John Wiley & Sons Inc (WLY) 2014 Q2 法說會逐字稿

Good morning and welcome to the Wiley second quarter earnings call. As a reminder, this conference is being recorded. At this time, I would like to introduce Wiley's Director of Investor Relations, Mr. Brian Campbell. Please go ahead, Sir.

Thank you. Hello everyone of thank you for participating in our call today.

Before introducing Steve Smith, President and Chief Executive Officer, I 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 obligation to update or revise forward-looking statements to reflect subsequent events or circumstances.

(Conference Instructions)

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. In addition to Brian, I'm joined by John Kritzmacher, Wiley's Chief Financial Officer.

We are pleased with the results for the quarter and through the first six months of the year. As we stated back in June, FY14 is a transitional year for us, with the implementation of our comprehensive restructuring program in the integration of recent acquisitions. In the first six months, we have made significant progress toward our full-year guidance, and are on course to achieve our restructuring savings objectives for FY15. While we are only halfway through the year, Wiley's base business is performing solidly, our recent acquisitions continue to meet expectations, and we're on track to achieve short-term and long-term goals.

Adjusted revenue growth for the second quarter was solid, driven by continued growth in journal subscriptions and open access revenue, contributions from online program management in Education, and online training and assessment in Professional Development. Digital book growth across all three segments also contributed to the results. There were timing benefits, primarily due to the impact of Hurricane Sandy, which closed our New Jersey shipping facilities, delaying $4 million worth of print book revenue into the third quarter last year. This had a favorable impact on prior year comparisons in our Education and Professional Development segments. Adjusted earnings per share, or EPS, growth of 11% in the quarter, was strong, due to revenue performance restructuring and other cost savings, lower taxes and lower distribution costs, offsetting an increase in technology expense related to investments in our transformation, and higher incentive accruals on the expectation of full-year performance in line with our plan for this year.

Our restructuring program continues to grow as expected. Through the first six months of this year, we have realized $10 million of restructuring savings and $4 million of other savings. As of October 31, Wiley had developed and approved plans to achieve $70 million of the $80 million of expected run rate savings starting next fiscal year. And besides closing the pension plan, we've taken significant steps to simplify and consolidate our organization.

Second quarter adjusted revenue of $449 million, was up 8%, excluding the impact of foreign exchange and the prior-year operational results of divested consumer businesses. From this point forward, unless otherwise noted, I will exclude the impact of foreign exchange in the divested consumer business when commenting on all revenue variances, in order to give a clear measure of operational performance. Also note that adjusted contribution to profit, adjusted operating income, and adjusted EPS metrics, exclude all restructuring charges, asset impairment charges, gains on the sale of the operating results from the divested consumer publishing program, and deferred tax benefits arising from significant rate changes in the UK.

Journal subscription revenue growth continued through the second quarter. We also realized higher growth from our Solutions businesses in Education and Professional Development, including online program management and WileyPLUS in Education, and talent management and test prep in Professional Development. Digital books were up 40% to $31 million; and for the first six months, adjusted revenue is up 6%.

Adjusted operating income grew 5% in the quarter to $70 million. Contributions from revenue growth in restructuring and other cost savings, were offset by a 25% increase in technology expense related to our transformation activities, and higher incentive accruals related to our expected current year performance tracking to our plan. Adjusted operating income for the first half of the year rose 3%. Adjusted EPS for the quarter was up 11% to $0.84, and was up 6% for the first six months year-to-date. Organic revenue, which excludes the prior-year operating results of the divested consumer programs and current-year results of Deltak and ELS, rose 4% for the quarter and 2% for the first six months. As a reminder, Wiley acquired Deltak and ELS in October and November of 2012, respectively.

Research revenue was up 2% in the quarter to $253 million, or 4% year-to-date. Journal subscription revenue grew 2% in the quarter, and is up 3% for the first six months. Journal subscriptions renewals are up by over 3% in calendar year 2013, with 99% of business closed. We are in the very early stages of the renewal season for calendar year 2014, with activities so far tracking to expectations. Also, funded open access revenue doubled in the quarter to $4 million. We signed two new society partners in the quarter, with combined annual revenue of $7.8 million, including the highly prestigious European Molecular Biology Organization, or EMBO. We also renewed 13 society agreements, worth approximately $10.5 million per year. No society agreements were lost. Demand for our content continues to increase, with full text downloads up 28% over prior year. Digital books were up 45% for the Research business, partially offsetting a decline of 10% in print books.

Wiley Research announced a licensing agreement with the global informatics company, Information Handling Services, or IHS, in August. Under the agreement, IHS added Wiley digital books databases and major reference works to their collection of technical documents, spanning engineering standards and related industry and technical knowledge. Adjusted contribution to profit after shared services allocation for research, was up 1% to $74 million, with revenue growth partially offset by higher society royalties. Year-to-date contribution to profit was up 6%.

Adjusted Professional Development revenue was up 7% to $93 million, and flat yea- to-date. Our online training and assessment business, including Inscape and ELS, was up 44% in the quarter. Inscape's digital delivery platform, EPIC, saw record usage in the quarter, with more than 238,000 learners receiving a personalized work profile assessment. The Accounting and Finance test print business was buoyed by new ELS CPA test prep revenue, and the performance of our CFA partnership. Digital book revenue grew by 30%, offsetting a slight decline in print book sales. However, the prior-year impact of Hurricane Sandy on our print book fulfillment operations, delayed approximately $2 million of print sales into the third quarter last year. Growth in the Business and Finance category continues to offset the challenging year in technology, which is the result of market weakness related to a decline in commercial software launches. Adjusted contribution to profit for the quarter, after shared services allocations, grew by $6 million to $9 million, due to revenue performance, higher gross margin percentage related to reshaping of the portfolio, and restructuring savings. Year-to-date adjusted contribution to profit was up 93%.

Education grew 30% to $104 million in the second quarter, and is up 22% year-to-date. Strong revenue growth in key areas, including, online program management, digital books, and binder and custom products, helped drive results, offsetting the decline in print textbooks. Print textbook alternatives, including WileyPLUS Course Management, digital books, and binder ready in custom products, grew at double-digit rates in the quarter, and now represent a combined 39% of total education revenue. Timing also played a part in the second quarter, including the favorable impact of later orders in the current year due to late semester starts in the US, and the shift to digital formats, which pushed revenue into the second quarter. In addition, second quarter and year-to-date revenue comparisons include the favorable impact of $2 million of sales delayed in the prior-year due to Hurricane Sandy, as well as earlier-than-usual orders in the Australian schools business in the current year.

Revenues for the Deltak online program management business were $17 million in the quarter, and $31 million in the first six months, Excluding Deltak, Educational revenue performance for the first six months was essentially flat. In the quarter, Deltak added another high-profile partner in the McCombs School of Business foundation at University of Texas Austin, and at the end of October, Deltak had 34 institutions under contract, with 107 programs generating revenue, and 43 programs in development. Global education adjusted contribution to profit, after shared services allocations, grew 43% in the quarter to $23 million, reflecting revenue growth, gross margin improvement from digital products, and restructuring savings. Year-to-date, adjusted contribution to profit was up 17%.

As in the first quarter, technology expense increased significantly over prior-year, as we continue to invest in new technology-enabled products and systems. We expect that the rate of growth in technology expense will moderate in the second half of the year, and likely finish up approximately 10% for the full year. Distribution expense declined again in the quarter as a result of lower print volumes and restructuring savings. Finance and other administration costs increased 5% and 7% in the quarter, respectively, mainly due to higher professional fees and employer -- employee related costs.

In regards to our balance sheet, net debt fell $111 million to $498 million compared to $609 million year ago, when we acquired Deltak. Our balance sheet continues to be strong and offers significant flexibility to invest in our transformation. Our trailing 12-month net debt to EBITDA ratio was 1.2 at the end of the second quarter. Deferred revenue grew 29% to $138 million from $107 million a year ago, driven by billing growth and cash collections. Journal subscription billings, Inscape online training and assessment, and WileyPLUS online course management all contributed to deferred revenue growth. Finally, the change in our technology, property and equipment assets was primarily due to an asset impairment charge of $4.8 million in the quarter, related to the termination of a multi-year software development program for an internal operations application, due to a change in our longer-term enterprise system strategy.

Free cash flow improved to a use of $112 million compared to a use of $143 million in the prior year, mainly due to a $10 million German tax appeal deposit in the first six months of this year, compared to a $30 million deposit last year. We have made all require deposits to date. Ultimately we believe the outcome will be a positive one. Excluding the deposit, free cash flow improved 10%. Note that free cash flow is negative in the first half of Wiley's fiscal year, principally due to the timing of annual journal and subscription cash collection. Finally, for the quarter, Wiley bought back 85,000 shares in the quarter at an average price of $46.31 per share. At quarter end, there were over 4 million authorized shares remaining in this program.

Our broad-based cost restructuring is well on track; as a reminder, we expect to achieve $80 million of run rate savings starting in FY15. More than 50% of the $80 million will fall to the bottom line, the rest will be reinvested back into the business to fund high-growth opportunities, such as those in front of Deltak. As of October 31 we developed and approved plans to achieve the proximally $70 million of the $80 million. Through the first six months of this year, we have realized $10 million of restructuring, and $4 million of other savings. We've taken a little over $47 million in charges since the program began in January, including $15 million in this quarter. The charges cover severance, consulting fees and facility relocation. We have closed our US pension plan, and simplified and consolidated our operations, particularly in areas of IT, distribution, content management, marketing, and facility services. Wiley expects to take an additional $10 million of restructuring charges in the second half of the year.

In summary, we are pleased with the performance in the quarter and through the first half of the year, particularly with journal subscriptions, the Solutions businesses and Professional Development and Education, and digital books across all three segments. Timing played a role of the quarter's results, specifically in Professional Development and Education. Our adjusted earnings performance for the quarter was also strong, mainly due to revenue growth, lower taxes, and restructuring savings; and given our first half results, and what we see for the remainder of the year, we are reaffirming our FY14 guidance of low single-digit adjusted revenue growth, and adjusted EPS of $2.85 to $2.95. With that as background, we welcome your comments and questions.

(Operator Instructions)

We will take our first question from Drew Crum with Stifel.

Good morning everyone. So Steve, based on the first half performance, the annual guidance that you are reintegrating this morning would imply some declines in the second half, and I'm wondering if you guys could just walk us through the puts and takes as you see it, in the second half of the fiscal year.

Sure drew. So I'll begin with a couple of comments, and then I will let John take over with some more of the detail. One of the big drivers of the change in the second half of the year will be around incentive compensation, which was a major expense in the second half of last year. And as we said at the beginning of the year, although we will have restructuring savings building in the second half of the year, those are largely compensating for the increase in incentive costs on a year-to-year basis.

It is also important to note that a lot of the revenue growth that we have seen in the first half comes from the newly acquired businesses, particularly from Deltak and ELS, and they, of course, do not contribute positively to EPS growth in this fiscal year, given that both of those acquisitions remain dilutive. I will let John build out on that a little bit.

Drew, so let me just expand on a little bit. In the line of what we said previously, we continue to expect, across the back half of the year, that were going to see low single-digit revenue growth across the business, including the acquisitions; and as Steve noted, the acquisitions don't contribute to the bottom line. Noteworthy, around revenue performance, on the back half of the year we just reiterate the impact of Sandy, which benefited the third quarter in the year-ago, as well as in the comparables for this year -- earlier ordering out of the Australia schools than we have seen in prior years. So some impact on revenue in the year-over-year comparison there.

And then broad terms around impact on profitability we will see further savings from restructuring as that continues to ramp a bit. Those savings from restructuring, largely to be offset by higher incentive accruals, and, going back to what we said previously about the accrued incentives, we should expect to see, on the back half of the year, that those accruals are about $20 million higher than what we saw in the prior year.

The incremental margin that we'll earn from revenue growth, on the back half of the year, will be offset by modestly higher spending on technology; and we'll see some other discrete expense impacts on the back half of the year, including the partial winding down of a long-term occupancy incentive that we have been recording annually for several years in our third quarter. So there's a bit of an impact from that item on expense in the third quarter.

Okay. Very helpful guys thanks. And Steve, in your prepared remarks you mentioned the calendar 2014 journal subscription renewals tracking to expectations. Can you expound upon that a little bit? Give us a range of growth that you're expecting or what you're seeing early on?

As you know, Drew, it is really very early at the of our second quarter, so we are in the peak season now in terms of bringing business in; but there is always timing swings that make it a little difficult to get a read on exactly where we are. But overall, the licenses that we've already closed, the new business that has been completed, shows signs of overall subscription growth that is pretty consistent with prior-year experience and we are expecting overall 2014 to be fairly consistent.

But, do remember that 2013 included the benefit also, of some large society wins -- larger than usual for us -- particularly, the American Geophysical Union that brought in significant new revenues in 2013. It may not be quite at the level that has been in 2013, net of society -- but net of society renewals, the overall subscription growth should be about the same. We are in the same ballpark.

Okay. One last question for me guys. The tax deposit, $10 million year-to-date, should we expect additional tax deposits in the back half of the year, or anything else going forward, beyond FY14?

We are continuing to make our tax payments now, on the premise that we will pay without the stepped up basis in Germany that is the subject of our dispute. So, we are caught up in terms of retroactive tax deposits, and we are now making payments at the higher rate until the dispute is resolved. So there are no catch-up payments any further. We just continue to now pay at the higher rate.

Got it. Okay. Thanks guys.

(Operator Instructions)

And we will take our next question from Dan Moore.

This is actually Arnie Urschner backing up Dan Moore today. Just as a follow-up to last question, could you remind us what tax rate is embedded in your EPS guidance for the year?

We are anticipating an effective tax rate in the range of 27% to 28% for the year. In the second quarter we were little bit lower than that. We had one discrete item that was a reversal of a reserve for a contingent item that cleared. But you should expect it will have an effective tax rate in the 27% to 28% sort of range.

Okay; and then my second question is, the EPS and margin impact, obviously, Deltak is a high-growth area, you are in the development stage. Perhaps, and you're incurring a lot of start up expenses. Can you remind us what the total of that might be, for EPS impact this year? And equal, if not more importantly, what level, or number of clients can you leverage the investment you have made in that, turning it to a more positive contributor in the upcoming year?

So, we have said previously that we expect Deltak, in terms of flow through to bottom line, all in including interest expense, will be dilutive to earnings for the year, by approximately $0.10 a share. We are continuing down that track. The actual performance, in terms of delivery to bottom line, as we continue to accumulate partners, of course, depends on mix and the pace at which we continue to invest in acquiring new partners and new programs.

It is our expectation that the contribution to earnings will significantly improve going into FY15; and that's about as much as we are providing right now. We're continuing to look at the opportunity to establish our share position there and that requires continued investment. Will give you an update on how we are thinking about profitability for Deltak in 2015 as we make our way into 2015 guidance.

Thank you.

(Operator Instructions)

It appears we have no further questions in queue at this time. I would like to turn the conference back over to Mr. Steve Smith.

I do apologize, we do have a couple more questions that came in to queue. We will take our first question from John Helmer with Caldwell Securities.

Good morning. About two years ago I visited Ellis, and asked him a question that had been prompted to me by an individual who had presided over the transfer of profit in the music publishing business, and he said, find out if Wiley is writing its own code. And he said, if they're serious about going digital, they will be writing their own code. And that was the first question I asked Ellis, came back and told this guy, yes, they write their own code, but they're doing it in Russia. And you made reference to a project that has been shut down, having a to do with some kind of a strategic change. Is there any connection there?

No, none at all. This is Steve, John. The team in Russia are the developers for -- they been the development team behind WileyPLUS, they have a very successful integrated online learning platform for the education segment. That is a customer-facing technology that continues to power growth, and is helping transform our education business.

The impairment of a system that we referred to in the release and in my remarks, is actually a transactional system that supports our journals business, and it is an internal transactional system. And this was being developed -- it is actually an external system, but we've taken a change of direction, recognizing a change in technology strategy, we need a more integrated infrastructural system. So those two things do not connect at all.

Thank you.

Our next question is from Ian Whittaker with Liberum.

Thank you. It's just a very quick one. I think you mentioned, that you used to tell Deltak, the Education revenues would be flat, I think, for the first six months. Can you just say, that you benefited from timing in the Australian deal, or Australian education? Could you just say would it be just for the pure US higher education side ex Deltak?

Yes. In the first half of the year the Australian numbers are really tiny. They would not move a needle on that. You can take the comment about flat referring to the higher ed business, excluding Australia.

Thank you.

We currently have no further questions in queue. Mr. Smith?

Well I think we set a new record for the speed of the call and the number of questions; but hopefully that reflects the quality of the material and information we provided. So thank you for participating in the call. We look forward to talking to talking you again at the end of our third quarter. Thank you.

This does conclude today's conference. We thank you for your participation.