John Wiley & Sons Inc (WLY) 2013 Q4 法說會逐字稿

Good morning and welcome to Wiley's fourth-quarter and year-end 2013 earnings conference call.

As a reminder, this conference is being recorded.

At this time, I'd like to introduce Wiley's Director of Investor Relations, Mr. Brian Campbell.

Please go ahead.

Thank you.

Hello, everyone, and thank you for participating in our call today.

Before introducing Steve Smith, President and Chief Executive Officer, and Ellis Cousens, Chief Financial and Operations 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.

For those that prefer to listen on the call over the phone but would still like to view the slides, we recommend clicking on the gears icon located on the lower portion of the left-hand side window, and selecting a Live Phone.

This will eliminate any delays that you may experience in viewing the slide transitions.

As well as remove any potential background noise should you ask a question on the call.

A copy of this presentation will be available on our Investor Relations page at the conclusion of this call.

Thank you.

I'd now like to turn the call over to Steve.

Good morning.

Following the positive feedback we received from investors after our third-quarter call, we are again presenting visual materials to provide clarity and context around the Company's fourth quarter and full year.

In addition, we will provide an update on our previously announced restructuring program.

And close with fiscal '14 guidance and a directional description of our expectations for Wiley's longer-term outlook.

Faced with fundamental changes in our business environment, we have taken significant steps in fiscal '13 to reposition Wiley for future success.

We have refocused human and financial resources on opportunities with the greatest potential.

And have taken steps to divest or deemphasize certain businesses and activities.

We have acquired new businesses, which we believe have the potential to propel Wiley's future growth.

We are leveraging our core business, increasing the value we provide to our customers, and extending Wiley's reach and capabilities.

We have embarked on a wide-reaching restructuring plan from which Wiley will emerge as a more flexible and agile organization.

As a result of these changes, fiscal year '14 will be a year of transition, in which we continue to build upon a platform that propels rapid earnings growth in fiscal '15 and beyond, as the benefits of cost reduction and new business investments bear fruit.

Wiley's core business has faced strong headwinds throughout fiscal year '13.

Print book revenues continue to be under pressure across all three segments as a result of tight library budgets, changes in student purchasing behavior, shrinking sales in brick-and-mortar sales channels, and the continuing migration to digital.

Digital books continue to grow but the dollar growth is not yet offsetting the pace of decline of print books.

Digital book revenues are growing very rapidly in Asia and Europe, although growth rates have moderated a little in the US.

Fiscal year journals growth was affected by changes in the timing of new subscription billings and in the timing of issue publication.

As a result, journal subscription revenues for fiscal '13, excluding foreign exchange, were essentially flat to prior year, despite the fact that subscription sales increased by 1.6% in calendar year 2012, and for the calendar year 2013 at the end of April, were up by over 3%.

I will explain the complex combination of variables affecting the timing of journal recognition later in this presentation, when discussing segment performance.

Despite these performance challenges, we are pleased with the progress we have made in the year towards Wiley's transformation as a knowledge company that provides essential digital content and services to our customers in research, education and professional practice.

In November 2012 we acquired Deltak, the largest non-content acquisition in our history.

We completed the divestment of a range of consumer publishing assets.

And refocused and rebranded our professional development business on the needs of practicing professionals in the workplace.

Notwithstanding the revenue timing challenges, our journals business is performing well with over 3% subscription growth in the calendar year 2013 versus 2012 to date.

And including over $20 million of net new society business, one including the American Geophysical Union, one of our largest ever society contracts.

And while still maintaining historically attractive levels of profitability and cash flow.

Adjusted free cash flow for the Company of $270 million was exceptional, equally our best year ever.

Through the cost restructuring and re-investment initiative, we are targeting a reduction in run rate operating expenses of $80 million by April 2014.

We have made significant progress with restructuring plans across all businesses and functional areas, and are well on track to achieve our goals.

In the fourth quarter of fiscal '13, we announced a one-time restructuring charge of $24 million associated with plans to restructure our cost basis associated with approximately $38 million of ongoing annual savings.

During the year, we deployed approximately $74 million to repurchase over 1.8 million shares of Wiley stock.

At Wiley, we take succession planning for critical leadership positions very seriously.

In May, we were very pleased to announced that we have recruited John Kritzmacher as Wiley's new Chief Financial Officer, with effect from July 1. John is an experienced public company CFO, with an impeccable track record as a leader at companies such as Lucent Technologies and Global Crossing.

John will succeed Ellis Cousens, who, on our last call, formally announced his intention to retire at the end of June, 2014.

From July onwards, Ellis will devote his time to leading the Company's restructuring effort until he retires.

I believe that this period of overlap, with John focusing on his new responsibilities across finance, business development, mergers and acquisitions and Investor Relations, while Ellis leads the charge on restructuring, will benefit the Company considerably.

Ellis's contribution to Wiley's success over 12 years has been enormous.

And we are very grateful to him for his contributions.

We will have many opportunities to celebrate and acknowledge his distinguished career in the year ahead.

I'd also like to take a moment at this point to acknowledge the retirement of another long-serving and outstanding executive at Wiley.

Bill Arlington is retiring from his position as Senior Vice President of Human Resources at the end of this month, after 32 years of highly-valued service to Wiley.

Bill has worked tirelessly to ensure that Wiley had access to the talent required to prosper in a rapidly changing environment.

While also making sure that our culture in human resources policies sustained a high level of engagement in pursuit of our mission and goals.

We are greatly indebted to him.

Bill will be succeeded by MJ O'Leary, formerly Vice President of Sales & Marketing for our Education business.

MJ has been shadowing Bill for the past year and assumes his new position from May 1.

For the full year, revenue increased by 1% excluding foreign exchange and the divested consumer assets.

As mentioned previously, research journal revenue declined due to factors affecting the timing of revenue recognition, and lower corporate and backfile sales.

Print book sales have declined across the board, partially offset by growth in sales of digital books.

Adjusted EPS is down 5%, to $2.92, excluding the impact of foreign exchange and the operational results from the divested assets, the gain on sale of travel publishing assets, other unusual one-time items, and all impairment and restructuring charges.

The lower EPS performance was due to the decline in top-line performance and higher technology costs due to investments in digital products and infrastructure.

On a comparable basis to third-quarter guidance, EPS was $2.97, which is equivalent to US GAAP, but excluding all fourth-quarter unusual items.

The result was unfavorably impacted in the fourth quarter by $0.02 of additional negative foreign exchange.

For the quarter, adjusted revenue increased by 3% as a result of the contribution from recent acquisitions.

But offset a decline in print book sales across all three segments.

Excluding the impact of acquisitions and foreign exchange, revenue declined by 2%.

Adjusted EPS for the quarter was down 5%, excluding foreign exchange, to $0.71 per share, as a result of the lower print book revenue and higher technology expense, partially offset by growth from the Inscape acquisition and contingency cost savings.

Now, I would like to provide a brief commentary on the performance of Wiley's three global businesses.

Research revenue for the fiscal year was down 2% to $1 billion, excluding the impact of foreign exchange due to timing and phasing issues around journals subscription orders and publication, the decline in print book sales, and a significant drop-off in corporate sales and advertising.

Journal subscriptions account for approximately 60% of the research business.

This chart shows graphically the major contributing factors to revenue performance of our research business by product or service type.

The declines in print books and other revenues for this segment reflect the priorities of our library customers who, when faced with constrained acquisition budgets, choose to protect their journal collections at the expense of books, backfiles and other products and services.

Print book declines in the year were also affected by destocking in the distribution channel.

With major intermediaries moving to lower inventory and just-in-time ordering practices.

Customers in important book markets in the Middle East faced significant challenges in fiscal year 2013.

And in India the decline in the value of the rupee was a major inhibiting factor to imported book sales.

Digital book growth was lower in fiscal '13 as a result of a large, one-time sale made to a customer in Saudi Arabia in the fourth quarter of the prior year.

A sharp decline in advertising revenue stems from the fall-off in demand from pharmaceutical manufacturers for print advertising collateral for their declining sales forces, partially offset by increased revenue from online advertising of Wiley Online Library and elsewhere.

To better understand the underlying health of the journal subscription business, a granular understanding of what drove the variants in full-year performance versus both the 2% growth expectation we had communicated earlier, and to prior year, should be insightful.

The left column provides an explanation of the factors relative to our 2% or $24 million growth expectation over prior year.

Most are timing related.

From the top, currency translation was $9 million negative, while our net society win/loss record was as expected.

The timing of publication of issues for our big new American Geophysical Union Society, win with 23 journals, did not have the overall linear publication schedule we had anticipated.

Subscription growth from price and volume was as expected.

But the timing of both when licenses close and when issues were published in this calendar year were later than expected.

The time-based earnings pilot this year and the receipt of two years worth of payment from cash basis customers in the prior year should have been factored into our growth assumptions, but they were not.

Some of those negative factors account for $22 million of the $24 million shortfall to expectations.

The $9 million decline to prior fiscal year is comprised of many of the same elements, partly offset by $12 million of growth coming from net society wins and organic growth in the business.

While the unfortunate confluence of these factors was a net negative, the good news is that all indications are that the business is performing well.

Subscription and license growth is strong overall, with robust growth in the Americas and Asia-Pacific, somewhat offset by more anemic growth in EMEA, in Europe, Middle East and Africa, especially southern Europe and some parts of the Middle East.

The proportion of our journal subscription revenue and the license continues to grow, up 2% to 81% at the end of April, 2013.

In addition to the encouraging subscription performance, we continue to see significant growth in online usage of journals and other products on Wiley Online Library.

And also continue to add new revenue and content to our portfolio through our success in winning new society clients.

In fiscal year '13, we signed contracts to publish 42 new journals, with combined annual revenues of $31 million.

We renewed or extended contracts to publish 81 journals, with combined revenues of $52 million.

And we lost four journals, with combined annual revenues of $7 million.

Excluding the divested consumer publishing assets from both current and prior year results, the professional development business grew 5% to $371 million, excluding foreign exchange.

Primarily driven by the acquisition of Inscape and ELS, together with the new test preparation and certification revenue from our publishing relationship with the CFA Institute.

Divestment of the consumer lines during the course of the year has put the business in a far better position to realize growth in the context of Wiley's overarching objective to become a provider of content-enabled services.

And, within professional development, to focus on thought leadership serving professionals across the lifecycle of their careers.

Core retained both businesses were largely flat on prior year, as digital book growth slowed somewhat, and print continued to decline.

Overall print revenues, including the divested publishing programs, were 12%, or $39 million, behind prior year, and represents 70% of the overall business.

For the print business, the fourth quarter continued the trend of the previous quarter, with some stabilization in retail accounts globally.

But with overall inventory in the channel much leaner than prior year.

EBooks continued to be a source of growth, especially outside the US where the device penetration remained at a lower level but growing quickly.

The impact of our two acquisitions, Inscape and ELS, has been significant, bringing new capabilities and dramatically accelerating business development.

Inscape, in its first full year, achieved 8% revenue growth, and met or surpassed the financial goals for the acquisition.

ELS was also on target for the stub year and performed in line with the acquisition model.

Our strategic realignment to focus on providing professional content and services across the career arc is now the primary driver of our growth.

With digital and service revenues advancing 35% for the quarter, and 54% for the full year, to 20% of the total business or $84 million.

We have reorganized the professional development business around four communities or professional markets -- business, including finance and accounting, technology, talent management, and professional practice.

Additionally, we have brought significant new products to market in test preparation, certification, assessment and e-learning.

And secured a number of valuable partnerships with professional associations, notably in finance and accounting.

For the restructuring and reinvestment initiative, we are taking steps to reinvigorate the core business, while reallocating resources to higher growth and more profitable revenue opportunities.

The percentage of education revenue coming from traditional print textbooks is down to a little over 50%.

While digital revenue now makes up almost one-third of overall revenue.

The US market continues to contract due to declining enrollments, especially in the for-profit sector, increased demand for rental of print text, and lower inventory held by bookstores due to uncertainty of demand.

The decline in demand of traditional printed textbooks has accelerated, reaching 15% in the current fiscal year compared to a slight increase in fiscal '12.

Wiley's core business continues to perform slightly above industry trends over the last 12 months.

Wiley's net sales in the US college market for the fiscal year, excluding Deltak, were down 3.3% in a market that was reportedly down 5.8%.

In March, in a surprising judgment, the Supreme Court overturned a ruling in the Second Circuit that had found in Wiley's favor in a case against a Thai student who was found to have reimported and resold copies of internationally priced textbooks in the US market on a commercial scale.

It is important to note that Wiley and other higher education publishers have been dealing with reimportation for decades, since we have never been able to rely solely on litigation to stem the leaks.

Over several years, Wiley has implemented business solutions to address the problem, including accelerating the transition to digital products and services, and creating unique international versions of core textbooks that are not susceptible to the kind of arbitrage practice by Mr. Kirtsaeng.

In the US, we're also increasing the proportion of our sales that come from more flexible formats, including custom editions and binder-ready versions.

As a result of the Kirtsaeng decision, we will move to a trusted distributor model in certain markets.

We will increase the international prices of selected titles.

We will continue to differentiate international versions of best-selling titles where it make sense to continue to do so.

And we will continue to accelerate the move to digital, already well underway.

As an excellent example of the success of our digital strategy in education, WileyPLUS is an integrated teaching and learning solution that helps teachers to be more effective, and it helps improve student outcomes.

In fiscal 2013, WileyPLUS sales grew by 26%.

While eBooks and other digital content sales grew by 17%.

Non-traditional revenues, including WileyPLUS, Deltak, eBooks, binder-ready and custom products, now represent over 40% of total education revenue.

The overall decline in the proportion of Wiley's education revenue that is earned from print textbooks owes a lot to the acquisition of the Deltak online program management business, which you can see here added $34 million to total revenue in the six months since the acquisition was completed in November.

We're very pleased with the performance and the future promise of Deltak.

In its first six months as a Wiley business, Deltak is tracking nicely to our acquisition plans.

We have identified significant additional new business opportunities, both in Deltak's core online program management space, as well as an other synergistic areas that build on Wiley's core content, relationships and brands.

In particular, secular challenges to higher education institutions in both the for-profit and the not-for-profit sectors, are driving more and more schools to seek partners to help build their online strategy.

A recent survey of the online program management market conducted by consultant group, Eduventures, estimated that currently 200 to 300 schools work with online program management providers like Deltak.

Over the next two years, this number is expected to rise rapidly as approximately 500 additional schools will consider engaging an online program management partner.

The growth in demand is driven by the pressures on universities and colleges to answer the demands of an evermore savvy and price-conscious student population, regulatory pressure in the US and around the world around student debt, return on investment and gainful employment, and the rapid adoption of digital and online learning models, as exemplified by the rapid growth of MOOCs.

Deltak continues to show rapid revenue growth as we continue to add new partners.

Five new partners were added since the acquisition in November -- American University, Case Western University, Queens University of Charlotte, Butler University, and the University of Dayton.

Since the fiscal year end, we have added a further new partner.

And have an exceptional pipeline of new opportunities that we will speak about more on our September call.

It is important to note that Deltak's partnership agreements averaged from a 7- to 10-year duration.

In the typical model, it will take from 18 to 24 months for each new partnership to begin generating revenue.

While we're in a phase of rapidly building the base of new partners and programs, earnings growth will lag revenue growth, even though the economics of expansion are compelling.

Looking ahead, we expect Deltak to be a major engine of earnings growth in our education business, along with the expected growth from digital products like WileyPLUS, and the addition of services that address the needs of the global higher education sector, building on the combination of Deltak's capabilities with Wiley's content brand and relationships.

As with the two other businesses, we are making good progress with our plans to restructure the education business, and to reallocate resources to future growth opportunities.

I will now ask Ellis to provide a brief summary of Wiley's year-end financial position, and an update on the restructuring initiative.

Thanks, Steve.

Shared service costs increased modestly with all the increase in technology investments over the past year.

That investment was focused principally in the areas of content management and technology and e-learning capabilities.

The acquisition of Deltak mid year added an expense run rate increase of approximately $2.6 million, mostly in technology and some in other admin for occupancy.

The sizable reduction that you see in distribution was driven by lower print volumes in books and journals.

And significantly lower headcount to support the lower print distribution that we realized in fiscal '13.

Lower incentive compensation was a factor, as well, in all shared service areas.

Looking at the balance sheet, the increase in cash at year end was driven by the strong cash performance of the business, and the timing of cash receipts late in the quarter.

Deferred revenue was comprised principally, 98%, of journal subscriptions.

While there is some favorable timing related to the strength of subscription cash collection versus prior year, the 6% growth that you see in deferred revenue as of April 30 is a good directional indicator of calendar 2013 journals performance to come.

And correlates directionally with the 3% growth in subscriptions that Steve noted earlier.

Long-term debt increased almost $200 million, and net debt by $124 million, due to the acquisitions of Deltak at $220 million, ELS, $24 million, and the repurchase of 1.8 million shares at $74 million.

Those together offset by the strong free cash flow performance of the business during the year -- partially offset.

The sharp increase in the accrued pension liability is the net effect of a drop in the discount rate and changes in actuarial assumptions, and the expected rate of return on plan assets.

Noteworthy is that as of June 30 of this year, as part of the Company's $80 million restructuring program, the US defined benefit program will be frozen.

Moving to free cash flow, or cash flow, adjusted free cash flow, as Steve noted, of $270 million, was ahead of last year by $10 million.

The $270 million is adjusted for unusual or one-time items such as the restructuring and impairment charges.

And, as noted previously, or as noted on the slide, and as previously discussed, a disputed tax deposit with the German government of $42 million.

You will recall that we are in a dispute with the German tax authorities as to their adverse audit finding for their interpretation of the reorganization of our German operations over a decade ago.

Many companies are disputing the same interpretation.

However, we are required by German law to deposit all disputed amounts with the German government until a court decides the issue, which is expected to take a number of years.

The Company and its advisers firmly believe that we will be successful in court.

At which time all monies deposited, plus simple interest, will be returned to the Company.

On a per-share basis, free cash flow was $4.48, up 5.6% from last year.

Free cash flow yields improved to 12.1%.

In terms of allocation of cash and borrowed funds, as noted, were principally deployed to acquire Deltak and ELS mid year, following the Inscape acquisition last year.

The Company also reacquired over the last two years $161 million of common stock, and raised the dividend 20% last June.

Now, for a brief restructuring update.

As noted, we took a restructuring charge of $24.5 million in the fourth quarter.

We had signaled that to you in the third quarter, that it would be roughly that size.

That relates to employee separation benefits, consulting costs and a termination of the US pension plan to come.

The activity is expected to yield $38 million, as Steve noted, in terms of ongoing savings towards the $80 million run rate when fully implemented over the course of this year.

We expect a similar size charge, somewhere around mid fiscal year, this year, 2014, related to further employee separation benefits, other restructuring activity.

We'll update you in advance as far as possible with respect to the size and timing of such charges.

More than 50% of the $80 million savings that we've noted previously, would be directed towards improving earnings and financial performance, with the remainder to be reinvested in high-growth digital opportunities.

The $80 million total program savings is a run rate, as noted, at the end of the year.

We expect that roughly one-third of the savings will benefit 2014 results as the programs are implemented this year.

A recap on restructuring as to what the program entails focuses principally on the consolidation of business activities and shared services for multiple locations and segments into lower-cost locations.

And achieve that through a combination, in some cases, of offshoring.

And in other cases, outsourcing.

We are also eliminating certain activities that provide for marginal benefit to the business.

And also have made decisions about the continuation or the operation of certain businesses which led to the impairment of certain assets in the fourth quarter.

As a part of some of the consolidation activities, there is significant management delayering in certain operations that will occur over the course of the year.

And, as noted, we've terminated the US-defined pension plan effective June 30.

A final element is across the board and across the Company strategic sourcing and procurement, which will yield benefits over the course of this year and into next year.

Back over to you, Steve.

Thanks, Ellis.

Now, we'd like to provide some thoughts about Wiley's outlook for the years ahead.

As stated earlier, fiscal year 2014 will be a transitional year for Wiley, as we focus on restructuring and the bedding down of recent new business launches and acquisitions.

We're expecting low single-digit revenue growth, excluding the impact of foreign exchange, and fiscal year 2013 revenue from divested consumer businesses.

Adjusted EPS, excluding all fiscal year 2013 and 2014 restructuring and impairment charges, the full impact of our former consumer publishing programs, and one-time tax benefits or charges will be more or less flat, in the range of $2.85 to $2.95.

Expected results for the fiscal year 2014 include ongoing investments in enabling technology, the one-time restoration of incentive plan cost target levels versus the fiscal '13 expense accrual, and investments to accelerate growth in Deltak, in line with the extraordinary market opportunity.

Partially a benefit from the $80 million restructuring initiative will offset some of the expense growth in fiscal 2014, but not all of it.

When fully implemented at year end, the benefit of restructuring in both direct savings and the flexibility of expense management will offset the expected continued decline in print revenues.

Given the transitional nature of fiscal '14, we are pleased to share our expectations for the longer-term performance in Wiley's businesses.

For fiscal year 2015, we expect to see a significant jump in earnings based on the full-year impact of restructuring savings.

These savings result from the actions we are taking to realize $80 million of run rate savings during fiscal '14.

And will, of course, be baked into our cost base for future years beyond fiscal '15.

Also in fiscal '15, earnings will benefit from the growing contributions from recent acquisitions -- Deltak, Inscape and ELS.

As well as the contribution from recently launched businesses such as online training and assessment, test preparation and certification, professional services and workflow tools.

From a foundation of accelerated earnings growth in fiscal '15, we believe Wiley to be well-positioned for sustained, attractive earnings growth as the earnings performance of our recent acquisitions, shown here in purple, and the new businesses, grows rapidly to layer significant growth onto a more efficient, flexible and stable core business.

This chart does not consider any future acquisitions we might make.

Although, clearly, with Wiley's strong cash flow generation expected to persist into the future, we will be in a position to make further acquisitions, if and when attractive opportunities arise.

Our core business consisting primarily of print and digital books and journals, and shown here in blue, becomes a smaller contributor, mainly due to the anticipated decline in print books, partially offset by the growth of digital books.

We expect the recent downward pressure on core business earnings to stabilize from fiscal '15 onward, as revenues from digital products, including custom products from WileyPLUS, continue to grow, combined with ongoing measures we are taking to address the efficiency of the core business and move to a flexible cost base.

In summary, despite a challenging year in fiscal 2013, we are very optimistic about the potential to deliver sustained earnings growth going forward.

In fiscal '14, we will due continue to take decisive action to secure Wiley's long-term success.

The restructuring initiative is on track.

Our recent acquisitions are performing better than expected.

Newly developed products and services are gaining traction.

And our core journals business is performing well.

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

(Operator Instructions)

Daniel Moore, CJS Securities.

Good morning.

Can you talk about some of the incremental investments around Deltak that are expected?

And, if possible, can you quantify the EPS impact that's embedded in your fiscal '14 guidance?

Sure.

Let me start and then Ellis can talk maybe about the EPS impact.

So, as I mentioned during my remarks, Deltak's primary business is around online program management, which really involves the creation of turnkey online degree programs for partner universities.

And the current partner base is 32 partners, of whom about one-third are relatively recently acquired partners and are pre-revenue.

With Deltak, we provide a lot of the upfront investment in terms of both creating those programs, preparing faculty to teach those programs, in partnership with the universities.

And marketing and recruiting the programs to new students.

So, as we are in a build phase with the business, those partners that are new are obviously consuming resources.

And only after the first 1.5 years or so the partnership will begin to earn those revenues that have been earned out over the 7- to 10-year license period of the business.

We see a huge opportunity in the coming years to accelerate the acquisition of new partners and to also launch new programs, new degree programs, with existing partners, as well as to grow by attracting more students to existing programs with existing partners.

The combination of those things point to very healthy rates of earnings growth in fiscal '15 and beyond.

But in fiscal '14 we are still very much in a build stage.

And Ellis can talk a little bit about the EPS impact.

I would say that at our September investor meeting, we will provide much more granularity around the Deltak business so that people can see the performance both of the more mature revenue-producing partners, separated from the performance of new partners.

And understand the dynamics of that business in a more detailed way.

Dan, the underlying performance of Deltak would have been flat in '14 but for the acceleration of investment.

For the accelerated investment, we, again, can manage or modulate that to some degree over the course of the year.

But it could have up to a $0.10 or so negative impact over the course of the year, which is factored into the guidance that we've provided.

That's helpful.

And on the same subject, just talk about the capacity for growth at Deltak.

Obviously you put up that chart where you have 500 potential customer opportunities.

But how quickly can you grow on an annual basis?

As often is the case, the pace at which we grow will depend on the competitive terrain in the environment, but also on our ability to scale up organizations in order to meet the opportunity.

We are very focused on developing our relationships with high-quality partners.

And, vital to the future success of Deltak, maintaining the excellent relationships they have with partners and the results of those partnerships in terms of improved student outcomes, and a strong return on investment for the student tuition dollar.

So, we believe that we're moving at a pace that both reflects the opportunity that is there, but also balanced by the need to maintain quality and, really, the integrity of the partnerships.

Right now we're focused on the US only because that's where the early opportunities exist.

Although there are clearly opportunities to take this model and the capability, and expand outside of the US where we have considerable reach in Europe and Asia.

So, I wouldn't say that we have our arms around the full scale of the potential out there for the future, but it is very exciting.

It's attractive, and the economics of the business look really solid.

We will certainly share more of our plans with that with you in the future.

Helpful.

And can you quantify the impact, on a year-over-year basis, of the increase in incentive plan accruals for '14?

$24 million, is to restore incentives from what was paid in fiscal '13.

As you know, we under-performed relative to not only our guidance, which is formed off the basis of our plan, so we had a significant underpayment with respect to incentives.

To restore that back to target is $24 million.

That's helpful.

One more.

I'll switch gears and then jump back in queue.

Just focusing on books, I can look at the segments but, in general, anything you can tell us about the accelerated decline, particularly in the global education piece?

How much of it is inventory, that you can tell, versus actual consumer declines?

And what are your expectations for the rate of declines going forward?

Again, more granularity in September when we talk about individual segments.

And it is a pretty complex combination of factors, most of which are negative in fiscal '13.

And some of which we believe will moderate in fiscal '14 and beyond.

And some of which are probably more changes in customer preference and customer behavior.

So, you asked specifically about the education segment.

Really what we are seeing there is continued student reluctance to pay the full price of the traditional textbook.

We anticipated that, of course, with the introduction of all of the new options and the flexible options that we give to students, whether that's through digital versions of the book, WileyPLUS, custom and binder-ready versions.

I mentioned a 15% decline in sales of the traditional textbook.

Some of that business has clearly gone to rental over the years.

Some of it has now moved to our more flexible format.

The good news is the traditional textbook was the book that, after its first use, then went back into the marketplace as used books, year after year.

And, so, we had a business that was used to selling in large volumes in the first time the course ran, but then with very heavy attrition in the years that followed.

Under the new, more flexible model, the initial purchase price is lower but we have more opportunities to sell something to every student, every semester, as we do with WileyPLUS.

So, we'd expect that traditional print business to continue to decline.

And, frankly, we'd be delighted if we moved more quickly to digital and other more flexible business models.

In the research segment, as I mentioned in my remarks, some of what we've seen in fiscal '13 relates to challenges in particular geographies, particularly the Middle East and parts of Asia.

Some of it relates to changes in stocking policies and inventory levels at made [intermediate].

But some of it also reflects the fact that library budgets remain under pressure.

And faced with difficult choices, librarians are choosing to retain their journal collections, and often at the expense of buying books.

And more interested in buying digital books, as well.

So, we're adjusting both the resources and the cost base that supports that print business, as well as some of our strategies around the number of titles that we publish and how we think about the growth of that business going forward.

Thank you.

I will jump back in queue.

Drew Crum, Stifel.

Okay, thanks.

Good morning, everyone.

I wanted to ask about the calendar '13 journal subscription renewals.

Steve, you noted that that's up 3% year on year.

Can you talk about how firm that number is?

What are the risks to that number moving down?

Or is there opportunity to move that number higher?

And in the context of the research business, you've got a good number there.

What needs to change in order to see some growth from the business in fiscal '14?

The underlying calendar year 2013 performance of the journals, as I said, over 3%.

And it is somewhere between 3% and 4% actually at the end of April.

And holding up well as we look forward.

At this point in the year, somewhere around 96%, 97% of the full-year business is completed.

There's still around $20 million, $25 million worth of revenue to finalize in terms of licensing and billing.

Our indications are that we will hold up, certainly, better than prior year in terms of overall subscription growth.

And that comes partly from the strength of renewals, particularly in North America and Asia.

As I said in my remarks, partially offset by declines, particularly in southern Europe and in parts of the Middle East.

And the strength of the new society starts that we had in calendar year 2013 that are also helping fuel that.

So, we have pretty good visibility into the first eight months of fiscal '14, based on our expectations of good, steady growth for 2013 journal subscriptions.

We don't have the same visibility into calendar year 2014 that will influence the performance of the journals business in the last four months of this fiscal year.

But, again, there's no reason to expect any sudden changes of direction around the journals business.

I think Ellis?

I would just add, Drew, the elements that could affect that certainly could be, as they were in '13 over '12, could be the timing of, in '14 -- that is, calendar '14 -- the timing of closing those licenses, completing orders and being able to book the revenue.

And then, therefore, the ability to recognize revenue and earnings.

And then also the timing of production of issues.

The earnings pilot, which we piloted in calendar 2013, is not increasing in size so it shouldn't be a factor year on year.

It really is down to three things, as Steve noted, or four things -- the completion of that last few percentage points of calendar 2013 business, what '14 looks like from a calendar year perspective, and then, therefore, the timing of completion of license agreements, orders -- meaning billings -- and then production of issues in the first four months of the calendar year, meaning the last four months of the fiscal year.

Those are the variables that, unfortunately, all negatively lined up together against the prior year in '13 -- so that's '13 against '12 -- which doesn't have any follow-on impact, so to speak, into '14.

Okay, very helpful.

And then I want to circle back to Deltak.

I had a couple of questions there.

In your prepared remarks, you suggested there are about 200 schools that currently work with online program management providers.

And then your expectation is that there will be an additional 500 schools over the next two years.

Of that 700, what is your addressable market?

What is the market opportunity for Deltak?

That's my first question.

And the second question pertains to the 46 programs you currently have under contract that are not yet revenue-generating.

When should we expect to see those programs convert to revenue-generating accounts?

The data that I provided there was from a report on the online program management segment by Eduventures, a consultant.

Of the 200, we currently have 32, if those numbers match up well.

There are four or five major competitors to Deltak in that market space.

The competition for new business remains intense.

But we're delighted with the performance and our ability to continue to win new business in a competitive circumstance.

The 500 additional partners, I think the word in Eduventures' report were -- these were from interviews with chief academic officers in institutions -- those 500 academic officers and university provosts are going to consider working with online program management providers.

That doesn't mean that they will.

All 500 of those are addressable by Deltak.

We have a pretty rigorous process based on looking at employment opportunities around specifics institutions, because we are very focused on providing return on investment and employability as a student outcome.

So, based on market research, we've identified which are the highest priority among those 500.

We certainly won't chase after all of them with equal vigor.

But we would expect to win our share of that business, and for that share to represent some of the highest quality partnerships that have the greatest potential for sustainable, long-term earnings growth.

With regard to your question about the 46 programs and how quickly they will start to generate revenue, some in fiscal '14, many more in fiscal '15.

Ellis, have you got any more you can add on that?

No.

The exact timing of that -- we will provide, as I mentioned earlier, we'll provide some detail in terms of breaking down between current programs that generate revenue and profit -- the performance of those -- and new programs, and new partners when we meet with investors in September, so you can really understand the timing and the trajectory of the business and why we feel so excited about it.

Okay, thanks.

And, Ellis, I just have one more question around cash flow.

Actually it's a two-part question, the first of which is, what is the expectation for income tax deposits in fiscal '14?

$42 million expended in '13.

Should we expect more in the current fiscal year?

And, then, I don't think there's any announcement around the dividend.

Has the Board met?

Does the Company plan to increase the dividend in fiscal '14?

Or are you not going to increase the dividend?

Let me take both of those in the order that you asked.

In terms of additional deposits with the German government, we expect something on the order of about $3 million to $4 million of additional deposits this year.

And maybe a similar amount next year or so.

I think the $42 million represents the vast majority of what we expect to deposit with the German government over the entirety of the points until we get to a decision from the court.

In terms of dividends, the board meets later this week and we'll consider whether or not to increase the dividend.

I can't really indicate whether or not the Company is recommending an increase but it comes later this week, if it does.

Okay, perfect.

Thanks, guys.

Michael Corty, Morningstar.

Thanks.

Good morning, everyone.

I just had a few questions.

On the restructuring slide in terms of the use of savings, 50% was identified for high-growth opportunities.

I'm assuming that's external.

If it is, how would you measure those types of growth opportunities versus actually investing more in Deltak, which would be an internal investment?

How do you think about that in terms of digital growth?

Michael, I can address that.

The $80 million in savings is targeted in two components.

The majority, not an indication of how much of the majority, is actually earmarked for improving the performance of the Company.

So, less than a majority is earmarked for investment.

That is internal investment, so that would include Deltak, eLS, Inscape, in terms of acquisitions, new businesses that we've discussed around transformational opportunities, and the like.

So, it is devoted towards entirely organic -- or internal, I should say.

Organic, meaning that we have made those acquisitions.

To the extent that there are additional acquisitions to come, those would be funded through use of either additional leverage or cash the Company generates over time.

As Steve noted, the Company had, in the past year, and we have no expectation to see any reason for other than a solid performance in terms of cash flow going forward, so we certainly do continue to have an appetite to make acquisitions.

As Steve said, of course, to the extent that they're available, makes sense from an economic and strategic perspective, and fit well with our forward strategy.

Does that answer your question, Michael?

Yes, it does.

Thank you very much.

And then on the journals business, on the slide, it talked about, for the year I think the print book sales were down 12% for the year.

But in the fourth quarter they were down 24%.

Obviously not a huge portion of that business.

Is there anything going on in the fourth quarter in particular that will go away in the following quarters?

Is there any way to quantify that?

I don't have anything in front of me that explains why the fourth quarter was as sharp.

The things that I would look at there was there anything in the fourth quarter of fiscal '12 that was unusual.

Our book business tends to be -- it doesn't follow an even trajectory throughout the year, and a little bit unpredictable about when certain larger orders may be completed.

And, so, I don't want to hazard a guess at that.

But there's no reason to think that the fourth quarter indicates the start of a trend of much accelerated revenue decline.

In fact, the full-year decline of 12%, we believe, includes certain factors that are specific to fiscal '13 around the changes in inventory management practice in major intermediaries.

Great.

And then just one more.

On stock buybacks, will these be opportunistic?

There is a timing issue here where the earnings performance -- you expect it to grow in fiscal 2015.

In the meantime, with the stock undervalued, how are you going to think about buying back the shares?

Michael, share repurchase remains a focus over the course of this period in transition.

As Steve described, '14 is a transitional year.

So, as in '13, there's no commitment here with respect to share repurchase.

But, as you know, opportunistically, we believe in the forward performance of the Company and business, and reflect that with respect to current performance.

So, it features within the use of cash as a major factor.

Fair enough, thank you.

Marc Heilweil, Spectrum Advisory Services.

Hello, guys, and thanks for the hard work in transforming Wiley.

Do you have any view on when the downturn in enrollment at the for-profit colleges should begin to level off?

Any rules that you are looking at?

So, thanks, Marc.

We work closely with for-profit schools as our customers, and have frequent dialogue with them.

The issue, really, around enrollment at this point for the for-profit schools seems to be one of student value and return on investment.

So, as I mentioned in my remarks, students are an increasingly savvy customer.

They are looking at the cost in education and comparing that to the value of that education in terms of return on investment, and related to future employment needs.

I think that the more forwar4d-looking for-profit schools have already begun to make significant changes to their operations, to offer more flexibility, to offer lower-priced qualifications that better meet the needs of employers.

With our Deltak business, we are actually, to a certain extent, in a similar marketplace, working with both for-profit and not-for-profit institutions.

I think the next three years in higher education in this country are going to be really interesting, as the market reshapes itself to meet the demands of a growingly sophisticated student audience.

And tying the cost of education much more closely to better educational outcomes, better employment opportunities, better return on investment.

And through our investments in Deltak and other digital products and services, we are in a really good position to validate that working with Wiley helps improve those student outcomes.

And so, represents a good value for money.

I don't think I got an answer to the question.

Sorry.

You asked what do you think is going to happen to enrollment.

Right now, talking to the for-profit institutions, most of them are expecting a leveling out, but not necessarily a rapid return to growth in terms of enrollment.

And there is still pressure on enrollment in the not-for-profit institutions coming from the factors that I mentioned.

So, I guess I gave you the reasons for the answer without giving you the answer.

So I apologize for that.

Okay, fair enough.

Although I would add that the for-profit sector has probably predicted a bottoming for two, three years now, a continued decline, albeit somewhat more modestly.

So, take that with that.

Okay.

I realize predictions about the future are inherently difficult to make.

But can you talk, just give a little background on what are some of the competitive factors in competing for online courses?

And the contract length is maybe three to five years.

Have there been any evidence that incumbents can be unseated in that?

And maybe, I'm not sure I was specific enough on that first part of the question, but, talking about the competitive factors where does Wiley think it has a competitive edge over some of the other players?

I'll give a relatively quick answer this time because the last one was long.

First of all, our contracts are 7 to 10 years.

We've seen no sign of people interrupting periods of contract, in either direction.

We haven't taken -- I don't think we've caused any university to change horses in mid stream.

We've not seen any partners change, so they're all new starts.

In terms of competitive advantage and our competitive position, I think I spoke to that but it's really around focusing on the outcome, focusing on quality and what it delivers.

It's not enough just to create the course.

It's also essential that we attract the right students, we support those students through their education, that they come out of it with good degrees, and that those good degrees lead to jobs.

Okay.

Thanks a lot.

Good luck.

Sami Kassab, Exane Investments.

Good morning, gentlemen.

Can you comment on the print textbook revenue decline that you would expect for fiscal '14?

We've seen an acceleration in Q4 to 26%.

Again, as previously asked for the research part, do you see any reason why print textbook revenue decline has accelerated in Q4?

Or, in other words, should we think of the minus 14%, minus 15% as a trend going into fiscal '14, please?

And, secondly, can you comment as to why custom print materials are still growing?

And how sustainable do you think custom print revenue growth is in '14 and forward, please.

Thank you.

Yes, Sami, this is Steve.

Thank you for your question.

As you know, fourth quarter for us, the period from February to April, is a very low season for the global ed business, for the higher education business.

It's not a period where you've got any new semesters starting.

So really anything from fourth-quarter performance as a trend would be a mistake.

In some years during the month of April, we have worked with some distributors on early start orders for the coming semester.

We didn't do much of that this year, and that explains the variants for the fourth quarter itself.

So, as I said, again, earlier, we're quite content to see the traditional print book decline.

That doesn't mean to say that print overall is declining, but we're moving to more flexible business pricing models as well as the move to digital.

Custom print is still something that many customers still prefer.

What's important for us is that we manage that business -- it's a digital business -- where the content itself is presented digitally in order to make the custom publishing decision.

It's been up to the customer, frankly, whether they want a custom eBook or a custom print book.

While customers continue to demand custom print books, and some students and some professors still prefer them, we'll continue to provide them with that option.

So, should we think of the print textbook revenue to decline in the same vicinity than in fiscal '13 -- i.e., say, between 10% and 20% in the upcoming 12 months?

You'd have to differentiate between the traditional textbook model -- that is the full price, hardcover, 900 page, introductory textbook -- and all of the other formats, some of which are print.

If you aggregate all of those together, we don't believe that there'll be anything like that, but the traditional print book model could continue to decline.

I wouldn't comment on whether it's going to be at the levels that you (technical difficulty).

Thank you very much, gentlemen.

Daniel Moore, CJS Securities.

Thank you.

What are your expectations for growth or moderation around advertising corporate reprints, given the high incremental margins of that business?

That business has always been one of the most cyclical businesses.

It depends on new drug discovery.

It depends on when particular drugs go into generic and patents expire.

Overall, the pharmaceutical industry, as you probably have seen, has not been in a high-growth mode over the last couple of years.

And it is new drug related and drug discovery that has fueled the print advertising and the creation of print supplements.

Which is really pharmaceutical companies recognizing scientific evidence in our journal publications that supports the efficacy of the drug.

And taking a reprint, a sponsored reprint, from us so that they can distribute it to their clients.

We saw a pretty rapid decline through fiscal '12 and into '13.

We do feel that right now that business has hit something of a new level.

At the same time, we are seeing increasing interest in moving from print to online, because, obviously, for a drug marketer or pharmaceutical marketer, they get much better evidence in terms of the return on investment with their advertising dollars from advertising in our digital products, and being able to see the actual usage of the online advertising.

So, we expect to see a continued transition from print to digital.

We are seeing more growth in some parts of the world that others.

So Asia -- the opportunities are a little better in Asia than they are in other parts of the world.

Overall, we think that business is stabilizing in fiscal '14.

If I could add just one more dimension to that, Dan, to more broadly answer the question with respect to research.

As part of the restructuring effort we identified in the fourth quarter, is that we took an impairment charge with respect to, I think it was about $9.9 million, $10 million worth of publishing assets associated with controlled circ journals, which roll up into advertising.

Recognizing, just as Steve said, to accelerate or transition from print to digital.

So, focusing less on print in the future, aligning costs around that, and focusing more on digital.

So we would expect to see, out of that decision, a decline in advertising of a print nature generated by our own look at how we're managing those businesses going forward in '14 and beyond.

That's helpful.

And, Ellis, you mentioned roughly one-third of the $80 million cost savings would come in '14.

Is it safe to assume that's largely back-half loaded?

It is.

A piece of that is centered around June 30.

I discussed that decision that we made, and has been communicated internally, to freeze the US defined benefit pension plan.

That will lead to a linear savings from June 30 forward.

Much of what remains outside of that savings, though, that is part of the one-third is, yes, very much back-end weighted.

Whereas we've identified programs, activities and locations, for the most part.

The ability to execute on those plans, do them in a way that's not disruptive to the business over the course of '14, will mean that we will need a runway to be able to do that.

So, yes, those are more back-end loaded over the course of '14.

And then, as I described earlier, there will be more to talk to the remainder of the program around mid year or so that represents the balance between the $38 million that will be generated out of actions already identified, and a charge taken at the end of the fourth quarter of '13end than what will impact fiscal '14 that will make up the balance of the savings over the year.

And then, therefore, being able to exit the year with an $80 million run rate savings.

Lastly, just elaborate on -- you mentioned the strategy behind the pilot for an alternative subscription license model for some customers and journals.

Is that something that's being requested by customers?

Is it something you are pushing?

What's coming out of that, if anything?

It's both.

Actually both customers, but it's primarily from a Wiley perspective.

Customers, quite frankly, the effect of it to them is not meaningful.

Today we recognize revenue on issue publication.

That's a bit of a fuzzy definition because of the release of journal content in an online environment versus print issues.

Licenses, which represent 80% of subscription business, have historically been based upon issues published.

So we commit some customers for a certain number of issues for a journal for a period of time.

And the pilot speaks to supplying content for a 12-month period beginning January 1, ending December 31.

And, therefore, you recognize one-twelfth of your revenue per month as you fulfill the terms of that contract.

So it is really an effort on our part to, quite frankly, recognize and reflect the reality of a digital business, or principally digital business, where content is continuously, so to speak, released into an online environment.

And, at the same time, to mitigate some of these issues with respect to publication scheduling, inasmuch as publication scheduling means less than it used to mean, quite frankly, now in digital, formerly in print.

And based on what you are seeing so far do you expect a higher percentage to move to a flat --?

We have no plans to extend the pilot at this point, Dan.

We'll run for another year at least and then we'll see what make sense.

But, as we've explained, in the year that you make that change, it has an impact of delaying revenue because more than one-third of our revenue is typically earned on issue publication in the first four months of the fiscal year.

So the impact of that is to push revenue back later in the year.

So, we'll think carefully before we extend the pilot any further.

Thank you.

And we will see you at our conference in July.

(Operator Instructions)

Ian Whittaker, Liberum.

Hi.

Thanks very much.

Just two questions, just around the education model.

First of all, I think in previous times, yourself, or maybe some of your peers, have provided an impact of rentals on the US higher education market, somewhere in the range around 2% to 3%, impacted market growth.

Can you give us an idea whether that figure has stabilized around that level or whether you're seeing an acceleration, or indeed a deceleration of rentals impact on overall market growth?

And the second question related to that is, can you -- again, there's been this argument before, advanced, really, by all publishers, that book rentals will only pretty much eventually enter the used book market, and that we are approaching, as it were, the point at which its major effects should really be coming to an end.

When we speak with some of the retailers, they seem to have somewhat of an opposite view, and saying that book rentals for them have only really started to be something of a business model.

And they actually think there's a lot of potential growth to come through from book rentals in higher education.

So, can you give us your current thoughts on that, please?

Yes.

You didn't see the chart from us.

That wasn't a Wiley schedule.

I think -- did I hear you say an estimate of 2% to 3%?

Yes.

It might have been Cengage who gave that.

That seems plausible enough.

Certainly rental grew very rapidly in what was our fiscal '12.

And continued to grow a bit in '13.

I think it affected, it particularly affected that traditional textbook line -- the chart, the bar that we showed declining at 12% over the course of the fiscal year '13.

And some of that business was clearly, in earlier years was done to provide the inventory that supports rental.

And we've probably seen across the whole market, the 6% decline in the US higher education market in the course of our fiscal year, probably has some of that rental impact in it.

So, while I don't have a figure for the actual amount, it seems reasonable enough.

Our strategy, as I've said on several occasions, is to move the whole business rapidly away from the traditional textbook model to more flexible price points, to more flexible offerings, including custom and binder-ready versions, neither of which lend themselves at all to the rental market.

As well as to digital, which again is not a rental proposition under the kind of licenses that we have around digital products.

So, rental has certainly clouded the picture a lot in the last couple of years.

We continue to work with our retail accounts, as well as with some of the providers of rental services.

We don't see it as being a long-term challenge to the business.

We don't see it being a big part of the future of our business as we move more to flexible price points and digital business models.

Just as a follow-up, if you look at some of the polling data on students' preferences, there still seems to be a surprisingly large percentage of students who prefer print.

Obviously, as you said, you've got custom.

But what are the implications there in terms of eBooks?

How do you manage to persuade those students who are still wedded to the print model, presumably for convenience sake, to switch over to eBooks?

Without getting into the detail of how we think about educational products, to me, the answer would be in providing additional value in the digital version that goes way beyond the value of the print.

And, again, the perfect example of a value-added digital product would be WileyPLUS, which is not an eBook.

It's an online course.

It's an integrated learning solution that, at its heart, includes an eBook, but that also includes the opportunity for remediated self-learning, adaptive learning.

It provides enrichment materials.

It provides professors with the opportunity to set homework assignments and to automatically grade them so students get a real-time feedback on their work, and are also pointed to revisit concepts that they struggle with.

It's so much more valuable to teachers and to students if we can create those kinds of digital products.

WileyPLUS resonates well with our customers.

It's grown really strongly in the last year.

Many of our competitors have other offerings that are attempting to do similar things.

We think that's very much the way the future is oriented.

And if students still want print for parts of their course, we should be able to give them that flexibly through custom print options.

And in the future perhaps through print on demand options, as well.

Thank you very much.

It appears that we have no further questions.

At this time I would like to turn the conference back to Mr. Smith for any additional or closing remarks.

We thank you for your comments and questions.

We are very focused on the year ahead.

We look forward to sharing our results for the first quarter with you at our September call.

And hopefully talking to many of you in much more detail about our business and its future prospects at the September Investor Conference.

Thank you.

This concludes today's conference.

We thank you for your participation.