Publisher John Wiley & Sons reaffirms flat revenue forecast for 2017 fiscal year, decline in EPS
Second quarter revenue declined 2% on a US GAAP basis to $425.6 million, EPS declined 127 percent on a US GAAP basis to a loss of $0.20, but rose 3 percent on an adjusted basis
HOBOKEN, N.J. – December 7, 2016 — John Wiley & Sons, Inc., a global provider of knowledge and learning services primarily in areas of science, technology, medicine, mathematics/engineering, and business/finance today announced the following results for the second quarter of fiscal year 2017, ending October 31:
Adjusted results exclude tax charges and credits, pension settlement, and restructuring charges and credits as more fully described in the attached financial schedules.
New Segment Reporting
To reflect shifts in its management structure, Wiley has implemented a new reporting structure comprised of three reportable segments: Research (Journals and Atypon; 50% of total fiscal 2017 year-to-date revenue), Publishing (Books and related content, Course Workflow, and Test Preparation; 37% of total year-to-date revenue) and Solutions (Online Program Management, Corporate Learning, and Professional Assessment; 13% of total year-to-date revenue). Please see the attached financial schedules for more detail, including historical segment restatement for the past five quarters.
“We made solid progress in the quarter,” said Mark Allin, Wiley’s President and CEO. “Research continued to deliver good performance through the quarter and the first half of the year, with steady growth from journal subscriptions and strong double-digit growth from author-funded access. Our Atypon acquisition, which closed in the last month of the quarter, will further enhance our Research capabilities with an industry-leading online library platform and expanded Research service offerings. In our other two segments, Solutions posted double-digit revenue growth through the first six months, while Publishing revenue continued to decline due to market weakness in print book publishing.”
Fiscal Year 2017 Outlook
Wiley reaffirms its fiscal year 2017 operational outlook of flat revenue and a mid-single digit decline in adjusted EPS excluding foreign exchange, the favorable impact from shifting to time-based journal subscription agreements (+$37 million in revenue and +$0.42 in EPS), and the partial year revenue contribution (approximately +$20 million) and EPS dilution (approximately -$0.15) of the Atypon and Ranku acquisitions. The acquisition-related dilution reflects the impacts of acquisition accounting, including amortization of acquired intangibles, as well as costs associated with initiating the migration of Wiley Online Library to Atypon’s Literatum platform.
Income Tax Judgement in Germany
As previously reported in a September 26, 2016 filing, Wiley received an unfavorable final judgement from the German Federal Fiscal Court, denying Wiley’s longstanding income tax appeal. As background, the finance court denied the argument that Wiley was entitled to claim additional tax depreciation deductions over 15 years related to a fiscal year 2003 reorganization of several German subsidiaries. No further appeals are available. As a result, the Company forfeited its approximate 57 million euro deposit and incurred a predominantly non-cash income tax charge of $48 million ($0.83 per share for the quarter, $0.82 for the six month period). This charge is included in the Company’s income tax expense for the second quarter and six month periods ending October 31, 2016.
Foreign Exchange (FX)
Note that foreign exchange was adverse to second quarter revenue and EPS by $15 million and $0.04 per share, respectively. Wiley generates approximately half of its revenue from outside the United States, and is therefore exposed to foreign exchange rate fluctuations, particularly in relation to the euro and pound sterling. The weighted average rates for fiscal 2016 were 1.11 and 1.50, 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” contribution to profit and EPS, which exclude a previously announced tax charge; restructuring charges; a pension settlement charge related to voluntary lump sum buyouts; and certain deferred tax benefits as more fully described in the attached financial schedules. Variances to adjusted 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 2% on a US GAAP basis to $425.6 million, or rose 2% excluding the unfavorable impact of foreign exchange ($15 million). Higher revenue on a constant currency basis was driven by growth in Journal Revenue (+3%), Online Program Management (+21%), Corporate Learning (+16%), Online Test Preparation (+11%), and Course Workflow (+8%), along with a one-month results contribution from the Atypon acquisition (+$2.5 million), partially offset weakness in Books (-9%). The shift to time-based journal subscriptions in calendar year 2016 had no material impact on revenue growth in the second quarter. First half revenue declined 3% on a US GAAP basis to $829.9 million, and was flat excluding the impact of currency. For the six months, the shift to time-based journal subscriptions resulted in a favorable revenue impact of $4 million.
- Second quarter EPS declined 127% on a US GAAP basis to a loss of $0.20, but rose 3% on an adjusted basis. Adjusted EPS excludes the unfavorable impact of foreign exchange ($0.04); an adverse income tax judgement in Germany ($0.83); a settlement charge related to a voluntary lump sum pension distribution program for terminated employees ($0.10); and restructuring charges in the current ($0.08) and prior year quarter ($0.04); partially offset by a deferred tax benefit related to a future tax rate reduction in the United Kingdom ($0.04). Adjusted EPS growth was mainly due to revenue performance and cost savings from restructuring initiatives, partially offset by an increase in technology spending. The shift to time-based journal subscriptions in calendar year 2016 had no material impact on earnings growth in the second quarter. First half EPS on a US GAAP basis declined 74% to $0.34. Adjusted EPS declined 1% to $1.27. Also note, for the first six months, the shift to time-based journal subscriptions resulted in a favorable earnings impact of approximately $0.05 per share.
- Atypon acquisition: In October, Wiley closed its $120 million Atypon acquisition, which was first announced in August. Atypon is a publishing-software and service provider based in Santa Clara that enables scholarly societies and publishers to deliver, host, enhance, market, and manage their content on the web. Atypon’s Literatum platform hosts nearly 9,000 journals, 13 million journal articles, and more than 1,800 publication web sites for over 200 societies and publishers. Atypon generated over $31 million in calendar year 2015 revenue. The platform will replace the current Wiley Online Library platform in calendar year 2018.
- Appointment of Judy Verses as Executive Vice President, Research: In October, Wiley announced the appointment of Judy Verses as Executive Vice President, Research. Judy was most recently President, Global Enterprise & Education at Rosetta Stone, a market leader in online language learning and literacy, where she had global responsibility for all institutional business, as well as product and business development, IT, and global communications. Previously, Judy had been President and Chief Client Officer at Blackboard, a leading supplier of educational enterprise software, overseeing global sales and marketing, and President and COO at Blackboard Learn.
- Net Debt and Cash Position: Net debt (debt less cash and cash equivalents) at the end of October was $616.6 million, up from $580.8 million at the end of the prior year. The increase is mainly attributed to recent acquisitions. Cash and cash equivalents as of October 31, 2016 were $267.4 million.
- Free Cash Flow was a use of $155.4 million for the first six months compared to a use of $192.7 million in the prior year period mainly due to earlier journal cash collections. Note that free cash flow is seasonally negative in the first half of Wiley’s fiscal year principally due to the timing of cash collections for annual journal subscriptions.
- Share Repurchases: Wiley repurchased 193,955 shares this quarter at a cost of $10.0 million, an average of $51.56 per share. Over 4.3 million shares remain in the current authorized repurchase programs.
As noted, below are our redefined segments:
RESEARCH (JOURNALS AND ATYPON)
- Revenue: Second quarter revenue of $206.0 million declined 1% on a US GAAP basis but rose 5% on a constant currency basis. Growth in constant currency was driven by a 3% rise in Journal Revenue, including 3% growth in Journal Subscriptions and 27% growth in Author-Funded Access, as well as a $2.5 million revenue contribution from the acquisition of Atypon in the last month of the quarter. For the first six months, Research revenue was flat on a US GAAP basis but grew 4% at constant currency, including in both cases the $4 million favorable impact from the shift to time-based journal subscriptions.
- Contribution to Profit: Second quarter contribution to profit of $60.3 million was down 6% on a US GAAP basis but was essentially flat on an adjusted basis. Contributions from revenue growth were offset by costs associated with the Atypon acquisition, higher technology costs, and other spending to support society journals. For the first six months, contribution to profit was down 5% on a US GAAP basis, and 1% on an adjusted basis, including in both cases the $3.8 million favorable profit impact from the shift to time-based journal subscriptions.
- Calendar Year 2016 Journal Subscriptions: As of the end of October, calendar year 2016 Journal Subscriptions increased 1% on a constant currency basis, with 99% of targeted business contracted for the 2016 calendar year.
- Society Publishing Agreements: Two new society contracts were signed in the three month period ending October 2016 with combined annual revenue of $2.7 million; 12 were renewed with combined annual revenue of $7.9 million; and one with annual revenue of $1.6 million was not renewed.
- Nobel Prize Winners: In October, Wiley announced that six Wiley authors have been honored with the 2016 Nobel Prize in their respective fields, including Professor Yoshinori Ohsumi, Tokyo Institute of Technology, Tokyo, Japan (Physiology or Medicine); Professors Jean-Pierre Sauvage, University of Strasbourg, France, Sir J. Fraser Stoddart, Northwestern University, Evanston, IL, USA and Bernard “Ben” L. Feringa, University of Groningen, The Netherlands (Chemistry); and Professors Oliver Hart, Harvard University, Cambridge, MA, USA, and Bengt Holmström, Massachusetts Institute of Technology (MIT), Cambridge, MA, USA (Economic Sciences). Wiley has now published the works of over 470 Nobel Laureates.
PUBLISHING (BOOKS, COURSE WORKFLOW, ONLINE TEST PREPARATION)
- Revenue: Second quarter revenue declined 7% on a US GAAP basis to $163.3 million, or 5% at constant currency. Growth in Online Test Preparation (+11%), Course Workflow (+8%) and Licensing and Other (+20%) was more than offset by a 9% decline in Books and Reference Material revenue, with STM and Professional Books down 12% and Education Books down 5%. Digital revenue grew 7% in the quarter. For the six months, Publishing revenue declined 11% on a US GAAP basis, or 10% at constant currency.
- Contribution to Profit: Second quarter contribution to profit rose 6% on a US GAAP basis to $36.5 million, or 8% at constant currency. Performance was primarily due to cost savings from restructuring and lower consumption of distribution, technology and facilities shared services. For the six months, contribution to profit on a US GAAP basis was down 13%, or 10% on an adjusted basis.
- Dummies Birthday – In October, Wiley’s iconic dummies brand celebrated its 25th birthday. Over 250 million copies have been sold to-date.
- Partnerships: In October, AuditFile, Inc. and Wiley jointly announced a new version of AuditFile’s award-winning audit automation software that features the full suite of 2017 Wiley Advantage Audit programs and planning documents for industry-specific audits, reviews and compilations. The new cloud-based, all-in-one audit program and automation solution empowers firms of all sizes to work more efficiently and effectively from any browser or device.
SOLUTIONS (ONLINE PROGRAM MANAGEMENT, CORPORATE LEARNING AND ASSESSMENT)
- Revenue: Second quarter revenue rose 14% on both a US GAAP and constant currency basis to $56.3 million. Growth at constant currency was driven by Online Program Management (+21%) and Corporate Learning (+16%). Professional Assessment grew 2%. For the six months, Solutions revenue was up 13% on a US GAAP and constant currency basis.
- Contribution to Profit: Second quarter contribution to profit on a US GAAP basis rose 120% to $5.4 million, or 129% on an adjusted basis. Performance was due to revenue growth and improved operating leverage. For the six months, Contribution to Profit on a US GAAP and constant currency basis was up $7 million.
- Online Program Management: As of October 31, 2016, Wiley had 37 university partners and 231 programs under contract, compared to 37 partners and 232 programs at the end of last quarter. Wiley signed three new programs; four programs were not renewed.
- Partnerships: CrossKnowledge is partnering with O’Reilly Media’s PubFactory to provide organizations with a curated solution to access the very best library of world class IT and business information published by Wiley brands and imprints. Used in combination with other CrossKnowledge learning formats, OpenBooks creates customized training paths and allows employees to search and instantly find relevant answers their technical or business questions.
- Ranku acquisition: In September, Wiley acquired Ranku, a recruitment technology and predictive analytics software company for universities and community colleges, for an undisclosed amount. Ranku has been a partner to more than 1,000 online degree programs at the undergraduate and graduate level, providing advanced market research and recruitment capabilities.