John Wiley & Sons Inc (WLYB) 2012 Q2 法說會逐字稿

Good morning, and welcome to the John Wiley and Sons Quarterly Earnings Call. Before introducing Steve Smith, President and Chief Executive Officer, I would like to remind you this call is being recorded, and may include forward-looking statements. You should not rely on such statements, as actual results may differ materially, and are subject to factors that are discussed in detail in the Company's 10-K and 10-Q filings with the SEC. The Company does not undertake any obligations to update or revise forward-looking statements to reflect subsequent events or circumstances.

I will now go ahead and turn the call over to Mr. Steve Smith. Please go ahead.

Good morning. Thank you for participating in Wiley's fiscal-year 2012 second quarter investor conference call. I'm with Ellis Cousens, Executive Vice President and Chief Financial and Operations Officer, and Brian Campbell, Director of Investor Relations. I'll take a few moments to provide an overview of Wiley's performance in the second quarter, and we will then respond to your questions and comments.

In a difficult global economy, Wiley achieved revenue growth of 1% in the second quarter, but declined slightly excluding the positive effect of foreign exchange. Currency-adjusted revenue growth of 1% in STMS was offset by declines of 2% for P/T and 1% for Global Education. EPS of $0.83 decreased by $0.05, both including and excluding the effects of foreign exchange. Lower revenues and higher technology and facilities costs were partially mitigated by improved gross margins and lower interest expense.

For the six months, revenue of $877 million was flat on a currency-neutral basis, but grew 3% including the positive foreign exchange impact. Adjusted EPS for the six months fell 2% to $1.51. Excluding favorable foreign exchange, adjusted EPS fell 6%, reflecting the top-line results, and higher technology and facility costs.

Year-to-date gross profit as a percent of revenue was 70.1%, 1.3% ahead of the prior-year figure of 68.8%, due to increased digital product sales, product mix, and timing. Year-to-date shared services and administrative costs of $194 million were up 10% due to ongoing investments in digital products and infrastructure, and increased facility costs related to the consolidation of operations and the doubling up of occupancy costs during the [fade-out] period as we move to new premises in Singapore, San Francisco, and the UK.

Free cash flow for the first six months was a use of $88 million, $63 million greater than the prior year. Lower cash earnings, as a result of the timing of subscription cash collections, higher non-cash subscription revenue, and higher capital spending on technology were the major drivers of the higher cash usage. Subscription cash collection delays relate to the timing of 2012 subscription renewal negotiations, and are expected to recover in the third and fourth quarters. Net debt was $428 million at the end of the quarter, down from $545 million a year earlier. During the quarter, Wiley repurchased 600,000 shares at a cost of $28 million.

Now I'd like to provide some information regarding the performance of Wiley's global businesses. STMS second quarter revenue of $251 million increased by 3%, or 1% excluding the favorable effect of foreign exchange. Currency-neutral journals revenue grew by 1.5% over prior year, reflecting solid underlying [rep] calendar-year 2011 subscription and reprint sales growth, partially offset by lower backfile sales and the adverse impact from the timing of issue publication.

Journal subscription revenue grew by 1.8% in the quarter, and is up 3% year to date. The lower growth rate in the second quarter reflects the adverse impact of publication timing versus the second quarter of fiscal-year 2011. It is still early in the calendar-year 2012 journal subscription renewal process, and we're working closely with our customers on a large number of significant license renewals. To date, we have successfully negotiated approximately one-third of our full-year forecast subscription and license revenues, which is ahead of where we were this time last year, and early indications are that our growth rates will be similar to those experienced in calendar-year 2011. Cash collection typically follows licensing and invoicing by around 30 days. As a result, we expect the timing of collections noted with respect to the second quarter to be cleared by the end of the third quarter.

We have completed negotiations with members of several large consortia customers, such as -- [JUSTICE], the Japan National and Private University Consortium; the Nestle Consortium in the UK; the [Cooperand] Consortium in France; ANKOS in Turkey; the Bavarian Consortium in Germany; the Statewide California Electronic Library Consortium; Georgia University System Consortium, among many others. In aggregate, the value of these licenses is growing in line with our expectations.

The STMS book business was down by 4% against prior year on a currency-neutral basis, reflecting tight library budgets. Direct contribution to profit for the quarter of $107 million was 4% ahead of prior year, or 2% ahead on a currency-neutral basis. For the six months, STMS revenue increased 1.9% on a currency-neutral basis to $504 million, reflecting solid journal subscription income growth, growth in backfiles, and corporate sales offset by a 6% decline in book sales.

Excluding the impact of a large one-time sale to Saudi Arabia in the first quarter of the prior year, STMS book sales are flat with prior year. Year-to-date direct contribution to profit increased by 4%. In the quarter, STMS signed new contracts with societies to publish six new journals with combined annual revenue of $3 million, and renewed or extended contracts to publish 10 journals with combined annual revenue of $11 million. Four journal contracts were lost, with combined annual revenue of $560,000.

For the 12 months ending in October 2011, full text access on Wiley Online Library increased by 50% across all product types, compared with the same period a year ago. In September, the Company launched the Wiley Job Network. Designed to give corporate recruiters access to the highly coveted market of professional job seekers, the Wiley Job Network combines Wiley's community of highly-skilled professionals and researchers, must-have content in Wiley Online Library, and cutting-edge job board technology into a digital offering that is unique in our market.

Six Wiley authors were named among the list of 2011 Nobel Laureates. Wiley authors were joint winners of the 2011 Nobel Prize in physics, and the 2011 Nobel Prize in physiology. Second quarter professional trade revenue of $112 million declined 1%, or 2% excluding the favorable effect of foreign exchange. The decline is largely attributable to softness in consumer categories, particularly cooking and travel, which were greatly impacted by the loss of sales to Borders, which contributed to sales growth in the prior year through December, combined with the impact of subsequent Borders liquidation sales that have negatively impacted sales through other accounts in the first half of fiscal-year 2012. We believe that these deep-discounted sales were finally completed in mid-September. Sales of For Dummies titles grew strongly across multiple channels for the quarter and the year to date.

Revenues in the business, finance, and technology categories continued to grow, powered by the rapid growth in sales of e-books and other digital products. e-book sales increased by $5 million, to $9 million in the quarter. Strong global sales growth at Amazon, Barnes & Noble, and Apple contributed to the increase, along with sales growth with a number of new e-book vendors. The growth in e-book sales, as a percentage of total P/T revenue, is having a positive impact on gross margins. Gross profit at 63.3% of revenue reflect the 2.1% improvement compared with the same quarter in the prior year, due to e-book growth and lower inventory provisions. Direct contribution to profit grew 6% to $31 million, or 5% excluding foreign exchange, reflecting top-line results, higher gross margins from digital products, and cost controls.

Second quarter Global Education revenue was flat at $84 million, or down 1% excluding favorable foreign exchange. Factors negatively impacting revenue include the impact of college bookstore inventory build-up for rentals in the prior year, higher returns, and a slowdown in several international markets. According to published industry data, the US higher education market declined by 0.6% from January to October, during which period Wiley's US sales increased by 1.9%.

Despite strong student demand, decreased public funding has slowed the growth in the number of available seats at two- and four-year public institutions. The higher education market has also been affected by a decline in for-profit enrollments resulting from a federal investigation into their recruitment practices. Non-traditional and digital revenue, which includes WileyPLUS, e-books, digital content sold directly to institutions, binder editions, and custom publishing was up 10% to $27 million, and accounted for 32% of total education revenue. WileyPLUS billings were down 7% for the six months year to date, mainly due to the lower for-profit college enrollments in the US. Outside the US, year-to-date sales in EMEA are down 8% on a currency-neutral basis, as a result of declines in the Middle East. Revenue in Australia, where we were about to enter the peak ordering season, is running slightly behind.

In September, we executed an institutional license agreement with Indiana University. This agreement would enable the university to license access to Wiley's e-book and WileyPLUS on behalf of its students for a per-section fee. All eight Indiana University campuses, collectively serving over 100,000 students, are eligible to participate under this agreement, which begins in the spring semester of 2012.

Global Education direct contribution to profit for the quarter was flat at $32 million, or down 1% excluding favorable foreign exchange. The decrease reflected top-line results and higher direct operating costs, offset by improved gross profit margins.

In conclusion, our revenue performance at mid-year reflects a continuing softness we are facing in many of our markets, particularly for higher education. We continue to focus on sustaining our core business, while innovating to create new business opportunities and revenue streams that leverage Wiley's unique combination of talent-rich content and enduring customer relationships. While continuing to invest in our future, we will manage costs prudently to protect bottom line expectations for the business as a whole in fiscal-year 2012.

Based on our first-half results and market conditions, particularly for higher education, we are lowering our full-year revenue guidance from mid-single to low-single-digit growth, excluding foreign exchange. As a result of careful cost control to cover the revenue shortfall, we are reiterating our EPS guidance of $3.15 to $3.20, with possible currency-related upside if the US dollar remains at current levels. This excludes the $0.14 deferred tax benefit related to reduction in UK tax rates from the prior year.

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

(Operator Instructions). Drew Crum, Stifel Nicolaus.

I want to go back to the guidance for fiscal '12. The EPS guidance implies a pretty significant uptick in EPS growth in the second half versus the first half. What do you attribute that to, or what are you assuming in the second half that drives that growth? As a follow-on to that, coming off of the first quarter, you'd mentioned an incremental $0.10 benefit coming from ForEx. Is that still the assumption embedded in the EPS guidance?

This is Steve. I'm going to start, and then Ellis, I'm sure, will chip in with some further remarks, particularly on the foreign exchange impact. We have confidence in our EPS forecast for the balance of the year, based on a number of factors. I'll just reel off a few of them for you, and we can talk about them in greater detail, as you wish. First of all, we have improving comparables versus prior year in the second half of the year compared with the first half of the year. A number of factors there -- first of all, obviously the presence of Borders for the full year fiscal '11 and the first half of fiscal '12. We'll have a like-for-like comparison starting from December in the second half of the year, as well as the completion of those liquidation sales that I referred to.

Global Education had a strong first half in fiscal-year 2011, but we saw the beginnings of a decline in that growth rate as of the end of October 2011. So again, we have better comparables in the second half of the year. We have some confidence on the results so far with 2012 general subscription renewals, which will fuel growth in the last four months of the year, and as well as the presence of that Saudi online book deal in the first half fiscal '11, which has made comparables for the year so far somewhat challenging. All of those give us some confidence that we'll see growth pick up a little bit in the second half of the year.

We also expect to have the benefit of some very careful expense management that will kick in increasingly during the second half of the year, and some of that is the carry-over of timing benefits from the first half. Last but not least, to the extent we miss our revenue targets, there will be incentive accrual adjustments in the second half of the year that will also provide favorability compared to prior.

I'll let Ellis add to that.

I can't add anything to that. On your question about the foreign exchange piece, Drew, is we said $0.10 at the end of the first quarter based upon what dollar rates were relative principally to sterling and euros back at that point in time. The assumption was -- as stated was, if those rates stay the same, we know they never will, it could go up or down or they could stay the same -- I actually shouldn't say we know they won't -- but the dollar, as you probably know, has strengthened a bit against both of those currencies, given some of the issues in Europe. And as a result, I would lower that to something around $0.05 to $0.07 or so. I could tell you in a forecast, based upon current rates as they exist for right now, I'd say $0.07, but I'm hedging a bit by saying I have some expectation the dollar might strengthen a little bit further, so to be cautious I'd say $0.05 to $0.07 against prior year, as a benefit.

Got it. Okay. Just to follow on the expense management, any thoughts on the technology spend, which was up pretty significantly in the quarter. Should we expect to see that moderate a little bit going forward?

Drew, as you know, we've talked for many quarters now about the trajectory of technology expense growth, and we've talked about how that is lumpy over points in time. The second quarter and the first half, quite frankly, was a bit of a lump. Whereas I don't expect a decline in technology spend for the balance of the year, it will moderate a bit. Some of that has to do with the timing of what we're spending as planned, and some of it has to do with a reprioritization of some of that spending. Again, so, what has been, as you can imagine, change in our revenue guidance, a bit more difficult here than we imagined, particularly in Higher Ed. We'll be a bit tighter and have to prioritize, and have prioritized a little bit differently; that'll affect the second half. I would expect that to moderate a bit in the second half. And as Steve said, that'll contribute to some of the second-half performance relative to the first half.

Okay. Shifting gears, the gross margin was up pretty significantly. I think above 70% is one of the highest, if not the highest, second quarter gross margin we have in our model, and I think we've seen out of your business for some time. Is that a fair run rate, or a fair way to think about the business as it continues to transition from print to digital?

Yes. Again, Drew, we're pleased by that, certainly. I wouldn't use that as a run rate. Again, there's some timing, but clearly, a lot of our digital strategy is taking hold. Those investments are making sense. Those things, digitals, transformational, transitional are the things that are growing fastest in our business. Certainly, it's one of those things in terms of managing the business, the questions are completely legitimate, and need explanation around the rates and levels of investment in technology. But clearly, that is a major kind of fueler of growth, so to speak, both in the present and into the future.

Again, it's kind of investing a little bit ahead of revenue. That is where one has the difficulty in terms of matching up perfectly investment with return. The long answer to the short question is -- I wouldn't use it, but certainly the trajectory on gross margins over time will continue to improve, provided two things are true -- one is that our technology investments continue to perform as we expect.

And I would add one in there, is that market conditions, at some point, will need to improve for us to see the full benefit of our investments in technology. I'm talking about out there, I'm not talking about the next quarter, the quarter after that. But certainly, some expectation of improvement in market conditions in the longer term. Some of these investments, as we've discussed, are ones that have material benefits a couple of years out -- two to three years out or so. Again, they make sense in the context of current market conditions, but if we really want to see significant improvements that extend beyond gross margins, to a question you've had before, to operating margins, improving market conditions could certainly factor heavily into that.

Okay. I just have one more question, and I'll jump back into the queue, it relates to professional trade -- actually a two-part question. One is, have you seen any pick up in consumption amid the release of the Kindle Fire, which seems to be creating some buzz in the market?

Then on a separate topic, the European Commission announced an e-book pricing probe the other day, and I think the Justice Department also acknowledged that they are conducting a similar probe in the US. Are you guys in any way involved, or can you talk about how that impacts your business?

Drew, I'll take both of those. We've seen, as I mentioned in my remarks, a huge pick up in e-book sales, up over 100% in the quarter, up over 100% year to date. It is fueled by a number of devices, including the Kindle in its various versions, as well as to the iPad, to the Nook, and a whole range of devices. Frankly, the more of these devices that are sold, the better it is for us. We're delighted to have those multiple channels and multiple devices.

It's too early for us to make any comment on the Fire. I would observe that the Fire looks like a great multi-media entertainment device. It isn't just a dedicated book reader, and so what people actually use that device for will be interesting to see. There are other tablets out there that have very similar features and functionality, including the Barnes & Noble Tablet. We're looking forward to seeing the benefits from the holiday season of more and more devices in more and more hands, and we think that's going to drive revenue.

Interestingly, it does drive revenue later in the cycle. Whereas people used to buy the books before the holidays in order to give gifts to friends and loved ones, now people turn on those devices on Christmas Day, fire them up and the sales come a little later in the cycle for us. But it's all a very positive trend, and an exciting time in the world of e-books.

On the question of the e-books pricing probe, the Justice Department probe has actually been in progress for quite a while, and the EU is following suit there. Wiley is not involved in that. The big, general, mass market and fiction publishers are those who are being investigated. The investigation is around this notion of agency pricing. Wiley does have agency pricing relationships with some vendors, and we have more traditional vendor relationships with others, including Amazon. At this point, we're happy for those dual models to exist side-by-side, and I think we don't feel any sense of risk around the issue of the investigation into pricing.

Okay. Thanks, guys.

Torin Eastburn, CJS Securities.

Can you provide any update on how you're progressing with WileyPLUS Version 5?

Sure. As you know, at the first quarter conference call, we talked about the fact that we had delayed the launch of WileyPLUS 5.0. We have made a lot of progress in the last quarter in terms of our plan to enhance WileyPLUS Version 4 for the spring semester. We will be re-launching a number of new courses based on an enhanced version of release 4 with a lot of the new functionality that was planned for Version 5, in order to get that into our customers' hands as quickly as possible. In particular, we've made significant advances in the functionality of our very important accounting list. We've also made improvements in the area of organic chemistry.

In parallel, we're continuing to make advances with the development of WileyPLUS Version 5 to make sure that we have a fully functioning, and very robust and stable system for our customers. We'll have a beta launch by the spring of 2012, which will be in the hands of our customers. We have contingency plans for our 2012 [front list] sales season to make sure that we have Version 4 titles available for the fall of 2012. We have not yet announced a launch date for Version 5. We want to make sure that it's rigorously tested, and that we have everything in place before we make that announcement.

Do the issues you're having with WileyPLUS explain some of the high technology spending so far this year?

I'll answer that, Torin. This is Ellis. There's been a small increase in spend. As Steve described, we are building functionality into 4.0. That wouldn't be a part of expense, that is capitalizable development. It will show up in depreciation eventually. There's been a little bit more cash investment. We're talking about a few hundred thousand dollars, not a few million dollars here, so we're not talking about big numbers. But that'll enhance 4.

By the way, when 5.0 does ultimately launch, it doesn't mean that 4 gets shut down. Those two things run in parallel for a period of time because of the nature of courses, and what's required in certain types of course areas. There's not an abandonment of 4 when 5 ultimately launches.

I will say, just to add a little bit to what Steve described, is some of the things that we did validate having to do with 5, as you recall, it was a performance issue, not functionality and things like that, it was performance and not wanting to turn a more slowly-performing product into the hands of customers who are accustomed to a much more quickly or rapidly functioning product, so to speak, in somewhat layman's terms. What we've done is validated the technical architecture, and a lot of the components that would have contributed to that we've made some minor tweaks. The good news is, there is not a major overhaul required with respect to 5. I would describe it as major tweaking, but tweaking nonetheless. Not rearchitecting and start from scratch kind of thing, or back up 50% of the way and start over again.

The good news is, so far, from a technical perspective, it looks very good. We've done some rigorous full-load testing on it, and found that it's performing up to what we expect in terms of standards, so those are very positive outcomes as well. Positive stuff on the front in terms of development. There is some additional investment. Some of the work in 5.0 to validate some of that activity is in the form of project and program management. There is some additional expense related to 5, not so much related to 4. It's not a key driver of technology investment, it really is -- what's driving technology is what has been driving it all along.

But there is some lumpiness associated with when you begin major initiatives and projects, and where you invest. We talked a little bit about that. Again, sorry for the long answer here, but we talked a bit about that at the investor day that we had. We spoke a lot about our investment in technology, what we expect it to yield. We also talked about investing in some of the backend systems to support new business models. Those investments are beginning to ramp up a bit.

Again, it's not a vertical trajectory, but it is a trajectory that has some lumpiness associated with it. There'll be a little bit of time until we begin to shut down some of the legacy services that are being replaced by those new services and so forth. I will say that, as part of that, there are adjustments in workflows that'll be benefits in direct expense and contribution to profit and so forth, so the benefits will come not just in systems, but also how we do the kinds of things that we do. Sorry for the long answer, but just wanted a little bit of context with that.

That's all right. What, if any, has been the revenue impact?

We've lost a couple of courses. Overall, it's a very modest impact. Most of our customers have stayed with Version 4, and are looking forward to those enhancements that I talked about. We could quantify it. It's order of magnitude, it's not much more than $1 million or thereabouts, for what we know to date.

It is important that people understand that the challenges that we're having with revenue in Global Education don't relate to WileyPLUS, they relate much more to the overall market conditions. I'll refer to the market trajectory of the US market as a whole being down 0.6% for the year to date. We are outperforming that, we believe, and we're outperforming most of our major competitors, although not all of them. The revenue challenge really relates to the dramatic shortfall in for-profit enrollments, first and foremost, as well as some other challenging factors within the distribution of higher education products.

Okay. Just one other quick one -- I know M&A has been part of your strategy in Global Education. That seems to be an increasingly competitive space as far as deals are concerned; some of the multiples are a bit high. Have you changed your thinking or revised your thinking at all there?

It's not just been a feature of our strategy in Global Education. Acquisition opportunities are a constant focus for the Company. We don't look at target acquisitions as being the domain of one of our three global businesses exclusively. The whole area of learning, and particularly online learning and e-learning, is of huge interest to us for continuing professional education in our professional trade segment. It's of huge interest to us in terms of continuing professional development, in STMS particularly, and the fact that many of our learned society partners also see part of their mission is to provide continuing professional development opportunities for their membership.

We're looking at learning more broadly. You're right that there's a lot of competition for acquisitions in the e-learning space, but our ability to leverage investments across all three of our global businesses gives us some confidence that we can come up with credible business plans that would enable us to compete for acquisitions on sensible pricing. Notwithstanding the fact that anything we do, we'll make sure the economics are sound, and the potential for return on our investment is there for the longer term.

Thank you.

Dave Lewis, JPMorgan.

The first question is -- can you help us quantify the impact of Borders in the first half?

Yes, Dave. It's a little bit difficult. There was about $4.5 million worth of revenue, sort of year on year. What is a little bit difficult to quantify is we know what sales we had last year in Borders; what we don't know is sales that were foregone by customers that they may have made that were offset by their liquidation sales that affected all of the first half and the second quarter, as well at least through September. It is kind of that -- I refer to it as -- Steve is not accustomed to this term in England, but it's called a double whammy. We had the double whammy of last year's sales, plus this year's liquidation. It's a bit hard to quantify all of it.

Okay. Thanks, Ellis. With regards to the margin guidance from investor day, flattish the next two to three years, Ellis, can you just give us an update on what should be or how should we think about the baseline from the traditional P&T retail businesses? I know Borders is a bit of an outlier in terms of their performance recently, and many of the smaller retail distributors are very small, with the exception of Barnes & Noble, of course. But with the speed of the growth in e-books, I just wanted to see if you could give us an update on how we should think about the offset there between digital and the traditional retailers? Thanks.

Yes. I was digesting all of that, Dave, when I spoke to that at the investor conference day about flattish margins. I would characterize that it's no worse than flattish margins. Again, not quarter to quarter, we're talking about over a two-year horizon or so that I'd see us before we begin to see significant pick up in operating margins from some of the benefits of digital. We're certainly seeing them, as noted on some of the previous discussions and a question earlier, in gross margins. It is the rate of technology spend that's, as we've discussed again, offsetting that.

I've taken into and digested some of the e-book transition from print to digital. I wouldn't call that transformational, that's part of the transition from print to digital. Some of those benefits are included within that assumption that we have margins that are roughly where they are today. It does exclude, though, some major things that may happen related to potential acquisitions. It may have -- what we might do with respect to -- and I did describe some of that in terms of continuing to change the cost structure of the business around offshoring some outsourcing of certain activities. We've certainly done and talked about some of that in the past. We believe there's more opportunity to do that.

It's not just digital transformation that is affecting operating margins, it's a whole range of things. I just mentioned a little bit, and did so at the discussion as well, around some of these backend systems and looking at workflow dynamics in the business and how it is we support, how we historically supported what was largely a print business with very little digital, and how work flows would be modified. They imply cost savings in direct expense as well, in terms of how you support digital workflows. They're different, and they allow us to do some consolidation, whereas we might have managed our workforce somewhat differently in the past.

There's opportunities that are throughout the business, and we're being aggressive in taking advantage of those. There'll be more that we'll talk about over the next quarters, and couple of years or so. It's kind of good news. It's exciting for us that there are opportunities to favorably change the cost structure of the business to offset more of the technology spend than we have in the past. We have the combination of all that, and the margin contributions from moving from print to digital.

Okay. Thanks, Ellis. I'll just ask one last two-part question on Higher Ed, and I'll hop off. Can you just give us an update on the for-profit impact, when you think that might subside? The second part of the Higher Ed question is -- you've discussed the IU, Indiana institutional model; it sounds interesting. Can you provide any color on what perhaps the uptake could be from some of the other major institutions, perhaps the SUNY schools, Ohio or California, those would be other big markets, I would think. Are they pursuing this type of institutional relationship as well? Thank you.

Thanks, Dave. Let me take both of those. So far, throughout 2011, it's hard to get an exact number. We estimate that the for-profit enrollments have fallen off something like 20% versus the prior year, and the largest single player there has shown a decline of 110,000, I think, against a base of 490,000. These are pretty substantial declines in enrollment, and they reflect, I think, the increased regulation around enrollment practices. There's also, I think, some rebalancing on the part of prospective students about the value of a college degree, and whether there's a return on investment there in terms of increased employability.

Everything that I've read suggests that we're close to hitting the bottom of that trajectory. Certainly, [Apollo] are predicting a return to low-single-digit growth from about now onward into 2012. It's too early to call what will happen next fall, but we'll be watching those enrollments very closely. It has taken us a little bit by surprise. I think it's taken the industry by surprise, frankly. I don't think anybody called this exactly, although there were perhaps some early warning signs that there may be some declines in those enrollments. Our assumption is leveling out of that, but not a return to rapid growth to the prior-year numbers.

In terms of Indiana University, it's a very interesting partnership that we have with them, the notion of an institutional license. What we like about that is obviously the fact that we get our books and products into the hands of every student. Every student on the course has access to that, and that helps sustain repeat business. It's very much a pilot, but we're working with IU, and other publishers have a similar license with them. What we'll be looking at and what the university will be looking at is clearly the usage of this, and what it delivers in terms of improved outcomes for students who are taking those courses.

We're having conversations with a number of customers on multiple fronts about similar kinds of institutional licensing deals. You mentioned SUNY, Ohio, I think University in California. I won't comment on individual university systems, but we are having conversations on multiple fronts both here in the US and around the world. In fact, we think that some of the early successes we are likely to have with these kind of institutional sales may well be in developing parts of the world where universities are gearing up. There isn't a legacy system for distributing and purchasing print products, and we can skip that generation and go straight to institutional licenses.

The benefit for Wiley is we also have an institutional sales force selling Wiley Online Library for our research products in journals and books. It gives us an inroad to be able to have those conversations at higher levels with the administrations of universities around the world.

Thanks a lot, Steve.

William Packer, Exane BNP Paribas.

I've got some questions around the STM division specifically. Firstly, what percentage of revenue is a source for emerging markets, and how do you think these will grow in 2012? Secondly, for the STM division, what portion of full-time equivalents are currently offshored, and where do you think this number could be in 2015? Finally, just perhaps to firm up exactly why there was weakness within the book division. Am I right in thinking it was purely phasing issues and library budgets, or am I mistaken? Thank you very much.

William, I've got your first and third question, I didn't pick up your second question exactly. Let me deal with the first and the third, and then you can re-ask the second. Percentage of revenue from emerging markets obviously depends on how you define an emerging market. Asia is a mixture of emerging and mature markets. Overall, our business splits around approximately 40/40/20 between North America, Europe, Middle East and Asia; 20% from Asia. Asia has, for a long time, been the fastest-growing segment, continues to be that. China, is it an emerging market? Not really now for us, we've got a very substantial footprint there. It's not really a question I can answer without getting down to the granularity of individual countries, which I don't think this is the right time to do that.

You asked about the decline in book sales. Yes, it is a combination of timing and tight library budgets. I mentioned the difficult comparable we had the first half because of the quite large Saudi Arabia and online book deal that we had in the first half of 2011. We are in conversations with a very large number of customers around similar deals of varying sizes. When library budgets are tight, libraries tend to protect their journal subscriptions and their journal licenses first, and regarding purchasing other things, including books and databases is somewhat more discretionary.

We often find that we have a lot of new orders coming in around the end of budget years for libraries, and in many parts of the world, budget years end in March rather than December. There's a lot more for us to work on throughout the balance of the year. We hope to see some growth in the second half.

Can you repeat your second question?

Sure. Just a quick follow-up on the first question. For that 20% you identified as Middle East, Asia, would you be able to share us a broad organic revenue growth rate you'd expect for 2012 there?

I won't. Not on this call. (multiple speakers) That 20% was Asia. Europe and the Middle East is 40%, Asia is 20%.

Understood. Thanks. The final question was around moves in the industry towards offshoring. I just wondered what percentage of your current full-time equivalents are currently offshored at the moment, and where did you think this could progress by 2015? (multiple speakers) the STM division?

I can't isolate it for the STM division, but what I will do is say we have a very large hub of activity that is offshored in Singapore, based in Singapore. It supports principally our STMS business, but not exclusively our STMS business. Those are Wiley colleagues and employees, and then we outsource principally to the Philippines from there. There's a significant amount of support that is focused out of Singapore. I can't tell you percentage of heads. Again, it's mostly content management support kinds of activities as opposed to editorial.

Then we have a very large in-source, but offshore -- I kind of hate to use that term -- but a large number of colleagues who are based in Russia who support some of the content technology associated with STMS, but principally support our higher education business. That's a very large group. It's a significant proportion of our technology staff and our web publishing technology group. We do that because costs associated with senior developers in that region are less than half the cost of just about anywhere else. They're comparable to the cost of developers in India, but in fact, it's probably diverging a bit. There are lower costs or will soon probably be lower costs than in India as well. I can't break it out by business unit or region, but just to say that there's a significant amount of activity and there's opportunity to do more.

Thanks very much.

(Operator Instructions). Michael Corty, Morningstar.

I had a few questions on professional trade. The first one is in terms of the e-book sales, is it too early to know how your market share in e-books is compared to your traditional books, in terms of market share versus your competition? On the gross margin, obviously the improvement, you mentioned the digital migration. Someone had asked a question about gross margin overall for the Company, but in terms of professional trade with the growth of e-books, how should we think about those gross margins, or how do you think about them over the next three years?

Michael, first of all, it's difficult for us to benchmark our e-book trajectory versus competitors because it varies dramatically segment by segment within the professional trade industry. It depends on the type of book and the usage of book. For the big fiction publishers now, they're seeing anything from 25% to 30% of their total revenues are coming from e-books. We have some product lines that are getting close to those kind of numbers. But the early pickup in e-books has been -- the fiction story has been the most dramatic. Actually, at this year's Frankfurt book fair, it was interesting that much of the talk was around the next wave being non-fiction. We certainly see, in some categories like business and technology, we're getting rates for those certainly up around 20% of overall sales coming from e-books.

But it's less for other categories, and so overall, our percentage of total trade book revenues that come from e-books is in the low teens. We expect that to continue to increase. As I said, e-books have already doubled this year to date. We expect, obviously, as the base grows, the rate of growth will moderate, but overall we expect e-books to continue the increase as a percentage of our revenue. We expect that to have a very beneficial impact on margin.

As Ellis said, this is transition, this is migration away from print to digital. There's a lot of waste in the print book, a lot of inefficiency in the print book distribution paradigm. We print in anticipation of demand, we send books to bookstores in anticipation of demand, they send them back to us. Ultimately, there's a fair amount of wastage in the print book model. All of that goes away in the e-book world. It will make the industry more efficient. It will make Wiley more efficient. It will help take out significant costs. One of our priorities will be to manage the infrastructure base that supports print, in order to anticipate when print overall will start to decline.

I should emphasize that at this stage, although we're seeing most of our growth coming from e-books, we're still seeing print books holding up at fairly consistent levels across most categories. The question is when will print start to decline as e-books become even more entrenched. There's also quite a bit of variability around the world, so e-books are much more established here in the US. The UK is running probably a year's time lag behind the US, and the rest of the world further back still. We still haven't seen the surge of e-books outside of North America. As I said, overall it's a positive story. It's going to have a beneficial impact on margins.

Just to add a little bit, Michael, quantitatively, it depends on mix of products, and what's selling and what's growing faster with respect to transitioning from print to digital, to e-books, I should say. But there's roughly 20 points of margin on average, over time, going from print to e-books. If we extrapolate that out, you can draw your own conclusions about what the effects will be as to how that transitional trajectory goes, and as Steve just noted, when it begins to significantly erode print book sales. Some of the e-book sales are incremental, and some of them are cannibalized in print, and it's hard to separate what's what, quite frankly.

Great. I really appreciate the insight there. A quick one on higher education, thanks for the comments on the licensing deal with Indiana University, that was very interesting. Can you comment on what you see competitors doing in terms of trying to push for the similar initiatives with universities? What you see from competitors?

Very briefly, Michael, because I don't want to get drawn into a long conversation about competitors. Obviously, our competitors are very active in doing many things, a lot of them very interesting and we follow them with great interest. Several of our large competitors, but not all of them, are participating in the pilot with Indiana University. A couple of our competitors are making significant acquisitions and investments in similar ways to Wiley that are looking at opportunities to get closer to their customers, including changing the nature of their dialogue with institutions, focusing around, I think, the potential outcome for using published educational materials, whether traditional print books or enhanced learning vehicles. It's an interesting and dynamic time in the industry, let me just say that.

Great. That's fair. Thank you.

That is currently the last question. I will now turn the call back over to Mr. Steve Smith. Go ahead, please.

Thank you for participating in the second quarter conference call. We look forward to talking to you again at the end of our third quarter. Thank you.

Thank you, ladies and gentlemen, for joining today's presentation. That will conclude the call. Have a wonderful afternoon.