John Wiley & Sons Inc (WLY) 2009 Q4 法說會逐字稿

Welcome to the John Wiley & Sons conference call.

As a reminder, 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.

Welcome to Wiley's year end conference call.

I'm with Ellis Cousens, Executive Vice President and Chief Operations Officer; and Brian Campbell, Director Investor Relations.

I'll provide an overview, then we'll respond to your questions.

Fiscal year 2009 was unlike any other in my 20 year career at Wiley.

Our professional/trade business was hit hard by economic conditions, which resulted in sharply reduced spending by consumers and professionals, as well as tight inventory management by major accounts.

STMS finished the year strongly and exceeded our expectations for the full year.

Higher education performed well in fiscal year 2009 despite a soft fourth quarter, which we expected.

Foreign exchange had a significant and unprecedented effect on Wiley's reported financial results.

Compared to prior year, foreign exchange reduced reported revenue by $120 million and EPS by $0.50.

All the numbers that I'll be referencing during my remarks exclude the effect of foreign exchange, both transaction and translation effects.

Wiley's full year revenue growth was 3% ahead of prior year, while EPS increased by 22% excluding an unusual tax benefit, which was reported last year.

Earnings reflect the top line results, reduced incentive compensation, lower interest and prudent management of expenses.

Wiley's gross margin in fiscal year 2009 of 68% was essentially the same as prior year.

Operating and administrative expenses increased from prior year by only 1%, reflecting the combined effect of contingency plans, Blackwell integrations cost savings and lower accrued incentive compensation.

Free cash flow in fiscal year 2009, of $164 million, increased over prior year by 40%.

Cash from operating activities principally drove the improvement of backlog.

And cash collections of approximately $30 million, caused by the journal billing delays in the third quarter, will be substantially cleared in the first quarter of this fiscal year.

Free cash flow was used to repurchase approximately 1 million shares for $35 million; pay dividends of $30 million; consummate several small acquisitions, totaling $24 million; and reduce net debt by $63 million.

Year end net debt, which is long-term debt less cash and cash equivalents, was $720 million.

Wiley's fourth quarter revenue increased 8%, while EPS increased 25%.

These results were driven by a strong STMS performance and the resolution of the aforementioned journal billing delays.

Professional/trade revenue was down from last year's fourth quarter.

As expected, higher education's revenue was below prior year due to a planned reduction of a spring promotion.

While navigating through challenging market conditions, I believe we are continuing to distinguish Wiley from our competitors.

Two of our three global businesses met or exceeded our expectations.

All of our businesses gained market share.

The Company generated strong free cash flow, which we used to invest in our business, reduce debt, pay dividends and repurchase Wiley shares.

Beyond the financial results, we remain keenly focused on our noble mission of promoting knowledge and understanding around the world.

We are providing more access to more content by more people, never before in Wiley's history.

While the Company operated under contingency plans throughout the year, we continue to invest in enabling technology and we continued to introduce new business models.

Our collection of business, STMS, professional/trade and higher education is unique in the industry.

Our brands are highly regarded by customers, authors and partners.

A significant portion of revenue is recurring and generated online.

And we are serving our customers through multiple channels of distribution and we are doing it globally.

Most important, Wiley's culture, built on a solid foundation of ethics and integrity, is as strong as ever.

Wiley was named to the "New Jersey Bus." "best companies to work for in New Jersey" list.

The evaluation process include a survey of randomly selected colleagues and an assessment of the Company's benefits, policies and practices.

Wiley's inclusion on various best company lists in recent years, has enhanced our profile in the industry and with prospective colleagues.

I recently conducted a series of town hall meetings with my colleagues, focusing on Wiley's performance, as well as future challenges and opportunities.

During these meetings, I communicated my strongly held view that the current state of our industry and the economy represents a wonderful opportunity to distinguish Wiley from the competition.

I urged our colleagues to continue investing in enduring relationships with authors, partners and customers, while sustaining Wiley's culture.

Speaking about Wiley's culture, I'd like to share three of the many messages I received from my colleagues.

"I want to thank you for the town hall meeting today.

It was frank and informative, without being somber.

For somebody just starting a career in publishing, it's reassuring to know that Wiley's leadership is taking a long-term approach." Another colleague wrote, "I just wanted to get in touch again, as I did after the last time I heard you speak, to thank you for planning this event.

It's so rewarding to be part of an organization where people clearly care about the work they do and the people they work with."

One more.

"I want to thank you for taking the time to conduct town hall meetings over the last few days.

I feel very fortunate to work for a Company where our leaders consider the concerns of their colleagues.

I am honored to be able to do the work that I love for Wiley.

I am proud to be part of this organization and want to thank you for leading us through this very trying time."

I'd like to provide some highlights about each of our global businesses.

Once again, all numbers exclude the effect of foreign exchange.

Global STMS revenue in fiscal year 2009 advanced 9%.

Revenue growth from journal renewals, new business, global rights and books was partially offset by lower sales of back files, reprints and custom publishing.

A $17 million acquisition accounting adjustment, which reduced revenue in fiscal year 2008, also contributed to the favorable comparison to the prior year.

Direct contribution of profit in fiscal year 2009 advanced 14% from prior year.

The year-over-year increase reflects top line results, including the aforementioned acquisition accounting adjustment, partially offset by higher editorial fees due to the edition of society journals and increased performance-based compensation.

Direct operating expenses increased 3% over prior year.

In the fourth quarter, STMS revenue advanced 17%, bolstered by the resolution of the third quarter journal billing delays, which shifted about $4 million of revenue into the fourth quarter.

Direct contribution to profit in the quarter increased by 22%.

In fiscal year 2009, journals performed well in all regions, mainly due to healthy renewals and new business.

The acquisition accounting adjustment recorded last year also contributed to the year on year comparison.

In fiscal year 2009, STMS signed new contracts with societies to publish 32 journals; renewed or extended contracts for 87; while not renewing nine journals.

Journal licenses provide academic, government and corporate customers with online access to multiple journals.

In the fourth quarter, agreements were signed or renewed with universities, library consortia and government agencies in the United States, Norway, Japan, China, Brazil, Canada, Greece, Chile, Denmark and India.

We achieved an important milestone in the early part of fiscal year 2009 by migrating online journal content, customers and access licenses from Blackwell's Synergy platform to Wiley InterScience.

The migration included approximately 29,000 customers, over 2 million licenses and nearly 2 million journal articles.

Book sales, which account for approximately 18% of STMS revenue, were up 5% over prior year.

Market weakness in the US and delayed publications in Germany contributed to these results.

Online book sales increased approximately 20%.

In fiscal year 2009, global professional/trade revenue declined from prior year by 10%.

The decline reflects a weak retail environment and tight inventory management, particularly in the United States.

Europe, the Middle East and Africa and Canada recorded modest revenue growth.

Professional/trade direct contribution to profit in fiscal year 2009 was down significantly, reflecting the revenue shortfall; additional inventory and royalty advance provisions; and a bad debt recovery in the prior year.

The decline was partially mitigated by prudent expense management, principally in advertising, sales and marketing, as well as lower performance-based compensation.

Direct operating expenses were essentially flat with prior year.

In the fourth quarter, revenue declined 10%.

While direct contribution to profit fell 38%.

The decline was due to lower revenue, higher inventory and royalty advance provisions, and the timing of performance-based compensation accruals.

In the US, all outlets contributed to the down year.

On the bright side, the custom publishing team drove a year on year sales increase of 11%.

The picture in the UK was mixed.

Sluggish sales in the retail channel were partially offset by growth in online, wholesale and library.

In Germany, the book market held up reasonably well.

Retail markets in Asia, particularly Hong Kong, the Philippines and Singapore, were sluggish, as were corporate sales in India.

Revenue was up in Canada.

Wiley became the official publisher of the Graduate Management Admission Test Study Guide.

In March, the 12th Edition of top selling official guide for GMAT review was released worldwide.

In March of 2009, as part of a multi-year agreement with Meredith, Wiley began publishing Better Homes and Garden books and other brands such as Family Circle and Food Network TV.

Wiley and General Mills signed an agreement to renew our publishing partnership.

As a result, Wiley will continue to publish cookbooks under the Betty Crocker, Pillsbury and other General Mills brands.

Wiley Canada entered into an agreement with the Vancouver Olympic organizing committee, becoming the official publication partner for the 2010 Winter Olympic and Paralympic Games in Vancouver.

We will produce commemorative books, game reports and custom publications.

For the fiscal year, Frommers.com maintained its top position by posting 137 million page views and nearly 29 million visits.

However, these results were lower than last year due to the effect of economic conditions on travel.

Whatsonwhen.com was rated as one of the top travel Websites by the Independent Newspaper.

Launched in November 2008, the new Dummies.com generated 29 million page views by fiscal year end, a 23% increase over prior year.

11 million unique visitors represented a 21% increase.

Users are spending 17% more time on content pages.

Cliffnotes.com recorded year on year increases of 5% in page views and 21% in unique visitors.

Global higher education revenue in fiscal year 2009 grew 6%.

Strong growth occurred in every region and in nearly every subject category.

Growth was strong for the sciences, mathematics and statistics, the social sciences and engineering and statistics.

In the US, higher education's revenue growth outpaced the industry.

Contributing to these results were a strong front list, higher than expected revenue from acquired textbooks, solid growth in sales of Microsoft books and the continued success of WileyPLUS.

Direct contribution to profit in fiscal year 2009 fell 3%.

The decrease reflects prior year contingency planning, which significantly curtailed expenditures in fiscal year 2008; higher performance-based compensation in fiscal year 2009; incremental costs associated with newly acquired books; and increased spending to support a large front list.

In the fourth quarter, revenue fell 5%, reflecting the effect of a planned reduction in a spring promotion, as well as higher returns.

Direct contribution to profit for the quarter was down from prior year.

The decline reflects prior year contingency planning, which significantly reduced operating expenses in last year's fourth quarter, higher performance-based compensation and increased spending to support a large front list.

All WileyPLUS metrics improved in fiscal year 2009.

WileyPLUS now accounts for 9% of global higher education revenue.

Full year billings increased over prior year by 38%.

While digital only sales grew by 70%.

WileyPLUS sales outside the United States represent 15% of the total.

Validations and usage rates also increased from prior year.

Wiley received a 2009 Innovation Award at the Mark Logic User Conference in May.

The award recognizes Wiley Custom Select, which was recently launched by our colleagues in higher education, with the support of the Web publishing technology team.

Wiley Custom Select helps instructors build customized course materials quickly and efficiently.

In fiscal year 2009, custom sales increased by approximately 25%.

In the United States, community colleges are receiving significant funding from the recently enacted Economic Stimulus Bill.

Under the New American Opportunity Tax Credit, most students will receive a tax credit for the cost of their textbooks.

Unfortunately, budget cuts are taking the toll on higher education in some states, particularly California.

In Australia, the federal government announced its intention to launch the national broadband network, which will support various digital initiatives in education.

In the UK, while enrollments are healthy, many research universities are facing budget cuts.

Wiley is partnering with the American Hospitality Training Institute, an online provider of hospitality training for students outside the US who are interested in working for US based hotels and resorts.

Higher education and Learning House agreed to create online courses based on Wiley textbooks.

Leaning House is an online education solutions partner that helps small colleges and universities offer and manage their online degree programs.

Higher education expanded its partnership with Amazon to offer some Wiley textbooks for sale through the Kindle DX.

Books are set to go live on the Kindle store this summer.

In conclusion, I would certainly characterize fiscal year 2009 as a very demanding year.

I'm proud of our accomplishments and grateful to my colleagues for the leadership they provided.

In fiscal year 2010, projected operating performance improvements in each of our businesses and the positive effect of debt reduction, will be partially offset by a higher tax rate and the effect of performance-based incentive compensation plans.

We anticipate that the effective tax rate will increase by 4 to 6 points in fiscal year 2010.

On a currency neutral basis, we are projecting EPS growth of approximately 10%, from a base in fiscal year 2009 of $2.30, which excludes foreign exchange transaction losses of $0.15 per share.

While we anticipate revenue growth on a currency neutral basis, top line results will be highly dependent on economic conditions around the world.

While library budgets well be tight, STMS, bolstered by Blackwell, is well positioned to get its fair share of that business.

We anticipate a slow recovery in retail markets.

Therefore, we expect professional and trades revenue growth to be stronger in the second half of fiscal year 2010 than in the first half.

The strength of our global brands in print and online will help us outpace the industry.

We will also benefit from the full year effect of the Meredith and GMAT agreements.

In higher education, we have a large front list, featuring several of our franchise brands.

In addition, we believe WileyPLUS growth will continue to be strong around the world.

As stated in the third quarter, I cannot predict the future with certainty but I can state with conviction that we will continue to lead Wiley in the manner in which you are accustomed.

We will execute our plans carefully, while managing our expenses and cash prudently.

We will generate strong free cash flow, which will be used to reduce debt and pay dividends.

We will make our content more accessible and more discoverable to realize the vision of all Wiley, all the time.

We will invest in enduring relationships with authors, partners and our colleagues.

And we will sustain Wiley's culture because it's a tremendous source of competitive advantage.

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

Thank you.

(Operator Instructions).

Our first question comes from Drew Crum with Stifel Nicolaus.

Great.

Good afternoon, everyone.

Let me start with the processing delay.

It looks like you guys picked up $4 million of revenue from that in the fourth quarter.

Is there any risk that that $30 million that accompanies that is not collected as you look to fiscal year '10?

And just wanted to get a sense on timing of the collection of that revenue or the cash, rather.

Yes, Drew, this is Ellis.

The vast majority of that will have been collected by the end of June.

All but about maybe $5 million or so is collected as we sit today.

So the risk is quite small.

And the balance of the $5 million coming over the balance of June, we said first quarter to be sure.

But the rest of it comes substantially in June.

There's a little piece that sort of hangs out a little bit later in the year but that's not atypical, quite frankly, from prior years.

And Ellis, should we expect that $3 million of revenue to be recognized in the first quarter?

Is it similar to the cash collection?

Essentially, the deferred liability is set up -- I don't want to get into the accounting of this too much, but essentially there's no receivable associated with those collections and those licenses.

So we've recognized revenue.

We did a catch-up, as you noted and Will noted, in the fourth quarter related to it and the earnings release as well, related to revenue that had moved from the third into the fourth quarter because we had not invoiced all of the customers yet.

So we recognized revenue against those customers who were invoiced in the fourth quarter, meaning through the end of April.

Some of that was catch-up and some of that would be normally recognized within the fourth quarter.

The rest of that -- so we're trued-up as of the end of April.

from this point forward, with respect to calendar 2009 licenses, that revenue will be, shall I say, normal over the balance of the year.

There's nothing left, other than cash, with respect to what happened related to those delays that moves out of last year into fiscal 2010.

Okay.

Got it.

And then related to that, the scientific journals business, I think one of the strongest quarters we've seen in terms of organic growth.

Even if you back out that processing delay, it looks like about 16% growth, X foreign currency.

Just want to get a sense if there are any one-time items in that number?

And I know you're not prepared to quantify what you're looking for in terms of growth in 2010 but just wanted to get your sense as to how calendar year '09 looks versus calendar year '10, when you consider the budget issues for that business?

Yes, Drew, I can say that in the fourth fiscal quarter, especially the last couple of months, there was a very strong push within the business to close out a lot of business.

In part, sort of making up for or catching up with respect to the processing delays that we had from the third quarter.

So we did, in fact, sign a tremendous amount of business in the fourth quarter.

I would say the vast majority of it, however, was normal business, as it were.

It's just that it sort of backed up into the fourth quarter, so-to-speak.

The balance of calendar 2009 and how that affects 2010 is essentially, you can look at -- I wouldn't necessarily just take the fourth quarter and roll that forward for the next eight months.

I think that would be a mistake to do that, certainly.

There still is a fair amount of revenue that relates to things like books, corporate sales, reprints and so forth and advertising, that is still yet to be captured, in essence, and that business yet to be done.

So, it would be quite dangerous to take that and extrapolate forward.

Okay.

And is there any update on Blackwell and the synergies you expect to recognize in fiscal year '10?

And maybe related to that, can you confirm that you're through the integration spending?

Yes, we are through the integration spending.

I'll take that first.

There is some very minor projects, which you've alluded to in the past, that will go beyond the end of fiscal 2009.

They're extremely minor.

I'd say the vast majority of that which would result in cost savings are past.

So we've realized the cost savings that we will realize into the future, on a running rate basis, so-to-speak.

So meaning that not quite literally but let's say on the last day of April, April 30, from that point forward, we're on a clean basis with respect to integration savings.

Other than maybe some subletting of some real estate space, that kind of thing but that's relatively minor.

So I can report that we had posited about $30 million in savings.

We've gone through a number of times, analytically, what that means.

I think we're relatively comfortable that we've gotten that.

It's a little bit difficult to decipher, there's additional savings.

Some of that relates to foreign exchange translation on the expense side outside of US.

And some of it relates to, quite frankly, some of the cost savings that we put in place over the course of this year to offset the significant softness that we saw in professional trade.

It gets somewhat difficult to decipher some of those savings because whereas, some of those savings are in professional/trade for example, some of them, in fact, are in shared services, for example.

And at times, it becomes a little bit of a fool's errand to try and separate whether or not a cost savings came from integration activity or from doing something differently than you might have done otherwise.

So, all that to say that, we're relatively comfortable with the cost savings figures that we posited at the beginning.

That we've gotten there and that the integration work is substantially done.

Okay.

And then on the professional and trade business, just want to get a sense as to what you're hearing from your retail partners in terms of planned inventory levels, maybe for the first and second quarter?

This is Will, Drew.

Hi, Will.

How you doing?

Good.

I would say that, just to emphasize the point that, there were two things that I believe effected our professional/trade business in fiscal year '09.

One is the retail market conditions that we spoke about and it's reflected in so many ways, at the point of sale, store traffic, all sorts of things.

And then on top of that, the fact that major retailers really did tighten up inventories beyond what we have ever experienced with them.

And so our belief is the -- in terms of the inventory management part of that, so there was an adjustment that we took a hit on, if you will, in fiscal year '09 and we think that is largely behind us.

It is now at the so-called "normal" rate or "normal" pace that we would expect from them.

And that's a good thing.

That's one of the things that we're counting on going forward in fiscal year '10, that that correction is now in place.

And that with reasonable levels of sell-through, that we won't take the hit from that.

And then, so what we're left with is the gradual recovery, and I emphasize that's what we're assuming, in retail markets.

On top of that, although you didn't ask it specifically, it is in the context of our professional/trade business.

I would also want to reiterate that we will get the full year benefit of these partnership agreements that we signed late in fiscal year '09 with Meredith and GMAT.

Not only have those agreements been signed, they've been -- we're operating under them now.

We're actually generating revenue.

So, we didn't have the benefit of those agreements in '09.

So, if you take all those things together, you start getting a picture of a revenue performance in '10 versus '09 that we feel pretty good about.

Okay.

Thanks, guys.

Our next question comes from [Adrian de Sainhela] with [Exane].

Yes, hello, good afternoon, everyone and thanks for taking my questions.

I would have two of them, actually, if I may.

The first one concerns higher education.

Can you give us some color on how you see the higher ed markets growing in calendar 2009?

Yes, this is Will.

The first is, the market was pretty healthy and in fact, is healthy as it's been in years.

And the market date is usually on a calendar year basis.

So let me talk about calendar year 2008.

And then, when you look at calendar year 2009, so far, so good.

And there's no doubt that there is growing concern among students and parents, frankly, about the cost of higher education.

So far, at least, our business and the industry has held up reasonably well.

I would suggest that growth in the marketplace somewhere in the vicinity of the mid single digits is not unrealistic for the higher education industry in the United States.

I am not in a position where I could state with confidence what I think it will be outside the states but I think it is reasonable to assume that somewhere in the mid single digits is certainly possible.

The higher ed, the market would be somewhat affected by economic conditions and has been in terms of the student loan market.

We're getting a little bit of help from the US Federal Government.

I think I pointed out in the last conference call, I can't recall a time when the US Government actually put tax policy in place that included the cost of instructional materials at the higher education level.

And I do think there will be some benefit to that.

And then tied to the growth, we're anticipating a pick-up in the move from print to electronic.

We actually think these kind of economic conditions make online delivery of services like we have, products like we have with WileyPLUS, will do well in this environment.

So, that's how I would characterize the higher ed market.

Okay.

Thank you for the very interesting answer.

The second question I would have is about STMS revenues.

Do you still expect those revenues to grow in 2009, despite the library budget pressure that you mentioned, especially in the UK?

Yes, this is Will again.

We don't normally provide specific guidance about our individual businesses on a going forward basis, other than for me to say that our current expectation is that we will have, on a currency neutral basis, growth in all three of our businesses.

So, I think it is fair for you to assume that.

And I think it is worth just to take another minute or two on this because sometimes people can trip over calendar years and fiscal years.

So when you take a look at Wiley's fiscal year reporting basis, we're in fiscal year '10 and it ends April 30 of next year.

The calendar year 2009 is a business that's pretty much locked in at this stage.

So we have pretty good visibility, as I know some of you like to say about that revenue in STMS.

And the budget conditions that we're all concerned about, in terms of effect on our current fiscal year, will be mainly in the period from January through April of this fiscal year, January through April of 2010.

And a comment or two about that is, our Company and our industry, we've been dealing with tight library budgets in the States and abroad for a long time.

But I just want to be clear that we all feel that this is going to be a tougher marketplace than what we may have encountered in the past and obviously, that's a challenge for us.

But the reason we feel pretty good about our situation and when I made the comment earlier, we can't -- the market is what the market is.

What we can do is operate at the highest level we possibly can to make sure we get our fair share of the business.

And our share fair share of the business, for me, relates to the quality of our journal collection, the combination of Wiley and Blackwell.

Each of those companies separately, pretty impressive collections of journal content.

Put them together, and it really is quite an impressive collection and we do a lot of that in association with respected societies.

On top of that, we've been investing, over the years, millions and millions of dollars on enhanced access and discoverability of that content.

And trying to improve the cost per usage and things of that nature, which certainly, over the long term, help library budgets.

And we believe will continue to help us in this environment.

And we have a team of people around the world who work very cooperatively and professionally with our customer partners and we feel pretty good about that as well.

So, we do think it will be a tight library market.

We also think we're very well positioned in terms of the priorities that librarians put on their collection.

We think we have a lot of content that is very high on their priority list, is my way of saying that.

Okay.

Thank you for your answers.

It was very interesting.

You're welcome.

(Operator Instructions).

We'll take our next question from Dave Lewis with JPMorgan.

Hi, guys.

Good afternoon.

Can you just -- the tax rate has moved around a little bit and I know you cited, I think, 4 to 5 points of increase in this year.

What's the year end?

What's the base on that, please?

Yes, Dave, this is Ellis.

The tax rate, as you can calculate or see, was 22% over the course of 2009.

There are a couple of one-time items that benefited '09 that won't benefit 2010.

Plus there are some adjustments to a couple of items related to a tax planning strategy that we've discussed in the past related to the manner in which we acquired Blackwell and some other assets in the UK.

Those arrangements are subject to a couple of things.

One is, those benefits are earned principally in the UK, so they're subject to translation.

Those are sterling credits against tax.

To the extent the dollar has strengthened, those benefits are diminished in value.

The second item is that there's a loan that runs between the parent Company here, John Wiley & Sons, Inc.

and an entity in the UK that paid for a portion of the acquisition cost.

That loan rate is reset on an annual basis at the start of the year.

Think of where interest rates were a year ago versus where they are roughly five weeks ago, six weeks ago, wherever it was.

So, they're probably 200 basis points lower.

The combination of the credits last year that were one-time, plus the reset related to interest rate for 2010, plus the exchange effect, which at this stage, obviously is an assumption on our part, would account for 100% of the difference between the 22% and the -- if you take the 4% to 6% that Will said, that the 26% to 8% rate that we're assuming.

Again, this is an assumption, for fiscal 2010.

That would explain the difference.

Thanks, Ellis.

And can you just touch on credit exposure there, if there's any change or you're still pretty comfortable with Borders and some of the third parties?

Yes, it's naturally something that we track carefully over any ending period and this period is no different.

In fact, it's heightened.

The frequency and the level of contact and communication we have with key customers and partners is more so than it's ever been in the past.

With Borders specifically, since you point them out, we do meet with them on a very regular basis.

I think I might have described before that we have an agreement with them, which allows us to look under the cover, so-to-speak, in some greater detail of what their financial condition is.

We're relatively comfortable for the short term and these are decisions that are made and revisited in very short periods of time.

We continue to be comfortable with their credit position and to continue to extend credit.

There are other customers that we do look at carefully as well, it's not just Borders.

And we make a decision on a customer by customer basis over the course of the fiscal year.

Great.

Thanks, Ellis.

You're welcome.

And can you give me the -- give us the constant currency cost increase for Q4?

And X, M&A as well, X the small contribution that you would have from M&A, what's your normalized cost increase this quarter?

I'm not quite sure what your question is, Dave.

I just -- excluding foreign currency, all-in, what are your cost increase?

Sorry.

Costs in the quarter.

In the quarter, 4%, it looks like.

Yes, 4% on an exchange neutral basis.

Okay.

Thanks.

And were there any savings in there?

There are savings in the quarter.

As Will alluded to in his discussion -- in his remarks, sorry, that we have realized.

If you're talking about savings with respect to the Blackwell integration, the answer is yes, there were savings included in that, as well as contingency savings.

Well, we call them contingency savings.

These are savings related to trying to offset some of the under performance in our professional/trade business relative to initial expectations.

And so, some of those blended in along with that.

Okay.

Thanks.

And can -- you guys have talked about the incentive compensation headwind or increase this coming year.

Elaborate on that, as well as how much you have left or what you can still do for contingency costs going forward in this fiscal year.

Yes, I'd characterize it this way.

Our incentive compensation plans are designed to essentially -- we establish targets, which are not different from the guidance that we provided you last year and the guidance we provided you today with respect to fiscal '10.

Those targets are those that which we establish, at which we pay out much of our incentive compensation.

There are sales targets that affect individuals and individual pieces of the business.

All I can say with respect to that is, that a substantial portion of the contribution towards our achieving what was, as you recall, we said approximately 20%, we had a 22% growth last year on an exchange neutral basis.

There was a significant contribution towards achieving that number, based on incentive plans not paying at the level at which we initially had expected them to.

So as we set new targets for fiscal '10, along the lines of of what we described, we reset those plans as well.

So there will be certainly -- if we achieve those targets, which we intend to, there will be incentive payments this year, fiscal '10, that are in excess of what they were in fiscal 2009.

Okay.

Great.

And in terms of contingency cost savings, how much is left there?

What's the thinking heading into this fiscal year?

Well, in fiscal 2009, we did beyond incentives not paying out, there was a certain level of headcount that was left open.

We had scaled back some of our advertising and marketing spend, particularly in professional/trade.

There were very minor tweaks, with respect to some investment that we made, with respect to some of our IP spending and technology spending, relatively small.

The bigger impacts related to headcount positions being left open that became vacant over the course of the year; advertising, sales and marketing, as I just mentioned; and the incentive plans.

We did, for fiscal 2010, we have a relatively modest, although do have a merit increase, which is lower than the increase was in the prior year but it is an increase.

Although for more highly compensated individuals within the Company, there's no increase.

So we -- you can call that a contingency plan.

It's a way of saving cost and trying to get to a reasonable result in these economic conditions over the course of fiscal 2010.

There are some additional variable costs that one could look at in terms of individual operations from time to time, very little -- there's some of that happened in 2009.

It's not to say that there's much of that left to go but one could certainly look at their operations.

We could, based upon market conditions and performances and make decisions around that as well, that could impact costs.

And Dave, this is Will.

I just would like to make a couple of additional comments.

One is, just in terms of your reference to what is left, I just want to be clear about what we mean by this.

So the what is left part is this is a never-ending discussion that we have among the leadership team about what we have been doing historically, that in the spirit of resource allocation, is no longer as important as anything else.

So we can save some money there, so that we can continue to finance, for example, investments in enabling technology and product development and things of that nature.

So in a way, there's always something left.

We're constantly trying.

And I believe that's been a big part of the culture of this place for a long time.

And then, you go through economic and market conditions like this.

You ramp that up even more and you're constantly asking yourself, "What's more important?

what were we doing that we shouldn't be doing anymore?" The discipline around that.

In addition, every year, right about the time that we're talking about, which is early in the new fiscal year, every department, every business, every part of Wiley, we prepare what we call contingency plans.

Which outline, if we were to be off our internal expectations of revenue, if we were to begin to fall off our plan, what would we have to do to protect our earnings based upon that revenue fall-off and the gross margin effect.

And then the leadership team, as we are operating in the year, decides how much and when to implement those.

In this kind of environment, you should assume that we're still operating under what I would call a contingency plan, which reflects some of the things that Ellis has already highlighted in terms of very modest merit increases, as he said.

And it's important for you to understand, anyone over a certain level, no increases.

Travel budgets, can we avoid some of that?

More efficient ways of producing our product, all sorts of things.

And some of that's kind of normal business and some of it's ramped up to the next level when you know you're operating in an environment like this.

So, I want to be very clear that it's not how much that's left, it's kind of like it's the way we do business around here.

And it's critically important, in this environment, to be very mindful so that you're not sitting there saying, "I wish I had that money to invest in enabling technology." We're still making investments in our future.

So those contingency plans are not only to protect earnings, make sure we have the money to invest in what we think is going to give us the outcome we're looking for going forward.

Great.

Thanks, Will.

That's great.

Just a few more here.

Product development investments for next year, what's -- Ellis, do you have, if we're looking at CapEx, do you have an estimate at this point or will we see it in the K?

You'll see it in the K but I can give it to you now as well.

Product development spending, we're estimating at about $130 million, which is slightly less than 2009, which was $132 million.

And capital spending of about $50 million, which is a bit higher.

I know the logical question might be well, why $50 million?

Because I thought the $46 million or whatever it was included some integration related spending.

And the answer is well, first of all, it's a good question.

The answer, answer though is that there are initiatives beyond integration, like ones that Will and I have talked about over the last several quarters with respect to Wiley Online Library, which is a significant investment the Company is undertaking to put our now much larger STMS business on a completely different footing.

With respect to the competition, with respect to what our customers want and can utilize.

So we're making significant investments there.

Those are capitalized.

When that service becomes live, somewhere around calendar year end or beginning of next calendar year, we'll begin to cap -- sorry, to amortize that investment over a period of time.

There's also hardware, meaning server capacity and connectivity to support that, which require investments over the coming several months before we get to that point in time.

We're also investing in something else we've discussed, which is kind of the next generation of WileyPLUS, which requires additional investment.

As Will has described very often, these aren't projects with a beginning, a middle and an end.

These are projects that kind of go on and on and we continue to enhance.

I will say that Wiley Online Library is a somewhat new project but its foundation, not its technological foundation but some of the logic certainly embedded within it, is based in Interscience.

But Interscience will essentially be shut down at a point in time.

And Wiley Online Library is an entirely new service, built on a new set of technology and new capabilities.

So it's quite an exciting thing for us and for our customers, in fact, which includes both librarians and our society partners as well.

There's also continued investments, that Will described, with respect to content technology.

We're making some exciting new investments in customer data management and customer capabilities to be able to manage and sell directly to customers more effectively and efficiently in the future.

Those investments are now.

Capabilities will be coming over time.

We've described, in the past, kind of our initiatives around all Wiley, all the time, which is the combination of using that customer and data management and that content and those capabilities.

We've launched a service just recently, called Wiley Custom Select, that's being used by our higher education business.

First, it is a Wiley wide capability.

It is sort of the marriage of both content capabilities and accessibility capabilities.

So those kinds of investments continue to transform the business from largely a print business to one that has a greater proportion of digital or electronic publishing directly to consumers.

Communicated either directly through sales and marketing efforts or through the Web.

Those are investments we continue to make.

So that's embedded within that $50 million.

So sorry for the long answer to my own question but that's it.

No problem.

That's great.

Thanks, guys.

You're welcome.

Our next question comes from with [Doug Najensen] with [Pine Cottel] Capital.

Hi, guys.

Thanks for taking my call.

Can you talk, in a little bit more detail, about why you expect revenue growth in STMS over the back half of this fiscal year?

I'm under the impression, perhaps mistaken, that the bulk of the renewal season this the fall.

And as part of that, can you just talk about the implicit growth baked into the revenue that you already have in the bag for the remainder of this calendar year?

I can answer that question this way.

This is Ellis again.

Is that in terms of the renewal cycle, you're right, the renewal cycle begins in the fall but it relates to calendar 2010's licenses.

So those revenues would be -- the collections would proceed that but the revenue would be recognized beginning in January of calendar 2010.

The licenses that we've discussed a little bit on this call and previously relate to calendar 2009 licenses.

That revenue will be earned over the course of calendar 2009, which is the first eight months of our fiscal 2010 year.

The piece that doesn't relate to licenses, relates to things like books and other things like corporate sales, which would be reprints advertising and so forth.

That bit of revenue is still yet to be captured and earned.

Some of it, obviously, we have for fiscal 2010 but not all of it.

So eight months of what is associated with fiscal 2010 is, "not in the bag," as you say but nonetheless, we have a level of comfort, as Will described earlier, that we know from a license perspective what we have.

The pieces that we don't know, again, are fully what our book sales might be, what our corporate sales might be and maybe some additional revenue that might come from back files and so forth.

So, we're not counting on much of that for the remainder of calendar 2009.

It really is and I think what you're getting at, is the last four months of the fiscal year, which is the first four months of the calendar year.

That's the piece that Will talked to a bit in answer to a question earlier about library budgets and so forth and so on.

So I don't think I can add any more to that at this stage.

For the licenses that you do have, what's the growth that's implicit over the next couple quarters?

That's not the kind of guidance we can provide.

Although, I would guide you to a question that another person asked earlier, regarding the fourth quarter and the level of organic growth or growth within that and the caution about not to extrapolate that forward.

That's all I'd say about that.

Thank you.

Okay.

You're welcome.

That does conclude our question-and-answer session.

I will now turn the call back over to our speakers for any additional or closing remarks.

Thank you very much for your interest and support.

And we'll speak with you again in September, talking about our first quarter results.

Thank you very much.

That does conclude today's conference.

Thank you for your participation.

Have a wonderful day.