John Wiley & Sons Inc (WLY) 2015 Q3 法說會逐字稿

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

Thank you. Good morning, everyone, and thank you for participating in the call today. As we announced in early February, President and CEO Steve Smith is currently on medical leave as he receives treatment for an illness.

In the interim, the executive leadership team will report to Mark Allin, Chief Operating Officer, and Mark will report to the Executive Committee of the Board of Directors. Mark will be hosting this conference call, along with John Kritzmacher, Wiley's Chief Financial and Operations Officer.

Before I pass the call over to Mark, I would like to remind you that this 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.

(Caller Instructions)

A copy of the presentation will be available on our Investor Relations page at the conclusion of the call. Thank you. I would now like to turn the call over to Mark.

Good morning, everyone. John and I would like to begin by extending our best wishes to Steve, as he focuses on his treatment. Steve and I have worked together for many years, starting before Wiley and then as part of Wiley Asia, and finally during my time as head of the professional development business. In Steve's absence, John and I will work closely together with the executive leadership team to continue executing on our plans.

I'll begin the call by discussing business performance, and then John will follow with an update on operations and finance. Unless otherwise noted, I will be excluding the impact of foreign exchange when commenting on all variances to give a consistent measure of operational performance.

Third quarter revenue rose 5% on a constant currency basis, driven by steady growth in journals, contributions from our two professional development acquisitions, and strong growth in our solutions businesses, which together offset a decline in overall book revenue. Organic revenue for the quarter excluding the combined contribution of $22 million from CrossKnowledge and Profiles International, was essentially flat on a constant currency basis.

Adjusted operating income increased 6% at constant currency, due to higher margin, digital revenue growth and cost savings from restructuring. Adjusted EPS grew 9% at constant currency to $0.99, driven by higher operating income and a lower effective tax rate.

Note that adjusted operating income and adjusted EPS exclude the impact of restructuring charges in the current quarter and the previous year. We will discuss this in more detail later.

Our performance in the nine months of the year-to-date closely mirrors performance for this quarter and is tracking well with our annual guidance, with revenue growth of 5% at constant currency, and adjusted EPS [up] 8% to $2.45. For the nine months, organic revenue rose 1% on a constant currency basis.

Research revenue rose 3% to $247 million. Growth was fueled by research communications revenue, with journals subscriptions up 4%, funded access up 46%, and other journal revenue, which includes backfile licenses and article sales up 7%.

Research books revenue reflects sustained downward pressure, down 8% in the quarter and 8% year-to-date. As we previously announced, Wiley is beginning to plan and manage the research and professional development books businesses in a more integrated fashion, to increase process and workflow harmonization and drive a consistent approach to portfolio management.

Calendar year 2014 journal subscription billings were up 1% as of the end of January, with approximately 81% of expected calendar year 2015 subscriptions already closed. The lower growth rate for subscription billings reflects net losses in society licensing agreements for calendar year 2015, and the adverse impact of the Swets bankruptcy.

As noted last quarter, Swets information services declared bankruptcy in September, which we anticipate 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.

Two new society journals were signed in the quarter, with combined annual revenue of $0.2 million, 24 were renewed with combined annual revenues of $13 million, and 3 with combined annual revenue of $0.6 million were not renewed. Adjusted contribution to profit for research grew by 11%, driven primarily by revenue growth and cost savings from restructuring. For the nine months, research revenue is up 2%, and adjusted contribution to profit is up 7%.

Professional development revenue grew 17% in the quarter to $109 million. Our newly-acquired businesses contributed a combined $22 million in revenue this quarter, reflecting five months of results for CrossKnowledge and three months for Profiles International.

As noted in prior quarters, we had been reporting CrossKnowledge on a two-month lag, pending the implementation of financial reporting process improvements. We are now current on a year-to-date basis with the business.

Revenues for CrossKnowledge and Profiles on a nine-month basis are $32 million and $17 million, respectively. Excluding those contributions, professional development revenue for the quarter was down 7% due to continued softness in the book market overall.

Online tax preparation and certification had another solid quarter, growth of 14% was driven by our newer online test preparation products for the CFA and CMA exams. Other revenue streams including licensing, advertising, and agency revenue rose 26%. Our post higher assessment business, formerly called Inscape, continues to grow steadily, up 9% in the quarter.

Weak retail and wholesale demand in books continued this quarter with print and digital revenues down 11% and 13%, respectively with most of the decline coming from our For Dummies franchise, as well as the psychology, architecture, engineering and construction categories. We don't expect that rate of decline in Q4, but the professional book market remains challenged.

Adjusted contribution to profit was up 8%, with the restructuring savings offsetting the dilutive impact of the Talent Solutions acquisitions, and the decline in book revenue. For the nine months, professional development revenue rose 13% and adjusted contribution to profit rose 27%, mainly due to savings from restructuring, partially offset by lower book revenue and dilution from acquisitions. Excluding the year-to-date contributions from the Talent Solutions acquisitions, revenue is down 5% for the nine months.

Education revenue declined 2% in the quarter to $111 million. A 23% decline in print books offset double-digit growth for digital books, WileyPLUS core solutions, and Deltak education services. Print text book revenue decline reflected renewed market share pressure from book rentals. Rental providers buy a print text book from Wiley, and then rent it out to students across four or five semesters on average, until product quality becomes an issue or a new version is introduced.

Excluding education services, our online program business formerly known as Deltak, year-to-date revenue for education, increased 1%. The education services business grew 20% in the quarter.

We signed Manhattan College as our 38th university partner, and added 11 online programs, for a total of 192 programs under contract. Of those, 164 are revenue-generating, and 28 are in development. The 11 new programs came from a mix of existing partners and our new partner.

Adjusted contribution to profit for education declined 5% in the quarter, as lower revenue and the investment in new Deltak partnerships and programs offset savings from restructuring. For the nine months education revenue grew 4%, and adjusted contribution to profit declined 1%.

I'll now hand off to John to complete our discussion of the third quarter results, and provide some forward-looking commentary.

Thank you, Mark. Picking up on the next slide, shared services costs increased 4% over the prior year. Distribution and operations services declined 13%, driven by restructuring savings and the benefits of our shift to a more variable cost structure to track with declining print volumes.

Technology and content management spending increased 3% in the quarter. Technology excluding content management increased 11% for the quarter to $50 million, as we continue to invest in platform enhancements and expand our solutions businesses.

In the nine-month period, technology expense is up 10% compared to the prior year period, in line with our full-year expectations. And finally, the noteworthy increase in other administration expense reflects the expiration of a real estate tax incentive for our Hoboken headquarters, some early stage investment in our multi-year global ERP implementation, and occupancy costs related to our recent acquisitions.

Wiley recorded a $24 million restructuring charge this quarter, with half of the amount related to completion of real estate consolidations and dispositions in connection with prior restructuring actions. Looking ahead, this real estate charge gives rise to mostly noncash savings in future periods.

The remaining half of the charge relates to severance costs for reorganization and consolidation plans. The severance portion of the charge is expected to be fully recovered by the end of our FY16, and we expect annual run rate savings thereafter to be on the order of the one-time charge, or approximately $12 million.

Turning to the balance sheet, net debt grew $110 million over prior year due to our Talent Solutions acquisitions, which were acquired for a combined $214 million in cash. The short-term debt on the balance sheet represents two $50 million revolving credit agreements implemented over the past two quarters to lower our interest expense.

Our net debt to EBITDA ratio on a trailing 12-month basis remains low at 1. Our strong balance sheet continues to provide considerable flexibility for investment and the return of capital to shareholders.

Free cash flow was $80 million for the nine-month period compared to $84 million in the prior year, with capital investment in technology increasing by $9 million as compared to the prior year. For the nine-month period, we returned $113 million to shareholders through dividend payments and share repurchases, reflecting an increase of $30 million over the prior year. Wiley repurchased 350,000 shares in the quarter at an average cost of $58.42 per share, and nearly 1.1 million shares year-to-date at a cost of $57.26 per share.

Foreign exchange is now a substantial headwind for us as we move into the fourth quarter. With about half of our revenue generated outside the United States, our results are adversely impacted by a strengthening dollar, particularly with respect to the euro and the British pound. In the third quarter, the strong dollar resulted in an unfavorable impact to revenue of $13 million and an unfavorable impact to EPS of $0.02 as compared to the year-ago period.

That said, we are reaffirming our full-year guidance of mid single-digit revenue growth on a constant currency basis, and despite FX pressures, we continue to [expect] adjusted EPS to be in a range of $3.25 to $3.35. Looking further ahead, at these rates the strength of the US dollar may be a significant headwind going into our FY16. We will provide an update on that in June.

On the next slide, I would like to call your attention to planned changes in our digital subscription model for journals. At present, our digital subscription agreements generally provide access to individually identified titles based on the volume year of publication.

Starting in calendar year 2016, Wiley will be moving to digital subscription agreements that are defined by time intervals, generally by calendar year. This means customers will have access to all content published per journal title during the contracted time period, regardless of the official publication date or volume year.

This time-based approach will enable a new database option that we are introducing for customers in our mature markets. This option will provide access to our entire journal portfolio rather than access specified by title.

The new approach will greatly simplify the contracting and administration of our largest subscriber agreements. We have successfully piloted the journal database access option with library consortia in the US and Australia, and we observed the competitors are implementing similar offers.

The change to time-based subscription agreements will result in a change in the timing of revenue recognition for digital journal subscriptions. Under the present model, journal subscription revenue is generally recognized as issues are published. Historically, our publication timing has been skewed toward the front end of the calendar year, with nearly 40% of volume year issues published by our fiscal year end in April.

Under the new model, revenue will be recognized evenly over the subscription period, with only 33% of calendar year subscription value to be recognized by our fiscal year end in April. The accounting implication of this change is that a portion of journal revenue will shift to the next fiscal year on a recurring basis, beginning in January of 2016. The estimated initial impact is a shift of $35 million in revenue, and $0.35 of EPS from FY16 to FY17.

Given the benefits to subscribers, particularly from library-wide database access and the internal efficiency gains from simplification in contracting and administration, we fully expect our underlying operational performance to benefit from these changes in our journal subscription model. Please note that our free cash flow performance will not be impacted by these changes.

In summary, we are pleased to report continued growth in our business with revenue, adjusted operating income, and adjusted EPS up 5%, 6%, and 9%, respectively. Our results continue to be driven by steady growth in our research journals business, and double-digit growth in digital solutions revenue, however, books revenue remains under sustained pressure.

Wiley is becoming a more nimble Company as we focus on improving the operating efficiencies of our core journals and book businesses, while investing in our rapidly growing education and professional solutions businesses. We are pleased to reaffirm our full-year guidance of mid single-digit revenue growth on a constant currency basis, and adjusted EPS between $[3.25] and $3.35.

And with that as background, we welcome your comments and questions.

Thank you.

(Operator Instructions)

And we'll take our first question today from Drew Crum with Stifel.

Okay, thanks. Good morning, everyone, and please give our best to Steve. Wanted to start with the gross margin, John, 180 basis point increase year on year which is fairly significant, I think higher than what we've seen in most recent quarters. But can you talk about what drove that? And as you look out further, any thoughts on how high gross margin goes, and what do you need it to be at, in order to hit your EBIT margin target in 2017?

Good morning, Drew. So the increase, as you've noted, is substantial, and it's largely driven by our continued migration to digital in our, in our business, and in particular by the addition of CrossKnowledge and Profiles, which also are digital-based services that carry higher margins. So the improvement is principally driven by those.

In terms of a longer-term view around margin, I think it's probably most appropriate to look toward our operating return on sales, and the contributions that will come from these businesses over time. And as we've said in our model, we are aiming to drive that operating income return into the high teens over time. Our goal, as we had said for FY17, is to get that into the range of 17% or higher. So this is all part of our planned migration toward higher margin digital services, and with scale, an improvement in our operating return.

Okay. I know in the past, guys, you've focused on this journal subscription renewal metric. Under this time-based journal subscription model that you're going to be rolling out, has that become a less meaningful metric for you guys? I guess, as we think about 2015, you talked about some of the puts and takes for this year. Is it at risk of being down in 2015?

It looks like you're up 1% at constant currency, but you've got another 19% of that to negotiate or renew. And I know Steve's talked about in the past being -- that last 20% or so, being very difficult to negotiate. So any thoughts around those would be helpful?

So two important things about that. First, I would note that the metric that we have talked about in terms of subscription growth rates on a calendar year basis, and in this month's report, we've said that we are at 1% subscription growth through the end of January, and 81% through our expected calendar year subscriptions.

That metric is still entirely relevant. And in fact, it becomes in the model a bit easier to think about. Because instead of having revenue actually rolling off based on the timing of issues, it's going to roll off based on the timing of those calendar year subscriptions, 1/12th of the year at a time on an annual subscription basis. So the metric is highly relevant, and will continue to be.

And in terms of tracking toward FY16, we'll get more specific in June when we provide guidance for our FY16, but clearly want to flag that the change that we're implementing here, is going to have an adverse impact on revenue growth on the order of $35 million when we get there. So just something to think about, as we prepare to provide guidance to you all in June.

Okay. And this -- one last question for me, maybe for both Mark and John. Mark, maybe you can talk about operationally, how CrossK and Profiles are performing post integration or since you've acquired those businesses, and how they are tracking relative to your guidance, which I believe was up to $0.10 of dilution for FY15? Thanks, guys.

So, thanks, Drew. It's Mark. Operationally, CrossKnowledge is performing very much to our current expectations. The prior year revenue before the acquisition was $37 million. We're at $32 million year-to-date. So we're tracking that number, and also hitting most of our marks on our key metrics, in terms of new customer acquisition, particularly in the US.

Profiles is tracking slightly behind, $27 million full year before acquisitions, $17 million year-to-date. The main reason for that is we are realigning the distribution model, and we're shifting it to a higher margin business. That has some short-term revenue impact, but actually delivers more value for us in the longer-term. In terms of dilution guidance, I'll hand off to John.

Sure. And so, Drew, we had said that we expected the combined CrossKnowledge and Profiles to be dilutive to earnings in our FY15 on the order of $0.10, and we are still tracking within that for the year.

Okay. Thanks, guys.

Thank you.

(Operator Instructions)

We'll go next to Daniel Moore with CJS Securities.

Good morning. And again, please pass along our best to Steve and his family.

Thank you.

I wanted to drill down a little bit more. I was furiously writing, with regard to the shift to time-based agreements. But what would your expectations be of the impact on both revenue and profitability per customer, as you shift to time-based agreements over time?

Would not expect the revenue or profitability per customer to change in any material fashion. It will I think, enable -- well, as we've said, it will simplify the contracting and licensing process. So it will make it easier to work with customers, and more efficient to work with our subscribers. It will be simpler on both sides, in terms of our subscribers having clarity around exactly what they are going to receive to fund by time, and it will greatly clarify the administration of agreements.

The move to the database model for our largest subscribers, where we will provide library-wide access in the form of access to the entire database. Again, I think is somewhat of an enhancement for subscribers. It will greatly simplify that process and ease their administration. And I think generally in terms of widening up access a bit, it will perhaps relieve some price pressure. But I wouldn't expect it to make a material impact.

And was this a -- the shift kind of dictated or pulled by customers, something that you and others in the industry were promoting? Just maybe a little color around how this has evolved?

So the shift toward time-based overall, I think is something that others have done in prior years. So we're not leading the way on that. But we think it's an important and valuable change to make.

The move toward a database model for library-wide access for our largest subscribers is something that we were, I think early to market on with a pilot in 2013. Pilot went fairly well. We've run the course of that pilot now, and determined that we think it would be very attractive to other customers. And so, we're beginning to move it out more broadly, and we are observing that some of our competitors are doing the same.

Okay. And so, just so -- I think you said it a couple times, but at this stage, you expect about a $35 million shift out of FY16, which would wind up sort of into FY17, as it would smooth out over the year, and about a $0.35 EPS impact?

That's correct. And then it moves on a recurring basis. So there's -- if you will, there is a one-time shift out, and then it continues thereafter.

And do you expect to shift an increasing percentage or number of large -- of clients or customers to that model over time?

We are -- so we are today about 87% digital in terms of journal subscriptions. We have almost 10% on a database model today, as a consequence of the pilot that I described. Over time, we'll migrate all. Mostly next year, we'll migrate to the time-based subscription agreements as I described. And we're anticipating that about 30% of our digital subscriptions will move to -- well, 30% of subscriptions, 30% of the 87% overall, will move to the database model for access in FY16.

Okay. That's helpful. And maybe one or two more, and I'll jump back in queue. In terms of -- just the cost side of the equation, now that with the roughly $80 million restructuring is essentially complete, are there additional restructuring or cost savings opportunities that you see on the horizon? And as we look out to FY16, what areas of expense do you expect to be materially higher or lower than just general GDP growth?

So we continue to look for opportunities to improve the efficiency of our operations. Among the things that we have underway, we've talked a bit about synergies to be realized in how we go about managing our portfolio of books businesses across research, professional development, education. So that's a work that's in progress.

We also have noted that we are in the process of implementing an ERP, which is a multi-year program that will be completed over a period of about three to four years, and we expect to achieve some significant operational benefits from that.

Beyond that, we continue to look for other opportunities for efficiency gains, as we more tightly align the organization. We're continuing to look, for example, at how can we drive better value out of our investments in technology, those sorts of things. So we have a number of opportunities that we're still working on, and we do expect that as we make our way over the next couple of years, we're going to find some additional opportunities to improve our cost profile as part of our path to improving profitability.

Okay. Thank you again.

Thanks, Dan.

(Operator Instructions)

And gentlemen, with no further questions in the queue, I'll turn the call back to you for any additional or closing remarks.

We thank you for joining us on the call today, and look forward to speaking with you in June.

Thank you, and that does conclude today's conference. Thank you for your participation.