John Wiley & Sons Inc (WLYB) 2012 Q3 法說會逐字稿

Good morning and welcome to the John Wiley & Sons quarterly earnings call.

Before introducing Mr. 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. Mr. Smith, please go ahead.

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

In a difficult global economy, Wiley achieved revenue growth of 1% in the third quarter, both including and excluding foreign exchange. Currency adjusted revenue growth of 3% in STMS, and 2% for Global Education was offset by a decline of 5% for Professional/Trade. Adjusted EPS of $0.91, excluding a $0.12 per share one-time tax benefit in the third quarter of fiscal year 2012, and a $0.10 per share bad debt charge in the third quarter of fiscal year 2011 increased by 8%, or 6% excluding the effects of foreign exchange.

Higher revenues, prudent expense management, lower interest expense and lower income taxes contributed to the result. For the nine month revenue of [$1.328 billion] was flat on a currency-neutral basis, but grew 2% including the positive foreign exchange impact. Adjusted earnings-per-share for the nine months grew 2% to $2.42.

Excluding favorable foreign exchange, adjusted EPS fell 1%, reflecting top line results and higher technology and facility costs partially offset by lower interest expense. Year-to-date gross profit as a percent of revenue was 69.5%, 0.5% ahead of the prior figure of 69% due to increased digital product and product mix.

Year-to-date showed services and administrative costs of $284 million were up 8% currency-neutral, due to ongoing investments in digital products, and infrastructure and increased facility costs partially offset by lower distribution expense. Free cash flow for the nine month declined 12% to $181 million, principally due to technology spending and the timing of income taxes partially offset by journal subscription cash collections. Net debt -- long-term debt less cash and cash equivalents -- was reduced from prior year by $128 million to $199 million. During the quarter, Wiley repurchased 520,000 shares at a cost of $23 million.

Now I would like to provide some information regarding fulfillment of Wiley's global businesses. During the quarter, we have made significant announcements that herald an exciting new direction for our Professional/Trade business. In mid-February we announced the acquisition of Inscape, a leader -- leading provider of assessment-based training products in interpersonal business skills, including leadership and management.

Inscape, with annual revenue of approximately $20 million, strengthens Wiley's position in the global training market and brings a number of key strategic and financial advantages. Chiefly, a global customer base with associated sales channel reach and capabilities, a technology platform for product delivery and customer support, as well as strong revenue growth and attractive financial performance.

Inscape derives approximately two-thirds of its revenue from digital products, and strongly complements Wiley's existing portfolio of training products published under the Pfeiffer brand. Inscape and Pfeiffer will be integrated to create a powerful force in the growing workplace learning industry. The Inscape network of authorized distributors and consultants extends Pfeiffer's globes reach and approximately one-third of Inscape revenues are earned outside the United States.

In a separate statement this week, we announced that we will explore the sale of a number of consumer print and digital publishing assets in Professional/Trade that longer align with our long-term strategies. The assets offered for sale are in Travel, including the well-known Frommer's brand, Culinary, General Interest, Nautical, Pets, Crafts, Webster's New World and CliffsNotes. The planned divesture follows a strategic review the Company's business portfolio, which led to a renewed focus on opportunities in categories that meet the strong global demand for high-quality information for professionals and lifelong learning enabled by new technology.

In Wiley's fiscal year 2011, the publishing assets offered for sale generated approximately $85 million of revenue and approximately $6 million in profit contribution before related shared service expenses. Third quarter Professional/Trade revenue of $108 million declined 6%, or 5% excluding the unfavorable effect of foreign currency. The decline is largely attributable to softness in the Business book market and reduced retail shelf space for some print consumer categories, particularly Cooking and Travel. eBooks sales doubled again in the quarter to $9 million, or $28 million year-to-date. Strong global sales growth at Amazon, Barnes & Noble, Kobo and Apple contributed today increased eBook sales.

Year-to-date gross profit at 62.7% of revenue reflects a 1.1% improvement, compared with the same quarter in the prior year, due to the EBIT growth partially offset by higher author advance provisions. Adjusted direct contribution to profit fell 7% to $28 million, reflecting top line results partially mitigated by prudent cost-control measures. STMS third quarter revenue of $245 million increased by 3%, including and excluding foreign exchange.

Currency-neutral journals revenue grew by 3.8% over prior year, reflecting solid underlying calendar year 2011 and 2012 subscription growth and advertising revenue, partially offset by lower reprint revenue. Calendar year 2012 journal subscription billings are 6% ahead of prior year at the end of January. Calendar year 2012 subscription receipts are 4% ahead of prior year on a currency-neutral basis, reflecting accelerated renewals, higher license values and new business. At the end of Wiley's third quarter, we had completed negotiations covering 75% of targeted full-year business, compared with 73% at the same time last year. Overall, the growth in subscription receipts is slightly ahead of our expectations.

The STMS book business was up 6% against prior year on a currency-neutral basis, reflecting growth in electronic revenues, particularly digital reference works and eBooks. Direct contribution to profit for the quarter of $99 million was 2% ahead of prior year due to sales growth partially offset by higher royalties.

For the nine months STMS revenue increased 2.3% on a currency-neutral basis to $749 million reflecting solid journal subscription income growth and growth in [rights] income, partially offset by a 2% decline in book sales, excluding the impact of the $5 million one-time sale to Saudi Arabia in the first quarter the prior year, STMS book sales up 2% ahead of prior year.

Year-to-date direct contribution to profit increased by 3% currency-neutral in the quarter STMS signed new contracts with [societies] to publish two new journals, with combined annual revenue of $1.4 million, and renewed or extended contracts to publish 39 journals with combined annual revenue of $20 million. Two journal contracts were lost with combined annual revenue of $630,000. For the twelve months ending in January 2011, full text accesses on Wiley Online Library increased by 36% across all product types, compared with the same period a year ago. Full text accesses for books content and the Cochrane Library database of evidence-based medicine increased strongly in the quarter.

Third quarter Global Education revenue grew 2% to $98 million, revenue in North America grew 4%, and Asia-Pacific revenue grew 1%, while revenue in the EMEA -- Europe, Middle East and Africa -- declined by 9% due to challenging market conditions, especially in the UK and some Middle East territories. According to published industry data, the US Higher Education market declined by 0.7% from November to January, during which period Wiley's US sales increased by 3.6%. For full-year calendar 2011 Wiley grew 2%, whereas the US market was down slightly.

Year-to-date global billings of WileyPLUS of $31 million were down 3% versus prior year, reflecting sharp declines in enrollment at for-profit institutions, where market penetration rates for WileyPLUS have been comparatively high. In the third quarter, WileyPLUS billings were up 7%, with a 44% increase in digital-only billings. Sales from WileyPLUS, eBooks, digital content sold directly to institutions, binder editions and custom publishing grew by 5% to $73 million year-to-date, and now represent 28% of global Higher Education sales. Sales through online accounts continue to outperform other channels.

We launched our WileyPLUS integration with Blackboard Learn in January. We are currently field testing the WileyPLUS integration with Blackboard in over 50 courses. The integration will enable customers to seamlessly integrate and customize their Blackboard Learning management system courses with WileyPLUS, including instructor assignments, student homework, Wiley-provided resources and their own materials. We expect to convert more print (Inaudible) to WileyPLUS through this new service, and we expect an increase indirect e-commerce sales because students will be able to purchase WileyPLUS through their instructor's Blackboard course site.

Year-to-date gross margin for Global Education of 68.5% is on the par with prior year. In the third quarter, direct contribution to profit improved 5% from prior year to $42 million, due to the top line results and lower accrued incentive compensation. For the nine months, direct contribution to profit declined by 5% on a currency-neutral basis versus prior year, reflecting the decline in revenue.

In conclusion, our revenue performance after nine months reflects the softness we've been facing in Global Education an Professional/Trade markets. STMS remains solid, strength in key leading indicators, while in Global Education an Professional/Trade some of the factors driving difficult comparisons to prior year have become easier since the start of the new calendar year. With the acquisition of Inscape and the proposed adjustment to our Professional/Trade portfolio, we are taking positive steps towards higher rates of sustainable organic revenue growth. In Global Education, we are focused on serving the needs of our customers by providing them with valuable teaching and learning solutions that yield improved student outcomes.

While continuing to -- 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 the nine months results and other leading indicators, we are maintaining our full year revenue guidance of low-single digit revenue growth, excluding foreign exchange. As a result of careful cost control, we are reiterating our EPS guidance of $3.15 to $3.20. This excludes the $0.14 deferred tax benefit related to the reduction in UK tax rates and the acquisition of Inscape, which is not expected to have significant effect this late in the fiscal year.

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

Thank you. (Operator Instructions). Our first question is from Drew Crum from Stifel Nicolaus. Go ahead your line is open.

Okay. Thanks. Good morning everyone. So I want to start with the guidance. Can you talk about some of the drivers for the fourth quarter that give you confidence that you can hit the range you've reiterated this morning? It implies a pretty big step-up year-on-year.

Yes. Drew, this is Ellis. So, clearly, we've looked pretty carefully at the balance of the year on the performance on a year-to-date basis. The third quarter and the year-to-date is, from an EPS perspective, is certainly where we expect it to be over the course of the year from earlier on in the year so the guidance hasn't changed from the beginning of the year second and third quarter no changes.

In the fourth quarter in particular, you are probably seeing -- at least through three quarters and the third quarter in particular -- some deceleration in shared service vending, so we expect that to continue and over the balance of the year, Steve alluded to, and it's in the earnings release as well, we've been controlling costs very carefully over the course of the year. That continues into the fourth quarter, so that's been having a tempering effect on -- on direct expense across-the-board.

Also, as you know, we've lowered our revenue guidance from the beginning of the year which was mid-single digits, we're now at low-single digits. That will have an effect on incentive compensation. As a result, we'll expect lower incentive accruals in the last quarter of the year, relative to the last quarter of the year last year. Last year we had some acceleration of results, so we had a very strong finish to the year last year in parts of the business. So as a result, on a year-on-year basis, we expect to have accruals to be significantly lower in the fourth quarter.

When you take those pieces together also the effect of -- the cumulative effect of share repurchase over the year, we get the full benefit, so to speak, of what we have purchased over three quarters in the fourth quarter, whereas we've just getting -- been getting averaging benefit, so to speak, through each of the quarters as we buy shares back or have bought shares back. This is not say that it's not an indication of anything in the fourth quarter. Just purely the arithmetic of the benefits of what we've done on a year-to-date basis (Inaudible) 300,000 shares.

When you take all of those pieces together, certainly, we still need to hit our expectations with respect to top line performance. All indications are pretty good there. We talked a little bit in the earnings release and I'm sure you will probably have some follow-up questions regarding how our STMS renewals business is going, how it will affect obviously the -- the three months remaining in the fiscal year through the end of April. So all of that taken together we're confident about sticking with our guidance of $3.15 to $3.20.

Okay. Great. And, Ellis, can you talk about the gross margin decline year-on-year in the quarter and I think through the first half of fiscal 2012 we had seen record gross margins for the business and it was partly due to the digital transition, and given the digital continues to ramp for you guys, is a little surprised to see the gross margin fall in the quarter. So could you discuss what happened on that line?

Yes. You know, much of that has to do with timing and our product mix so I wouldn't read too much into that, Drew.

Okay. Okay. And can you talk a little bit about what your intentions are with the proceeds of the funds you received from divesting in the consumer publishing assets? Have we seen it already with the acquisition of Inscape, or do you have further plans for those proceeds?

Well, Drew, you know, cash is all fungible, obviously, we're generating significant pre-cash flow. We reduced our net debt position is very favorable where we've been buying shares at least through three quarters at a reasonable clip. We continue to have an interest in acquisitions.

There are a number of things that we are looking at which is not to say that we're ready to do anything in particular, but nonetheless, there are some interesting opportunities that we continue to look at. So that cash combined with -- operating cash combined with capacity to borrow under our existing revolving credit facility and access to Capital Markets, so it's a range of options, in terms of how that cash gets used. Again, one doesn't -- often doesn't want to begin spending cash before they've gotten it so I don't want to go too far out and have anticipating what kind of proceeds we'll get from that sale.

But nonetheless we assume those assets are very salable. There has been a lot of interest expressed in those assets over the last several quarters, and for a period of time quite frankly, from both what you might consider to be traditional publishers but also from -- and more importantly from -- or importantly from others who I won't name, but certainly who are not typically in the market for publishing assets per se. They see other opportunities with the strength of those brands in the marketplace, particularly in the digital space and areas that we couldn't directly get to without significant investments in directions that don't necessarily follow our strategy.

So we're excited about the possibility and potential of those assets moving to a seller -- sorry -- a purchaser who could make terrific use of them. We have a lot of belief in those assets in the marketplace, and we're excited about focusing on our Professional/Trade business and -- and our Higher Education, Global Education and STMS business.

Okay. Great. Just one last (Multiple Speakers) -- go ahead.

It's Steve, this is Steve. I would just like to add a little bit more color to that maybe, because you might find helpful. So the -- the premise behind the -- the divestiture which we're exploring is that Wiley will grow faster and improve financial performance by focusing on our core target audiences of research, learning and professional practice, and to the extent that we are able to divest those businesses and target the use of that cash at acquisitions in the space that serves those three core target audiences in areas where through the application of enabling technology we can add significant value, that aligns much better with our core strategy, we feel.

Thanks for the updates, guys. And one last question for me and I'll give it to Steve. Can you give us an update on what you're seeing from a macro perspective and how you're thinking about calendar 2012 for the US Higher Education market and if you can talk about some of the headwinds you guys have addressed in the past -- for-profit enrollment, textbook rental, funding, etcetera. Thanks.

Sure. So, obviously we've been very focused on that, particularly as we're in the middle of our strategic planning cycle for the --for the following fiscal year. It's much too early for us to give guidance on -- on how we see fiscal year 2013 [when] we get providing you with that, obviously, at the end of the year. But just some of the things that we're observing in the -- typically in the US Higher Education market place. First of all, the headwinds that you refer to primarily relate to, I think, the biggest single driver was the shop four in particular for-profit enrollments that affected our business in calendar year 2011.

Along with the difficult comparables that was driven really by the -- the gearing up of the marketplace in 2010 to provide -- to stock up the rental business, that didn't repeat itself in 2011. Both of those, while we're not expecting a rapid recovery in enrollment in for-profit education, we are expecting to see the rate of decline moderate and to stabilize and to begin to move towards future growth again.

We also feel that the disruption that was caused in the textbook rental channel, we're through that now, and we have a more sustainable business model. We don't see textbook rentals as being a major drag on the business going forward and, in fact, it's pretty clear that, actually, many of the players in that segment in the business model is actually pretty difficult manage. As well as we see some really positive movements in the increasing movement to digital-only. The growth in the potential for digital sales across the marketplace.

So we are expecting a market that grows very modestly, and we are positioning ourselves to be able to continue to take greater market share and, therefore, drive back our Global Ed business to the kind of revenue growth that we've seen in years past and getting through this difficult year -- the difficult year was really calendar year 2011, and I referred in my remarks to the relatively improved performance of Global Education in the -- in the third quarter where we saw 4% growth in the US.

The Middle East is -- we have had significant business. It's not in the scale of things -- a big proportion of our business -- but countries like Egypt and some of the -- some of the countries that have gone through the Arab Spring have been difficult markets for us in 2011. On the other hand, we are seeing nice growth in the Arabian Gulf countries that have been more stable, and we've got some really interesting prospects there with WileyPLUS. Overall, we're more optimistic than we were in 2011, and we feel we're well-positioned to -- to get the business moving again.

Thanks, guys.

Thank you. Our next question is from Mr. Dave Lewis from JPMorgan. Go ahead, please. Your line is open.

Hey, guys. Good morning. I was wondering if you could just comment or give us your views on the STMS business and the ongoing open access to bid, specifically with -- referring to the Research Works Act, the Federal Research Public Access Act. Obviously, one of your competitors has been in the press and has been receiving some criticism of late.

Obviously the results are very -- are very -- this is an ongoing debate, and the results for the renewals are very strong, but I was wondering if you could, I guess, comment on that and then specifically on if you're having to give any type of concessions to some customers, how that dialogue is going and how are you able to drive what is clearly increased usage and some positive trends within the overall business so the -- the renewal conversation? Thanks.

Yes. Thanks. So there's a couple of things in there. I'll talk a little bit about open access first, and then come back to the linkage between usage and revenue. But thanks for the question. So, yes, the controversy that you referred to was around the Research Works Act, that was a bill that was carried forward primarily by The Association of American Publishers and [Reed Elsevier]. That attempted to sort of draw a line in the sand in terms of government mandates around the compulsory deposit of research articles funded, but with the US Government money or with research institution money in publicly open depositories.

Wiley did not publicly support the RWA. Although we support many of its principles, we didn't feel that the timing of the proposed bill was -- was really in the best interests of the long-term dialogue that we have ongoing with groups like The Office of Science and Technology Policy of the White House. In the UK we are [actively] involved, and have a seat at the table with the Finch Group that's looking at Open Access and changes in -- in copyright law.

And our preference was really to maintain that dialogue recognizing that the -- the National Institute of Health mandate that was put in place several years ago is really now -- it's a fact and there's no -- there's no real benefit in trying to overturn the NIH mandate. What we would like to do is work with the research and (Inaudible) community to make sure that we develop sustainable models for scholarly publishing and the dissemination of the -- the products of scholarly research. So that did rate a little bit of a storm in a tea cup. The RWA has been withdrawn, there is now another piece of legislation that sort of counters RWA that's been introduced in Washington called FRPPA, and we -- we are actively opposing that legislation, which seeks to extend the NIH mandate to other agencies.

The fact is there's nothing new about any of this. We've probably been living with a level of dialogue and a level of controversy around open access as a model for -- you know, for at least ten years. Over that periods of those ten years, the noise around that and the interest around that has -- has moved up and down. It's probably at a little bit of a peak at the moment. We believe there are -- there is a role for publishers in the process of scholarly dissemination that we can work with many models. We have launched, as you know, a number of open access models that are -- open access journals that are growing successfully and achieving status in the -- in the marketplace.

In the end it's the -- it's a value that we bring to Peer Review, to the digitization and enablement of that research content that is valued by our audience. That's reflected in the fact that submissions to our journals are up significantly each year versus prior year and the current year, no exception. So while a debate is likely to continue for a long time, we feel well positioned to participate in that and are confident that those who -- those who are in a position to influence this recognize the need to develop an economically sustainable model in the long-term.

The question you raised about usage. Clearly usage is a -- is a strong indicator of the value that -- that the target audience puts on the contents. So we track usage as an indicator of -- of whether we are publishing quality content, whether we're making it as acceptable as it needs to be. The 36% growth in usage that I referred to in the prior year surely certainly reflects to us the value that our audience has, or places, on access to our content. We don't today have a usage -- we don't have a pricing algorithm for our journal subscriptions that includes usage as a variable. There are -- there have been certainly experiments around that, both from Wiley and other publishers, and we're always looking at ways to bring it in.

We -- we normally when we work with our individual customers and consortia, around the decisions they make, whether to not to renew their licenses and to bring journals into their licenses. We focus as part of the discussion on -- on usage as well as, obviously, the quality of the content and the price of that contents, the value that -- that it gives to the audience, so usage is already a factor in those discussions, but one of many variables that -- that our customers look at when they make their purchasing decisions.

That's great. Thanks, Steve. I'm going to ask one more here and then I will hop off and come back. Can you just provide us with the margin for Inscape or give us -- so we can model that? How should we think about that $20 million revenue? What is that business growing -- where did it grow in 2011, and what are the margins there roughly?

Yes. Dave, this is Ellis. So just a couple of things about that. Certainly we will provide much more guidance around that when we get to the end the year when we have had a little bit more experience. Certainly we have modeled what we have in terms of expectations from that business, from an economic perspective, to come to a purchase price (Inaudible). One of the key components associated with coming to guidance associated with what our expectations are below revenue, certainly, have to do with our being able to complete our purchase accounting associated with the acquisition. That is still not yet completed. The -- we have an independent valuation firm who is working on that, so I don't quite yet know what that answer is going to be. It would certainly make a set of assumptions associated with that, and I can tell you I'm pretty confident that we should expect accretion associated with the acquisition beginning in fiscal 2013 and forward.

That's as much as I would like to say now, but just to say that it's a business that we believe has strong top line growth attractiveness, very healthy and attractive margins and the combination of those things in addition to, even more importantly, its strategic fit within the context of where we want to take our business were the bases of making that acquisition.

Great. Thank you all.

You're welcome.

(Operator Instructions). Our next question is from Michael Corty from Morningstar. Go ahead, please.

Good morning. I had a few questions. Following up on the STMS business. With all of the 2012 calendar discussions pacing a bit ahead of last year, can you just provide any specific insight into that business, maybe by region of the world, or more specifically in the US by your private versus publicly funded customers, kind of any insight, if you can kind of break that down a little bit in how those sales are progressing?

Sure. As I said at the end of January, we were up around 4.3% versus the prior year in terms of the amount of licensed business that we had closed in negotiation, and I also mentioned that 75 -- based on our projections for the full year we equate that with 75% of our full -- of our 2012 total business, whereas we were at 73%. So there is -- there could be some timing element to this.

We are certainly seeing some earlier renewals in North America and Asia, which is being offset by some slightly slower renewals in Europe, in particular, where obviously we have some customers who are facing some financial constraints and so we're needing to work closely with them through those negotiations, but it's important to note that our underlying growth appears to be -- to be quite solid. Some of the growth coming from the fact that we continue to add new customers and to convert from existing non-licensed customers to higher value licensing deals, and that's particularly true in high growth emerging markets, so in India, for example, as well as in other parts of Asia.

We continue to see some modest price increases for licenses and for title-by-title subscriptions, reflecting the rapid expansion of the amount of content and the high -- the high-quality content that is published under those titles. And we're having some success in upselling some new journals and packages to our existing customers for access to journals that they previously did not subscribe to.

So, for example, a customer who had an STM collection -- that's Scientific Technology and Medicine -- may have upgraded to a full collection that includes Social Sciences and Humanities titles. The growth --the growth is coming fairly evenly across the world. We have had, for many years, the experience that Asia has grown slightly faster than the more mature markets of Europe and North America, this year is no exception to that. We're also seeing some nice growth in the Middle East and in Latin America, but as I said the growth is pretty solid across all regions.

Great. That's helpful. And then I just had one more question on eBooks. And, sensitive area possibly, you're not named as one of the five publishers that's talked about with this government lawsuit and Apple.

Yes.

But just from -- if you don't want at that talk about that specifically, I guess, just in terms of -- seems to me that eBooks is such a new business and, you know, there is a fine line between price fixing, alleged, versus just price discovery, given that eBook is such a new industry. How do you think about the pricing of your eBooks relative to traditional books? Obviously there needs to be some sort of an experime -- experimentation there, given it's such a new business.

Yes, thanks Michael. Let me comment on -- I would rather comment on the implications of the suit -- or the ongoing dispute for Wiley, and I will give you some sense of how we think about eBook pricing. So the -- the five publishers that are mentioned in the articles or in the press today are primarily publishers -- they're the big fiction houses that focus on fiction and general publishing.

To me this is really a debate around price volume, so the premise in that marketplace, certainly on one side of the argument, is that by pricing more aggressively the potential volume is greater and therefore the total value to the -- both to the publisher and to the vendor -- the intermediary is greater and others who believe they need to sustain pricing that is closer to the pricing of the -- of the original paper format.

That question, well that debate, doesn't really apply to Wiley Publishing, in areas of professional and educational content, because the audience is more defined, it's more targetable. I think that we, and our -- we, our customers and their intermediaries recognize that the publish -- the kind of material that we publish is of higher value to our customers and that, therefore, the -- and maybe the price demand is a little less elastic and, therefore, we have been successfully able to sustain higher prices. In general, the price of a Wiley eBook in a general professional category -- a business book for example -- would be a few dollars less than the equivalent print book.

It certainly is -- we have some books priced at $9.99, but very few. Generally it's a couple of dollars less than the price for the print book, reflecting the fact that we can pass on some of the benefits of obviously not having to manage inventory and -- and print the material to the customer and the customer gets the benefit of the wider access and the -- the lack of friction in the purchasing process. So that's -- that is essentially where we are.

It's also important to note that although Wiley works with Apple under the so-called agency model where we set the price in advance and pass on a percentage of the revenue to -- to Apple, we do that also with -- with several other eBook vendors and we are also working with Amazon and others on the more traditional model. So we have not -- we have not enforced one model on the entire vendor community, and the models handily co-exist without Wiley and for the time being at least, there's no intention to change that.

Great. That was helpful. Thank you very much.

Thank you. And our next question is from Mr. Dave Lewis from JPMorgan. Go ahead, please.

Hey, guys. I just want to circle back and P&T, and there's bunch of questions so I figured I would hop off before. Steve, could you touch on the -- the digital thesis with respect to Professional/Trade that's been outlined in the past two Investor Days? Does this announced divestiture, is there any change to the management team's thinking there, or is it more respective or specific to the types of content and consumer content and -- can you just address that? And to be more specific, obviously as an example, is there -- are there more issues with pricing that you have seen over the course of the past six months that have you more concerned in a specific content area, or are there more concerns of this intermediation with specific types of content. That's what I'm angling at. Thanks.

Yes. So there isn't a change to the overall thesis for Professional/Trade. As you have seen, David, several of our Investor Day presentations, when we've talked about out strategy for Professional/Trade, there's been a combination of recognizing that -- the potential value to professional customers from technology-enabled content, particularly as it applies to work -- workplace training and accreditation assessment and all of the -- the additional value that we can bring to our strong reservoir of professional content and bring that to audiences that are very targetable for us in areas like Finance, Business, Technology, Architecture, Psychology, as well as what we see as the potential for lifelong learning, particularly around the For Dummies brand.

So that was always been a central plank of our strategy, and we remain entirely focused on that and in fact part our strategic intention here, in terms of readjusting the portfolio, is so that we can focus even more resource around those other opportunities, because we have a high degree of confidence in --in our ability to serve those -- that marketplace. I think you hit the nail on the head when you talk about if is there something specific to certain categories.

You know, we believe that the future value of our Travel content, for example under the Frommer's brand, is definitely a digital thesis, it's definitely a digital strategy, but it's probably not in an area where -- where it's paid-for content, as much as it is content that is provided and funded by advertising or other kind of affiliate revenue, and where we saw the real divergence and strategy was the target audience, for us to be able to build the kind of community and traffic for the -- for the whole potential audience of the global traveler, and the same could be said for culinary, for example. You know, the cookbook market.

It's not something that we have built that capability, we don't feel that Wiley is necessarily the best place for that -- for that to be taken forward. And we think the Frommer's brand is very well-positioned both in -- in the books -- in the book store but also online through our investments in Wiley Unlimited -- in -- in Frommers.com and Frommer's Unlimited, but we think at this point in order to really leverage that potential across such a diverse and global mass audience, it would be better for someone who is more focused on a different business model other than paid-for content and paid-to service, which is where we expect to be earning most of our revenues going forward.

That's great. Thanks, Steve and can you give us a sense, can you update us on -- within P&T, the revenue by channel, so bricks and mortar. What percentage of revenues today are -- are driven by bricks and mortar and how are they trending?

Yes. I'm going to hesitate to give you an exact figure, because I would -- I don't have that number at my fingertips. Bricks and mortar, as a percentage of our total business, has obviously come down dramatically, and has been accelerating lately particularly with the -- the removal of Borders as a bricks and mortar channel. We estimate that over the last twelve months, somewhere between 800 and 1000 book stores have closed around the world.

So that's a pretty sharp reduction in the -- in the amount of shelf -- retail shelf space that's out there. We've had -- we've been seeing bricks and mortar decline as sales through online resellers -- and it's not just Amazon, by the way, but Barnes & Noble and many other online resellers have been growing at the expense of bricks and mortar, and we don't feel -- we feel much less dependent on bricks and mortar today and -- than we did five years ago, which is probably a good thing. And it is true to say that the -- the categories that we are exploring divesting are more heavily dependent on bricks and mortar than the business that with will remain with us. So, again, we reduce our dependence on bricks and mortar as a result of this proposed transaction.

That's great. Thanks, Steve. And I guess the last question, and it's somewhat of a two-part question. Do you feel like you're investing or you're able to invest enough to -- to offset these decline -- investing enough in digital to offset the continued decline in bricks and mortar? And the second half of that question is, Ellis, with respect to this P&T announced divestiture, should we still think about modeling operating margin improvement flattish over the next two to three years or so? Thanks.

So let me take the first part and I will let Ellis answer the operating margin question although I could give you an answer that. It should get better. But the -- the -- clearly, the pace of change over the last year has accelerated in our business and we -- we've been using scenario planning very effectively as a tool at Wiley for several years, but we went through a fairly intensive scenario-planning exercise about a year and a half ago and recognized that the -- the rate of change in our marketplace would -- would determine how quickly the digital opportunities would unfold and how quickly we would need to move to transition and transform our business from -- from -- from the print model and I think that -- that pace is only accelerated in the last year. We feel -- we feel well placed in terms of the investments we've made and we have seen -- you have seen in terms of the -- the increases in technology spending year-on-year at Wiley that we have been investing very heavily.

But I think we also recognize that we would -- we would love to have opportunities to leap forward faster by making the right kind of strategic acquisitions, would help us develop some of the technology capabilities and some of the technology models that we know we're going to need, and so we have good organic investment plans in place. Inscape, we hope, is just one of what will be a -- a future trajectory of several acquisitions that will have similar characteristics that really help move the needle a little faster towards those digital business models and digital capabilities.

And, Dave, on your second question. So, with the -- with the sales of those assets that we've outlined, we would expect a -- essentially a (Inaudible) function improvement in both gross margins and in contribution margins and in operating margins, and then the remaining business would be a greater beneficiary of our digital strategy -- approach along the lines of of what Steve described, so we would expect also some uplift in leveraging with respect to those investments around a residual, so to speak, Professional/Trade, Business, and greater top line perspective and then adding to that is as I characterized earlier, and Steve did as well, the Inscape acquisition provides for faster revenue growth as we expect and also at greater margins both again at the gross level and at the operating level.

So the combination of those three things, the sale of the assets that we've identified, the acquisition of Inscape and the benefit to the remaining business of technology and our direct digital strategy investments should all speak positively to margins both -- both at the gross margin level and at the operating level.

That's great guys. Thanks a lot for the time.

Thank you. And our next question and last question is from Daniel Moore from CJS Securities. Go ahead, please.

Yes. Good morning.

Good morning.

Regarding the strategic review, just a clarification. Do you view it as kind of a culmination or more an going process? In other words, are we likely to hear about additional divestments in the coming quarters?

Thanks. So I also just mentioned in my answer to Dave the -- the ongoing process of scenario planning. So we, of course, continue to -- to monitor very closely events and circumstances in our operating environment that could have an impact on the future growth and health of our business.

The strategic review that led to the identification of these consumer categories as strategic misfit really sort of followed on from scenario planning and our recognize -- recognition of changes in the marketplace and the opportunities that exist for us in our core categories of research, learning and professional practice.

For the time being, we feel confident that everything that would remain after the successful divestiture of these business categories, and is a good fit with our core strategic audience and our core target market. That -- of course, you can never say never, so we will continue to monitor changes to make sure that everything aligns with our long-term strategy, but I don't -- I would certainly not expect to see any further changes any time soon. So not in the foreseeable future.

That's helpful. My last question refers to cash flow and cash generation. Royalty advances ticked up in the quarter as they had been. Does any of that have to do with the announcement of the Wiley Learning Institute, and how should we think about going forward -- current assets a little bit higher than current liability for the first time -- should we still think of you as having a negative working capital model or will that be more neutral as we think about advances going forward?

Yes. Daniel, none of that relates to the Wiley Learning Institute which is -- which is not -- you know, which is a great way for us to bring together a community around the activities that we have under our Jossey-Bass publishing brand, and our Global Education business. But there is no royalty advance implication at all of Wiley Learning Institute.

The advance tiup that you have seep in the quarter actually relates to our STMS business, and -- and then the timing of advances that we pay to society clients so it's -- there's no change there, over the long-term. And in fact, on the year-to-date basis, I think you can see that it's even sort of a bit catch-up in the quarter.

Okay of the thank you.

Thank you. And that is our last question. I will now turn the call back over to Mr. Steve Smith. Go ahead.

Well, we thank you for your comments and questions and for your interest in our Company. We look forward to talking to you again at the end of the fiscal year at our next conference call. Thank you.

Ladies and gentlemen, thank you ladies and gentlemen for joining today's presentation. That will conclude the call. Have a good day.