Value Line, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter and six months ended October 31, 2019, the second quarter and first half of fiscal 2020; comparisons are with the corresponding 2018 periods. Value Line publishes investment research and licenses its copyrights and proprietary ranking information. It also holds non-voting revenue and profit interests in EULAV Asset Management (EAM), accounted for under the equity method. Unless otherwise stated, amounts below are in millions of dollars.
Financial performance and position
| Metric | Three months 2019 | Three months 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Publishing revenue | $10.080 | $9.051 | $19.697 | $18.022 |
| Operating income | $2.629 | $1.760 | $4.654 | $3.030 |
| EAM revenue and profit interests | $3.058 | $2.384 | $5.929 | $4.655 |
| Income before taxes | $5.830 | $4.267 | $10.867 | $7.922 |
| Net income | $4.211 | $3.302 | $7.901 | $6.406 |
| Diluted EPS | $0.44 | $0.34 | $0.82 | $0.66 |
- First-half publishing revenue rose 9.3%; copyright fees grew 64.8% to $5.715 million, while periodicals and related publications revenue fell 3.9% to $13.982 million.
- First-half operating income increased 53.6% and net income increased 23.3%. Operating margin, calculated as operating income divided by publishing revenue, was 23.6% versus 16.8% for the first half; for the quarter it was 26.1% versus 19.4%.
- Operating expenses were nearly flat year over year for the first half, at $15.043 million. The effective tax rate rose to 27.29% from 19.14%, primarily due to state and local tax factors.
- First-half operating cash flow was $1.802 million, down from $3.416 million. Investing activities provided $0.594 million; financing activities used $4.258 million, including $3.865 million of dividends and $0.393 million of share repurchases. Cash, cash equivalents and restricted cash ended at $5.100 million.
- At October 31, cash and short-term securities totaled $26.321 million; working capital was $8.258 million. Total assets were $101.605 million. The company reported no conventional borrowings; operating lease liabilities were $9.867 million ($0.925 million current and $8.942 million long term).
- Accounts receivable rose to $4.320 million from $1.504 million at April 30. Unearned revenue was $22.749 million, down from $25.483 million at April 30. The EAM investment was $59.186 million.
Changes, outlook, risks and unusual items
- Growth was led by copyright fees and EAM interests: first-half EAM income rose 27.4% to $5.929 million. Assets in EAM-managed or distributed Value Line funds were $3.50 billion, up 36% year over year; the filing cites market appreciation and positive net flows, partly offset by redemptions in eight of eleven funds.
- Subscription trends were weaker: total product-line circulation was down 6.1% year over year, including print circulation down 7.1% and digital circulation down 4.6%. Periodicals revenue declined despite the overall publishing revenue increase.
- Management said cash resources, expected operating cash flows and EAM interests should cover liquidity needs for the next 12 months and that it does not anticipate borrowing during that period. The company expects dividend payments to continue; dividends declared were $0.20 per share for each of the first two fiscal quarters, versus $0.19 per share in the comparable prior-year quarters. No formal earnings or revenue guidance was provided.
- Management noted a possible 5%–10% reduction in fees from the largest ETF copyright arrangement during fiscal 2020, based on current assets, while also noting that ETF assets had continued to grow. A single customer generated 29.0% of first-half publishing revenue.
- The company adopted lease accounting Topic 842 in May 2019, recording a $9.575 million right-of-use asset and $10.340 million lease liability at adoption. This accounting change materially increased reported property and equipment and liabilities; it did not represent a new borrowing.
- Key stated risks include subscription retention, market and economic conditions, EAM and copyright assets under management, competition, intellectual-property protection, significant-customer collections, regulation, and cyber or other disruptive events. Management described a modest-growth economic outlook but flagged trade and political uncertainties. No legal proceedings were reported; management expected no material effect from the ongoing federal tax audit.
Important facts for investors to verify
- Whether copyright-fee growth and the increase in EAM-related income are sustainable, and how exposed they are to market levels, fund flows and the largest ETF’s fee negotiations.
- Whether declining circulation and subscription revenue stabilize, and whether lower unearned revenue and higher receivables affect subsequent cash generation.
- The concentration risk: one customer accounted for 29.0% of first-half publishing revenue.
- The company’s liquidity assumptions, lease-payment commitments and capacity to sustain dividends and repurchases; management’s no-borrowing expectation covers the next 12 months.
- The drivers and persistence of the higher effective tax rate, as well as the outcome of the federal tax audit.