John Wiley & Sons Inc (WLYB) 2013 Q1 法說會逐字稿

Welcome to the John Wiley & Sons quarterly earnings conference 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. Mr. Smith, please go ahead.

Good morning, thank you for participating in Wiley's fiscal year 2013 first 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 first quarter. We will then respond to your questions and comments. My overview of Wiley's performance will refer to financial variations excluding the effect of foreign exchange unless otherwise noted.

In a difficult economy, Wiley posted a 2% revenue decline for the quarter, reflecting declines in our STMS and Global Education businesses, partially offset by an increase in P/T. On a US GAAP basis, earnings per share fell 26% to $0.60. US GAAP EPS includes deferred tax benefits of $0.14 per share for both fiscal years 2013 and 2012, and a 6% share restructuring charge in fiscal year 2013. The tax benefits were derived from two consecutive legislative reductions in the United Kingdom corporate income tax rates. The benefits had no current cash tax impact. Adjusted EPS of $0.52 declined by $0.16 both including and excluding the effects of foreign exchange. Lower revenues and higher operating and administrative expenses offset the lower tax rate. Adjusted EPS excludes the deferred tax benefit and the restructuring charge. Shared Services and Administrative Costs of $95 million were flat to prior year including foreign exchange. Excluding a $500,000 restructuring charge and foreign exchange, Shared Service costs increased by 1% driven mostly by higher technology costs to support investment in digital products and infrastructure, partially offset by lower distribution costs.

Free cash flow for the first quarter was a use of $106 million, that's $47 million greater than the prior year. A $30 million contested German income tax deposit was the main driver. As reported previously, tax authorities in Germany notified Wiley in May 2012 that they are challenging the company's tax position with respect to the amortization of the stepped up assets. Under German tax law, the company must deposit with the German government all contested taxes and the related interest to have the right to defend its position as challenged by the authorities. The Company's management and its advisors believe the tax treatment is valid and in accordance with German tax regulations and I think we'll be successful in court. The circumstances are not unique to the Company. First quarter free cash flow was also affected by lower cash earnings as a result of the decline in revenues, acceleration of calendar year 2012 cash collections into fiscal year 2012, and higher capital spending on technology. Net debt was $365 million at the end of the quarter, compared to $353 million a year earlier. During the quarter, Wiley repurchased 218,000 shares at a cost of $10.6 million, and in June, Wiley increased its quarterly dividend by 20% to $0.24. It was the 19th consecutive annual increase.

Now, I'd like to provide some information regarding performance of Wiley's global businesses. You will note that the company now includes a report on segment performance after the allocation of certain direct Shared Service and Administrative Costs for the purposes of assessing performance and making resource allocation decisions. STMS revenue of $236 million for the quarter declined by $9 million or 4%. Journal subscription revenues declined by 3% from prior year, mainly due to publication timing. Rights, backfiles, and corporate sales revenue also declined in the quarter against a very strong performance in the first quarter of fiscal year 2012. Calendar year 2012 subscription growth rates moderated during the quarter, as we saw fewer major license deals compared with a year earlier. At the end of July, institutional subscriptions for calendar year 2012 are up approximately 2% compared with calendar year 2011 at the same time. Weaker renewals in Europe, Middle East, and Africa driven by cuts in public funding and non-renewal of subscriptions in some Middle East markets have slowed our revenue growth. Our business in the US and Asia is performing well.

The STMS book business increased 1% to $37 million. Digital revenues grew 54% as a result of strong sales of e-books and digital licensing. This growth was offset somewhat by a decline in print revenue. Digital sales now comprise 23% of total STMS book sales compared with 15% a year ago. Adjusted direct contribution to profit for the quarter of $94 million was down 9% from prior year. Adjusted direct contribution to profit excludes a $3 million restructuring charge related to the discontinuation, outsourcing, and/or relocation of certain STMS activities that will result in a reduction in ongoing operating costs. The restructuring charges are expected to be fully recovered within 18 months. In the quarter, STMS signed new contracts with societies to publish seven new journals with combined annual revenue of $2 million and renewed or extended contracts to publish eight journals with combined annual revenue of $8 million. Two journal contracts were lost with annual revenues of $6 million. In August, we announced a new agreement to publish 17 journals from the American Geophysical Union, the world's leading society of Earth and space science. The AGU journals, which have annual revenues exceeding $20 million, will be published by Wiley from January 2013.

For the 12 months ending in July 2012, full text accesses on Wiley Online Library increased by 15% across all product types compared with the same period a year ago. During this period, usage of journals was up 14% and of books up 38%. Impact Factors are an important measure of journal quality based on the frequency with which articles published in a particular journal are cited elsewhere in the peer reviewed literature. The high quality of the Wiley-Blackwell journal portfolio, as measured by Impact Factors and rankings, is an important element in the purchasing decision-making process for our customers. The Thomson ISI 2011 Journal Citation Reports showed that Wiley-Blackwell has continued to increase both the number and proportion of its journal titles with an Impact Factor with 1,156 titles, that's 76% of our total now included. This is an increase of 5% from the 2010 Journal Citation Reports and includes 43 titles which have received their first Impact Factor. 35% -- sorry, 34% of all Journal Citation Report categories have a Wiley titled ranked in the top three and over 300 Wiley journals achieved Impact Factors that place them within the Top 10 ranked journals in their field.

Turning to Professional/Trade. Professional/Trade had a solid start to the year with first quarter revenue up 4% to $102 million. The acquisition of Inscape contributed to the growth in the quarter, exceeding expectations with revenues of $6 million. The consumer category fell 6% to $23 million while technology declined 5% to $19 million, even as Wiley strengthened its market leading position in the category. Sales in the business category grew significantly by 23% to $39 million, driven by the Inscape performance and the successful launch of a new partnership with the Certified Financial Analyst Institute. E-book sales of $10 million were flat for the quarter due to timing. Digital revenue, including Inscape, grew by 43% in the quarter and now accounts for 21% of global P/T revenue. Gross profit at 63.2% of revenue declined slightly compared with the prior year performance of 63.5%, due to product mix. Adjusted direct contribution to profit grew 4% to $22 million, driven by higher revenues and Inscape margins. Adjusted direct contribution to profit excludes a $1.3 million restructuring charge relating to the discontinuation or relocation of certain P/T activities.

As a subsequent event, following the close of the quarter, Wiley announced an agreement to divest its travel business including the Frommer's travel brand to Google. The sale closed at the end of August. We continue to explore opportunities to sell a number of other consumer publishing assets in culinary, general interest, and the CliffsNotes brand as announced in March. We will provide additional guidance on the impact of the divestiture of the travel business in the second quarter. And, with respect to the sale of other consumer publishing assets when and if they occur.

First quarter Global Education revenue fell 5% to $73 million. The decline in revenue is due to cautious ordering on the part of bookstores as they anticipate changes in student purchasing behavior and the impact of online ordering, used books, and rentals. Revenues from nontraditional products including digital, binder ready versions, and custom formats increased by 15% to $21 million and now account for 29% of Global Education revenue, up from 23% a year ago. WileyPLUS sales grew by 18% in the quarter, leading to an increase in deferred revenue as these revenues are earned over the duration of each course. According to published industry data, the US higher education market has declined by 2.7% since January and grown only slightly by 1.2% for the 12 months ending July. In comparison, Wiley has outperformed the market with revenues flat for the calendar year-to-date and growth of 2.5% for the rolling 12 month period.

We successfully released the integration of WileyPLUS with the Blackboard learning management system in June. Over 150 campuses have implemented the Blackboard WileyPLUS Building Block in the first two months since release. Instructors at any Blackboard campus now have direct access to WileyPLUS courses in their discipline. When WileyPLUS is adopted, the instructor will be able to assign WileyPLUS directly through Blackboard, and students will have a seamless experience between Wiley course materials and their campus environment. The agreement with Blackboard will enable us to increase WileyPLUS penetration in so-called low validation markets, increase direct digital e-commerce sales, and enable sales to distance and online education programs.

Global Education's adjusted direct contribution to profit for the quarter declined 18% to $22 million. The decrease reflects top line results and higher composition costs. Adjusted direct contribution to profit excludes approximately $170,000 in restructuring charges.

In conclusion, we remain confident that Wiley will weather the ups and downs of these challenging market conditions through the balance of fiscal year 2013. We continue to gain market share in the markets we serve. We are focused on accelerating the transition to digital business models which remain critical to our ability to serve the needs of our customers. And, we are taking the opportunity to reduce our ongoing operating costs. While the first quarter was a bit weaker than anticipated, looking at the remaining three quarters and what we know with regard to revenue to come and how our expenses lay out for the remainder of the year, we continue to believe we can achieve what we provided as guidance in June. We will again need to manage expense growth carefully as we did successfully last year. Foreign exchange has been a headwind thus far and it's the piece we cannot forecast as to its effect towards EPS by the end of the fiscal year. In light of these factors, we reiterate our fiscal year 2013 guidance of currency neutral, mid-single digit revenue growth and EPS in the range of $3.50 and $3.55 with foreign exchange as a possible down side. This excludes all unusual tax benefits and the first quarter restructuring charges. With that as background, we welcome your comments and questions.

(Operator Instructions)

Daniel Moore, CJS Securities.

Good morning.

Good morning, Dan.

Given the revenue declines were somewhat across the board, but looking at the segments in Q1, just elaborate a little bit more as to your confidence that you can still grow the top line in the mid-single digit range. Obviously speaking ex-currency for the remainder of the year. What are the main drivers? A little bit more detail would be fantastic.

Okay, Dan. I'll start, and as usual, I'll let Ellis complete the things that I should have said and didn't say.

There are a number of things as we look forward to the year in terms of leading indicators. Obviously, one of the big metrics we track is the calendar year subscription growth for 2012. Two-thirds of which becomes revenue in fiscal year 2013. I mentioned the figure of 2% at the end of July at a period where most, but not all, of that business is done. And, our sales force continues to work on some late license opportunities, particularly in Europe, Middle East, and Africa.

But, overall, we see that as being a driver of further revenue growth. The subscription performance in the first quarter, as we mentioned, was largely due to the timing of issue publication. Which, as you know, is the basis for how we recognize revenue. We also have the benefit of knowing that we have won the American Geophysical Union contract which will bring nice revenue into the last four months of the year, once we start publishing those journals from January 2013. As well as some pretty good leading indicators around corporate sales which we expect to perform better in later quarters. That's by and large for the STMS business, those are factors that give us some confidence that we'll perform much better in coming quarters than we did in the first quarter.

With respect to our P/T business, again, we have a very strong front list that we're looking at for second and third quarters. And so, we expect to really pick up some momentum in the marketplace there. We're very optimistic that we will complete the process of restructuring our consumer businesses. And, we'll be able to continue to benefit from the growth in not only Inscape but also across the business category. And, some expectation that we will see further e-book growth during the year.

I mentioned that e-book sales in the quarter were flat. There's a timing issue there. We had to catch up in the previous year in terms of the way that our customers report revenue to us which gave us a boost in the first quarter of fiscal '12. Now, we expect to be much better than flat throughout the rest of the year for e-books, that continues to be a significant driver of results.

And then, lastly, turning to Global Education. As always, it's tough to call at the end of the first quarter right in the middle of the sales season how that market is going to play out. I mentioned the industry statistic figures, that market has been depressed. There is no doubt that rental textbooks and other business models are having an impact on sales of new books, particularly the traditional textbook. But, we also think that, and we're pretty confident, that our customers in the book stores are holding back a little bit in terms of their ordering patterns. We expect to see more sales as and when students actually show up for the first week of college, whether that's sales of digital products to them directly or whether it's book stores waiting to anticipate the ordering patterns before placing late orders once they see the whites of the students' eyes.

I think those are all factors that roll into our confidence that we can stay with our guidance of mid-single digit revenue growth. We are in a tough operating environment. There's no doubt our markets continue to be difficult as they have been for the last couple of years. But, we believe the strategies and action plans we've put in place will continue to provide us with growth opportunities for revenue growth.

Very helpful. Last year, if we look back, revenue obviously was a little bit disappointing, didn't quite meet your expectations. But, with strong cost controls you were still able to hit bottom line targets. Maybe talk about your confidence there. If revenue doesn't come through and it's more of a flatter low single digit revenue environment this year, are you still confident that you can get to the $3.50 or $3.55?

Yes, Dan, this is Ellis. I'll speak a little bit more to the cost side and Steve can fill in the holes that I have, if I've missed anything.

But, again, as you noted, particularly in the fourth quarter last year, and throughout the year, actually, actually three quarters -- the last three quarters of the year we were pretty careful in terms of managing costs and had a pretty -- a very strong fourth quarter coming from cost control. A piece of that is what we internally call contingency plans. Which is we carefully, in putting together plans, prioritize our spending in terms of new investments, additions to headcount, and the like. And, we do that every year, whether or not a year is going to turn out according to plan or not, as we've done in last year, which also started out a little bit on the weak side, this year as well. We're carefully watching and looking at investments in adding people and investments that are lower priority, let's say, in terms of meeting our short, mid-term, and long-term goals and objectives in terms of investment around digital transformation and transition.

As you also know, that to your question about if you miss revenue management costs one of those elements of missing revenue is unfortunately incentive comp, I guess it's fortunate and unfortunate. We have a fair amount of compensation that is related to performance. And, to the extent we missed any one of the three measures that drives that, one of which is revenue, the other is earnings per share, and the third is cash flow, if we miss revenue significantly that would release some incentive comp that otherwise would have been paid to colleagues back into earnings and, would bridge some of that gap.

The one piece that Steve did mention and is in the earnings release as well that we can't really predict with any certainty has to do with foreign exchange effects on the bottom line. So, $3.50 to $3.55 was including the effect of foreign exchange, which was neutral to the first quarter of the year. But, as we exited the quarter, exchange rates, particularly with respect to the Euro, would have an adverse impact if it stayed where it is for the balance of the year. So, that's Steve's reference to being a headwind is over the balance of the year. That if rates stayed exactly where they are, we could come off of that number or be at the low end more so than the higher end.

That leads to my last question. If indeed -- if we stay where we are today, are we talking about low end or $0.05 impact? Or can you quantify what the impact on FX might be?

I can tell you, I have a forecast and the number is around the number you mentioned. It's around $0.06 a share or so.

At current levels.

That would mean exchange rates would need to stay exactly where they are and everything else would need to be exactly as we forecasted for the balance of the year. But, in terms of order of magnitude it's about $0.05, $0.06.

Very helpful. I'll jump back in queue. Thank you.

Drew Crum, Stifel Nicolaus.

Okay, thanks. Good morning, everyone. So, couple questions on the scientific journals business. Is there any way to quantify the impact from the journal publication timing issue? And, when should we expect you guys to recoup that?

And then, also Steve, I think you made reference to the US market, the business doing well in the US. Can you talk about market conditions in the US and any change that you're seeing? Or is this just relative out performance for your business?

Yes. Drew, thank you for the question. So, the impact of the publication -- every quarter we don't publish exactly the issues that we expect. There are some that move forward into the preceding quarter and some that don't make it into the quarter. So, we look at that based on our expectations. And, it's of the order of around $3 million is the impact of timing which is one of the impacts on our overall lower subscription revenue. As well as another factor there that you might want to just be aware of is in fiscal year 2011 -- sorry, fiscal year 2012, we still billed from 2010 calendar business in the first quarter of that year. This year, we only billed a tiny bit of the same revenue of 2011 in calendar 2012. The difference there is about $1 million as well so you add that to the $3 million. That's based on the timing of not publication but actually at the timing of licenses being transacted.

With regard to your question about the US market, my comments were relative. So, EMEA is particularly challenging at the moment, given the ongoing trouble in Europe. But, also, we've lost entire markets, Iran was actually a significant market for scientific journals. We no longer sell scientific journals to Iran because we can't get the money out. That's had a big effect on that marketplace.

In the US, we continue to see pretty much the same patterns that we've seen in previous years, with really strong renewals with the major [consorsior] who recognize the high quality of the Wiley Blackboard Journal portfolio and we're very encouraged by that. So, we're seeing strong growth and good renewal rates with those major customers. Offset a little bit by some softness in certain states and territories, California again being one of our most challenging marketplaces, really as a result of tight funding for government funded library budgets and research institutes. So, we're seeing some growth in the US, we're probably seeing EMEA being flat to down. We're continuing to see nice growth in Asia.

Okay, good. So, next question pertains to digital. At your investor meeting last year you talked about fiscal '14 targets for all the segments. And, looking at Professional/Trade for the fiscal first quarter, digital accounted for 21% of the total revenue. I think the goal was about 25% by fiscal '14. And, jumping over to the higher ed, or Global Education, it seems like the adoption rates around digital may be a little slower than we had anticipated previously. So, taking those two into consideration, do you rethink the targets that you set out last year? So, just like to get your comments on the trends in digital for those two businesses.

Drew, as you know, we have an investor conference coming up at the end of the month and we plan to give you a very thorough update. But, just as a headline, we think P&T is well on track. And, well positioned, actually, to exceed its 25% goal. Digital and the Inscape acquisition has helped enormously with that, of course. And, we continue to look for similar opportunities to really move the needle.

In terms of Global Ed, we're still seeing very nice take-up of WileyPLUS. We're also introducing some new offerings in terms of other digital courses that we can bring to market more quickly. We'll talk quite a bit about our strategy in Global Ed at the upcoming investor conference. I would say watch this space. But, we certainly don't see any need, at this point, to revise downward any of our projections about the speed with which we migrate to digital.

Okay, last question from me, just housekeeping item. Ellis, what tax rate should we -- will we be using for fiscal '13?

I would say 28% to 29% is a good number to use, excluding the adjustments that we've made out with respect to UK tax.

Right, okay. Okay, thanks, guys.

You're welcome.

Michael Corty, Morningstar.

Good morning. Just a few questions from me. First of all, in the Professional/Trade business with the variety of assets you have for sale, would you be willing to keep any of those assets for which you don't get a fair price? Obviously, you're being patient in the sale process.

And then, another one on the Open Access initiatives that were -- you talked about briefly in the earnings release. Any quick comments on this additional option for single journal articles? Sometimes investors are not familiar with Wiley, they tend to overemphasize the threat of Open Access to your business model.

Michael, let me start out with respect to the sale of P/T assets. Just to recap, as you know, and we announced, we completed the sale of all of our travel businesses to Google back at the end of August. We'll report on that in the 10-Q. In fact, that question's been asked a number of times. We got $22 million, roughly, for the sale of those assets. The remaining assets we have we're in various stages of discussion with parties concerning those assets. It's a good question. If we get a good enough price, the question is what is a good enough price, given the nature of what our expectations are with respect to performance on those assets?

The key there is that those assets do not fit strategically with where we're headed in our professional business. And so, therefore, exiting those assets will be key over a point in time or in somehow transitioning or transforming those in another way. Because, strategically, the way those assets currently sit within Professional/Trade they just don't fit. So, our greater preference, it certainly, as announced, is a sale. I think we're feeling relatively neutral to okay that something may materialize there. There are other options other than sale to exit those businesses in the event that a sale doesn't work. We're a little bit up in the air and through the end of September we'll have a better read on that. I think by the end of the quarter, when we sit here and have a discussion with you in December, we'll have -- we will at that point in time give you conclusive information about what we've done either with respect to a sale or with respect to how else we might manage those business for the balance of the year.

Another question that you didn't ask but is one that would be logical to ask is with respect to the sale of the travel business and what else we might do with respect to the sale of any other consumers assets. In the second quarter, when we get to December, we'll provide adjusted guidance with respect to the effect on those sales as to revenue and earnings per share, if any, and free cash flow, if any. Although we don't provide guidance on free cash flow we would provide any proceeds associated with the sale.

And then, I'll pick up on the second part of your question, Michael. So, first of all, I really welcome your caution that investors should not over react to news and stories in the media around Open Access. Open Access has been with us for a very long time. And, the debate continues although there has been, as you will have seen, quite a lot of movement around that coming from the UK and from the European Union over the course of the last quarter. Our view is that Open Access, as it stands today, has not had a detrimental impact on our STMS business. Although, what does have a detrimental impact is insufficient library funding to maintain the kind of growth in journal subscriptions that we would like. But, Open Access itself, as another business model, has actually provided us with some revenue opportunity as we continue to grow the number of titles where we accept publication fees. And, also launch so-called gold road Open Access only journals.

With respect to the developments in the UK and Europe, we're both somewhat encouraged and mildly concerned about what we see happening there. We take encouragement from the fact that the debate seems to becoming more sophisticated. That is the naivete that existed around the thought that somehow journals could be -- journal articles could be reviewed, digitized, published, and made available through highly effective digital platforms, that all of that could happen without payment, that it could happen for free. That notion seems to have been dispelled. And, there's clear recognition, both from the [Fence] Committee report in the UK, but also in language from the UK government and from the EU that recognizes that a sustainable business model is needed to maintain the quality and reliability and trust in scientific publication and discourse. So, we do take encouragement from that. We hope that ultimately whatever business model prevails, there's a recognition that there is a need to continue to fund the peer review and publication of scientific research. And, we are concerned to make sure that -- and we don't see any dramatic changes in the condition for Open Access deposit, particularly in the so-called green road model around the embargo period under which articles, after publication, are posted to publicly available websites.

So, our view is we will be living in a mixed economy for some time to come. We don't see any precipitous decline in the subscription business. But, we do see a little bit of a move towards quality. And so, that is why we emphasize quality in our earnings releases and in our communications with investors. We think that quality is going to be a -- has become even more important than it has been in the past for the success of individual titles. And, we also see the continuation of growth in the so-called gold road Open Access model. And, we will no doubt continue to expand our offerings in the Open Access sphere.

Thanks for your comments. I'm going to jump in the queue for a question on a different topic. Thank you.

(Operator Instructions)

Ian Whittaker, Liberum.

Thank you, very much. I had three questions, all on the Global Education business. The first thing was just interested in your comments about why book stores have been more cautious in the ordering and your comments about anticipating changes in students' behavior. I wondered if you could talk a little bit more about that?

The second thing, then, just has to just -- I'm looking at some of your other comments there, you're talking about the impact of online ordering, used book, and rentals. These have been impact factors for a number of years. Do you think there's any acceleration coming through you in those trends on the impact on the Global Education side of the business?

And, the third thing is, and it's more of a clarification point, you mentioned that the US higher education sales have been down 2.7% since January. When Pearson reported back in late July they were talking about gross sales being up 9.7% for the six months. Now, it would either be the July must have been a precipitous month or this may be some sort of difference in terms of how you both classify the market. If you could give some sort of clarification, that would be great, thank you.

Okay. Let me just take the last one first, Ian, if I can. So, I didn't listen to Pearson's conference call. So, I wasn't aware of their number. Were they talking about market growth or were they talking about Pearson's own growth in the period?

No, no, they were talking about market growth. What they said was in US higher education, the way they classified it was gross sales were up 9.7%. That was to the end of June.

Gross sales.

Gross sales.

I actually can't comment on that. They may -- whether their number came from the same source as the number that I provided. But, these were -- this is published industry data on the US higher education market through the month of July. So -- but, I think we talk about net sales rather than gross sales.

Okay. I'm sorry, could you just clarify what would be the difference between the two?

Yes, gross is before returns. So --.

Right. Okay.

Net would be after book store returns.

Okay.

Let me make a couple comments about book store ordering patterns. Yes, you're right, obviously online digital sales and used books and rentals have been around in the marketplace for a long time. But, I would say, yes, the impact of those is becoming greater in terms of the impact on sales of the traditional hard cover textbook at the prevailing single copy textbook price. So, that's made book stores less certain about stocking up. I would say if you look back two or three years ago, book stores would have anticipated student demand, they'd have taken a note of the enrollment for a specific course and they may have ordered anything up to 70% or 80% of the number of students, they'd have ordered copies to cover that. Recognizing that in any class there's always a subgroup of students who won't buy anything although they'll go to the library or whatever.

I think, what we're seeing, if we match ordering of known adoption to known enrollments, we're seeing book stores taking much smaller quantities up front. That's partly because they don't know how many students will buy a used book, how many will come online to buy digital only. Of course, Amazon's growing strength in the channel has also caused some channel confusion. Book stores, again, are reluctant to place orders until they see students show up on the first day of term with their book lists. And, textbooks have added further a confusion into that. We don't think the print textbook model is necessarily very sustainable. What it has been is there was a large amount of inventory that went out in previous years. Some of that has remained out in the marketplace and is now available on the used book shelves.

It's just added to a lot more confusion and book stores are naturally, I think they're cautious because they want to protect their working capital. They don't want to order more than they will have demand for. And, they're finding it much more difficult now than they were in previous years to predict exactly what that demand will be at the start of the semester.

Okay, and -- no, that's extremely clear. Just on that, do you think that's likely -- put it another way, do you think this is now likely to be a permanent feature of the market? That book stores are acting this way? Or is there any reason why you think it may be exacerbated by the cyclical pressures we're seeing at the moment?

Well, you would hope that book stores -- provided there aren't similar disruptions to distribution channels in the future, that book stores will get more used to the new environment and begin to get better at predicting their demand. I think it is the degree of change and the pace of change over the last year or two that's made it particularly hard for them to forecast at this point.

That's great. I'll jump back in the queue with further questions.

Sami Kassab, Exane.

Good morning, gentlemen. One quick question. I'm familiar with the issues on rentals, pressure on for profit enrollment in the US explaining the pressure you just talked about. Can you help me understand why Asia-Pacific is down more than the US at 9%, what's going on there, please? Thank you, very much, gentlemen.

Yes. Sami, I'm probably not going to be able to give you as comprehensive answer as I would like to. I do know we have some timing issues around some particularly large adoptions, especially in the country of Taiwan. It might seem strange that I would mention a small island off the coast of China as being significant, but within a quarter, actually, Taiwan has always been a very large consumer of textbooks. We sell a lot of accounting textbooks there. We do know we've got some orders that are delayed for Taiwan.

We're also seeing a tail-off in our business in India which we believe is temporary. But, given some of the challenges in the Indian economy that are relatively recent, we've seen enrollments in a number of courses in India tailed back in this year. And, we've seen some universities actually shut down individual courses. A bit of a bubble in Indian higher education as more and more students saw opportunities there. There's been a correction of that but we don't see that as being a long-term issue.

And, can I ask you with regards to August as the largest month of the year, do you want to make some comments on how the month of August has been for the market for higher Ed, please?

No, Sami, we'll talk to you about that at the end of the second quarter.

Okay. Thank you, Steve. Thank you, very much, gentlemen, bye-bye.

Michael Corty, Morningstar.

Thanks. The question on the book stores and the rentals got asked. But, real quick to -- I know these are smaller line items within your entire business, but in terms of impacts on the macro economy on your business, I know at one point you said that the back file sales can have some -- are cyclical in some manner as well as the small amount of ad sales you do. What are the -- any current trends there that we should be aware of on those two line items?

No. As I said in my earlier response, we've got -- we have leading indicators. Obviously, we have some back file deals pending that we're negotiating. We have a forward order basket for ad sales and corporate sales. Which, by the way, goes beyond advertising but also such things as sponsored reprints for the pharmaceutical industry. The leading indicators there are pretty good. We feel that there's still more business to come later during the course of the year. Obviously, we've got to get those deals done and we've got to finalize the publication of the items that are under order for advertising and reprint sales.

Thanks for clarifying that. Appreciate it.

(Operator Instructions)

Ian Whittaker, Liberum.

Thank you. I just have a follow-up question. Just going back to education, just look at your technology investment in the quarter. I think it was up around 21% year-on-year. Now, I know it's one particular quarter, there were timing issues and so on. But, coming back to this point before, the potential to flex costs if revenue declines continued, how much of that technology investment, as it were, was core investment that you needed to grow the additional product further? And, how much could you scale back on?

And, I guess, as a part of that, is that the argument with digital has always been that digital should help margins in education, you now got around 29% of revenues. If you're -- I know you've been very clear before in saying there may be a bit of a time lag there for digital being margin enhancing. Is there anything that you've seen so far that has changed your opinion that digital will eventually enhance margins?

Ian, it's Ellis. Let me pick up on those questions. With respect to our ability to manage expense growth in technology, there's a number of factors there. One is we manage current investments in technology in terms of prioritizing what we spend on that directly affects cash, certainly. And, has some degree of effect in some cases with respect to what is expensed.

Because of the nature of how some of that investment is capitalized, if it's development and some of it is expensed directly and/or in terms of the timing of when new services go in service and begin depreciating. So, there is a degree of flexibility around that. It's principally focused on current investments, so more so on cash expenses affected as well. It is an area of big spend and pretty significant spending growth. And, we do have clear plans of prioritization in terms of investment. And, much of that is focused on, I'd call it, mid to longer term, in some cases near term, investment in transformation and transition. We tend to protect those areas somewhat more so than other areas of spend.

In terms of the rest of your question around -- actually, I'm losing it for a second here.

Digital is --.

Yes, in terms of expectations of margin effect with respect to digital, there's nothing that we would conclude that our expectations in terms of margin benefits coming from digital would be less than we've seen in the past. Some of Steve's answer to the question earlier around the degree or speed of transformation to digital, transition and transformation to digital should in fact favorably affect margins sooner if that in fact plays out that way. One of the answers I didn't provide before in retrospect around cost control has to do with some of the structural views that we're taking with respect to our overall cost structure. Some of this is normal, you taking with respect to kinds of activities that even in great times, when the top line is growing robustly. It's been a while, but I can remember those days before this economic cycle that we're in. One takes a look at how we spend money, where we spend money, where we invest, and certain skill sets, some of which are strategic and critical and others of which are -- you can source in other areas where costs are lower.

Those opportunities are continuing to grow and expand in terms of the kinds services that need to be sourced in higher cost locations like in Western Europe or the United States. And, the percentage or the share of expense that could be sourced in other locations that are lower cost, within or outside of Wiley, so using third party vendors for that. So, those opportunities are ones that we're on to and we reap some benefit of that last year. We're gaining some benefit and accelerating some of those benefits this year. Unfortunately, at times it involves existing colleagues, hence the restructuring charge in the first quarter of $4.8 million.

So, all to say is that there are opportunities in the normal course with or without contingency plans, with or without higher or lower grades of revenue growth where there are opportunities to manage costs in a more tight, careful basis, and also strategically. I think I mentioned one of the conference calls, certainly, around us looking at strategic procurement of third party goods and services. That's an opportunity that we're moving on and we'll be moving on that in this quarter to begin to in place some of those opportunities. That will drive over time, it won't happen in a quarter or two or maybe even three. But, I would say within 12 to 24 months we'll begin to see significant savings coming from alternative sourcing approaches for those kinds of goods and services which involve, quite frankly, a fairly significant share of expense within the company.

That's very, very clear. Thank you, very much.

You're welcome.

We do not have any further questions in queue. I'd like to turn the conference back over to Mr. Smith for any additional or closing comments.

We thank you for your comments and questions. We look forward to speaking to you again at the end of our second quarter at our next investor conference call in December. Thank you, very much.

That does conclude today's conference. We thank you for your participation.