John Wiley & Sons Inc (WLY) 2011 Q3 法說會逐字稿

Welcome to the John Wiley & Sons quarterly earnings call.

Before introducing Will Pesce, President and Chief Executive Officer, I would like to remind you that this call is being recorded and may include 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 obligations to update or revise forward-looking statements to reflect subsequent events or circumstances.

Mr.

Pesce, please go ahead.

Welcome to Wiley's third-quarter conference call.

I am with Steve Smith, Ellis Cousens and Brian Campbell.

In a moment I will ask Steve to provide an overview of Wiley's third-quarter and year-to-date performance.

As you know, I am retiring on April 30 after 22 years at Wiley, 13 of which I served as the Company's President and CEO.

Therefore, this is my last investor conference call.

I'm retiring from this remarkable Company with a tremendous sense of pride.

I'm respectful of Wiley's rich heritage.

I'm optimistic about the future.

I'm confident the next generation of leadership led by my colleague, Steve Smith, will protect what is special about Wiley while implementing appropriate changes to ensure the Company's long-term success.

Wiley has been a grand stage upon which I have performed, supported by a talented and dedicated team.

Together we have pursued Wiley's mission of promoting knowledge and understanding around the world, and we have done it with conviction and passion.

I'm hopeful that future generations will look back to this time in Wiley's history as a time when we proved that you can put record financial results on the scoreboard while treating people as human beings first, professionals second; a time when we proved that you can build and sustain a culture that is performance driven, a culture built on a solid foundation of trust, ethics and integrity.

It has been an honor and privilege to serve as Wiley's 10th President and CEO.

Thank you very much for your support and for the respectful manner in which we have interacted, and thank you for listening patiently to my long-winded remarks during these conference calls.

I'm proud to introduce the 11th President and CEO of John Wiley & Sons, Steve Smith.

Thank you, Will.

At the end of the third quarter of fiscal year 2011, Wiley's revenue growth is tracking to our expectations for revenue and earnings-per-share.

STMS experienced strong growth in the quarter, and we're making good progress with calendar year 2011 license renewals.

P/T enjoyed a solid holiday season and grew strongly for the quarter.

Higher Education growth slowed somewhat in the quarter, although remained solid for the nine months to date.

In the third quarter, revenue of $448 million increased by 7% on a currency neutral basis and by 5%, including the unfavorable effects of foreign exchange, driven by strong performances in STMS and P/T.

Excluding a bad debt charge of $0.10 per share related to Borders, last year's impairment charge of $0.03 and foreign exchange, earnings-per-share rose 22% at $0.84.

On a reported basis, EPS grew 4% in the quarter to $0.74 or 13% excluding foreign exchange.

For the 9 months, revenue of $1.3 billion increased on a currency neutral basis by 5% or 3%, including negative foreign exchange.

Adjusted EPS for the nine months of $2.44 increased 20%, excluding the impact of currency or 15% including it.

Topline results, lower interest expense and a lower effective tax rate were partially offset by higher technology investments and an increase in the number of shares outstanding.

EPS of $2.34 increased 20% on a reported basis.

On a comparable basis for our full-year guidance, EPS growth after nine months stands at 17%.

This excludes the GIT impairment and restructuring charges last year, the Borders bad debt charge, and the tax benefit from the change in UK tax rates this year and the effects of foreign exchange.

Year-to-date gross profit as a percent of revenue was 69%, a slight improvement over prior year.

Improved margins and higher education fueled by increased sales of digital products and lower production costs drove the improvement.

On a currency neutral basis, year-to-date operating and administrative expenses increased 3% or 5%, including the $9 million bad debt charge related to Borders, reflecting increases in technology spending due to Wiley Online Library and increases in pension health-related costs, partially offset by lower Journal shipping costs due to print reduction initiatives.

Free cash flow for the nine months increased 19% to $206 million, reflecting the combined effect of increased cash earnings, lower pension contributions, growth in Journal subscription revenue, and the timing of Journal subscription cash collections.

Net debt -- that is long-term debt less cash and cash equivalents -- was reduced from prior year by $243 million to $326 million.

Days sales outstanding improved by approximately four days.

Inventory decreased from a year ago as a result of higher volumes of P/T frontlist cooking titles held in the prior year and lower higher education inventory due to the ongoing transition to digital products.

Now I would like to provide some information regarding the performance of Wiley's global businesses.

STMS revenue for the quarter rose 8% on a currency neutral basis to $238 million and was up 4% as reported.

Journal revenue increased by $14 million, reflecting increases in license values, new business, accelerated renewals and global rights income, partially offset by lower reprint and supplement sales.

Book revenue on a currency neutral basis grew by an impressive 9%, reflecting higher online and print sales.

Direct contribution to profit for the quarter increased 12% to $97 million on a currency neutral basis, excluding a $2.8 million impairment restructuring charge in the prior year related to GIT.

Including the impairment restructuring charge, direct contribution to profit for the quarter grew 9% or 15% excluding foreign exchange.

The increase reflects topline results.

For the nine months, STMS revenue increased 6% on a currency neutral basis to $712 million and was up 1%, including the adverse effect of foreign exchange.

Adjusted direct contribution to profit for the nine months increased 8% to $294 million on a currency neutral basis and increased 1%, including FX.

Adjusted direct contribution to profit excludes asset impairment and restructuring charges of $14 million in the prior year.

Journal subscription billings are 6% ahead of prior year at the end of January.

Calendar year 2011 subscription billings are about 8% ahead of prior year on a currency neutral basis, reflecting accelerated renewals, higher license values and new business.

At the end of Wiley's third quarter, we have completed negotiations covering 73% of targeted full-year business compared with 68% at the same time last year.

Overall the growth in subscription billings is in line with our expectation.

Journal backfile sales are performing above expectations.

We have signed significant backfile agreements in the quarter with universities in Germany, the US, South Korea, Israel, the Netherlands and Australia.

For the nine months, STMS book sales are running 11% above prior year on a currency neutral basis, including the benefit of a significant online book sale to a Saudi Arabian consortium reported in the first quarter.

Print sales are holding out well across all regions.

In the third quarter, STMS signed new contracts with societies that published 13 new journals, including a 10-year agreement to publish 10 journals on behalf of the American Counseling Association.

STMS renewed or extended contracts to publish 52 journals.

Only one Journal agreement with modest revenue was not renewed.

Wiley announced the release of its new funded access program, Wiley Open Access, during the quarter.

The first journals will launch under this program shortly, publishing peer-reviewed primary research in a broad range of subjects across the life and biomedical sciences.

Wiley Open Access offers scholars an opportunity to make use of publication fees offered by some research funding agencies to publish their work in high quality funded access publications.

In a strong third quarter, professional trade revenue of $114 million increased 7% versus prior year both including and excluding currency despite no orders being accepted from Borders since late December.

In the US Wiley P/T benefited from our multichannel sales and distribution capability and enjoyed a strong holiday season through online retailers, mass-market and some bricks and mortar accounts.

E-book sales nearly doubled again for the quarter versus prior year.

Growth in the business, finance and cooking categories fueled the strong sales, partially offset by lower sales in psychology.

Outside the US, growth in the UK, Germany, Canada and China offset weaknesses in Australia and India.

Direct contribution to profit fell 16% to $21 million for the third quarter, reflecting a bad debt charge of $9 million related to Borders.

Since its peak in 2007, Borders' share of market for Wiley Professional/Trade titles has decreased significantly.

Borders was projected to account for less than 5% of Wiley's global P/T revenue in fiscal year 2011, reflecting changes in customer purchasing patterns and the strong professional and educational profile of Wiley's P/T publishing portfolio.

Excluding the bad debt charge, direct contribution to profit for the quarter was up 22% as a result of topline performance and increased margins on higher e-book sales and improved inventory management.

For the nine months, P/T revenue was up 3% over the prior year period on a currency neutral and reported basis.

Year-to-date direct contribution to profit of $71 million was down 6%.

Excluding the bad debt charge and unfavorable foreign exchange, direct contribution to profit for the nine months rose 7%, reflecting the topline performance and lower accrued incentive compensation.

On a currency neutral basis, business program revenue advanced 16% in the quarter with leadership, investment and marketing lists performing well.

Consumer grew 6% in the quarter due to the strong holiday season for cooking titles, education grew 13% for the second quarter in a row, while technology maintained its number one market position, but was flat against the strong quarter in the prior year.

Digital revenue continues to grow at a faster rate than print for P/T.

In addition to the rapid growth of e-book sales, we launched seven mobile apps for the Apple platform in Q3.

An iPad version of Mark Bittman's How to Cook Everything was released in December and sold over 14,000 copies by the end of January.

Wiley CPA Exam Review Test Bank Online 2011 also released in December and offers more choice, flexibility and feedback on their progress as they prepare to set the CPA exam.

Global education third-quarter revenue grew 4% to $95 million or 2% excluding the effect of foreign currency.

Year-to-date revenue of $258 million is 7% ahead of prior year on a currency neutral basis, reflecting market share gains around the world.

In the US higher education revenue increased 10% year-to-date.

Sales are running 8% ahead of prior year on a performance basis in Canada, 10% ahead in EMEA, and 6% in Asia.

In Australia revenue for the nine months is slightly below prior year, reflecting reduced enrollment of foreign students at Australian universities and delays in major national curriculum reform in the high school market where we have a secondary school business.

In the US Higher Education revenue growth in fiscal year 2011 continues to be fueled by growth in engineering, computer science and the sciences.

Global billings of WileyPLUS of $32 million reflects growth of 9% for the nine months versus prior year.

Digital-only sales of WileyPLUS of $12 million account for approximately 40% of total WileyPLUS sales.

Sales from WileyPLUS, e-books, digital content sold directly to institutions, finder additions, and costs and publishings grew by 27% year-to-date and now represent [13%] of global Higher Education sales.

Sales through online accounts continue to outperform other channels.

Gross profits improved by $13 million year-to-date, excluding the effect of foreign currency with the gross margin of 68.5% reflecting an improvement of 0.9% percentage points over prior year.

Increased volume, efficiencies in manufacturing, and higher digital revenue continue to drive the improvement.

In the third quarter, direct contribution to profit improved 5% from prior year to $40 million or 2% on a currency neutral basis due to topline growth and gross margin improvement.

The nine months direct contribution to profit increased 12% on a currency neutral basis versus prior year.

Topline growth and improved gross margin for higher digital revenues drove the results.

Wiley Higher Education is helping teachers to teach and students to learn through its investments in enabling technology.

An efficacy study commissioned by Wiley but conducted by the University of Tennessee provides evidence of improved outcomes for students using WileyPLUS compared with a control group who used traditional educational resources.

Students using WileyPLUS achieved test scores as much as one letter grade point higher on the equivalent for the final exam.

In conclusion, we are encouraged by our performance through nine months.

We are gaining share in the markets we serve.

We are making steady progress in the transition to digital to business models, which remain critical to our ability to serve the needs of our customers.

Based on our year-to-date results, market conditions and leading indicators, we reiterate our fiscal year 2011 guidance of mid-single digit revenue growth on a currency neutral basis.

Excluding the effect of foreign exchange, the Borders bad debt charge, and the first quarter deferred tax benefit, we project EPS growth of approximately 10% from fiscal year 2010 adjusted EPS of $2.58.

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

(Operator Instructions).

Dave Lewis.

I was wondering if you can elaborate on some of the trends in STMS?

I guess the two-part question would be, I think you said billings are up on the renewals.

I believe it was 8%.

What is driving that?

It seems like that is one of the highest rates in many years.

And then some of the underlying trends in terms of institutional purchases, certainly books were strong this quarter.

But what is driving the upside there, and are there new trends, perhaps the online tools and solutions, that are contributing to that?

Thank you.

So, on your first question, yes, I did say that billings were up 8% for calendar year 2011 subscription renewals year-to-date.

And I also gave some signals as to how much of our projected full-year business we have so far negotiated and billed compared with the same period prior year.

Part of that growth is fueled by accelerated renewals.

Our sales force has been out in the marketplace talking to our customers since the end of the full 2010, and we are a little bit ahead of where we would project to be normally at this time of the year in terms of the amount of business we have closed.

And that has an impact on the 2011 subscription year piece of the third quarter.

So that has helped to also improve revenues for subscription and license billings during the quarter.

Having said that, some of the growth is certainly coming also from the fact that we are achieving some higher license values.

So when we look at some of the major deals and accounts that we have been negotiating with, based on the value of their content and the increased collections that we are offering, we have been successful in bringing in some higher license values than in previous years, some of which, of course, are driven also by multiyear price caps in the license arrangements we have with our customers.

And add to that the impact of some new business, particularly from new society relationship take-ons for 2011, so that is driving the growth.

Overall we would not expect to continue at the 8% level for the full-year 2011.

So some of that is acceleration, and we will see that moderate in the fourth quarter compared with prior year as we catch up to a more normal position.

On the second piece of your question around what we are seeing with institutional purchases, library budgets remain under considerable pressure in many parts of the world.

Whilst we are seeing continued accelerated growth in the volume of research output from our offers around the world, it is true to say that library budgets are not keeping up with that acceleration in every marketplace.

We have been successful in maintaining our business pretty well in North America and in Europe, and we are seeing more rapid growth in emerging markets, particularly in Asia, but also in the Middle East and other parts of the world.

We are very pleased with the ongoing resilience of our book portfolio and the investments that we have made in moving a lot of our book content online, and offering customers attractive ways to purchase that content under license is bearing out.

So we are seeing nice growth in online book sales.

But print book sales and STMS are also holding up pretty well.

(Operator Instructions).

Dave Lewis, JPMorgan.

Steve, I just wanted to see if I could close the loop on online tools and solutions.

With Online Library, it has launched now for, I guess, for nine months out with that.

How much is that changing the conversation with your customers with institutions, even in this economic climate?

Are you seeing or do you expect to see going forward your content more embedded in these institutions, and is that helping the conversation right now?

I think certainly had we not launched Wiley Online Library last year, we would be having a different conversation with our customers.

So we are very pleased with the initial reaction to Wiley Online Library.

The key link between our success with Wiley Online Library and our negotiations with library customers is going to be increased usage.

And over the nine months or so since we launched Wiley Online Library, we are seeing a nice pickup in usage, and we are targeting to continue to grow that usage dramatically over the coming years.

The other aspect of that is Wiley Online Library as a service to our customers also enables us to attract more society business.

So, as we enter into renewals negotiations but also negotiations with societies to take our new publishing businesses from them, our being able to demonstrate the power of Wiley Online Library as a research tool and as a effective platform to make our content more discoverable and more navigable has a beneficial impact on those society relationships as well.

Great.

Thanks, Steve.

And then shifting gears towards P/T, I was curious if you see any other changes among your broad P/T distribution channels as we shift to a more online distribution world?

First, I mentioned in my remarks we have seen some channel shift over several years.

Obviously the big gain there is the huge growth in online sales, not just of print, but almost more recently online sales of e-books.

That has been a factor for a few years, and most of the growth of online has come at the expense of traditional retail, whereas we continue to see proliferation of various channels, particularly through mass-market and through our sales to corporate training, direct to government and to educational channels.

So overall the big shift there has been the growth in online.

We expect that to continue, but we still retain very strong positions in the bricks and mortar retail channel, and, as I mentioned over the holiday season, overall we still see growth for Wiley in that bricks and mortar channel.

So there is some shift between the major players within bricks and mortar, but overall we are seeing some resilience there.

And the other factor I should mention is that we are also seeing growth in sales outside the US exceeding growth of sales in North America.

That has been a factor for several years and certainly is continuing this year.

Thanks, Steve, and I will just ask a couple more here.

You spoke about the rental model in Higher Education last quarter.

I was just curious if there was any update there or anything new you learned this most recent quarter?

Yes.

There is still, I think, a lot more for us to discover about what the impact of rental will be overall on the market for Higher Education books.

There has certainly been a proliferation in the number of College bookstores and other accounts that are offering the rental model, as well as players in the online space are offering rental.

It is clear that some College bookstores have found the rental model a challenge in terms of administrative support, and the process of managing that is adding costs to those customers.

We estimate the impact to be relatively small on our business this year, but we are watching it with great interest to see what the future could be for rental.

Okay.

Can you discuss what you are seeing in terms of tuck-in acquisitions as you continue to de-lever here?

What is the number of opportunities that you are seeing in this quarter versus perhaps last year or the previous quarter, and how competitive is that market right now?

Yes, thanks for that question.

So we are looking very actively at a number of opportunities.

I would characterize the last year -- the sort of deal flow rates have been fairly slow, but there are some signs over recent months that that is picking up a little bit.

So we are actively looking at a number of opportunities at the moment.

The key thing for us is to find potential acquisition partners that, first of all, fit strategically with our overall long-term strategy, but that also offer attractive economics in the short and medium term.

So we are actively looking.

The kind of businesses that Wiley is looking at today include additional or slightly different targets from the companies we have looked at historically, and we are certainly focused on opportunities to acquire new capabilities that have helped Wiley increase the value that it offers to its customers by providing services alongside content, for example, and we are staying focused on that as being the most effective use of our ability to throw off free cash flow for the long-term.

Terrific and last one on e-books.

Was the holiday season, was it as -- what were the trends there versus your expectations?

I think it matched onto our expectations pretty well.

We are seeing from an admittedly relatively low base and very high rates of growth quarter to quarter and year on year.

We don't have all of the results from sort of post-holiday season at this point.

So we are still expecting to see people who acquired a new device over the holiday season will be loading those devices up with content in the early part of this calendar year.

So we are expecting to learn more about that in the coming months.

But overall they are really pleased with the trajectory of the growth of e-books sales.

We have invested heavily in digitizing deep into our back lists, finding titles that we believe will appeal to purchases of e-readers and other tablet devices.

We have access to those readers through multiple channels and through a number of accounts and made them available on as many platforms as we can.

And, as we have said previously, the economics of that business are attractive to us as they take out -- as e-books take out a lot of the inefficiencies of the print business.

So we are very focused on the opportunity there.

Thanks, Steve.

And then the last one for Ellis.

Is there any change towards to tax investment versus offsetting refind distribution costs compared with your guidance at the Investor Day?

I think Steve partially answered that question with respect to some of our acquisition targets.

But we continue to invest pretty significantly in technology to continue some of the strategies, some of the success you have seen around some of the models, certainly Online Library, some of our e-book activities from a digital perspective in terms of supporting that on the content side, and in terms of capabilities that sit alongside of content to be described in terms of acquisition.

Some of those we will buy, some of those we will build, and some of those we will partner with.

So pretty much the approach has continued as we discussed back in, was it September or October?

I'm forgetting exactly when we had that meeting now.

Steve has talked a little bit to the deal flow kind of picking up a little bit in terms of what we are looking at in terms of what we have closed on, but it is certainly what we would be looking at.

More to look at now.

We are having more conversations.

One would hope that in time that would result in transactions that are both, again as Steve noted, strategically well suited to our digital goals or our Web-enabled goals, and we will supplant some of the technology spend that otherwise would occur internally.

I'm glad you note sort of distribution spending or the expense associated with the print side of the business has continued to kind of grow at fairly low levels, the 1%, 2%, 3% or so.

I will note, though, as Steve did note, is, our print business is still robust.

We are able to accomplish that with growing units of external -- or growing units, physical units being sold.

So it is through other kinds of efficiencies in terms of how we are utilizing space in terms of managing inventory, in terms of managing print runs, and getting closer to what would, I would describe, as a print to ship, so to speak.

We are not quite there yet, but we are doing more and more of what looks like print to ship.

So that allows us to take the per unit cost of distribution down, while units are still growing.

So that is helping us offset some of the otherwise higher than revenue growth, so to speak, in technology spend to support forward revenue growth and forward cost savings around the digital business.

Thanks, Ellis.

Enjoy your retirement well.

I will.

Thank you.

(Operator Instructions).

Bruno Yang, Annalex.

Great quarter.

I was just wondering, you did not change your guidance of 10% growth despite the fact that for the first nine months you have grown about 17%.

I was wondering if you could just give us a bit more color on why you're still guiding to 10% with one quarter left to go?

So it's a very good question.

So arithmetically one could deduce what the fourth quarter would look like.

You might recall last year's fourth quarter was a very strong fourth quarter.

Professional/Trade, I think, grew at something like 15% topline, Higher at about 20% or so.

And whereas STMS was relatively flat last year in the fourth quarter, as Steve described earlier, some of the 8% growth that you have seen in the third quarter was against what would otherwise have wound up in the fourth quarter, so to speak, simply because of some of the activities in terms of getting a lot of business closed earlier than we did in the prior year.

It is against the context of some difficult comps, so to speak, in the prior year, on the one hand.

And on the other hand, certainly the timing of expenses year on year can -- not everything is even and smooth over the course of the year.

We tend to have sort of a heavier fourth quarter in terms of some of the technology investment that was described earlier.

We true-up certain other expenses and accruals with respect to activities over the course of the year as we exit the year.

So we are pretty confident in saying that even though we have a 17% year-to-date earnings per share growth, as you have noted, is that we will wind up the year at approximately 10%.

So kind of those factors seem to be driving in that direction.

Great.

Good quarter, guys.

Thanks.

There are currently no other questions.

Well, we thank you very much for your interest in our Company, and we look forward to reporting on the full year at our next conference call in June.

Thank you.

Thank you.

This call has been concluded.