John Wiley & Sons Inc (WLY) 2005 Q3 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 will contain forward-looking statements.

Should you 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, sir.

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

I'm with Ed Melando, Corporate Controller and Chief Accounting Officer.

My colleague, Ellis Cousens, is not feeling well, so he's unable to join us today.

I'll begin with an overview of Wiley's performance, then Ed and I will respond to your questions.

As noted in the press release issued earlier today, third quarter revenue of 258 million increased 7 percent, or 5 percent excluding foreign currency gains.

Operating income of 50 million increased 15 percent over prior year.

EPS of $0.53 per share increased 18 percent, excluding a net tax benefit reported in last year's third quarter.

Excluding currency effects, operating expenses for the quarter of 120 million, increased from prior year by 4 percent.

Third quarter results were driven primarily by the solid performance of our professional and trade business and strong year-on-year growth in our international companies.

The continued strength of our global STM business also contributed to the growth.

The only disappointment in the quarter was the performance of our Higher Education business.

Wiley's year-to-date revenue of 732 million was up 6 percent, or 4 percent excluding foreign currency gains.

Operating income of 121 million, increased 7 percent from prior year.

EPS for the nine months of $1.27 exceeded prior year by 6 percent, excluding the aforementioned net tax benefit.

Excluding currency effects, operating expenses for the 9 months of 357 million were 4 percent higher than prior year.

Based on year-to-date results, leading indicators and market conditions, we anticipate full year growth in revenue and EPS of 4 to 6 percent in fiscal year 2005.

Excluding estimated expenses associated with Sarbanes-Oxley compliance of $0.03 per share, projected full-year EPS growth would be 6 to 8 percent.

For the nine months, cash flow after normal investing activities of 126 million which excludes acquisitions, exceeded prior year by 12 percent.

The year-on-year growth reflects the combined effects of increased cash earnings and trade receivable collections.

Inventories decreased by 4 percent from a year ago.

On January 31st, we had 140 million in cash and short-term investments, a 50 percent increase from last year.

We have put some of that cash to work through our buyback program.

On February 4, Wiley repurchased 1 million shares from several entities associated with the Vas Group of Fort Worth, Texas, at a price of $32.45 per share; for a total investment of approximately $32 million.

In January, "Fortune" Magazine named Wiley one of the 100 best companies to work for.

Wiley was the only publishing company selected and one of two companies in New Jersey that made the list.

As a part of its evaluation of Wiley's culture and practices, Fortune randomly surveyed 350 of our colleagues.

This is yet -- a further example of Wiley proving that we can be successful in financial terms while being a terrific place for our colleagues, as human beings first and as professionals second.

I'd like to provide some information about Wiley's core businesses.

Our professional and trade revenue of 92 million in the third quarter advanced 9 percent from the prior year.

Direct contribution to profit increased by 32 percent in the third quarter.

Gross margin improvement, prudent expense management and lower provisions as a result of improved inventory management, as well as a decrease in author advance provisions contributed to the strong year-on-year growth.

Year-to-date revenue of 257 million was up 4 percent over the prior year, while direct contribution to profit increased by 9 percent.

Third quarter results were driven primarily by strong sales of consumer "For Dummies" books, the professional culinary program, Webster's New World Dictionary and improved sales of high end technology titles.

Revenue generated through brand licensing, rights and websites, combined with lower sales returns also contributed to the strong performance in the quarter.

Five professional and trade titles were featured on major best seller lists.

JK Lasser, in particular, is having an outstanding year with over 300,000 copies sold.

A solid holiday season for both Barnes and Noble and Borders contributed to the third quarter results.

Amazon reported that it had the busiest holiday season in its history.

Baker and Taylor had an excellent January.

In the third quarter, a redesigned Frommers.com site was launched that includes several new features, improved search functionality and standard ad sizes to accommodate advertisers demand.

These improvements were well received as evidenced by record highs in monthly traffic and increased book sales.

At the end of the quarter, the Company launched Wiley's CPA e-Prep, a self-study tool for students preparing for the new computerized CPA exam.

This comprehensive product includes audio lectures and slides.

Students can use the tool to identify their own strengths and weaknesses and customize practice exams accordingly.

In January, about 800 titles went live in the Google Print program.

This program facilitates the discovery of products based on keyword searches, displaying descriptive information, table of contents and up to 10 percent of the book's content.

Publisher branding is incorporated and links to Wiley.com, as well as selected online retailers are included to support book sales.

STM revenue of 43 million in the third quarter grew over prior year by 2 percent.

Revenue growth was reduced by a delay into the fourth quarter of some license renewals to Wiley InterScience.

Direct contribution to profit was 5 percent below prior year, reflecting the combined effect of a reduction in gross profit as a percent of revenue, due to product mix and continued investments in Wiley InterScience, society journals and the book program.

Year-to-date revenue of 136 million increased 7 percent while direct contribution to profit was up 2 percent for the same reasons as in the quarter.

Globally, STM revenue increased approximately 8 percent in the quarter and 10 percent for the nine months.

The STM book program continues to perform well, maintaining the momentum that began in the fourth quarter of last fiscal year.

Journal performance, especially new society publications and non-subscription revenue, such as off-prints, back files and advertising sales also contributed to the year-on-year growth.

Visits to Wiley InterScience exceeded 10 million in the quarter, representing 9 percent growth over the previous quarter.

Customers continue to take advantage of Wiley InterScience's wide range of access options, as reflected in the positive trend in usage.

Google continued to be a key driver of that traffic.

The new customer driven pricing model for Wiley InterScience online books launched in January, delivering flexible and convenient sales options, enhanced functionality has also been added to the service.

The National Institute of Health announced its policy with regard to public access to articles that report on researched funds.

The policy requests, but does not require, authors to deposit into PubMed Central, which is part of NIH's National Library of Medicine, manuscripts of articles reporting NIH-funded research that have been peer-reviewed and accepted for publication.

NIH will release these manuscripts within 12 months or less after publication in the journal.

Authors will determine the timing of the release.

In our opinion, this is a much better outcome than the original NIH proposal.

We're pleased that the NIH listened and responded to the concerns of publishers and the research community.

Wiley believes that the research community and society at large are best served by the widest possible dissemination of published health and medical information.

During the past several years, the Company has made significant investments in Wiley InterScience and new services, such as pay-per-view, article select and the digitization back files to achieve this goal.

We are also enhancing the discoverability of our content through a number of other initiatives including: crossref search, Google Scholar and Google Print.

In addition, the Company has been working closely with organizations, including the American Cancer Society, American Diabetes Association, American Heart Association, crossref and other publishers to develop Patient Inform, a free online service that will disseminate medical research directly to patients and their caregivers.

In the past few years, Wiley and other publishers have participated in a health inter-network access to research initiatives sponsored by the World Health Organization and in access to global online research in agriculture, sponsored by the Food and Agricultural Organization.

As a result of all of these efforts, more content is accessible to more people in more ways than ever before in the long history of scientific, technical and medical publishing.

Higher Education revenue of 45 million decreased by 3 percent in the quarter.

Direct contribution to profit also decreased from prior year.

Year-to-date revenue of 131 million was within 1 percent of prior year, but direct contribution to profit was below prior year by $3 million, primarily due to the top line results.

The disappointing results for Higher Education reflect a combined effect of increased price resistance among students and continued softness in engineering and computer science.

Worldwide adoptions of Wiley's innovative online product, eGrade Plus, have been encouraging.

Currently available with 32 major frontless titles through several pricing options, eGrade Plus provides the student with a print and/or online textbook, as well as online study guides and self-testing products, which provide immediate feedback to help the student exceed in the course.

Professors who adopt eGrade Plus can customize the course content to fit their specific curriculum.

Over 70,000 units of eGrade Plus have been sold in the states.

During the quarter, Higher Education signed an important multi-year publishing agreement with the National Geographic Society, one of the world's foremost research and educational societies.

Wiley will create textbooks and digital learning tools that will incorporate maps and photographs, graphics, illustrations and videos from NGS's vast library.

Other alliances formed during the quarter include agreements with Outernet Publishing to create lab manuals for introductory biology textbooks, a software development company in India for licensing and selling business simulations, and Applia to sell a Wiley textbook that published during the quarter along with its software product.

Third quarter revenue for Wiley Europe of 66 million was up 16 percent over prior year, or 7 percent excluding foreign currency effects.

Direct contribution to profit increased by 13 percent.

For the nine months, Wiley Europe's revenue of 194 million was up 14 percent, or 8 percent excluding foreign currency effects.

Direct contribution to profit was 15 percent higher than prior year.

Continuing the positive trend of the first half of this fiscal year, journal and book revenue was up in the quarter.

Indigenous STM books and imported U.S. profession trade and Wiley VCH titles performed particularly well, especially in the Middle East and Africa.

Sales of the Cochran collection, which is now available through Wiley InterScience, were strong throughout Europe with Sweden signing and Norway renewing national site licenses.

The Cochran collection is a unique source of information on the affects healthcare intervention.

Published on a quarterly basis, the Cochran collection consists of a regularly updated collection of evidence-based medicine databases.

During the third quarter, three small acquisitions were completed.

The reference portfolio of the Nature Publishing Group, the book list of Professional Engineering Publishing, the publishing arm of the Institute of Mechanical Engineers and four journals from Henry Stewart Publications.

Wiley Europe signed an agreement with the Securities Institute to publish a series of introductory finance books.

To collaboration provides Wiley with preferential access to potential authors and readers among the Institute's 17,000 members.

In turn, Wiley will provide its global marketing expertise to help the Institute expand its membership in Asia and North America.

All visitors to the 2005 London Book Fair in March will receive a copy of the London Book Fair Tips for Dummies.

This promotional piece is being supported and distributed by the event's organizer, Reed Exhibitions, and will reinforce the "For Dummies" brand with an influential audience.

Wiley's revenue in Asia, Australia and Canada was up 14 percent during the third quarter, or 10 percent excluding currency effects.

For the nine-month period, revenue increased 8 percent, or 4 percent excluding exchange effects.

Direct contribution to profit essentially reflects the top line performance.

In Asia, all Wiley product groups contributed to the growth across practically all of its markets.

Strongest growth was in the global STM book program.

Sales of Chinese language "For Dummies" titles has been impressive, with every title reprinting at least once.

Third quarter results in Australia were up year-on-year with School and Higher Education exhibiting strength.

Wiley Australia signed an agreement with The Institute of Chartered Accounts to publish its accounting and auditing handbooks, annual publications that will not only serve student requirements at the university level, but also professionals.

Wiley Canada's performance during the quarter benefited from a strong local publishing program in both Professional Trade and Higher Education.

Sales to corporations, Amazon and library wholesalers contributed to the top line growth.

Shared services expenses of $47 million in the quarter and $139 million for the nine months increased from prior year by 2 percent and 3 percent, respectively, excluding foreign currency effects.

In conclusion, Wiley had a solid third quarter.

Professional Trade is performing as expected on the strength of a strong front list and deep back list.

Our global STM business is exceeding expectations on the strength of our journal and book businesses, in print and online.

Our Higher Education business is the only disappointment this year, mainly due to difficult market conditions.

That being stated, we are encouraged by the market response to innovative new products like eGrade Plus.

Our balance sheet is healthy, our cash flow is very strong.

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

[Operator instructions].

Peter Appert, Goldman Sachs.

I was just hoping we could maybe dig a little further into the weakness in Higher Ed because, specifically, it looks like your revenue numbers are lagging versus the industry.

So I was hoping you might just dig further into that.

And then if you could expand on the issue of price resistance, is this manifesting itself in the-- in the form of more pressure from the used book market?

Or are there other issues we should be aware of?

Regarding our performance relative to the industry, the calendar year 2004 numbers were up about 1.8 percent and through-- our year-to-date numbers are through January, we're about within 1 percent.

I would say, based upon the information we have and the disciplines that we are competing in, we don't believe that we are losing market share.

What I mean by that is that the engineering market and computer science market are not great right now, but that's affecting the whole industry.

We happen to have a significant percentage of our business in that particular area as opposed to, for example, the soft side areas.

So, we don't think in the markets that we're competing we're actually losing share.

We do believe that some of the areas we haven't had a strong presence in in the past are growing a little bit faster than some of the markets that we are in.

I would caution everyone to be very careful about drawing too many conclusions from industry data for one particular period or another.

The reason I say that is that from month-to-month, that has a tendency to change a fair amount.

And two, is that publishers include different revenue numbers in the industry data in terms of what they define as higher education; and sometimes that will affect the numbers from one quarter to another.

That all being stated, I think the headline news is really not the fact that we're off from prior year by a percent and the industry through December was up by 1.8.

I don't, frankly, feel that that is material enough to-- to be too concerned about.

The headline news is that the industry, all in, was only up somewhere around 2 percent in the past calendar year.

And my reference to price resistance is reflected in a number of different aspects of what's going on in the market.

Clearly, the used book market, as I have said in previous calls, has increased its share of -- of the total business.

Students are working even harder to find used books than they did before and, frankly, the supply is greater; not only through the bricks and mortars stores, but also through online retailers.

In addition, I believe students have been much more aggressive about sharing books, as opposed to just buying their own, whether that's used or new.

And, as I've talked about in the past, there have about been some issues with the reimportation of lower-priced textbooks from outside the United States back into the States.

I think all of those things have had an effect on the revenue performance for the industry, during the last 12 months.

This may sound a bit perverse, but the comment that I would make is, that I believe the good news is that students continue to find ways to gain access to our material.

You know, whether it's used books or whether it's through reimportation of textbooks sold outside of the United States or, frankly, through sharing.

The fact of the matter is that means that they re trying to gain access to it.

The issue, clearly, is that they don't feel that price and value are in alignment right now.

And they are being very -- they're taking actions to try to prevent for having to pay for the full price of the book.

I believe the strategic solution to that is to be doing the things that we are doing and that is to invest more heavily in the online dissemination of content.

Candidly, this last year has been bumpy in our industry, but if the outcome of that is a more rapid -- or an acceleration of the transition from print to more electronic, I think that is a positive development in the intermediate and long-term for the industry, for reasons that I've stated before.

So, you know, it's a matter of, you know, working through this transition period.

And in terms of the -- the ultimate -- the ultimate financial model, I guess, of the online college textbook, do you-- do you envision an environment where, not so much from margin perspective, but from a gross profit contribution per unit sold perspective, the profitability of that business could be consistent with what historically you've earned in this industry?

Yeah, I think what you, you know, just in rough terms, what you could expect is a lower price per unit in terms of absolute dollars of profit , in relative terms, as much, potentially, as good margins or maybe better; and potentially better return on investment.

The thing that is most clear to me is that the price per unit's going to be lower.

And when we're defining a unit here, we're defining-- I'm defining it as what a student would need for a particular course.

Right.

Price being lower, but if margin is the same, then profit contribution per unit is also going to be substantially lower, correct?

In absolute dollars?

Yes.

Well, not if you're able to sell more units, which is an assumption that we're making.

The biggest single reason, you know, other than all the obvious costs and investments that are required to successfully launch an education package in this-- in these markets and, by the way, you could spend a million dollars to launch a combination of print and electronics products in this market right now, so there's a substantial investment.

But the biggest affect, other than that investment on the price, is the fact that somewhere between 25 and 35 percent of revenue is lost to publishers and the authors who created in the first place through used books.

If we didn't have a used book market, I am absolutely confident that we could price this material lower and have a very attractive business and have price value more in alignment, but the reality is the used book market is there.

In an electronic world it wouldn't be.

In addition, I feel there are a number of other things in terms of inventory, obviously the benefits of inventory management, working capital requirements; 27 percent in the industry of what gets shipped out comes back in the form of returns.

When you take all of those things out of the system, I believe you have a very attractive model.

The challenge is navigating through this transition period where students still tell us, you know, we'd love to offer more electronic -- we're capable of doing it, but students are still telling us they want access to the print textbook; they just don't want to pay the full price.

And so waiting for that human behavior or helping to encourage that human behavior to change is the challenge the whole industry is facing.

And I believe that that is accelerating, that change, and I think that's a good thing.

John Christiano (ph), UBS.

Quick question on professional trade.

On the cost side, I think you mentioned that you had some improvement, I guess, based on inventory management, lower provisions there.

If you can just drill into that on the cost side and you obviously had a nice pickup in margins and is that something that's going to continue going forward?

Is this sort of a change in how you're doing business in that group?

And is it sustainable into next year?

And the other question would just be on the STM business.

I assume the libraries are getting their budgets together for next year.

What kind of pricing increases, whether it is differences between books and journals, are you looking for for the next school year?

On the PT side, the improvement that we referred to on inventory provisions is-- is not, you know, didn't just happen this quarter.

It reflects the fact that some of the intermediaries we've been dealing with are improving their inventory management, which is something we've been working on with them.

And, frankly, we continue to get better and better at that in terms of print decisions and managing our inventories.

So, that's just the combined effect over time of having less write-offs to deal with in that business.

And I think, frankly, our people in Professional Trade have done a terrific job for years and they have found a way to improve upon that.

Some of that is internal and some of that is getting the benefit of what our intermediaries have been doing.

And in terms of additional improvements, you know, I wouldn't take what happened in the quarter and assume that, you know, every quarter we're going get that kind of benefit.

I think this is a combined effect of things that we've been working on together during the course of the year.

And on the author advance side, which I don't think you asked about specifically, but that also contributed.

That's not just-- just, you know, lowering of provisions for the sake of lowering our provisions.

The fact that our sales performance and the earn-out of royalty advances has indicated that that was the appropriate thing to do.

So, the good news there is that we're doing, you know, as we expected on the top line and, even in some cases, better and that's reducing the need for the provision.

So, all of that is good news and what I wouldn't do is I wouldn't take the percentage of improvement there and extrapolate that on an ongoing basis; but I would assume this is a pretty good base point that we can continue to work off of.

Was this a particularly strong quarter then, I guess, seasonally?

Or Christmastime and things like that?

Pardon me.

Was this a seasonally strong quarter for you?

It was a very -- it was a good quarter for us.

It was, you know, the reference I would make to PT is right now through nine months, we're -- we're doing pretty much as expected.

So what happened in the third quarter is we made up some ground from earlier in the year.

We had a very strong fourth quarter in PT last year.

So the comparables are a little bit tougher for us fourth quarter this year versus fourth quarter next year.

But -- but all in, it was a very -- it was a very good quarter and I made some reference to, you know, some of the key accounts and we're very, very pleased, our online sales continue to be very strong and some of the other brick and mortar accounts had a good holiday season, which certainly helped.

And we have a terrific collection of brands that are holding up very, very well in -- in some, you know, challenging market conditions; not only in the states, but also around the world.

Regarding STM, on -- on average, as we've talked about in the past, the -- the percentage of growth coming from price increases has decreased significantly over the course of the past three years.

So, there's no really new news about that.

On average, and one has to be difficult -- careful about averages in terms of price increases because all journals are different.

You have a combination of print and electronic.

But if you needed to think about a number, I would say somewhere in the vicinity of, you know, 5 to 6, no more than 7 percent as, you know, average price increases; when you take print and online together.

In some of those cases, there are more issues being delivered, whether that's electronically or in print form.

But that's kind of a rough average that I think you can use and that is down from what the industry has experienced, if you go back three years ago.

And you had particular strength, I think you pointed out, both domestically and internationally on the book program.

Yes.

I guess I was a little surprised in that I thought, you know, the trend would be moving away from the books.

I mean, do we refer to online books here, as well, like are these online references or are these just strictly print books?

My-- when I referred to our global STM book business, I am referring to both print and online but, interestingly, the -- the-- the good news in this fiscal year is mainly on the print side.

We are getting growth in online, but it's not a huge part of what we're doing.

We're migrating that way, but it's not a big part of the revenue number yet.

And so I understand why you would say that's a bit surprising because in an environment where librarians have had to deal with slow growth or modest growth in their budgets and to the extent that they've been investing more in -- in licenses for primary research journals, you say to yourself, well how's the book program doing what it is doing?

And I really must compliment my colleagues who are involved in that business for just executing superbly over the last several quarters.

You, John, may not be aware, but others who have been participating in these calls in the past know that our book program in STM was really flat for a few years.

It -- margins attractive, return on investment attractive, but we really weren't getting a whole lot of growth.

And we have been making some investments, we've changed some responsibilities in terms of people who are leading it and we have really had some terrific success there and I -- I frankly feel it's just, you know, it's old-fashioned execution, it's sticking to the plan, getting done what we're saying we're going to get done.

Signing up and delivering some good content.

We are doing more online, as you mentioned, but it's the print side, as well, that's really driving this.

And looking at the business, much more holistically as a global business and getting the benefits of doing that.

So, it's really a very nice, positive story about executing your plan.

[Operator Instructions].

Brandon Dobell, Credit Suisse First Boston.

Just a couple of quick ones.

If you could talk about the acquisitions in the quarter, kind of where would they fall?

If they-- what the contribution was and how we should think about the contribution going forward?

And I also want to kind of get a better feel for the -- the eGrade product, you know, what you're seeing from adoptions, either in terms of publishers or customers on the college side, kind of better feel of who's buying that product and how they're using it in their -- in their local markets?

The acquisitions that I referred to and have been characterized as small acquisitions, are all in STM and they're all in Europe and the approximate annualized revenue is-- it's approximately $2 million, combined, all three; so, these are not material.

But, you know, the reason I mention them is that, you know, I think as people who follow the various segments that Wiley participates in is that, you know, you can make some nice niche acquisitions, which individually may not appear to matter, but when you get enough of them and Wiley's record of being able to integrate them successfully; over time, they can add up and contribute to both growth in -- in revenue but also earnings and cash flow.

So, very, very marginal effect, frankly, in fiscal year '05 and then on an annualized basis, about $2 million top line in '06 and again out of Europe.

And they fit nicely into what we're doing, they're straight integrations and we feel good about the opportunity to get them.

And will continue, by the way.

That's something we spend -- there's not a day that goes by that we're not looking at something in those areas and they may fall off the radar screen from others, but we think it's good business.

Now, eGrade Plus, you know, the -- the people who are buying it is, you know, there are a couple of things going on here.

The professors continue to be the gatekeepers in the Higher Education business and so, you know, clearly this process begins with Wiley sales professionals making professors aware of the availability of this product and, in turn of course, then getting students to actually acquire it.

And they can do it in a couple of different ways.

I made reference to the various models and there's, you know, one of the really neat things -- I made this comment during an earlier conference call, that, you know, Wiley has introduced more new business models in, you know, the last five years than we did in our entire history combined.

And some people say, well, you know, how do you know that?

Well, it's actually quite simple when you stop to think about it.

For the longest time, up until about five years ago, this was basically a business of selling books through intermediaries, or a journal subscription business.

And since then, with the advent of Wiley InterScience, with enabling technology, we're able to deliver many different models to people because we're breaking out of the physicality of a print book or a print journal and it's very, very exciting.

And eGrade Plus is an example of that.

Where, you know, if as a student you want just an electronic version, we'll sell you the electronic version.

If you want the electronic version bundled with the book, we'll sell you that.

If you want the book alone, you can have that.

And so it gives you the ability to kind of customize more to the specific needs of individual customers; and I think that's a very, very powerful and positive development, not only for Wiley but for our industry.

In the case of eGrade Plus, you know, I have to say that this has exceeded my expectations from where I sit.

I mean, I knew we had a very attractive product, but the takeup in the market has exceeded what I expected in terms of the official launch, which I believe was back in August, to what we're getting from the marketplace.

As I reference, I believe it's available now within 32 -- or with 32 major books and course areas, and we expect that to continue to grow.

And what we're getting from both professors and students, and I shared this story in the last conference call, the quotes; is that, for professors, it's helping them manage their courses more effectively and, for students, it's facilitating the teaching and learning process and they feel helping them be successful in the course.

And we have testimonials from both groups, students and professors and we're also getting some good response from outside the United States.

It's not having, right now, a huge effect on revenue for Higher Ed fiscal year '05, but it will continue to grow on the top line and begin to benefit more significantly in fiscal year '06 and beyond.

So we're very optimistic about it and I would just say that I think eGrade Plus is an example, a very good example, of what I mean by the transition from what we were providing in the marketplace to what we're capable of providing and why I'm optimistic that there's going to be some good growth opportunities in this business as we work through this transition.

From a business model and sales perspective, is it a kind of a per-student fee that the school pays?

And then from a sales perspective, are you partnering with the course management system guys, like WebCT, Blackboard, Angel, those kind of companies, or using channel guys to sell the product?

Or is it just your direct sales force out there?

Well, we-- we do, you know, work cooperatively with course management companies and have been for some time.

But eGrade Plus is a separate and distinct, unique to Wiley, product that we developed through-- we developed internally and we are selling it through our sales force.

The institution-- it is not an institutional sale.

It is, in essence, not different from what's happened in the past.

And what I mean by that is professors will recommend to students that they acquire it and then the student pays for it.

And the student pays for it either over a semester or, if it's a two-semester course, they can pay for and get is it over the course of two semesters.

And, of course, the pricing is different depending upon whether it's one or two.

So it is through our existing sales force, it is through professors as the gatekeeper, students are ultimately paying for it.

And it is Peter -- the question that Peter had asked earlier, when we were talking about the future of Higher Education publishing and my reference to lower price per unit but, you know, attractive margins, attractive ROI; eGrade Plus fits right into that model.

It is a lower price per unit than a textbook, but we're beginning to see the model that, you know, we've been speculating about playing out with that product.

Okay.

And then final question, cash flow guidance or kind of how you think about operating cash and CapEx, if we exclude some of those share repurchases.

Any change to-- to how we should look at that for the full year?

No, one of the things that all of you who have followed our company have known for a long time is, a terrific attribute of this business, is our ability to throw off free cash flow.

And the Company, in my opinion, our reputation to know what to do with the cash, once we develop it.

And we had a period of time a couple of years back where we made investments having to do with our relocation and we said that once we got past that, we would start getting back to a substantial level of free cash flow that you've come to like about this company and we're doing that.

And on top of it, I think we've become even better at our working capital management.

I think we're, you know, we're just doing a better job on the inventory levels.

And so, what you can continue to expect for us, I see no reason why the trends that-- that you've been seeing, you know, annually, I mean from quarter-to-quarter there may be some fluctuation; but our ability to throw off that level of cash on an annual is something you should continue to expect and our, you know, willingness to reinvest in the business, to drive organic growth or acquisitions, or to support, you know, in terms of a good investment in my opinion, by buying our own stock; we're going to if not to do that because we -- we are confident in our future and we believe that's a good way to put our cash to work.

Chris Stein, AG Edwards.

I was curious if in the last quarter -- was there any pricing reductions on -- in Higher Education or did you try and push through price increases or did you just keep prices flat?

And then on the comment that Google's been driving a lot of traffic to Wiley InterScience, has there been any way for you guys to determine whether or not that's -- you've kind of generated some incremental subscription revenue from people that may not have been Print subscribers in the past?

And then, do you pay Google for that placement or do you get that in exchange for that beta test with just providing them the content?

Regarding your question on Higher Ed, there haven't been -- in the quarter there weren't any "price reductions."

As I've mentioned in the past, the price increases are much lower on average than they have been for years.

And that has been in place, basically, throughout all of fiscal year '05.

That's not to say there haven't been any selective price increases.

There have been some in particular areas where we felt, based on competitive market conditions, it was the right thing to do.

But most of the growth that happened in the industry is really volume-related and most of the growth that, you know, that we had experienced in particular course areas would have been volume-related.

There's a little bit of price in there, but much, much less than in if the past.

So, that's not really a big driver of year-on-year performance.

If anything, in comparison to prior years, there is less price benefit than we had experienced in -- in the -- not only last year, but if you go back over the course of two or three years.

And you should -- you know, as you think over the -- as you monitor our performance in the future; and you look out, you know, one year, two years, three years out, you know, as we move more to electronic dissemination, at the risk of being redundant price per unit on the electronic delivery will be less.

And, so, we'll find meaningful ways to talk about that during these conference calls.

It's early days yet, but I don't see that as a negative thing, assuming that we make it up in volume and assuming that we get the benefits that I referred to earlier in terms of working capital management and cash ROI.

My references to Google, you know, one of the things that I'm very proud of about my -- my colleagues and the way they think about things here, and you may find it odd that I will make reference to a company like Amazon and a company like Google in the same sentence, and they say well, what's the connection?

When Amazon first became a player in the book business, you know, candidly, there were many people in our industry that viewed them as a threat.

And I must say that a number of my colleagues, particularly in our Professional and Trade business, very much embraced what Amazon was doing.

And they embraced it from the point of view that they saw this as an opportunity to reach more people than we could through existing channels.

They saw it as an opportunity and not a threat, and have consistently been at the front end with Amazon on new experiments that they've been trying and the experiments that tended to be ones to try to drive more unit sales, not only in the United States, but around the world; and it's been very collaborative.

And I reference that because Google, when they first started introducing a number of services, you know, the initial press from within the industry was to look at them, you know, possibly as a-- as a threat.

And I'm not here to make long-term predictions about how their business will evolve over time, but I am prepared to say, in this case, our STM people and also, certainly, in Professional and Trade, what we've embraced is that Google provides yet another opportunity to drive traffic to our sites, another opportunity to get more people interested in the content that we provide.

And we see that as a good thing and so we have been very supportive of a number of these initiatives.

In the case of Wiley InterScience, we know, we are able to track when people do a Google search and then end up at Wiley InterScience.

So, we know that there's quite a bit of increased traffic coming through Google and we see that, again, as a very positive development.

I can't tell you-- what I'm not able to say is, you know, did that directly relate to some license that we were able to sign or not.

That's a harder thing for me to be able to comment on or trace.

But if you accept that increased traffic to the site ultimately ends up with a revenue opportunity, either with more revenue from an existing customer or new revenue from a customer we didn't have, and I believe that there's a good reason to expect that correlation, then I see it as -- as a good thing.

Unfortunately, I don't have at my fingertips a response to your question about the specifics of the transaction between Wiley and Google and if you would like, this is Chris, right?

Yes.

If you would like, Chris, I would be happy to have one of my colleagues follow-up directly with you, someone who's closer to it than I am, to explain to you how that works.

Okay.

I don't want to-- I have some ideas about it generally, but I don't have enough of the specifics.

So, I'd be happy to have someone follow-up.

Sammy Casabi (ph).

I have a few questions, if I may, on the science business, please.

The first one is whether you would expect margins to continue to decline in the coming quarter or whether this was due to elements relative to Q3 and, therefore, would expect Q4 margins or the contribution to profit to revert to last year's level, please?

Our assumption in our internal plan for our STM business for fiscal year '05 was that our revenue would grow faster than our earnings.

And the reason we assumed that, there were really two major reasons.

One is that we felt that our book business and our society journal business would represent a higher percentage of our total business and that is at a lower gross margin percentage then our wholly-owned journal business.

So, we knew going in that there would be some of that.

Secondly, as I referenced, we've been making some additional investments-- and when I say investments in this case, they are a combination of period expenses that get recorded from quarter-to-quarter in-- in people or in grants or in plant costs or those kinds of things to support the new society journals, Wiley InterScience.

Some other investments are--when we make an investment in digitizing back files, we will initially capitalize that, but then we amortize it over a relatively short period of time.

We're making those kinds of investments.

So, I actually am prepared to tell you that, for the full year, the expectation going in was that revenue would grow faster than operating income.

From quarter-to-quarter that can fluctuate, I don't really know as I'm sitting here whether or not that should be expected in the fourth quarter or not.

But, you know, it's better, I think, to look at it on an annual basis.

And that that is not a surprise to us.

It's still our highest-margin business and the investments that we're making there are to get the kind of top line growth, which frankly has been better than expected this year, that we're experiencing.

And even though it's at a reduced margin than what we've experienced before, it's at a greater margin than the total company margin and that nets out to be a good thing.

That's very clear.

I have a second one.

In order to assess the potential impact of NIH-like policies, can you please comment on the timing of article downloads from Wiley InterScience?

Basically, in other words, what is the percentage of downloads taking place within the first 12 months of publication, please?

Yeah, unfortunately I can't-- I can't answer that question.

What I can tell you is, the traffic and usage patterns for Wiley InterScience, meaning people accessing the system, continue to be really very strong.

I made reference to some of the recent numbers, and I believe it was like 9 percent growth or something close to that, from-- and that was from one quarter to the next; and, I think, you know, that's really reflecting a couple of different things.

One is we're -- each and every day we're putting more and more context online, and that's certainly helping.

The reference I made earlier to services and traffic that's coming to Wiley InterScience through services that Google provides is certainly helping.

And we continue to have a pretty good track record in terms of license renewals and also gaining new business through individual article supply and pay-per-view.

So, I don't have a specific response to downloads for the year-to-date period, but I can tell you that all of the usage data that we are looking at, for Wiley InterScience, this year versus last year, those trends all very positive and we're really very pleased and I think it reflects the benefits of the investments we've been making.

You also made some reference, I think, to NIH?

Yes.

Well, the NIH policy change that I referred to has had no effect on our business or anyone else's business, at this point.

It is a new policy that is going to be implemented, you know, over the course, I believe, of the next several months.

It's not something that's been fully implemented yet and-- I -- the clear comment I'd like to make about that, that I talked about earlier, is that I really believe this policy is a much -- a much better outcome than what was -- or initially proposed.

And I also want to say that I am very, very confident that what Wiley is doing and, frankly, what some of our competitors are doing and have been doing for a number of years now, and that is investing and enabling services to provide more access, is the best way to address policies like the NIH policy.

And that is that if you're providing the service in the first place, you shouldn't be concerned about that kind of a policy change.

And I am not really overly concerned about that new policy, and I think the outcome is one that represents a reasonable balance and that the NIH heard the concerns of the academic community, the research community and publishers.

The very quick last one.

Are you aware of any other similar initiatives from other research-funding institutions, similar to the NIH policy?

Or do you think the NIH policy will be more of an isolated event?

I'm not prepared to say that it's-- it's an isolated event.

It is possible that some other groups will say, well, okay, the NIH did this and therefore we should.

But, again, my-- my point about all of this is that I -- I don't think -- I think it's a bad thing for people to-- obviously it's a bad thing to underreact.

It's almost as bad to overreact.

And I think sometimes when these initial headlines get out there, people become overly concerned and start reading into the implications without taking the time to think about strategically and long-term what it means.

And we've been in business almost 200 years and I'm not, you know, saying that that means we're going to be in business 200 more years.

But I am going to say that we're in it for the long haul, we're making investments that we believe are going to allow Wiley to continue too thrive.

I'm very, very pleased with the way our businesses are evolving.

You know, surely I would have loved to have had a better performance, both in the market and individually for our business in Higher Education this year but, you know, the fact of the matter is we have three core businesses and the other two businesses are doing reasonably well, and I'm confident we're going to get the higher Ed business back to where it belongs.

So, we're investing in the kinds of initiatives that'll continue to drive growth, and I think what we'll continue to do when these other groups come up with new policies is we will address them; and we're already addressing issues of more access to content.

And to me, that's a robust strategy for the future.

There are no further questions at this time.

Mr. Pesce, I'd like to turn it back to you for any additional or closing remarks.

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

And we look forward to speaking with you again when we report our fourth quarter and full-year results.

Thank you very much.

Thank you, that does conclude our conference.

We'd like to thank everybody for their participation.

Have a nice day.