John Wiley & Sons, Inc. (NYSE:JW.A) is in the midst of restructuring. They are shifting focus from publishing towards digital training, assessment, and learning. John Wiley's shift has been necessitated by the decline in the book publishing industry.
As shown above, the company's book publishing revenue has decreased despite the rapid rise of digital books. The decline in publishing has impacted each of Wiley's three operational segments which are Research, Professional Development, and Education.
The Research segment is the company's largest (59% of revenue) and most profitable division. In 2014, the company's gross margin and contribution margin for the segment was 73.1% and 42.8% respectively. Research margin and revenue have remained flat over the last three years.
|Revenue Growth||Since 2012|
Print Books and Other Publishing income have significantly weighed on growth. In 2014, the company generated 30% of their research revenue from these two sub divisions. The decline in physical publishing was expected due to the transition to digital. However, the shift to digital hasn't been able to offset the decline in physical publishing. Print Books and Other Publishing have declined $41.9 million and Digital Book's sales only increased $13.7 million, since 2012. Combining Open Access and Digital Book's growth ($29.2 million) haven't been enough to offset the decline in print and publishing. As their revenue falls, physical books and publishing income's impact on this segment will decrease. However, the decline will continue to hinder growth in the short-term.
Although print and publishing are important, the Research segment is driven by Journal Subscriptions. Journal Subscriptions represent 63.9% of Research's revenue and 37.6% of total revenue. Journal Subscriptions' growth has been slow. It has grown at a CAGR of 1.25%, since 2012. Wiley and the Research segment are dependent on Journal Subscriptions' revenue. Yet, growth has been slow and even sporadic (declined 1.4% in 2013). The slow growth should continue due to the maturity and competitiveness of the journal industry.
There is one possible growth driver in the Research segment. Open Access is the fastest growing sub division by far. Yet, the size and future growth of Open Access is in doubt. Research journals are used to spread quality and accurate research. However, John Bohannan distributed a fake research paper to many Open Access journals and the piece was published by over 100 journals, according to The Verge. Some Open Access journals have a rigorous review process. Yet, the low standards of a few could destroy the credibility of the industry. Ultimately, the success and growth of Open Access depend on the ability to create high quality and accurate research.
The Research segment should continue to grow in the low single digits. Open Access and Digital Books will continue to grow rapidly but this will be subdued by the decline in publishing and print. Journal Subscriptions should continue to grow slowly due to the maturity of the industry.
Professional Development has experienced a significant increase in profitability. Since 2011, gross and contribution margins have increased 7.6 and 5.3 percentage points respectively. The segment's improved margins have occurred despite a significant decline in revenue. Revenue has declined a total of 14.9%, since 2012.
|Revenue Growth||Since 2012|
|Online Training & Assessment||432.3%|
|Other Publishing Income||2.4%|
Declining revenue is troubling enough but the decline is made worse by favorable industry growth. PwC estimated the professional book industry will increase a total of 11%, from 2013-2018. As expected, the industry is shifting towards digital. PwC estimates eBooks will represent 35% of the professional book market, up from 18% in 2013.
Professional Development's Digital Books sales have slowed significantly over the last 3 years. Digital Book's revenue grew 55.9% in 2012 but has slowed to 10.4% in 2014. The slowdown is surprising because of the industry's rapid shift to digital. The lackluster growth of digital has been very problematic for this operating division. Even with a -13.3% decline in revenue, physical books still represent over 60% of this segments revenue.
It's not all bad news for the Professional Development segment. Online Training & Assessment revenue has grown rapidly. As a result, Wiley has been investing heavily to continue to grow this segment. They recently acquired Crossknowledge which had $37 million in revenue during fiscal 2013, according to TrainingIndustry.com. Yet, Online Training & Assessments still only represent 11% of sales.
The Professional Development segment is suffering from slowing digital sales and an over reliance (64.9%) on physical book sales. Even, Online Training & Assessment's rapid growth can't offset the decline. As a result, the Professional Development segment should continue to decline over the next few years.
The Education segment is a fast growing operational segment. The segment has grown in excess of 16% over the last 3 years. Education has grown fast but the segment is starting to suffer from margin compression. The company's contribution margin has declined from 33% in 2011 to 29.4% in 2014.
As with the other operating segments, the Education segment has suffered due to the decline in physical book sales.
|Revenue Growth||Since 2012|
|Binder and Custom Products||12.8%|
|Online Program Management*||108.0%|
|Other Publishing Income||-2.6%|
However, the Education segment's other sub divisions have been able to offset the decline in print. The Education segment has several growth drivers. WileyPlus is an online education tool which can be used by teachers and students. The online system has self evaluation tools, tests, and provides instant feedback. Currently, WileyPlus makes up 13% of the segment's revenue.
WileyPlus has been important to growth but the most important growth driver is Deltak. Deltak is an online course management system. Deltak has been able to grow with the adoption of online classes. Deltak now represents 19% of revenue. The Education segment is growing but there are some near-term headwinds.
Deltak is the fastest growing Education sub division but may experience a slowdown. According to US News, Babson Survey Research Group estimated growth in online courses slow down in 2012. Babson Group estimates online courses grew 6.1% which is the slowest in a decade. PwC's estimates don't make the prospects of the Education segment look any better. PwC estimates global education book sales will grow a total of 3.5%, from 2013-2018. Global print sales are expected to decline $1.6 billion while eBook sales are expected to grow $2.9 billion. Since print represents a larger share of Education revenue, Print's decline will overshadow eBook's growth.
The Education segment has experienced a significant amount of growth over the last 4 years. The company has made several strategic acquisitions which has driven this growth. However, the overall stagnation of the education book market along with the possible slowdown in online courses will hinder this segment's growth rate.
Over the last 4 years, the company's revenue has shifted away from Professional Development towards the Education and Research divisions.
|% of Revenue||2011||2012||2013||2014|
The shift isn't necessarily a bad thing. The Professional segment's contribution margin is the lowest of the three segments.
The issue for Wiley is the Education segment is rapidly losing margin and may face a slowdown in revenue growth. The Research segment has remained extremely profitable but the segment is suffering from slow growth.
John Wiley's stock has outperformed the S&P 500 by over 24 percentage points in the last year. The company's restructuring plan has been well received by investors.
|Valuation Metrics||P/E (TTM)||P/S(((TTM)))||EV/EBITDA(((TTM)))|
|John Wiley & Sons Inc.||27.7||2.0||12.1|
|The E. W. Scripps Company (SSP)||740.4||1.4||16.5|
|Scholastic Corporation (SCHL)||28.8||0.6||8.0|
|Pearson plc (PSO)||17.4||1.8||13.0|
Source: Yahoo Finance- Key Statistics
Yet, the company is trading at a high valuation for a low to mid single digit growth company. The company is overvalued based on the P/S ratio and is valued more reasonably on a P/E and an EV/EBITDA basis. The company's stock is overvalued or at best fairly priced. Ultimately, the company is too dependent on physical publishing to command such high multiples.
Declining Sales Outweigh Growth
John Wiley & Sons is a company in transition. The company's three operating segments are all suffering from the decline in physical book sales. Each operating segment has been able to offset this decline with varying degrees of success.
The Professional Development segment has suffered significantly from prints decline. The segment is overly dependent on the physical medium which represents 64.9% of sales. Digital books have failed to offset the decline despite the industry's move toward digital. The company's one major growth driver is Online Training & Assessment which won't be able to offset the decline in books sales over the near-term.
The Research segment has experienced 0.35% growth over the last 3 years. Journal Subscriptions' slow growth has weighed on the segment. Additionally, physical book and other publishing sales have declined rapidly which hasn't been fully offset by Open Access and Digital Book's growth.
The Education segment has been growing fast. WileyPlus and Deltak are driving this segment higher. However, online course growth appears to be normalizing and slowing down. This slowdown combined with slow educational book sales will reduce this segment's growth rate.
John Wiley will have trouble growing revenue while Journal Subscriptions and non-digital publishing (77.7% of revenue) continue to grow slowly or even decline. These two segments will cause the company to struggle to grow revenue. The company's slow growth combined with the current valuation (27.7 P/E and 2.0 P/S) make the stock not worth the risk.
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