Business Context and Reporting Period
John Wiley & Sons, Inc. reported results for the three months ended July 31, 2020, the first quarter of fiscal 2021. Wiley operates through Research Publishing & Platforms, Academic & Professional Learning, and Education Services. Results reflect the continuing effects of COVID-19, including disruption to physical books, test preparation, in-person training, retail activity, and university budgets, partially offset by growth in open research, digital courseware, and online education.
Key Financial Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|
| Revenue | $431.3 million | $423.5 million | Up 2% |
| Operating income | $30.0 million | $4.6 million | Up $25.5 million |
| Operating margin | 7.0% | 1.1% | Up approximately 5.9 percentage points |
| Net income | $16.3 million | $3.6 million | Up $12.7 million |
| Diluted EPS | $0.29 | $0.06 | Up $0.23 |
| Adjusted EBITDA | $81.8 million | $57.5 million | Up 42% |
| Calculated Adjusted EBITDA margin | 19.0% | 13.6% | Up approximately 5.4 percentage points |
| Cash flow from operations | $(120.8) million | $(94.2) million | Greater seasonal use of cash |
| Free cash flow less product development spending | $(145.1) million | $(124.6) million | Greater use of cash |
Revenue by Segment
| Segment | Q1 FY2021 Revenue | Year-over-Year Change | Adjusted EBITDA |
|---|
| Research Publishing & Platforms | $240.8 million | Up 5% reported; up 6% constant currency | $89.3 million, 37.1% margin |
| Academic & Professional Learning | $126.9 million | Down 12% | $18.5 million, 14.5% margin |
| Education Services | $63.6 million | Up 29% | $8.0 million, 12.5% margin |
- Operating and administrative expenses declined 5%, primarily from lower discretionary spending, employee-related costs, and strategic-planning fees.
- Restructuring and related charges declined to $2.2 million from $10.7 million.
- Interest expense declined to $4.6 million from $6.1 million despite higher average debt, reflecting lower borrowing rates.
- The effective tax rate increased to 45.1% from 8.6%, including a $6.7 million non-cash deferred tax expense from the U.K. statutory tax rate increase from 17% to 19%.
- Adjusted EPS was $0.42 versus $0.21, excluding restructuring, foreign-exchange effects, and the U.K. deferred tax remeasurement.
Liquidity, Debt, and Capital Allocation
- Cash and cash equivalents were $101.4 million at July 31, 2020, down from $202.5 million at April 30, 2020. Approximately 94% of cash was held outside the United States.
- Total debt was $846.7 million, compared with $775.0 million at April 30, 2020. Debt consisted primarily of a $1.25 billion revolving facility and a $250 million term loan facility.
- Unused borrowing capacity was approximately $648.1 million. Wiley was in compliance with its consolidated leverage and interest coverage covenants.
- Interest-rate swaps with $300.0 million of notional value hedged a portion of variable-rate debt. A hypothetical one-percentage-point increase in rates on $547.3 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $4.3 million.
- Cash flow from operations was seasonally negative because annual journal subscription collections generally occur in the second half of the fiscal year. Management estimated that approximately $30 million of customer payments were delayed into fiscal 2021.
- Wiley paid $19.2 million of dividends and increased the quarterly dividend to $0.3425 per share. Share repurchases were suspended; no shares were repurchased during the quarter.
Material Changes Versus the Prior Comparable Period
- Research Publishing & Platforms benefited from growth in open access and “read and publish” agreements. Approximately $4.0 million of revenue reflected journal renewals delayed by COVID-19.
- Academic & Professional Learning declined due to weaker print-book sales, retail closures, canceled exams, and lower classroom-dependent corporate training. Digital content and courseware grew.
- Education Services benefited from the January 2020 acquisition of mthree, which contributed approximately $12.4 million of incremental revenue, as well as growth in online program management.
- Cost reductions and business-optimization actions materially improved profitability. Wiley expects the restructuring actions to generate approximately $130 million of gross savings over three years, with most savings reinvested in the business.
- Goodwill increased to $1.134 billion and intangible assets increased to $829.2 million, primarily reflecting acquisition accounting and foreign-currency translation.
- Wiley adopted the current expected credit-loss standard on May 1, 2020, recording a $1.8 million cumulative adjustment to retained earnings. The filing states that the income statement and cash flow impact was immaterial.
Guidance, Outlook, Risks, and Unusual Items
- Wiley did not provide specific fiscal 2021 financial guidance because of uncertainty regarding COVID-19, university budgets, student enrollment, customer collections, and the duration of economic disruption.
- Management expects continued pressure on library budgets and journal pricing, challenges for print books, test preparation, and in-person training, and potential enrollment-related pressure in Education Services.
- Management expects continued growth in open access, research platforms, corporate solutions, digital content, digital courseware, and online education.
- Fiscal 2021 capital expenditures are expected to be approximately $100 million, focused on technology-enabled services, platforms, workflow automation, and process redesign.
- Management is pursuing cost reductions, real-estate rationalization, process reengineering, technology insourcing, and discretionary-spending controls. The CEO, executive leadership team, and Board agreed to temporary base-pay reductions.
- Key risks include COVID-19 effects on demand and collections, subscription-agent liquidity, customer concentration, foreign-currency volatility, variable-rate debt, sales-return estimates, integration of acquisitions, and the ability to realize restructuring savings.
- Print-book sales-return reserves increased to $39.4 million from $32.8 million. A one-percentage-point change in the estimated return rate could affect net income by approximately $0.3 million.
- Pending litigation was described as routine, with management stating that its resolution is not expected to materially affect the financial statements.
Most Important Facts for Investors to Verify
- Whether journal subscription renewals delayed by COVID-19 convert to revenue and cash collections in subsequent quarters.
- The pace of recovery in Academic & Professional Learning, particularly print books, test preparation, and corporate training.
- Enrollment, partner growth, and profitability trends in Education Services following the mthree acquisition.
- Progress toward the stated $130 million three-year gross savings target and the timing of additional restructuring charges.
- Debt repayment capacity, covenant headroom, variable-rate exposure, and the effect of seasonally negative operating cash flow.
- Whether the company can sustain the dividend while share repurchases remain suspended and capital expenditures increase.
- The ultimate impact of COVID-19 on customer credit losses, subscription-agent liquidity, university budgets, and student enrollment.
