Value Line, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 31, 2013; comparisons are to the corresponding 2012 periods. Amounts below are in millions of dollars unless stated otherwise. The company publishes investment research and licenses proprietary data; it also receives revenue and profit interests from EULAV Asset Management (EAM).
Financial performance
| Metric | Three months 2013 | Three months 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $9.013 | $8.809 | $17.965 | $17.747 |
| Operating income | $0.646 | $0.920 | $1.115 | $2.272 |
| EAM revenue and profit interests | $1.854 | $1.529 | $3.623 | $3.002 |
| Income before taxes | $2.534 | $2.479 | $4.810 | $5.330 |
| Net income | $1.616 | $1.572 | $3.061 | $3.348 |
| Diluted EPS | $0.16 | $0.16 | $0.31 | $0.34 |
- For the six months, revenue rose 1.2%, but operating income fell 50.9% and net income fell 8.6%. Second-quarter net income increased 2.8% despite lower operating income.
- Operating margin was approximately 7.2% for the quarter and 6.2% for the six months, versus 10.4% and 12.8%, respectively, a year earlier. Six-month net margin was approximately 17.0%, down from 18.9%.
- Six-month revenue from periodicals and related publications increased 4.1% to $16.502 million. Digital revenue rose 16.3% to $7.235 million; print revenue fell 3.8% to $9.267 million. Copyright data fees declined 22.7% to $1.463 million.
- Operating expenses increased 8.9% for the six months to $16.850 million. Salaries, production and distribution, office and administration, and advertising all increased.
- Six-month operating cash flow was negative $0.404 million, compared with negative $0.721 million in 2012. Investing activities provided $0.767 million, including $3.373 million of EAM distributions; financing used $3.308 million, mainly dividends and share repurchases. Cash declined $2.945 million to $3.895 million.
- At October 31, cash and cash equivalents were $3.895 million and available-for-sale securities were $7.966 million, totaling $11.861 million in cash and short-term securities. Working capital was negative $10.645 million, principally reflecting $20.371 million of current unearned subscription revenue. Total assets were $83.358 million; total liabilities were $50.575 million. The filing reports no borrowings and says management did not anticipate borrowing over the next 12 months.
- The company declared dividends of $0.15 per share in each quarter. It repurchased 39,151 shares for $0.349 million during the six months; $2.469 million remained under the $3 million authorization at October 31.
Changes, outlook and risks
- Digital circulation was 42.7% higher year over year and total product-line circulation was 8.3% higher, while print circulation fell 2.7%. Retail print revenue remained pressured by declining subscribers and competition from free or low-cost online and brokerage research.
- Copyright-fee revenue weakened as assets covered by four third-party contracts fell to $2.9 billion from $3.4 billion, following a portfolio shift to a new subadvisor. Separately, total assets in Value Line funds managed or distributed by EAM rose 13.2% to $2.318 billion.
- Six-month operating income included $0.771 million of overlapping rent for the former office during the lease extension. The company moved to new offices in August 2013; management said the new sublease reduces annual rental expense. Six-month rent expense nevertheless increased to $1.638 million from $1.255 million.
- Management expected new digital product launches to begin in early 2014; a preview of a new equities digital product launched in August 2013. The filing notes modest delays in completing and quality-checking a central data database.
- Management said liquid resources and anticipated operating and EAM cash flows should cover forecast liquidity needs for the next 12 months. No specific earnings or revenue guidance was provided. Management described its market view as cautious, considering equities fairly valued and noting potential effects from rising interest rates and possible Federal Reserve tapering.
- Key risks include subscription retention and digital competition, intellectual-property protection, dependence on EAM interests and fund assets under management, market and economic changes, regulation, key personnel, and cybersecurity or natural disasters. The company has equity-price exposure through its available-for-sale portfolio; it reported no fixed-maturity investments at period-end and therefore no interest-rate risk from such securities.
- No legal proceedings were reported. New York City tax examinations for fiscal 2010 and 2011 were ongoing; management did not expect a material financial-statement effect. Disclosure controls were deemed effective, with no material change in internal control reported.
Investor verification priorities
- Track whether digital growth and subscriber circulation gains can offset continued retail print declines and rising operating costs.
- Verify the timing and execution of planned digital launches and completion of the data-platform work.
- Monitor copyright-data assets and fees, and EAM fund assets, distributions, and the company’s dependence on those interests.
- Assess cash generation against dividends, repurchases, software investment, and negative working capital driven by unearned revenue.
- Review the former-office lease overlap, new-sublease costs, and the outcome of the tax examinations.