Value Line, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 31, 2014. Income statement and cash flow amounts are in thousands, except per-share data. Comparisons are with the corresponding 2013 periods.
Business context
Value Line’s principal business is publishing investment research and periodicals and licensing proprietary copyright data. Its former investment-management business is operated by EULAV Asset Management Trust (EAM); Value Line retains non-voting revenue and profit interests and accounts for its investment in EAM under the equity method.
Financial performance
| Metric | Three months ended Oct. 31, 2014 | Three months ended Oct. 31, 2013 | Six months ended Oct. 31, 2014 | Six months ended Oct. 31, 2013 |
|---|---|---|---|---|
| Revenue | $9.261 million | $9.013 million | $18.331 million | $17.965 million |
| Operating income | $1.046 million | $0.646 million | $2.108 million | $1.115 million |
| Income from EAM interests | $1.949 million | $1.854 million | $3.971 million | $3.623 million |
| Net income | $1.982 million | $1.616 million | $4.018 million | $3.061 million |
| EPS, basic and diluted | $0.20 | $0.16 | $0.41 | $0.31 |
- For the six-month period, revenue increased 2.0%, operating income 89.1%, and net income 31.3%. Operating margin was approximately 11.5%, versus 6.2% a year earlier; net margin was approximately 21.9%, versus 17.0%.
- Publishing revenue rose 2.0% for six months: digital publication revenue grew 12.4%, while print revenue fell 6.2%. Copyright data fees increased 3.3% in the period.
- Operating expenses declined 3.7% for six months, primarily reflecting lower rent expense. The prior-year period included $771,000 of one-time overlapping rent; current-period expenses also included higher software amortization.
- Cash from operating activities was negative $261,000, compared with negative $404,000 in the prior-year half. Investing activities provided $2.642 million, including $3.889 million of EAM distributions; financing activities used $3.015 million, mainly for dividends and treasury-stock purchases. Cash and cash equivalents ended at $5.154 million, down from $5.788 million at April 30, 2014.
- At October 31, cash and short-term securities were $14.377 million. Working capital was negative $7.511 million, largely because of $19.893 million in current unearned revenue. The company reported no borrowings and said it did not expect to borrow in the next 12 months.
- Total assets were $86.283 million, total liabilities $51.999 million, and shareholders’ equity $34.284 million. The balance sheet included a $57.962 million investment in EAM and $9.223 million of available-for-sale securities.
Changes, outlook, and risks
- Management attributed improved operating results partly to lower occupancy costs and stronger digital revenue. Digital circulation grew 2.2% year over year, while total circulation across product lines declined 4.1%; print circulation fell 7.0%.
- Management expects print revenue to continue declining over the long term as customers shift to digital services. It described efforts to develop products and market through traditional, internet, and mobile channels.
- Asset reassignments in third-party products reduced assets supporting copyright data fees. The company anticipates a cumulative reduction of about $1.5 million in annual pretax revenue from these changes, beginning in the fourth quarter of fiscal 2014; replacing the lost business may take considerable time or may not be possible.
- EAM-related revenue and profit interests remain an important earnings and cash-flow source. EAM-managed Value Line fund assets totaled approximately $2.39 billion, up 3.0% year over year. Value Line does not control EAM and has no obligation to provide it future funding; its disclosed maximum exposure to loss was the $57.962 million carrying value of its investment.
- Management said cash, liquid assets, and anticipated operating and EAM cash flows should meet forecast liquidity needs for the next 12 months. It expected financing activities to continue including dividends and treasury-stock purchases. Dividends declared were $0.15 per share for each of the two fiscal quarters.
- Risks identified include subscriber retention and competition from free or low-cost online research; market-driven changes in EAM assets under management; reliance on EAM interests; copyright-data contract and fee pressure; intellectual-property protection; key-personnel dependence; regulation; and cyberattacks or other disruptions. The filing reported no material change to previously disclosed risk factors and no legal proceedings.
Important facts for investors to verify
- Whether digital growth and renewal sales can offset falling print circulation and the continued expected decline in print revenue.
- The timing and full effect of the anticipated approximately $1.5 million annual pretax copyright-data revenue reduction, and prospects for replacement contracts.
- The sustainability of EAM distributions, fund asset levels, and the company’s exposure to changes in markets, redemptions, and EAM performance.
- Operating cash generation relative to dividends, share repurchases, and ongoing software-development spending; negative working capital should be considered in light of subscription cash received in advance.
- That the reported year-over-year operating-income improvement is affected by the prior-year one-time overlapping rent charge and current-period software amortization.