John Wiley & Sons Inc (WLY) 2015 Q2 法說會逐字稿

Good morning, and welcome to Wiley Fiscal Year's Second-Quarter Earnings conference.

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 in 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 prefer to listen to the call over the phone but would still like to view the slides, we recommend clicking on the Gears on the 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 of 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.

I'm pleased provide you with our report our Wiley's second-quarter financial performance today, including commentary on our expanding solutions businesses and our expected performance for the balance of our fiscal year.

Second-quarter revenue rose 6% on a constant currency basis.

Driven by growth in Journals, contributions from our two newly acquired Talent Solutions businesses, CrossKnowledge and Profiles International.

And double-digit growth on online test preparation, Education Services, formerly Deltak, and WileyPLUS Workflow Solutions.

Journal Subscription's revenue continued to increase steadily, with 2% growth in the quarter.

Journal performance overall was enhanced by $10 million in revenue from a non-recurring back file license with a large European consortium.

This quarter, we've reached an important milestone in our transition to Digital Solutions, with 60% of our revenue now coming from digital products and services, up from 53% a year ago.

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

Adjusted EPS grew 8% at constant currency to $0.90 a share.

Note that adjusted operating income and adjusted EPS exclude the impact of restructuring charges, impairment charges, and a UK deferred tax benefit in the prior year.

Our performance in the first half of the year closely mirrors what we have reported for the second quarter, with revenue growth of 5% at constant currency and EPS up 8%.

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

Adjusted EPS, adjusted contribution to profit, and adjusted operating income metrics all prior-year restructuring charges or credits, impairment charges and the aforementioned tax benefit.

Research revenue rose 5% to $265 million.

Growth was fueled by Research Communication revenue, with Journal Subscriptions rising 2% and Funded Access growing rising 30%.

As noted earlier, we recorded $10 million in revenue from a non-recurring back file license with a national consortium in Europe, which is reported as other Journal revenue on this slide.

As background, the back file license provides perpetual access to a historical collection of Wiley journals for a one-time fee.

Setting aside this unusually large back file license, total Research Communication revenue increased by 4%.

Calendar year 2014 Journal Subscriptions were up 1.8% as of the end of November.

Nearly all of the full-year expected business is closed.

While it is too early in the cycle to provide a projection for calendar year 2015 renewals, the overall environment remains consistent with recent years.

With expectations of growth in low single digits in Journal Subscriptions, and strong double-digit growth rate coming from complimentary revenues in Funded Access.

In 2015, Journal Subscription revenues will be modestly impacted by the bankruptcy of the subscription agent [Swept] Information Services which was declared in September.

We anticipate that the [Swept] bankruptcy will negatively impact calendar year 2015 Journal Subscription revenue by around $5 million.

As background, subscription agents facilitate the subscription ordering process between libraries and publishers.

Cash is generally collected in advance by the subscription agents, and is usually remitted to the Company between the months of December and April.

Subscription agents account for about 24% of total consolidated Wiley revenue in FY14.

While we do not foresee any further disruption with agents, we continue to closely monitor their financial health and implement safeguards.

Also in the quarter, we signed three new society journals worth $900,000 annually, two journals were not renewed worth $400,000.

Research Books had a challenging quarter, down 9% overall.

Digital growth was not enough to offset the decline in print.

We recently announced a reorganization of our Research segment.

All journals and Journal related business will now be consolidated under the leadership of Philip Carpenter, Senior Vice President of Research Communication.

Who will report in to me, and the Research Books business will be aligned with Professional Development books under Mark Allen, Executive Vice President Professional Development.

Steven Miron stepped down for his role as Executive Vice President of Global Research, and retired from the Company on November 30th.

We thank him for his significant contributions to Wiley over 20 years with the Company.

The reorganization is intended to prioritize new business and technology investments across our Journals business.

Improve our flexibility in decision-making, create a more consistent approach to portfolio management, and drive process, workflow, and cost improvements into our Books business.

Finally, adjusted contribution to profit grew by 9%, driven primarily by revenue growth.

For the first six months, Research revenue rose by 2%, and adjusted contribution to profit by 5% percent.

Professional Development revenue grew 14% in the quarter to $106 million.

Our newly acquired businesses, CrossKnowledge and Profiles International, contributed a combined $17 million in revenue this quarter.

Excluding those contributions, revenue was down 4%.

Our consolidated results for the quarter include three months of performance of CrossKnowledge.

As indicated in our first-quarter report, we are reporting CrossKnowledge on a two-month lag pending the implementation of financial reporting process improvements.

We are making good progress on those improvements, and we fully expect to report those additional two months in the second half of the year.

Online Test Preparation and Certification had a strong quarter, growth of 30% was driven by our CPA Excel product.

Other Knowledge services, which includes licensing, advertising and agency revenue, rose by 10%.

The make up of the Professional Development segment continues to shift, with Print Books falling to 50% of revenue and Talent Solutions growing to 25% of revenue.

Finally, adjusted contribution to profit was up 2%, with the restructuring savings offsetting the diluted impact of recent acquisitions.

For the first six months, Professional Development revenue rose 12%, and adjusted contribution to profit by 48%.

Mainly due to savings from restructuring, partially offset by lower Print Book revenue and dilution from acquisitions.

Education revenue grew 3% in the quarter to $107 million.

Double-digit growth for Custom Products, which include binder additions and content customized by instructors, WileyPLUS course Workflow Solutions and Deltak Education Services was partially offset by a 7% decline in Books.

For the year, Books revenue grew by 1%.

We are pleased with the strong pace of growth for our WileyPLUS Workflow Solution.

Students and instructors are recognizing the value it brings in terms of course management, improved performance, and analytics.

The Education Services business, formally known as Deltak, grew 19% in the quarter.

We announced the University of Birmingham as our first European partner.

The student body of 19,000 undergraduates and 9,000 post graduates, Birmingham is the 11th largest institution in the UK.

In addition to its importance as a prestigious international university partner, the relationship with Birmingham will serve as a springboard from which we can reach out to other institutions in Europe and around the world.

The addition of Birmingham brings our total partner account to 37 at the quarter, and after net additions of two programs in the quarter a total program count of 181.

Of these, 156 are revenue-generating, and 25 are in development.

Education adjusted contribution to profit fell 11% in the quarter, as investment in new Deltak partnerships and programs more than offset the margin contributed by modest overall revenue growth.

For the first six months, Education rose 7%, and adjusted contribution to profit increased 2%.

Shared services costs were down 1% compared to prior year.

Distribution and operations services saw a 12% decline, driven by restructuring savings.

Including a more variable cost structure from outsourcing to track with the declining print volumes.

Technology and Content Management fell 1% in the quarter, but was up 1% in the first six months.

Technology, excluding Content Management, increased 7% for the quarter to $50 million and 9% year to date.

We continue to anticipate full-year Technology spends to be 10% higher than last year.

Finally, higher other administration expenses reflect the added operating costs of recent acquisitions.

In November, we announced a reorganization of our Research segment with the dual objective of consolidating Journal related products and services, and moving Research Books under Professional Development to achieve better operating synergies.

We expect to record a third-quarter restructuring charge of approximately $18 million.

Approximately half of that is related to the real estate consolidation enabled by the restructuring actions taken during our FY14.

The remainder of the charge is the severance related to the research of reorganization, and plans of further operating synergies related to the Books business.

The severance portion of the charge is expected to be fully recovered by the end of our FY16.

Also, Wiley recently received an unfavorable decision from a lower court in Germany regarding its previously reported tax dispute.

This was fully anticipated, and we are in the process of appealing that decision.

As we and our tax advisors remain confident in our position and continue to believe that the outcome will be a successful one, no charge was recorded.

As a reminder, Wiley had deposited a total of $64 million with German tax authorities related to the tax dispute.

The resolution of the appeals in uncertain in regards to timing, and could take a few months or several years.

If we are successful, the tax deposits will be returned with 6% simple interest based on current German legislation.

Turning to the balance sheet, net debt grew $102 million over prior year, principally due to approximately $227 million spent on acquisitions.

Our net debt to EBITDA ratio on a trailing 12-month basis remains low at 1.4.

Our strong balance sheet continues to provide considerable flexibility for investments, and the return of capital to shareholders.

Free cash flow use of $141 million this year compared to a use of $112 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 Journal subscription cash collections.

The variance to last year's results is principally due to a higher FY14 annual incentive compensation payments, which are paid each year in July, and higher payments related to restructuring.

We returned $76 million to shareholders in the first six months on dividend payments and share repurchases, up from $48 million in the prior year.

In the quarter, Wiley repurchased 532,000 shares at a cost of $29 million for an average $55.19 per share.

This is up from the previous quarter's total of 200,000 shares.

Note that 2.5 million shares remain in the current annual authorization.

In summary, we are pleased with our second quarter and year-to-date performance.

Revenue growth continues to be fueled by double-digit growth in our Solutions businesses, and steady performance out of Journals.

Digital Products and Services now make up over 60% of our revenue, up from 53% a year earlier.

This transition has created new opportunities to augment growth and improve overall efficiencies.

Margin growth has been further enhanced by restructuring savings.

Based on how we are tracking and what we see for the rest of the fiscal year, we are reaffirming our FY15 outlook of mid single-digit revenue growth, and EPS in a range of $3.25 to $3.35.

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

(Operator Instructions)

Drew Crum, Stifel.

Good morning, everyone.

Thanks.

So the first question pertains to Deltak.

19% growth in the quarter, it accelerated as you suggested it would from the first quarter.

But want to get a sense at to how you're thinking about the pace of growth in the second half of FY15.

I guess we haven't seen the sequential growth from your fiscal fourth-quarter, where you had significantly fewer revenue-generating programs.

So maybe there's a mix issue there.

But just want to get a sense as to how you're thinking about the growth in the second half of the business.

Sure, Drew, thanks for the question.

So let me start, and maybe John can jump in with any further color around that.

So as we said on the first quarter call, there's a phasing in of during the course of the year of new programs.

As those new programs come on stream, that has made a difference looking at second quarter to first quarter, and we expect to continue to benefit from the addition of new revenue-generating programs through the year.

As those come on stream and begin to attract enrollment.

Just speaking about the growth of Deltak overall, we feel encouraged about where we stand today.

We have a strong pipeline.

Would remind you that growth in Deltak comes from a combination of growth in the enrollments with existing programs, growth of new programs in existing partners, and the addition of further new partners.

And as we look forward to that pipeline, we see conditions continuing to be very strong for growth.

And the uptake of the Deltak business model remains very attractive with the new and existing partners.

Okay.

And then returning to the topic of the restructuring, I think you said about half of that was severance and other.

What is the impact we should expect on the cash flow statement?

And as a follow on, are you anticipating any cost savings or subsequent revenue synergies from this action?

So, Drew, it's John.

Good morning.

Break it apart into the two pieces.

So first, the real estate portion of this is about half of the anticipated charge of $18 million.

The restructuring charge is related to our exit from facilities that was enabled by the restructuring actions that were implemented across the last six quarters.

So that was work that's been underway for some time, and the charge comes when you have actually exited the property.

So we will be completing that in this quarter.

In fact, there are three principal properties involved and we've already exited two that are involved in the charge, and one will be done in a few weeks.

And those are Singapore, Oxford, one of our facilities in Oxford, and part of our San Francisco office.

So those are in motion.

Essentially those are charges for net expenditures that we anticipate on those leases.

It might not be recovered through subletting.

The remainder of the charge relates to severance.

Severance being, as Steve described, principally related to our Research reorganization and consolidation and expected synergies around our operations related to Books.

Our expectation is that the recovery on those charges will occur by the end of our FY16.

So, it's again, about half of the $18 million in the way of severance charges, and we expect the payback on that to be pretty short.

Got it.

Okay.

And then just last question.

As far as CrossKnowledge and Profiles are concerned, I think going into the fiscal year you were guiding to about $0.10 of dilution from all the investment spending there.

How are you tracking to that?

It looks like the second-quarter contribution to profit was down a little bit, but you're up significantly year-to-date.

I just wanted to get a sense as to where you are relative to that prior guidance.

Thanks.

So firstly, Drew, so the CrossKnowledge and Profiles businesses, we've been continuing the work to consolidate those with our other assessment business.

That consolidation is on track, and we are now poised to launch a fully integrated Talent Solutions business for all of Wiley's acquisitions.

The performance of the business in FY15 is expected to align with our expectations.

Including that $0.10 dilution, which is still what we expect on a combined basis across CrossKnowledge and Profiles.

And again, the pipeline is building in terms of new customers for that business.

And we feel great about where it is and its prospects as an important engine for growth for Wiley in the future.

Okay, great.

Thanks, guys.

(Operator Instructions)

Daniel Moore, CJS Securities.

Good morning.

Thanks for taking the questions.

Just quickly on guidance for the full year.

The $10 million back file license sale, was that contemplated or anticipated when you initially gave guidance for the year?

Good morning, Dan.

First, I would point out that back file sales are part of the normal flow of our business.

So, I don't want to lead people on the call to believe that this is out of the flow of our business in general.

That said, the reason we're calling out this particular back file sale is that it is unusually large.

So within our revenues each year, there are typically a number of smaller transactions.

This one just individually happens to be large.

That said, this particular opportunity has been in the works for quite a long time, and it was our guidance anticipated.

It would occur during this fiscal year.

So yes, it was assumed in our plan for the year.

Perfect.

Appreciate it.

And then switching back to Deltak a little bit.

With the new agreement in the UK and Birmingham, maybe just talk about the landscape in Europe, where it is versus the US in terms of adoption of online higher ed programs.

What the competitive landscape looks like, and what your expectations are for ramping that growth opportunity in the next few years?

Sure.

Dan, and this is Steve.

In my remarks, I think I described it as a springboard for future growth.

We do see further opportunities in the EMEA region in Europe, Middle Eastern Africa for the online program management business.

There are not as many partners working with online private management providers in the UK and Europe as there are in the US today.

So, it's fair to say the market lags behind a little.

But institutions like the University of Birmingham see they have opportunities as US universities to extend their reach, to attract new students, to generate new profitable revenue streams, and to leverage their brand globally by offering online education with high-quality programs with partners like Wiley and Deltak.

So we have other European customers in the pipeline.

We see other opportunities in the UK.

As you probably know, we need to build a team around each partner.

And having the base now to build from gives us an opportunity to really explore further growth opportunities.

I would say that the early opportunities are also likely to also be in the UK, but we also see opportunities in other European countries as well as in some of the countries in the Arabian Gulf area.

Got it.

And then in Professional Development, you mentioned CrossKnowledge.

Talk about how the integration process is going with profiles and Inscape into a more seamless offering, and how that is being received in the market.

I don't want to get into too much detail around that, but the Profiles business is built around primarily pre hire assessment tools.

That are sold both direct to corporations, and through a reseller network.

Inscape primarily post higher assessment tools, although there's some overlap between profiles and the Inscape portfolio.

And with Inscape selling its post higher assessments primarily through a reseller network.

We, first of all, started by looking at sales channels to make sure that we're upselling to all existing Profiles customers.

The Inscape network and vice versa.

We're also integrating the whole thing with our direct sales capability that came to us with CrossKnowledge.

But to provide a network of different sales models or sales channel opportunities, combining the global reach of CrossKnowledge the strength of Profiles and Inscape in the US.

And the strong reseller network that's been selling both Wiley and Inscape products for several years.

And that's helping us to identify significant revenue synergies.

We're also a lining the management of Profiles and CrossKnowledge and Inscape into a single team, and are looking at the opportunities to roll out business models that offer and end to end solution to corporate that help them manage their talent base.

And resolve the challenges of how to develop a competitive workforce for today's environment.

In terms of the full cross-selling capabilities, that's still obviously in progress at this stage?

Yes.

I think as we move into calendar year 2015, that capability will become cemented into the way that we work.

But we, as you suggest, we're not all the way there yet.

But we're making very good progress

Perfect.

And then lastly just in terms of capital allocation, now talk about the acquisition landscape for Professional Development.

And then you stepped up buy backs in Q2 absent significant acquisitions, would you likely be similarly aggressive in buying back stock in coming quarters?

As always, we will continue to use our cash, and focusing on our main priorities.

First priority is to continue to invest in organic growth where we can see opportunities to drive profitable revenue growth from innovation around our core and existing businesses.

We will continue to use cash to make acquisitions, particularly around that Talent Solutions business.

Where we see gaps and opportunities to round out the portfolio into a total end to end Talent Solutions offerings.

Provided that we can identify targets and consummate deals with interactive economics.

And to the extent that we still have additional opportunities to deploy cash flow beyond that, we'll continue to focus on buyback and dividends as a ways to return capital to shareholders

Thank you again, and we look forward to seeing you at our conference in January.

Thank you.

(Operator Instructions)

It appears we have no further questions in the queue.

I'll turn the conference back over to Mr. Smith to offer any additional or closing remarks.

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

That does conclude today's conference.

Thank you for your participation.