John Wiley & Sons Inc (WLY) 2016 Q1 法說會逐字稿

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

Thank you, Noah. Good morning, everyone, and welcome to the first-quarter FY16 earnings call.

Before I pass the call over to Mark Allin, Wiley's President and CEO, I'd like to remind you that this is being recorded and may include some 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 icons 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 and a playback of the webcast will be available on our Investor Relations page. Thank you. And now I'd like to turn the call over to Mark.

Thank you, Brian. Good morning, everyone.

I will begin the call by discussing business performance. John Kritzmacher will follow with an update on operations, finance and our cost reduction initiatives. And I will finish with a summary before taking your questions.

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. Before I do, however, note that foreign exchange was a substantial headwind for us this quarter, as expected. With about half of our revenue generated outside the United States, our results are adversely impacted by a stronger US dollar, particularly with respect to the euro and the British pound. In the quarter, the unfavorable impact to revenue and EPS was approximately $22 million and $0.04, respectively, as compared to the year-ago period.

First quarter revenue rose 2%, driven by strong organic growth in our solutions businesses and stable Journal performance, although first quarter Journal revenue was muted by the trailing effects of the Swets bankruptcy. As a reminder, Swets Information Services, a Journal subscription agent, declared bankruptcy in September, 2015, negatively impacting calendar year 2015 Journal subscription revenue by about $5 million.

Also contributing to overall results was inorganic growth from the CrossKnowledge corporate learning business, which reported one month of revenue in the prior year. Operationally, CrossKnowledge continues to perform well.

Adjusted earnings per share grew 11% on a combination of revenue growth, cost reductions and lower tax expense. Partially offsetting the strong earnings growth was continued investment in the Online Program Management opportunity and investment in our ERP program. Our Online Program Management and Online Test Preparation businesses performed well this quarter, with organic revenue up 26% and 40%, respectively.

Finally, calendar year 2015 Journal subscription billings are up modestly, with 98% targeted business closed. It is too early to comment on the calendar 2016 renewal season.

As discussed, our solutions businesses performed well, as did Custom Course Material and Author-Funded Access. Offsetting this was the anticipated decline in traditional textbooks and professional books, in line with market trends. Research books were flat this quarter, reflecting recent additions to our research books front list.

Adjusted operating income rose 5%, due to efficiency gains from our restructuring program, while adjusted EPS grew 11%, to $0.58, driven by higher operating income and a lower effective tax rate. Note that adjusted operating income and adjusted EPS exclude the impact of a $3 million restructuring charge in the quarter, principally for organization simplifications, process reengineering, and severance costs related to workforce reductions in our shared service operations.

Research revenue was essentially flat, at $237 million. Journal revenue was down 1%, due to the Swets bankruptcy. Wiley had a good quarter in our Society business, signing four new society journals with combined annual revenue of $12 million and renewing 18 worth $20 million annually. Four journals were not renewed, worth an estimated $2 million in combined annual revenue. We currently expect net wins and losses of society publishing business for calendar year 2016 to be roughly neutral.

As noted, calendar year 2015 Journal subscription billings were up 0.4% as of the end of July, with approximately 98% of targeted business closed. Going forward, the library budget environment for calendar year 2016 is likely to be similar to that of 2015, although it's too early to comment specifically on the upcoming renewal season. Research books and references were flat in the quarter, with digital books up 1% and print books down 1%. Finally, adjusted contribution to profit grew 1%, driven primarily by cost reductions.

Professional development revenue grew 10% in the quarter, to $99 million. Inorganic revenue growth of $8.5 million contributed to performance, as the CrossKnowledge corporate learning business reported only one month of revenue in the prior-year period. CrossKnowledge also showed continued organic revenue growth on a comparable basis.

Online Test Preparation and certification had a very strong first quarter on the strength of recent CFA and GMAT programs. The Assessment business rose 1%, with post-hire assessment growth offsetting an expected decline in pre-hire assessment revenue, following portfolio actions to optimize longer term profitable growth.

Professional books declined 4% this quarter, primarily due to continued weakness in the Technology category. As noted last year, we're in the process of integrating research books and professional books in order to focus on areas of growth and improve efficiencies. Adjusted contribution to profit rose from $8 million to $19 million, due to higher margin digital revenue and efficiency gains.

Education revenue declined 1% in the quarter, to $87 million. A 17% decline in Print Textbooks offset 26% growth in Online Program Management, 16% growth in Custom Course Material, and 6% growth in Digital Books. The Print Textbook revenue decline reflected sustained pressure from book rentals and textbook alternatives, which Wiley also provides in the form of the WileyPLUS course workflow solutions, digital books and Custom Course Material. As a reminder, this is seasonally a very light quarter for WileyPLUS.

Our Online Program Management business, formerly Deltak, continued its strong momentum this quarter, finishing with 210 programs under contract compared to 200 programs at the end of last quarter. New programs were signed with existing partners George Washington University, the University of Scranton, and St. Mary's University of Minnesota. Adjusted contribution to profit for Education declined 37% in the quarter, reflecting anticipated print textbook revenue declines and investment in new Online Program Management partnerships and programs.

I'll now pass the call off to John to further discuss our financial performance and fiscal year outlook

Thank you, Mark.

Moving on, adjusted shared services costs were 2% higher than prior year, primarily due to the inclusion of two additional months of CrossKnowledge expenses as compared to prior year, as well as increased investment in our ERP implementation. Continued efficiency gains from outsourcing led to a 9% decline in distribution and operation services costs and an 18% decline in Content Management costs.

Technology costs increased 7% for the quarter, reflecting the two additional months of CrossKnowledge expense and higher ERP investment. Finally, an increase in other administration expenses was mainly due to one-time employment-related costs.

Our balance sheet continues to provide us with the ability to pursue strategic acquisitions and return cash to shareholders in the form of dividends and share repurchases. Net debt to EBITDA on a trailing 12-month basis was 1.1 at the end of July, compared to 1.3 in the year-ago period and 0.7 at our April fiscal year end.

The short-term debt on our balance sheet represents two $50 million revolving credit agreements implemented in FY15 to lower our overall interest expense. On August 6, 2015, the Company amended one of these two agreements to increase the facility to $100 million, raising our total short-term debt capacity to $150 million.

Turning to our cash flow performance, free cash flow was the use of $155 million in the quarter, as compared to a use of $123 million in the year ago period, with capital investment increasing by $8 million. The decline in cash from operations as compared to the first quarter of FY15 was primarily due to timing differences in working capital, including receivables and payables, partially offset by lower annual incentive compensation payments, which are issued each year in July.

As a reminder, free cash flow is seasonally negative in the first quarter of Wiley's fiscal year, principally due to the timing of annual Journal subscription cash collections and the seasonality of our Education business. As noted in our June report, we expect FY16 cash from operations to be in line with 2015, but free cash flow will be lower due to $35 million of incremental capital expenditures related to the ERP program and our Hoboken office transformation.

Finally, in the quarter we raised the quarterly dividend by 3%, our 22nd consecutive annual increase, and we deployed $12.7 million to repurchase 230,000 shares at an average cost per share of $55.22.

As discussed last quarter, Wiley is embarking on an efficiency initiative, substantially enabled by our multi-year ERP deployment. The general focus is to align expenses with our evolving revenue profile and to realize cost reductions in our shared services functions through process simplification, standardization and automation. Key areas of focus include technology, finance, distribution and operations.

Based on competitive benchmarking and detailed opportunity assessments, we now expect to achieve annual run rate savings of approximately $25 million by FY18, with some benefit to come in FY17. Additional savings opportunities will be evaluated as we move along in the planning process. Savings will come from efficiency gains, including lower employment costs, reduced occupancy requirements, outsourcing and decommissioning of legacy systems.

Meanwhile, we are reaffirming our FY16 outlook of low single-digit revenue growth and flat EPS performance, excluding the impact of foreign exchange and the previously announced timing shift for Journal revenue. As a reminder, for calendar year 2016, we are introducing a time-based Journal subscription approach, including a new database option for customers in our mature markets, which will provide access to our entire Journal portfolio rather than access specified by title.

This approach will greatly simplify the contracting and administration of our subscriber agreements, but it will also shift $35 million of revenue and $0.35 of EPS into FY17. Most of the revenue and earnings impact will occur in our third fiscal quarter. As a reminder, our cash flow performance will not be impacted by this change.

Meanwhile, the strong US dollar is likely to remain as a significant headwind. In the first quarter alone, foreign exchange was unfavorable to revenue by $22 million and EPS by $0.04. Overall, we continue to expect steady annual operational growth in Journals and double-digit growth in Solutions, which will offset an anticipated decline in Book revenue.

Also, while adjusted EPS is up 11% in our first quarter, we expect full-year earnings to be operationally flat, with higher expenses in the remainder of the year, including taxes and a ramp up in ERP spending. As a reminder, our adjusted EPS guidance includes roughly $0.15 of increased ERP expense as compared to FY15. And finally, we continue to expect cash from operations to be in line with FY15, but free cash flow to be lower, due to the $35 million of capital investment related to our ERP implementation and our Hoboken office transformation.

And now I'll pass the call back to Mark.

Thank you, John.

In summary then, we are pleased with our first quarter performance of 2% revenue growth and 11% adjusted EPS growth. Journal revenue was stable, excluding the trailing effects of the Swets bankruptcy. Our strategic growth areas performed well, including Online Program Management and Online Test Preparation. We continue to deliver on our core mission, to enable the skills and knowledge that researchers, professionals, and students worldwide need in order to be successful.

We're embarking on a program to achieve competitive cost benchmarks in shared services and align our expenses with our revolving revenue profile, all enabled by a multi-year ERP investment. We anticipate run rate savings to approximately $25 million by FY18, with some benefit realized in FY17. We will continue to evaluate additional savings opportunities as we advance our efficiency initiative.

Finally then, we reaffirm our FY16 guidance of low single-digit revenue growth and flat EPS, excluding the impact of foreign exchange and the Journal revenue shift. With that as background, we welcome your comments and questions.

(Operator Instructions)

Drew Crum, Stifel.

Good morning, everyone. I wonder if you could comment on any impact you experienced in China or anything you're anticipating. I believe you have a fairly substantial research business in that market, and amid all the market turmoil, I'm just curious as to what you're seeing or what you're anticipating. Thanks.

Hello, Drew. It's Mark. We have a fairly substantial Journal business in China. We're currently not experiencing any disruption to that. It's a business that we transact in dollars through government agencies. It's solid and we have good visibility into that going forward. We have a strong team on the ground. We have very close relationships with universities. And the funding for scientific research for education institutions in China have had no real impact from the turmoil in financial markets. It continues to be a government commitment. So right now, we don't see any significant adverse impact.

And I would add, if the government there tries to stimulate activity a bit, it actually works to our advantage to support, since a good bit of the economic activity that they would like to stimulate relates to research and growth in technology. So generally speaking, the environment is stable to positive, I would say, for our business.

Okay. Good. And then sticking with the research business, you guys had a very strong quarter with society wins, one of the better quarters you guys have had in recent memory. Noting that the net impact for the year in terms of wins versus losses will be neutral, but were you guys more aggressive during the quarter in terms of bidding for these new societies, and if so, what are the implications for royalty expenses for that segment?

Hello, Drew. It's Mark again. So one, it's hard to form an opinion from one quarter. We've been consistent in the way that we've approached society business. We are the largest society publisher, so we have a lot of business out there for us to both retain and to win. But we have been consistent in our financial offers over time. It is very competitive. And critical society relationships, we evaluate very carefully in terms of their long-term financial performance. But we didn't change our behavior in the quarter. It's simply due to the timing of when those particular agreements were reached.

Go it. Okay. And then just one last question. On Education, very strong growth for Deltak. Could you provide an update in terms of the progress or ramp to profitability for that business?

So I'll comment a little bit on business development. John may want to add a comment on profitability, as well, Drew. But I think we've mentioned over a couple of calls, our focus in the Online Program Management business is now firmly on adding the right number and the right kind of programs in order to drive higher student enrollments. That's what will drive long-term growth in the business. As we do that, then we start to work towards a mix of programs and partners, which begins to migrate that business towards profitability. And we do expect it to be EBITDA positive within this fiscal year.

Drew, just to add a bit more to that. In fact, your note before our call this morning commented that it appeared that Deltak was more dilutive in this quarter. In fact, our expectation for the year is that we are investing substantially earlier in the year and they were more dilutive than a typical quarter to our results in this quarter, and then we will earn our way back over the course of the year, all part of our growth plan for the year. We do still expect that on an EPS basis, they'll be dilutive for the year. But they are moving squarely in the direction of improving profitability and we expect them to be, as Mark said, EBITDA positive for the year.

Okay. That's great. Thanks, guys.

Thank you.

(Operator Instructions)

Daniel Moore, CJS Securities.

Good morning and thank you. Could you provide a little bit more detail around the $25 million projected cost savings in FY18? How much of that might flow into 2017? And then in the past, when you've had these types of restructurings, you've taken a significant portion and reinvested it. How much of those cost savings might actually drop to the bottom line in 2018 and beyond?

So, good morning, Dan. In terms of our current expectations, as you noted, overall we're expecting to achieve run rate savings of $25 million in FY18. We're anticipating that about half of that will actually flow through results in 2017, as we build over time with the efficiency gains that we plan to implement. In terms of flow through to savings, these are savings that we anticipate driving out of our shared service functions, some of which, including finance, you can think of as being relatively fixed in their nature, at least in the short term. And as we take down the cost in these functions and realize savings, we're expecting those to flow through to the bottom line. So most of the $25 million that we're anticipating in run rate savings in 2018 will flow through to the bottom line.

Okay. Very helpful. And then obviously, continue to invest heavily both in online education capabilities, as well as general technology of the ERP implementation. Do you have line of sight to a potential inflection point when revenue growth might start to begin to outpace investment growth in these areas and start to show more meaningful margin improvement?

Yes. I think that if you look across the different parts of the business, I think that each has slightly different characteristics. In fact, we talked a bit about the Profiles business that we acquired a little over a year ago, actually managing some decline in revenue in that business in order to manage for long-term profitability. So that one's actually, while revenue as we go through the transition has been declining somewhat, we're actually increasing the earnings in that acquisition straight along the way. So that one's on the move. And as we now -- a base and then begin to build that business again, our profitability there will continue to go.

CrossKnowledge is, while dilutive, as we noted last year, its profitability will improve substantially this year. And it's on a substantial march for very strong double-digit growth. So that one's on the move. I wouldn't say perhaps that there's really an inflection point. It's just a matter of that business continuing to grow to scale.

And then finally, where the real -- where you may think of there being an inflection point -- the real period for change eventually comes with the Deltak business, which has required, as our competitors have required, substantial investment in order to build a position in that business. We're still in an investment mode. But as I commented earlier, we also expect that we're now going to start to accelerate the improvement in profitability of that business. We'll be in EBITDA positive territory this year. And then as we make our way along, I think we'll be able to talk more about when we're accretive to earnings, but we're not quite prepared to discuss that yet. We're still investing for growth.

Just remind me, what is the projected EPS impact to earnings this year of Deltak?

I'd have to go back, frankly, and look. I can't quite recall exactly what we said on the fourth quarter call, but it will be somewhere, give or take, it will be somewhere in the zone of 10% to dilutive.

Got it. Okay. And the Swets, how much of that -- what was the impact on revenue this quarter? Roughly, I know it's a guesstimation.

Roughly $1 million. And overall, on a calendar year basis, it's a loss of about $5 million from that bankruptcy.

Got it.

Over the calendar year.

Okay. And lastly, just remind me, how much do you have on the current repurchase authorization remaining, and maybe just any updated thoughts on the M&A pipeline in general?

Mark, maybe you comment first on the M&A pipeline and then I can comment on the repurchase.

Sure. Sure. Hello, Dan. We continue to be very focused and disciplined around our acquisition strategy. We are focused in two areas, really. One is education to employment marketplace, both potentially adding scale to our Online Program Management and Education Services business, but also adding to our corporate learning business and continuing to invest across that whole continuum from the university to the workplace. And the other is we remain interested in the right opportunities to add both content, scale, and potentially publishing technologies to our research business. So we continue to be focused on those two areas, with nothing immediate.

And Dan, on your question with respect to the repurchase authorization, we still have available just under 2 million shares to repurchase under the existing authorization.

Okay. I'll sneak one more in and get out of the way. But, just in terms of the Deltak business. It grew 10 new program wins. Maybe just give a little bit more tenor around how many of the programs are currently profitable and what your expectations for that number might look like 12 months out. Just trying to get a sense of programs that have been ramping, how those are progressing.

So Dan, when you dig deeper into the profile of this business, the age of the programs has a substantial impact on where they are in terms of their profitability cycle. So what matters most in terms of where our programs on the path to profitability is not per se do we have a successful program or not, but really where it is in the maturity cycle. And typically the programs don't reach a point of being profitable until they're somewhere out in their third year. A relationship is typically -- a partnership, I should say -- has typically got a payback period from the initiation of partnership to the launch of its programs and on through, about four years to break even, a little less than four years to break even.

So it's really around that cycle and the pace at which we're growing. And the 210 program base that we have today, frankly, we still have a large number of programs that are very early in their maturity cycle, as we add new programs. And we'll continue to add new programs this year. So it's a mix. Those that are more mature, those especially that are out beyond the third and fourth years, start to, generally speaking, add substantial margins. Frankly, programs that once they get out to that level of maturity, if they're not demonstrating that they've got market receptivity, we wind them down or we adjust them or combine them with other programs that will provide for better results for our partner institution. Does that help?

Thank you again. Yes, it does, indeed. I appreciate the color.

All right, Dan. Thank you.

(Operator Instructions)

John Helmer, Caldwell Securities Incorporated.

Good morning. The WileyPLUS numbers look really small to me, and they're declining. Can you comment on WileyPLUS?

Sure, John. I will and then Mark can add comments, if he'd like. This first quarter for us is probably, I would call it actually, in terms of results, not a meaningful period when looking at WileyPLUS. The WileyPLUS digital platform is a course delivery, course management platform. And the revenue that we earn from that platform gets recognized ratably over the school period. Summertime being a very, very light period here in the US, principally where that product is sold, it just does not generate a meaningful amount of revenue. So I wouldn't read much of anything at all into the first quarter's results. It is truly not a meaningful period in terms of revenue recognition on that platform. That said, we do continue to believe that product will grow -- that product line will deliver strong double-digit growth for the business and we're still looking into that for the coming year.

Okay. Thank you.

(Operator Instructions)

And with no further questions, I'd like to turn the call back over to Mark Allin for any additional or closing remarks

Thank you. Thank you, everyone, for joining us on the call today. We look forward to speaking with you again at our Investor Day in late September and then in December for second quarter earnings.

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