Value Line, Inc. — Form 10-Q Summary
Business context and period: Value Line publishes investment research and licenses proprietary data. It also receives non-voting revenue and profit interests in EULAV Asset Management Trust (EAM), which operates the asset-management and mutual-fund distribution businesses. This report covers the three months ended July 31, 2014, the first quarter of fiscal 2015, compared with the three months ended July 31, 2013. Financial amounts below are in thousands of dollars unless noted.
Financial results
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $9,070 | $8,952 | Up 1% |
| Operating expenses | $8,008 | $8,483 | Down 5.6% |
| Operating income | $1,062 | $469 | Up 126% |
| EAM revenue and profit interests | $2,022 | $1,769 | Up 14% |
| Income before taxes | $3,125 | $2,276 | Up 37% |
| Net income | $2,036 | $1,445 | Up 41% |
| Diluted EPS | $0.21 | $0.15 | Up 40% |
Operating margin was approximately 11.7%, versus 5.2% a year earlier; net margin was approximately 22.4%, versus 16.1%. Net income included $2,022 of EAM interests, reported below operating income, and $41 of net securities income. The effective tax rate was 34.86%, compared with 36.51%.
- Revenue mix: Print publication revenue fell 9% to $4,247, while digital publication revenue rose 14% to $4,026. Copyright data fees increased 5% to $797.
- Cash flow: Operating activities provided $1,353, compared with $790 used in the prior-year quarter. Investing activities provided $1,285, including $1,887 of EAM distributions; financing activities used $1,514, including $1,472 of dividends. Cash and cash equivalents ended at $6,912.
- Liquidity and balance sheet: Cash and short-term securities totaled $16,007. Current assets were $18,674 and current liabilities $26,875, resulting in reported negative working capital of $8,201, largely reflecting $20,663 of current unearned revenue. Total assets were $87,414; shareholders’ equity was $33,735. The filing reports no borrowings and management did not anticipate borrowing in the next 12 months.
- Investments and distributions: Available-for-sale securities were $9,095. The equity-method investment in EAM was $57,985. The company declared a $0.15-per-share dividend and repurchased 3,053 shares for approximately $42.
Material changes and management commentary
- Operating income improved as expenses fell, particularly office and administration costs, which declined 36% to $1,278. Management attributed the decrease primarily to $615 lower rent expense and one fewer direct-mail campaign. The prior-year quarter included $304 of one-time overlapping rent.
- Print circulation was 6.4% lower year over year, and management expects print revenues to continue declining over the long term. Digital circulation grew 12.1%; digital revenue gains included growth in both institutional and retail subscriptions.
- New subscription sales orders declined, which management attributed to reduced direct-marketing efforts; conversion and renewal orders increased with greater in-house telemarketing activity. Unearned subscription revenue was $24,736, up 5.6% year over year but down 1.5% from April 30, 2014.
- Third-party assets supporting copyright data contracts were $2.35 billion, versus $2.8 billion a year earlier. Earlier portfolio reallocations were expected to reduce annual pretax copyright-data revenue by about $1.5 million cumulatively beginning in the fourth quarter of fiscal 2014; management said replacement arrangements could take considerable time and might not replace a material portion.
- Total assets in Value Line funds managed and/or distributed by EAM were $2.311 billion, up 3.5% year over year. Value Line’s quarterly share of EAM revenues was 49.18%, compared with 46.66% a year earlier. Management cited market appreciation partly offset by redemptions and sales.
Outlook, risks and other items
- No specific company earnings or revenue guidance was provided. Management stated that cash, liquid assets, and expected operating and EAM-related cash flows should cover forecast liquidity needs for the next 12 months.
- Management’s economic commentary was generally constructive about U.S. growth and employment, while noting risks from overseas weakness, potential inventory drawdown, and market conditions. These are management views, not company financial guidance.
- Key disclosed risks include subscriber retention and competition from free or low-cost online research; continued print declines; dependence on EAM distributions and fluctuations in fund assets; copyright-data partner and fee-scale pressures; market and economic conditions; intellectual-property protection; regulation; key-personnel dependence; and cybersecurity or natural-disaster events.
- The company’s $9,095 securities portfolio included inverse equity ETFs. Unrealized securities losses reduced other comprehensive income by $85 after tax during the quarter. The company said it had no fixed-maturity investments and therefore no interest-rate risk from such holdings.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no legal proceedings and no material changes to the risk factors in the annual report.
Important facts for investors to verify
- Whether digital subscription growth and renewal activity can offset declining print circulation and reduced new-order activity.
- Actual revenue effects of the copyright-data asset reallocations and the prospects for new licensing arrangements.
- EAM’s operating results, distributions, and managed fund assets, given the size of Value Line’s EAM investment and the contribution of EAM interests to pretax income.
- The quality of reported liquidity: negative working capital is substantially affected by subscription revenue collected in advance; review unearned-revenue trends and cash conversion.
- Performance and market exposure of the available-for-sale portfolio, particularly the inverse ETFs, and the continuation of dividends and share repurchases.