John Wiley & Sons Inc (WLY) 2014 Q4 法說會逐字稿

Welcome to the Wiley's fourth quarter earnings call. As a reminder, today's conference is being recorded. At this time, I would like to introduce Wiley's Director of Investor Relations, Brian Campbell. Please go ahead, sir.

Thank you, Lisa. Good morning, everyone. Thank you for participating on our call today. Before introducing, Steve Smith, President and Chief Executive Officer, I'd 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 who'd prefer to listen to 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 live phone. This will eliminate any delays 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 the 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. A quick note before we begin, Ellis Cousens, our outgoing Chief Financial Operations Officer will officially retire from the Company on June 30. Ellis joined in March 2001. His contributions to Wiley are many and significant. He was a major contributor to the strategic decisions that shape our Company today, including the acquisitions of Blackwell, Deltak and others as well as our recent restructuring. He has helped drive our transition from print to digital. I'd like to take this opportunity to thank Ellis for his contributions and to wish him well in his future endeavors.

Now, onto our results. I will be excluding the impact of foreign exchange and the divested consumer business in previous year results when commenting on all revenue variances in order to give a clear measure of operational performance. Also note that adjusted EPS, adjusted contribution to profit and adjusted operating income metrics exclude foreign exchange, the divested consumer businesses and all unusual items.

In FY14, we made substantial progress in pursuit of our long-term goals. We exceeded our revenue and earnings guidance, successfully executed on our restructuring plans to achieve a lower and more flexible cost structure and late in the year, made two strategic acquisitions that will expand our solutions portfolio in professional development. Adjusted revenue increased 4% on continued steady growth in research journals accompanied by double-digit growth in professional and educational solutions. The Company continues to grow its share of revenue from digital and solutions now at over 55%.

Our transformation to the provider of knowledge-enabled solutions that integrate content, technology and services will accelerate with the additions of CrossKnowledge and Profiles International and the continued strong growth in online program management, course management and test preparation solutions. The full year share of revenue earned from print book sales is down to 29%.

Adjusted EPS rose 4% to $3.05 due to revenue and margin growth, restructuring savings of $38 million and other savings of $9 million, partially offset by higher incentive compensation accruals and a 13% increase in technology investments. Free cash flow was 10% higher than last year at $250 million. There were unusual items that impacted cash flow in both years including restructuring impairment charges, restructuring payments and German tax appeal deposits.

In FY14, we made three acquisitions including: CrossKnowledge, which provides online learning solutions for corporations and academic institutions; Profiles International, which provides pre- and post-hire assessment for corporations; and Elan Guides, which provide CFA test preparation content for professionals.

Finally, we've completed our plans for the restructuring program which began in January 2013. As a reminder, we expect $80 million in run rate savings for FY15. Approximately half of that will be reinvested in the business to take advantage of growth opportunities in online program management, WileyPLUS course management, test preparation and talent management solutions.

Adjusted revenue grew 2% in the quarter to $457 million, driven by steady performance of the research business and strong growth in education, which offset a decline in professional development. Fiscal year adjusted revenue grew 4% reflecting solid performance in research and education and growth from the full-year impact of the Deltak acquisition.

Adjusted operating income grew 3% in the quarter. Contributions from revenue growth and restructuring and other cost savings were partially offset by higher incentive accruals and a 5% increase in shared services costs. For the year, adjusted operating income was up 1% with revenue growth and restructuring savings offset by higher incentive compensation accruals, a 13% increase in technology investment and investment related to Deltak. Adjusted earnings per share was up 4% in the quarter reflecting the improvement in adjusted operating income as just described and lower income taxes. As noted earlier, adjusted EPS also rose 4% for the fiscal year.

Research revenue was up 2% in the quarter to $297 million and 3% for the year. For the quarter and the fiscal year, performance was driven by steady growth in journal subscriptions and strong growth in digital books and other -- and author-funded open access partially offset by a decline in print book sales. 2014 calendar year journal subscription billings are up 2% as of April 30, with 96% of targeted full-year business closed. Subscription growth rates for the full calendar year are expected to remain at this level. Growth is due to a combination of new society business and modest price increases.

For the quarter, 16 society journals were renewed for combined annual revenues of $8 million. There were no new wins or losses. For fiscal year, Wiley signed seven new journals worth $10.6 million annually, renewed 85 journals with combined annual revenue of $40 million and lost 11 journals worth $6.9 million annually.

For the year, digital research book revenue was up 27% largely offsetting the 11% decline in print books. Adjusted contribution to profit after shared service allocations improved 3% in the quarter or 4% for the year. Revenue growth and restructuring savings offset higher society journal costs and accrued incentives.

Adjusted professional development revenue fell 2% in the quarter to $93 million and 2% for the year. Online training and assessment showed solid growth in the quarter and in the year driven by test preparation solutions for finance professionals and Inscape post-hire assessments as well as one month of contribution from Profiles International which closed on April 1.

Print book revenue was down 10% in the quarter due to softness in technology and consumer categories. For the year, print books fell 8% as growth in business and finance did not offset weakness in technology and consumer.

Our recent portfolio changes and new product developments are resulting in improvements in profitability. Adjusted contribution to profit for the quarter, after shared service expense allocations, grew 58% or 50% year-to-date. Performance was driven by restructuring savings and higher-margin digital revenue.

As we discussed during our May 8 acquisition call, we are very pleased to have made recent acquisitions -- additions to the professional development portfolio. The combination of CrossKnowledge and Profiles International with our existing talent solutions business will create an end-to-end solution from candidate assessment through employee learning and development which will in turn provide significant value to corporate customers and individual professionals across the globe. While you will now be able to leverage a broad set of sales resources, content and solutions across a wider base of existing talent solutions customers.

For example, CrossKnowledge has only recently entered the US market and can immediately take advantage of Profiles and Inscape's strong US sales footprint, while Profiles will benefit from CrossKnowledge's strong presence in Europe. Wiley's talent solutions portfolio is now a $100 million revenue business and positioned for strong double-digit growth. As noted in early May, combined dilution from the two businesses is estimated to be $0.10 per share in FY15, primarily driven by one-time write-downs of deferred revenue under purchasing accounting.

Education revenue was up 10% in the quarter to $67 million or 12% for the year. Strong growth from online program management, WileyPLUS and digital books drove results. Fiscal year revenue growth also includes the comparability benefit of acquiring Deltak midyear in 2013. Online program management showed significant momentum again this year with the number of university partners growing from 31 to 37 and the number of programs growing from 146 to 174. In the quarter, Deltak added George Washington University as a partner and nine additional programs.

The share of our global education revenue coming from print textbooks continued to fall from 55% a year ago to 44% today. The decline continues to be largely offset by growth in alternatives such as WileyPLUS, digital books and binder and custom products. Education's adjusted contribution to profit after shared services allocations declined slightly in the quarter but improved 2% for the year with revenue growth in restructuring savings offsetting investment in online program management and higher accrued incentive costs. Deltak was dilutive to earnings in FY14 by $0.06 per share.

Shared services costs were up 5% for the quarter to $112 million or 7% for the year. For the year, technology expense increased 13% over prior year, as we continue to invest in new technology-enabled services and systems. For FY15, we expect technology expense growth to be approximately 10%. Distribution expense declined again in the quarter as a result of lower print volumes. Finance and other administration costs were up in the year due to the higher accrued incentives and the reduction of a property tax incentive related to our New Jersey headquarters.

Turning to our balance sheet, net debt declined by $125 million compared to the prior year to $214 million. Our trailing 12 month net debt to EBITDA ratio at the end of April was 0.5. However, our $175 million CrossKnowledge acquisition, which was financed using a combination of overseas cash on hand and capacity from our revolving credit facility, did not close until May 1. Also note, we exercised an accordion feature under our existing revolving credit agreement bringing the aggregate commitment from $825 million to $940 million. In summary, our strong balance sheet positions us well to continue to expand our service base and global reach.

Free cash flow for the year was up 10% to $250 million. Earnings performance and lower disputed income tax deposits paid to the German government offset cash payments relating to restructuring. Also, higher accrued incentive compensation in the current period offset the benefit from accelerated collections in the prior period. Acquisitions made in FY14 include Profiles International and Elan Guides totaling $55 million. Including the $175 million spent on the CrossKnowledge acquisition which closed after the fiscal year ended. Wiley has invested nearly $500 million on acquisitions since May of 2012. Companies and assets acquired include Deltak, ELS, CPAexcel, Profiles International, Elan Guides and CrossKnowledge.

During the same period, Wiley has returned over $250 million to shareholders in the form of dividends and repurchases. Last June, we raised our quarterly dividend for the 20th consecutive year. In FY14, we repurchased 1.25 million shares. Over 3 million shares remain in the current share repurchase authorization.

Plans have been completed in regards to our broad-based restructuring. We expect to achieve $80 million of run rate savings starting in FY15 with approximately half of that reinvested back into the business. FY14 savings were higher than expected with restructuring savings contributing $38 million and other savings $9 million. We've taken $67 million in charges since the program began in January 2013. The charges cover severance, consulting fees and facility relocation. Our reinvestment will be focused on growing our acquired solutions businesses including online program management, test preparation, pre-hire and post-hire assessment and learning and development.

We are developing new products in all three of our segments. There is further development work in expanding our Wiley online library and WileyPLUS platforms we are developing plus the relationship management tools and resources as we continue to expand our direct sales capabilities across our businesses. We are at the beginning stages of deploying an enterprise resource planning or ERP solution to replace multiple internally developed systems.

Finally I'd like to extend my utmost appreciation to all Wiley colleagues around the world, who have performed exceptionally through this challenging period of restructuring. Our strong performance in FY14 is a direct reflection on them.

Including the CrossKnowledge and Profiles acquisitions, we are expecting to achieve mid-single digit revenue growth and adjusted EPS in a range of $3.25 to $3.35 for FY15, including the combined $0.10 per share dilution impact of the acquired Companies. We are also reiterating our FY17 goals which we set down last September. These goals include mid single-digit revenue growth, operating margin at or above 17%, EPS growth at or above 10% and 25% of our revenue coming from solutions.

Finally, our 2014 Investor Day will be held at our global headquarters in Hoboken, New Jersey, on Friday, September 26. We hope to see you there. With that as background, we welcome your comments and questions.

(Operator Instructions)

Daniel Moore, CJS Securities.

Quickly, Ellis, thank you very much for all your help over the last couple years. Your guidance for FY15, are there any additional restructuring impairment charges assumed?

I assume they would be adjusted, but do you anticipate further charges? What is the implied tax rate for the guidance range?

Hi, Dan. It's John Kritzmacher. First with regard to your question on restructuring charges, as we have been saying, we are aiming to have our restructuring program fully designed and in motion by the end of the year. We are there now.

So we are not anticipating additional charges in our FY15 related to restructuring. Now, of course, there will be true-ups along the way, just as our estimates become more refined and the programs are completed. But in terms of significant new activities, it is not our current intent nor does our guidance anticipate that we'll have additional restructuring charges.

Then with respect to the anticipated tax rate, we would expect to be somewhere plus or minus 27%, 28% in terms of effective tax rate.

Excellent. What profitability or dilution for Deltak is embedded in the guidance?

We're assuming that Deltak will be dilutive again in FY15, mid single-digit pennies, somewhere plus or minus around $0.05 or $0.06.

That's still very much in investment mode as far as Deltak is concerned?

We're still in investment mode with that. Yes. Looking for strong continued double-digit revenue growth in FY15.

Got it. The amount of intangible amortization expense continues to increase as you make these additional tuck-in acquisitions. By my model, I'm looking at cash EPS of $4 or higher in FY15. The balance sheet, despite multiple acquisitions, still highly under levered.

Are there lots of additional acquisition opportunities out there that you're contemplating? If not, what would be the most likely alternative uses of cash? By my model, you're trading at maybe 10 times. As I look out -- cash EPS, as we look out a year or two, would you consider more aggressive share repurchases at these levels?

Dan, let me take that to begin with and John can maybe jump in on capital allocation. I think you can expect for us to continue to have a blend of use of cash over the coming year.

We still believe actually that we have the opportunity to add further acquisitions that can complement the portfolio and help accelerate this migration towards solutions businesses. So we continue to look at opportunities in that space across all three of our businesses.

Share repurchase and dividends will still feature large in the way that we allocate cash. I don't expect any major changes there. John, do you want to --

No, I think that's right. We continue to pursue a balanced view that takes advantage of the flexibility we have on our balance sheet, given the strength of our balance sheet and our cash flow. We've been appropriating cash in a relatively balanced way across dividends and share repurchases in the past year in a fairly consistent fashion.

Just would remind, this is the time of year when we typically take another look with our Board at the dividends. We will have more information about our expected dividend in the coming days.

Very helpful. Last one, then I'll jump back in queue. Of the $80 million run rate savings from restructuring that you expect in 2015, how much of that actually did benefit 2014?

The benefit through 2014 in terms of realized savings in the year, that's $38 million.

$38 million? Very good. I'll jump back in queue. Thank you.

Thanks, Dan.

(Operator Instructions)

Mr Smith, we do have one follow-up question from Daniel Moore. We'll take that now.

Just in terms of shared service, how much leverage is embedded in FY15 guidance? When would you expect more material given that the restructured more material leverage on shared service to start to kick in, in the model?

Well, these actions that we're taking around shared services, Dan, go across all parts of the business. They do affect a significant cross-section of the shared services functions including distribution, including our technology group, including some of the integration and the rationalization we're doing around content management. Those things are all part of the $80 million run rate building into our momentum going into FY15.

Some of them are still a little bit -- have still a bit of work to go. But, for example, the reshaping of our distribution model is largely in place. We've moved to a lower and more variable cost structure there in where (inaudible) that. Some other pieces are still a bit more work in process such as the execution of our strategy around content management. But those will all be kicking in to the plan as we make our way into 2015.

I'm going to keep going, if you don't mind, because I've got a few more. Author-funded open access, is that becoming an even greater tailwind? Do you expect that to taper off? What are you seeing there?

Dan, this is Steve. We're continuing to see good growth from author-funded open access. We have -- every year, we reject significant numbers of papers that are submitted to our journals. Because they don't fit with the first tier, if you like, of publishing decisions around our subscription journals.

We're finding opportunities to provide a service to authors to publish those journals in open access journals that are rigorously peer-reviewed and maintain very high quality standards. There are funds available to pay for funded open access.

We expect that to continue to be a growth -- obviously, it's come from a very low base, so you're seeing in percentage terms, a high rate of growth in FY14. We continue to expect to see good growth in 2015 and beyond. But as the base business gets bigger, the pace of growth will properly moderate.

Very helpful. In professional development, given the acquisitions you've made, many of the divestments, obviously and then the fact that print books is the highest percentage among your segments of that. Are we at a stage where we should be seeing positive organic growth going forward, the segment as a whole? Or is that maybe another year or two away?

Yes. As I said in my prepared remarks, the acquisitions of CrossKnowledge and Profiles combined with our other businesses create a talent solutions business in PD of approximately $100 million. That will be growing in double-digits.

We expect, overall, that will fuel growth of the segment in its entirety. We have seen and probably will continue to see a decline in print book sales with the digital version of those print books, the straight e-book, not yet replacing the lost sales of print.

But we are beginning to see in some areas such as business and finance opportunities to develop new business models that go beyond the flat content of an e-book to add certification test preparation services, et cetera, that can fuel growth overall from that category. We have repositioned that business so that we can get similar rates of growth in other categories. So overall, we expect to see professional development being a growth engine in the years ahead.

Very helpful. The tax payment to the German government this year, remind me, is there any tax timeframe when you would might hope to recoup that?

We're still expecting, Dan, that's going to take a few years time. So we're not expecting any resolution to that in the near future, probably something like three to five years before we'll get that resolved. We will be making incremental payments on that for the next, probably, two years or to get to a point where it's -- once -- that's it's then paid up.

All right. Lastly, you mentioned Steve, ERP solution that you were starting to engage in. Any sense of the quantity of what that investment would look like -- might look like in the timeframe?

As with any major systems implementation, an ERP implementation is likely to span out over at least two to three years. I'm not sure whether John can give any guidance on --

We can provide a little more about it as we make our way through the year. Frankly, we're still in the formative stages.

We're at the point of selecting the platform as well as an integration partner to work with. So we're down the track but we're not yet in implementation mode. We'll give you more details as we finalize our plans and actually get underway.

Presumably anything that would hit the P&L is embedded at least for 2015 in that 10% guidance range?

Yes.

Okay.

Yes. That's correct. It is reflected in the P&L. It is also reflected in our commentary around the level of technology spending that we anticipate for the year.

Very good. Look forward to seeing you at our conference in July.

All right, Dan. Thanks.

Mr Smith, we currently have no more questions at this time, sir. I'd like to turn the conference back over to you for any additional comments or remarks.

Well, we thank you for joining on the call today. Thank you, Dan, for your questions. We look forward to speaking to you again soon.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.