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Executives

Brian Campbell - Director of Investor Relations

Stephen M. Smith - Chief Executive officer, President and Director

Ellis E. Cousens - Chief Financial & Operations Officer and Executive Vice President

Analysts

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

Daniel Moore - CJS Securities, Inc.

William Henry Packer - Exane BNP Paribas, Research Division

Michael Corty - Morningstar Inc., Research Division

John Wiley & Sons (JW.A) Q3 2013 Earnings Call March 7, 2013 10:00 AM ET

Operator

Good morning, everyone, and welcome to Wiley's Third Quarter 2013 Earnings Conference Call. As a reminder, today's call is being recorded. At this time, I'd like to introduce Wiley's Director of Investor Relations, Brian Campbell. Please go ahead, sir.

Brian Campbell

Thank you. Hello, everyone, and thank you for participating in our call today. Before introducing Steve Smith, President and Chief Executive Officer; and Ellis Cousens, Chief Financial and Operations Officer, I'd like to remind you that this call is being recorded and may include forward-looking statements. You should not rely on such statements as actual results may differ materially and are subject to factors that are discussed in detail in the company's 10-K and 10-Q filings with the SEC. The company does not undertake any obligations to update or revise forward-looking statements to reflect subsequent events or circumstances.

For this quarter, we are introducing a new format for our presentation to include visual materials that are designed to provide increased clarity and comprehension of our third quarter and year-to-date performance. In addition, we will provide an update on our previously announced restructuring program and our full year business outlook.

For those who prefer to listen to the call over the phone but would still like to view the slides, we recommend clicking on the gears icon located on the lower portion of the left-hand side window and selecting Live Phone. This will eliminate any delays you may experience in viewing the slide transitions, as well as remove any potential background noise you should ask -- should you ask a question on the call. A copy of this presentation will be available on our Investor Relations page at the conclusion of this call. Thank you.

I'd now like to turn the call over to Steve.

Stephen M. Smith

Thank you, Brian. In recent years, Wiley's revenue growth slowed due to a combination of difficult market conditions and shifting end-user behavior. Library budgets, on which a significant proportion of our core business depends, remained tight around the globe, impacting both journals and books. Sales of print textbooks continue to decline due to a combination of factors, including the impact of used books and rental in global education, bricks-and-mortar bookstore closures and tied to inventory management by many of our channel partners. Print book sales are also affected by the ongoing transition from print to eBooks. Digital book revenues continue to grow rapidly across all 3 Wiley businesses, both in the current year -- sorry, both in the current quarter and year-to-date.

In Global Education, we're addressing the decline in sales of traditional hardcover textbooks through the introduction of low-cost formats and custom publishing, as well as eBooks and WileyPLUS. Digital textbook sales more than doubled in the quarter to $8 million, while WileyPLUS revenues grew by 24% to $15 million.

To address the slow revenue growth of our core business, we have recently acquired several high-growth businesses and platforms that will enable us to leverage new opportunities across the spectrum of Wiley's core content assets, brand and relationships. We continue to diversify our product mix to mitigate library funding constraints in areas like funded access and article delivery, assessment and certification in our professional business and online program management in higher education. We have divested our consumer publishing program due to its declining revenue performance and its uncertain trajectory in a digital environment. We continue to develop and refine our content-enabled service offerings with WileyPLUS in our education business and financial certification and test prep in our professional business. These investments and activities should result in higher rates of sustainable revenue growth in coming years.

The persistent pressure on top line growth, combined with the fact that we have a large and somewhat fixed infrastructure supporting legacy business models, along with the need to continue to invest in technology capabilities to support our growth plans has led to significant pressure on earnings. In response, and as mentioned during our conference call in December, we have embarked on a significant company-wide program of cost restructuring in order to support earnings in the short term and to enable reinvestment of resources in new growth opportunities for the future.

We are making progress to improve the efficiency and return from our technology investment in order to enter new markets, develop new content-enabled services and platforms, increase agility and improve our variable to fixed cost ratio. Ellis Cousens will provide a high-level description of our restructuring plans later in this presentation. Through this initiative, we will accelerate Wiley's transformation to a knowledge business that serves the evolving needs of our customers in research, learning and professional practice.

Wiley's revenue grew 6% in the third quarter, excluding the impact of foreign exchange and adjusted to exclude the results of our divested consumer assets due to the contribution of recent acquisitions, notably Deltak and Efficient Learning Systems and modest organic growth in professional and higher education, offset by declines in STMS journal revenues and print books. Excluding the addition of Deltak and ELS and $4 million in revenue from delayed shipments due to the storm at the end of the last quarter, revenue grew by 1%.

Adjusted EPS for the quarter, which excludes the divested consumer publishing programs, grew 6% due to higher gross profit margins, cost control measures and share repurchases. Newly acquired businesses added $0.01 per share in the quarter.

For the 9 months year-to-date, revenue increased by 1%, excluding foreign exchange and the divested consumer assets, but was flat excluding the impact of newly acquired businesses. STMS journal revenue declined due to factors affecting the timing of revenue recognition and lower corporate and backfile sales. Print book sales have declined across the board, partially offset by the growth in sales of digital books. Adjusted EPS is down 5% excluding the impact of foreign exchange and the operational results from the divested assets, the gain on sale of travel publishing assets and all impairment and restructuring charges. The lower EPS performance was due to the decline in top line performance and higher technology costs due to investments in digital products and infrastructure.

Now I'd like to provide a brief commentary on the performance of Wiley's 3 global businesses. STMS revenue for the third quarter and year-to-date is down 3% and 2%, respectively, excluding the impact of foreign exchange. Despite growth in subscription billings of almost 2% in calendar year 2012, earned revenues have declined slightly by less than 1% in the fiscal year-to-date because of differences in the timing of issue publication between fiscal year 2012 and fiscal 2013, delayed revenue recognition due to changes in license terms of some customers as described in the earnings release and as yet unpaid license agreements from at least one large Middle East customer. Journal subscriptions account for approximately 60% of the STMS business. STMS print books, advertising, corporate reprints and backfiles are also down, while digital books and funded open access continue to provide growth, albeit from a relatively small base. In January, the journals of the American Geophysical Union went live on Wiley Online Library, adding a collection of 160,000 articles to the database.

Despite revenue challenges, leading indicators in the research sector are generally very positive. At this time, calendar year 2013 journal renewals are showing 3% to 4% growth over prior year, with about 85% of expected full year business closed as at the end of February. Much of that growth stems from the contribution of the contract within the American Geophysical Union that brings additional revenues of more than $20 million in the year. The portion of total journal revenues under institutional license remains constant at close to 80%. Article submissions to Wiley journals continue to rise.

In the quarter, STMS signed new contracts with Society to publish 2 new journals with combined annual revenue of approximately $150,000 and renewed or extended contracts to publish 40 journals with combined annual revenue of $26 million. No journal contracts were lost.

For the 9 months year-to-date, the aggregate value of new contracts won is $27 million versus $6 million in contracts lost. Society contract renewal rates remain overall very strong. Percentage of STMS revenue derived from digital products continues to grow, with online books accounting for almost 1/4 of book revenue this quarter. Full text article accesses increased again by 11% in the quarter.

All of these leading indicators demonstrate that Wiley's core STMS products and services continue to meet the needs of our customers in research and professional practice and are highly valued by end-users. However, our ability to convert that customer value to higher rates of revenue growth remains constrained by stagnant library funding.

The Professional Development or PD business showed modest organic growth for the quarter excluding acquisitions and divestments and foreign exchange. Print book sales declined by 4% or $3 million, partially offset by digital book growth of 20% or $2 million. Business and technology categories performed well, and digital revenue now accounts for 18% of total PD revenue, a 74% increase over the prior year. Online assessment is a major growth focus for professional development following the acquisition of Inscape and ELS over the last year. Both Inscape and ELS are performing above our expectations, and we expect to realize synergies by leveraging the acquired platforms and distribution capabilities across more of Wiley's assets in the months and years ahead.

Following the acquisition of Deltak in November 2012, the trajectory of our Global Education business looks quite different from previous quarters. The percentage of revenue coming from traditional print textbooks is now down to a little over 50%, while digital revenue now makes up 1/3 of overall revenue. For the quarter, print textbooks continue to decline, while binder-ready versions and custom print grew modestly. eBook sales more than doubled and WileyPLUS continued to show promising growth, accounting for 13% of revenue in the quarter.

Deltak contributed $17 million in its first reportable quarter under Wiley's ownership, exceeding expectations in our acquisition model. Since the closing of the acquisition, Deltak has signed 3 new partner agreements, each with a contract period of at least 7 years. Working together, Wiley and Deltak colleagues are realizing new ways to grow the combined customer base and broaden the range of products and services we offer. As a result, total education revenue grew 18%, mainly due to the acquisition of Deltak. Organic revenue, excluding Deltak, showed modest growth of 1% due to WileyPLUS and eBooks.

At this point, I'll hand over the presentation to Ellis Cousens, who will take us through shared service costs, cash flow performance and describe our restructuring plans.

Ellis E. Cousens

Thanks, Steve. Shared service expense increased by 5% in the quarter, excluding foreign exchange. Among the 3 largest functional areas in shared services, distribution expense, as you see, declined, in fact, improved, so to speak, was favorably impacted by lower print units shipped -- lower print units shipped, sorry, both variable labor cost and trucking expenses associated with print books. And also, we gained efficiencies in print journal shipping, and there was a onetime facility restoration charge in the prior year that wasn't repeated in the current year.

Technology spending is higher due to continuing investment in digital products and services, principally content management systems, and the addition of the technology support activities from the Deltak acquisition at the end of the second quarter. Year-to-date technology expense is up about 9%, both with and without exchange. Finance and other admin lower -- is lower principally due to reduced accrual of incentive compensation and some duplicate rent in the prior year.

Free cash flow is $96 million lower than last year due to the following principal factors: The timing of journal cash receipts, which is the principal driver of a $42 million cash shortfall and deferred revenue. I can report that a good portion of that $42 million has been made up as of this date; a $29 million tax deposit related to the previously announced German tax audit disagreement that Wiley has with the German tax authorities. As you may recall, under German tax law, a company must pay all contested taxes and the related interests have the right to defend its position when challenged by the tax authorities in Germany. The challenge will ultimately be decided in court but will take several years to reach resolution. If the company is successful, as we anticipate we will be, all those funds will be returned, along with 6% simple interest. I could -- should note that Wiley is not unique in challenging the German tax authority on their interpretation of this specific tax matter. Additional deposits of up to $33 million are expected in future years until the matter is completely resolved. The 6% interest that I noted earlier is being recorded as an offset to our tax provision.

$22 million of the free cash flow difference is related to the timing of cash tax payments, which will normalize by the end of the fiscal year. Lower composition and capital spending offset most of the other increases and lower operating performance on a year-to-date basis versus prior year.

In terms of the uses of free cash flow, this fiscal year we spent $260 million roughly to acquire both Deltak and ELS and a number of smaller acquisitions. We were active in the share repurchase program through the third quarter, acquiring just under 900,000 shares, bringing the total shares repurchased year-to-date to 1.1 million. We have 1.3 million shares remaining in the current authorized program. In June, we increased our quarterly dividend 20% to an annualized rate of $0.96 a share. Now this represented our 19th consecutive annual increase.

We continue to manage capital spending judiciously, although we expect spending to be a bit higher than last year by the end of this fiscal year. If you look back to the last 10-Q, and you look at the 10-Q which will be issued in the coming days, we don't expect any changes to forecasted full year composition, royalty advances or capital spending. So $55 million, $110 million and $75 million, respectively, will stick. Net debt was about $450 million at the end of the third quarter, and our average cost of borrowing all-in was just under 2%. Our current level of leverage, 1.7x EBITDA, remains at a comfortable level. We also have considerable balance sheet flexibility despite some weakness in recent operating performance.

I'll turn to a high-level discussion of the restructuring program. You'll recall that in December, we initiated both our conversation with you and our efforts to identify a comprehensive cost restructuring program that as we sit today will result in approximately $80 million of run rate savings by the time we exit the next fiscal year. So that is April 30, 2014. In January, we've retained AlixPartners to work with us to evaluate and assess our businesses, processes and organizational design. Implementation of the restructuring program will consist of the following actions over the remainder of this fiscal year and throughout fiscal 2014: Implementation of the first initiative already underway is global coordination of realignment for procurement, tracking and management of outside supplied services, products and materials using the recently engaged Arriba tool set, which I've mentioned previously. We're in the progress of implementation of the tool set, redesigning workflows and the organization of our activities to make best use of the capabilities that Arriba brings us. The restructuring program will delayer redundant management and functional areas throughout the organization that can be consolidated. We will be developing and driving a shared service support model more deeply into the organization, which may involve moving certain functions to lower-cost Wiley locations and potentially outsourcing to non-Wiley locations, where we're warranted to achieve savings and flexibility going forward. We're evaluating our product offerings to determine where and how we can streamline and/or simplify how we develop and support our array of products and services while meeting current and future expected consumer demand.

Back to you, Steve.

Stephen M. Smith

Based on key indicators going into the fourth quarter, our guidance is unchanged on an operating basis. Currency-neutral, low single-digit revenue growth, including $37 million of additional revenue from the Deltak and ELS acquisitions and fore-won [ph] revenue from the divested consumer businesses. Our full year U.S. GAAP EPS of approximately $2.95 to $3.05, which includes the net negative impact from the divestiture of the consumer publishing assets, a restructuring charge of $0.06 per share in the first quarter, $0.14 per share benefit from a reduction in U.K. tax rates and forecasted $0.02 per share of negative foreign exchange will be further impacted by the $25 million restructuring charge equivalent to approximately $0.30 per share, that we expect to take in the coming quarter.

With that as background, we welcome your comments and questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Drew Crum of Stifel.

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

So Steve, I want to talk about the subscription renewals for calendar '13 and what the change behind the outlook has been. I recall in the December quarter, December earnings release, you suggested that the renewals were tracking to a comparable rate to what you'd experienced in calendar '12, which was around 2%. Now you're looking at 3% to 4% growth. Can you talk about what has changed over the course of the last couple of months?

Stephen M. Smith

Yes. So thanks for the question, Drew. The primary driver of the higher rate of growth is the commencement of our relationship with the American Geophysical Union. The AGU brings total revenues of over $20 million, although not all of that is subscription revenue, something less than 3/4 of it is subscription revenue. But if you add that onto the base, that certainly helps improve the overall rate of growth, both -- we have a larger database with those 160,000 additional articles I mentioned. There can always be timing factors, particularly at this time of the year, depending on the rate of which -- or the pace at which we bill new customers. We believe that every year, billings do get a little earlier as our licensing terms become perhaps more familiar to our customers. So we closed that business a little bit more quickly. That can sometimes affect a view at any point in time, really from the period of December through to around about now in early March. But overall, with 85% of the business now complete, we're pretty encouraged by the 3% to 4% for the full year, and we'll continue to report on that at the end of the next quarter.

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. And Ellis, can -- as far as the cost savings are concerned, can you help us understand what portion of the $80 million will be reinvested and what portion enhances earnings and cash flow going forward?

Ellis E. Cousens

Yes, Drew, I can. Steve can add to my description of that as he sees appropriate. So we're in the process of developing or finalizing plans that will drive those $80 million worth of cost savings. Again, it's an approximate figure, but we're feeling relatively confident around that number. It will take place as I described or the actions will take place over the course of the remainder of fiscal '13, which is about 1.5 months plus all of '14. In terms of redeployment of those savings or deployment of those savings, a fair chunk of that will go into investing in digital businesses and activities, accelerating some of the investments to drive forward the performance of some of the acquisitions that we've already made. So there clearly is an intention to reinvest a meaningful portion of those savings into investments that we have already, for the most part, identified. But we'll be able to do that without dilution coming from those investments as we may have had in the past, so to speak. However, a majority, meaning more than half but less than all, will be used to improve financial performance. So clearly, there will be some acceleration of earnings growth coming from this, principally after '14. So you'll see that in '15. That will not materialize in '14 because of how those programs will be implemented and how those savings will accumulate over the course of '14. We'll be a lot clearer about that because we'll be in the implementation phase by the time we get to June. In fact, we'll be well into the implementation phase in June. So we can be a lot more numerically descriptive and descriptive around that in June. So the best I can say now is that something more than half will be used to improve financial performance. That's an important element of the restructuring. It isn't all around reinvestment, but there's a fair portion of that savings that will be used for reinvestment as well.

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

And also, just a follow-on to your response, as far as IT spending is concerned within your shared services and admin line, how should we think about that in terms of growth going forward?

Ellis E. Cousens

I would say, Drew, after this year -- so this year, as you know, we've discussed and described in the past kind of mid-teens growth in technology expenditure over the course of the foreseeable future. We've taken on some additional resources and capabilities. And at the same time, we've -- as part of how it is, we are resourcing using third-party resources. We've consolidated a lot of those activities into 2 very large partners, and we've gotten some very favorable terms associated with using just those 2 partners rather than the myriad of providers we've used in the past for specialized services. So that will mitigate a lot of what is the additional resource investment we've made this year to improve our capabilities going forward. So this year is a transitional year. We will not have sort of the ongoing rate savings coming out of having moved to a 2-provider, externally resourced surface methodology, so to speak, or construction. So to answer your question about this year, not materially different than in past years, so let's say kind of mid to low teens is kind of where we're thinking we'll come out this year. So a little bit better than in the past but not significantly so. But moving out into future years, clearly seeing that sort of mid-teens growth declining to sort of low teens to maybe, shall I say, don't hold me to it though, the very highest single digit, if not the lowest sort of double digit, so to speak. But clearly, a moderation in spending coming from increased level of activity quite frankly. So not less activity, more activity, which is the way and how it is we're deploying and utilizing those investments.

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. Last question for me, guys. If I heard you correctly, Steve, you said that the acquisitions contributed $0.01 to third quarter results, and I apologize if I missed that. But thinking about the balance of fiscal '13, what is the accretion or dilution expectation from some of the acquisitions you made during the course of fiscal '13?

Ellis E. Cousens

Drew, if I could, I think we still anticipate being about neutral on a full year basis. So the $0.01, it may just be a timing issue.

Stephen M. Smith

But you did hear me correctly.

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

Okay, got it. Okay.

Ellis E. Cousens

Again, we're talking about just Deltak and ELS, right? Inscape had a contribution of its own, but that was included in our original guidance.

Operator

We'll go next to Daniel Moore, CJS Securities.

Daniel Moore - CJS Securities, Inc.

The $80 million of cost savings looking out to fiscal '15 and beyond, can you give us some sense of the breakout between shared service and operating costs within the segments?

Ellis E. Cousens

Dan, those $80 million come from effectively all aspects of our business. So it comes out of 3 -- the 3 businesses, segments themselves, it comes out of each functional area within shared services. There is quite literally no area that's left untouched with respect to what we've examined and explored and what we're planning to do. I will say that currently, some activities that are presently undertaken within each of the 3 business units will be moved to a shared service model. So we'll drive, as I've described, a deeper shared service model into the business. So that means that some of the cost savings are presently -- some of the expense that's currently undertaken within the business will now become a shared service expense. That may even be that in time, we have an additional category of shared service expense beyond what we've typically described around distribution, technology, finance and then all other, which included in the past and does include facilities, legal, executive, human resources and the like. So as a result of examining how it is we execute on some of these businesses, particularly as more and more of the business is digitally oriented, it may be that we have other services that presently are self-provided, so to speak, in the businesses that become shared service models. The point of all of what I'm saying is that the mathematics of how that comes together is really, quite frankly, unimportant when you look at it from a business to business to business to shared service perspective because it touches literally upon all businesses and all shared services.

Daniel Moore - CJS Securities, Inc.

Going -- excuse me, in terms of the $25 million or so of restructuring charge that you expect to take in the coming quarter, do you have a ballpark order of magnitude when we look out to fiscal '14 with the total cost in terms of restructuring will be in order to achieve that $80 million in cost savings?

Ellis E. Cousens

Yes, clearly, there will be more. And we expect that in the course of '14, there will be a significant charge or charges as well, as we've outlined at least narratively, in the earnings release. By the time we get to June, I can be very clear in terms of specifying a bit more with respect to magnitude and timing. Our effort would be to try and isolate those restructuring costs into as few quarters as possible, ideally one. But realistically, as one implements programs, it may be that restructuring charges are triggered by some of the actions that we take. We'll call those out as best as we can ahead of time, which is why in June I'd like to be able to identify what we expect in '14 and why here, as we sit in the third quarter, I'm identifying our best shot at what we think will be the charge that we'll take in the fourth quarter. So $25 million is an estimate. Clearly, by the end of April, we'll know what that number is, and we can talk to about what it relates to when we get to June and the same thing in June about potential charges in '14. There may be also be some -- a cleanup, so to speak, charge, I hate to sort of refer to it that way, but sort of things that may move later into '14. After we've taken the charge, we may discover some additional opportunities that may result in a charge in '15. But as we sit here today, we expect something like $25 million in the fourth quarter, a charge of not dissimilar size and scale but could be larger, could be smaller. I know that's rather vague, somewhere around the middle of the fiscal year. We'll signal that in June and describe that more fully and then potentially a smallish charge if we kind of do the sequencing, as we expect we will, in fiscal '15.

Daniel Moore - CJS Securities, Inc.

That's helpful. And then switching gears quickly, one more on Deltak. You mentioned outperforming expectations and a number of the contract signings. Maybe just give us a little bit more color on how that's performing relative to your expectations, as well as what your -- what type of growth rates we should expect over the next year or 2.

Stephen M. Smith

Sure, Dan. So the early responses from Deltak's existing client base to the acquisition has been extremely favorable. So people, they really welcome the coming together of Wiley and Deltak, which adds a lot of potential to the way that we serve institutional customers with online program development. I mentioned that Deltak successfully closed 3 new partner licenses, taking the total number from 23 to 26 in the quarter since the acquisition. I know they have a very strong pipeline of likely prospects and negotiations that are close to being finalized, so we expect to announce in the coming quarter. We see a huge amount of potential here. Just to expand on the Deltak business model, the sources of growth there come from increasing the numbers of students that are recruited for existing programs. That's the -- that's one of the key drivers of growth. The launch of new programs with existing partners and then the addition of additional partner relationships. The potential here in the United States is very exciting. There are also a little longer term significant opportunities in international markets to leverage Deltak's capability to institutional sales across some of our existing customers outside the United States. So -- and the performance in the quarter is everything that we hope it would be and a little bit more as we get to know the leadership team there really well and they integrate more fully with the leadership team of our existing Global Education business. We see opportunities to leverage their strength in technology, in institutional sales and in program development more widely. And that will drive their future growth. I won't give a projection for the future growth of the business, but we expect it to continue at a trajectory that's pretty consistent with the high level of growth that it's achieved in the past.

Ellis E. Cousens

Right, which is -- Dan, as we described, that this is a high-growth business at attractive margins. So in some of what we described earlier in terms of reinvestment around restructuring will help to drive, even faster, the growth that we expected out of Deltak, so beyond what our initial expectation was, which was attractive. I'll say that when we get to June or maybe September in the coming quarters, let me put it that way as to not make a commitment for June, but we'll begin to provide some indicative metrics for Deltak and potentially for Inscape as well that would give you better insight. I know this is a relatively new business for you as it is for us. You have metrics that provide leading indicators like subscriptions, the amount of billings closed year-to-date, what the growth rates look like. So we'd like to provide leading indicators as well for a business like Deltak as we all get familiar with it in terms of understanding what to expect of it in the future. So I'll say that, that will happen somewhere over the next couple of quarters, but not commit specifically to it because we need to understand what we can and can't say in part because of our partner relationships and in part because of competitive dynamics in the marketplace.

Daniel Moore - CJS Securities, Inc.

That is helpful. And lastly, housekeeping, you bought back close to 900,000 shares in Q1. Have you continued to or how many shares have you bought back to date thus far in Q2?

Ellis E. Cousens

That was Q3, yes, fiscal third quarter. In fourth quarter, the window just opened. I make no commitments but have indicated that there is open -- or there's existing authorization in the existing program. Can't say much more than that.

Operator

And we'll go next to William Packer of Exane BNP Paribas.

William Henry Packer - Exane BNP Paribas, Research Division

It's Will Packer from Exane. I've got some questions around the higher education division, if possible. Firstly, we heard from a number of publishers that -- and you mentioned it today, but textbook rental is factored as a drag on higher educational organic revenue growth. We've heard from Cengage the take-up in rentals is starting to flatten, i.e. the growth is flattening. Is that something you see?

Stephen M. Smith

Sorry, could you just repeat the question, last part? You broke up a little bit.

William Henry Packer - Exane BNP Paribas, Research Division

Sure, sorry...

Ellis E. Cousens

Just the last sentence.

William Henry Packer - Exane BNP Paribas, Research Division

Is the growth in rentals flattening and textbook rentals flattening?

Stephen M. Smith

So we, like other higher education publishers, saw a spike in revenues in what was Wiley's fiscal year 2012 -- actually, a little bit in '11 and a little bit in '12, as the rental channel kind of geared up because that inventory needed to get out into the marketplace. Some of it came from the used book market, a lot of it came and actually fueled some growth for the higher education publishers. And that -- we certainly are not seeing large volumes of our sales going out into the rental market as far as we can determine. The overall impact of rentals on the traditional full priced textbook sale has been pretty dramatic over the last couple of years. And so if you look at total market declines, as market has been declining for the traditional print textbook, the compound rate is probably around 10%. Wiley's performance has been a little better than that. But as I mentioned in my remarks, what we're really seeing is a pretty rapid transition away from the traditional print textbook in favor of other lower-priced models such as binder-ready volume -- binder-ready versions and custom and more particularly towards eBooks and WileyPLUS, which is, as you know, a much more fully integrated online learning solution that adds a lot more value, both to the teacher and to the student. So we're pleased to see that transition. We think that's a more sustainable model. Don't see digital or e-rental as being a particularly viable business model. And so the quicker that business moves to digital, the better it will be from our perspective.

William Henry Packer - Exane BNP Paribas, Research Division

Great, that's very helpful. Secondly, how do you see higher education enrollment developing in 2013? We heard recently the number of 2012 was minus 2%. Do you expect enrollment to improve from that or to deteriorate further or stay roughly similar?

Stephen M. Smith

We're not expecting any significant rebound in enrollments. I think there's still a little pressure on state budgets and still pressure on the for-profit sector. So our assumptions looking forward are that enrollments stay pretty flat.

William Henry Packer - Exane BNP Paribas, Research Division

That's great. Just what do you mean by flat? Do you stay at minus 2% or rebound to 0%?

Stephen M. Smith

Somewhere between the 2 probably.

William Henry Packer - Exane BNP Paribas, Research Division

Okay, great. And then the last question for me is, could you comment on the threat or opportunity you see from open educational resources? It's something we've heard more and more about in the media and the trade press and it would be interesting to hear your views.

Stephen M. Smith

Yes. Well, we support obviously the principle of widening access to higher education and providing more value for the student dollar, both in terms of their tuition and the quality of tuition that they receive and the price and value of the education materials that are available to them. We're working in partnership with a number of players who are in the open arena, the MOOCs if you like, working on content licensing models and pilots with a number of the major players there. We feel that the future trajectory is moving more to a service model for education where there's an opportunity for public-private partnership to really add significant value to the overall educational endeavor. And that is why we were so delighted to be able to come together with Deltak to build business around a wider and full service model. But we also see that products like WileyPLUS are very well-positioned to continue to grow because even if a sustainable model could be found for open education resources and without significant, either taxpayer or for profit funding, it's hard to see how the quality of content that's available through open -- the open model is really going to -- the traditional level to attract customers. Even if that were enabled, we still think that teachers and students are going to want to move from the kind of static delivery of 2-dimensional text material to a much more fully integrated online learning platform experience that adds the capability for adaptive learning, personalization, customization and in a way that really requires very significant investment on the part of the publishers. And we believe that our position in the value chain is very sustainable there.

Operator

[Operator Instructions] We'll go next to Michael Corty of Morningstar.

Michael Corty - Morningstar Inc., Research Division

Just a few questions, one, a bit backwards looking and one, more forward-looking. Just in context of all these cost savings and restructurings, I just wanted to get a sense of -- Wiley has always looked to cut cost and look for ways to improve the efficiency of the business. Can you ballpark maybe what percentage of kind of these ideas and cost cutting savings were in process before the higher ed business kind of took a hit and maybe what -- versus what was sped up by the decline of the higher ed business? Maybe that would kind of be helpful just for some context. And then kind of looking ahead on the bar chart in the higher ed business, any thoughts strategically on how you might possibly speed up the process in terms of the transition from print to digital looking at your binder, eBooks and WileyPLUS businesses, how you might use those to offset that decline in print?

Stephen M. Smith

Thanks, Michael. So I'll take those questions in order that you asked them. The restructuring initiative that we are now embarked upon has really picked up preexisting initiatives that were already in place across all 3 of our businesses. So you're right, Wiley has always looked to rationalize its cost base. It was through the careful examination of the returns that we were getting from those consumer assets that led us to the decision to divest those last year. What -- I think what we're really seeing here is the pace of change in our markets has accelerated dramatically. Our print book business, for example, is many tens of million dollars smaller than it was just 3 years ago as we've seen not just in the higher education market, but also in professional businesses and in STM, where the movement to digital continues, but the decline in the demand for print products is falling off more sharply. We need to accelerate some of the things that we're already doing in response to the acceleration of the pace of change in our market. And it's not just about the pace of change, it's also about the uncertainty concerning future rates of change, though to the extent that a significant proportion of that cost base was to a degree fixed around long-term contracts and wholly-owned enterprises. We feel that given the uncertainty about the future trajectory of those businesses, we need to move to a more flexible cost base so that we can flex the resources and the investment in those resources as revenue rates change going forward, as well as to be able to continue to invest in accelerating the digital model. Maybe that leads into the second part of your question. We see a real change in student behavior over the last couple of years. Student exception -- student acceptance of eTextbooks is a relatively new and rapidly growing phenomenon. That's partly driven by improvements in the interfaces, although most of our eTextbooks are still delivered today to a laptop environment rather than to digital readers. There is an opportunity I think for that to further accelerate if and when new digital reading devices that give students the kind of flexibility in the way they read and use that content. And that hopefully is not too sort of far around the corner. The biggest single driver, frankly, is that when we sell WileyPLUS or eBooks to students, and those eBooks -- those books or online courses cannot be sold back into the used book market, we get to sell something to every student every semester rather than selling to most students in the first semester the course runs and then heavy attrition in the years -- or the semesters and the years that follow. It enables us to really reduce the initial price to the student. So the price that students have paid -- been asked to pay historically for the traditional print textbook is reduced considerably around these lower-priced print editions, as well as all of the digital versions that we offer them. So we think that the trajectory has really increased in terms of the movement from print to digital. As I said, print textbooks today are less or around 50% of the total global ed revenues, and we expect that percentage to continue to decline pretty rapidly in the coming years.

Michael Corty - Morningstar Inc., Research Division

Great. I'm going to try to sneak in one more real quick. In terms of the STMS business, it's a global business and a lot of times with the library budgets, it gets questions from investors that are focused on the U.S. If you could maybe kind of remind us where there's other key geographies where the library budgets are soft other than the U.S., that would be kind of helpful.

Stephen M. Smith

Yes. Well, this -- so we tend to look at this -- the Americas, Europe, Middle East and Africa and Asia Pacific at the most macro level. Across those 3 geographic regions, the most growth challenged are actually in Europe still. So we still continue to see fallout from the deep economic recessions that affected particularly Southern European countries and the challenges around funding in the U.K. and in some other Northern European countries. The Middle East has been in some turmoil. We, for example, we had a significant business a few years back in Iran. We don't have a business in Iran anymore. And Egypt and many other Middle East countries have been rocky. So while we still see growth in some parts and we still believe the long-term potential is still there, we can be affected by short-term political and economic events. Asia Pacific still continues to outpace the growth of the other 2 regions. Today, it's over 20% of our revenue that has come forward a long way, still seeing very nice growth in China, in Korea and increasingly from India and Japan. Actually, in dollar terms, it's the second-largest journal market in the world after the U.S. and has been pretty resilient over the years. And then in the States, even within the U.S., significant variability from state to state and from consortium to consortium depending on -- again, what we're hopefully seeing to be short-term funding constraints. But overall, we're not expecting library funding on a global basis to provide much growth. So our ability to grow there in the coming few years is going to be driven by market share gains, increasing the portfolio of products that we have through new society take-ons, new journal launches, as well as new and emerging business models such as funded access and article delivery.

Operator

And that does conclude today's question-and-answer session. I'll turn the conference back over to management for any closing remarks.

Stephen M. Smith

Thank you. So at our next investor call in June, we will report on our full year numbers for fiscal '13. And as discussed, we'll provide a restructuring progress report, including a more detailed timeline. As usual, in June, we will give revenue and EPS guidance of fiscal '14 and we'll also provide some more forward-looking color around long-term expectations for revenue and EPS growth.

Before we hang up and in the spirit of full disclosure and transparency, I would like to inform you that as part of our customary careful approach to succession planning, Ellis Cousens has announced his intention to retire at the end of fiscal year 2014, so in around 14 month's time. In the coming quarter, we will commence a recruitment search for a new CFO, and we are therefore providing this advanced information to investors.

Thank you for participating in our third quarter earnings call.

Operator

And that does conclude today's conference. Again, thank you for your participation.

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