Value Line, Inc. — Form 10-Q Summary
Reporting period: Unaudited third quarter and nine months ended January 31, 2016; comparisons are to the corresponding periods ended January 31, 2015. Fiscal year ends April 30. Value Line’s core business is publishing investment research and licensing proprietary data. It also receives non-voting revenue and profit interests from EULAV Asset Management Trust (EAM), which manages and distributes the Value Line Funds.
Financial performance
| Metric | Three months ended Jan. 31, 2016 | Nine months ended Jan. 31, 2016 |
|---|---|---|
| Revenue | $8.599 million, down 3.0% | $26.068 million, down 4.1% |
| Operating income | $557,000, down 34.5% | $2.342 million, down 20.9% |
| EAM revenue and profit interests | $1.919 million, down 5.2% | $5.901 million, down 1.6% |
| Income before tax | $2.609 million, down 12.2% | $8.458 million, down 7.6% |
| Net income | $1.913 million, down 12.1% | $6.024 million, down 2.8% |
| Diluted EPS | $0.20, versus $0.22 | $0.62, versus $0.63 |
| Operating margin | 6.5%, versus 9.6% | 9.0%, versus 10.9% |
Revenue mix and trends: Nine-month periodicals and related publications revenue was $24.200 million, down 3.3%; print revenue fell 6.5% while digital revenue was nearly flat, up 0.1%. Copyright data fees declined 14.0% to $1.868 million. Management attributed pressure to lower retail print revenue, promotional pricing, and fewer third-party copyright-data contracts/assets. Total product-line circulation was 4.4% higher year over year, but average prices were about 3% lower. Institutional sales orders rose 4.6% to $9.747 million.
Costs and margins: Nine-month expenses declined 2.1% to $23.726 million. Production and distribution costs rose 14.7%, mainly due to software amortization and digital hosting/vendor transition costs; advertising and promotion fell 16.5%, and salaries and benefits fell 3.0%. The nine-month effective tax rate was 28.78%, versus 32.35% in the financial-statement note; MD&A elsewhere cites 35.30% for the prior period, so the prior-year comparison is not consistent in the filing.
Cash, liquidity, debt and capital allocation
- Cash and cash equivalents were $10.351 million at January 31, 2016, including $9.641 million in short-term investments; available-for-sale securities were $4.550 million. Cash plus short-term securities was reported as $14.901 million, down from $15.506 million at April 30, 2015.
- Nine-month operating cash flow was $317,000, down from $1.427 million, primarily because of a smaller increase in prepaid subscription revenue/unearned revenue.
- Investing cash flow was $9.372 million, including $8.789 million in proceeds from securities sales and $5.915 million in EAM distributions. Financing cash outflow was $5.212 million, including $4.603 million of dividends and $609,000 of share repurchases. Ending cash increased by $4.477 million.
- Current assets were $17.923 million and current liabilities were $24.206 million, resulting in negative working capital of $6.283 million. Current and long-term unearned subscription revenue totaled $24.333 million, a key component of current liabilities.
- The filing reports no borrowings or fixed-maturity investments at period end. Total liabilities were $50.694 million, including a $21.528 million long-term deferred tax liability; these should not be confused with funded debt.
- Shareholders’ equity was $35.007 million. The quarterly dividend increased to $0.16 per share in fiscal 2016’s second quarter; the company repurchased 41,453 shares for $609,000 during the nine months, with $1.537 million remaining under its authorization.
Material changes, outlook and risks
- Revenue and profitability weakened versus the prior year, particularly operating income. EAM interest income was nearly stable for the nine-month period, but EAM’s profit-interest contribution fell 28.6% to $355,000. EAM-managed/distributed fund assets declined 6.6% year over year to $2.144 billion; management cited market movements and redemptions.
- The company sold dividend-paying ETF and inverse ETF positions during the period. Available-for-sale securities fell to $4.550 million from $9.632 million at April 30, 2015; the sales generated a $15,000 realized loss. Unrealized securities losses reduced nine-month comprehensive income by $153,000, net of tax.
- Management said cash and other liquid resources, future operating cash flow, and EAM interests should fund forecast liquidity needs for the next 12 months and that it did not anticipate borrowing during that period. It expects continued dividend-related cash outflows. No specific company revenue or earnings guidance was provided.
- Management’s economic discussion anticipated modest U.S. growth early in 2016, with potential improvement later, while noting global weakness and risks to growth. This is management commentary, not company-specific financial guidance.
- Key stated risks include subscriber retention and competition from free or low-cost online research; reliance on EAM interests and fluctuations in fund assets; copyright-data client departures; market and economic conditions; intellectual-property protection; key-person dependence; regulation; and cyberattacks or natural disasters. Management reported no material change to the prior 10-K risk factors, no legal proceedings, and effective disclosure controls.
- A new warehouse lease signed February 29, 2016 runs from approximately May 2016 through April 2024, with base rent of $192,880 in fiscal 2017, rising to $237,218 in fiscal 2024, plus certain operating costs and taxes. The existing New York office sublease ends February 2017.
Most important facts for investors to verify
- Whether subscription revenue, renewal trends, pricing and unearned revenue stabilize, particularly in retail print and digital products.
- Whether copyright-data contracts and sponsor assets continue to decline, including the client’s stated planned reassignment effective April 2016.
- How EAM fund assets, redemptions, fee waivers and EAM profit distributions affect Value Line’s recurring income.
- Whether operating cash flow can support dividends and capital needs given negative working capital and the timing of subscription receipts.
- The correct prior-year effective tax-rate comparison: the filing gives both 32.35% and 35.30% in different sections.