John Wiley & Sons Inc (WLY) 2006 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 that 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, sir.

Good morning.

And welcome to Wiley's first quarter conference call.

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

I will begin 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 237 million increased 4%, including and excluding currency effects, EPS of $0.34 was up 6%, excluding an income tax benefit related to the repatriation of earnings from our European companies.

First quarter performance was driven primarily by continued strength in our global STM business.

PT also contributed on year-over-year growth.

While higher education's revenue was essentially flat with last year's first quarter.

Gross profit as a percent of revenue exceeded prior year, reflecting the positive effect of product mix.

Operating expenses increased 5%.

With technology related spending contributing to the year on year growth.

Cash flow after investing activities was below prior year due to the acceleration of cash receipts related to enhanced access licenses into the fourth quarter of last year.

In addition, while day sales outstanding improved by one day, the accounts receivable balance increased as a result of the year on year revenue growth.

We also received a tax refund in last year's first quarter.

During the quarter, the Company repurchased approximately 542,000 common shares of stock, at an average price of $39.32, representing an investment of $21 million.

Based on first quarter results, leading indicators and market conditions, we reaffirm our guidance for fiscal year 2006.

Revenue growth in the mid to high single digits.

And EPS growth greater than that of revenue.

I would like to provide some information about Wiley's core businesses, our US STM business started the year strongly.

With revenue increasing 6% and direct contribution to profit increasing 10% from last year's strong first quarter.

Nonsubscription revenue, especially Journal back files contributed to these results.

STM's profit growth reflects the effect of the revenue increase, as well as favorable product mix.

Wiley Journals provided quite well in the recently announced ISI Impact Factor Analysis.

Which measures how frequently a journal's articles are the cited by researchers.

Access to Wiley Interscience was up significantly.

STM books benefited from excellent product output, a strong flow of manuscript, generally favorable market conditions and the growth in online channels.

Globally, STM books were up 9% over prior year.

Professional trade revenue was up 3%, while direct contribution to profit advanced 21%.

The year on year revenue growth reflects the strength of the business, psychology, and education programs, and additional revenue from the Sybex acquisition.

Sales through online accounts, notably Amazon continue to be robust.

PT's significant increase in earnings was due to an improved gross margin resulting from favorable product mix and lower inventory provisions.

It is important to note that the first quarter is the least significant for PT in terms of revenue.

We are well positioned to take advantage of the largest release of books in the history of our PT business during the second quarter.

Several Wiley books received favorable publicity and some of our authors won prestigious awards during the quarter.

Higher education revenue was essentially flat with last year but results in August improved a bit.

Direct contribution to profit increased 6%.

Mainly due to a decrease in expenses from last year.

Growth in mathematics, science and accounting was offset by sluggish sales in the social sciences an engineering.

Strong market acceptance of WileyPLUS bodes well for the future.

WileyPLUS provides an integrated suite of resources that allows instructors to customize content, create class presentations, assign homework and quizzes for automatic grading, and track student progress.

Unlike the sale of a textbook, which is recorded when it is shipped to book stores, WileyPLUS revenue is deferred.

And the majority of it will be recognized in our second, third, and fourth quarters.

Revenue in Europe was up 6%, while direct contribution to profit was essentially flat with prior year.

Due to the effect of product mix on gross margin and increased expenses to support the top line growth.

STM journals and reference books drove the top line results.

In addition, initial sales of German Language for Dummies books contributed to the top line growth.

Revenue in Asia, Australia, and Canada was up 3%, but flat excluding currency effects.

A sluggish performance in Canada was partially offset by growth in Asia.

PT books performed well in India, China, Thailand and the Philippines.

In Australia, the education businesses exhibited strength, while PT revenue lagged due to a sluggish retail environment.

Wiley Australia was named Secondary Publisher of the Year for the sixth consecutive year at the Australia Awards For Excellence In Educational Publishing.

While first quarter results in Canada were somewhat disappointing, we expect a recovery in the second and third quarters.

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

Overall, first quarter results are consistent with our expectations.

STM is off to another solid start.

PT performed as expected and is well positioned for a strong second quarter.

Higher education continues to confront challenging market conditions.

But WileyPLUS is being well received.

Our balance sheet is healthy.

As I stated during our year end conference call, we do not anticipate reaching last year's record cash flow of $152 million in fiscal year 2006.

It is unlikely we can match the level of improvement in accounts receivable collections that we made in the fourth quarter of fiscal year 2005.

In addition, we anticipate some growth in inventories, product development costs and capital spending, after three years of essentially no increases in these areas.

That being stated, we remain confident that we will continue to generate healthy levels of free cash flow while investing in Wiley's future.

We continue to anticipate revenue growth in the mid to high single digits.

And EPS growth greater than that of revenue.

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

Thank you, Mr. Will Pesce. [OPERATOR INSTRUCTIONS] We will take our first question from Brandon Dobell with CSFB.

Please go ahead, sir.

Hi, guys.

Good morning.

Good morning.

A couple of quick ones.

Maybe for you, Ellis.

The impact of currency in the quarter?

Was fairly small.

Okay.

Relatively insignificant.

Okay.

A little bit, as we said in Asia, Australia and Canada but not much out of Europe.

All right.

And then looking at the cash flow statement comparing this quarter to last year's first quarter, the biggest delta being in the operating assets and liabilities.

Maybe a little more color on there, on what made that number so different from last year?

Well, there is a - - overall, as Will kind of suggested, this year is not going to be the same as last year.

Right.

We had some I would call them kind of one-time kinds of things related to - - we had a tax refund last year, which provided a benefit last year that likely won't be repeated this year.

Also, we had an acceleration.

We put forth significant effort in the fourth quarter of last year to collect EAL receivables.

Which in the prior year would have fallen into the first quarter of the year.

So there is about a $7 million delta coming out of those collections.

Overall, the receivables balances a bit higher related to growth in book sales this year over last year.

As you recall, book sales were a little bit weak last year.

We had had a very strong journals' first quarter last year but book sales were a bit weak.

Also, we had the acquisition of Sybex, it is not a cash event.

Because that is is sitting in the opening balance sheet of the acquisition.

But there is a few million dollars worth of receivables related to the acquisition of Sybex.

As well as some inventory additions there.

So those are some of the pieces related to that.

Foreign exchange had very little impact.

Some, but a few hundred thousand dollars.

Not much.

Okay.

That's helpful.

I guess more broadly, as you guys look at the revenue guidance for this year, I guess I'm trying to get a better idea of the components that - - of that guidance that would drive it towards the high end.

If there are things you see out there on the horizon.

Maybe it is like you said, the biggest PT release, or changes in what the sales force is telling you, in college, that would drive it towards the high end?

Or maybe it is - - a better question is, your level of comfort, with the different levels of revenue growth that we could model this year?

Brandon, this is Will, a few things about that.

First is I will repeat what I said earlier, because I think it is important for everyone to understand that this quarter is very much as we expected it to be.

In any given quarter, at any given year, there are ups and downs and roundabouts but no significant surprises.

That's why we reaffirmed our guidance.

And then if you take what we've experienced in the first quarter and as we have, we've looked at leading indicators in our business.

And what we consider those to be are; the books that we know that are in the pipeline, and some of the initial responses from book stores.

Some of the initial publicity that we're getting.

We know about adoptions on some of our college materials.

And obviously, you get those revenues mainly in the first quarter.

But in the second quarter there are some reorders that you expect.

We know through the adoption process in higher Ed, the pickup we're getting in WileyPLUS, we know that, but it is in the in our revenue yet.

Because we defer that revenue and record it as the material is being used throughout the course of the school year, by students.

Those are the kinds of things we look at.

And that's why we've reaffirmed the guidance.

If you want to kind of peel away the layers of the onion a little bit and look at the individual markets and pieces.

What we've said is mid to high single digits.

And what you assume there is PT, our professional and trade business would be on the higher end relative to STM and higher education.

And the reason it will be on the higher end is a combination of organic growth.

And there, I'm referring to, as I stated earlier, we feel very good about the books that we're releasing and the feedback that we're getting.

And we will get the benefit of that in the quarter that we're currently in.

And that should continue its momentum through the holiday season.

So we feel very good about what we're seeing there.

You're looking at 3% growth in the first quarter but that is no indication of the kind of year we expect to have in PT.

And again, it is not a surprise to us.

We knew the timing was going to happen that way.

And then there was also beyond the organic growth, which will drive most of it in PT.

We will get a little help from acquisitions, they're small but acquisitions we've made toward the end of the last fiscal year, early in this fiscal year.

So that, in the mid to high single digits.

The higher end will come from PT, organic and some help from acquisitions.

STM will have - - what we're looking at year to date, is pretty much in the range of what we should expect for the full year.

It might move a little bit one way or the other.

But we're having another solid year there and a combination of journals, print and online.

The STM book business, which for a few years had been flat due to a combination of external market conditions, and some other factors, is now experiencing quarter after quarter of nice growth.

Again, we refer to them as books but it is a combination of STM content that was primarily in the form of a book or encyclopedia but is increasingly online.

And we are getting growth out of both in the States and around the world.

And also in STM, additional revenue streams frankly that did not exist, you know, three years ago, Article Select, pay-per-view, the back file collections where we digitized back issues.

And have now sold those to academic and corporate institutions.

A program that we started a year or two ago is now generating revenue for us.

So, you should expect that STM will perform right in the center of that kind of guidance and pretty consistent with what you're seeing now.

And higher Ed as we expected would be on the lower end of that.

Last year, last fiscal year, we were essentially flat with prior year.

This year, the first quarter, we're essentially flat, with prior year.

We do expect growth.

We think the market is going to probably perform somewhere in the 2% to 3% to 4% range for calendar year '05.

Hard to predict right now but that's what we're probably looking at and we would like to believe that we will perform somewhere in that range as well.

And basically the news there is although we were flat in the quarter, we did see some encouraging signs in August.

And we will get the benefit of this WileyPLUS revenue.

But we do expect that higher Ed will be at the lower end of the guidance.

So that's how we see it shaking out.

If you look at the major regions of the world, we continue to have above average growth in Asia.T that's no surprise to anyone.

And it is across these businesses.

Europe will continue to be a solid contributor and of course, we will operate within the range of this guidance in the States as well.

That's great.

That's what I was looking for.

In a different direction, the recent GAO Report on textbook pricing in the college market, obviously a lot of dissenting opinions on both sides of the issue.

But I would like to get your thoughts on kind of the tenets of [Inaudible, audio cuts out]- -

Brandon?

Hello?

Yes?

Brandon, I didn't hear you.

Okay.

For some reason, I don't know if it was us or you but we got cut off there.

You're talking about the GAO Report.

I heard that part.

Correct.

I was just trying to look at how you guys think about the report or the findings?

But also, do you anticipate any reaction, negative or positive or anything, potentially from either other publishers in the college market, or from schools or some of the trade industry groups out there?

Okay, for the benefit of those of you who may not be aware, just a quick summary of the GAO Report, which was requested by a group of U.S. representatives.

And actually representative Wu from Oregon was the primary person promoting this study.

And we were, as other publishers were, actively involved in it.

We were interviewed and we're happy to provide detailed information about our business.

And in addition, I know book stores and other groups were interviewed as well.

The main conclusions of the GAO study are as follows.

One is that they found that the price of textbooks over the last several years have increased at a rate greater than general inflation.

But below the increase in tuition.

There is absolutely no surprise in that information to any of us who are involved in this business.

They attributed those increases to the additional educational materials that publishers have been providing and the related investments.

And in some languages they've referred to a supplemental materials , increasingly those supplemental materials are becoming a primary part of the course.

But we shouldn't bicker about that.

But they certainly attributed increases to the fact that the packages are more extensive and we certainly support that conclusion.

In addition, there was some reference to the fact that publishers have been providing more support to activities that historically have been performed by universities.

There we are referring to classroom management, online homework and quizzing.

As you know, many teachers on campuses these days are adjuncts.

They may not be as able as full professors to handle some of the course work.

We have something called the Wiley faculty network, which we pay to provide a service to a faculty to help them with technology.

So the GAO Report did acknowledge that publishers have been making those developments.

There was some reference to the differential pricing and the reality that textbooks are priced at generally lower prices outside the United States than inside the States.

And that should not be a surprise to anyone who understands supply and demand and economics and ability to pay.

And this was an acknowledgement by the GAO that that's the case.

And I would like to point out that publishers made it it very clear that the incremental units we are able to get by distributing and marketing and selling these books outside the States actually allow us to amortize the investment over more units.

And has a positive effect on pricing here.

Without those units frankly I believe those prices would be even higher.

Those were the main conclusions coming out of the GAO study.

Our trade association, the Association of American Publishers, as well as its membership, certainly have some disagreements with methodology.

You're always going to have those kinds of things people have different perspectives about these things.

But for sure, we feel very strongly that some of the data that was quoted about how much students pay typically, I think a number that was referenced was somewhere around $800 some odd for textbooks and supplies.

And our point is that the "and supplies" part of it kind of overstates what people are actually spending on textbooks.

And that's not a small matter.

We're not talking about pencils and erasers.

We're talking about sometimes computers are included in some of that data.

And we know that there is other information available that excludes supplies.

That brings the number to somewhere around $500 or in that vicinity.

And it is just a point to be made that one has to be careful about how they interpret the information.

In addition, we felt that the study really missed a major point.

And that is, that many students sell their textbooks and so they - - if they purchase a new book, they are certainly spending some money.

When they sell it, they recover some of it.

What they recover is not in any way shared with the original publisher or author.

That's life.

That's the way the market has developed.

But the point is, the net cost to the student is much below those statistics that had been quoted.

When all is said and done, I believe that the study has some interesting and valuable points.

I think there is really nothing in it that most of us who have been following the industry or participating in it, nothing in it that is news to us.

The most critical thing here is that this industry is, I believe, effectively tackling some issues related to price and value.

I have never felt that this is a matter of price alone.

And I've made the case over and over again.

That we have students who will pay well over $100 for materials related to a course in anatomy and physiology.

And they feel that they're getting value because those materials are helping them get through the course.

Whereas if they spent $20 on a book that they never use, that is a price value problem.

It is not just price.

It is what are they actually doing.

And how is it helping them get through the course and understand the material?

So publishers are working on this matter of price and value.

We're doing it in lots of ways.

Ranging from the materials that we're publishing in print form, the materials that we're offering electronically.

WileyPLUS is one of those.

Having lower cost print editions with less of the so-called bells and whistles.

Lower production values, if you will.

We recently announced a new initiative called Wiley Desktop Editions.

This is a new initiative that we've been working on, where students can gain access to an electronic book at their desktop through a password that they can acquire.

This are lots of different ways that not only Wiley but other companies are investing in to try to address these problems.

So sorry for going on a bit about it but I do think it is an important point and I want to assure that you there is nothing in it that was really new to us.

And we're staying focused on our strategy of delivering more for less, frankly, to students.

And I think we're beginning to see some progress with that, with initiatives like WileyPLUS.

Okay.

That's very helpful.

Thanks.

You're welcome.

We will take our next question from Allen with First Manhattan.

Please go ahead, sir.

You dropped my last name, but that's okay.

It is Allen Zwickler from First Manhattan Hi.

Hello.

You answered the question I was going to ask about the textbook business, so that was great.

And just a quick perusal on the worldwide business on the journal business.

I mean are there anything to speak of relative to the usual suspects in terms of things turning up?

Because it seems rather quiet these days and I'm knocking wood.

Allen, I think the main points are ones I made earlier that are worth repeating.

As we had a really solid year globally in our STM business, in fiscal year '05, we're now through the first quarter fiscal year '06 and we are maintaining our momentum.

It's - - what is encouraging to me is that it is a cross section of our journals business print and online.

The Wiley interscience usage is growing at a very healthy rate.

These back file collections that - - where we have digitized issues, back issues so people are buying those.

New revenue streams are opening up.

Our book business, which as I said had been flat for years, we have real good growth in '05.

We're continuing the pace of that in '06.

It is is in all of the major markets.

A few years ago, I started talking more about China, because of the - - our Company's role as well as the Trade Association and others and working with the Chinese government, we've made some real progress with piracy there.

Meaning that one of the pirates that actually used to make copies of all STM Journals and provide them to the research community was put out of business by the government.

And as a result, we're getting revenue now.

And China went from a market where they were gaining access to the material and not paying for it.

And I believe the latest information, I've got a source that it's about an $8 million or so STM journal business and growing nicely for us from virtually nothing a few years ago.

So Asia is strong for that business.

But we're also doing well in the States.

And in Europe, our enhanced access license renewals are very solid.

Encouraging news there.

We are retaining society relationships that have been up for renewal.

We are able to keep those situations where we have a contract with a medical or technical or scientific society to publish their journal.

We've been successful in getting new agreements but also in keeping the ones we have when they're up for renewal.

So, all indications are pretty good.

I mean there was a lot of news out there regarding government initiative, the NIH, the Welcome Trust in the U.K.

And those things are still out there, open access.

I think the most robust strategy that I have talked about in the past, that certainly Wiley has invested in over the years, is we're making more of our content more accessible to more people than ever in the history of this Company.

And that's working well for us.

Thank you very much.

Keep up the good work, guys.

Thank you.

[OPERATOR INSTRUCTIONS] And at this time, we are showing that we have no questions.

So, for any additional or closing remarks, I will turn the call back over to Mr. Pesce.

Please go ahead, sir.

Well thank you very much for your continued interest and support.

And we look forward to speaking with you again at the end of the second quarter.

Thank you very much.

That concludes today's conference.

Thank you for your participation.

And have a great day.