John Wiley & Sons Inc (WLY) 2006 Q4 法說會逐字稿

Welcome to the John Wiley & Sons conference call. Today's conference is being recorded.

Before I 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.

Welcome to Wiley's year-end conference call. I'm with Ellis Cousens, Executive Vice President and Chief Financial and Operations Officer. I will begin with an overview of Wiley's performance, and then Ellis and I will respond to your questions.

As Wiley approaches its Bicentennial in 2007, I'm proud to report that the Company reached another milestone in fiscal year 2006, revenue of $1 billion. This milestone and record levels of operating income and EPS reflect Wiley's competitive strengths, our highly regarded global brands and must have content, our ability to adapt and innovate to serve customers better and effective blend of long-term vision and operational excellence.

As noted in the press release issued earlier today, full-year revenue of $1 billion increased 7% or 8% excluding foreign currency effects. Operating income of 153 million advanced 8% or 9% excluding foreign currency effects. The Company's operating margin was slightly better than prior year. EPS of $1.61 increased 10%, excluding certain favorable tax adjustments noted in the press release. All of Wiley's businesses around the world contributed to the year-on-year revenue and earnings growth. The Company's gross margin of 67.2% was better than prior year, operating expenses of $536 million increased 8%, reflecting the combined effects of investments to drive topline growth in fiscal year 2006 and beyond, as well as growth in employment and facility leasing costs.

In fiscal year 2006, the Company generated $150 million in cash flow. During the year we repurchased nearly $3 million shares of common stock for 109 million, acquired publishing assets in several transactions aggregating to 31 million, paid 21 million in dividends to shareholders and repaid 33 million in debt. At year-end cash and short-term investments of $61 million were down from last year, reflecting the combined effect of debt repayment and the share repurchase program. Receivables of 158 million was 15% higher than prior year, reflecting the fourth-quarter revenue growth. Day sales outstanding was the same as last year, while the percent of receivables in the current and one to 90-day categories increased from prior year. Inventories of $89 million grew 6%. Accounts and royalties payable increased due to business growth and timing. Long-term debt decreased $36 million.

I would like to provide some highlights regarding the performance of our core businesses. Professional and trades revenue growth accelerated throughout fiscal year 2006, culminating in a strong fourth quarter. Revenue for the full year advanced 9% to $380 million. The fourth quarter's revenue reached a record $106 million, 13% over the comparable prior year period. April was a record month as well. Virtually all of P/T's publishing categories and sales channels contributed to the strong results with solid performances by the technology, business, finance, and architectural programs. Global rights licensing and website advertising were up strongly over prior year. P/T's direct contribution to profit of $107 million was up 5% for the year. The positive effect of the topline results was partially offset by a decrease in gross profit as a percent of revenue, reflecting increased inventory costs.

Last year P/T experienced a very favorable product mix. Fiscal year 2006 included the hugely successful Sudoku For Dummies, which is an imported title with margins in the United States that were much lower than we experienced in the UK.

A new series, Frommer's Day by Day and the first Frommers.com Podcast successfully extended the market reach of this key brand. The Podcast will provide up-to-date travel information weekly via Frommers.com and iTunes. The CliffNotes.com partnership was developed with myYearbook.com, the fastest-growing networking site in 12 to 17 and 18 to 24 age groups. More than 800 articles were adapted from For Dummies books for licensing with [Yahoo!Tech], a website that provides technology, advice and information. For Dummies books about gardening were developed for Wal-Mart. Nine pocket-sized For Dummies titles were published for the Rite Aid pharmacy chain. An agreement with Microsoft was signed to license content from seven of Wiley's cookbooks.

In fiscal year 2006, sales to the major chains were strong. The mass-market channel finished with a huge fourth quarter, bringing full-year results up by double-digits, and the success story with Amazon continued in fiscal year 2006 as we set new records. Scientific, Technical and Medical delivered consistently excellent results throughout fiscal year 2006, growing revenue over prior year by 8% to $206 million. Fourth-quarter revenue advanced 7%. Subscription, as well as revenue from journal backfiles, advertising and commercial reprints contributed to these results.

The reference book program completed another year of strong growth. STM also benefited from the acquisitions of Dialysis and Transplantation, a medical journal and InfoPOEMs, a provider of Evidence-Based medicine content. STM's direct contribution to profit for the full year of $96 million increased 8% over prior year. Gross profit as a percent of revenue improved, reflecting the positive effect of backfile revenue and the increased profitability of STM books. The contribution margin for global STM books was up nearly a full percentage point from prior year.

Wiley InterScience reached a milestone with more than 1 million journal articles available online. The value of this growing body of literature to the global research community can be quantified in the concurrent increase in a number of users, as well as the number of manuscripts submitted for publication. During the fourth quarter, over 16 million visits to Wiley InterScience were recorded, representing a 30% increase over the previous year. In addition, more people gain access to Wiley InterScience by taking advantage of alternate purchasing programs such as pay-per-view, which began offering individual articles sales from the growing backfile collection.

At the end of the fiscal year, Wiley participated with Microsoft in the launch of Windows Live Academic Search pilot, which improves the search capabilities of journal content from Wiley and 10 other major STM publishers. Higher education revenue increased 4% to $156 million in fiscal year 2006. Fourth-quarter revenue advanced 15% over prior year. The mathematics, life science, engineering and computer science programs performed well. Higher education's direct contribution to profit of $40 million exceeded prior year by 5%. Gross profit as a percent of revenue improved from prior year as a result of lower inventory provisions and composition costs. Science had a strong year led by Tortora Principles of Anatomy and Physiology. Mathematics and statistics had a stellar year driven by two leading calculus texts. Engineering and computer science were up nicely as a result of the successful revisions. The business and accounting programs were up slightly, while social science was below prior year due to disappointing sales in psychology and attrition of key back lists.

WileyPLUS continued to gain traction during fiscal year 2006 as more students and faculty around the world chose to use its customizable multiformat suite of content, teaching and learning tools to help them to do homework, study for tests, assess coursework and administer classes. WileyPLUS is clearly making a difference for students and professors.

In a survey, 85% of students reported that WileyPLUS improves their understanding, makes learning easier, helps them achieve a better grade. Professors commented that students who use WileyPLUS are better prepared for class.

Wiley has developed a wide array of products at different price points. The Company is now offering over 50 titles in Wiley Desktop Editions, which are in downloadable etext format intended for students who want lower-priced versions of textbooks. We expect to nearly double the number of titles in the Desktop Editions program by calendar year-end.

Soon after the end of the fiscal year, Wiley became Microsoft's sole publishing partner worldwide for all Microsoft official academic course materials. This agreement is a major coup since we won a hotly contested battle with our major competitors. Microsoft and Wiley will collaborate on a new cobranded series of textbooks and elearning products for the higher education market.

Wiley Europe's revenue of $292 million in fiscal year 2006 advanced 9% over the prior year at 12%, excluding currency effects. Full-year direct contribution to profit of $93 million exceeded prior year by 12%, excluding foreign currency effects. Our UK company had a phenomenal year led by the global success of Sudoku For Dummies. In Germany Wiley-VCH revenue increased 8%, excluding foreign currency effects.

The expansion of Wiley Europe's publishing portfolio has opened new markets and customer groups. The health care solutions group which focuses on the pharmaceutical industry experienced significant growth. The technology channel exhibited strong growth benefiting from agreements with major telecommunications companies. The Cochrane library, an Evidence-Based medicine collection, finished the year strongly, reflecting Wiley's ability to increase revenue through multiple sales channels.

Fiscal year 2006 revenue in Asia, Australia and Canada advanced 14% over the previous year to $124 million or 12% excluding foreign currency effects. Higher education and school publishing in Australia and P/T sales in Asia and Canada drove the year-on-year growth. Fourth-quarter revenue advanced 40%, reflecting the timing of school sales in Australia and increased Professional/Trade sales in Canada and Asia. Direct contribution to profit for the full year in Asia, Australia and Canada increased 8% or 3% excluding foreign currency effects. The positive effect of the revenue growth was partially offset by unfavorable product mix in Canada and Asia. Wiley Asia sustained growth across all product lines, particularly in Indiana, Japan and China. In Australia the school business recorded significant market share gains.

Wiley Australia was once again named Secondary Publisher of the Year by the Australian Publishers Association and Higher Education Publisher of the Year by the Australian Campus Booksellers Association for the ninth and eight times respectively. For the fifth consecutive year, Wiley Australia was awarded the Employer of Choice for Women citation by the federal government's Equal Opportunity in the Workplace Agency.

Wiley Canada's P/T performance was strong, particularly in the fourth quarter. Cooking, technology and business titles led the way. Considerable success was achieved in Canada with the sale of WileyPLUS, demonstrating the product's global appeal. Wiley Canada was named to Canadian Business Magazine's 2006 list of the Best Workplaces in Canada.

We are pleased with Wiley's record-setting performance in fiscal year 2006. Our financial results were driven by a combination of print and electronic products, traditional and new customers, and established in innovative business models. Based on leading indicators and market conditions, we anticipate fiscal year 2007 revenue growth in the mid single digits and EPS growth in the high single digits.

In closing, I want to express my strongly held view that Wiley's greatest strength is our unique culture, which enables us to attract and retain an extraordinary team of committed and creative colleagues.

In a recent survey to which 97% of our colleagues around the world responded they identified commitment, trust and respect and teamwork as characteristics that distinguish Wiley. I would like to share some quotes from colleagues in response to the survey question, "What do you like the most about working at Wiley?"

One colleague wrote, "Challenging work with smart articulate colleagues, a collegial atmosphere with highly inclusive leadership."

Another colleague expressed the following opinion. "Being treated like a valued member of the team. Feeling respected and that the people I work with care about me both as a co-worker and as a human being. I came from a company where this was not the case. So it is a great thing to wake up in the morning and I want to go to work because I enjoy it so much."

A colleague wrote, "It's a very honorable company that truly cares about its employees."

Another individual shared this view. "Management at Wiley practices what they preach regarding family, performance, ethics and remuneration."

A colleague wrote, "I love Wiley -- the people, its products and the overall feeling you get from being part of this wonderful company."

And in the spirt of full disclosure, I must share one more. "For a company that publishes For Dummies, you don't seem to meet very many at Wiley."

We are proud of our accomplishments. As we approach Wiley's Bicentennial, we are well positioned to confront the challenges in our markets and realize the great potential of this wonderful company.

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

(OPERATOR INSTRUCTIONS). Drew Crum, Stifel Nicolaus.

My first question for you concerns higher education. We are about a year removed from the GAO report, and it seems that market conditions have at least stabilized. I just wanted to get your thoughts on what you're seeing on the market, what type of pricing power you think you have going forward, and maybe if you could comment on your front list as you head into the fall semester?

Sure. I think it is a fair assessment to say that market conditions have stabilized. However, I don't think any of us should interpret that to mean that we must not continue implementing the strategies that Wiley has put in place in terms of addressing the price value concerns of students and professors. At just about every conference call over the last year or so, I have been talking about WileyPLUS, which in my view I have been at this company now for 16 years and at one time was responsible for our higher education business. I think it is one of the most successful and innovative product launches we have had in this company during my career here.

The reason I stress that is that it is proving a model, and the model is that we're able to deliver more value to customers at a price that is below the traditional textbook, and we are getting positive feedback from both professors and from students in terms of the productivity of teaching and learning. I think the key variable there is that we are able to use enabling technology to deliver that value. But we are not relying on technology alone. I made some reference to some of the other practices that the Company has put in place in terms of lower cost print additions. But the reality is many students tell us as much as they appreciate and value the quality of technology and the ability that it enables us to deliver, they also like print on paper when they are trying and when they have to read a lot of text.

So what we are doing there is we have a number of initiatives in place throughout our higher education business to lower the cost of production whether that be paper printing and binding or the composition cost or the cost of so-called non-salable supplements which we're delivering now electronically. These are always reducing our costs so that we can deliver the quality content at a lower price and still have the kind of return on investment and profit margins that we would consider to be acceptable for that business.

So we have, indeed, hit a point where I think there is more -- it is kind of more stable than it was a year or two ago. I think what we are beginning to see is some traction with a number of these initiatives that we were started investing in a few years ago, and we are really confident that we are on the right track.

I would also say to you that some of the initiatives that are in place that obviously have been targeted to our biggest market, the United States, I do believe the investments that Wiley has made and continues to make, not only in higher education but in all of our businesses, will turn out to be very attractive outside the United States. For example, not this year or necessarily next year but we're clearly on a path of where online delivery of educational materials will be robust in a place like China, whereas distribution of high-cost to produce textbooks would probably not make economic sense. So I want to make the point that while these strategies are robust today in markets that are developed like the United States and Canada and throughout Europe and Australia, I believe they are also robust longer-term in developing markets like China.

And the front list?

The front list is we have a number of -- a very effective combination of both first editions, as well as revisions of successful backlists. If you look at this list vis-a-vis what we have had in the last couple of years, there is no reason to not expect that we will get a result out of that.

Two questions revolving around guidance maybe Ellis can comment on. The first of which, if I'm correct, you were required to adopt FAS 123R with your new fiscal year. Is that incorporated into your guidance, and if so, what impact is that going to have on the results for '07?

And then secondly, if I'm correct, you have maximized your share repurchase or you have exhausted your share repurchase. Are you going to go back to the board for additional authority? And if so, is further share repo implied in your guidance?

In terms of 123R, we will be adopting that in the first quarter of fiscal '07. As you know, the guidance is sort of on a like-to-like basis. The guidance we provided is on a same like-to-like basis irrespective of the effects of 123R, which we will obviously figure out and calculate before we get to the end of the first quarter.

In terms of our share repurchase, in fact we're about halfway through our current authorization of 4 million shares. We have 2 million shares left to go. It would have to get closer to being towards the end before we would go back to the board for (multiple speakers) reauthorization.

Okay. But is that included in your guidance? The assumption that you're going to continue to repurchase shares?

Yes, our guidance typically -- well, it includes two things. One is the effect of shares repurchased previous, so the full-year effect of those. And then any assumption about whether or not there are share repurchases on a going forward basis.

Okay and then one last question and I will jump back into the queue. The open access front or movement seemed to have settled down, but a couple of weeks ago we had an announcement that there is a bill, the Federal Research Public Access Act pending in Congress. I just wondered, that is something that is going to be similar to the NIH policy, or is that going to have more of a negative impact on your business? I guess I'm just curious as to what your -- under the worst-case scenario, what your exposure to that would be?

I will take a shot at responding to that as best I can with the information that I have. Just in the way of background not only for you but for others who are listening in on the call because I think this is a really important topic, and that is that you know there are a bunch of things that sometimes people put in one basket. What I mean by that is they talk about open access, and some people talk about institutional repositories and then some people talk about this legislation. I just wanted to be clear there has been some reference to, for example, author pays as opposed to subscriber pays.

Well, there are connections among all of these things. They are not precisely the same thing. Let me just go back at least a little bit to make some points about our STM business that coincide beautifully I believe with the comments that I made about higher education.

That is going back now actually almost my entire tenure as CEO, we recognized that our STM business was going through a period of significant change. We started making investments about seven years ago and digitizing content, for example, which ultimately became this profitable online global service we now call Wiley InterScience. We started thinking about the business that had been primarily print on paper, subscriptions to academic and corporate libraries and began to imagine other business models where we could earn compensation, acceptable cash returns on investment, while satisfying the needs of not only corporate and academic customers but perhaps down the road individuals. That led to business models like individual article supply and pay-per-view services like that.

More recently, we recognized that the library community would benefit by gaining access to digitized backfiles where we literally made millions of dollars and continue to make investments in digitizing journal content going back many many years giving libraries through license agreements access to that.

My point in stating all of those things is that going back around six or seven years we recognize that there was change in the market and that we needed to change. We needed to change business models. We needed to change where we were putting our resources. We needed to add even more value to what we had already had in that business so that we could continue to compete effectively and as I keep saying serve customers better.

So all of that is backdrop for the following comments. As it relates to open access, there has been a lot of dialogue about this and some experimentation. The fact of the matter is it is still a very very insignificant part of this business. As we have stated repeatedly for a few years now, open access -- if people mean by that is author pays, it is just another business model. Which means that as opposed to the subscriber paying for it, the author pays a certain amount of money to get it published, or the person who is financing the author writing that article pays for it. Either way, there is revenue in that.

I just wanted to point out that a number of companies are providing author pays and open access services, but it is still an insignificant part of the total picture. When you talk about recent legislation, and specifically I suspect you're talking about the [Corn] and Lieberman bill as a major piece of legislation that is currently being discussed in the U.S. Senate, I would make a few comments about that.

One is that the overarching point about that is the access to articles that are based on research that have been funded by the U.S. government. I know that is a mouthful, but that is what we're talking about. The government funds the research, then articles are published. Free access to those articles. Now that's the kind of umbrella statement.

Let's just kind of peel away the layers of the onion here. Of course, I'm going to take some positions on this, and I feel that I have the right to. After all, I'm the CEO of a company in this business, and I am a U.S. citizen. So let me make a few comments.

One is the government funds the research. They do not fund the peer review publishing process, and they do not fund digitization of the content, linking of the content and online dissemination of the content. If the U.S. government determines it is in its best interest to get into that business, it will cost millions of dollars for them to do that. Frankly, I would consider it to be, in here with the biases of the CEO of a public company that is in this business, a waste of U.S. tax dollars, and I'm not very confident, frankly, that the U.S. government would be as equipped to do this as publishers both not-for-profit and commercial proposals publishers have been for years.

There are economic consequences not only for publishers but generally speaking across geographic boundaries. Hypothetically one of the questions that needs to be asked by people who are supporting this legislation is, will people in other countries gain free access to articles based on U.S. funded research, or will the U.S. government try to create a mechanism to restrict that from happening? Will other governments pass similar legislation in an attempt at retaliation if you will? What effect will that have on the global scientific and research community and the productivity of such research? If such legislation passes, there are many factors to consider, including the so-called embargo period. And the embargo period is how long from when the article is published usually in a peer reviewed journal like the ones that Wiley publishers. What period of time from when it is published will it become free and open access? Is that at the date of publication? Is it six months? Is it 12 months? There is some legislation that is linked to this but in some ways separate that has been supported by the NIH and the leadership there, and it was recently passed that calls for a 12-month period of time from publication when this information would be freely accessible to others who want access to it.

So that period of time actually does matter if such legislation passes. The proposed legislation of the Corn and Lieberman bill is currently referenced at six months; however, the NIH who had gotten out ahead of this as it relates to its own funded research has currently supported 12 months. That is a significant consideration.

In addition to that, there are questions about the fees that the government will be charged by publishers for access to these articles. I want to repeat the government funds the research. They do not fund the publication. And with all due respect to the U.S. government, they are not taking our intellectual property that we have helped to create for nothing. Somebody will have to pay for that. We would imagine that there would be some fees that the government if they want to go in this route would be willing to pay.

And then there's also the question of compliance among the author community. There have been some experiments with this, including through the NIH, and one of the issues that they have had is getting people to comply with the requirement in the first place because it takes time and effort to get it done. Frankly, there has not been enough intellectual or financial incentive for them to do it.

Not to say that any or all of those things cannot be resolved. In fact, we as a company would welcome the opportunity to influence how those things would be resolved, and we think that there are ways in which they can for the benefit of all.

I would also like to state with absolute conviction that we remain confident in the value of the peer review process. We remain confident in Wiley's ability to innovate, adapt and change business models to serve our customers better than even we're doing today. As a reminder, an increasing percentage of Wiley's global STM revenue is coming from nonsubscription revenue through new business models and new services that have come from the investments that I referred to earlier that we started making six or seven years ago. And the overarching objective of all of this is that publishers like Wiley are determined to provide more access to more content and more people than ever before, and we are, in fact, doing those things.

So we are obviously very well aware of the legislation. We are very well aware of a number of these market trends, and our approach to this is to build robust strategies, robust business models that work in lots of different scenarios, and that is exactly what we have been doing and will continue to do. I would also say to you that there is some learning we can all have from a recent experience last one, two, three years. The UK government, for example, was at one time heading in a direction of supporting initiatives like this in the UK and quickly determined that the UK is a net provider of intellectual property in this field and was running the risk of sharing that the economic gains to the UK economy of providing that for free to other countries, one. Also, you get into this interesting situation where commercial enterprises, maybe the pharmaceutical industry would be getting access to this information for free.

I don't think that is an outcome any commercial publisher, any not-for-profit publisher or any government would really want to entertain. So we are mindful of it. We are thinking about it. We're addressing it. We're influencing it, and we are absolutely confident it will be a positive for us in all of this.

(OPERATOR INSTRUCTIONS). Brandon Dobell, Credit Suisse.

A couple of questions. First, in the trade space, maybe a bit of color around what you are assumptions are for kind of the macroperspective that might drive your guidance? And I guess within that, any anticipated changes in how you think the bookseller is looking at frontlist versus backlist, shelf space, you know inventory, corrections to a level of those kind of things? I'm just trying to get a feel for how consistent we can see this business be kind of year-over-year and quarter-over-quarter?

This is Will. I don't see any reason to call out a dramatic change in the next 12 to 24 months in the areas that you talked about. In fact, I would see a continuation of certain well-established trends. And that is Wiley and the major intermediaries that we deal with have been for years focusing on improving what has been a wasteful part of our business, and that is the whole business of inventory management and returns and shifting stuff back and forth. We have been experiencing some real improvement -- steady improvement over some period of time across our businesses, but certainly in our professional and trade business.

So that is not new, but I would expect that there will be continued emphasis on that happening.

In terms of shelf space, you know this is a point of where we all compete. We compete against each other for shelf space, and frankly, in some cases, we're competing against some of our intermediaries who have gotten into the business of publishing. And for as long as I have known in this business, it continues to rely on the quality of your content, your ability to market effectively and get it in the right place at the right time.

And my reference earlier about Wiley's global brands, you know we -- before we did the Hungry Minds acquisition back in 2001, we were very proud of the name recognition associated with Wiley and the authors that we publish. I must say we are in a whole other place since we acquired the brands associated with Hungry Minds in September 2001. You hear them talking about the For Dummies series and the Frommer's series, and I'm using them as examples because they are recognized names in the business. We have very effectively learned some brand management expertise from them, and we're extending those brands.

So when you talk about shelf space, another robust strategy is to use the power of those brands to get that shelf space either in bricks and mortar bookstores or obviously in the virtual shelf space of online accounts, and we continue to feel very good about that. As you know, we are not a fiction publisher, so some of this stuff about fighting for that Window space, and you get it for a few weeks or whatever is not something we have to deal with. Our backlist still has legs. We look for revenue, clearly a lot of it in the first few months after we publish, but it continues for a period of time after that because of the nature of our publishing program.

I also want to say that we really are a category publisher. I mean you look at the areas that we publish in, and we really have a lot of depth. In the technology market, which has been a very competitive and difficult one for years, we cover from consumer to the high-end, and we're showing real growth in market share gains there, not only in the United States but around the world.

In the cooking area, we publish at the low-end in terms of when the consumer end, but the Betty Crocker and Pillsbury alliances we have with General Mills, but we are also the publisher of the Culinary Institute of America for professional chefs. I think that approach has really helped us in terms of shelf space and backlists and also, frankly, in the online channel.

Okay. I appreciate the color. Moving over to the library space a bit, it seems like most states are in pretty decent physical shape these days. But we have seen kind of continued volatility in how libraries are spending money or how they view their collection.

Let me break it into two parts -- electronic versus print, and if you see any major trends there or inflection points in trends with regard to higher ed spending, public spending. I'm sure you can weave the STM business in there as well.

I mean all of our business is higher ed P/T, STM, gain the benefit of our access to the library channel. So we are experiencing good results there, not as fast-growing as some other outlets, but completely consistent with our expectations.

I think as it relates to Wiley, surely the biggest issue here is with the STM collection and percentage of the library budget that is available for some combination of access to electronic or print journals, and frankly, STM books, which increasingly we're making available online.

The points that I would make about that is that we continue to have terrific success negotiating acceptable licenses, one, two, three years in length with major consortium. When I say major consortium, there are several of them in the United States and around the world that negotiate licenses on behalf of several participating libraries. When we negotiate those licenses, in most cases we are negotiating a combination of print and electronic at a price that is above print alone or the electronic alone. We're getting good renewal rates on those, very good renewal rates on those. The negotiations take a fair amount of time. That is undeniably the case. But an outcome of that is that we are also finding increased usage to some of the smaller libraries who have joined these consortia who were not able to participate in the past. So there is benefit to them who are gaining access to content, and there is incremental revenue to us.

So I don't see -- again if I look at fiscal year '06 and now we're already into obviously fiscal year '07, I don't see material change there. In direction I don't see a major issue coming out of the funding of all the trade-offs that we have been dealing with for years now will continue to be present. We have I think some pretty well-established now models that are working well. I tell you the backfile collections I referred to earlier, which was a revenue streams that did not exist three years ago has been endorsed enthusiastically by the library community in the United States and increasingly around the world. So we are continuing to invest in that. But I would have to say that no dramatic change anticipated '06 into '07 in that market.

I appreciate it. And then one final question. Maybe some color around the traditional schools versus for profit from a couple of perspectives. One, do you see the traditional schools moving more towards the models that some of the for profits have developed with the online libraries if you want to call it that, like an Apollo Group with their resource products? And then secondly, do you see them being anymore sophisticated in terms of how they deal with publishers, with content providers, or do you think that they are acting any differently relative to the competitive dynamics of higher ed than you have seen in the past and trying to offer more services or being a little bit further along the curve than they have been in the past?

I think the dialogue -- when you say traditional, I'm going to interpret that to mean two and four-year public and private community colleges and colleges and universities and vis-a-vis the for profit. University of Phoenix is a classic well-known case.

What I would say is I think my experience personally and professionally is that there is much more dialogue among these so-called traditional higher education markets about alternative delivery systems. There is much more dialogue and, frankly, increasing pressure for more accountability in terms of U.S. higher education. What I mean by that is teaching and learning happening at the right degree given the resources that are being invested or their improvements that are required there. I have made the case, frankly, to some of the people that I know in higher education that it behooves them and I think publishers can help them with this to try to find effective ways of measuring outcomes. That is by the way one of the hot terms in this field is outcomes-based learning where you can actually quantify and document what we thought was happening in the classroom is actually happening.

Now some people will tell you that, you know, I am a professor. I conduct a lecture. You read the material. I give you a quiz. You pass or you fail. I have learned whether or not learning has happened. And so I don't want to give people the impression that there has not been a system in place for a long time. But I think what people are looking at is whether or not we can get much more sophisticated in measuring learning outcomes and maybe what it is that is really contributing to those things.

So the dialogue is absolutely there. There is much more of it, and I think it is a much more prevalent than maybe three years ago. However, the implementation is really moving at a slow pace. And by that I mean the acceptance of online dissemination of content into the higher education or into the classroom is moving pretty slowly.

We have had some really good success with WileyPLUS. But, as I pointed out earlier, we're still selling a lot of books, and we still get a lot of feedback from students that they want their books. They would just like them at lower prices. So you know you and I have talked about this, and I will say it again because I feel as strongly about it today as I did when I first said it a couple of years ago. I really do believe online dissemination of higher education content -- I will use the word again -- is robust for professors, for students and publishers. I think it would take some of the inefficiency out of the system of shipping physical goods and getting 25% of them back. I think it would have an effect on the used book market. I think it would allow us to provide more for less in terms of pricing, and I think you can build in as we have with WileyPLUS assessment tools to help measure the progress of teaching and learning. So I think it starts getting more to this outcomes base.

But there are human beings involved in this process, and it takes time to orchestrate this kind of change. So don't look for dramatic change in my view in the next one to two to three years, but look for steady change. I know I sometimes deliver more information than you want during these responses, but I want to say one other thing. One of the things that I think is terrific about our combination of businesses is I believe some of what we have done with InterScience and STM and some of the technology and business models we have proven work in that market will over time benefit our higher education business as an example.

Okay. Do you think that transition is more driven by individual personalities within a school, or is it student driven? What becomes the inflection point?

I think it is really right now it is individual professors, maybe some departments, and then I think what happens is it grows from there. But it is really that kind of activity. I don't really believe the students will be successful catalysts for change in this regard. I really believe the professor has been, is and will continue to be for some period into the future the gatekeeper, the driver of the process. I think as more and more of these young PhDs who have used technology for their research and for their own learning are finding their way into classrooms and will start using it.

But I think it really is still at that point. Over time there may be another push, and that may be that, which I think would be a good thing, is the leadership of colleges and universities. Here I am talking of Presidents and (indiscernible) as they start addressing this question of accountability and funding issues, and they try to figure out how they can make their institution more productive. They may drive some more of this down respecting the individual choice of professors. That is a pretty important part of the culture of teaching and learning in this country.

Okay. I appreciate the color as always. Thanks.

(OPERATOR INSTRUCTIONS). [Chris Stein], [Galeten Asset Management].

Forgive me if my questions are redundant. But could you elaborate a little bit on $13 million reserve for returns in obsolescence what segment that was related to, and is that more a doubtful account or obsolescence? Just a little more clarity on that. And then also if you could talk a little bit about the expense growth across the segments and how much of that over the last two quarters is tied to some revenue opportunities that have yet to play out versus just some new costs in the business?

In terms of the sales returns reserve release, that relates to we carry a reserve across on a channel by channel basis. So we have had actually over the last couple of years still improving sales returns experience pretty much across the business within principally within P/T, but across a number of channels. So that just reflect again some improvement.

There was a question earlier about -- which could partially be woven into this -- about, are any of our major accounts kind of viewing inventory management differently? And the answer is that they have continuously improved inventory management, particularly I will point to some of the large brick and mortar customers of ours. They have continued to improve inventory management, which means we have had lower returns experience off of essentially increasing gross sales.

And then on the expense growth for I guess primarily in the P/T segment? I know you have talked before about how there was a lot of -- some investment opportunities to drive new revenues sources. I was just curious how much of the expense is related to those type of things versus just some general margin compression.

Yes. Within P/T specifically within the segment, are you asking about sort of the difference between the rate of growth in revenue and contribution margin? (multiple speakers). I mean that is principally a mix issue, quite frankly. It has little to do with growth in operating expenses within P/T. It is a mixture of products sourced internationally versus in the U.S. So some of the offsets of some of that margin compression, quite frankly, resides in the UK.

A big seller, quite frankly, this year was Sudoku For Dummies, which we have discussed a bit on the call and in the earnings release, and that was a book that was published in the UK that sold principally in the UK and in the U.S. So that drove a fair amount of or some number of sales in the United States at albeit lower margins in the U.S., but the margin was captured in the UK. So there is I don't think there is anything to look at beyond that.

There are no further questions in queue at this time. I will turn the call back over to Will Pesce for any closing remarks.

Well, thank you very much for your continued interest and support, and we look forward to speaking with you again after the first quarter. Thank you.

Once again, this does conclude today's conference call. Thank you for your participation and have a great day.