Wiley, a global provider of knowledge and learning solutions, Reports First Quarter Fiscal Year 2017 Results

Note: Results include a favorable transitional impact of shift to time-based journal subscriptions ($4 million revenue and $0.05 of EPS).  There is no cash impact from the change. Adjusted results exclude restructuring charges and credits as more fully described in the attached financial schedules.

Management Commentary

“Our largest and most profitable business, Research journals, delivered 2% revenue growth for the quarter, excluding the impact of moving to time-based subscriptions in calendar year 2016,” said Mark Allin, Wiley’s President and CEO.  “To further enhance our position in Research journals, we signed an agreement to acquire Atypon, a leading provider of research publishing software and services.  The acquisition will enable us to immediately accelerate our technology roadmap and provide advanced service offerings to scholarly societies and publishers.  Meanwhile, our digital solutions businesses continued to post double-digit revenue growth rates, while traditional book publishing remained under considerable market pressure, particularly in Education.” 

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 acquisition.  The Atypon-related dilution includes the impacts of acquisition accounting (partial write-down of deferred revenue, amortization of acquired intangibles) and costs associated with initiating the migration of Wiley Online Library to Atypon’s Literatum platform.

Income Tax Appeal in Germany

A hearing was conducted in the German Federal Court today regarding Wiley’s 2014 tax appeal, and a final judgement is expected over the coming weeks.  The appeal is related to a 2003 merger of several of German subsidiaries into one operating entity, which enabled the Company to increase (“step-up”) the tax deductible net asset basis of the merged subsidiaries to fair market value.  In May 2012, the German tax authorities filed a challenge to this tax position.  Under the rules for the appeal, Wiley has been required to make deposits totaling $62 million to-date, including related interest.  If Wiley is successful in defending its position, the tax deposits will be returned with 6% simple interest.  If Wiley’s tax position is denied, deposited funds will not be returned and a related charge of approximately $60 million, predominantly non-cash, will be incurred.  No further appeals are available beyond the current proceedings.

Foreign Exchange (FX)

Note that foreign exchange was adverse to first quarter revenue and EPS by $9 million and $0.01, respectively.  Wiley generates 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 1.50 and 1.11, 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. 

Adjusted Results

The Company provides financial measures referred to as “adjusted” contribution to profit and EPS, which exclude restructuring charges and certain tax benefits.   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.

First Quarter Summary

• First quarter revenue declined 4% on a US GAAP basis to $404.3 million.  Revenue decline 2% excluding the unfavorable impact of foreign exchange.  Performance was driven by growth in Journal Revenue (+2% excluding a $4 million favorable impact from the shift to time-based journal subscriptions), Online Program Management (+13%), Corporate Learning (+20%), Online Test Preparation (+23%), and Author-Funded Access (+39%), which was offset by weakness in Books across all three business segments (-16%).
• First quarter EPS declined 4% on a US GAAP basis to $0.53.  Adjusted EPS declined 9% on a constant currency basis.  Adjusted EPS excludes restructuring charges and credits as further described in the attached reconciliation of US GAAP to Adjusted EPS.  The decrease in Adjusted EPS was due to the revenue decline and higher technology costs (+$10 million), including investment in Wiley’s ERP deployment and related systems, partially offset by one-time favorable items related to certain employee benefit plans (+$8 million). 
• Wiley Signs Definitive Agreement to Acquire Atypon for $120 million.  Atypon, a publishing-software and service provider based in Santa Clara, California, 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 transaction is expected to close with an effective date of October 1. 
• Net Debt and Cash Position: Net debt (long-term debt less cash and cash equivalents) at the end of July was $467.1 million, down from $481.1 million at the end of the prior year period.  Cash and cash equivalents as of July 31, 2016 were $185.9 million.   
• Free Cash Flow was a use of $165.5 million for the quarter compared to a use of $154.6 million in the prior year period mainly due to lower cash earnings from operations and higher incentive payments.  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 221,305 shares this quarter at a cost of $11.3 million, an average of $51.01 per share.  Over 4.5 million shares remain in authorized repurchase programs, including a 4 million share repurchase program approved in June. 

• Dividend: In June, the Board ofDirectors increased Wiley’s quarterly cash dividend by 3.3% to $0.31 per share on its Class A and Class B Common Stock.  It was the 23rd consecutive annual increase and raised the annualized dividend payout to $1.24 per share.

RESEARCH

• Revenue:  First quarter revenue of $234.4 million rose 2% on a constant currency basis. Results were driven by 4% growth in Journal Revenue, with 3% growth in Journal Subscriptions (primarily due to a $4 million favorable impact from the shift to time-based journal subscriptions) and 39% growth in Author-Funded Access.  Books and References revenue was down 12%.  Overall, Research revenue on a US GAAP basis declined 1% reflecting the unfavorable impact of currency. 
• Adjusted Contribution to Profit:  First quarter adjusted contribution to profit of $63.2 million was essentially flat on a constant currency basis.  Contributions from revenue growth were offset by higher technology costs and other spending to support society journals. Excluding the favorable impact of time-based subscriptions, adjusted contribution to profit declined 6%. Contribution to profit on a US GAAP basis declined 3% reflecting the unfavorable impact of currency.
• Calendar Year 2016 Journal Subscriptions:  As of the end of July, calendar year 2016 Journal Subscriptions increased 1% on a constant currency basis, with 98% of targeted business contracted for the 2016 calendar year. 
• Society Business:  Three new society contracts were signed in the quarter with combined annual revenue of $2.9 million; 13 were renewed with combined annual revenue of $13.2 million; and four with combined annual revenue of $1.3 million were not renewed.
• Journal Impact Index:  In July 2016, Wiley announced an increase in impact factors across more than half of its indexed titles.  According to the 2015 Journal Citation Reports (JCR), recently released by Thomson Reuters, 58% of Wiley journals increased their impact factor from 2014 to 2015.  Wiley had 1,204 journals indexed (73% of the Wiley portfolio), an increase on the previous year, with 11 Wiley titles receiving their first impact factor in this year’s JCR release. In addition, 26 Wiley journals achieved a top-category rank, including CA-A Cancer Journal for Clinicians (Impact Factor of 131.7, ranked #1 in Oncology), World Psychiatry (Impact Factor of 20.2, ranked #1 in Psychiatry), and Biological Reviews (Impact Factor of 10.7, ranked #1 in Biology).  The Thomson Reuters index is a barometer of journal influence across the research community.

PROFESSIONAL DEVELOPMENT

• Revenue:  First quarter revenue declined 2% on a constant currency basis to $96.1 million with growth in Corporate Learning (+20%), Online Test Preparation (+23%), and Assessment (+2%) more than offset by the decline in Books (10%).   Revenue on a US GAAP basis fell 3% with results impacted by unfavorable foreign exchange. 
• Adjusted Contribution to Profit:  First quarter adjusted contribution rose 7% due to continued efficiency gains.   Contribution to Profit on a US GAAP basis grew 3%. 
• Partnerships:   In August, Wiley announced a publishing agreement with Amazon Web Services (AWS) to introduce official study guide learning tools for the AWS Certification Program. The AWS Certification Program recognizes IT professionals that possess the skills and technical knowledge necessary for building and maintaining applications and services on the AWS Cloud. To earn an AWS Certification, individuals must demonstrate their proficiency in a particular area by passing an AWS Certification Exam. 
  

EDUCATION

• Revenue:  First quarter revenue declined 14% on a constant currency basis to $73.8 million as declines in Books (-28%) and Custom Material (-15%) offset growth in Online Program Management (+13%).  The decline in textbooks and other course materials reflects the continued weakness in overall textbook demand and further share gain in textbook rental.  Revenue on a US GAAP basis fell 15%. 
• Contribution to Profit:  First quarter contribution to profit on an adjusted and US GAAP basis declined to a loss of $2 million, driven by the revenue decline. 
• Online Program Management:  As of July 31, 2016, Wiley had 37 university partners and 232 programs under contract, compared to 38 partners and 226 programs at the end of last quarter. Ten (10) new programs were contracted with existing partners in the quarter; one partnership and four programs expired in the quarter.