John Wiley & Sons Inc (WLY) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the John Wiley & Sons conference call.

Today's conference is being recorded.

Before introducing Will Pesce, President and Chief Executive Officer, I would like to remind you that this discussion will contain forward-looking statements.

You should not rely on such statements as actual results may differ materially and are subject to factors that are discussed in detail in the Company's 10-K and 10-Q filings with the SEC.

The Company does not undertake any obligation to update or revise forward-looking statements to reflect subsequent events or circumstances.

Mr. Pesce, please go ahead.

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

I have a touch of laryngitis so if my voice gives way, I'll turn it over to Ellis Cousens.

It probably pleases you to hear that I have a touch of laryngitis but I'll go on from there.

The fiscal year that will bring us to Wiley's bicentennial in 2007 is off to a very good start.

Our first quarter performance was driven by continued momentum in all of Wiley's global businesses.

Revenue of $263 million increased 11% while EPS of $0.40 advanced 18%, excluding incremental stock option expenses due to the adoption of SFAS 123R, and a one-time tax benefited reported in last year's first quarter.

The effect of SFAS 123R was approximately $2.4 million, or $0.03 per share.

Operating income increased 16% on the same basis.

Based on first quarter results leading indicators and market conditions we reaffirm our guidance for fiscal year 2007 revenue growth in the mid single-digits and EPS growth in the high single-digits excluding the aforementioned impact of SFAS 123R and the one-time tax benefit recorded last year.

Gross profit as a percent of revenue was essentially the same as prior year.

Operating expenses excluding SFAS 123R of $137 million increased 9% from prior year excluding currency effects.

Year-on-year expense growth reflects the combined effect of increases in employment cost, the timing of advertising expenditures and incremental expenses related to acquisitions.

Free cash flow is nearly $14 million lower than prior year.

The comparison to last year was affected by the timing of vendor and author payments and increased incentive compensation related to fiscal year 2006.

While receivables increased reflecting the growth in book sales, days sales outstanding improved by three days from a year ago, inventories increased 8% from prior year to support anticipated growth in book sales, property, plant and equipment declined 6%.

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

Professional Trade revenue for the first quarter, which is the smallest quarter of the year, advanced 9% over prior year to $86 million.

The solid performance was led by business and consumer cooking, professional education, the online advertising program and the sale of rights.

Back file sales were particularly strong.

Globally, P/T revenue in the first quarter increased 14% over prior year.

Direct contribution to profit increased 2% to $19 million.

Adjusting for the effect of the change in inter-segment product prices that was noted in the press release, revenue and direct contribution to profit improved 11% and 9% respectively.

The business category continued its strong momentum as evidenced by a 17% year-on-year growth.

Technology publishing had one of its best quarters since the acquisition of Hungry Minds in 2001.

Consumer publishing exhibited solid growth up 11% from prior year.

Cookbook sales were robust led by Weight Watchers New Complete Cookbook and a custom publishing sale to General Mills.

Wiley continues to be the number one publisher in the travel category.

Global rights revenue was 22% higher than last year while P/Ts Web sites nearly doubled revenue from a year ago.

Several P/T titles received considerable media, customer attention and awards during the quarter.

The AMA Family Medical Guide was named one of the top books by Prevention Magazine and was subsequently featured on the Today Show and in USA Weekend Magazine.

Business Week listed Against the Gods by Peter Bernstein and Common Stocks and Uncommon Profits by Philip Fisher and Kenneth Fischer among the eight books recommended in an article entitled, "Must Read for Investors."

Scientific, Technical and Medical revenue increased 10% to $54 million.

Results were driven by increased revenue from journals, controlled circulation advertising and books.

New businesses and publications acquired during the past year such as InfoPOEMS, Dialysis & Transplantation, the Hospitalist, and Journal of Orthopaedic Research contributed about $1 million to the year-on-year revenue growth.

Direct contribution to profit of $25 million increased 2% from prior year.

The modest increase was mainly due to the timing of advertising and selling costs and additional expenses to support future growth, particularly editorial staff additions.

Journal subscription revenue increased 7% while general revenue from other sources advanced 23%.

Back file sales were robust and continue to exceed our expectations with revenue from the older collection showing no signs of slowing.

The global SCM book program experienced another solid quarter fueled by growth in online revenue and strong title output.

In addition to healthy renewals, several new licenses were signed by academic and corporate customers.

The number of visits to Wiley InterScience increased by approximately 30% in the first quarter over the comparable prior year period.

The growing value of Wiley's journals to the scientific community was evident in the results of the recently announced ISI Journal Citation Reports, and independent ranking of impact factors which measure how often a journal's articles are cited by other researchers.

Globally, 65% of Wiley's journals that are included in the report's Science Edition increased their impact factors.

Wiley publishes six of the top ten polymer science journals representing 30% of the citations in that category.

17 of 25 chemistry journals increased their impact factors.

In the life sciences 21 of 31 journals increased.

The Journal of Comparative Neurology is at its highest level in 15 years.

In medicine, arthritis and rheumatism retained its number one ranking and cancer increased its ranking for the fifth consecutive year.

We continue to build our controlled circulation business through the acquisition of Clinical Cardiology for $4 million.

The Company also signed a contract with the American College of Rheumatology to launch The Rheumatologist, a controlled circulation newspaper.

There have been some interesting developments regarding open access and institutional repositories The Public Library of Science revealed that it lost about $1 million last year as revenue covered only 35% of its cost.

Its open access fees were increased from $1,500 to 2,000 or $2,500.

In addition, the Public Library of Science acknowledged it will continue to rely on financial support from charitable organizations.

The Royal Society in the U.K. launched its Open Choice service.

Authors opting for this service will be charged $370 per printed page for some journals and $550 per printed page for others.

Nondiscounted fees place the Royal Society at the high-end of open access fees for articles that are more than five to eight pages.

And the Research Council for the U.K. issued a statement that it could not reach consensus among its eight research council's regarding an open access policy.

Higher Education revenue of $48 million grew 5%.

The increase was principally due to strong sales in the accounting and social sciences programs, globally Higher Education revenue increased 7% over prior year.

Direct contribution to profit of $17 million was unchanged from the previous year.

Adjusted for the affect of the aforementioned change in inter-segment product prices, revenue and direct contribution to profit increased 7% and 6% respectively.

WileyPlus sales climbed rapidly as more teachers and students were introduced to this online integrated suite of content, learning and teaching tools.

Revenue from the sale of WileyPLUS is deferred and recognized over the applicable semester.

By the end of the first quarter the deferral exceeded $2 million.

Higher Education launched the Wiley Visualizing Series developed in exclusive partnership with National Geographic Society.

These introductory level textbooks integrate rich visuals and media with text to enhance learning.

Wiley and the George Lucas Educational Foundation signed an agreement to co-produce a series of six textbooks employing project based learning which has been demonstrate to do deepen the knowledge of the subject matter, increase self direction and improve research and problem solving skills.

Wiley Europe built on the strength exhibited throughout fiscal year 2006 as first quarter revenue $72 million grew 14% over prior year.

Our U.K. company had a particularly strong quarter with revenue exceeding prior year by 17% excluding currency effects.

In Germany, Wiley VCH was up 7% over prior year also excluding currency effects.

Wiley Europe's direct contribution to profit of $24 million increased 32% over prior year excluding currency effects.

Adjusted for the aforementioned change in inter-segment product prices, revenue and direct contribution to profit increased 15% and 19% respectively.

Our U.K. company continues to benefit from strength in P/T, particular the For Dummies program, which was bolstered by ongoing success of SuDoku.

It is noteworthy that SuDoku had a significant effect on last year's performance beginning in the second quarter.

The British Journal of Surgery, which Wiley publishes, was awarded the prestigious Association of Learned and Professional Society Publisher prize.

Wiley VCH's Angewandte Chemie retained its ranking as the number one chemistry journal based on impact factors.

In Asia, Australia and Canada, Wiley's revenue of $28 million was up 16%, or 13% excluding currency effects.

Stronger Higher Education in P/T sales in Asia and Australia and P/T sales in Canada contributed to the results.

In summary, fiscal year 2007 has begun on a positive note.

The momentum from the fourth quarter of last year continued throughout the first quarter.

At this point in the year, we are on course to achieve results that are consistent with our guidance.

With that as background we welcome your comments and questions.

[OPERATOR INSTRUCTIONS] We'll take our first question is from Drew Crum of Stifel Nicolaus.

Good morning, everyone, it's Steve Holt.

First quarter for you guys pertains to Higher Education.

I wonder if you could comment on what you saw in the month of August in terms of sales and is it too early to the comment on your experience with returns?

It's too early to the comment on both of those questions.

All I can tell you at this point in the year is that our Higher Education business is tracking to our expectations.

One of the reasons why I outlined some of the partnerships and alliances that we've been working on is that we are presenting to the marketplace more variety of products than ever before in our history.

And it is a combination of traditional, highly developed, four color, comprehensive textbooks to a combination of print and online access to lower cost, lower production value of textbooks as well; trying to address the varied needs of our customers, not only in the United States but around the world, and we are seeing very clear indications that our strategy is working and working effectively and I'm particularly pleased with the ongoing success of WileyPLUS, which you have heard me talk about for several quarters now, which is a suite, an integrated suite of access to content and learning tools that benefit both professors and students.

We've been very pleased with market response in the United States and I'm happy to report that penetration outside the states is beginning to develop quite nicely for us.

But at this time, really too early.

The returns question is best addressed at the end of each semester.

So you get most of your revenue in for the first semester by the end of September and then you have the month of October as a kind of, a return season, if you will, the November, December and January pickup again for the next semester and then, basically, end of February, March into April is the return season.

But so far, and as you know, July is one of the big months in the Higher Education business.

It's not as big as it used to be in our business mainly because, for example, products like WileyPLUS are deferred and that revenue will have a tendency to flatten it out, if you will, or smooth it out over the course of the semester, but it's still a very important month and as you can see in our results, you don't have that kind of first quarter without having a good July in Higher Education.

Will, what countries have you not deployed WileyPLUS to?

Well, there are several countries which we have not.

The ones that I think are worth talking about in terms of getting some real traction, obviously the United States, Canada, Australia.

We actually introduced it in Germany, recently.

It's beginning to have an effect in Canada.

We're encouraged by some developments in several markets in Asia, and when I say we're encouraged is that sometimes with new technology, particularly in developing markets, what you do is you pilot it in a particular class or section.

And what we're seeing now is a really solid conversion from piloting to actual use and revenue generating opportunities.

So it is a staged and successful rollout.

And the more people who are using it, I mean the feedback consistently from both professors and students in the markets that it has been introduced to has really been quite positive.

Okay.

Maybe a question for Ellis.

The options expense dilution came in about $0.03 for the quarter.

Is that a good run rate, you know, should we be utilizing about $0.03 dilution going out in the out quarters for the remainder of the year?

Yes.

Okay.

And then could you provide some additional detail on what some of the driving factors were behind the sharp increase in the contribution to profit in the European segment?

Anything worth noting there?

Journal sales, as you know, the journal publishing program has very positive characteristics.

I would also highlight that the, when I refer to indigenous or local publishing they're Wiley Europe's local publishing programs have been doing very well.

So these are programs that they create there and are sold not only in local markets but outside the states and we've had very rapid growth, for example, in our Professional Trade area in local publishing and you're seeing the benefit of that revenue and profit growth in their P&L.

Okay.

I'll jump back into the queue.

Thanks.

[OPERATOR INSTRUCTIONS] Next we'll go to Brandon Dobell from Credit Suisse.

Thanks.

A real quick one on the WileyPLUS, the $2.6 million in deferred.

Any sense of what that's up year-over-year, how we should think about that?

Last year, Brandon, it was about 1.1 or so at this point in time.

So it's more than doubled.

Got it.

Okay.

In terms of driving adoption for that product, what are the main methods you guys are using right now?

Any one of those that you're seeing particular success with or anything innovative you're trying to get the product to move from a pilot to an adoption phase?

Brandon, it's basically getting exposure through -- it's still face-to-face interaction between sales representatives and faculty.

And it's, you know, candidly, one of the real issues in Higher Education in the states, and I suspect this applies to other places, is that people are genuinely excited about the technology but there hasn't been, in my view, enough training of professors to actually capitalize fully on the benefits of technology.

So part of what we are doing, people think of the sales, well, you go in and talk about a product, somebody decides to use it.

Well, increasingly we are having to provide them with additional support so that they understand the technology, how to use it effectively in the classroom.

Now the good news part of that, sure, it takes more time and effort but the good news is it really does deepen the relationship between the publisher and the professor beyond what it was historically, so I don't see that as a long-term negative.

But there's nothing profound about this.

It's getting it out there, having positive experiences through piloting and then word of mouth combined with our own coordinated sales and marketing programs in the states and around the world.

I've talked about WileyPLUS several times since it was introduced and I've describe it as one of the most successful new product launches in Higher Education at Wiley, certainly during my tenure here, and I reiterate that sentiment.

I'm very encouraged about the market acceptance of this and I think it's kind of an early chapter in what we've talked about or you're seeing evidence of what we've talked about for a while now about this evolution from what was historically primarily print to some combination of prints and electronic to the electronic in Higher Education becoming increasingly important.

And I think WileyPLUS is an example of that.

I should also point out to you that I really do believe that penetration into, for our Higher Education business, greater penetration outside the United States, particularly in markets in Asia, I really believe online dissemination of content is going to be an important part of that because of the economics of print versus electronic in markets that have relatively low price points.

So WileyPLUS is another example of how we're not only benefiting from the States but will bring value to the Company long-term, I believe, in places like Asia and Higher Education.

Is any of that, of your perspective dependant or collated with the course management guides getting their penetration rates to a certain level or are those guys seeing the same kind of uptake in their own products?

I think, you know, certainly in the United States if you're talking about the blackboards of the world, the course management was probably one of the first, if you will, technology solutions really embraced by the educational community because, you know, and I think it's, the penetration is really quite high in the United States.

I really can't comment with confidence about how that plays out outside the United States, although I suspect in places like Canada and perhaps in Australia and some of the established markets in the U.K. there's a similar kind of activity.

I really don't know in Asia and if you're very much interested in that one of us can follow-up and get back to you on it.

But that was one of, you know, when people talk about early adopters those course management systems were kind of the first to be adopted broadly by higher education.

It's not required to do that, to be able to benefit from WileyPLUS.

I just think it's kind of like the continuum of, you know, this was kind of the easiest thing for them to get their arms around, it took care of a whole bunch of administrative tests that professors don't like to do anyway, and what WileyPLUS does is it handles some of that, it's compatible with those systems, which is good, but we're talking about [pedigochi], we're talking about teaching and learning and into that getting used to that as a professor is, I think, a little bit more of a step than some of the administrative course management systems.

Okay.

Shifting gears a bit, you mentioned the strength in the online advertising program within Professional/Trade.

Can you give more color on the size of that, what's going on with that and your plans for growing that?

I'll ask, I'll begin to respond and if Ellis has any specific information about size and growth and all that we'll talk about it.

I think one of the themes that I hope you've been picking up from my remarks, not only in P/T but also in STM, that we really have opened up some new revenue streams in the last five years that are based on the strength of our content and brands but it's not revenue in the traditional way in which we have developed revenue streams.

What I mean by that is it's not the sale of a book or the sale of a journal.

We're still doing that, of course, but we're opening up additional revenue streams, back file sales coming out of STM has been a source of significant revenue growth and profit growth living off of the content that we have.

In P/T the Frommer's travel brand I refer to us as being number one in the category.

Well, we have a Frommer's site and the Frommer's site is generating significant traffic doing two things, one is it's opening up these advertising streams which we did not enjoy in the past, and two is, it's reinforcing the print brand.

As people are going to that site they're getting some information and then they're moving toward purchases of print product as well.

So Frommer's is probably the best example I would have of a site that's generating that kind of opportunity.

I would also say related to this is, you've heard me talk about global rights sales.

Historically, global right sales were selling the right to publish something we've already published maybe in another language.

A big source of income has been licensing the rights to use some of these brands like, for example, the For Dummies brand or a license to gain access to some of our content.

And you've heard me over the last several quarters talking about that.

So these are incremental sources of revenue that did not exist in any material way three, four, five years ago that are helping to accelerate some of the growth in these areas.

I don't know if Ellis has anything to add.

Just, Will did mention that the P/T Web site nearly doubled the revenues from a year ago in his comments and, you know, advertising the global rights on those sites increased about $1 million versus the first quarter of last year.

I mean a meaningful number, not huge in the scheme of things, but certainly it's sort of incremental growth once again.

Okay.

And finally the last one, in terms of free cash flow guidance for the year how should we think about that?

Anything that might change on a year-over-year basis, working capital wise or capitalized software investments that we should build into our free cash number?

We kind of limit guidance other than the guidance we provide in terms of capital spending and product development spending I really can't say much else there.

There's nothing extraordinary or unusual that you should look to versus last year quite frankly.

That's just full-year as opposed to the first quarter.

Exactly.

As you know, this first quarter doesn't really mean much in terms of a full-year's free cash flow performance.

Fair enough.

Thank, guys.

Next well go to Sami Kassab from Exane.

Good morning, gentlemen, it's Sami Kassab at Exane BNP Paribas.

May I ask you a few questions?

First whether you could comment on the advertising trends which you've seen your controlled circulation titles in the STM business?

What type of revenue growth are we talking about?

Is it mid to low or high single-digits?

And what segment of the market is driving the growth, is it online as well?

And secondly, some medical publishers in Europe have reported an increasing the cost of content licensed from third parties.

You just mentioned the licensing yielding to third parties.

Can you comment on the overall trends you're seeing [inaudible] regarding the cost of content which you license from or to third parties?

And finally, whether you could share with us your view on the U.S. higher ed market growth rate which you expect for this year, please, for the market as a whole?

Thank you.

I'll start and I'll ask Ellis to contribute as he sees appropriate.

In terms of controlled circulation, I suspect if you go back, I'd have to think about this a little bit, if you go back a year, two years ago, you would have heard very little from us about controlled circulation as a revenue stream at Wiley.

You know, other companies have been doing it, it has not been a significant part of our business.

We have developed this business basically building off of existing relationships.

It is mainly coming from, when I say existing relationships, we maybe publishing a journal with a scientific or technical or medical society and we're doing that successfully, both print and online, we're generating the subscription revenue, and as a part of just strategic and business development discussions, we'd say, you know, there are opportunities to convert some of that into controlled circulation advertising revenue stream.

It's not a big part of our business anywhere around the world.

However, it is a growing part of our business by strategic design playing off of the strength of some of the content that we already have and relationships we already have.

Most of it at this point is print, particularly as we're talking about the STM business, however, it doesn't mean down the road that those relationships can evolve into online as well.

Is there anything in financial [inaudible] that you have at your fingertips?

Sami, I would not, and this is really for the benefit of everybody, some of these things that I mention is really to try to give you a sense of growing revenue streams.

I mean there was comment in response to a question that Ellis made about a $1 million increase in the first quarter, I think he was referring to P/T.

Well, $1 million of year-on-year revenue growth on the margins that we're talking about is a nice contribution to Wiley's profits and cash flow.

That's one quarter year-on-year growth.

It's just to be clear that these revenue streams are contributing nicely by strategic design and you're likely to be hearing more and more from us about that.

It's also tied to a broader strategy that we have in place at the Company and that is that we're trying to serve the communities that we reach in lots of different ways.

Historically, it was print on paper textbooks or journals or encyclopedias or books.

Now what you should be seeing is that we're doing that.

We're taking that strength, moving it into the online world.

We're getting people to certainly pay for access to that content, either complete bodies of work or pieces of bodies of work and we're opening up other revenue streams off of that content and those relationships through advertising, licensing arrangements, and all of this at the end of the day having deeper, richer, more extensive relationships with either the publishing partnerships we have or the customers we serve.

So in that sense it's a long-term, robust strategy that you'll be hearing more and more about.

I -- regarding your point about medical publishers paying more for content, I'm not sure exactly what you mean by that other than to say there's nothing that I'm aware of and I think you referenced Europe, there's nothing that I'm aware of that is of any concern to us here.

The content that we pay for, if you will, is, we negotiate with societies, for example, to publish their journals.

For the longest time that has been intensely competitive and will be continue to be, but there's nothing really remarkable or new for me to talk about there.

We have been able to achieve very nice returns on our content investments through us licensing to third parties.

We're not seeing price pressure down on that.

In fact, what we are finding is more and more people who are aware of what we have in the Wiley portfolio and as we make them more aware of that they are more and more interested in doing deals with us.

So that doesn't seem to be an issue one way or the other at least for Wiley at this point in time.

And in terms of the U.S.

Higher Education business I would say somewhere in the mid single-digit, somewhere around 5% or so for total industry growth, seems realistic at this point in time.

You know, it's a hard thing to judge from one quarter to the next but I think if you're looking over the full-year, the calendar year of 2006 you're probably talking in that range.

This has been very, very helpful.

Thank you very much, gentlemen.

You're welcome.

And it appears there are no further questions at this time.

Okay.

Well, thank you very much for your interest and support and we look forward to speaking with you at the end of the second quarter.

Thank you.

And that concludes today's teleconference.

We'd like to thank you for your participation.

Have a wonderful afternoon.