John Wiley & Sons Inc (WLY) 2007 Q2 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 the factors that are discussed in detail in the Company's 10-K and 10-Q filings with the SEC.

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

Mr. Pesce, please go ahead, sir.

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

I'll begin with an overview of Wiley's performance.

Then Ellis Cousens and I will respond to your comments and questions.

The Blackwell acquisition, which we announced on November 17th, is by far the largest in Wiley's history.

The combination of Wiley and Blackwell, two of the world's most respected publishers, is a rare opportunity, with highly favorable, long-term strategic implications.

Together, we will deliver even greater value to all our stakeholders than we could as separate entities.

For our authors and society partners, we'll provide best of class service through our extensive global network of editorial, production, marketing and sales talent.

For our customers, we'll provide more access to more content to more people than ever before in the history of the two companies.

For our shareholders, we will generate accelerated growth, steady cash flow and increased shareholder value.

For our colleagues, we're provide intellectually stimulating and financially rewarding opportunities.

Last week I visited Blackwell's global headquarters in Oxford, accompanied by four of my colleagues.

We met with Blackwell's leadership team, then I addressed the staff, accompanied by Chairman, Nigel Blackwell, and CEO, Rene Olivieri.

Small group meetings were conducted, as well.

It was a rewarding experience and we received positive feedback from our new colleagues.

The acquisition will be the focus of a Webcast scheduled for tomorrow, beginning at 2:30 p.m.

It will be available for two weeks on our website.

While the acquisition is the most noteworthy accomplishment, I'm pleased to report that Wiley had another solid quarter, as reflected in top line growth of 8%.

STM and Professional/Trade led the way.

In my opinion, it's important to analyze operating income and EPS on a basis that is comparable to prior year.

Three items are affecting comparisons to last year.

One, incremental stock option expense due to the adoption of SFAS 123R.

The effect on operating income for the quarter and six months was approximately $3 million and $5.4 million respectively.

The effect on EPS was $0.03 per share in the quarter, and $0.06 per share for the six months.

Two, a relocation incentive from the State of New Jersey, which was received in the second quarter of last year and is anticipated in the third quarter of this year.

The effect on operating income for both the quarter and six months was approximately $2.7 million, or $0.03 per share.

And three, tax benefits in the second quarter of this year were $4.2 million, or $0.07 per share, and in the first quarter of last year were $7.5 million, or $0.12 per share.

On a comparable basis, excluding the effect of these three items, underlying results for the quarter were revenue up 8%, operating income up 10 %, and EPS up 12%.

For the six months, revenue was up 10%, operating income up 13%, and EPS up 17%.

Operating expenses, excluding SFAS 123R, were 9% higher than last year.

If the relocation incentive had been received in the second quarter, as it was last year, the growth in operating expenses would have been consistent with that of revenue.

Free cash flow was down from last year due to the timing of vendor and author payments and increased annual incentive payments, partly offset by higher cash earnings and trade collections.

While receivables increased reflecting the revenue growth, days sales outstanding improved by four days from a year ago.

Inventories and product development assets both grew by 4% to support top line growth.

Property, plant and equipment was essentially flat with last year.

Based on year-to-date results, leading indicators, and market conditions, we anticipate fiscal year 2007 revenue growth in the mid to high single-digits, and EPS growth in the high single-digits, excluding the aforementioned impact of SFAS 123R, the one-time tax benefits, and the Blackwell acquisition.

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

Professional/Trade revenue for the second quarter advanced 10% over prior year to $104 million.

For the six-month period, revenue of $190 million exceeded prior year by 9%.

Adjusting for the change in intersegment product prices noted in the press release, revenue for the quarter and six-month period increased 12%.

Direct contribution to profit increased by 14% to $29 million for the quarter, and 9% to $48 million for the six months.

Building on the first quarter's momentum, P/T delivered solid second quarter results, driven by the business, consumer, architecture, and culinary programs, as well as online advertising.

After a record October, the business publishing program was 25% ahead of prior year.

Consumer publishing had a tremendous quarter, bringing year-on-year growth for the six months to 21%.

Our market-leading travel program ended the quarter up 13% over prior year.

A Frommer's CustomGuide to Las Vegas for the Consumer Electronics Show was created with more than 100,000 copies shipped in four languages.

All sales channels performed well, with particularly strong results from the national accounts and online retailers.

Amazon had another outstanding quarter.

And sales have been quite healthy though mass merchandisers.

P/T's online business had an active quarter with the launch of new products.

Wiley's branded websites, CliffsNotes.com, ForDummies.com and Frommers.com, generated new advertising and licensing revenue through co-promotions with major corporations and the launch of podcast to promote books.

During the quarter, Wiley acquired Whatsonwhen Limited, a UK-based provider of travel-related online content, technology and related services, with brand name clients with such as British Airways, Hilton Hotels, and the Discovery Channel.

The acquisition will enhance Wiley's extensive travel-related content business.

STM revenue increased 7% over the previous year's second quarter to $53 million, and 9% to $106 million for the first half of the fiscal year.

Direct contribution to profit for the quarter of $23 million and for the six months of $48 million were essentially flat with prior year.

The profit effect of revenue gains was offset by additional costs to support new business growth, gross margins on imported books, and royalties on society-owned journals.

Second quarter growth was driven by journals, books, and controlled circulation advertising.

New businesses and publications acquired during the past year contribute $2 million to the year-to-date growth.

U.S.

STM journal revenue for the six-months was 8% higher than prior year.

Customers continue to take advantage of Wiley InterScience.

The number of visits through the first six months increased by approximately 32% over last year to 33 million.

In October, there were over 6 million visits, the largest ever in a single month.

Early in the quarter, Wiley and the International Society For Stem Cell Research signed a multi-year agreement to jointly develop and publish current protocols in stem cell biology.

The first comprehensive source of high quality methods for isolating, maintaining and differentiating embryonic and adult stem cells.

Higher education revenue for the second quarter was $42 million, essentially the same as in the prior year.

Year-to-date revenue increased 3% to $90 million.

Adjusting for the change in intersegment product prices, revenues grew 3% for the quarter and 5% for the first six months.

Higher education is experiencing savings of 10% to 15% on key titles as the result of aggressive negotiations with major printers, changes in paper grade, and moving composition services offshore.

WileyPLUS usage continued its upward trend, with more than 0.5 million individual visits during the quarter.

WileyPLUS revenue was deferred, with the majority of it being recognized over the course of the second half of the fiscal year.

October was the first month in which Wiley distributed Microsoft Official Academic Curriculum textbooks and e-learning tools.

The alliance with Microsoft was extended internationally during the quarter, and our global salesforce is already launching it around the world.

This important relationship enables Wiley to establish a significant global position in the technology certification market.

Wiley Europe's second quarter revenue of $81 million improved 5% over prior year.

Revenue for the first six months of the year increased 9% to $153 million.

Adjusting for the effect of the change in intersegment product prices, as well as foreign exchange, Wiley Europe's revenue for the second quarter and six-months improved 4% and 8% respectively.

Direct contribution to profit for the second quarter and six-month period improved over prior year by 11% and 19% respectively.

Once again adjusting for the effect of the change in intersegment product prices, as well as foreign exchange, direct contribution to profit for the second quarter and six-month period improved over prior year by 3% and 11% respectively.

Our UK company had a relatively soft quarter, but year-to-date revenue was up 7% over prior year, excluding currency effects.

Growth in journal revenue and P/T sales was partially offset by the anticipated reduction in sales of Sudoku For Dummies.

Wiley-VCH exhibited solid growth.

STM journals continued to improve, particularly in chemistry, which includes the Angewandte Chemie journals published on behalf of the German Chemical Society.

A new monthly record for full text downloads of Angewandte Chemie International Edition was set in the quarter.

Wiley's revenue this Asia, Australia, and Canada advanced 7% to $32 million, or 5% excluding favorable foreign exchange.

For the first half of fiscal year 2007, revenue advanced 11% to $60 million, or 8% excluding foreign exchange.

Growth was driven by P/T in Asia and Canada, and higher education and school sales in Australia.

Excluding the effect of foreign exchange and the change in intersegment product prices, direct contribution to profit decreased for the second quarter and six months, principally due to product mix and higher sales, marketing and composition costs associated with new business development.

Malaysia exhibited strong year-on-year growth due to Ministry of Education projects.

WileyPLUS continued to gain momentum, benefiting from government funding for new universities.

Microsoft titles are eliciting interest, especially in India.

All of Wiley's Australia's businesses showed strength during the quarter.

The second half of the year, which is the peak selling season for the higher education and school businesses, began on a high note.

P/T reported year-on-year growth of 6% for the six months.

Wiley Canada delivered mixed results for the second quarter, showing strength in its P/T business, but falling short in higher education.

College bookstores in Canada are increasingly filling their orders with used books from the U.S.

In conclusion, at the midpoint of the year, Wiley's financial results are tracking to our expectations.

While we continue to focus on driving results this year, we will dedicate considerable human and financial resources to the Blackwell acquisition.

We look forward to finishing this year on a positive note, while beginning the next phase in the evolution of Wiley as a formidable global enterprise.

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

[OPERATOR INSTRUCTIONS] Drew Crum, Stifel Nicolaus.

Congratulations on the quarter.

My first question is kind of a maintenance item.

The relocation incentive that drifts into the third quarter, should we expect that $0.03 benefit to fall to the bottom in the third quarter?

Yes.

Okay.

Yes.

It's merely timing, Drew.

Okay.

Good.

And, Will, just wanted to get some thoughts from you on the higher ed industry in the U.S.

At 5%, you seem to be outpacing the industry growth.

And some of your competitors have thrown out some growth targets for next year even.

I wonder where you see the industry going?

And for you specifically.

And maybe offer commentary on some of the external issues that have been impacting -- negatively impacting the industry, i.e. used books and internet resellers, and how that's influencing growth, as well?

Sure.

Beginning with much of the industry data is reported on a calendar year basis.

And I think-- so, there's only a few weeks left in this particular calendar year.

And I believe most people are projecting growth in the United States for higher ed of approximately 3%.

When you take into account our performance on a comparable basis, including the effect of our WileyPLUS program which, as I mentioned earlier, we defer that revenue, we are actually tracking quite well to the market.

And we anticipate that throughout the course of the fiscal year, that we will continue to track better than the market.

I attribute that to a couple of different things.

Over the last several years, we have been investing quite effectively in many different alternatives to the traditional textbook.

We have been doing that to try to improve the perception of price and value among students and professors.

And when I say that, I'm not only talking about highly successful technology-based programs and services, like WileyPLUS.

But I'm also talking about lower-cost print versions of a whole range of material.

So we have been on this strategy, actually for quite some time.

The investments we have been making over the last few years have resulted now in product that's being brought to market.

And we are having very good success, not only in the United States, but abroad.

It is undoubtedly true that this is a highly competitive market, and that there are some, as there have been for quite some time, concerns among the academic community about the overall price of textbooks.

When I refer to price, I usually talk about it in the context of value.

And that is, I have made the case over and over again, if a student spends $100, just to use an example, in a particular course, and they find that actually need the material to be successful in that course, I think most students will say we don't have a price-value problem.

Whereas, if they spent $30 or $40 for materials in the course and they never use them, then they have a price-value problem.

So, it's not just about price alone.

It's how these materials are integrated into the curriculum.

And we have been working more closely with faculty to accomplish that, particularly with our WileyPLUS service.

So, consistent with what I have said for some time now, we are addressing the issue of price and value, not through one potential solution.

And that is, it's not just about technology.

I believe it's an effective combination -- or some people talk about a blended versions of both print and electronic.

Not because we at Wiley have all of the wisdom about this.

It's because that's what the market has told us.

Students still prefer to read lots of text with print on paper, as opposed to on a computer screen.

That has been verified by pilot programs and tests that we have done.

On the other hand, what we're finding is we're able to deliver more value to them at a -- more value in terms of lower cost, lower price, and effective pedagogy through the use of online services, like WileyPLUS.

So we're investing in both.

In terms of the future for the market, we feel actually quite strongly that we are on the right track.

We believe that the offerings that we will have, not only in this current fiscal year, but in the future, will continue to be a blend of print and electronic.

We believe that the electronic side of the business, as represented by services like WileyPLUS, have attractive financial characteristics to Wiley.

That is, that we are able to generate, not only incremental revenue, but also improved cash return on investment because of the working capital requirements being less than print products.

And we're also finding that we're able to deliver that at a lower price to students, helping them with their price-value concerns.

In addition, as a result of some initiatives that we have put in place that I mentioned earlier in managing our cost of sales for traditional print products, we are managing our gross margins and profitability in that business, I think, quite effectively.

So we remain very committed to this business.

We feel strongly that publishers like Wiley will continue to have a role to play in higher education, not only in the United States, but abroad.

Hopefully you picked up on some of my comments about the response to WileyPLUS, not only in the United States, but in Canada and throughout Asia, Europe, Australia.

We're finding that that product is having great success beyond geographic boundaries.

Regarding the performance and decisions of other competitors, I really can't comment on exactly what they are thinking or seeing.

What I can tell you is I believe this will remain intensely competitive, and I am very confident that Wiley will play a leadership role in this market.

Well how widespread is WileyPLUS?

How widely is it distributed now?

And maybe talk about the upside from a geographical perspective.

I think the latest information - I'll ask Ellis to correct me if I'm wrong - I believe it's available with over 100 -- .

125 textbook titles, yes.

And about 250,000 units sold so far, obviously biggest in the U.S.

But also a substantial presence in Canada.

We're using it in Australia and in the UK as well.

And testing it in other markets.

So, it's certainly throughout North America.

We're expanding and extending it with respect to the number of titles it covers, and also extending it into the market, as well.

And doing so globally.

Okay.

Last question, maybe you guys could review uses of cash in light of the acquisition of Blackwell.

I noticed you did not repurchase any shares in the quarter.

Yes, Drew, we repurchased some shares in May, at the start of the fiscal year.

Right.

And then when, as you might imagine, our confidential negotiations progressed to a point where it seemed more likely than not, to use an accounting term, that the acquisition would likely be consummated at a point in the future, we began at that point in time, to conservative cash.

We continue to have an open share repurchase program.

We have existing authorization.

So I can tell you through -- from at least June through October, we haven't purchased additional shares, as you have noted.

And -- but we do have the capability of purchasing shares if we feel its the right thing to do at a point in time.

So to this point in time, we have pretty much conserved cash for the acquisition itself to minimize borrowings, when it's finally consummated, somewhere around the end of January, beginning of February.

Okay.

Thanks, guys.

[OPERATOR INSTRUCTIONS] [Robert Riggs], Credit Suisse.

I was just wondering if you could provide any additional detail related to the college textbooks, in particular related to trends and returns, or used books?

Thanks.

Not much-- this is Will.

Not much to report in terms of the returns experience.

Obviously, as we continue to move forward with this migration from print to a combination of print and electronic, that will have a beneficial effect on overall returns rate, obviously on the electronics side of things.

And in terms of used books, for as long as I have been in this business, used books have played a role in the marketplace.

If you go back about, in rough terms, probably about five years or so ago, I believe that market flattened out.

And then it picked up again in the last couple of years, in terms of percentage of total sales, as a number of factors I believe contributing to that.

Certainly some price resistance, this business of price and value that I talked about earlier.

Also increased sophistication in the market, in terms of the availability or the supply of used books from lots of different sources.

And it was facilitated by a whole bunch of intermediaries.

And so that had an effect in terms of increasing penetration.

Right now, I would say it's pretty much stabilized again.

And I think for as long as we talk about this business, you'll have a used book market that will play a role, as it has for as long as I can remember.

Once again, I will state though, that as the business moves from print on paper to electronic, obviously, it will have a profound effect on the used book market.

And we take that into consideration as we look at the investments we're making in that area.

Great.

Thank you.

[OPERATOR INSTRUCTIONS] [Gabor Wagner, Cheng Capital.]

I have three questions, all of them related to WileyPLUS.

First, would you mind discussing for this quarter you have just reported, how much of your textbook segment units were WileyPLUS units, and how much in dollar terms of textbook revenue was WileyPLUS revenue?

Ellis, do you have that?

Yes, we don't report discretely on units by quarter, so I'm reluctant to provide that information.

I can tell you that as of the end -- or the close of the second quarter, we had deferred $3 million in WileyPLUS revenue versus $2 million in the prior year.

So a 50% increase over prior year through six months.

So that's what is sitting on the balance sheet.

I see.

And the second was actually related to deferred revenue.

You reported 19.5% growth in deferred revenue for this quarter, relative to same quarter last year.

What were the factors influencing that growth, other than WileyPLUS?

Principally in that account is the journal subscription business.

Our enhanced access licenses are sold under licenses that run on a calendar year basis for the most part.

So the vast majority of that is represented by increases in journal subscriptions over prior year in the same period.

And also as you note, as I gave you, about $1 million increase related to WileyPLUS.

I see.

And the final thing, in the cash flow statement as I review it, it seems like the outcome wasn't as good this year as last year.

But you noted in the discussion that as you shift to electronic format, there should actually be improvement in working capital structurally.

So I'm wondering if you could comment on this?

Yes.

Most of that happened on the liability side -- side should I say, as opposed to in terms of working capital.

Really, there was some timing with respect to accounts payable.

It may be a bit too technical, but we actually run accounts payable on Tuesdays and Thursdays.

The quarter happened to end on a Tuesday.

So we had a substantial accounts payable run.

It's just -- it's the arithmetic of it.

Also at the beginning of the year, there was carry-forward payable -- accounts payable into the year because of some capital spending that occurred sort of in the latter part of the last quarter of last year, that became essentially an accounts payable in the first part of the first quarter of this year.

So those two factors, and some other sort of timing issues.

But it's mostly on the payable side.

It's mostly sort of a timing-related issue, and a bit of carry over from prior year.

So it's, quite frankly, not disappointing to us.

It's explainable and understood by us.

And how much of this do you expect to reverse in the second half of the fiscal year?

Much of it.

I can't give you a specific number at this point in time.

Okay.

Thank you.

Thank you.

At this time there appears to be no further questions.

I would like to turn the call back to Mr. Will Pesce for any addition or closing remarks.

Thank you for your continued interested and support.

We look forward to speaking with you after the third quarter.

At that time, we will be in our bicentennial year, and hopefully we will have successfully closed the Blackwell transaction.

Clearly, two milestones in Wiley's remarkable history.

Best wishes to you, your families and friends for a happy, healthy, and peaceful holiday season.

Thank you very much.

Thank you.

This concludes today's call.

We thank you for your participation, and have a wonderful day.