Q2 2020 Earnings Call

Good morning, and welcome to why the second quarter fiscal 20 earnings update in the room with me are Brian <unk>, President and CEO , John Kritzmacher, CFO and he VP operations.

You reminders to start first the call is being recorded and May include forward looking statements you shouldn't rely on these statements is actual results may differ materially and are subject to factors discussed in our SEC filings.

The company does not undertake any obligations to update or revise forward looking statements to reflect subsequent events or circumstances.

Second why the provides non-GAAP measures as a supplement evaluate underlying operating profitability and performance trends.

non-GAAP metrics, which generally exclude items that impact.

Our ability comprise the following.

Generally screwed up adjusted <unk> free cash flow less product development spending adjusted operating income and margin adjusted contribution to profit adjusted EBITDA in results on a constant currency basis and results excluding the impact of acquisitions.

He's performance measures do not have standardized meanings prescribed by U.S. GAAP and therefore, it may not be comparable to the calculation of similar measures used by other companies.

They should not be viewed as alternatives to measures under GAAP.

Also note me abbreviate the constant currency that's easy.

Please see the reconciliation and explanations of all non-GAAP financial measures presented in a supplementary information included in our press release.

Turning to know all variances in this presentation exclude the impact of currency unless otherwise noted.

For those before prefer to listen to the call over the phone, but still want to view the slides we recommend that you click on the gears icon located in a lower portion left hand side window and select Blackstone.

This will eliminate any delays in doing this slide transitions as well as removed any potential background noise. If you prefer to ask a question.

After the call a copy the presentation I'd play back of the webcast will be available on our Investor Relations Web page I'll now turn the call over to Brian <unk>, why these president and CEO .

Thanks, Brian .

Let me start with a brief refresher about our business and our mission in a sentence widely empowers researchers learners universities and corporations to achieve their goals in an ever changing world.

We do this by delivering research and education in the high demand subjects in careers that are fueling the global knowledge economy.

We deliver must have content platforms and services they drive real outcomes in these areas.

And we are committed to delivering a compelling value proposition to our customers with business models in pricing that meet the needs of todays demanding markets.

In total widely accelerate scientific discovery and advances powerful career focused education are wonderful colleagues around the world is very proud of who we are and what we do.

As a reminder, we operate in report in three segments, our largest segment research publishing and platforms is a strong performer with favorable market and cash generation fundamentals widely as a leader in this market, which is growing around 3% annually the highest rate since 2011.

We were investing in this business to publish more with increased quality and speed and to support a more open research ecosystem through.

Through the first half the business made up 52% of why these revenue with an adjusted EBITDA margin of 34%.

Our academic and professional learning segment includes educational content in courseware used in both University and corporate settings.

Well the transition away from traditional books is weighing on results, we see increasing momentum in our shift to innovative digital courseware, especially those that target high growth subjects and career areas.

This segment represented 36% of Wileys revenue in the first half and yielded a 24% adjusted EBITDA margin.

Today, our education service segment.

Engages in the comprehensive management of online degree programs for universities and has grown to include a broad array of tech enabled service offerings that address our partners specific pain points.

Increasingly this includes delivering full stack career Credentialing education that advances specific careers with end demand skills.

We are recognized leader in this market, which is now over $3 billion in size and is expected to approach $8 billion like 2025.

Through the half education services made up 12% of why these revenue and generated a and adjusted EBITDA margin of 8% up from 1% in the prior year period.

[noise] among why these greatest strengths is our unparalleled network of customers and partners. This network is made up of the world's leading universities and corporations and of course millions of researchers students and professionals.

We are leveraging this unique asset across all of why these businesses to extend our reach build new businesses and better advance the goals of our customers.

Now onto the quarter's results.

First note that will be excluding the impact of currency when discussing financial performance.

We continue to see good momentum in research and education services, while experiencing market driven declines in academic and professional learning specifically in traditional books.

Second quarter book publishing declines were somewhat steeper than expected and we now anticipate revenue in this segment to be down by low single digits for the year.

We continue to sharpen our focus toward high growth disciplines and must have digital courseware, while also significantly enhancing our operating efficiency.

That transition is progressing well.

Having said that we're seeing good underlying momentum in key areas across widely.

In research, we're attracting more article submissions growing publishing volume and introducing new workflows, new work flow tools that support our researchers.

Academic and professional learning as stated we are shifting our publishing program toward high demand disciplines in high impact digital courseware, and we are growing in high potential areas like corporate training and test prep.

This transition is progressing steadily and we are seeing positive signs in these strategic parts of the segment.

In education services, we are growing nicely by extending the core opn business and by delivering a broader array of essential University and career Credentialing services that the market is demanding and that leverage our core wiley skills and assets.

And across the business, we're on track to improve operating efficiency was steady progress against our stated business optimization goals.

Adjusted EBITDA grew by 3% well he has declined modestly due to investment in growth initiatives, including acquisitions.

Our research business continues to report strong results with revenue up 4%, we continue to see terrific growth from open access publishing models and subs and our subscription model remained steady.

We are evolving toward a healthy blend of these complementary models.

A man metrics continue to be favorable with article submissions up 9% in the quarter and online usage continuing to grow with 3.3 billion Wiley platform sessions over the last 12 months.

Researchers want to publish with Wiley and the data shows that we're gaining share.

Learned societies continue to migrate to Wiley is there publishing partners.

The global leader in this essential part of the research Eco Rica's research publishing ecosystem net society wins for calendar year, 2020, total $8 million annually with renewal rate of 88% New Society partnerships. This quarter included the old Timers Association, the American Dental Education Society, and the International Society for demand.

Developmental neuroscience.

We're extremely proud that 12 of the recent Nobel Prize recipients were widely authors. This brings our total count to well over 500.

Scientific discovery continues to accelerate the world over facilitated by peer review journals from Wiley.

There was no substitute for the validation and promotion that our journals provide for our researchers and their discoveries.

Adjusted EBITDA and research grew 6% in the quarter driven by revenue growth and optimization savings.

We are building lasting relationships with researchers improving the author experience and expanding to support them across the value chain.

This relationship is the foundation of our growth over the long term.

As Judy verses the head of our research business said at our recent Investor Day, researchers are North Star and we are maniacal focus on their evolving needs.

In our many customer listening sessions the feedback is consistent.

Researchers value our journal brands and they want their research out faster for the World, Tennessee, and we're making that happen in fact, we reduced the number of days from exceptions. The publication by 40% in the last 12 months with more progress to come.

We're giving researchers new capabilities to help them work more effectively in the past couple of months, we have launched two exciting workflow tools citrus and manuscripts.

Thanks, Chris is a filtering tool that puts machine learning to work for every researcher generating a personalized feed of the latest in most relevant information on topics of specific interest to their research work.

Manuscripts is a research collaboration platform that enables multiple authors to work together editing and annotating research articles in real time manuscripts makes it easy to share verifying reproduce experimental results.

We have also added other new capabilities, including a platform that offers continuous insights across different stages of drug development and introduced promotion services for researchers that provide comprehensive article preparation journal selection and article promotion support.

We continue to improve the researcher experienced by adding capabilities and enhance the productivity of the researcher workload.

Now onto academic and professional learning, which had a difficult quarter in first half, resulting from market driven declines in book called book publishing.

Challenges are most apparent in higher education publishing as is evident across the higher Ed sector, our declined a significant but in line with a market, while we see headwind.

What we see headwinds in the higher Ed part of the academic and professional segment Weve strategies in place to address them, which I'll talk to in a moment.

Overall revenue and academic and professional was $178 million down, 5% or 9% organically.

This was the result of a 12% decline in books, driven by print textbook revenue, which was down 23%.

Note that print textbooks represent only about 5% of why these overall revenue.

Despite this we are seeing positive signs as we shift from high priced books to low cost high impact courseware as we discussed at our recent Investor Day, We talk there about the significantly increased sell through that results from the combination of lower price points and engaging effective digital courseware and example of this is ibooks.

Newly acquired Courseware for computer science in stem disciplines, which is up 32% on a normalized basis. We are rapidly extending this ibooks model to other high demand career disciplines like statistics and engineering the integration of XIAFLEX in Newton is on track and we feel good about the trajectory of these parts of the business.

We also saw good second quarter growth in test prep, driven by the CMS and CFA programs offsetting declines in SCPA related revenue.

Inline with our expectations.

We also saw good growth in corporate training.

Here, we signed 90, new training partners to market, our assessment driven professional development programs and 10, new corporate partners for whom we will implement broad digital learning programs based on our Crossknowledge platform.

Among the new partners is naval group, a European defense in energy giant as is typical we will help build enables corporate university by establishing a digital learning offering for its 20000 people.

Year over year EBITDA performance for the academic and professional segment was impacted by the book revenue declines and our investments to grow the courseware business, including Cybex adjusted EBITDA was down 19% to $53 million.

As indicated we continue to see students in hike in higher education turned away from traditional textbooks and toward required digital courseware, there was reduced willingness to pay for non essential content, such as flat textbooks and we continue to see the evolution of our distribution channels toward new business models and more affordable.

Solutions.

As discussed earlier, we are actively responding to these challenges by rapidly shifting the focus of our business. We are investing in publishing for the growing disciplines skills and careers that are driving education across the economy.

These include stem business and Ikea education, we are accelerating our move toward digital courseware that drives results and we are actively driving affordability.

This all has the demonstrated effect of increasing sell through and thus revenue while also enhancing customer satisfaction.

We're also emphasizing our test prep in corporate training programs, where we are seeing good market driven growth.

And at the same time, we are realigning our expense base against proven opportunities and redoubling, our focus on operating efficiency.

We believe in education content for the long term both for academic and professional markets. We have the right assets tight focus and a sound strategic plan to return to growth while not a major driver of Wileys growth plan. This business segment can provide consistent revenues and maintain highly attractive profit margins.

Education services delivered another strong quarter with revenue up 80% or 10% organically.

Note this will be the last quarter of inorganic contribution from the learning counts.

Student enrollments are up 9% year over year derivate, driven by the implementation of new programs and partnerships. We added no new University partners. This quarter, but the pipeline is solid and includes a broad array of schools and programs.

At quarters close we had 65 University opium partners the largest opium footprint in the industry and we are seeing strong growth in the broader services portfolio portfolio, which I'll talk about next.

Adjusted EBITDA was up significantly to $8 million certain onetime items and the timing of expenses boosted our EBITDA margin this quarter to 14%.

For the year, we expect EBITDA margin in the mid high to mid to high single digits. In summary, we continue to manage this business consistently and prudently to achieve and sustained profitable growth.

The core business at Wiley Education services is performing well and is becoming a platform for even broader growth.

Based on the strength of the traditional comprehensive Opn business, we continue to extend our offerings using why these core skills to address the varied needs of our University partners to extend to new markets and to help learners achieve their goals beyond their university degree.

With Korea Credentialing services.

Our targeted University services include academic design marketing student recruiting students support and much more.

For example school everywhere are struggling to compete for students Wiley has an industry leading ability to help the schools drive growth by identifying and attracting just the rights student body that will succeed in their degree programs.

It's a complex data driven undertaking and we do it very well this quarter, we launched three new partners that require such targeted off northern Illinois, Babson and Linden one.

This part of this segment is showing double digit growth.

Momentum is building for Wiley in Europe , particularly in the UK with University partners, like Birmingham, Bath, Glasgow, and Nottingham Trent.

The International segment is an important opportunity for us given our presence in key European markets and our reputation as a go at global institutions worldwide.

Increasingly we're delivering career credential education to both students and professionals today. This full stack education includes teacher professional development and I T skills training through which we develop deliver professional credits and job placement through our 500 plus corporate partners.

Our stated strategy is to actively bridge the gap between education and employment by delivering career enhancing education through our University partners and for our corporate partners.

I'll now pass the call John to take you through our consolidated financials.

Thank you Brian for the quarter revenue of $466 million was up 5% driven by contributions from our learning House Newton and Cybex acquisitions.

Excluding acquisitions revenue declined 1% with challenges in academic and professional learning book sales offsetting strong organic growth in research and education services.

GAAP EPS of 79 cents rose, 4% with lower restructuring charges and the lower effective tax rate offsetting higher interest expense and foreign exchange transaction losses.

Adjusted EPS was down modestly primarily due to investments in growth and optimization initiatives.

Adjusted EBITDA rose, 3% to $110 million and our adjusted EBITDA margin for the quarter was 24%.

Yes.

For the half revenue of $890 million was up 5% in total and 0.5% organically again driven by growth in research and education services.

GAAP EPS declined by 36 cents, driven by 15 cents and higher restructuring charges investment in growth and optimization initiatives and higher interest expense.

Our effective tax rate was 20% through six months down from 22% in the year ago period.

Adjusted EPS declined 18% to one dollar and six cents, while adjusted EBITDA was down 5% to $168 million.

Note that our consolidated earnings performance was in line with our expectations for the first half of the year.

Our cash flow used in operations and free cash flow results were favorable to prior year by $17 million and $7 million respectively.

As a reminder, wileys cash flow is typically a use of cash in the first half of the fiscal year, principally due to the timing of collections for annual journal subscriptions, which is heavily skewed towards late fall and winter months.

We expect free cash flow for the year to be inline with our prior guidance up $60 million to $80 million over prior year.

Capital expenditures rose $9 million to $56 million due to investment in technology enabled products and services.

With a leverage ratio of 1.8 at quarter end, our balance sheet continues to give us the capacity to invest acquire and return cash to shareholders.

Our consistent record of returning cash to shareholders continued with first half share repurchases and dividends totaling $63 million inline with prior year.

Our covered current dividend yield is roughly 3% and 1.3 million shares remain in the current share repurchase authorization.

Relative to our business plan research and education services have performed well through the first half of our fiscal year.

We originally expected academic and professional learning to grow slightly this year inclusive of acquisitions.

Given the market driven declines in book publishing through the second quarter, though we now expect that segment to decline at a low single digit rate.

Overall, we are tracking to our annual financial objectives, and therefore, reaffirming our full year outlook for revenue of $1.855 billion to $1.85 billion.

Adjusted EBITDA of $357 million to $372 million.

Adjusted EPS of $2.35 to $2.45.

Free cash flow of $210 million to $230 million.

As a reminder, our outlook is based upon average foreign exchange rates for fiscal year 2019, and excludes the impact of foreign exchange movements in fiscal year 2020.

It includes all acquisitions made to date.

Note that foreign exchange rate movements adversely impacted our first half revenue by $12 million and had only a small impact on our earnings.

Our guidance is based upon the euro at $1.15 and the pound Sterling at $1.31.

If current exchange rates were to hold we would see a full year unfavorable impact to revenue of approximately $15 million and an immaterial impact to EPS and EBITDA.

In summary, we continue to see strong momentum in research and an education services, while experiencing market driven declines and academic and professional learning, particularly in traditional books.

We are fully confident and our strategy to publish more in research migrate from content to courseware and high demand disciplines and broaden our portfolio in education services, all while driving efficiency gains across the company.

We're making solid progress in each of these areas and we remain confident in our guidance for this fiscal year, while continuing to drive toward achieving the fiscal year 2022 targets, we set out at the beginning of this year.

I'll now pass the call back over to Brian .

We at while you're making moves today that will drive profitable growth for years.

As you know we take a very long term point of view, if a terrific team strong asset strategy to capitalize on the big opportunities that exist in research and education.

Forward won't always be smoothed from quarter to quarter feeling good about our markets our direction in our progress.

By now you know that Wiley strategy as five elements, one focus squarely on the disciplined skills and careers that the world demands.

To deliver the brands content platforms and services that are customers need to achieve their goals three enable all of our offerings with powerful technology.

That drives real outcomes.

For ensure a compelling price value proposition for our customers in five continually optimize wiley for efficiency and effectiveness.

We see plenty of reason for optimism fundamentals in research and education are favorable for the long term.

We see increasing momentum in many key strategic areas of the business.

Our business profile is solid with 80% of our revenue coming from digital and Tech enabled services and 50% 55% of our revenue recurring.

Our balance sheet and cash flow or enduring strength and we continue to return cash to our shareholders while investing to grow.

As always and as we enter the holiday season I want to thank our wonderful Wiley colleagues for their great contributions to our ongoing success throughout the year and thank you all for joining us today for those who didnt have a chance to attend our October Investor Day, I encourage you to access the replay which is available on our website under about Wiley.

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

Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one key on your Touchtone telephone. If your question. It's been answered you were saying were softer MCU. Please press the pound key.

Our first question comes from Daniel Moore with CJS Securities.

Brian John Good morning, Thanks for taking my questions. Good morning.

Wanted to start with research, 4% underlying growth obviously.

Currency had a nice pickup and very healthy and you mentioned.

The market growing at about the fastest clip and maybe six seven years.

Was there any timing related impacts sell in of larger newer contracts that boost growth in the quarter, just trying to get a handle on the sustainability of the growth that we saw.

Hi, I don't think so no no in fact, there werent basically our drove growth is being driven.

Hi advances.

Our publishing volume were basically publishing more.

Expanding our publishing program. In addition, we have a set of smaller businesses such as our corporate training in digital businesses, which are growing nicely and rapidly. So its core underlying growth stemming from the strength of the publishing program and our move into adjacent.

Business opportunities.

Very helpful Perfect in an education services.

What are.

In VIX build back into this but underlying organic growth for learning house, specifically, just trying to get a sense of trends, there accelerate and acceleration or deceleration in momentum since coming under you are the Wiley umbrella.

Yes, John I would say at this point wouldn't actually break that out separately, we've integrated the operations and so we don't really think of we've got learning house clients are we've got it services clients organic growth overall for the good services business was and the tone of 10%.

So continuing double digit rates consistent with our expectations, but theres not they're not a distinguishable difference now.

And I'll just add that we've done that we've done a very good job of integrating the two businesses. So all the colleagues working on these businesses consider at one one business as well. So we're not we're not thinking of them separately anymore.

Helpful. Leslie just as far as the tax rate little lower than our expectations.

What's your what are your.

Tax free assumptions or expectations for H., two and has there been at the full year. EPS Guide is unchanged is or is there any change in the tax rate relative to the beginning of the year. Thanks.

So Dan we've been guiding as you know to 20% to 23% for the full year. It's clear now at this point halfway through the year, the though will be headed towards the low end of that range, but we'll be in that zone of 22% for the year.

Yeah.

Very good I'll jump back with any follow up thanks.

Thanks, Dan.

Our next question comes from drew Crum with Stifel.

Hey, guys. Good morning to do so you. Some adjustments are made an adjustment to the academic national publishing revenue guidance for the year.

But the total revenue guidance remains unchanged. So is there any.

Adjustments, you're making the research and or education services within that.

So so do you absolutely right, we have had a shift in expectations among the segments and we noted that we're seeing the bit lighter performance out of the academic and professional learning segment.

But on balance relative to our business plan overall, we're seeing some improved performance in other parts of the business, notably in the research business so on balance.

We're still on the zone on a consolidated view and feeling good about the year.

And then shifting over to research you mentioned the.

And what are the implications there on gross margin I know royalties.

The last couple of years, which says it had a negative impact on gross margin.

So drew I don't have off the top my head what the net wins were four last year I'm guessing it was somewhere lower than that but so you're up here and I was just seen going up.

I'm sure. It was up I, just don't recall to what extent that was up in the prior year, but plus 8 million is a solid performance.

For calendar year 2000 for sure.

And in terms of.

Our overall renewal rate in the in the high Eightys.

I think thats quite good we haven't had.

Some fluctuation in our renewal rates over the past few years would that rate as you know veering toward the high end.

In the past year in fact last year's renewal rate was in the high nineties.

We were trying to balance out a bit as we look at managing our portfolio for overall growth and profitability and so.

There were some we're making some choices about renewals that will push that rate down a little bit and.

I think we're doing a better job.

Around reading, where we need to be in the market given the quality of services that were delivering to earn those renewals with our current clients. We've put a lot of focus on customer service in the last couple of years to help drive those renewal rates and so I think weve I think we've begun to fund a better balance there all that said you know where.

We're managing our we're managing our overall.

Portfolio to balance out the royalty rates ensure that we're getting the right balance there and driving for profitable growth over time.

Okay and.

The net wins for the prior year than that society wins were $3 million. So.

Three to eight.

Got it Okay very helpful. And then just last question on Education services, you demonstrates nice year on year profit improvement.

You did mention some favorable timing of expenses in the quarter.

Can you address that more detail and what the implications are for the second half of fiscal 2000. Thanks.

There were there were few things that were there was one item that was revenue related there was no matter of timing something coming in in the quarter that is nonrecurring and.

There was also the matter of some timing around expenses, which will probably even them their way out over the balance of the year, including things like accruals for bonuses and accruals for benefits and such so on balance.

We would say the second quarter from a profit perspective is not a trend.

But if you look across the year as Brian commented, we're expecting adjusted EBITDA for the Ed services business to be in the mid to high single digit ranges that would be up from 3% for fiscal year 19.

Remind me what was that the prior guidance I don't recall you guys given a adjusted EBITDA margin range for fiscal 2000 is that.

We got has not changed that in line.

So we had we reported as I noted, 3% last year and we write said in our view for fiscal 2002 that we're targeting 15% adjusted EBITDA, we had not previously given a view on the year, but we are now because we did want to call out that the ups.

Pick in the second quarter is not a trend in in of itself, but across the full year, we're expecting to see a significant improvement in adjusted EBITDA for that part of the business.

Okay got it thanks guys.

Thank you.

Our next question comes from Daniel Moore with CJS Securities.

Thank you again.

I appreciate the color John as it relates to FX.

And it just want to make sure I'm hearing you correctly, essentially negligible impact year to date, thus far.

On it from an earnings perspective, and if we you know if rates stayed around where we are now.

I would also be negligible relative to your full year guidance that right.

Yes, that's correct to be adverse to revenue by about $15 million at the current rates, but the impact to earnings is immaterial for the year.

Helpful and as as if we play that out to your fiscal 22 goals. Similar you know 350 adjusted EPS goal.

Right now.

Yeah hasn't been any material impact relative to where we started.

No we're still sticking to our fiscal year 22 targets, we've not we've not been any changes there obviously, we've got a bit of a challenge around the the academic and professional ordering books businesses, but but again on balance as we look across the first year.

Three year Horizon overall, we're performing in line with our business plan than we've seen some some improvements in other parts of the business that are helping to offset the decline in the books business.

Helpful and one more if I may just in terms of M&A pipeline.

Yes.

Look to the balance of fiscal 20 at least are you kind of more in the digestion mode as far as integrating learning house and site books and some of these others or are we still.

Kinda very active near term and longer term.

Yes, we we're continuing.

In the market to be active with looking at opportunities that can materially advance our strategy.

And so so that is we certainly always continue to have a pipeline of opportunities we are doing very.

Very good and consistent job of integrating the acquisitions that we have.

But we will continue to look at opportunities as they come up.

And as I said, we have an active pipeline.

Thank you again.

Thanks.

And I'm not showing any further questions at this time.

All right.

Well, thank you for joining us on the call today, and we'll look forward to presenting our third quarter results in March.

Ladies and gentlemen. This concludes todays presentation you may now disconnect have a wonderful day.

Yeah.

Yes.