VALUE LINE INC quarterly report, Q3 FY2017

Value Line, Inc. — Q3 FY2017 Form 10-Q

Reporting period: Quarter and nine months ended January 31, 2017; comparisons are with the periods ended January 31, 2016. Amounts are in millions of dollars except per-share data. The company’s core business is publishing investment research and licensing copyright data; it also receives revenue and profit interests from Eulav Asset Management Trust (EAM).

Financial performance

Metric	Quarter	Prior-year quarter	Nine months	Prior-year nine months
Total revenue	$8.647	$8.599	$33.941	$26.068
Operating income (loss)	($0.212)	$0.557	$7.948	$2.342
Income from EAM interests	$1.934	$1.919	$5.782	$5.901
Net income	$1.445	$1.913	$9.283	$6.024
Diluted EPS	$0.15	$0.20	$0.96	$0.62

Quarterly publishing revenue was $8.647 million, up 0.6%; subscription publications fell 6.4% to $7.468 million while copyright data fees rose 89.5% to $1.179 million.
For the nine months, subscription publications declined 6.0% to $22.747 million. Print revenue fell 11.5% and digital revenue 0.6%; copyright data fees increased 64.4% to $3.071 million.
Nine-month operating income includes an $8.123 million gain on sale of the distribution facility. Excluding that gain, operating results imply a loss of approximately $0.175 million, versus $2.342 million operating income in the prior-year period.
Quarterly operating margin was approximately -2.5%; nine-month reported operating margin was approximately 23.4%, elevated by the facility sale. Nine-month net income also includes the sale’s approximately $5.28 million after-tax contribution.
Operating expenses rose 10.2% in the quarter and 9.6% for nine months. Higher salaries and benefits, production and distribution, and office costs were partly offset by lower advertising. Increased software amortization and less capitalization of internal development costs were significant expense drivers.
Effective tax rate for the nine months was 33.48%, versus 28.78%, with the facility-sale gain and state tax factors affecting the comparison.

Cash flow, balance sheet and capital allocation

Nine-month operating cash flow was a use of $5.241 million, versus a source of $0.317 million. Management cited higher income-tax payments, subscription-related working-capital changes, copyright-data receipt timing and vendor-payment timing.
Investing activities provided $4.293 million, including $11.555 million of sale proceeds, partly offset by $10.089 million invested in securities and $0.879 million in property and equipment. Financing activities used $5.646 million, principally dividends of $4.965 million and share repurchases of $0.681 million.
Cash and cash equivalents were $6.528 million at January 31, 2017, down from $13.122 million at April 30, 2016. Cash plus short-term securities was $21.473 million, compared with $16.759 million at year-end.
Working capital was $1.502 million, versus negative $6.346 million at April 30, 2016; current liabilities include $18.947 million of unearned revenue. Current assets were $25.557 million and current liabilities $24.055 million.
Total assets were $86.966 million and shareholders’ equity $38.395 million. The filing reports no borrowings; management said it did not anticipate borrowing during the next 12 months.
Quarterly dividends were $0.17 per share. The company repurchased 41,461 shares for $0.681 million during the nine months; no shares were repurchased in the third quarter. $0.669 million remained under the repurchase authorization.

Material changes, outlook and risks

The July 2016 sale of the 85,000-square-foot distribution facility generated $11.555 million in proceeds and an $8.123 million pre-tax gain. Fulfillment operations moved to leased warehouse space.
The company’s new New York office sublease runs through November 2027, with first-year base rent of $1.126 million and scheduled annual increases of 2.25%. Management said the arrangement reduces initial annual rental expenditure by 23%, considering the first six months of free rent; a $0.417 million landlord allowance is available for relocation costs or additional free rent.
Management believes liquid resources, operating cash flows and EAM interests will meet forecast liquidity needs for the next 12 months. No formal earnings or revenue guidance is provided.
Fund assets managed or distributed by EAM were $2.302 billion, up 7.4% year over year, reflecting market appreciation partly offset by redemptions. Value Line’s EAM revenue and profit interests generated $5.782 million for the nine months, down 2.0%.
Key business risks include declining subscriber circulation, competition from free or low-cost online research, reliance on EAM interests and fluctuations in fund assets, market conditions, regulation, intellectual-property protection, cyber events and dependence on key personnel. The company reported no material change to previously disclosed risk factors.
The Department of Labor examined the employee plan; the company decided to reimburse it $0.277 million for fees received indirectly from EAM after the 2010 restructuring. The company reported no legal proceedings and stated that disclosure controls were effective.

Important facts for investors to verify

Whether subscription declines and circulation losses continue, particularly in retail print and digital products, and whether institutional sales can offset them.
Copyright data revenue durability: the filing cites three contracts representing $3.2 billion in sponsored assets, versus four contracts and $1.3 billion a year earlier.
How much reported earnings growth depends on the one-time facility-sale gain; nine-month operating results excluding that gain were a loss.
EAM fund-asset trends, redemptions, fee waivers and the sustainability of Value Line’s contractual revenue and profit interests.
Cash conversion and liquidity, including the effects of taxes, advance subscription collections, dividends, lease obligations and planned software upgrades.
The long-term office and warehouse lease commitments, and the execution and cost of the planned fiscal 2018 product-production-cycle software upgrade.