John Wiley & Sons Inc (WLY) 2015 Q1 法說會逐字稿

Good morning, and welcome to Wiley's fiscal year first-quarter 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, Brian Campbell.

Please go ahead, sir.

Thank you.

Good morning everyone, and thank you for participating on the call today.

Before introducing Steve Smith, the 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 prefer to listen to the call over the phone but would like to still 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 this presentation will be available on our Investor Relations page at the conclusion of the 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.

First quarter revenue grew 4% on a constant currency basis driven by double-digit growth in education, contributions from our two newly acquired talent solutions businesses, CrossKnowledge and Profiles International, and low single-digit growth in our research journal business.

Please note that our first quarter results include only one month contribution from CrossKnowledge rather than the full three months.

Financial results for that subsidiary will be reported on a two-month delay, and the implementation of reporting process improvements later in the fiscal year.

Adjusted operating income at constant currency rose 10% due to revenue growth and restructuring savings.

Adjusted EPS excluding foreign exchange grew 8% to $0.56 a share.

A lower effective tax rate largely offset modestly higher interest expense, and a $600,000 one-time sale of property in fiscal year 2014.

Adjusted operating income and adjusted EPS exclude the impact of restructuring credits and charges in both years, as well as a large tax benefit in the year-ago period related to a reduction in the UK corporate income tax rate.

From this point forward, I will exclude the impact of foreign exchange when commenting on all revenue variances in order to give a clear measure of operational performance.

Adjusted EPS, adjusted contribution to profit, and adjusted operating income metrics exclude the impact of foreign exchange, restructuring credits, and charges in both years, and the aforementioned prior UK tax benefit.

Finally, please also note that we made some changes to the segment categories based on our newly acquired businesses.

I will make note of those changes as I go through the presentation.

Research revenue was $255 million, essentially flat to prior year on a constant currency basis.

Research communications revenue, which includes journal subscriptions, funded access, and other journal products such as the sale of publishing rights, back files, and article pay-per-view rose 2%.

Journal subscriptions grew 1% while funded access rose by $2 million.

As of July 31, 2014 journal subscriptions were up 1.5% with 98% of the business closed.

Within the quarter, our new society win fell short of losses by $2 million after two very strong years.

Books declined 8%, with both print and digital formats declining.

Quarterly book performance tends to fluctuate due to several factors, including the irregular timing of large institutional sales.

We expect the decline in total research book sales to trend closer toward flat for the full year.

Other research revenue, which includes advertising, reprints, and other publishing rights fell 8% to $19 million.

Finally, Wiley continues to be recognized as having one of highest impact journal portfolios in the world, as cited in Thomson Reuters' 2013 Journal Citation Reports.

27 Wiley journals achieved the top rank in their respective categories compared to 25 in 2012.

These rankings are an important measure of a journal's impact and influence on authors, library customers, society partners, and end-users.

Demand for Wiley's research publishing services remains strong with continuing healthy growth in article usage metrics and author submissions.

Professional Development revenue grew 9% in the quarter to $92 million.

Our newly acquired businesses, CrossKnowledge and Profiles International, contributed a combined $10 million in revenue this quarter.

Excluding those contributions, revenue was down 3%.

CrossKnowledge contributed one month of revenues to this quarter's result, even though the acquisition closed on May 1. Financial results for that business were reported on a two-month delay, and the implementation of reporting process improvements.

We are seeing very positive momentum for CrossKnowledge in Europe and have made a very encouraging start in entering the US as a new market.

CrossKnowledge jumped four spots to the number eight spot in Bersin by Deloitte's Global Market Share Report entitled The Global Marketplace for Learning Management Systems.

Learning management systems are defined as training technologies that enable organizations to develop and share content, deliver instructional materials to employees and administer formal training.

We are pleased with the ranking and the industry reception for both CrossKnowledge's innovative learning platform and the company's combination with Wiley.

In addition, the post-hire talent assessment business grew 16%, primarily due to the successful launch of the Five Behaviors of a Cohesive Team, an assessment-based facilitation tool and program designed to help professionals and their organizations build cohesive, effective teams.

A collaboration between best-selling Wiley author Patrick Lencioni and our Everything DiSC assessment platform, the Five Behaviors of a Cohesive Team has shown very strong momentum since its release in June.

Knowledge services, which includes print and digital books, online test preparation and certification, and other knowledge services such as publication rights and advertising, fell 4% to $75 million.

Growth in professional education, driven by the continued success of strong selling education title Teach like a Champion by Doug Lemov and our Common Core franchise titles, as well as a successful new GMAT title in business, was offset by weakness in consumer, dummies, psychology, and architecture.

Our recent restructuring initiative resulted in significant improvements in Professional Development profitability.

Adjusted contribution to profit for the quarter after shared-service expense allocations more than tripled over prior year to $8 million.

Turning to Education, revenue grew 12% in the quarter to $91 million.

Books were up 10% with a strong quarter for both print and digital.

Custom products which include both content customized by instructors and binder editions grew 20%.

Our WileyPLUS course workflow solution was up 20% in a seasonally light quarter.

Overall growth across these formats was primarily due to earlier ordering patterns at US bookstores and new adoptions at US high schools.

While we are pleased with our results this quarter, we do not expect this pace of growth to continue through fiscal year 2015.

Deltak, which we now refer to as Wiley Education Services, was up 10% and continues to show strong momentum.

During the quarter, Deltak signed its largest partnership to date, a university-wide agreement with a highly prestigious US institution.

Two expiring partnerships concluded in the quarter, totaling five programs.

And finally in August after the quarter closed, we signed our first partnership with a UK university institution.

We expect Deltak revenue to accelerate throughout the year as the many new programs we have signed over the past few quarters turn revenue-generating.

As of July 31, Deltak had 179 programs under contract, 47 of which were in development but not yet generating revenue, compared to 173 programs in the previous quarter with 53 in development, and 129 programs in the prior-year period of which 29 were in development.

In terms of profitability, revenue growth across the portfolio and restructuring savings resulted in a 58% increase in contribution to profit after the allocation of shared-service costs.

Shared-service costs were even with prior year, excluding the impact of foreign exchange.

As part of Wiley's restructuring and reorganization program, the Company consolidated certain business functions into global shared-services functions in order to improve efficiencies and enable cost savings.

These include content management, which is now grouped with technology, vendor procurement, now reported under operational services alongside distribution, and marketing services now grouped under other administration.

The cost of these functions were previously reported as direct operating expenses in each business segment, but will now be reported within the shared-service functions.

Prior-year numbers have been revised to reflect the same reporting methodology.

Distribution operation service costs declined 9% due to restructuring savings and our continued migration to digital.

Technology costs rose 2% for the quarter, but investment in technology is still expected to increase by up to 10% for the full year as we continue to invest in our solutions businesses' digital platforms and internal systems.

Turning to our balance sheet, net debt grew by $62 million from the prior year to $532 million.

Our trailing 12-month net debt-to-EBITDA ratio at the end of April was 1.3 compared to 1.2 in the prior-year period and 0.5 at the end of fiscal year 2014.

Note that we closed the acquisition of CrossKnowledge this quarter for a total consideration of $166 million net of cash.

Free cash flow use of $123 million this year compared to a use of $79 million in the prior year.

Note that free cash flow is seasonally negative in the first half of Wiley's fiscal year, principally due to the timing of annual journals' subscription cash collections.

The variance of last year's results is principally due to higher fiscal year 2014 annual incentive compensation payments, which are paid each year in July, and severance payments related to restructuring, combined with lower trade receivable collections.

With the acquisitions of Elan Guides, Profile Internationals, CrossKnowledge, and Symbiosis we have invested over $220 million on acquisitions over the past 12 months in areas of talent management for corporations, test preparation and certification for professionals, and laboratory workflow capabilities for researchers.

In June, Wiley raised its quarterly dividend for the 21st consecutive year, increasing it by 16%.

We repurchased over 200,000 shares in the quarter at a cost of approximately $12 million, an average of $60.72 per share.

Over 3 million shares remain in our current share repurchase authorization.

To summarize, our 4% revenue growth for the quarter came from a combination of low teen growth in Education, some of it due to earlier ordering patterns, contributions from our recent acquisitions, and low single-digit growth in our research journal business.

As a reminder, we do not expect the pace of growth in Education to continue through fiscal year 2015.

Operating income and EPS grew 10% and 8% respectively, fueled by revenue growth and restructuring savings.

Finally, we continue to achieve important new milestones in growing our digital solutions businesses.

Based on this performance and what we see for the rest of the year, we are reaffirming our fiscal year 2015 outlook of mid-single-digit revenue growth and EPS in the range of $3.25 to $3.35, including a $0.10 a share dilutive earnings impact from newly acquired CrossKnowledge and Profiles International.

Finally, our 2014 investor day will be held at our global headquarters in Hoboken, New Jersey on Friday September 26.

If you are interested in attending, please contact Brian Campbell if you have not already done so.

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

(Operator Instructions)

Daniel Moore, BJS Securities (sic).

Steve, you gave some color obviously regarding the positive, surprisingly positive print textbook revenue in Education.

Is it possible to quantify the benefit in the quarter of the shift forward in the ordering pattern from bookstores, and how much revenue are you generating from high schools, and do you expect -- is that sustainable and do you expect that to grow over time?

Sure, Dan.

As you know, our quarter end coincides with peak season in terms of inventory ordering for the new college semester.

And there's always a fair amount of volatility between orders that are placed in July and orders placed in August.

And last year you might recall we actually had a pretty light July and a heavy August.

Not easy to quantify it exactly, and I won't give you a number, but there is a significant movement this year compared with last, we anticipate.

So that's why we're obviously urging caution in terms of interpretation for the first quarter, given that the quarter ends in the middle of a very busy period for ordering.

And this year print texts for orders in particular from our major bookstore customers appear to have come in earlier than they did in the prior year.

The high school business is relatively small, sub-$10 million in terms of [total], and it's up significantly this year.

We have a new sales organization facing that space.

We've always had some good sales into that marketplace.

We don't see it as a major engine of growth for the future, but we expect it to continue to serve students in high schools who can use college-level introductory textbooks.

Very helpful.

So the longer-term pattern over the last year or two of print books being down high single to low double digits, do you expect that to continue or perhaps moderate, or just too early to tell for this year?

We're expecting a market growth in the US higher ed market to continue to be in low single digits.

We expect Wiley to outperform the market as we have done for the last few years, particularly based on the great traction we're getting with our renewable revenue products, particularly WileyPLUS, but also custom publishing.

And then for the overall Ed business, growth to be substantially lifted by the impact of our new online program management business under Educational Services, formerly known as Deltak.

One more.

On Deltak specifically, a little bit more color around the UK partnership, if you can.

And maybe talk about the size and scope of the opportunity internationally.

Do you expect this to accelerate your penetration internationally?

And I have one follow-up.

We're not going to be able to name the partner just yet.

It's a very new relationship, and we are working towards an announcement with them at a pace that also fits with their needs.

But it's a significant institution, a Russell group university in the UK, one of the leading universities there.

And in order to secure the business we've built some infrastructure in the UK to be able to serve that partner.

Infrastructure gives us a terrific bridgehead now to be able to build further partnerships, not just in the UK but across the whole EMEA region as well.

So we do see opportunity for international expansion.

We will continue to prioritize potential partners that offer the best return on investment.

That means we'll still focus a lot of our energy on building the US partnership base in the US, but we feel very encouraged by the opportunity to grow the business internationally as well, and we'll talk a little bit more about that at the investor day.

okay, look forward to it.

Lastly, on the flipside, two contracts expired that were not renewed.

Any color as to, obviously there's lots of potential reasons, but any reasons why those partnerships chose not to renew?

Yes.

So the total number of programs across those two partnerships, there's five programs.

Those programs had reached the end of their contract lifecycle.

The larger of the two partners has made a decision to see if they can run those businesses on their own.

And unusually in that contract, the termination clause was a final cessation.

So we wish them well.

The relationship has gone well.

They're going to have a go at running the business themselves.

That's unusual in our experience.

We've had one other partner who's taken some programs to go it alone and have since come back to us to engage us in a contract to continue to provide services, finding that it's not that easy to run these businesses without a third-party partner.

But we continue to renew many of those contracts and see continuing growth, both in terms of existing partnerships but also the addition of new partnerships for the future.

So we remain confident and very pleased with the performance of that business.

Okay.

Thank you.

(Operator Instructions)

Drew Crum, Stifel Nicholas.

Steve, just to follow up on Dan's question, just to clarify.

I think you said your expectations are for the US market to grow low single digits and for Wiley to outperform.

Is that specific to the print piece or is that the entire market?

And if it's not for print, do you have an expectation around the print?

So that would be for the -- specific to the adoption business, Drew.

That would exclude the new businesses.

So it's really the total of the book business plus custom products, WileyPLUS et cetera.

So we think the market for educational materials sold at the course level will continue to grow in low single digits as it has done for several years.

And we expect it to do a little better than that, but then our overall growth for Education will be lifted considerably by the impact of the Deltak business, Education Services.

Okay.

Good.

Steve, can you comment, just shifting gears to the Research business, can you comment on the calendar 2014 journal subscription renewals to date?

1.5% is lower than what you guys experienced in calendar 2013.

Just put some context around that.

And then as it relates to the society journals, and I know it's difficult to prognosticate what happens the remainder of the year, but any sense as to what your win rate, what you're anticipating around win rate or net renewal rate for the balance of the year?

There's a whole bunch of things in your question there, Drew that I'll try and unbundle for you a little bit.

So with relation to the 2014 calendar year subscription growth of 1.5%, that is a little lower than we have experienced in the last couple of years.

Institutional library budgets continue to be constrained, but we believe are growing pretty much consistently with previous year growth rate.

There is a significant shift in our subscription revenue away from title-by-title subscriptions, and in particular member subscriptions from society membership, towards longer-term institutional license deals either with individual partners or through consortia.

That trend is continuing.

We continue to see consistent rates of growth with the institutional license business, and so we feel really encouraged by that.

But the title-by-title business is a little harder to predict and we've seen some falloff in that this year as those customers migrate to institutional license businesses.

So overall we don't see this as being a structural shift in the market and we're not feeling any less positive about the stability and long-term resilience of subscription revenues.

We do find that it is increasingly instructive to look at the total journal business, or what we call the research communications business, in the round, because we're now finding new ways to monetize those journal brands and the relationships we have with those scientific communities.

So we currently reject something like two-thirds of the papers that are submitted to our scholarly journals.

Of those two-thirds, about one-third are rejected on grounds of publishing quality or scope, but the other third is really papers that we've been rejecting because we don't believe we can monetize their publication because of the constraints on library funding.

As you know, research funding continues to greatly outpace the growth in library funding.

But through the open access model, which has added another $2 million this year and last year added a full percentage growth rate to our journals business, we are increasingly finding new ways to monetize that content, and rather than rejecting those papers, we're able to offer publishing services that are funded by the research funders and that provide a valuable service to the community.

So we find it instructive to look at the research communication business in the round.

With regard to the first quarter, there are also some timing implications there.

As you know, we earn revenue based on publication schedules.

We've had some publication schedule changes between the first quarter of last year and the first quarter of this year.

That has depressed the revenue growth in the quarter.

We expect that to recover as we go through the rest of the year so that overall revenue growth will come into line with the overall growth in the leading indicators.

And lastly just looking forward, we don't have any large society wins compared with the last couple of years coming on 2015.

So overall, we won't see a pickup from new society relationships.

And there will be very few changes now affecting 2015, although we're working on a number of really attractive opportunities for a start in January 2016.

And it's a bit too early to say what we will see in terms of 2015 calendar rate renewals, but we're expecting as I say, a stable market, low single-digit growth, and we believe that we can continue to power our research communications business above that through the addition of those new revenue streams.

Okay.

Very helpful, Steve.

One last question for me for John.

Any impact in the quarter from the CrossKnowledge or Profiles acquisitions?

You guys are guiding to $0.10 of dilution for fiscal 2015.

Was there any impact in this quarter?

All three were dilutive in the quarter, in line with our expectations for the year and just in terms of trending.

I'll note that Deltak was a bit more dilutive in the first quarter than it will be over the balance of the year, given the timing of relatively slow summer season for some of the institutions that we partner with and our continued investment in growing our partner and program base there.

So we'll see the pace of growth in Deltak from a revenue perspective pick up as we move into subsequent quarters.

As I'm sure you noted, 10% this quarter was a bit lower than we've been reporting other periods.

That will pick up again.

And we'll see more favorable performance around earnings out of Deltak over the balance of the year.

Okay.

Thanks, guys.

Ladies and gentlemen, it appears there are no further questions in queue.

I would like to turn the conference back over to Mr. Steve Smith for any closing or additional remarks.

Well, we thank you for joining us on the call today and look forward to speaking with you again at the end of the second quarter.

Thank you.

And that does conclude today's conference.

We do thank you for your participation.

Have a great rest of your day.