John Wiley & Sons, Inc. — Form 10-Q Summary
Business context and reporting period
Wiley is a global provider of research publishing, digital platforms, academic and professional learning, and education services. This unaudited Form 10-Q covers the three and six months ended October 31, 2019, the second quarter of fiscal 2020, with comparisons to the prior-year periods. The principal segments are Research Publishing & Platforms, Academic & Professional Learning, and Education Services.
Financial performance and position
| Metric | Three months ended October 31 | Six months ended October 31 |
|---|---|---|
| Revenue | $466.2 million, up 4% | $889.7 million, up 4% |
| Operating income | $63.4 million, up 10% | $68.0 million, down 27% |
| Net income | $44.7 million, up 2% | $48.3 million, down 31% |
| Diluted EPS | $0.79, versus $0.76 | $0.85, versus $1.21 |
| Adjusted EPS | $0.85, down 4% | $1.06, down 19% |
| Adjusted EBITDA | $110.0 million, versus $107.1 million | $167.5 million, versus $177.3 million |
- Reported operating margin was approximately 13.6% for the quarter and 7.6% for the six-month period, compared with approximately 12.8% and 10.9%, respectively, in the prior-year periods.
- Research Publishing & Platforms revenue increased 2% reported and 4% at constant currency for both the quarter and six months. Six-month adjusted EBITDA increased 5% to $156.5 million.
- Academic & Professional Learning revenue declined 6% for the quarter and 7% for the six months. Six-month adjusted EBITDA declined 27% to $77.4 million, reflecting market-driven weakness in book publishing and higher investment costs.
- Education Services revenue increased 80% for the quarter and 75% for the six months, primarily from the Learning House acquisition. Six-month adjusted EBITDA increased to $8.0 million from $0.7 million.
- Cash and cash equivalents were $107.7 million at October 31, 2019, compared with $92.9 million at April 30, 2019. Approximately 82% of cash was held outside the United States.
- Net cash used in operating activities was $99.5 million for the six months, improving from $116.6 million in the prior year. Free cash flow less product development spending was negative $155.7 million, versus negative $163.5 million.
- Investing cash outflows were $134.4 million, including $74.2 million for acquisitions and $44.5 million for technology, property and equipment. Financing cash inflows were $249.3 million, primarily reflecting debt borrowings.
- Total debt was approximately $794.7 million at October 31, 2019, compared with $478.8 million at April 30, 2019. Unused borrowing capacity was approximately $705.8 million. The company was in compliance with its leverage and interest coverage covenants.
- The company adopted the lease accounting standard on May 1, 2019, recognizing $145.9 million of operating lease right-of-use assets and $183.0 million of present-value operating lease liabilities at October 31, 2019.
Material changes versus the prior comparable period
- Revenue growth was driven by Education Services and Research Publishing & Platforms, offset by declines in Academic & Professional Learning.
- Six-month profitability weakened despite revenue growth. Higher cost of sales, operating expenses, amortization, restructuring charges, and interest expense more than offset the revenue increase.
- Interest expense doubled to $12.9 million for the six months, primarily because of higher average debt balances used to fund acquisitions and a higher effective borrowing rate.
- The company completed the acquisition of Zyante Inc. (zyBooks) on July 1, 2019 for preliminary consideration of approximately $57.0 million, and acquired Knewton and other smaller businesses. These transactions added approximately $46.8 million of goodwill during the six months.
- Foreign exchange transaction losses declined to less than $0.1 million from $1.8 million in the prior-year six-month period. Foreign currency translation produced a $2.8 million comprehensive-income gain versus a $60.7 million loss in the prior year.
- Cash collections and contract liabilities remained highly seasonal. Current contract liabilities declined to $248.7 million from $507.4 million at fiscal year-end as deferred subscription revenue was recognized.
- The quarterly dividend increased to $0.34 per share from $0.33, and the company repurchased 551,847 Class A shares during the six months for $25.0 million.
Guidance, outlook, risks and unusual items
- Fiscal 2020 outlook was reaffirmed and updated for zyBooks: revenue of $1.855 billion to $1.885 billion, adjusted EBITDA of $357 million to $372 million, adjusted EPS of $2.35 to $2.45, and free cash flow of $210 million to $230 million.
- Management now expects Academic & Professional Learning revenue to decline at a low single-digit rate for fiscal 2020, compared with its previous expectation of slight growth. Education Services adjusted EBITDA margin is expected to be in the mid- to high-single-digit range for the full year.
- The multi-year Business Optimization Program generated $14.0 million of charges during the six months. Management expects total charges of approximately $15 million to $20 million and gross savings of approximately $100 million over three years, with most savings reinvested in the business.
- The company adopted a new $1.25 billion five-year revolving facility and a $250 million five-year term loan. Approximately $595.4 million of variable-rate debt was unhedged at October 31, 2019; a 1% annual change in interest rates would affect net income and cash flow by approximately $4.5 million.
- Key risks include weakness in book publishing and the used-book market, seasonality of education and journal subscriptions, financial condition of subscription agents and major retailers, foreign exchange movements, interest-rate exposure, integration of acquisitions, intellectual-property protection, and execution of cost savings.
- Sales-return estimates are material: the print-book sales-return reserve net liability was $22.5 million. A 1% change in the estimated return rate could affect net income by approximately $0.8 million.
- Routine litigation was not expected to have a material effect. The company reported approximately $0.2 million of revenue from sales to certain publicly funded Iranian institutions and stated that it believes the transactions comply with applicable sanctions.
- Disclosure controls were assessed as effective. Zyante was excluded from management’s internal-control evaluation while integration is ongoing.
Important facts for investors to verify
- Whether Academic & Professional Learning weakness stabilizes and whether the revised fiscal 2020 outlook remains achievable.
- The pace and quality of Education Services growth following the Learning House acquisition, including sustainable margins after marketing and program costs.
- Debt reduction, interest expense, covenant headroom, and the impact of variable interest rates.
- Actual restructuring charges, savings realization, and the extent to which planned savings are reinvested rather than converted into operating-margin expansion.
- Operating cash flow in the second half of the fiscal year, when seasonal journal-subscription collections are expected, and achievement of the $210 million to $230 million free-cash-flow outlook.
- Acquisition integration, purchase-price allocation changes, potential impairment of goodwill or intangible assets, and the effectiveness of controls as Zyante is integrated.