Value Line, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended January 31, 2012 (fiscal 2012). The filing is dated March 15, 2012. Financial amounts below are in millions unless stated otherwise.
Business context
Value Line’s principal business is publishing investment research and licensing proprietary investment data. Following its December 2010 restructuring, it no longer consolidates the investment-management and fund-distribution businesses; instead, it holds non-voting revenue and profit interests in EULAV Asset Management Trust (EAM). Publishing is its sole reportable operating segment.
Financial performance
| Metric | Three months ended Jan. 31, 2012 | Nine months ended Jan. 31, 2012 |
|---|---|---|
| Total revenue | $9.00; down 25.3% year over year | $27.51; down 29.7% |
| Operating income | $1.82, versus $0.23 | $4.98, down 10.5% |
| Operating margin | 20.3% | 18.1% |
| EAM revenue and profit interests | $1.46 | $4.37 |
| Net income | $1.84, versus $31.44 | $5.84, versus $34.84 |
| Diluted EPS | $0.19, versus $3.15 | $0.59, versus $3.49 |
| Operating cash flow | $1.74 for nine months, versus $7.33 |
Prior-year net income included a $50.51 million non-cash gain on deconsolidation of the former subsidiaries, as well as restructuring costs and $1.77 million in non-cash postemployment compensation expense. Comparisons of total revenue are also affected by the fact that prior-year results included investment-management fees before the restructuring; current EAM interests are reported below operating income.
Publishing revenue was $9.00 million for the quarter, down 6.5%, and $27.51 million for nine months, down 3.3%. Periodicals and publications revenue fell 6.0% and 3.8%, respectively; copyright data fees fell 10.8% in the quarter but rose 1.5% year to date. Nine-month expenses declined 32.9%, partly because restructuring and investment-management costs were no longer incurred. Lower revenue and the changed business perimeter make headline year-over-year comparisons less representative of continuing operations.
Liquidity, balance sheet and capital returns
- At January 31, cash and cash equivalents were $12.54 million and available-for-sale securities were $3.08 million, totaling $15.61 million in cash and short-term securities. Current assets were $17.69 million and current liabilities $25.93 million, resulting in negative working capital of $8.24 million. Current liabilities include $20.80 million of unearned subscription revenue.
- Total assets were $82.84 million; total liabilities were $50.14 million; shareholders’ equity was $32.70 million. The filing reports no borrowings and no fixed-maturity investments at January 31.
- Nine-month investing cash flow was positive $10.91 million, including $4.34 million of EAM distributions and $2.99 million of capitalized software spending. Financing cash outflow was $6.91 million, including $5.97 million of dividends and $0.95 million of share repurchases.
- The board reduced the quarterly dividend from $0.20 to $0.15 per share in January 2012. The repurchase authorization expired January 15, 2012, and was not renewed; no shares were repurchased in the quarter ended January 31.
- Management said available liquid resources and expected operating and EAM cash flows should meet forecast liquidity needs for the next 12 months, and it did not anticipate borrowing during that period.
Changes, outlook and risks
- Retail subscription pressures persisted: total product-line circulation was about 3% lower year over year, print circulation was down 6%, and the flagship Investment Survey renewal rate improved to 78% from 76%. Management said new subscriber additions were insufficient to offset non-renewals and expected the negative subscription trend to continue until new products are developed and marketed.
- Institutional digital sales orders rose 13% to $7.84 million for nine months, but growth did not fully offset lost retail revenue. The company launched a refreshed website, single sign-on, e-commerce features and a new fulfillment system; ValueLinePro.com launched in March 2012. Management said it could not predict when digital initiatives would reverse declining retail revenue or whether they would succeed.
- Value Line Funds’ assets under EAM management were $2.08 billion at January 31, 2012, down 3.6% year over year and $169 million (8%) from April 30, 2011, due to market depreciation and net redemptions. EAM’s nine-month net income was $0.24 million after Value Line’s revenue interest and before profit-interest distributions. Value Line’s recorded EAM investment was $56.31 million; its disclosed maximum exposure to loss was that investment amount.
- Management’s macroeconomic view was for U.S. GDP growth of 2.0%–2.5% in 2012 and modestly above that range in 2013, assuming global conditions did not deteriorate. This is economic commentary, not company earnings guidance.
- Key stated risks include subscription retention and competition from free or low-cost online research; dependence on EAM interests and EAM’s assets under management; market and economic volatility; key-personnel and intellectual-property risks; regulation and litigation; and cyberattacks or natural disasters. The company said there were no material changes to its previously disclosed risk factors.
- The unpaid estimated costs associated with the SEC Fair Fund and related settlement were $0.30 million at January 31, 2012. A separate derivative-shareholder case was settled with $2.9 million paid by parties other than Value Line on February 6, 2012; the filing says it had no material effect on the company.
Important facts for investors to verify
- Underlying publishing performance, especially subscriber counts, renewal rates, retail versus institutional digital revenue, and whether new digital products improve retention.
- EAM’s distributions and operating performance, including fund assets, redemptions, fee waivers, and Value Line’s contractual revenue and profit interests.
- Cash generation relative to dividends, capitalized software investment, and the working-capital deficit driven in large part by unearned subscription revenue.
- The assumptions and progress behind management’s digital initiatives and 12-month liquidity assessment; the filing provides no formal company revenue or earnings forecast.
- Completion and final costs of the Fair Fund administration and any developments in regulatory or litigation matters.