Value Line, Inc. — Form 10-Q Summary
Reporting period: Three months ended July 31, 2012, the first quarter of fiscal 2013. Unless otherwise noted, financial amounts below are in millions of dollars. Comparisons are with the three months ended July 31, 2011; balance-sheet comparisons are with April 30, 2012.
Business context
Value Line publishes investment periodicals and related products and licenses proprietary investment data to third parties. It also retains non-voting revenue and profit interests in EULAV Asset Management (EAM), an unconsolidated investment manager for the Value Line Funds. Subscription revenue is recognized over the subscription term, with unearned amounts recorded as liabilities.
Key financial results
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Revenue | $8.938 | $9.370 | -4.6% |
| Operating expenses | $7.586 | $7.732 | -1.9% |
| Operating income | $1.352 | $1.638 | -17.5% |
| EAM revenue and profit interests | $1.473 | $1.572 | -6.3% |
| Income before taxes | $2.851 | $3.221 | -11.5% |
| Net income | $1.776 | $2.076 | -14.5% |
| Diluted EPS | $0.18 | $0.21 | -14.3% |
- Operating margin was approximately 15.1%, down from 17.5%; net margin was approximately 19.9%, down from 22.2%.
- Publishing revenue fell in both major categories: periodicals and related publications decreased 4.4% to $8.028 million, and copyright data fees decreased 6.4% to $0.910 million. Print revenue declined 5.9%; digital revenue declined 2.0%.
- Advertising and promotion expense fell 27.6%, while salaries and benefits rose 3.8% and production and distribution expense rose 10.8%, including higher software amortization.
- Cash from operating activities was negative $0.552 million, versus negative $0.526 million. Investing cash flow was negative $0.225 million, compared with positive $3.063 million in the prior-year quarter, which included $2.998 million of fixed-income security proceeds. Financing cash flow was negative $1.484 million, primarily dividends. Cash and cash equivalents declined $2.261 million to $9.781 million.
- At July 31, cash and cash equivalents plus available-for-sale securities totaled $14.007 million. Current assets were $16.643 million and current liabilities $25.467 million, resulting in negative working capital of $8.824 million, largely reflecting deferred subscription revenue.
- Total assets were $82.927 million, total liabilities $50.295 million, and shareholders’ equity $32.632 million. The filing reports no borrowings and management did not anticipate borrowing in the next 12 months. Long-term deferred tax liabilities were $20.772 million, primarily related to the prior deconsolidation gain.
Material changes and management commentary
- Core renewal rates for the flagship Value Line Investment Survey were 71% for the 12 months ended July 31, versus 81% in the prior fiscal year. Management said new subscribers were not offsetting non-renewals. Print circulation was down 8.7% year over year.
- Institutional gross sales orders increased 15.8% to $2.318 million, but management said this growth was insufficient to offset lost retail revenue. Deferred subscription income was $24.592 million, down 3.2% year over year.
- Management attributed subscription pressure to free or low-cost online research, brokerage research alternatives, reduced retail investor activity, market volatility, and a sluggish economic recovery. It expects the negative subscription revenue trend may continue until new products are developed and marketed.
- Technology initiatives included a new fulfillment system, e-commerce platform, single sign-on, website refresh, and institutional sales website. Management described these as groundwork for a new product offering targeted for mid-2013, but said timing and success are uncertain.
- Assets in the Value Line Funds managed by EAM were $2.021 billion, 6.0% below the prior year, reflecting net redemptions. Value Line’s EAM-related income declined to $1.473 million. EAM’s money-market fund faced low-rate economics and expense subsidies; EAM planned to exit that business in August 2012 through a merger into a third-party fund.
- The company declared dividends of $0.15 per share for the quarter, compared with $0.20 in the prior-year quarter. Management said cash, liquid assets, and expected operating and EAM-related cash flows should fund forecast liquidity needs for the next 12 months.
Risks, contingencies, and other items
- Key disclosed risks include continued subscription declines, competition, protection of intellectual property, dependence on EAM-related interests, fluctuations in EAM assets under management, regulation, and dependence on key personnel.
- The company’s principal office lease was due to expire in May 2013 and was non-renewable; management identified securing replacement space as a risk.
- The company had no fixed-maturity investments at July 31, 2012 and therefore reported no interest-rate risk from such securities. Its $4.226 million available-for-sale portfolio was exposed to equity-price fluctuations.
- 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 prior annual report.
- No formal earnings or revenue guidance was provided. Management cautioned that quarterly results may not indicate full-year results.
Most important facts for investors to verify
- Whether renewal rates and retail circulation stabilize, and whether institutional growth can offset retail subscription losses.
- Progress, launch timing, and commercial performance of the planned digital products targeted for mid-2013.
- Changes in EAM-related income, fund assets, redemptions, and the execution and effects of the money-market fund exit.
- Liquidity trends, including operating cash flow, dividend payments, and the significance of negative working capital driven by unearned revenue.
- Replacement office arrangements before the May 2013 lease expiration and any resulting costs.