John Wiley & Sons Inc (WLY) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Wiley's third-quarter earnings call. Today's conference is being recorded. At this time I would like to turn the conference over to Wiley's Vice President of Investor Relations, Brian Campbell. Please go ahead.

Good morning and welcome to Wiley's third-quarter FY16 earnings call. Before we begin, I'd just like to remind you that the call is being recorded and may include forward-looking statements. You shouldn't rely on these statements as actual results may differ materially and are subject to factors discussed in our 10-K and -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 still want to view the slides, we recommend that you click on the gears icon located on the lower portion of the left-hand side window and select live phone. This will eliminate any delays in viewing the slide transitions as well as remove any potential background noise if you prefer to ask questions. After the call, a copy of this presentation and playback of the webcast will be available on our investor relations page. I'll turn the call over to Mark Allin, Wiley's President and CEO.

Thank you, Brian. Good morning. In addition to Brian, I am joined by John Kritzmacher, CFO and Executive Vice President of Technology and Operations. I will speak to business performance and John will follow with an update on operations, balance sheet and cash flow, cost savings initiatives and full-year outlook. Note that I'll be excluding the impact of foreign exchange and the transitional non-cash impact of shifting to time-based journal subscriptions when commenting on all variances to give a consistent measure of our underlying operational performance.

As expected, foreign exchange remains a headwind. Since half of our revenue is generated outside the United States, our reported results are adversely impacted by a stronger US dollar, particularly with respect to the euro and the British pound. In the quarter the unfavorable impacts to revenue and EPS were approximately $16 million and $0.06, respectively, as compared to the year-ago period. Year to date, the revenue and EPS impacts were $57 million and $0.14, respectively.

Also, as previously announced, Wiley is transitioning from issue-based to time-based digital journal subscriptions for calendar year 2016 to simplify the contracting and administration of these agreements. For the quarter and year to date, the transitional adverse impact of the change in subscriber agreements was $29 million of revenue, $25 million in operating income and $0.32 of EPS. For full year 2016 the change in subscriber agreements will shift roughly $37 million of revenue and $0.40 of EPS from FY16 to FY17 with recurring effect annually thereafter. Please note this is up from our prior estimates of $35 million of revenue and $0.35 of EPS. The change will not impact cash flow. In certain instances, I will be excluding this transitional impact in my discussion, referring to results on an operational basis.

Now onto our third quarter highlights. We are pleased with our progress. Revenue grew 3% operationally, thanks to solid growth in key areas including journals, certain areas of publishing, and solutions. Revenue was boosted by a $10 million back-file sale to a national consortium, which offset an unfavorable reporting comparison for corporate learning, where the prior period included two additional months of cross-knowledge results. That unfavorable comparison was adverse to third-quarter revenue by $5 million. Adjusted earnings per share grew 6% operationally due to a combination of revenue growth, cost reductions and contribution from the large back-file sale. Partially offsetting the underlying earnings growth was investment in our ERP program and related systems.

Journals, which make up about [50%] of total volume revenue, rose 5% operationally due to the back-file sale and strong author-funded access growth. Journal subscription revenue was flat to prior year, partly due to a net loss in society journals and the final trailing effect of the Swets bankruptcy. Calendar year 2016 subscription renewals were up 1%, with 79% of targeted business closed. As noted, third-quarter reported performance reflects the shift of time-based journal subscriptions, which adversely impacted revenue by $29 million, operating income by $25 million and EPS by $0.32. Excluding that transitional shift and the impact of currency, revenue grew 3%, operating income grew 5% and EPS rose 6%.

I'll touch on each of our business segments in a moment. Year to date, revenue growth on an operational basis is even with prior year, mainly due to declines in higher education print textbooks, offsetting double-digit growth in our solutions businesses, while adjusted EPS is up 2%, primarily driven by restructuring savings and a lower effective tax rate.

In the research segment, third-quarter journal revenue grew 5% operationally, driven by a $10 million back-file sale to a national consortium and double-digit growth in digital books and author-funded access. Journal subscriptions were neutral with prior year due to a net loss in society publishing contracts in calendar year 2015, which overlapped into the first two months of the current quarter. Results were also modestly impacted by the trailing affects of the Swets bankruptcy. Swets will have no further impact on the business. Calendar year 2016 journal subscription billings were up 1% as of the end of January, with 79% of targeted business closed.

In our society business, Wiley renewed 56 society journals during the quarter worth approximately $28 million in combined annual revenue. Six were not renewed worth $5 million annually. No new journals were signed. Note that society journal win/loss is modestly positive for calendar year 2016.

Research books and references grew 13% on strong digital book sales, including a new digital book license worth $4 million. As a reminder, we have integrated our various book businesses to achieve operating synergies and increased focus on areas of growth. Finally, adjusted contribution to profit on an operational basis rose 18% over prior year, driven by the high margin contribution from the journal back-file sale and restructuring savings. Year to date, research revenue growth on an operational basis is even with prior year and adjusted CTP is up 2%.

For the quarter, professional development revenue declined 1%, primarily due to an unfavorable comparison with prior year for corporate learning, which makes up our CrossKnowledge business. As a reminder, CrossKnowledge results in the prior year included five months of operations as we unwound a temporary two month reporting lag for that acquisition. The comparison was adverse to year-over-year results by $5 million. Operationally, however, professional development revenue grew 4%.

Corporate learning continues to show better than 20% operational growth and we feel very good about the market opportunity in that space. Online test preparation had an exceptional quarter with CFA, PMA and CPA Excel products contributing to a 69% growth rate as we continue to attract new students and add new courses. The assessment business rose 2%, with solid post-hire assessment growth offsetting a managed decline in pre-hire assessment revenue, following portfolio actions to optimize longer-term profitable growth. Book revenue declined 5% overall due to planned portfolio adjustments and weaker retail trends in EMEA and Asia.

Finally, adjusted contribution to profit for this segment continues to improve, growing 47% over prior year from a combination of restructuring savings and efficiency gains. Excluding the two extra months of corporate learning in the prior-year period, professional development adjusted CTP grew 19%. Year to date, revenue growth for professional development is up 2% and adjusted CTP is up 89%.

Education delivered better results this quarter than last, particularly in custom materials and course workflow, which were up 20% and 6%, respectively. Course workflow growth was driven by solid performance in accounting and engineering programs, while custom material grew on increased binder addition sales. Print textbook, however, declined at double-digit rates again, as students continue to navigate towards lower-cost alternatives. Online program management revenue grew 13% and is up 18% for the year. Wiley added six new net programs this quarter for a total program count of 222 programs, up from 192 programs in the year-ago period.

As part of our ongoing portfolio review, we decided to retire a non-revenue generating partner in the quarter resulting in a total university partner count of 38. The opportunity to sign new partners is as strong as ever, but we remain disciplined and selective in our approach to the business. Wiley's unique position inside of academic institutions is not lost on potential partners, whether it is providing research content to the academic library, course material in the classroom or administering graduate degree programs on behalf of the institution.

Adjusted contribution to profit for education declined 7% in the quarter, reflecting lower print textbook revenue and long-term investment in new online program management. Year to date, revenue growth for education is down 3%, while adjusted CTP is down 16%. John will now take you through our financial position, cost savings program and FY16 guidance.

Thank you, Mark. Adjusted shared services costs for the quarter rose 9% over prior year, driven by a 17% increase in technology investment related to our ERP deployment, technology infrastructure and digital product enhancements. For the year, we continue to expect the ERP and other systems investments to be more than $0.15 per share higher than the prior fiscal year.

Note that other administration costs rose 14%, or $3 million. This increase was mostly due to higher legal provisions related to litigation of certain copyright matters. And finally, as communicated last quarter we are outsourcing our US print textbook distribution operations to Cengage Learning to lower our fixed costs and shift to a more variable cost structure for print textbooks. The transfer of these operations is on schedule and we expect to close our US distribution center located in Somerset, New Jersey, in April.

Moving on to our balance sheet, we recently amended our revolving credit agreement, increasing its capacity to $1.1 billion and extending its term by five years to March 2021. The facility will continue to be used for general corporate purposes, including seasonal operating cash requirements and for strategic acquisitions. Net debt to EBITDA on a trailing twelve-month basis was 1.1 at the end of January as compared to 1.0 in the year-ago period and 0.7 at fiscal year end.

Cash from operations was down $38 million from prior year due to lower cash earnings and less favorable timing of cash collections. We expect to recover most of this shortfall in our fourth quarter. For the year, we expect cash from operations to be close to flat after setting aside the adverse impact of foreign exchange on our net income. For the nine months ending in January, the adverse FX impact on net income was roughly $8 million.

Free cash flow was $19 million for the first nine months of the year, compared to $80 million in the prior-year period, reflecting lower cash from operations and higher capital spending. The CapEx increase of $22 million reflects investment in our ERP and related systems as well as the redesign of our global headquarters in Hoboken, New Jersey. As a reminder, we expect to spend a total of $75 million in FY16 and FY17 on our ERP program, with half of that expensed and half capitalized. The initiative is expected to be completed during the first half of our FY18 and will result in significant efficiency gains. We expect to realize $25 million in run rate savings across our shared services operations in FY18, with much of that enabled by our ERP implementation. In addition, the headquarters office redesign will allow us to consolidate floors, lowering our ongoing operating costs and creating a far more productive and collaborative environment.

Finally, we deployed $15 million in the quarter to repurchase 348,000 shares at an average cost per share of $43.11. Year to date, we have deployed $60 million to repurchase 1.2 million shares at an average cost of $49.09 per share. 963,000 shares remain in the current repurchase authorization.

As previously communicated, we've increased our focus on improving our operating efficiency and effectiveness. We are continuing to integrate our three books businesses. We are also outsourcing our US-based print textbook distribution operations to Cengage Learning to lower our fixed cost and shift to a more variable cost structure for print textbooks. Finally, we are making good progress with our shared services cost benchmarking programs.

Our competitive reviews for technology and finance are complete and we are now moving toward the implementation of streamlined service delivery models for these important functions. We expect these initiatives will substantially improve the effectiveness of our technology and finance functions while achieving parity with competitive cost benchmarks. These initiatives gave rise to a third-quarter restructuring charge of $14 million. Consistent with our comments last quarter, we also expect to record a restructuring charge of approximately $8 million in the fourth quarter, primarily for real estate costs related to the winding down of our US distribution operations. As noted, we are on track to realize $25 million in run rate savings in FY18, with half of that being realized in FY17.

Finally, I would like to comment on our full-year outlook. Based on our performance for the first nine months and certain leading indicators, we are reaffirming our guidance of flat operational revenue growth and flat operational EPS growth. Our performance year to date is tracking in line on a revenue basis in slightly ahead on an adjusted earnings basis, with adjusted EPS up 2%. Our guidance excludes the effect of currency and the transitional non-cash impact of shifting to time-based journal subscriptions. As a reminder, we expect $37 million of revenue and $0.40 of EPS to shift from FY16 into FY17. To date, $29 million of revenue and $0.32 of EPS have moved, with the remainder of the shift to incur in the fourth quarter. Cash flow is not impacted by the shift.

With respect to currency, the strong dollar versus the euro and British pound has resulted in adverse impacts to year-to-date revenue and adjusted EPS of $57 million and $0.14, respectively. As a reminder, our EPS outlook includes an incremental expense of more than $0.15 for our ERP and related systems investments as compared to the prior year. Now let me pass the call back to Mark.

Thank you, John. This was a solid quarter for underlying revenue and adjusted EPS growth. Several key areas drove results, including mid-single-digit revenue growth in journals, strong growth in research books and custom education material and double-digit growth in solutions. We are encouraged by the steady growth we're seeing in our calendar year 2016 journal subscriptions. We remain focused on our mission to enable people to gain the skills and knowledge they need to be successful in research and in lifelong learning. We continue to expand the number of users for our products and services as we grow our digital revenue.

Our effectiveness and efficiency initiative is showing good progress. We are integrating our books businesses, have begun to implement our cost benchmarking program in shared services and are on track to outsource our US print distribution to Cengage Learning and close our US distribution center. The global headquarter redesign has commenced. When it is completed, it will allow us to realize efficiency gains, the benefits of cross-functional collaboration, as well as cost savings from floor consolidation. Our balance sheet, together with our new $1.1 billion credit facility, gives us the flexibility and capacity to make meaningful strategic acquisitions and continue returning cash to shareholders in the form of dividends and share repurchases.

In summary, while the work continues in this year of investment, we are pleased with the underlying results for the quarter. We reaffirm our full-year outlook of flat revenue growth and flat adjusted EPS growth on an operational basis.

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

(Operator Instructions)

Drew Crum, Stifel Nicolaus.

Guys, I have a couple of clarification items on the research business. First, starting with the large digital book sales that you guys mentioned, $4 million to the government sponsor. I take it that's one time. Can you talk about any other large deals that you may have in the pipeline that would swing the research business quarter to quarter or year on year? Thanks.

That is a one-time deal, Drew. We are continuing to explore digital book sales, including with national consortia and governments, but these are necessarily large and therefore somewhat infrequent. We continue to grow digital revenue for the business, mainly on a library-by-library, customer-by-customer basis but continue to put resources into exploring those kinds of large digital deals but we're certainly not able to forecast or predict those with any accuracy, given that they are largely national and depend on long-term negotiations.

Got it. Okay. And you mentioned, Mark, the expectation for calendar 2016 on the society journals was kind of neutral in terms of wins versus losses. Is that on a counts basis or is that on a dollar basis, or both?

Drew, that's done on a -- this is John, good morning. That's done on a dollar basis, wins versus losses.

Got it. Okay. Moving onto the education business, can you talk about what's contemplated in terms of number of adds around programs, university partners. I think you mentioned earlier that you expect to be selective going forward. I just want to better understand as how you intend to grow that business going forward. On a related item, are you seeing any changes in terms of the economics you're getting, or the splits, I guess said differently, with these contracts that you have with your university partners?

Sure. Perhaps I'll take the first part of the question and then John can comment on the second, Drew. The important metric to focus on in our online program management business is the number of programs.

We're increasingly selective in adding new partners and we'll only contemplate adding partners where we believe we can really get to scale in the number of programs that we offer. It's the addition of the right size and scale of programs which really drives both the top line and over time the economic productivity of the business. Amongst our existing partner base, those again where we believe and are adding new programs, you'll see over the course of the last 12 months, we have added around 30 programs with existing partners, where we think there's the opportunity for us to go deeper in the partnership and to launch programs that get real scale in terms of student numbers. At the same time, I think as I mentioned, we review the portfolio of partners and occasionally we will retire those partnerships which are smaller or nonproductive.

Just to add on that, Drew, I would just say in terms of the general characteristics of the business that we are contracting, the profitability profile, if you will, the revenue-sharing arrangements, they seem to be relatively stable, I would say. No material changes over the last couple of years.

Okay. Last question and then I'll jump back into the queue. John, your comfort level in the Company's ability to generate $250 million of pre-cash flow going forward, excluding 2016, given you've got some one-time items, but I think you mentioned would it impact cash flow performance year to date. But as I look at the numbers through the first nine months, you're at $19 million, whereas the 10-year average through the first 9 months for this businesses is close to $160 million. Just feels like a drastic drop off in the cash flow generation for this Company. I just want to gain better understanding as to how you think about the free cash flow power of the Company going forward.

I made some comments about what we expect to see the balance of the year. When we talked about expectations for the year last June, we said that we expected operationally that cash flow from operations would be essentially flat year over year and that we would then see about $35 million increase in CapEx. That would have us close to the $200 million level, $210 million for cash flow for FY16. As we have made our way along, we've seen a bit of an impact from timing, which as I indicated in my comments, we expect will make up most of that improvement in cash from operations in the balance of the year.

I did note that there's an adverse impact to date on our net income that hits cash from operations about $8 million. And then if you look through to our investments, our investments are up year to date by $22 million over last year and again, we said that, that would be something on the order of about $35 million for the year. Those are the overall characteristics. They are falling in line with our expectations of for the year, albeit that some of the timing has us lagging to the fourth quarter. I still have confidence in what we've said about free cash flow for the business in the past and our ability to continue to drive strong free cash flow performance in the business going forward.

Okay, great. Thanks, guys.

Daniel Moore, CJS Securities.

Just wanted to piggyback on that. I kind of missed your comments, I'm afraid. What, John, is your expectation at this stage for cash flow from operations for FY16?

We had said coming into the year that we expected for the year that cash from ops would be relatively flat operationally year over year. Our current expectation is that we will be close to flat, excluding the impact of foreign exchange on our net income, which has been unfavorable by $8 million year to date. We're still in the same sort of spot but impacted a bit by the foreign exchange impact on cash.

Perfect, thank you for the clarification. I wanted to dig into a couple of business lines. WileyPLUS in particular has slowed a bit here this year, this FY. Just talk about the outlook for that and your confidence that we could start to generate positive growth once again as we look out into next school year and beyond.

Sure. Hi, Dan, it's Mark. We were pleased to see WileyPLUS restored to growth in the third quarter at 6% on a year-on-year basis. We continue to see that business impacted by some of the forces that were more obvious in the second quarter, particularly lower US enrollments, students finding lower-cost alternatives, particularly rent and secondhand textbooks and so on. I think that there are some channel issues there. There are some pricing issues there. But the long-term trend towards digital education and towards the kind of core solutions that we're investing in, we remain very positive about.

I think we will continue to monitor enrollments in the overall growth and number of students carefully, but we are pretty clear that universities are moving towards digital education, that the more that we invest in the functionality and the outcomes-based features of those products, the better pickup we'll get. Our strength in engineering and accounting in particular, which are highly quantitative and highly suitable for digital teaching, have been encouraging as well. We see positive long-term digital trends, with some questions to answer along the way, particularly around pricing and what's happening in retail channels.

Okay. You touched on, in prepared remarks and a little in Q&A, the online program management. Growth has slowed a little bit and I know you're being more selective. Do you still see, under the new focus, if you will, the ability to drive strong double-digit, closer to 20%, growth going forward, or should we be thinking of that more as kind of a 10% to 15% growth business relative to what your expectations were when you acquired the business?

We continue to see growth potential in that business around the level that it's growing now, 15% and towards 20%. We have become a lot more focused around the number of partners that we acquire. Actually, we've gained real traction and momentum from the fact that Wiley has strong relationships across campuses with the right kind of larger university partner who can really create scale for us in that business going forward. So we absolutely remain confident in the outlook for the business and confident in Wiley's ability to continue to gain share and drive top-line growth.

Just remind us the impact of profitability right now, and if you were maybe signing up fewer newer partners where you have a significant amount of upfront investment spend, talk about how we should think about the ramp of earnings or profitability in online management for the next couple of years.

Dan, it's John. On a year-to-date basis, Deltak has been dilutive to our earnings by $0.15. Our expectation -- and that's roughly even with where we were last year and that's about where we will level off for this year. We have not yet set a particular point in time where we tend to drive Deltak to be accretive. We'll talk about that more again when we come back around to our thinking on the year and our guidance for FY17. We continue to believe that as that business matures and the relative mix of mature programs versus new programs starts, shifts in the balance to its more mature programs, that we will get that part of the business up to operating margin rates that are at or above the average of the business.

I appreciate the color. Is that a sort of a three- to five-year timeframe, or should we be thinking about longer?

You should not be thinking about longer but we'll get more precise about this when we come back around to talk about 2017.

In the assessment business, up 2% year to date, when we entered it I think we were looking at more like double-digit growth. I know there's been some puts and takes. Can we get back to double-digit growth rates in the current environment, in the current economic environment? What types of initiatives will it take to get there?

It's Mark again, Dan. Our post-hire assessment business continues to expand at around that rate and we certainly feel good about that going forward. The 2% blended rate, growth rate that we talked about, is a result of the portfolio actions that we took in our pre-hire assessment business, so Profiles International. We've rationalized the channel approach to that business. It was a multi-channel business and that created real pressure on both profitability and scale. We've focused on that as a reseller-driven business as we are in our post-hire business and that we can get both businesses to continue to be productive at a double-digit growth rate as we work through the next 12 months of restructuring in the pre-hire business.

Very helpful. Maybe just lastly a reminder capital allocation, the balance sheet continues to get better, relatively under levered, particularly as you think about the cash flow potential in 2017 and beyond. Talk about the balance of opportunities from an acquisition standpoint versus perhaps being more aggressive with the repurchases, et cetera.

I think, Dan, I would generally described for now that we're continuing on the path where we've tried to strike an even balance between having capacity available to invest in the business, including acquisitions, and returning cash to shareholders in the form of repurchases as well as dividends. I don't see any near-term change in the pattern that we've had for the last couple of years here.

Okay. Thank you for the color.

(Operator Instructions)

And we do have a follow-up question from Dan Moore.

Take one more crack and maybe once again talked about this journals and the society businesses. I think six society journals were not renewed. Did you walk away from that business? Talk about the general overall environment for pricing and the competitive landscape for societies in particular.

Dan, it's Mark. Those were relatively small agreements. It's in the natural rhythm of the business for some to go away as we continue to work towards acquiring and winning bigger society business. It is competitive. I think that's pretty obvious.

That creates the need for us not only to be clearly providing the kind of broad service that society is looking for, both from publishing services, through membership services, learning and education, but also to be competitive. That competitiveness requires us equally to be focused on realizing efficiencies elsewhere in our research business that allow us to continue to compete. We certainly feel good about our competitive strengths and our ability to win going forward.

All right. I leave you alone for good.

Thanks, Dan.

(Operator Instructions)

It appears we have no further questions in the queue. I'd like to turn the call back over to Mark Allin for any closing remarks.

We thank you for joining us on the call today and look forward to speaking with you again at our June year-end earnings call.

Once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation. Have a nice day.