston.

Good morning, guys.

A couple of things on the STM business.

I wonder if you could characterize, maybe last couple of quarter or any kind of -- how the current trends look on a volume versus pricing basis, kind of in the core journal market?

And somewhat similarly, you mentioned a couple of renewals on the STM side.

And, the contract agreement with MERC.

I wonder if you could characterize those renewals and agreements in terms of how they look relative to how things looked in the past?

Is it the same kind of content?

Switching over from print to electronic, was the MERC a competitive situation?

I'm just trying to get a flavor for what the landscape looks like now from a number of different perspectives.

Okay, Brandon.

Just overall at STM, as we commented in the past -- we are very much, as our competitors are dealing, with very tight library budgets.

But, many of the leading indicators that we are experiencing are indeed positive.

And, when I talk about those things, let's start with renewals of licenses to the Wiley Interscience online service.

We are in very good shape in terms of the renewal process.

As I noted earlier, it has basically gone pretty much as expected.

It would be fair for me to say that some of the negotiations have taken longer than in the past.

But, again, that was as expected, due to the library funding constraints that many of our major customers are dealing with.

I'm very pleased to report that we have successfully consummated almost all of the major licenses, -- there are a couple still under negotiations in the States and around the world.

And, some of the terms -- actually mostly terms -- are consistent with experience that we've had over the last couple of years.

What I mean is that is that we are signing up several of these licenses for more than one year.

In fact, many of the significant ones cover approximately three years in duration.

And we think is a very positive statement about the value of the material that Wiley is presenting to our customers, and their commitment to use that kind of material.

The other comment that I would make in terms of price and volume is that relative -- if you go back, let's say three or more years, overall pricing growth, not only for Wiley but in the industry, has moderated considerably from three or more years ago to the more recent period -- again, as expected -- reflecting some of the budget constraints that we talk about before.

But, that does not mean that we are not generating incremental revenue.

We are, and is coming from a combination of volume and the volume is coming from two things.

One is, some customers who did not have access to print subscriptions before, because their library budgets could not afford it, are gaining access through these enhanced access licenses through electronic delivery.

Two is, we are -- as I have commented over several quarters now -- not only is our journal available online, but we are adding these backfile collections.

I refer to the polymer backfile collection a few quarters ago.

Basically, what that means is that we digitize content of back issues.

And I think, in that case, we went back to the 1940s.

And, we are generating incremental revenue from customers as they ask to gain access to that.

We just, as I mentioned during my opening remarks, added Angewandte Chemie, one of the world's leading journals, also in the backfile collection.

So, it is more price, sorry -- more volume than price, relatively speaking.

And that is coming from gaining access to customers who do not have access to Print, and also putting more content online.

In terms of the renewals, as I said, going very much according to plan.

We feel good about that.

In terms of print, vis-a-vis electronics, still very much a combination of both.

As I've stated previously, we offer (indiscernible), we offer electronic loan, we offer a combination of both.

And most customers are still requesting access to both means of delivery.

Your reference to the MERC relationship -- I mentioned these, by the way -- MERC is a good example, but I mentioned a few others.

These are wonderful examples, I think, of the respect other entities have for the Wiley brand and wanting to be associated with it, as well as the respect that they have for our ability to bring capabilities to them that they may not possess.

In the case of the MERC relationship, we were in competition with two major global competitors.

One that previously had the agreement and another that wanted it.

And, we are proud to report that we succeeded in winning that agreement.

And what we get is access to high-quality respected content.

What Merck gets in return, is our ability to distribute that content effectively.

And, the other point that I made, that I reiterate here is that you start with something like that -- and my hope is that, through ongoing relationships, that it could lead to some other positive developments for Merck and for us.

Thanks.

That was very, very helpful.

Shifting gears a bit to the higher-ed business, I want to get a couple of the quick ones -- pretty good growth in the quarter and you guys have showing (indiscernible) acceleration there.

If you were to characterize what you would -- what you thought the market would look like the next two or three years, in terms of overall industry growth, I guess the context that I put this in -- in the broad 10-K, they talked about kind of a two to three or two to four percent market growth number.

I would assume that they had a plan to beat that number.

Is that a fair characterization from your perspective of what you expect higher-ed to be?

Or is it somewhat different?

I would say couple of things about that, just for some context.

In calendar year, and I think it's best refer to calender year numbers, when we talk about the industry, not fiscal year numbers.

The industry was up 3 percent in higher education.

And, Wiley's growth, on a calendar basis and the 12 months ending December 31st, 2003 was 6 percent.

Our current expectation for calendar year 2004 for the higher education market would be growth at or perhaps a little bit better than that 3 percent.

I'm talking about market growth.

So, certainly in the range of 3 to 4 percent.

An I think, frankly, all of us are being a bit cautious about expectations for growth in the market.

I'll get to Wiley's expectations in a moment.

But, for the overall market growth -- because this is truly a market in transition -- that is not new to us -- it's something we've been dealing with for some time.

But, the migration from what used to be exclusively a print business to a business that is now a combination of print and electronic to one down the road that could be, in my opinion, primarily electronic.

We are in the midst of that transition.

And so there's quite a bit of change going on.

And, I think people are sorting out significant issues of price and value and being conservative about the forecast.

I think it is probably reasonable to assume about 3 or 4 percent market growth in calendar year 2004 -- at or maybe a little bit better than 2003.

I think you should be careful about those numbers in the sense of, you know, different disciplines or coarse areas may grow faster than others.

But, as an overall expectation, I think that is reasonable.

And, is Wiley did -- we will talk more about our prospects for fiscal year 2005 during the next conference call, after we have completed this fiscal year.

But, as we did in calendar year 2003, Wiley does indeed expect to exceed the market growth.

We did in calendar year 2003 -- we expect to again in calendar year 2004 in higher education.

Okay.

And then one last one on higher education as well.

How much of an impact these days do you think the economy is having, either in terms of number of the courses that colleges are able to offer, how much students are willing to pay for textbooks?

Is there more push-back from professors on the pricing (indiscernible) -- pricing increases -- just pricing in general?

Just trying to get a sense for the order of magnitude of what the impact is on the overall market growth -- historically has been more -- 5 to a 6 or a 6 to a 7 -- something like that.

In last year, this year, that ticked down a bit.

I'm just trying to understand a better -- what you view as the primary drivers for that kind of -- that difference between what used to be growth and what is now growth?

I would say that the economy has affected the higher education, both -- generically, speaking, higher education, but also the purchase of textbooks and related materials more -- relatively speaking, more -- than in the past.

And, I think it is really at -- for two reasons.

One is, to the extent that parents of higher education students have suffered from unemployment or losses in investments or things of that nature, one can make the case, that there is less discretionary income filtering down through the student population.

And, as a result, people are making tougher trade-off decisions and -- hard thing to quantify.

But, I think it is fair to say that there has been some effect of that.

More significant than that is that particularly, when you're looking at public two-year and four-year institutions of higher education.

And particularly, when you look at some of the major estates, in the United States, there have been such significant funding cutbacks, where some schools have had to cut off admissions, and are accepting fewer students than they would normally accept because they don't have the faculty in the classrooms and the resources to finance having the faculty in the classrooms.

And, that is a relatively new development.

This has been, of course, documented as being a big issue in the state of California.

But it is not only there.

Although I think we should continue to expect modest enrollment growth -- again, it depends on course areas -- the economy has definitely had a dampening effect on enrollment growth -- not because the demand is not there, but the ability to satisfy the demand.

And here I am emphasizing two and four-year public colleges and universities more than private institutions.

So, that is certainly an effect.

And, I have -- you have heard me talk about this before.

As it relates to prices and price resistance I have a lot of conviction about this.

And, that is that the issue, in my opinion, is never, ever price alone.

It's usually -- and in my case, it's about price versus value -- and to talk about one without talking about the other, I think, is not a very meaningful conversation.

I frankly, have these kinds of discussions with authors, with professors, with students and my colleagues here.

Let me give you example of what I mean by that.

Let's take an example of a package of instructional materials for the intermediate accounting market -- Wiley happens to be a leader in that area.

If a student who is majoring in accounting is taking that particular course, they will indeed, spend approximately -- I'm using very round numbers here -- $100 to buy new materials if they so choose.

So, let's take that student, as student A. And then, let's go to another student that spends, let's say, $50 for a book, maybe in another course area -- probably in another course area, because there's something available in intermediate accounting that I'm aware of at that price -- but let's pick another course area.

Now, if the intermediate accounting student reads that book, is tested on the content of that book, and feels that he or she needs it to be successful -- and we can define success in any which way we want -- for many students is -- I want to pass the course.

If they really feel that they need that book and those materials to pass the course, we don't have a price issue with intermediate accounting.

On the other hand, you can spend $50 and never use the book in the class and we have a price issue or price-value issue.

My point being, that it's not price alone -- it's a matter of how the materials are being integrated in the curriculum.

And, I think we and the academic community have some more work to -- to more effectively integrate this material into the curriculum, so students get the full value of what it is that they are acquiring in the first place.

Longer-term, probably not for this conversation right now, so that others can ask some questions, I would say, longer-term, as I said over and over again -- and I really feel strongly.

I think technology will enable us to deliver more value, over the long-term.

And, the pace of change there is very much dictated by the human beings who are teaching the course and the infrastructure available in higher education.

But, I do think there are a number of things underway that will really get this price-value more aligned over time.

Thanks for the help.

I really appreciate it.

Now, I will jump out of line.

Great.

You're welcome.

(OPERATOR INSTRUCTIONS).

Mr. Pesce, at this time, there are no further questions in queue.

I will turn the call back over to you.

I want to thank you very much for your continued interest and support.

And we look forward to speaking with you again in June, after the Company reports our fourth quarter and fiscal year 2004 results.

Thank you very much.

And that does conclude today's conference.

Have a great day.