Business context and reporting period
Value Line, Inc. filed this unaudited Form 10-Q for its fiscal second quarter and six months ended October 31, 2017. Its core business is publishing investment research and licensing proprietary investment data. It also receives non-voting revenue and profit interests from EULAV Asset Management Trust (EAM), which manages and distributes Value Line mutual funds. Unless stated otherwise, financial amounts below are in millions.
Financial performance and position
| Metric | Three months ended Oct. 31, 2017 | Six months ended Oct. 31, 2017 |
|---|---|---|
| Publishing revenue | $8.989 | $17.903 |
| Operating income | $0.808 | $1.973 |
| EAM interests income | $2.237 | $4.373 |
| Income before taxes | $3.136 | $6.533 |
| Net income | $2.072 | $4.287 |
| Diluted earnings per share | $0.21 | $0.44 |
Second-quarter operating margin was approximately 9.0% (operating income divided by publishing revenue). Cash provided by investing activities was $2.653 million for the six months, while operating activities used $1.204 million and financing activities used $3.646 million. Cash and cash equivalents were $4.360 million at October 31; cash plus short-term securities totaled $22.324 million. Working capital was $2.064 million, including $18.531 million of current unearned revenue. The filing reports no borrowings and says management does not expect to borrow in the next 12 months.
Total assets were $85.927 million and shareholders’ equity $38.753 million. The $58.588 million investment in EAM is a substantial asset concentration. Total liabilities were $47.174 million, including $18.471 million of deferred income taxes and unearned revenue; the filing does not identify interest-bearing debt. Quarterly dividends were $0.18 per share. The company paid $3.496 million in dividends and repurchased $0.150 million of stock in the first half.
Material changes versus prior comparable periods
- Second-quarter publishing revenue increased 3.9% year over year; EAM interest income rose 15.8%, and net income increased 40.0% to $2.072 million.
- For the first half, publishing revenue rose 4.3%, but reported total revenue fell 29.2%, net income fell 45.3%, and EPS declined from $0.81 to $0.44. The comparison is heavily affected by the prior-year $8.123 million gain on sale of an operating facility; there was no comparable gain in 2017. The prior-year gain generated approximately $5.2 million of after-tax profit.
- First-half periodical and related publication revenue, excluding copyright fees, declined 2.7%. Print revenue fell 3.2% and digital revenue 2.3%; total circulation was down 5.0% year over year, with digital circulation down 12.3%. Copyright data fees increased 60.5% to $3.037 million, supported by sponsored assets of $4.2 billion versus $2.6 billion a year earlier.
- Operating expenses declined 7.0% to $15.930 million, primarily reflecting lower software amortization and depreciation; salaries and benefits increased 10.5%. EAM-related income increased 13.6% to $4.373 million.
- Cash and short-term securities declined from $23.133 million at April 30 to $22.324 million at October 31. Unearned subscription revenue was 4.0% above October 2016 but 7.6% below April 2017.
Outlook, commentary, risks and unusual items
Management believes available liquid resources, operating cash flows and EAM distributions will fund current and forecast liquidity needs for at least the next 12 months. It provided no specific company revenue or earnings guidance. Management described the economic and market outlook as relatively bright, while noting risks from policy changes, overheating, political developments and global events.
Key business risks include retaining print and digital subscribers amid free or low-cost online research, competition, intellectual-property protection, dependence on EAM and changes in its assets under management, key-personnel dependence, regulation, cyberattacks and natural disasters. EAM-managed Value Line fund assets were $2.510 billion, up 12.2% year over year, with market appreciation partly offset by net redemptions in ten of twelve funds. Value Line has no control over EAM’s operations; its recorded investment and stated maximum exposure to loss were $58.588 million.
Unusual and relevant items include the prior-year facility-sale gain, lower amortization following a reassessment of software useful lives, and a new 11-year New York office sublease. The new office arrangement reduced annual rent expenditure initially by 23%, with actual cash rent payments delayed until November 2017; future minimum lease payments were $14.199 million. The company reported no legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls. A federal tax audit for fiscal 2015 was ongoing; management did not expect a material financial-statement effect.
Important facts for investors to verify
- Whether subscription declines and lower circulation—particularly in retail digital products—continue, and whether copyright-data growth can offset them.
- How much future earnings and cash flow depend on EAM distributions, fund assets, market performance and redemption trends.
- Underlying earnings comparisons excluding the prior-year facility-sale gain and the effect of lower software amortization.
- Cash conversion and liquidity, including operating cash outflows, unearned revenue movements, dividends, repurchases and upcoming lease payments.
- Valuation and concentration risks in the EAM investment and the company’s marketable equity securities.