Wiley reports Q2 2016 earnings: earnings down 10%
Publisher sees ‘weaker demand for college textbooks and custom education material’ as revenue falls 5% for the quarter
The book publisher Wiley today reported its second quarter earnings for fiscal year 2016. Although the top numbers were down – revenue down 5%, earnings down 10% – there was some good news in the report.
First, the company is profitable. Let’s not forget that. It earned $43.6M in net income.
Second, Wiley reported growth in digital books, with education seeing a 12% hike in digital sales. This should continue as more and more students, and faculty, move toward digital book products.
Here is Wiley’s earnings statement:
HOBOKEN, N.J. – December 8, 2015 — John Wiley & Sons, Inc., a global provider of knowledge and learning solutions that improve outcomes in research, professional practice, and education, today announced the following results for the second quarter of fiscal year 2016:
“As anticipated, second quarter results reflect a challenging comparison to the prior-year period due to an unusually large backfile sale in that prior period,” said Mark Allin, Wiley’s President and CEO. “In addition, the quarter was adversely impacted by substantially weaker demand for college textbooks and custom education material. For the six months, revenue and adjusted EPS were down modestly, with Research journal revenue showing steady performance excluding the prior year backfile sale. Meanwhile, we continue to make good progress in the integration of our books businesses, our continued shift to a more variable cost model and the implementation of our cost benchmarking initiative.”
Fiscal Year 2016 Outlook
Wiley is reaffirming its fiscal year 2016 adjusted EPS outlook for flat performance but lowering its revenue outlook from low-single digit growth to flat; both are on a constant currency basis and exclude the adverse transitional impact of shifting to time-based journal subscription agreements. As previously announced, Wiley is moving to time-based digital journal subscription agreements for calendar year 2016. The change will shift roughly $35 million of revenue and $0.35 of EPS from FY16 to FY17, with recurring effect annually thereafter. Most of the revenue and earnings impact will occur in the third quarter, and the change will not impact cash flow. Included in the FY16 EPS guidance is an incremental expense impact of more than $0.15 for the enterprise resource planning system (ERP) implementation as compared to FY15.
Foreign Exchange (FX)
Wiley generates half of its revenue from outside the United States, and is therefore exposed to a stronger dollar, particularly in relation to the euro and pound sterling. For fiscal year 2015, the weighted average rates for sterling and the euro were 1.60 and 1.25, respectively, on a US dollar equivalent basis. The weighted average rates for the first half of fiscal 2016 were 1.55 and 1.12, respectively. Throughout this report, references are made to variances “excluding foreign exchange” or “on a constant currency basis”; such amounts exclude both currency translation effects and transactional gains and losses.
The Company provides financial measures referred to as “adjusted” revenue, contribution to profit, and EPS, whichexclude restructuring charges. Variances to adjusted revenue, contribution to profit, and EPS are on a constant currency basis unless otherwise noted. Management believes the exclusion of such items provides additional information to facilitate the analysis of results. These non-GAAP measures are not intended to replace the financial results reported in accordance with GAAP.
Second Quarter and First Half Summary
- Second quarter revenue declined 5% on a constant currency basis to $433.4 million due to a $10 million journal backfile sale in the prior year period and declines in book revenue across the three segments. Together, Journal Subscriptions and Author-Funded Access were flat compared to prior year, including the trailing effects of the Swets bankruptcy. Online Program Management and Online Test Preparation grew 18% and 13%, respectively. Second quarter revenue on a US GAAP basis declined 9% primarily due to an adverse currency impact of $19 million. First half revenue declined 2% on a constant currency basis to $856.3 million, or 6% on a US GAAP basis.
- Second quarter adjusted earnings per share (EPS) declined 10% on a constant currency basis to $0.78 due to the high-margin journal backfile sale in the prior year period, higher technology expense related to ERP planning and deployment, and investment in online program management, partially offset by incremental cost savings from restructuring programs. Adjusted EPS excludes restructuring charges and credits, as further described in the attached reconciliation of US GAAP to Adjusted EPS. Second quarter EPS on a US GAAP basis declined 18% to $0.74. US GAAP EPS includes a $0.03 adverse impact from foreign exchange and a $0.04 per share restructuring charge in the quarter. First half adjusted EPS declined 1% on a constant currency basis to $1.36, or 12% on a US GAAP basis.
- Free Cash Flow was a use of $192.7 million for the first half of the year as compared to a use of $140.7 million in the prior year period due to lower net income, working capital timing, and higher capital spending related to the ERP and related systems deployment. Note that free cash flow is seasonally negative in the first half of Wiley’s fiscal year principally due to the timing of annual journal subscription cash collections.
- Restructuring Charge: Wiley recorded a $3.7 million pre-tax restructuring charge in the quarter ($0.04 per share) principally related to process re-engineering consulting costs. After the quarter closed, Wiley completed an agreement to move its US-based print textbook fulfillment operations to Cengage Learning, with the aim of closing its New Jersey distribution facility by April 2016. The exit from the facility will result in near-term restructuring charges as activities progress.
- Share Repurchases: Wiley repurchased 637,717 shares this quarter at a cost of $32.0 million, an average of $50.15 per share. Approximately 1.3 million shares remain in the current authorization program.
- Revenue: Second quarter revenue of $238.4 million was down 5% on a constant currency basis due to the $10 million journal backfile sale in the prior year period and an 11% decline in Books and References revenue, which offset steady performance in Journal Subscriptions and Author-Funded Access, in combination. For the first six months, Research revenue was down 3% at constant currency.
- Calendar Year 2015 Journal Subscriptions: At the end of October, calendar year 2015 Journal Subscriptions were up 0.3% on a constant currency basis, with nearly all targeted business under contract for the 2015 calendar year. Results were adversely impacted by the Swets bankruptcy and net society publishing losses for the year.
- Adjusted Contribution to Profit: Second quarter adjusted contribution to profit of $67.6 million declined 11% on a constant currency basis mainly due to the high-margin backfile sale in the prior year, as well as higher allocated marketing and technology shared service costs, partially offset by savings from restructuring and strategic vendor sourcing initiatives. For the six months, adjusted contribution to profit was down 5% at constant currency.
- Society Business: Seven society journals were renewed during the quarter, worth approximately $9.9 million in combined annual revenue, and one was not renewed, worth $0.3 million annually.
- Revenue: Second quarter revenue declined 3% on a constant currency basis to $99.2 million with organic growth in Online Test Preparation (+13%) and Corporate Learning (+7%) offset by a 6% decline in Books. The Assessment business rose 4%, with post-hire assessment growth offsetting an expected decline in pre-hire assessment revenue following portfolio actions to optimize longer-term profitable growth. For the six months, Professional Development revenue grew 3% due to growth in Corporate Learning, which included two additional months of revenue (approximately $5 million) due to a prior-year reporting lag, and strong double-digit growth in Online Test Preparation (+27%).
- Adjusted Contribution to Profit: Excluding foreign exchange, adjusted contribution to profit rose 95% for the quarter and more than doubled for the year. Performance was impacted by lower revenue offset by efficiency gains from restructuring and cost synergies within the Talent Solutions businesses. Six month performance includes two additional months of operating results from the CrossKnowledge acquisition.
- Acquisitions: In October, Wiley announced the acquisition of Chartered Financial Analyst (CFA) content and AnalystSuccess.com from The American College of Financial Services. Terms were not disclosed. The acquisition positions Wiley as a market leader for CFA Test Preparation. Wiley runs online CFA Exam Review Courses on its Efficient Learning Systems platform. In addition to the CFA, Wiley provides advanced online test preparation for the CPA, CMA, CIA, and PMP designations.
- Test Preparation Partnership: Wiley recently announced a partnership with ACT, the nation’s leader in college and career readiness, to enhance our collective test prep product offerings. Wiley will become the exclusive publisher for ACT’s The Real ACT® Prep Guide beginning in January 2016. As producer of the ACT test and ACT WorkKeys®, among other respected assessment programs, ACT is committed to providing insights that help individuals better prepare for success throughout their lives – from education through career.
- Junior Achievement Program: CrossKnowledge and Junior Achievement USA® recently announced a joint partnership that will bring digital learning solutions to thousands of students and educators. As part of the agreement, CrossKnowledge has donated the use of its Learning Management System (LMS) to Junior Achievement USA for the next five years (starting in 2016) through the CrossKnowledge Foundation. It is estimated that nearly 300,000 Junior Achievement users will access CrossKnowledge programs in 2016, and that figure is expected to reach 1.6 million in 2020.
- Revenue: Second quarter revenue declined 8% on a constant currency basis to $95.8 million, with Print Textbooks down 22% and Custom Material down 25%, offsetting strong growth in Online Program Management (+18%) and Digital Books (+12%). The decline in Textbooks and Custom Material reflects lower enrollments, increased market penetration by rental, channel inventory consumption, and fewer adoptions. WileyPLUS grew 2% over prior year. For the six months, Education revenue is down 5% at constant currency.
- Adjusted Contribution to Profit: Second quarter adjusted contribution to profit declined 19% on a constant currency basis to $15.6 million, reflecting lower revenue and continued investment in Online Program Management.
- Online Program Management (formerly Deltak): Wiley added one university partner in the quarter – Nottingham Trent University (England) – and six new degree programs spanning business and nursing. Nottingham Trent is one of the largest universities in the UK with over 28,000 students. At the end of October, Wiley had 39 partners under contract and 216 online degree programs.
- Distribution Partnership: In November, Wiley entered into an agreement to outsource its US-based print textbook fulfillment operations to Cengage Learning, with the aim of creating a more efficient and variable cost model for print products. Under this agreement, the Company plans to exit its New Jersey distribution center in the spring of 2016.