Value Line, Inc. — Form 10-Q Summary
Business context and reporting period. The filing covers the three months ended July 31, 2018, Value Line’s fiscal 2019 first quarter (unaudited); comparisons are with the three months ended July 31, 2017. Value Line publishes investment research and licenses proprietary data. It also receives non-voting revenue and profit interests from EULAV Asset Management (EAM), which manages the Value Line Funds.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Publishing revenue | $8.971 | $8.914 | +0.6% |
| Operating expenses | $7.701 | $7.749 | -0.6% |
| Operating income | $1.270 | $1.165 | +9.0% |
| EAM revenue and profit interests | $2.271 | $2.136 | +6.3% |
| Income before taxes | $3.655 | $3.397 | +7.6% |
| Income tax provision | $0.551 | $1.182 | -53.4% |
| Net income | $3.104 | $2.215 | +40.1% |
| Diluted EPS | $0.32 | $0.23 | +39.1% |
| Operating cash flow | $1.512 | $2.978 | -49.2% |
Operating margin was approximately 14.1%, versus 13.1% a year earlier. Net margin was approximately 34.6%, versus 24.9%; the increase primarily reflects the lower federal corporate tax rate, not a comparable rise in operating profitability. Effective tax rates were 15.07% and 34.80%, respectively.
- Liquidity: At July 31, 2018, cash and cash equivalents were $4.992 million, available-for-sale securities were $18.870 million, and working capital was $2.617 million. Management reported cash and short-term securities of $23.862 million.
- Cash flow: Investing activities used $0.574 million and financing activities used $1.887 million. Cash, cash equivalents, and restricted cash ended the quarter at $5.461 million, down $0.949 million from the beginning of the period.
- Debt and obligations: The balance sheet reports no borrowings. Liabilities include $24.129 million of current and long-term unearned revenue and a $11.573 million deferred tax liability. Future minimum operating lease payments were reported at $12.833 million.
- Equity returns: The company declared a $0.19-per-share quarterly dividend ($1.841 million total) and repurchased 2,286 shares for $46,000.
Material changes and operating trends
- Periodical and related publication revenue fell 2.0% to $7.292 million: print revenue declined 1.9% and digital revenue declined 2.0%. Total product-line circulation was down 1.7% year over year; digital circulation fell 7.5%, while print circulation rose 2.6%.
- Copyright data fees increased 13.9% to $1.679 million. Sponsored assets under the three contracts rose to $4.4 billion from $3.9 billion.
- EAM interests contributed $2.271 million, up 6.3%; the revenue-interest portion slipped 0.5%, while the profit-interest portion rose 91.8%. Value Line’s EAM investment was $58.331 million.
- Advertising and promotion expense rose 15.7%; lower production and distribution and office and administration costs partly offset the increase.
- Operating cash flow was lower year over year. The company attributes the decline mainly to timing of tax payments and a smaller reduction in unearned prepaid revenue. Comparability is also affected by the adoption of a cash-flow accounting standard that reclassified EAM interest receipts—$2.3 million in 2018 and $2.1 million in 2017—from operating to investing activities.
Outlook, risks and unusual items
- Management expects liquid resources, operating cash flow, and EAM interest receipts to cover forecast liquidity needs for the next 12 months and does not anticipate borrowing during that period. It expects dividends and share repurchases to continue. No specific company revenue or earnings guidance was provided.
- Management’s economic commentary anticipated U.S. growth moderating to 3.0%–3.5% for the remainder of calendar 2018 and 2.5%–3.0% in 2019, while noting risks including policy missteps, trade tensions, and domestic political developments.
- Key business risks include subscription retention and new sales, competition and free or low-cost online research, market-driven changes in EAM assets and receipts, dependence on significant customers, intellectual-property protection, regulation, and cyberattacks or other disruptions. One customer generated 18.7% of quarterly publishing revenue.
- The Supreme Court’s South Dakota v. Wayfair decision may affect sales-tax collection obligations; the company was evaluating the impact. The company reported no material change to previously disclosed risk factors and no legal proceedings.
- The federal tax rate reduction from 35% to 21% materially lowered the quarter’s tax provision. The company also adopted revenue-recognition and cash-flow standards in fiscal 2019; it reported no material financial-statement impact from the revenue standard.
Important facts for investors to verify
- Whether subscription orders, circulation, and unearned subscription revenue stabilize, particularly for digital products.
- How much earnings and cash generation depend on EAM, its fund assets, market performance, and redemptions; EAM managed approximately $2.669 billion at July 31, 2018.
- Whether copyright data growth continues and whether the three related customer contracts and sponsored assets are retained.
- The recurring earnings and tax-rate outlook after the federal tax-law change, given that the quarter’s net-income growth materially exceeded operating-income growth.
- The effects of the Wayfair ruling, the 18.7% revenue concentration, and the reported lease commitments on future costs and cash flows.
- Cash-flow comparisons should be reviewed on a consistent basis because of the reclassification of EAM receipts between operating and investing activities.