John Wiley & Sons, Inc. — Q2 FY2023 Form 10-Q Summary
Business context and reporting period
Wiley is a global provider of research publishing, academic and professional learning, online university services, and talent development. The filing covers the three and six months ended October 31, 2022, corresponding to the second quarter and first half of fiscal 2023. Approximately 85% of revenue was generated by digital products and technology-enabled services, and approximately 57% was recurring during the six-month period.
Key financial metrics
| Metric | Three months ended October 31, 2022 | Prior year | Six months ended October 31, 2022 | Prior year |
|---|---|---|---|---|
| Revenue | $514.8 million | $533.0 million | $1,002.4 million | $1,021.4 million |
| Operating income | $57.4 million | $73.9 million | $40.5 million | $114.9 million |
| Operating margin | 11.2% | 13.9% | 4.0% | 11.2% |
| Net income | $38.2 million | $56.0 million | $20.4 million | $69.8 million |
| Diluted EPS | $0.68 | $0.99 | $0.36 | $1.24 |
| Adjusted EBITDA | $123.8 million | $127.1 million | $187.6 million | $222.4 million |
| Adjusted EPS | $1.20 | $1.29 | $1.56 | $2.14 |
Reported second-quarter revenue declined 3%, while constant-currency revenue increased 1%. Six-month reported revenue declined 2%, while constant-currency revenue increased 2%. The six-month effective tax rate was 18.4%, compared with 39.1% in the prior year, primarily because the prior-year period included a $20.7 million deferred tax charge related to the UK statutory tax-rate increase.
Operating cash flow was negative $76.2 million in the first six months, compared with negative $75.6 million in the prior year. Investing cash flow was negative $48.3 million, including $38.5 million of capital expenditures and $11.4 million of product development spending. Financing cash flow was positive $151.6 million, supported by net debt borrowings.
Cash and cash equivalents were $118.4 million at October 31, 2022, compared with $100.4 million at April 30, 2022. Total debt was $1.004 billion, up from $787.0 million, and unused borrowing capacity was approximately $464.2 million. The company was in compliance with its leverage and interest-coverage covenants. Weighted-average debt rates increased to 3.99% at October 31, 2022 from 2.55% at April 30, 2022.
Material changes versus the prior comparable period
- Academic & Professional Learning: Second-quarter revenue declined 14% reported and 10% constant currency; six-month revenue declined 10% reported and 6% constant currency. Weakness reflected lower print textbook demand, consumer spending pressure, and lower professional publishing revenue.
- Research: Second-quarter revenue declined 1% reported but increased 3% constant currency; six-month revenue declined 1% reported but increased 3% constant currency. Open-access article output increased approximately 34% in the quarter and 30% year to date.
- Education Services: Second-quarter revenue increased 12% reported and 17% constant currency; six-month revenue increased 10% reported and 14% constant currency. Talent Development benefited from approximately 63% growth in placements, while University Services online enrollment declined 5% in the quarter and 7% year to date.
- Profitability: Higher restructuring charges, increased interest expense, investments in technology and editorial resources, and higher employee and travel costs reduced earnings. Second-quarter interest expense rose to $9.3 million from $5.0 million; six-month interest expense rose to $15.7 million from $9.6 million.
- Restructuring: The Fiscal Year 2023 Restructuring Program produced $35.4 million of charges in the first six months, including severance, facility impairments, lease-related costs, consulting, and other charges. The company expects approximately $50 million of annualized savings, with approximately $29 million of savings from actions beginning in fiscal 2023.
- Unusual amortization: Wiley recorded $4.6 million of accelerated amortization in the first quarter after discontinuing the mthree trademark and renaming the business Wiley Edge.
- Foreign currency: Foreign-currency translation losses were $55.9 million in accumulated other comprehensive loss during the first six months, contributing to a $17.5 million comprehensive loss.
Guidance, outlook, risks, and contingencies
Wiley reduced its fiscal 2023 constant-currency revenue outlook to $2.110 billion-$2.150 billion from $2.175 billion-$2.215 billion because of consumer spending and enrollment headwinds in Education. Adjusted EBITDA guidance was reaffirmed at $425 million-$450 million, Adjusted EPS at $3.70-$4.05, and free cash flow at $210 million-$235 million. Adjusted EPS was trending toward the low end of the range, mainly because of rising interest expense. Management expects the adjusted effective tax rate to be approximately 22%-23%.
On November 30, 2022, Wiley amended its credit agreement, providing $1.315 billion of five-year commitments through November 2027 and retaining $185 million of existing commitments through May 2024. The company incurred approximately $5 million of related costs.
Key risks include consumer spending and enrollment trends, seasonal working-capital requirements, subscription-agent liquidity, interest-rate exposure, foreign exchange, integration of acquisitions, execution of restructuring savings, protection of intellectual property, and the ability to manage debt and comply with financial covenants. A 1% change in interest rates on $603.7 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $4.7 million. A 1% change in estimated print-book return rates could affect net income by approximately $0.4 million. Management stated that pending litigation was not expected to have a material effect.
Important facts for investors to verify
- Whether the Academic and Professional Learning revenue decline stabilizes and whether reduced consumer spending and enrollment pressure persists.
- Progress toward the approximately $50 million of annualized restructuring savings and the amount of additional restructuring charges still to be incurred.
- Debt reduction, borrowing costs, variable-rate exposure, available capacity, and compliance with leverage and interest-coverage covenants.
- Whether Talent Development growth offsets declining University Services enrollment and the effect of higher employee costs on margins.
- Conversion of seasonal contract liabilities and subscription receivables into operating cash flow during the second half of fiscal 2023.
- Achievement of the revised revenue, Adjusted EBITDA, Adjusted EPS, and free-cash-flow outlook, recognizing that the outlook uses non-GAAP measures.
- Effects of the fiscal 2023 segment realignment into Research, Academic, Talent, and Corporate categories on comparability of future results.