Value Line, Inc. — Q3 FY2018 Form 10-Q
Business context and reporting period. The unaudited quarter and nine months ended January 31, 2018 cover the company’s fiscal third quarter and year to date. Value Line publishes investment research and licenses proprietary data. It also holds non-voting revenue and profit interests in Eulav Asset Management (EAM), which manages the Value Line Funds; EAM is not consolidated.
Financial performance
- Revenue: Third-quarter publishing revenue was $9.094 million, up 5.2% year over year. Nine-month publishing revenue was $26.997 million, up 4.6%. Copyright data fees rose 54.3% to $4.740 million for nine months, while periodicals and related publications revenue declined 2.2% to $22.257 million. The prior-year nine-month total revenue included an $8.123 million facility-sale gain; accordingly, reported total revenue fell 20.5% to $26.997 million.
- Profit: Third-quarter operating income was $787,000, versus an operating loss of $212,000 a year earlier. Nine-month operating income fell to $2.760 million from $7.948 million, which included the facility-sale gain. Nine-month income before taxes was $9.862 million, down 29.3%; net income was $13.283 million, up 43.1%, or $1.37 per share versus $0.96.
- Tax item: The Tax Cuts and Jobs Act caused a $6.405 million deferred tax benefit for the nine months, primarily from remeasuring deferred tax liabilities at the lower federal rate. The resulting nine-month effective tax rate was negative 34.69%; the tax benefit substantially explains why net income rose despite lower pretax income.
- Costs and margins: Nine-month operating expenses decreased 6.8% to $24.237 million, chiefly because software amortization declined; salaries and benefits and advertising costs increased. Operating margin was approximately 10.2% for the nine months, compared with approximately 23.4% in the prior-year period, which included the facility-sale gain.
- EAM and investments: Value Line recorded $6.657 million of EAM revenue and profit interests for nine months, up 15.1%. EAM-managed fund assets were $2.612 billion at January 31, up 13.5% year over year. Net securities income was $445,000, versus $226,000.
- Cash flow: Nine-month operating cash outflow was $2.232 million, improved from $5.241 million outflow. Investing activities provided $5.327 million, including $6.575 million of EAM distributions; financing activities used $5.434 million, including dividends and share repurchases. Cash and cash equivalents ended at $4.218 million.
- Liquidity and debt: Cash and short-term securities totaled $22.622 million; working capital was $2.008 million. Total liabilities were $43.318 million, including $24.112 million of current and long-term unearned revenue and an $11.972 million deferred tax liability. No borrowings or debt are reported; management said it did not expect to borrow in the next 12 months.
Material changes and management commentary
- Print and digital publication revenue declined 1.8% and 2.4%, respectively, for nine months. Digital circulation was down 12.6% year over year; print circulation was up 3.1%. Management cited lower retail demand and advertising-related weakness in new digital sales, partly offset by institutional sales and price increases.
- Copyright data fees benefited from third-party sponsored assets of $4.4 billion, compared with $3.2 billion a year earlier. Fees depend on contract use and underlying market values.
- Management described the near-term U.S. economic outlook as favorable, while noting risks from policy execution, overheating, political developments and overseas events. This is general economic commentary, not company-specific financial guidance. No specific company revenue or earnings forecast was provided.
- Management expects available liquid resources and future operating and EAM cash flows to meet forecast needs for the next 12 months. The company expects dividends and possible share repurchases to continue. It declared regular dividends of $0.18 per share for each of the first three fiscal quarters and a special $0.20 per share dividend in January 2018.
Risks, contingencies and unusual items
- A single customer accounted for 17% of nine-month publishing revenue. The filing identifies dependence on significant customers and collection of receivables as risks.
- Value Line’s $58.350 million EAM investment is a major asset and source of income. The company says it lacks control over EAM and has no obligation to provide future funding; its stated maximum exposure to loss was the recorded investment.
- The company has a long-term New York office sublease ending in 2027 and a warehouse lease ending in 2024. Disclosed future minimum operating-lease payments were $14.199 million, excluding certain cost escalations.
- Market risks include equity-price movements and interest-rate changes affecting available-for-sale securities. The filing reports no material change to previously disclosed risk factors, no legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- How much of reported earnings growth reflects the one-time tax benefit, and what earnings may look like at the ongoing tax rate.
- Whether declines in retail subscriptions and digital circulation stabilize, and whether copyright-data growth can be sustained.
- EAM fund-asset trends, redemptions, and the durability of Value Line’s related distributions and income.
- Customer concentration, cash conversion, and liquidity after dividends, lease payments and other commitments.
- The effect of the upcoming revenue-recognition standard; management planned adoption in fiscal Q1 2019 and expected no material impact.