John Wiley & Sons Inc (WLY) 2005 Q1 法說會逐字稿

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 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 obligation to update or revise forward-looking statements to reflect subsequent events or circumstances.

Mr. Pesce, please go ahead.

Good morning and welcome to Wiley's first-quarter conference call.

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

I'll begin today's conference call with an overview of Wiley's first-quarter performance.

Then Ellis and I will respond to your questions.

As noted in the press release issued earlier today, first-quarter revenue of $227 million increased 3 percent, or 2 percent excluding foreign currency effects.

EPS of 32 cents per share was down from prior year, but right on our internal target for the quarter.

Based on these results, leading indicators, and in market conditions, we continue to anticipate revenue and earnings growth in the mid- to high-single digits in fiscal year 2005.

Our STM business reported healthy year-on-year growth in the first quarter, up 11 percent over prior year, with journals and books contributing to these results.

Journal revenue increased 12 percent.

New Society journals contributed significantly to the year-on-year growth.

STM books were up 9 percent, which is one of the strongest quarters we have experienced for this business in quite some time.

During the quarter, several new enhanced access licenses to Wiley InterScience were signed with academic and corporate customers; usage continued to increase.

The American College of Rheumatology signed a long-term contract extension with Wiley to publish Arthritis and Rheumatism and Arthritis Care and Research.

As we expected, our Professional and Trade revenue was flat with prior year.

As a reminder, revenue was up 8 percent in last year's first quarter.

The first quarter is the least significant for Professional/Trade in terms of revenue.

Solid fall, winter, and spring front lists will drive year-on-year growth during the balance of fiscal year 2005.

In the quarter, the architecture, professional culinary, psychology, and education book programs performed well, while the consumer cooking and business categories lagged behind last year's first quarter.

Several Professional/Trade publications were on best-seller lists and received various awards.

As a result of a special bulk (ph) sale, a customized version of Wiley's guide to New York City landmarks has been distributed to every delegate and guest attending the Republican National Convention in New York City.

The collaborative effort between Wiley's Professional/Trade and Higher Education business has resulted in a multi-year contract with Axia College, which is affiliated with the University of Phoenix, to provide course plans and textbooks and to develop curricula in hospitality management.

The only disappointment in the quarter was in our Higher Education business, where revenue was down from prior year.

We believe two factors contributed to these results -- some delayed ordering and tighter inventory management by college bookstores, which may have a positive effect, particularly on returns later in the year; price-value concerns among students, which are most likely driving increases in used book sales, parallel imports, and the sharing of textbooks.

Regarding the buying behavior of bookstores, the first-semester story will not be complete until the end of October.

College bookstores purchase inventory in July and August, with reorders in the first half of September, followed by returns in October, before the cycle repeats itself for the second semester.

Regarding price value-concerns, we are offering a wide array of products and formats at different prices to students and faculty in the States and abroad, including brief, low-cost core concepts titles, customized versions of textbooks and related material, and interactive online products and services.

Wiley's eGrade Plus is receiving positive feedback from the market and will contribute to our results later this fiscal year and beyond.

In the first quarter, eGrade Plus was launched successfully for 30 new courses.

This innovative product integrates a complete e-textbook with other instructional resources on a single Web-based platform.

It helps instructors organize lectures and assign homework, and provides students with online tutorials and practice problems linked to the text.

Revenue in Europe was strong, up 12 percent, excluding foreign currency effects.

General revenue was healthy, as were book sales, especially through online channels.

In Germany, Wiley-VCH successfully launched a new journal and a number of new major reference works.

Combined revenue in Asia, Australia, and Canada was flat with last year's first quarter.

Growth throughout most of Asia was offset by sluggish results in Australia and Canada.

Wiley Australia won Secondary Publisher of the Year for the fifth consecutive year at the Annual Awards for Excellence in Australian Educational Publishing.

A few words about expenses, cash flow, and the balance sheet.

Operating and administrative expenses of 118 million increased 6 percent, or 4 percent excluding foreign currency effects.

Other then some higher-than-anticipated health care costs in the States, spending was as expected.

Excluding currency effects, shared services expenses increased by less than 1 percent over prior year.

Cash usage improved from last year's first quarter.

The increase in the receivables balance from a year ago reflects the combined effects of enhanced access licenses, foreign exchange, and sales growth.

Inventories decreased from prior year.

In conclusion, I would like to summarize the key points.

Overall, first-quarter results are consistent with our internal expectations.

STM started the year strongly.

Professional/Trade performed as expected.

Higher Education was below expectations.

We continue to manage expenses prudently.

Our balance sheet is healthy and cash flow is strong.

We continue to anticipate revenue and earnings growth in the mid- to high-single digits in fiscal year 2005.

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

(OPERATOR INSTRUCTIONS) Brandon Dobell with Credit Suisse First Boston.

A couple of quick ones.

On the Higher Ed space, I think last quarter we talked -- maybe it was the prior quarter -- a little bit about where the used books might be coming out as a percentage of total sales, and I think we had heard from you around 25 percent or so.

Is that still a good number to think about, or is there other things going on that might be driving that a little bit higher?

And then a quick one after that would be, you mentioned parallel imports.

I'm not quite sure what that is, so excuse my ignorance, but if you could give us a little bit of definition around that, that would be great.

And then I'll come back with one more.

Brandon, with respect to the used book market, the reference to 25 percent -- normally, when I am talking about that, I provide a range, because it really does vary depending upon which course area you're looking at and whether you're talking about introductory level versus intermediate or advanced.

The rough range that many in the industry have used as a percentage of the market for used books is anywhere from 25 to 35 percent.

And for a long time -- as I've mentioned in the past, for a long time, that was really pretty steady, again, depending upon the course areas that you're looking at.

Our sense of it is that that percentage has increased as the used book market has become more efficient -- student buybacks, online selling, just many different vehicles for students to gain access to it.

And although I don't have definitive information based upon first semester at this point in time, the anecdotal stories would indicate that that percentage is likely to increase a bit.

That is, again, not something I can document right now other than to get feedback from what's going on on campus.

Regarding parallel imports, the reference there has to do with students gaining access to textbooks that were developed and sold outside the United States.

As I suspect most of you know, depending upon the local economies and economic conditions and all sorts of other things, prices are determined based upon the local markets in which we sell.

With the development of various online accounts and various other distribution systems, students, through either a local bookstore or through other channels, are gaining access to some of those books which were sold in some markets at a lower price than they are available in the United States.

So when I refer to parallel imports, Wiley does get revenue when a student buys a book from outside the United States, but in most cases, those price points outside the United States are lower than inside the United States.

I should also point out to you that in many cases, the contents for those other markets is not the same as it would be in the United States; again, there's a lot of versioning that goes on to make them more suitable for local market conditions.

So when I use that phrase parallel imports, that is what am talking about.

And although it could technically apply across many different businesses, in this case, it is mainly an issue for us in Higher Ed.

Okay.

That's very, very helpful.

Shifting gears a bit, maybe a question for Ellis over on the STM margins down a bit year-over-year, and with strong revenue growth, I would have thought there would have been some expansion, given how much leverage there should be in that business.

Is there something going on that we could point to that might be recurring for the back half of the year that we could model in, or was there something specific to this quarter that made the margins look a little bit tougher (indiscernible) last year's comp?

It's a little bit of a mix issue, Brandon, with new society journals coming online, which as you probably know have slightly lower margins because of hits (ph) and royalties associated with those journals.

And also, Will alluded to the fact that we actually had some solid performance in STM books, which, while they have really nice margins, they are lower than wholly-owned journals.

So it's the combination of what is two very positive things, the society journals and STM books, that are contributing to that shift in margins.

Okay.

So as we think about the rest of the year, how should we think about margins versus last year.

Obviously, on the royalty side that probably abates a little bit as you move out of Q1.

But if books remain strong, should we think of margins potentially being down from last year for that segment?

I think basically we're hoping certainly that the book group does sustain over the course of the year; so yes, you might expect to model a little bit of that into your full year.

Okay.

And then somewhat a similar question on the Higher Ed space.

Should we think about the first-quarter performance as being a trend, as indicative or not being indicative for the rest of the year?

It is kind of a tough quarter to judge how the rest of the year is going to pan out.

But (indiscernible) where market growth is for most companies, I think they talk about somewhere in the 3 to 4 percent range.

Should we still of that market growth as a decent number for you to hit for the year, or is it going to be a little bit less than the tough start for the year?

Brandon, this is a Will.

I think you all know this, but just to remind people, our first quarter is May, June and July.

And as I pointed out earlier, I have been involved with Wiley's Higher Education business since the day I arrived here, and my advice to people inside and outside the company is to not read too much into that particular period.

And I mean that if we were way ahead of prior year and I mean it when we're not ahead of prior year.

So I don't think one could or should easily just take those three months and extrapolate it out to the balance of the year.

Having said that, it is undoubtedly true that this market is tougher than I think a lot of people expected it to be.

Fortunately, we have a number of very effective strategies in place, and these are not things that we are just talking about, but things that we have been doing as our company and I think the market continues to migrate to more electronic dissemination of content.

The reference to eGrade Plus is one very, very good example of that.

Frankly, I think that is a good thing.

I think the long-term solution to some of the concerns about price and value will have an electronic solution to it.

And in many ways, I am pleased that we as a company, the industry and our customers are embracing that more.

But it is going to be a bit of a bumpy ride, I think, for the industry as we manage through that transition.

In terms of growth expectations, the 3 to 4 percent range, I have heard everything from 2 to 4, 3 to 4, 3 to 5.

I think all of those are within reason.

We have said from the get-go that we thought that the market was somewhere in the 2 to 3 to 2 to 4 percent range for the year, and that our hope was that Wiley's Higher Education business would perform within that context.

And our second quarter for the company ends at the end of October.

Conveniently, that is the end of the first semester business, and I think we will have a lot more to report at that particular point in time.

I should also point out to you that my own review of Wiley internally in terms of the books we're publishing, the electronic services that we are offering, the adoption reports, there is nothing there that we are seeing that concerns us at all.

What I believe is going on is a trend in the marketplace that everyone is adjusting to, and I continue to believe that long-term, Higher Education is going to be of great importance, not only in the United States but around the world.

I believe Wiley will continue to play a very successful role in that, and I believe that technology will enable us to provide more content to more people than ever before.

Okay, I appreciate the help.

Thanks a lot.

(OPERATOR INSTRUCTIONS) Rajesh Chelapurath with Burnham Asset Management.

I was wondering if you could give me the figures for the return on investment for unusual items in the latest quarter and for the last fiscal year.

Could you define exactly what you mean by that, please?

Exactly the same way you have defined it last year, in the fiscal year '03.

I'm not quite sure -- could you ask again?

Well, if you look at your fiscal year '03 annual report, you have a return on investment before unusual items described in the annual report.

I don't have that for the quarter handy.

Can I get back to you on that?

Okay, that sounds good.

Also had one other quick question.

How many shares were repurchased during the quarter?

We repurchased about 300,000 shares, a little bit more than that -- about 312,000.

Thank you.

This is Will.

Just one other comment I wanted to make about the ROI.

The only hesitancy there is that people define return on investment in many different ways.

We have a consistent way in which we define it within our company, and we just want to make sure that the definitions are the same.

Some companies talk about cash return on investment.

It is the kind of thing that people have different definitions for.

So we will be happy to get back to you with the specific once we know the number that you're looking at.

(OPERATOR INSTRUCTIONS) Paul Hogan with Fenimore Asset Management.

Just had a question about the acquisition of publishing assets that you reported in the quarter.

I assume those were titles and what categories those were in.

And if you could also comment on your view of the environment for making acquisitions, going out for the next 12 or 18 months, whether it is titles or companies, and if it is more favorable than you have seen it over the last year or two years.

I can certainly comment on what we have purchased during the quarter was a control circulation journal in the UK called The Journal of Microscopy and Analysis -- had to be really careful -- it is not an easy one to say -- which actually complements an existing portfolio of similar kinds of journals in the UK.

So that was a significant acquisition for us in the quarter within the UK.

If Will wants to get into or discuss what we feel the environment looks like and how it feels.

Sure, Paul, just to reiterate that we are genuinely interested in acquisitions in our three core businesses of Professional/Trade, STM, and Higher Education in the United States and in Europe.

As we have stated in the past, the first gate for us, whether we're looking at a product line acquisition or a company, a small acquisition or a large one, is that does it make long-term strategic sense and will it strengthen Wiley's competitive position, either in terms of providing content and/or capabilities.

We continue to be very disciplined financially.

That is just part of the way we do things around here, believing that the worst thing you can do is overpay and then you're swimming upstream from day one.

The supply of acquisitions that satisfy our criteria is somewhat limited in these particular businesses, and that has been the case over the course of the last year or two.

It does not mean that there are not opportunities out there.

It just means that it takes a little bit longer to identify the right deal and close it.

And we are very actively engaged each and every day in scouring the market for the right kinds of opportunities and building relationships with people who maybe own small companies or larger companies that have product lines that may no longer fit.

So it's a very active part of what we do.

But you have to work hard at it, because the supply is more limited than it was, I would say, 3, 4, 5 years ago.

In terms of uses of cash for you, if you don't find many opportunities out there in the acquisition arena, will you continue to buy back stock or let the cash build?

We certainly are cognizant of the great cash performance that this business has.

You may have noticed we have stepped up the repurchase program a bit over the last couple of quarters or so, and we have increased the dividend, I think, 15 percent within the last iteration.

So I certainly, myself, the CFO and certainly the management team of the company, the Board, are in favor of not allowing cash to accumulate -- to a point, yes, but not beyond a certain point.

So to have some cash certainly be flexible in certain situations is very helpful and useful and we will do that -- can expect that.

But beyond that, certainly, returning cash to shareholders through accelerated repurchases and dividends is certainly the way to go if there are no significant acquisitions.

And certainly, we feel comfortable doing that because we know we have a lot of flexibility in terms of our ability to finance large acquisitions or acquisitions of just about any size that we could and would want to digest that fits strategically.

So we are confident that we can get the financing, even if we do in fact maintain a fairly low cash balance.

Okay, thank you.

At this time, there are no additional questions.

Mr. Pesce, I will turn the call back over to you for closing comments.

Thank you.

Today is my 15th anniversary at John Wiley & Sons.

And I just wanted to say that 15 years is a serious commitment in any relationship, personal or professional.

I want you to know that I am as passionate and as committed as ever to this special place we call Wiley.

Wiley is known for our performance-driven culture and unwavering commitment to the highest standard of ethical behavior and integrity in all that we do.

We believe in the value of investing in long-term collaborative relationships, as reflected by the way in which we treat people, with dignity and with respect.

I am proud of that.

It is a privilege to serve as your CEO.

Thank you for your interest and support.

We look forward to speaking with you again in early December.

Thank you.

Ladies and gentlemen, this will conclude today's conference call.

We do thank you for your participation and you may disconnect at this time.