使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
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.
- President, CEO
Good morning and welcome to Wiley's third quarter conference call.
I'll begin with an overview of Wiley's performance, then Ellis and I will respond to your comments and questions.
Wiley had another solid quarter, as reflected in the revenue increase of 7%, or 5% excluding favorable foreign exchange.
While all of Wiley's businesses contributed to the year on year growth, our global STM business had a particularly strong quarter.
As I communicated during the second quarter conference call, it's important to analyze operating income and EPS on a basis that is comparable to prior year.
Four 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 nine months was approximately $3 million and $8 million respectively.
Two, a relocation incentive from the state of New Jersey, which was received in last year's second quarter was delayed to the third quarter of this year.
The favorable effect on operating income in the quarter was approximately $3 million.
Year-to-date results were not affected since the relocation incentive is in both years.
Three, an unanticipated bad debt provision of $5 million in the quarter related to the bankruptcy of Advanced Marketing Services, a distributor to Warehouse Clubs.
We do not anticipate any additional disruption to our business as a result of this bankruptcy and we believe we have fully provided for the financial exposure.
Four, tax benefits in the third quarter of this year worth about $1 million and in last year's third quarter of nearly $7 million.
Year-to-date results were affected by tax benefits in this year of over $5 million and in last year of $14 million.
On a comparable basis, excluding the effect of these four items, underlying results for the quarter were revenue up 7%, operating income up 2% and EPS up 5%.
For the nine months revenue was up 9%, operating income up 8%, and EPS up 12%.
Based on year-to-date results, leading indicators and market conditions, we reaffirm our fiscal year 2007 guidance of revenue growth in the mid-to high single digits, and EPS growth in the high single digits.
This guidance includes the unanticipated $5 million bad debt provision, which will be offset by improved operating results, but excludes the impact of SFAS 123R, the aforementioned tax benefits, and the dilutive effect of the recently completed Blackwell acquisition.
As expected, free cash flow is down from last year due to the timing of vendor and author payments, increased capital spending, incentive compensation payments and income taxes, partially offset by journal receipts and trade collections.
The increase in accounts receivable is due to the revenue growth, partially offset by an improvement in days sales outstanding.
Inventories and product development assets increased to support top line growth.
The 6% increase in property, plant and equipment is the result of investments in our UK facilities and technology spending.
I would like to provide some background about Wiley's core businesses, starting with the Blackwell acquisition.
We marked the beginning of Wiley's third century by embarking on a path of growth and expansion.
On February 2nd, we completed the acquisition of Blackwell for GBP 572 million or approximately $1.1 billion, cash of GBP 118 million was included in the transaction.
We anticipate Blackwell revenue of approximately $100 million in the fourth quarter.
As expected, the acquisition will have a dilutive effect on EPS in the fourth quarter of $0.40 to $0.45 per share, including an estimated $11 million increase in after-tax interest, and the estimated effect of non-cash acquisition accounting adjustments.
Blackwell is being merged with our global STM business to form the largest of Wiley's three core businesses with annual revenue accounting for more than half of Wiley's global revenue.
We are pleased with our progress and quite impressed with the capabilities, commitment and professionalism of our new colleagues.
Blackwell is a very well managed company, with a strong reputation in the communities it serves.
It pleases me greatly that several members of Blackwell's leadership team have already assumed increased responsibility at Wiley.
Key accomplishments during the month since we closed the transaction include the announcement of a global organizational structure, the appointment of transition team leaders to drive the merger process, the formation of teams to confirm and begin to generate synergies in critical areas, such as production, sales, marketing, technology, finance, distribution, and customer service, and the retention of key society relationships as well as the addition of some new ones.
While it's early in the process, I'm confident we'll meet the strategic objectives and financial projections that were presented to Wiley's Board of Directors when the acquisition was proposed.
STM revenue for both the quarter and nine months was up 9%, driven by advertising and reference books, journal renewals for 2007 are running ahead of the same time last year.
New businesses and publications acquired during the past year contributed about $1 million to the top line growth in the quarter, and $3 million to the year-to-date results.
Globally, STM revenue was up 7% in the quarter and 8% for the nine months.
Customers continue to take advantage of Wiley InterScience, as reflected in a 20% increase in visits during the quarter.
The amount of online book content that has been downloaded increased significantly.
P/T revenue for the quarter increased 2% but was up 7% for the nine months.
Adjusted for the change in inter-segment prices that is explained in the press release, revenue was up 4% in the quarter and 9% for the nine months.
Strong back list sales from major accounts, as well as new publication releases drove these results.
Several titles were published to coincide with the launch of Microsoft's new Vista software.
P/T's online business expanded, including a revision of our highly regarded treatment planning and clinical record management system, known as TheraScribe, the launch oh the Wiley CPA examination review for Windows and an update of LPI online, our leading management assessment tool.
New interactive mapping functionality for points of interest in U.S. cities was added to Frommers.com, enabling users to set up maps and populate them with hotels, restaurants, and attractions included in our Frommer's guides.
Higher education revenue was up 4% for the quarter, 3% for the nine months.
Adjusting for the aforementioned change in the inter-segment prices, revenue for the quarter and nine months was up 6% and 5% respectively.
WileyPLUS is being embraced by professors and students around the world.
Sales are deferred and the revenue recognized over the course of the semester.
As of January 31, nearly $2 million of current WileyPLUS sales were deferred to the fourth quarter of this fiscal year.
The first WileyPLUS user conference was conducted in November, attracting 60 of our largest customers from universities around the country.
Feedback about the conference and WileyPLUS was quite positive.
In Europe, third quarter revenue was sluggish, reflecting the effect of a tough comparison to prior year caused by the huge success of SuDoku for Dummies.
A strong fourth quarter publication schedule for STM books should bolster sales.
During the quarter, we signed a three-year site license in India for nation-wide access to the Cochrane Library, our evidence based medicine service.
We are pleased to report the renewal of our publishing agreement with the British Journal of Surgery Society.
Results in Asia, Australia, and Canada were mixed.
A strong retail performance benefited P/T in Asia.
In Australia, disappointing school sales were partially offset by solid results in P/T and higher education.
In Canada, P/T performed well, while higher education was sluggish.
In summary, with one quarter remaining, Wiley is well positioned to meet or exceed our guidance for fiscal year 2007.
While we are devoting considerable time and effort to the Blackwell acquisition, we are focused on a successful finish to this year.
We've begun Wiley's third century with momentum in our core businesses, the largest acquisition in our history, and a company culture that is a source of competitive advantage.
With that as background, we welcome your comments and questions.
Operator
Thank you. [OPERATOR INSTRUCTIONS] And our first come questions from Drew Crumb with Stifel Nicolaus.
- Analyst
Good morning, it's Stifel Nicolaus.
Will, I wonder if you can give us an update on the progress in the STM business in Asia year to date, maybe in the quarter.
And you also referenced, you expect improved operating results in the fourth quarter.
Maybe you could provide a little detail around that.
- President, CEO
Sure, Drew, the statements I'll make about STM in Asia are really more qualitative than anything else.
- Analyst
Okay.
- President, CEO
As most of you probably know our STM business is truly a global business.
We have had historically three major publishing centers, the United States, the UK, and Germany.
What we're doing in Asia is, we have done quite well selling licenses to our journals, both covering print content as well as electronic, as well as STM books.
What we have been doing in China recently is staffing up to create content -- published content in Asia that will be disseminated around the world.
So the major investments we were making there are primarily on the front end of the business in terms of editorial and project development.
And those plans are well underway.
In addition, as I have been reporting for several quarters now, we continue to increase sales in several markets throughout Asia in our STM business.
Most notably in China, and the growth in China has been very strongly for online access to our STM journal content.
We continue to be very pleased with that progress.
Regarding the fourth quarter performance and any statements about that, I'll defer to my colleague Ellis Cousens.
- EVP, CFO, COO
Yes.
I guess the statement was about the STM book program, that we're in good position in the fourth quarter with releases this year versus last year.
So we see a -- you know, kind of a strong releases in the fourth quarter for STM.
- President, CEO
Yeah, if that was specifically, Drew, what you were referring to, that's coming, I think mainly out of our UK publishing program, and we're very confident about those publishing schedules, so, you know, frequently quarter to quarter can be influenced by either major editions -- first editions being published or revisions, and that's the case in this particular quarter.
- Analyst
Okay.
I wonder if you guys could provide additional color around the expected dilution in the fourth quarter.
You have given detail behind the interest expense and it looks like the other major slug of that is coming from the amortization of the acquired publishing rights.
Are you guys recognizing or expecting to recognize any additional integration costs, or any cost synergies or revenue synergies offsetting that dilution?
- EVP, CFO, COO
Drew, the fourth quarter numbers are impacted heavily by the two things you noted, which are the heavily by the two things you noted, which are the acquired pub rights and the interest expense.
I guess I should proceed actually, anything I say with the following cautionary note.
We have a third-party firm that's doing an independent valuation of the acquisition and assigning values to the assets and liabilities.
That process a about midway through, so that's not done yet, and we have yet to obviously then -- once that's concluded discuss those -- those findings with our independent accounting firm.
So all of this is-- is our best shot at it, it's kind of a guess at it, but it's a well-educated guess at it, so I just want to precede it with that.
In terms of where the dilution is coming from, there are a couple of things, one of which is meaningful that will effect the fourth quarter and a portion of next year, not all of next year, so the thing you shouldn't do is take that 40 to $0.45 and multiply it by four.
That would be a mistake.
I'm not saying you were doing that, but I'm just saying I would caution you against doing something like that.
Two of the items that will have a partial effect-- well an effect in the fourth quarter and partial effect next year, relate to -- we acquire along with the business -- we acquire assets and liabilities, one over those liabilities is the deferred subscription liability, and we have to reduce that liability, which eventually gets recognized in to revenue, and therefore, in to gross profit, and then in to EBITDA, operating income, and EPS, all the way down the line.
That is reduced by the amount of expenses that were incurred in-- in capturing that or realizing that-- that liability over the course of a period prior to our acquiring Blackwell, which was February 2nd.
And that-- I'll call it is haircut for a moment, it is not inconsequential, is relatively substantial.
It is affecting the fourth quarter and it will affect the remaining quarters for the calendar year of 2007, which comprises a portion of our 2008.
So we'll be through that by the end of calendar year 2007.
Another piece, which is significantly smaller, relates to the inventory that we'll acquire along with the acquisition again, and it's sort of the flip side of that same notion.
There are expenses associated with creating that inventory, which will not be a part of our expense base.
So to eliminate the effect of what might otherwise be a higher than expected gross margin on cost of sales, we have to write-up that inventory, as opposed to what one might logically think is to write it down or take it over on a carry-over basis.
So those two things will work and impact heavily in the fourth quarter, the first one in particular, the second one far less so and far less have an effect in fiscal 2008.
When we discussed the acquisition back in December, and you participated and others participated in that discussion, when we had our meeting with investors and-- and broadcast that fairly broadly and webcast that, we then talked about our estimated, or what we anticipated in terms of dilution would be about three years or so.
I can tell you that our current view of that, again, with that helpful warning about not having completed a process yet, is that it will be better than that.
Meaning that the dilution will be shorter than three years.
I can't tell you substantially shorter.
I can't tell you what the numbers are at this stage but the effective dilution will be less than what we anticipated back then.
- Analyst
Ellis, when you say dilutive, what are we comparing that against?
Your fiscal year '07 guidance or--
- EVP, CFO, COO
With respect to the fourth quarter, yes.
So the $0.40 to $0.45 is-- we provided guidance with respect to EPS being high single-digit growth off of last year's base excluding against, again, the tax adjustments that we have alluded to that we'll talk to and the 123R effect.
- Analyst
Okay.
- EVP, CFO, COO
That $0.45 would be subtracted from the result of that versus last year.
- Analyst
Got it.
- EVP, CFO, COO
When I talk about forward dilution, I'm talking about what would have been had the acquisition not been made.
- Analyst
Okay.
Last question, are you guys able to share any growth or profitability metrics with Blackwell as-- you know, they exited calendar year '06?
- EVP, CFO, COO
Not at this stage.
I think we should wait until June when we have a better grasp of all of that information.
We'll actually provide more guidance with respect to that when we file an 8-K around the middle of April.
We're required to file 75 days post-acquisition a pro forma with respect to that kind of information.
You'll see more in April and you'll hear more again in June.
- Analyst
Is there any seasonality with the business?
You guys are expecting about a $100 million contribution from Blackwell in the fourth quarter.
Is that a fair run rate without the year or is there some seasonality with this business?
- EVP, CFO, COO
Again, the business roughly parallels our existing a global STM basis, so you should take it on the same basis.
- Analyst
Got it.
Okay, thanks, guys.
Operator
Our next question comes from Allen Zwickler with First Manhattan.
- Analyst
Hi.
I'll try to be a little less complicated, and I may have missed this in the translation, you said that you had a customer that either went bankrupt or had a bad receivable, but that you were including that -- you weren't changing your guidance and you were running that through the P&L.
Does that imply the business is better than you expected because you aren't expecting that?
I just wasn't clear about how you were talking about that particular situation.
- President, CEO
Alan this is Will.
- Analyst
Yes.
- President, CEO
I'll start and perhaps Ellis will add to this.
It is absolutely the case that it was unanticipated.
It's also from our point of view, we feel that we're very much on top of that situation, and we do not anticipate any other bad news relative to it, and we're pleased to report that as a result of strength in our underlying business, you're quite correct.
I think you have it right, and that is the guidance I gave you, although we had not anticipated in the past, that $5 million hit.
We have taken the hit and our business is performing better, so we're going to more than offset that hit and be able to stick to our guidance.
- Analyst
Now, is that 5 million the entire receivable from that customer or is that just a current -- I mean, could you-- I'm not trying to be too picky I just want to understand, sometimes in the world we live in, it's difficult to get to the bottom of that stuff.
- EVP, CFO, COO
At this stage the 4.7 represents the total amount of the receivable.
We just have really no idea how that will work its way through bankruptcy and it will be quite some time before we know how it will come out and if there's any favorable effect relative to the 4.7 in time.
So given the unpredictableness of how that might turn out, and with respect to amount and time or if there's even anything at the end of it, we've chosen to be, you know, treat it conservatively and say, listen, we're going to take the whole hit.
This way -- I wanted to avoid sort of a serial kind of thing.
- Analyst
That's right.
- EVP, CFO, COO
A hit here and then another one-- I wanted to get through it and say, okay.
Take the hit, swallow it and get on with life.
And if there's a positive outcome somewhere down the line we'll let you know that too.
- Analyst
That sounds great.
One follow-up, I seem to remember in the last week or so that Barnes and Noble said their business was kind of soft.
Could you reflect-- I know you have been doing more online business, with the Amazons of the world, et cetera, could you just maybe talk a little bit about how, you know, that part of the business is performing?
I mean they are a pretty big customer and a pretty decent indicator of what is going on out there.
- President, CEO
I think one of the additional pieces of information that came out of the Barnes and Noble news-- it wasn't only about top line.
It actually was more about profits and the fact that a lot of their top line growth was coming through membership in these clubs that offer discounts, and so I would just point out to you that that's-- I think an important distinction.
The other point I would make is, we are very pleased with the way our P/T business is performing, and I made a comment earlier, which I'll repeat here, and that is that we're showing performance and growth very consistent with our expectations across all of our major accounts, which includes Barnes and Noble, certainly you would throw Borders in there as well as Amazon.
As far as we're concerned we understand that they have had some news that some of their investors would consider to be disappointing in terms of earnings.
From our point of view, we're performing quite well through that a particular outlet as well as through several others.
And I will also say to you that the terrific growth that we have experienced for several years now in online accounts like Amazon is continuing and we're very pleased about that.
- Analyst
If I could sneak in one more.
There obviously had to be some overlap with Blackwell on some journals just because you both are in so many different categories.
Has that be sorted out yet?
Is there any indication whether or not there's going to be any, you know, disruption or anything that, you know, is worth noting at that point?
- President, CEO
When you say overlap, do you mean publishing in the same--
- Analyst
Yeah, I mean to-- yeah, well, obviously there's so many journals, but I'm talking about really within the same type of category, whether it be neurosurgery or some of that stuff that I can't even pronounce.
- President, CEO
Well, the nature of this business is that--you know, the fact that we may have more than one journal in that serves a particular segment of a market is not considered to, by us or by though people who read it, as an issue.
It's not the same as maybe the kind of competition you would experience in other markets, and I would also say that's no different than in other parts of Wiley's publishing.
We publish textbooks in similar areas that has to do with maybe more or less rigor depending on whether it's an introductory course in a particular school or more demanding somewhere else.
And my point about this is, we did not anticipate, nor are we finding, any areas where, because we have a journal, Wiley has one in a particular area and Blackwell has one, that it's creating a problem for us.
In fact, again to repeat a comment I made that I don't want to get lost in any of this, is that one of the accomplishments-- it's only been month, but that I have mentioned earlier is, you know, Blackwell is a major society publisher that-- those relationships, one month in to the agreement have gone really quite well, and in fact, we have had some success in securing some new ones.
So I really do want to emphasize that it is very early in this process, and notwithstanding some of the --you know, things about how you have to account for these things, we feel good about where we are and that includes the people, the publications, the society relationships, and our ability to generate the value that we anticipated when we made the proposal to our board.
- EVP, CFO, COO
Just two more things about that, Alan.
It is certainly-- as you would expect before the acquisition, we knew the full list of Blackwell journals that were being acquired.
So there was certainly nothing of a surprise in terms of what was in their list.
And the second point is along the lines of what Will just said is that you probably know in our own business, even prior to the acquisition, we published multiple business journals in the same areas like polymer science, chemistry and so forth.
Those journals lie on top of one another.
Each journal does not have all of the content.
Researchers want all of the content that is available within a particular discipline.
- Analyst
Thank you.
- President, CEO
You're welcome.
- EVP, CFO, COO
You're welcome.
Operator
Once again that is star one if you would like to ask a question at this time.
And next we're hear from David Lewis with JPMorgan.
- Analyst
Hey, good morning, guys.
Couple of questions, I think you guy s were considering organizing the five publishing groups.
I know you guys have plenty on your plate right now, but is that coming in the next few months or when should we look for that for reporting purposes?
- President, CEO
In terms of reporting structure, we are going to report-- first of all the five publishing groups are disciplines within our-- what we're going to call Wiley Blackwell-- which-- not to confuse is-- essentially we'll come up with some business description of it, but it's a combination of what previously was STM business and what is Blackwell.
So there are five disciplines as there are multiple segments or categories that we publish.
In P/T we don't report those separately.
They roll up in to a business called professional trade.
Here these roll up into a business.
It's how it's managed, sort of from an internal perspective.
When you get to the top leadership of the business, It is one business.
For the next five quarter, meaning the fourth quarter of fiscal 2007, and the four quarters of 2008, we will report Blackwell as a separate segment.
So you'll have existing segments, plus Blackwell as a separate segment.
We'll be-- we'll be spending a lot of that time essentially getting them up on to the same reporting and general ledger systems that we have.
And at that point in time, beginning in fiscal 2009, we can report then on a consolidated basis from a segment perspective.
Certainly, you know, when we roll up the P&L it will be consolidated Blackwell plus Wiley.
But on a segment basis, Blackwell will be a separate segment for the next five quarters.
- Analyst
Okay.
Great.
Thanks.
- President, CEO
You're welcome.
- Analyst
And could you give a little-- can you give us the effective interest rate on the financing?
- President, CEO
Yes, I can.
I'll -- I can give you the short answer, which is it will be about 6.5%.
- Analyst
Okay.
- President, CEO
Which includes a projection of, kind of the floating portion, which I wouldn't begin to be a good predictor for on a short-term basis.
It's floating at 3 months LIBOR, so I'm assuming rates would be flat on the portion of-- of the debt that is not swapped.
We swapped a substantial portion of the debt, about $660 million to fix, so we're essentially paying fixed rate at about 5.08% plus the margin associated with the financing itself.
If you add that together with the portion that is floating, which I'm assuming will be, quite frankly, not volatile over the next-- you know, number of quarters, the rate on the floating space actually a little bit higher, because on the swap we actually had a positive transition because the yield curve is slightly inverted from three months out to about three or four years or so, so there's a positive benefit to the swap both in terms of mitigating volatility on interest.
But also in terms of bringing down the effective rate.
The 6.5% also includes a little bit of write-off of fees associated with the financing that it replaced which was an existing revolving credit facility, so that's a book rate.
The cash interest rate be a little bit lower than that.
- Analyst
Okay.
And just one more.
Another modeling question.
The working capital CapEx, tax rate, I guess those three, if you could just give us a little more color on those items.
I know, certainly working capital with the STM business it is more attractive in CapEx.
I know you guys said in December [it was] pretty light.
- President, CEO
I think we should wait until June to get in to a discussion to that extent on those kinds of matters.
- Analyst
Okay.
Great.
Thanks.
- President, CEO
You're welcome.
Operator
[OPERATOR INSTRUCTIONS] It appears there are no further questions.
At this time I would like to turn the call back over to Mr. Will Pesce for any additional or closing remarks.
- President, CEO
Thank you for your continued interest and support.
We look forward to speaking with you again in June.
At that time we will discuss our full-year results and provide another update on our progress with the Blackwell acquisition.
Thank you very much.
Operator
That does conclude today's conference.
Thank you for your participation, and have a great day.