John Wiley & Sons Inc (WLY) 2006 Q3 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 third-quarter conference call. I'm with Ellis Cousens, Executive Vice President, Chief Financial and Operations Officer. I'll begin with an overview of Wiley's performance, then Ellis and I will respond to your questions.

As noted in the press release issued earlier today, third-quarter revenue of $278 million increased 8%. Excluding the unfavorable effect of foreign exchange, the growth would have been 9%. The topline growth was led by our global STM and P&T businesses. Higher Education's revenue also increased during the quarter.

Third-quarter EPS of $0.57 was up 8% excluding the tax benefit described in the press release. The EPS growth reflects the positive effects of the increase in operating income and the share repurchase program, partially offset by increased interest expense. The strengthening of the US dollar relative to the euro and pound sterling had a negative effect on results.

Gross profit as a percent of revenue increased in the quarter, reflecting the combined effects of favorable product mix and an increase in STM book margins.

Operating expenses increased over last year's third quarter by 8%. The increase was mainly due to technology-related initiatives that are in the design stage and therefore not capitalized. We anticipate that these expenses will normalize in the next fiscal year. The significant increase in other administrative expenses during the quarter was entirely due to timing, as reflected in the year-to-date growth of only 4%.

Year-to-date revenue of $778 million increased 6%. EPS of $1.36 advanced 7%, excluding the income tax benefits described in the press release. For the nine months, operating expense growth was in line with the revenue growth.

As expected, free cash flow of $101 million was down from last year's record, mainly due to increases in accounts receivable and inventories to support growth in the business. Days sales outstanding improved from prior year, as did the aging of accounts receivable. During the first nine months of this fiscal year, the Company repurchased approximately 2.1 million shares of common stock at an average price of $39.40, representing an investment of approximately $83 million.

As I stated in the press release, we are honored to be included again on Fortune Magazine's list of the 100 Best Companies to Work For. Wiley is the only publishing company on the list. Companies were evaluated in four areas -- credibility, respect, fairness and pride/cameraderie. This recognition is a tribute to my colleagues around the world whose integrity, creativity and dedication have made Wiley one of the best-performing companies in the industry.

I'd like to provide some information about Wiley's core businesses. Our STM business is having a solid year, driven by subscription revenue as well as advertising, reprints and back-files. The reference book program is also performing well. Direct contribution to profit reflects the positive effects of the topline growth, favorable product mix and improved book margins. The value of Wiley's journals to the research community is evident in the strong increase in full-text accesses to the more than 1 million journal articles available on Wiley InterScience.

In addition, many Wiley journals showed significant increases in the ISI Impact Factor analysis. We continue to add breadth and depth to our collection of STM content through the acquisition of journals, the addition of new society relationships and the extension of existing partnerships.

Our P/T business had a solid quarter, bolstered by the holiday season and strong performances in business, technology, architecture and engineering. Several titles have been on various best-seller lists. Five Dysfunctions of a Team by Patrick Lencioni has been on the Wall Street Journal business best-seller list for 66 weeks. The Little Book That Beats the Market, by Joel Greenblatt, has exceeded our expectations. The resounding success of Sudoku For Dummies is a compelling story about collaboration across geographic boundaries, timely publishing and the global power of the For Dummies brand. Sudoku was initially published in the UK, but quickly became a best seller on both sides of the Atlantic, as a result of seamless execution by colleagues in editorial, production, sales and marketing in the States and the UK. Several magazines and newspapers cited Wiley cookbooks in holiday best-of-the-year roundups. Revenue from licensing and website advertising, particularly frommers.com, was strong. P/T's direct contribution to profit reflects the combined effects of the topline results, partially offset by unfavorable product mix and an increase in inventory provisions.

In Higher Education, science and mathematics programs drove growth in the quarter. WileyPLUS, our highly successful online learning service, continued to gain momentum around the world, with significant adoptions in the States, Canada, Europe and Asia. Since it was first published in 2003, more than 250,000 students have purchased WileyPLUS with their course materials. Faculty and student feedback has been positive. It was recently named one of the five finalists in the education category of the annual Codie Awards by the Software and Information Industry Association.

As a reminder, sales of WileyPLUS are deferred and recognized over the course of the semester. As a result, there will be a positive effect on Higher Education's revenue in the fourth quarter of this fiscal year.

During the quarter, we were pleased to complete another agreement with our partners, The National Geographic Society, to create additional products that will be packaged with Wiley textbooks and WileyPLUS. Higher Education's direct contribution to profit reflects the effects of the revenue increase, offset by some investments to support important initiatives such as WileyPLUS.

We are having a strong year in Europe, which is attributable to the STM journal and book programs as well as P/T, especially the aforementioned Sudoku For Dummies, which has now been published in three volumes along with a related title. 11 German Language For Dummies titles were published successfully during the quarter.

In January, we signed a significant license for access to back-files with a consortium of German academic libraries. Wiley-VCH announced an impressive publishing partnership with leading chemical societies in China, India, Japan, Korea and Germany to publish Chemistry, an Asian journal, which complements the already successful Chemistry, a European journal and Angewandte Chemie. The new journal will provide a highly visible arena for prominent researchers from around the world, especially from Asia.

We continue to experience solid growth in Asia, particularly India, Japan and China. The STM and P/T book programs have contributed nicely to the year-on-year growth. At the close of the quarter, we completed the acquisition of the outstanding shares of Wiley Dreamtech. We acquired a majority interest in Dreamtech along with the Hungry Minds acquisition in September of 2001. Wiley has had a presence in India since 1965. In Canada, we benefit from improved Higher Education and P/T sales. Australia is experiencing a strong finish to the year, mainly due to sales in the School and Higher Education markets. Wiley Australia was once again recognized as the Publisher of the Year in Higher Education.

In conclusion, I would like to summarize the key points. Wiley's third quarter was strong, with all of our businesses around the world contributing to the year-on-year growth. We are pleased that our must-have products and services, enabled by technology and new business models, are being well-received by our customers. With one quarter to go, we are well-positioned to break through another milestone in this fiscal year, revenue of over $1 billion. We anticipate full-year revenue growth in the mid single digits and EPS growth in the high single digits, excluding the aforementioned tax benefits. Our global STM business is having another solid year, driven by a powerful combination of subscription revenue and new revenue streams. Wiley InterScience continues to be embraced by our customers around the world, as we provide more access to more content to more people than ever before in our history.

P/T had a solid quarter, which included a healthy holiday season. We are benefiting from strong publishing programs, growth in major accounts, particularly online retailers, and new revenue streams flowing from investments we have made in various websites and licensing activities.

WileyPLUS is contributing to our success in Higher Education around the world. It will have a positive effect on fourth-quarter results as we recognize revenue that has been deferred.

Our presence in Asia is expanding, as reflected in increased market penetration throughout the region, strong growth in India and China and as a source of content for local, regional and global markets.

Our balance sheet is healthy. As expected, our cash flow is below last year's record-setting performance. That being stated, we remain confident that we will continue to generate healthy levels of cash flow while continuing to invest in Wiley's future.

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

(OPERATOR INSTRUCTIONS). John Christiano, UBS.

Can you just briefly run through, I guess, overall for the Company or by segment, what the actual organic growth would be if we exclude acquisitions of journals or other properties?

The second question just concerns the interest expense. If you can just, I guess, just go over what your debt structure is, and then I guess fixed versus floating and what the difference is between this year and last year? Because I think debt levels were about similar, I guess, for the quarter compared to last year or even, I guess, down from the prior quarter.

And then, lastly, on WileyPLUS, I guess you are saying that the sales that have already happened now will be deferred until this coming quarter and the fourth quarter. Can you quantify what the impact, then, of WileyPLUS would be on the Higher Ed segment for last quarter?

Just on the revenue question, in terms of contributions from acquisitions, we made a number of acquisitions over the course of the first nine months. The only real -- well, one material acquisition, I think, in there is Sybex, was about 6 to $7 million through nine months. The rest are relatively small. So if you want to adjust for that 6 to $7 million, I think that would be appropriate to look at it organically in P&T, of course.

Also, your next -- the question you had was about fixed versus floating in terms of new debt structure. Is that true?

Yes.

We refinanced our term loan facility back at the very beginning of the quarter, with a $300 million revolving credit facility, 100% of which continues to be floating. So we actually haven't fixed anything, which is the same structure that we had previously, although the only difference here is this is a revolver. So that can obviously go up and down. It is a $300 million facility; it's expandable to $400 million, if we want to access an additional $100 million, for whatever reason.

And then, what is the rate on that, then? It's like LIBOR plus something?

Well, if there's a grid, we're at the bottom part of the grid. I can just tell you the current rate overall -- well, over nine months was about a little over 4%, 4.09%. It was about 150 basis points higher than the same nine months over last year. We kind of ended the quarter about 4.51.

And then there was a question on WileyPLUS.

The WileyPLUS effect on the fourth quarter -- so this is revenue that has been deferred and will be booked in the fourth quarter -- is approximately $1 million.

And I guess just one last question, then, for STM. I guess the heavy sort of electronic delivery of that division -- I guess they are furthest along the curve. I know you mentioned that books were doing well, but I guess I thought there would be a little more leverage, especially given the strong top line. If you can just talk to the costs, I guess, in that division?

You are absolutely right that STM, more than any of our businesses, because that's what the market was interested in, has moved to online dissemination faster than our other businesses. In fact, our initial investments in online dissemination in STM date back to 1997, 1998 and then, of course, followed by the commercial launch of Wiley InterScience. And we're very pleased, actually, with the evolution of that business from lots of different perspectives. One is the customer response, as they continue to sign up licenses for access, primarily to journal content but increasingly to book content as well. And, in addition to that, as a result of initiatives we have taken to digitize back-file collections, that has opened up a revenue stream that didn't exist before. In fact, as we look at this year's results, we're very encouraged to see that a significant percentage of our revenue growth is coming from revenue streams that did not exist in STM three, four, five years ago.

Now, in terms of leverage, most of the investments, the incremental investments we're making in that business, are really technology related and, to some lesser degree, sales and marketing related, to support the growth of online business -- specifically, the licenses that I talked about with journals, but also in digitizing the back-file collections and also enabling content historically available in print form on books being available both in print and electronically now. So those are really investments and enhancements to online services and some additional sales and marketing.

Overall, I would say, if you look at this business -- which investors who have been involved with the Company for a long period of time recognize that STM has been, in financial terms, a very attractive business to us -- we had made significant investments that, frankly, did not exist in this business years ago, including in a sales force. And we did not actually have a full-time sales force behind our STM business prior to the launch of Wiley InterScience. So we feel we are actually getting pretty good leverage out of the investment in online. And as we continue to make us investments, we're seeing incremental revenue growth to help finance those investments.

On sales and marketing, and I think you mentioned online, and I think in the press release you mentioned an increase from search engines -- is this an increase in marketing expenses, I guess, related to getting traffic driven to the Wiley InterScience? And then, with these investments, digitized and the back-files -- once that's done, you should be able to really leverage that product. Is this something that if we look to next year we wouldn't expect to see expenses, I guess, up faster than revenues?

When you digitize a back-file, you're absolutely correct that once it's digitized, the revenue stream and the variable margin that comes from that is very positive. We are in a stage of continuing to digitize new back-file collections, and will continue to do that at least through the next year, because we have a great deal of content that yet has not been digitizing, and the market is saying that they would be interested in these back-file collections. So we're going to continue to make those kinds of investments, and actually announced that as part of a press release some time ago, as we were talking about Wiley InterScience, its evolution and the back-file collection.

Regarding sales and marketing activities, it's not for one particular aspect of our STM business or another. This business has become a much more customer-centric business, frankly, than it was -- the whole industry was -- five or six or seven years ago. And that's a good thing. And as a part of that, we are making more investments in not only user-friendly, customer-friendly online services, but also investments in conveying that message more effectively to the various markets that we serve.

So some of this is an investment to ensure future revenue streams. Some of that is going to be part of the way we do business around here, having to do with STM. So I think you need to take into account that there are several different revenue streams and several different investment streams. We feel that the margins continue to be quite attractive.

And the other factor that is part of this that you didn't ask directly about, but it's linked, is the mix between wholly-owned journals and society journals. In the last couple of years we have, by strategic design, increased the investment, if you will, in acquiring society journals or relationships with societies that publish their journals. And with that comes some additional spending up and down the P&L to support those relationships. And relative to revenue, that spending is higher than on wholly-owned journals. Still good business, still very attractive cash flow characteristics, but different than wholly-owned journals.

You are basically talking about royalty expense?

Not only. There's royalty expense, there's brands, there's direct expenses, editorial costs. As I said, its up and down the P&L.

(OPERATOR INSTRUCTIONS). [Rajesh Telapurad], [Seer Investments].

I was wondering if you could quickly walk through for me the decision-making process with respect to share repurchases. At what prices do you guys generally go ahead and say, okay, this is a good point to buy the shares and not?

In terms of our repurchase program, we have an open repurchase program approved by the Board. We have essentially a grid that is established with an outside party that executes our share repurchase program. So we are essentially in the market based upon that grid and based upon conditions in the marketplace. As you know, there are rules regarding what numbers of shares you can buy, based upon float in the marketplace, which limit or also regulate the volume of shares that we can and cannot repurchase and also the times of year. So, for example, we are not buying shares right now because we are in a blackout period.

So we don't particularly take a view in terms of share price. We have a grid that has different ladder steps related to share price and volume. So we try to do that as objectively as possible, in terms of establishing a grid in the market.

Just to explore that further, how do you exactly decide at what -- my question is, what is the rationale behind the grid points there?

Behind the -- say again?

For the purchased shares, how do you guys reach these different grid points?

Well, for the most part, it's when the stock price establishes a certain trading range, we essentially center that on the grid and then, somewhat arbitrarily, but certainly mechanically, through analysis, figure out at what stage and what levels the share repurchases are accretive from a P&L perspective and accretive from an investment perspective from a cash flow [NTV] perspective. Every level on the grid is accretive, both with respect to the P&L and from an economic perspective. So every repurchase we have made thus far and every repurchase that's contemplated on the grid is accretive.

(OPERATOR INSTRUCTIONS). John Christiano, UBS.

Just a question on -- not so much share repurchase, I guess, but the stock comp expense. I guess, as we look into next year, I'm sure you will have more specific guidance. Are there any plans, though, to make any changes, I guess, to your stock option programs at this point, any acceleration of options?

Acceleration?

Acceleration of investing or anything like that?

No. One of the things that we are very proud of is when we look at our compensation programs and you match up the growth in compensation vis-a-vis the creation of shareholder value over an extended period of time -- and as I have said to investors, pick a time period, one year, three years, five years, ten years, 20 years. There has been tremendous creation of shareholder value. And we believe that is a direct result of the culture of the organization, how we go about our business, the strategic thinking we bring to it, the stability and consistency of the leadership team and the values that govern the way we go about our business.

And we have had performance-based incentive plans in place for a long time. I have been here 16 years; they have been in existence for at least that period of time. And when I say performance-based, what I mean is that the leadership team of this organization will not, relatively speaking, get wealthy on base salaries alone -- and that's the way it should be; we look at, certainly, competitive benchmarking -- but that the wealth creation is created by variable compensation, cash compensation plan that is linked entirely to Board-approved financial targets, those financial targets including earnings per share targets, revenue targets and cash flow targets.

And then there are equity-based awards, which is a combination of stock options and performance shares, not merely restricted shares. As my esteemed colleague in human resources says, these shares are earned on performance, not for presence. And they are actually shares that earn out based on targets over three years out. They are linked to our three-year strategic plan. They are linked to earnings of growth and cash flow. And then, after the three years, when they are earned, they have two years of additional restrictions on them, 50% each year, which is in place for retention purposes.

And the mix between options and performance shares -- again, I repeat, not restricted shares, performance shares -- is actually very much kind of ahead of the curve, in terms of what other companies have been doing. So where you are seeing people maybe granting less options, we may do a little bit less in terms of options as a percentage of the total package, but we have not had to make dramatic changes because we, frankly, had this in place for quite some time.

And we have no other questions at this time. I'll turn the conference back over to our presenters for any additional or closing comments.

Thank you again for your continued interest and support. We look forward to speaking with you in June after we close out fiscal year 2006. Thanks very much.

This does conclude today's conference. Thank you for your participation. You may disconnect your line at this time.