John Wiley & Sons' CEO Discusses F1Q 2012 Results - Earnings Conference Call

| About: John Wiley (JW.A)

John Wiley & Sons, Inc (NYSE:JW.A)

F1Q 2011 Earnings Call Transcript

September 8, 2012, 10:00 am ET


Steve Smith - President, CEO

Ellis Cousens - EVP, CFOO


Drew Crum - Stifel Nicolaus

Dave Lewis - JPMorgan

Torin Eastburn - EPS Securities

Michael Corty - Morningstar

Ian Whittaker - Liberum Capital


Welcome to the John Wiley & Sons quarterly earnings call. Before introducing Steve Smith, President and Chief Executive Officer, I would like to remind you 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. Mr. Smith, please go ahead.

Steve Smith

Good morning and thank you for participating in Wiley's fiscal year 2012 first quarter investor conference call. I'm with Ellis Cousens, Executive Vice President and Chief Financial Operations Officer; and Brian Campbell, Director of Investor Relations.

I'll take a few moments to write an overview of Wiley's performance in the first quarter and we will then respond to your comments and questions. Before I do so, however, I'd like to draw your attention to an 8-K statement filed on Tuesday concerning my health in which we announced that I am being treated for urologic cancer.

I have been treated surgically to remove all detectable tumor cells. I am now undergoing chemotherapy treatment to ensure that no cancer cells remain in my system. My doctor has advised that the prognosis is good for a full recovery and I expect to continue working through my treatment.

I am grateful for the unwavering support of Wiley's executive leadership team and the Wiley board of directors and I'm as passionate as I've ever been to be leading this great company through a period of exciting change and opportunity.

I'd like to now focus our attention on the company's first quarter results. In a difficult global economy, Wiley showed positive revenue growth for the quarter, both as reported and on a performance basis.

Including the positive effect of foreign exchange, revenue advanced 5%. Wiley's currency adjusted revenue growth of 0.4% versus prior year reflects the ongoing momentum in our STMS business offset by anticipated decline in P/T and a decline in global education resulting from weak market conditions.

On a US GAAP basis, earnings per share increased $0.10 including FX to $0.82 or by $0.05 excluding FX. US GAAP EPS includes deferred tax benefits of $0.14 and $0.07 per share for fiscal year 2012 and 2011 respectively.

The tax benefit was derived from two consecutive legislations productions in the United Kingdom corporate income tax rates. The benefits had no current cash tax impact.

Adjusted EPS of $0.68 increased $0.03 including the effects of foreign exchange but declined by $0.02 on a currency neutral basis. Higher operating administrative costs were partially offset by lower interest expense, a lower effective tax rate and gross margin growth. Adjusted EPS excludes the deferred tax benefits.

Operating and administrative costs of $231 million were up 10% of 5% excluding the adverse effects of foreign exchange driven mostly by technology spending to support investments in digital products and infrastructure and increase volatility and other direct costs to support business growth.

Free cash flow for the quarter was a use of $59 million, $22 million greater than prior year. Lower cash earnings was a result of the acceleration of calendar year 2011 journal cash collections into fiscal 2011 and higher capital spending on technology with a major driver to the higher cash usage.

Net debt was $353 million at the end of the quarter, down from $573 million a year earlier. During the quarter, Wiley repurchased 184,700 shares at a cost of $9.4 million. In June, Wiley increased its quarterly dividend by 25% to $0.20. It was the 18th consecutive annual increase.

Now I'd like to provide some information regarding the performance of Wiley's global businesses. STMS revenue of $253 million for the quarter increased 10% or 3% excluding the favorable effects of foreign exchange. Journal's revenue grew by 6.4% over prior year and by solid underlying subscription growth of 3.4% per calendar year 2011 receipts to date, strong publication flow, impressive back [file] sales growth and an excellent start to the year for corporate sales.

Institutional licensing business continues to grow accounting for 77% of total calendar year 2011 subscriptions versus the prior year of 72%.

The STMS book business was down by 2.5% against prior largely as a result of a one-time $5 million digital book sale to Saudi Arabia in the corresponding quarter of the prior year as discussed previously.

Direct contribution to profit for the quarter of $106 million was 13% ahead of prior year or 6% on a currency neutral basis. In the quarter, STMS signed new contracts with societies that published 14 new journals with combined annual revenue of $4 million and renewed or extended contracts to publish 36 journals with combined annual revenues of $5 million. No journal contracts were lost.

For the 12 months ended in July 2011, full [fixed] accesses on Wiley Online Library increased by 63% across all product types compared with the same period a year ago. During this period, usage of journals was up 64% and our books 86%.

Wiley Online Library was launched in August 2010, so this 12-month supporting period represents the true cumulative impact of the Wiley Online Library launch. This growth in usage can be attributed to the increased discoverability of Wiley Online Library, content by Google and other referring websites, improvements to the Wiley Online Library user experience and functionality and organic growth in the number of users achieved through better market penetration.

Impact factors are an important measure of journal quality based on the frequency with which arts was published in a particular journal sited elsewhere in the period of the literature. The high quality of the Wiley Blackwell Journal portfolio as [admitted by] impact factors and ranking is an important element in the purchasing decision making for customers.

The Thomson ISI 2010 journal citation reports show that Wiley Blackwell has continued to increase both the number and proportion of its journal titles with an impact factor with 1087 titles and 73% of our total now included. This is an increase of 7% from the 2009 journal citation reports and includes 58 titles which have received their first impact factor.

First quarter professional trade revenue of $100 million grew 0.4% or fell 2% excluding the favorable effect of foreign currency. The decline is largely attributable to the reductions in the consumer and technology categories.

Consumer fell by 8% to $24 million due to the timing of the Borders bankruptcy last year and the short-term impact of store clearance sales of Borders locations or in other retailers this year.

The decline in technology category of 8% to $19 million reflects strong stocking orders in the first quarter of the prior year associated with significant software releases.

Operational improvements have enabled us to increase the frequency and speed of shipments to major accounts. As a result, wholesale and retail accounts have reduced their inventory on hand and their returns.

Revenues in the business finance categories continue to grow powered by the rapid growth in sales of ebooks and other digital products. Ebook sales increased by $7 million to $11 million in the quarter and now account for 11% of global P/T revenue.

Strong global sales growth of Amazon and Apple contributed to the increase along with sales growth of a number of new ebook vendors. The growth in ebook sales as a percentage of total P/T revenue is having a positive impact on gross margins.

Variable gross profit at 63.5% of revenue reflects a 2% improvement compared with the same quarter in the prior year.

Direct contribution to profit grew 5% to $23 million or 2% excluding foreign exchange reflecting the top line results and the higher gross margins from digital products.

First quarter global education revenue fell 2% to $77 million or 5% excluding favorable foreign exchange. The decline in revenue is due to a combination of delayed ordering patents, lower orders for rental stock, declines in [proprietary] enrollments and a slowdown in several international markets.

According to published industry data, the US higher education market has declined by 8.4% since January and by 2.6% over the 12 months ending July. Despite strong student demand, decreased public spending has reduced the number of available seats at two and four-year institutions while the decline in [proprietary] enrollments is the result of a federal investigation into recruitment practices.

Non-traditional and digital revenue, which includes WileyPLUS, ebooks, digital content sold directly to institutions, finder editions and custom publishing, was up 13% to $18 million.

WileyPLUS billings were down 12% mainly due to lower college enrollments in the US. We are delaying the launch of WileyPLUS 5, which will not be made available to customers for the full semester as planned.

We determined that the new version was not ready and decided it was in the best interest of our customers and our company to delay the launch. The delay effects 35 WileyPLUS courses, which account for around 16% of the total number of WileyPLUS courses available.

We are assisting affected customers and are implementing contingency plans that vary from course to course which in many cases involve remaining on a current edition of WileyPLUS.

We are working hard to improve the performance of WileyPLUS 5 in order to bring a high-quality product to market as soon as possible.

We signed a partnership agreement in the quarter with Blackboard. Blackboard is estimated to have approximately 80% of the North American market and campus learning management systems. They are the leading present commercial LMS systems globally with a growing presence in the Middle East and Asia.

Instructors at any Blackboard campus will have direct access to WiileyPLUS courses in their discipline. When WileyPLUS is adopted, the instructors will be able to assign WileyPLUS directly through Blackboard and students will have a seamless experience between Wiley course materials and their campus environment.

The agreement with Blackboard will enable us to increase WileyPLUS penetration in low validation markets, increase direct digital ecommerce sales and enable sales to distance online education programs.

Global education direct contribution to profit for the quarter declined 17% to $26.9 million or 20% excluding favorable foreign exchange. The decrease reflected top line results and higher direct operating costs.

In conclusion, we remain confident that Wiley will weather the ups and downs of these challenging market conditions through the balance of fiscal year 2012. We continue to gain market share in the markets we serve. We are focused on accelerating the transition to digital business model, which remain critical to our ability to serve the needs of our customers.

We will take necessary steps to reinforce our ability to sustain our track record of excellence in delivering major technology projects.

Based on our first quarter results, market conditions are leading indicators. We reiterate our fiscal year 2012 guidance of currency neutral, mid-single digital revenue growth and EPS in the range of $3.15 to $3.20 with an upside of up to $0.10 a share in the US dollar remains at current levels. This excludes the 14% deferred tax benefit related to the reduction in UK tax rates.

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

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of Drew Crum - Stifel Nicolaus.

Drew Crum - Stifel Nicolaus

Just one additional clarification on the guidance; the additional $0.10 you're assuming with no changes to For Ex, is that expected or would it be expected over quarters two through four of fiscal '12 or is that in addition to what you picked up in the first quarter, which I believe was $0.05?

Ellis Cousens

So the $0.10 is what we would expect over the entire year based upon what we see in the first quarter, which was $0.05 versus prior year rates but our guidance when we begin the fiscal year is based upon a full-year weighted average rate. So the $0.05 isn't contributory to the $0.10 in full, not to get too technical about that. But it's actually about $0.02 a share that comes out of the first quarter towards the $0.10.

So if we stay at roughly where the dollar is relative to let's say sterling and the Euro -- obviously we're exposed to some other currencies as well, but those are the two principle ones -- we would expect that we'd get about $0.10 in total, so $0.02 plus an additional $0.08 over the remaining three quarters. Is that clear?

Drew Crum - Stifel Nicolaus

It is, thank you, Ellis. Just sticking with the guidance, the organic growth that you are forecasting for fiscal '12, how do you see that progressing through the balance of the year? You were up less than 1% in the first quarter. What are you expectations or thoughts for the businesses or the company as a whole as you progress through the year?

Ellis Cousens

Yes, so you're talking about revenue now, right?

Drew Crum - Stifel Nicolaus


Ellis Cousens

Yes, well, certainly we would expect a stronger second half, particularly fourth quarter or something in that neighborhood for professional trade. As you know, we had the benefit of Borders, so to speak, in the first quarter of last year, so that counts for some of the lightness in the first quarter this year.

As Steven noted and I think as we noted in the earnings release as well, there's a little bit of timing with respect to what we saw in the first quarter with respect to higher ed with respect -- meaning the ordering patterns and so forth.

So we expect a little bit. Of course, the first quarter and second quarter are the big quarters with respect to the higher eds. We'd expect certainly better performance in the second quarter than we saw -- sorry, in the second half of the year or the -- sorry, the three quarters of the remainder of the year in higher education.

In STMS, as we indicated, renewals for '11, as we spoke about earlier in the year, play out through the balance of this calendar year, we don't know yet what the renewals will look for the coming fiscal year -- sorry, the coming calendar year, calendar year 2012. It's a bit too early to tell on that.

However, reiterating our guidance, mathematically we get to a stronger three quarters on average than you would for the first quarter, albeit, again, without good, solid, strong performance out of STMS, the difference being made up principally out of professional trade and higher ed over the remainder of the year.

Drew Crum - Stifel Nicolaus

Then you mentioned the calendar '12 journal subscription renewals. While it's still early, are you guys doing anything different this year than you did last year with respect to -- go ahead.

Ellis Cousens

Well, last year I would say we were in great shape and did a terrific job in terms of renewing and also I've noted in the numbers moving -- a number of customers are moving more towards licensed models. We're now at 77% of the journal's business under license for 72 the year before.

So we continue to drive business into the license model. Customers find that very attractive. So we're encouraged where we start the year -- sorry, where we start the renewal cycle. We're in great shape as we were last year.

So there's nothing new, so to speak, just maintaining the level of effort that we had last year, which was a terrific year in terms of execution, in terms of signing up customers, getting out there early and closing business early.

Drew Crum - Stifel Nicolaus

Shifting gears to higher education, any explanation behind the weakness in WileyPLUS and given the delay, the 5.0, is the expectation for that trend to continue?

Steve Smith

So the weakness in WileyPLUS for fiscal '12 is really the result of falling enrollments. So we wouldn't have expected a major boost from WileyPLUS 5 to actually impact revenues this year. It would have been more customers migrating from release 4 to release 5.

So what we're seeing there has really impacted the market conditions, falling enrollment, particularly in the for-profit sector. That said, we, of course, are very concerned to make sure that we rectify the challenges that we face with WileyPLUS 5.

It really relates to complexity in the application and we, of course, wanted to make sure that we could be 100% competent in the performance of WileyPLUS 5 before it went live with our customers.

It was really the recognition that we didn't have that confidence that has caused us to hold it back and we are not going to give a date today as to exactly when we believe WileyPLUS 5 will be released. But we are very focused on getting that done and we'll have that announced in the market as soon as we can.

Drew Crum - Stifel Nicolaus

The other admin line and shared services was up considerably. Can you talk about what the nature of that was and what you're anticipating through the balance of fiscal '12?

Ellis Cousens

Yes, Drew, so certainly foreign exchange factored into that quite a bit, so in terms of other -- sorry, operating and admin expense, there was about $10 million worth of adverse foreign exchange. I think Steve noted that, 9.5%, 10% growth. That was noted on a -- including currency as just under 5%, 4.7%.

That, principally driven by shared services, that principally driven by a technology stint, the technology stint increase was about $5 million in the quarter, excluding foreign exchange. So an increase coming from certainly Online Library, increase maintenance, some spending against new initiatives and continuing initiatives certainly to get 5.0 where we need to have it and also to support growth in the activity with respect to Online Library in terms of hardware and licensing and maintenance and things like that.

So it's along the trend again. We talked about team level growth of technology spend. Some quarters it'll be low end of the teens and some quarters it'll be higher ends of the teens. So we don't manage to a specific number. We're managing, again, specific initiatives.

I'll also note that we had some -- this is a little bit of a one-time thing -- but we had duplicative rent or duplicative rent, I guess is the right English word for that. In three facilities we are moving into a smaller, more condensed space in our distribution facility in the UK called [Bogner] putting in some automation to get us into that much smaller space.

So there's a little bit of investment related to hardware associated with that, which you will see coming and it's part of what our projected spend is for this year, so it's in our capital spending numbers.

There's a little bit of duplicative rent that ran through the first quarter but will be out by well in the second and on quarters related to [Bogner]. That was about $0.5 million or so excluding foreign exchange, maybe $100,000 or so of foreign exchange there.

We also consolidated into a single facility in Singapore. We had formerly had our legacy facility pre-Blackwell in Singapore and we had the Blackwell facility in Singapore. We've consolidated into one facility, so there's a little bit of duplicate rent there, again about $0.5 million or so, a little bit more.

Then also we're, as the lease expires in San Francisco, we're moving into lower cost, better accommodations for [Josie Bass]' folks and others working in San Francisco. So there's a bit of duplicate rent there. That'll be out by the end of the third quarter.

So a little bit of overlap in rent there, $1.5 million to a couple million dollars or so that's unusual one-time-ish that contributed to a higher level of growth in shared service expense than you typically would have expected from us.


Your next question comes from the line of Dave Lewis - JPMorgan.

Dave Lewis - JPMorgan

The first one is can you guys discuss how the economics are different between WileyPLUS or a sale through [Core Smart] and ebook rental through Amazon?

Ellis Cousens

We haven't discussed the margins specifically and they are -- the products are not exactly identical, so WileyPLUS [holds] is WileyPLUS. There are discounts associated with different intermediaries who manage or handle our product. We haven't discussed those specifically and won't.

We sell arrangement products through [Core Smart] including digital text books and the like. So it's a mix of products and it's Amazon as well, different products. So sorry, the long answer to the short question is, no, we don't discuss the specific economics and discounts associated with those different products or different markets [or] different intermediaries.

Steve Smith

The principle here is to offer students choice wherever possible. So those are students who want to rent a book through Amazon are able to do that and the terms of our agreement there, we believe, are well for the company and give the students that choice. But, of course, we are really seeking to exploit every channel to reach students given that flexibility.

Dave Lewis - JPMorgan

Just one quick follow-up for the quarter with higher ed, were you guys able to quantify the timing impact in the quarter in terms of revenues or percentage?

Ellis Cousens

Not specifically; we'll know more of that as we progress through the second quarter. In fact, we might be able to get some color on that end of the second quarter in December.

Dave Lewis - JPMorgan

Just a couple of questions on profession and trade; you mentioned market share gains in the quarter. Do you expect there to be consolidation in professional and trade as some authors and smaller publishers move to larger publishers with more established digital strategies? Is that an opportunity?

The second after that is are you seeing -- I know you don't have full transparency in terms of book sales on the back end, but are you seeing more units being purchased as accessibility increased? I wouldn't frame it as an impulse buy but is that realistic? Are you seeing some trends like that?

Steve Smith

We do have quite a bit of visibility into sellthrough through a service called Nielsen Bookscan that aggregates point of sale data from retail channels. Of course, with ebooks we know that we're portfolioing to the end user, so we have a very clear visibility into end user data.

The good news is -- and I think this is also reflected in some industry data -- book sales are holding out extremely well and there's been growth overall over the last two years. So the trends there are quite favorable and, again, I think it's accessibility, as you say. It's discoverability and it's the ease with which people can now find relevant material and acquire it and read it on the platform of their choice.

Could you just remind me of your first question again? It was about market share.

Dave Lewis - JPMorgan

Sure, it was just with professional trade you cited market share or some outperformance in the quarter I guess is how I'll frame it. Is there opportunity to take market share in that business as I think publishers might have to gravitate or smaller publishers might have to gravitate or authors might have to gravitate to more established publishers like yourself that have firmer digital strategies, stronger digital strategies?

Steve Smith

The specific segment I was referring to there was business and finance where we've made some very good gains over many years now. I think it would be stressing the point to say that authors are going to look for larger publishers because of their digital strategy but clearly authors look for a platform in additional to obviously wanting to maximize their returns in terms of royalties.

They are driven by the desire to build a platform for their thinking and for their work and the innovations that publishers like Wiley have made in digitizing content not just as ebooks but also going beyond that to making it more interactive and to enriching that content are ways in which we can make the user experience more valuable and, therefore, drive greater use of their office products.

So it's a competitive gain. It's not just scale and size but it's also the intelligence with which you intervene to make content more valuable. We're very focused on that and we have large teams of people who are working with authors to try and give the best possible user experience we can.


Your next question comes from the line of Torin Eastburn - EPS Securities.

Torin Eastburn - EPS Securities

My first question is on the STMS business. I think it was up 3% excluding FX. Can you characterize roughly what the split was between volume and price?

Ellis Cousens

It's a very complex question to answer. Certainly there is a pricing element associated with the journal renewal cycle year-on-year, so we increased license values by two means, one of which is market penetration and expansion -- or three means -- second is growth in portfolio and third is price.

So price is a factor associated with that. I couldn’t characterize -- again, it's fairly complicated because pricing is a mix of a number of things in terms of issue flow and size of issue and so forth. So it's a complicated question to answer in a very precise and [arosmatic] way only to say that pricing does factor into growth as a component.

Torin Eastburn - EPS Securities

In the higher ed business, the profitability declined much more steeply than the revenue. If you continue to have a quarter or two that were a bit slow, would you see similar profitability or was there something this quarter that was one-time in nature?[

Ellis Cousens

The quarter itself was unusual with respect to about -- so the variability in quarters with respect to higher ed were fairly significant. Nonetheless, it's a business that was principally driven by the fall semester.

The underlying costs are both fixed and variable, as you can imagine the fixed piece is there throughout the year. The variable cost in part is driven by volume. Much of that, though, is represented in distribution and other areas outside of the business in CTP as well -- itself.

There's nothing unusual other than the fact that the quarter was light relative to what the first quarter was in the prior year. So the profitability, I would expect that the profitability will swing with revenue based upon the strength of the performance of the quarter but it is a fairly seasonal business, shall we say.

So the variability and profitability is quite significant between, let's say, the first and second quarter and second half of the year, particularly the fourth quarter; pretty hard, again, a difficult question to answer with a degree of precision at this stage.

Torin Eastburn - EPS Securities

My last question, can you talk a little bit more about the Blackboard alliance and specifically is it exclusive? How does it work if there is a competing product in a field for a given class?

Steve Smith

Torin, it's not exclusive, so a number of publishers have similar licenses. For us, what's I think attractive here is that it enables students to get access to WileyPLUS content through their university LMS and their management system, which really helps facilitate greater usage, makes it more accessible to them.

There are some courses where overall validation rates for WileyPLUS tend to be quite high. There are some courses where students have access to the WileyPLUS content but don't actually use it because it's not been embedded in their LMS.

This is a way of driving up usage, reinforcing the value of WileyPLUS to instructors and to students as a way of sustaining the further growth of that business.


Your next question comes from the line of Michael Corty - Morningstar.

Michael Corty - Morningstar

I had a question on the STMS business. I'll try to ask it in a different way to get away from the pricing question. If you could just maybe comment on the relative areas of strength or weakness among your customer buckets, maybe first the US business versus international then secondly, academic institutions public or private versus your corporate customers, any directional guidance in terms of how those bucket of customers are doing relative to your expectations.

Steve Smith

So the overall trend has been one for a couple of years now where growing the licensing business has been tougher in the more mature Western markets than it has been in developing markets, particularly in Asia. That's continued to a degree this year, although we are seeing growth across all markets.

It's tougher, I would say, in some areas of North America and Western Europe whereas we're still continuing to see growth in Asia and that's the rebalancing and the growth in Asia has been a pretty constant underlying trend.

As I mentioned in my remarks, one of the things that's particularly encouraging about the first quarter is we've seen a rebound in corporate sales and that sales mostly but not -- certainly not exclusively to the pharmaceutical industry where we're selling commercial reprints, we're selling advertising space, we're selling sponsorship and it's very good to see that rebounding.

Again, geographically, we're seeing that across the world. So we've seen a pickup in corporate sales in the US, which was actually a pretty difficult market for us a year ago.

So we're -- the balance is changing each and every year a little bit more in favor of Asia and emerging markets. But the number of customers who have come to us to participate in the license business now -- as Ellis reminded you, 77% of the total -- means that we're still getting very good traction in North America and Europe.

Michael Corty - Morningstar

Then I had a few questions on the higher education business. In your comments you mentioned that industry was down 7% this year. What I’m trying to get at is how should investors look at a long-term growth rate for that business? Excluding foreign exchange, your sales have been up 6%, 15% and 7% in the past three years, so that’s very strong.

So some weakness shouldn't -- I'm trying to just reconcile the weakness you talked about in terms of enrollments versus just a tough comparison, so if you could just comment on that.

Steve Smith

Yes, I think there are a lot of variables at play in that market that make it hard to get a real read on what the impact of this year and the inferences that you draw from a longer-term trend.

The first thing that has to be said is the demand for student places has not dropped off at all, so there are -- the demand for two-year and four-year places from the population continues at a very high level and what's really -- what needs to happen is for funding to be in place in order for those students who are looking for places in the two and four-year programs to be able to take those places up.

The challenge is within the for-profit sector I think they're fairly well known but the review of recruitment practice in for-profit has led to significant declines in enrollment at the major proprietary universities and we see them beginning to climb back now but it may be a year or two before they get back to 2009 levels.

So, yes, our best guess of this would be that there's going to be a recovery in student numbers. Some of the things that are affecting sales in fiscal 2012 for us relate not just to enrollment but also to channel blurring with the growth in the rental market. Students are finding different ways to acquire these materials and for us to fully understand those trends, to understand what the underlying growth rates are going to be is really important.


Your next question comes from the line of Ian Whittaker - Liberum Capital.

Ian Whittaker - Liberum Capital

Just to follow up on that point in regards to the market, if one of the major factors of the decline in the higher education revenues is because of falling enrollments and at the state funded education establishments that's been driven by cuts in places, surely we're talking here about a two to three-year impact just given that state budgets don't look as though they'll be recovering any time soon.

If you look at what states are doing in the current budget rounds, again they seem to be focusing on higher education enrollment as a place they can save costs. Would that be a fair assumption?

Steve Smith

It's certainly an assumption and we look at it on a global basis. So where we're seeing enrollments decline in the US we see enrollments picking up elsewhere. I don't know that we're predicting a two to three-year hiatus or recovery period but it may be a little too early to say exactly what will happen this coming year.

Ellis Cousens

Also, as you noted, the demand is out there by students, that is, looking for places. There is an episode or has been an episode with respect to proprietary institutions where the government looked carefully at enrollment practices.

To the extent that those students look for economic ways of accessing the higher education it may be speculative just like any other whether it takes two to three years to recovery in the public sector in terms of institutions, they could migrate to proprietary institutions, which are lower cost and private institutions. That could be the case. Who knows? So it's a mix of different flows and forces driving the market.

Ian Whittaker - Liberum Capital

Just one follow-up question as well just on another factor which is the pricing of books; obviously that's been in the news a lot. Student bodies or one student activist body has obviously been making a lot of noise in that.

Are you starting to see significant pressure on book pricing here or is that still something which hasn't really occurred?

Steve Smith

Well, as we reported in previous quarterly earnings calls, the advent of technology and then our investment in WileyPLUS and in other formats, the so-called binder-ready versions or ebooks, enable us to offer a lot more flexibility.

So overall there are more deals, if you like available to students to acquire that content. Print book prices have not changed dramatically but students who want to adopt WileyPLUS or who will buy a binder-ready version are able to get the same content at much lower prices.

So it's that emphasis on flexibility I think that's been really critical. Overall, the game plan there is that by making the content available at prices that are attractive to students but in formats that maybe are less resilient in terms of used book sales is a way for us to continue to drive that business forward by increasing volume and at the same time giving some opportunities on price.


(Operator Instructions). Your next question comes from the line of Dave Lewis - JPMorgan.

Dave Lewis - JPMorgan

One last one for me; can you just update us on capital allocation and what the cash flow priorities, the digital acquisition strategies? You provided a good update last investor day and the balance sheet is coming down. Obviously there is quarter fluctuations driven by the nature of the business.

But in the context of also I guess a potential tax repatriation holiday, if there is an announcement on that then I'm not sure how much that could impact decision making or not.

Ellis Cousens

Dave, in answer to your question, the allocation of cash flow or available cash to amongst the options that we've discussed in the past over the last couple of quarters, so it's really not shifted. So our focus is principally on investments surrounding growth, so those would be organic investments, which are obviously there before free cash flow but focusing also on potential acquisitions and alliances to accelerate some of our growth strategies.

Those again are somewhat opportunistic. We can't make acquisitions happen but certainly we have an appetite to do those. In the absence of acquisitions, we're continuing to execute on a share repurchase program and reduce debt rather than having the cash sit earning something like 1% or something like that.

Of course, we're paying down debt that's not much more expensive than that 1% we're earning but at least it's the flipside of it, so there's a benefit associated with that. Of course, as Steven noted and you know, we've increased dividend by 25% this past June to $0.20 a share, so another way of getting cash back to investors that we cannot invest directly into our growth strategy.


I would now like to turn the call back over to Mr. Smith.

Steve Smith

Well, we thank you for your interest and we look forward to sharing the results of our second quarter with you in December. Thank you very much.


Ladies and gentlemen, this concludes today's call.

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