John Wiley & Sons Inc (WLY) 2018 Q2 法說會逐字稿

Good morning, and welcome to Wiley's Second Quarter Fiscal 2018 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, sir.

Good morning, everyone, and welcome to our second quarter fiscal 2018 earnings review.

Some housekeeping items to start.

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 SEC filings.

The company does not undertake any obligations to update or revise forward-looking statements to reflect subsequent events or circumstances.

Also note, Wiley provides financial measures referred to as adjusted, which exclude unusual charges and credits as more fully described in our press release schedules which you can find on our website.

(Operator Instructions) After the call, a copy of this presentation and a playback of the webcast will be available on our Investor Relations page.

I'll turn the call over to Matthew Kissner, Wiley's Chairman.

Good morning.

First things first.

On the behalf of the Board of Directors and all of Wiley, I am delighted to introduce Brian Napack as the 14th CEO in the company's 210-year history, a history that involves many of the world's greatest scientific discoveries, medical breakthroughs and continuous advancements in research and learning.

After a very thorough search, the board unanimously agreed that Brian was the experienced and visionary leader we need to build on our foundational assets of content, brand and financial strength, to be a razor-sharp customer-centric organization focused on operational excellence, business model transformation and a high-impact culture.

Throughout his career, Brian has been a leader and innovator in the media, education and information industries.

He comes to us from Providence Equity Partners, a global private equity firm with more than $50 billion under management where he served as a senior adviser focused on investments in education and media.

Prior to Providence, Brian served as President of MacMillan, a global content publisher, where he helped drive significant profitable growth and to transform the company from a traditional publisher to an innovative provider of digital content, tools and services to its rapidly changing institutional and consumer markets.

Brian has served as an active director on the boards of numerous relevant companies, such as Blackboard, Houghton Mifflin Harcourt, Ascend Learning, Burning Glass, Ingram Industries, Recorded Books, myON, Synergis Education and Zero to Three, a science-based early childhood advocacy organization.

Finally, he has held senior leadership and entrepreneurial roles at L.E.K.

Consulting, ThinkBox, the Walt Disney Company, Simon & Schuster and A.T. Kearney.

I'd like to pass the call over to Brian to say a few words.

Thanks, Matt.

I couldn't be more excited about joining Wiley at this critical moment in time.

I've known the company for many years and I have a great deal of respect and admiration for it.

I can say with conviction that this is an extraordinary organization with great people, a commitment to high-quality publishing and services and exceptional financial strength.

It also has a gold standard reputation and world-class brand names, content, products and services that truly matter in this important market.

For me, it is a truly fascinating time to be a publisher to the research, education and human capital management communities.

The very definition of the word publisher, along with the portfolio of products and services that we deliver, is changing as rapidly as the real needs of our customers are changing.

All this disruption brings real challenges, but in my view, it is bringing much more opportunity.

We have work to do, but my belief is that if we deeply understand the needs of our customers innovate relentlessly and deliver content platform, tools and services that help them achieve their goals, and if we do this using business models that deliver a compelling price value proposition, we will thrive.

It's day 3 for me at Wiley, so I'm mostly in listen-and-learn mode.

I will look forward to reporting on our progress, sharing our strategies, our operational excellence initiatives and meeting with all of you in the future.

I'll pass the call back to Matt, but before I do, I want to thank him on behalf of the team for the remarkable accomplishments of the company over the past 7 months.

While not necessarily obvious to those outside the company, very significant progress has been made in critical areas such as team building, employee engagement and numerous operational progress that will benefit Wiley for many years to come.

Thanks to his excellent stewardship and John's consistent leadership, we are in a great position to move forward.

Thank you, Brian.

We are very fortunate to have you leading our team at this important time in our evolution.

As Brian only started a few days ago, I will speak to business performance, then John will follow with an update on our balance sheet, cash flow and outlook for the year before he hands it back to me for a brief summary, and then Q&A.

We had a good second quarter, with revenue up 3% and adjusted EPS up 22% on a constant currency basis.

Results were driven by growth in Research, better-than-expected performance in our book businesses and profit improvement across our 3 segments as a result of our ongoing operational excellence initiatives.

Free cash flow for the 6 months is tracking well.

In addition to Brian joining us as our President and CEO, we have a new Executive Vice President of Publishing, Ella Balagula, who comes to us from Reed Elsevier, where she served in numerous senior executive capacities.

Both Brian and Ella are exactly the kind of world-class change leaders we need at this opportune time.

Finally, happy birthday to us.

Wiley turned 210 years old this year.

We are immensely proud of our history, a legacy that includes publishing over 450 Nobel Laureates and being at the forefront of the industrial age, the technology age and the shift to knowledge-based economies.

Moving to quarterly performance.

Foreign exchange continues to be a major tailwind for us in fiscal 2018, contributing $15 million to revenue, $8 million to operating income and $0.08 to EPS in the second quarter.

This is a result of both year-over-year changes in exchange rates, notably, the weaker dollar against the pound and euro and more importantly, functional currency gains related to U.S. dollar-denominated calendar year 2017 Journal Subscriptions in the U.K. I will be excluding the impact of foreign exchange when commenting on all variances.

Second quarter revenue growth of 3% was largely driven by growth in Research Journals, STM and Professional Publishing and Education Services, or Online Program Management as well as the $6 million contribution from Atypon.

Note that going forward, we will see comparable year-over-year periods for Atypon.

Operating income growth of 16% was mainly due to the increase in revenue and lower technology expenses, including lower spending on our ERP implementation.

Note that adjusted contribution to profit, or CTP, increased for all 3 segments.

Adjusted EPS growth of 22% was a result of higher operating income and lower interest expense.

In terms of GAAP performance, there was significant unusual charges and tax items in the prior year, including an $0.08 restructuring charge, a $0.10 onetime pension settlement for terminated employees, an unfavorable $0.83 German tax decision and a $0.04 deferred income tax benefit.

From a first half standpoint, revenue, adjusted operating income and adjusted EPS rose 2%, 5% and 12%, respectively.

Revenue performance was driven by 2% growth in Research Journals and double-digit growth in Education Services, or Online Program Management, and Test Preparation, which offset a 2% decline in book publishing.

The Atypon acquisition contributed $14 million to the year-over-year revenue increase.

Operating income growth was due to revenue growth and savings from operational excellence and restructuring initiatives, particularly in shared services and segment contribution to profit improvement, notably in Solutions.

Our adjusted operating margin improved by 170 basis points to 14.5% for the first half of 2018.

Adjusted EPS growth of 12% was a result of stronger operating income performance, lower interest expense and a lower effective tax rate.

For the 6 months, foreign exchange was a benefit to revenue, operating income and EPS by $17 million, $14 million and $0.15, respectively.

Moving onto second quarter Research results.

Revenue growth of 5% was due to 3% growth in Research Journals and $6 million from Atypon.

Open Access continues to be a positive story, growing 25% year-over-year, while the subscription business was even.

Licensing, reprints, backfiles and other Journal-related revenue rose 11%.

Atypon continues to track well to plan, landing new clients as well as generating additional revenue from existing clients.

As a reminder, Wiley is transitioning its Wiley online platform to Atypon's world-class Literatum platform early in calendar year 2018.

Beyond the anticipated cost synergies and operating efficiencies, we are very excited by the opportunities that Literatum will bring to our customers and partners, enabling us to win new society business, provide enhanced content and services to existing society partners and offer new technology-enabled services and features.

While it is too early to comment on the calendar year 2018 Library renewal season, we continue to see favorable momentum in our Society Licensing business, which will benefit us in the coming calendar year.

Net Society Licensing wins for calendar year 2018 were up $3 million this quarter, after being up $6 million last quarter.

10 Society contracts were renewed worth around $7 million, and none were lost.

Research-adjusted CTP rose 4% due to revenue growth offset by investment in Atypon and higher royalties related to our Society business.

In the second quarter, book publishing performed better than expected, with STM, Professional and Education Publishing growing 3% overall.

Results were driven by 5% growth in digital and lower-than-expected declines in print.

Course Workflow, or WileyPLUS, was down 18% due to timing of revenue recognition, which reflected longer sales amortization for subscription periods extending across 2 semesters.

However, on an operational basis, excluding the revenue deferral impact, WileyPLUS sales rose 8% net of actual returns.

Test Preparation and Certification continues to be a strong opportunity, with revenue growing 5% for the quarter and 14% year-to-year -- year-to-date.

Importantly, adjusted CTP rose 14% due to savings from our operational excellence initiatives.

As noted, we welcomed Ella Balagula as our new Executive Vice President of Publishing.

We are excited by the experience Ella brings developing successful new business models, transforming product development, building out innovative partnerships and helping to generate profitable digital revenue growth.

Solutions had a muted quarter, with revenue up only 2%.

Growth in Education Services, or Online Program Management, offset a 4% decline in Corporate Learning, or CrossKnowledge, and a 2% decline in Professional Assessment.

Corporate Learning will continue to be challenged by a slowdown in French government funding for unemployment initiatives and blended learning programs, where Wiley benefits through partnerships with universities and business schools.

We now expect single-digit growth in that business for the year.

Professional Assessment was down due to a continued channel shift as we leverage intermediaries to enable profitable growth for pre-hire assessments.

The post-hire part of that business continues to perform very well.

Adjusted CTP growth remains a good story here, growing 14% for the quarter due to efficiency gains.

I will now pass the call over to John, who will take you through our balance sheet, cash flow and outlook.

Thank you, Matt.

Our balance sheet continues to be a foundational strength of the company, enabling us to pursue synergistic acquisitions while consistently returning cash to shareholders.

Our lower cash position at quarter end was due to the repayment of debt using proceeds from the repatriation of cash in the fourth quarter of fiscal 2017.

Net debt and net debt-to-EBITDA improved considerably over the prior year and our leverage remains quite low.

Cash from operations for the first half improved $40 million over the prior year due to an expected recovery in working capital performance following the close of fiscal 2017.

Free cash flow, less product development spending, improved by $38 million.

Technology, property and equipment CapEx was higher by $4 million, driven primarily by investments in product technology and business applications.

We continue to return cash to shareholders in the form of share repurchases and dividends, spending $66 million through the first half of the year as compared to $57 million in the prior year period.

We are reaffirming our full year outlook.

As a reminder, at constant currency, revenue and operating income are expected to be essentially even with the prior year and adjusted EPS is expected to be down by low single digits due to higher taxes.

While we are tracking favorably to our full year guidance, I would note that the second half will be challenged by an unfavorable tax comparison to prior year, which included discrete tax benefits of $0.12 per share recorded in the third quarter.

In addition, second half technology spending will be higher than prior year due to the timing of planned investments, including our ERP deployment of order cash functionality for our Journals business.

Foreign exchange is trending toward a positive story for the year.

If current rates were to hold, we expect the foreign exchange benefit from rate shifts and functional currency gains of approximately $45 million in revenue, $25 million in adjusted operating income and $0.37 in adjusted EPS.

As background, the functional currency benefit is specific to U.S. dollar-denominated Journal Subscriptions that are earned in the U.K. where the pound sterling is our functional currency.

And finally, cash from operations and CapEx are tracking in line with our prior expectations.

And back to you, Matt.

Thanks, John.

In summary, we are very pleased with our performance this quarter and through the first half of the year.

Revenue, adjusted EPS and cash flow were positive and are tracking well to guidance.

We are, of course, energized by the addition of new leadership.

While the first half numbers were very good, we are reaffirming guidance based on what we see for the second half.

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

(Operator Instructions) And we will take our first question from Dan Moore with CJS Securities.

This is actually Chris for Dan.

I know Brian just got there, I thought I'd throw a question his way.

Brian, maybe just talk a little bit further about kind of what attracted you to Wiley and some of the kind of unique skill sets that you bring to the company?

I'm happy to.

It was a big decision for me to decide to invest the next big chunk of my career in this company.

It all comes down to 2 things.

One is my passion for the spaces that we're in.

I think these are very important spaces, they're changing incredibly rapidly, and that change brings an enormous amount of opportunity.

And when I say these spaces, I'm talking about the Research space, the higher education space and the workforce development spaces.

But more than that, this company is a unique company, it's a legendary company, and it brings an enormous amount of assets to the game.

I've known the company for many years.

I have had a long-standing relationship with the company, I've been long impressed with it from afar.

It has an incredible reputation of strong portfolio of brands, incredible IP and content, fantastic talent throughout the company, market relationships and distribution reach that are incredible across the globe, and financial strength, including a very strong balance sheet that gives us the ability to pursue a long-term strategy of growth and profitability.

So for me, the combination of my passion for this space, my belief in the opportunity that comes out of these spaces and the company's legendary history and its unique best of skills and asset that we can apply to those was, to me, an opportunity not only too good to pass up, but an opportunity that I consider the sort of highlight of my career.

Terrific.

Maybe a few questions, guys, on the Online Program Management.

2U, looks like kind of the most visible competitor, had been growing in the mid-30% range versus kind of mid-teens from Wiley.

Can you talk a little bit about is their approach different from your perspective, kind of the comparison of the 2?

This is John Kritzmacher.

There are some differences in our approach to the market, for sure, and 2U by comparison to Wiley tends to focus on a shorter list of partners with much larger scale programs.

We've tended to go toward a more diversified base of partners.

We have just under 40 partners now, and programs that are more tailored to the unique universities that we're partnering with.

In terms of the rates of growth, what we've been doing in the past couple of years is to balance growth, with emphasis on driving the profitability.

And so we've been looking at our portfolio of programs and partners and evolving that portfolio toward partners that have strong national brands, partners that can support a number of programs, 10 or more programs, and programs that will support hundreds of students.

They all drive scale.

And so what you see on our performance over a period of time is a bit of an evolution in those partnerships toward partners that can grow with us, and we can help them grow, partners that can attract larger numbers of students and drive toward profitability, over time.

And if you look at our results, you'll see that we are balancing that growth dimension with the focus on profitability as we work a bit on the portfolio of programs and also our operational efficiency.

If you look at our results in terms of profitability, that business will be, for this year, essentially neutral at contribution to profit after the amortization of acquired intangibles.

And there's about $5 million of amortization associated with that business on an annual basis.

So you'll see, we're starting to move it into a position of contributing to our earnings.

Got it, terrific.

One last question, just looking at the Publishing business.

I know you've already explored potential divestments, partnerships.

Beyond the current restructuring initiatives, how much incremental cost can you take out?

Or what are the levers you have to pull to maintain margins should the current rate of volume declines continue at this pace?

I would say that we continue to have opportunities to improve the operational efficiency of the Publishing part of our business.

We're working, in particular, on improving the workflows associated with content creation and curation and publishing and moving toward a digital model whereas, today, much of our work is centered frankly around print-oriented processes.

So we're investing in process redesign and tools that are going to enable us to move toward digital-first environment, and that should provide some significant opportunities for efficiency gains for us, over time.

And then, of course, we continue to manage the overall production environment.

We've outsourced all of our production activities some time ago.

We've outsourced things like managing the supply of paper, and we continue to find strong partners to work with us around distribution that will continue to lower our per-unit course -- cost, rather, in an entirely variable model.

So I'd say, there's still substantial opportunity for us to continue to flex with the evolution of print.

We'll take our next question from Drew Crum with Stifel.

Brian, welcome.

John, one just kind of a housekeeping item with respect to Atypon.

Remind us what your expectations are for accretion or dilution in fiscal '18 and how you're tracking to that, and remind us again, what you're assuming for fiscal '19 with that acquisition.

Generally, I would say, I'm actually not sure if we've talked much about dilution per se about Atypon.

But what I would say is the business itself, from a profit perspective, is roughly neutral to us at this current point as we are making our way toward implementation of our online library on the Literatum platform.

As we commented in the prepared notes, our migration of Wiley online library onto the Literatum platform is expected to launch early in the next calendar year.

And once launched, we're going to drive annual operational savings of about $10 million a year in that business.

And then we also expect to continue to grow its own bottom line.

But the significant step-up in terms of contribution to Wiley comes as we make our way onto that platform and we wind down our own.

Okay.

And then shifting gears and, I guess, following up on the Online Program Management business.

You guys have been at 39 university partners or somewhere around that threshold for the last several quarters.

Can you talk about your pipeline and your aspirations of adding to that number or may be reducing that number in order to improve profitability?

I would say, Drew, the pipeline of potential partners there continues to be very good.

The relatively flat total, overall, that you're seeing is again a bit of a rotation away from some partners, frankly, who haven't had the brand strength to be really be effective in the online environment and to grow to scale.

But we are, along the way, taking on new partners.

On balance, we're probably in the direction of taking on something like 4 significant new partners a year.

But with the effect also of some coming off, we've been relatively flat there.

And I would tend instead to watch not on the total number of partners per se but where we are on the number of programs, which is increasing year-over-year, and more importantly, the number of students that are participating in those programs, overall.

Okay.

And I think in the press release, you've made reference to lower technology expenses, including the ERP implementation cost.

Can you quantify what that was in the quarter, and just any expectations for fiscal '18 in terms of where that number will be relative to fiscal '17?

So for the half, the first half of the year, lower spending associated with the technology was in the high single millions, it's pretty substantial on a year-over-year basis based on timing.

As we make our way across the back half of the year, that's going to even out because spending on the back half is actually going to be a little higher, and then total spending on technology for the year will be about flat.

Okay, got it.

One last question for Brian.

Brian, this company has been pursuing efforts to transition from print to digital for years but, at the same time, trying to manage some of the legacy print brands and programs.

Can you talk about the importance of maintaining a presence in print publishing for Wiley, or perhaps that's not part of your vision for this company.

So I'd just be interested in your views there.

Yes, look, I'm on the job all of 3 days, and it's premature for me to be opining on the future of our strategies or the tactics that we're going to pursue to achieve our objectives.

What I would say is that content, from my perspective, is important, for the mission of this company.

It's core to what we do, and it's also very, very important to the marketplace.

That content has to be enhanced by tools and services that make it incredibly valuable to our users such that the price value proposition for those products is apparent and our partners -- our customers look at us as valuable partners, not just folks selling them stuff.

So I can't speak about specific strategies, but I can tell you the future of this company will be building on things that we've done very, very well historically, and I expect those things to be valuable in the future.

(Operator Instructions) We'll go now to our next question from Nick Dempsey with Barclays.

First question.

Pearson has talked about 2017 in college textbooks as being better than previously expected because of the easier comps from heavy bookstore destocking back in 2016.

But then, they're talking about, in 2018, being comfortable with the market going back to declining 6 to 7 is their number because you don't get that easy comp effect anymore.

Does that kind of shape sound sensible to you on how to think about things?

Or do you subscribe to the view that the market is just reaching a better growth trajectory?

It's Matt.

I would say, right now it's hard to tell what's going on in the market.

We are seeing lower returns, so returns are down.

We're seeing better results in our backlist and our franchise titles, and we're really strong in business and finance and professional development.

And this just seems to be an industry trend.

But I would not opine to predict the future in such a volatile environment right now.

I would just add to Matt's comments.

To be clear, though, similar to what you're hearing from Pearson, we do expect to see a continued decline, overall, in textbooks.

We're not seeing -- anticipating that flattening or growing, we're anticipating a continued decline.

That's right.

Okay.

And just a quick follow-up.

Relic's CFO referred to the Journal renewal environment at the end of '17 as being same as in late '16, which for them is generally meant shorthand for we expect next year's growth to be broadly similar to the one we just had.

Have you seen anything different in the renewal environment that you're in currently compared to what you saw last year?

No, I would say that we see steadiness in the market.

It appears there are no further questions, so at this time, I will return the conference to Matthew Kissner, Chairman, for any final remarks.

We thank you for joining us on the call today.

Brian and John look forward to speaking with you again on Wiley's third quarter call in March.

Have a great holiday.

This does conclude today's conference.

Thank you for your participation.

You may now disconnect.