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

F2Q2012 Earnings Call

December 8, 2011 10:00 a.m. ET

Executives

Steve Smith - President and Chief Executive Officer

Ellis Cousens - Executive Vice President, Chief Financial and Operations Officer

Analysts

Drew Crum - Stifel Nicolaus

Torin Eastburn - CJS Securities

Dave Lewis - JPMorgan

William Packer - Exane BNP Paribas

Michael Corty - Morningstar

Operator

Good morning and 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.

I will now go ahead and turn the call over to Mr. Steve Smith, please go ahead.

Steve Smith

Good morning. Thank you for participating in Wiley's fiscal year 2012 second 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 will take a few moments to provide an overview of Wiley’s performance in the second quarter, and we will then respond to your questions and comments. In a difficult global economy, Wiley achieved revenue growth of 1% in the second quarter, but declined slightly excluding the positive effect of foreign exchange. Currency adjusted revenue growth of 1% in STMS, it was offset by decline of 2% of P/T and 1% for global education.

EPS of $0.83 decrease by $0.05 both including and excluding the effects of foreign exchange. Lower revenues and higher technology and facilities and costs were partially mitigated by improved gross margin and lower interest expense. For the six months, revenue of $877 million was flat on a currency neutral basis but grew 3% including the positive foreign exchange impact. Adjusted EPS for the six months fell 2% to $1.51, excluding favorable foreign exchange adjusted EPS fell 6%, reflecting the top line results and higher technology and facility costs.

Year-to-date gross profit as a percentage of revenue was 70.1%, 1.3% ahead of the prior year figure of 68.8% due to increased digital product sales, product mix and timing. Year-to-date shared services and administrative costs of $194 million were up 10% due to ongoing investments in digital products and infrastructure and increased facility costs related to the consolidation of operations and the doubling up of occupancy costs during the payout period as we move to new premises in Singapore, San Francisco and the UK.

Free cash flow for the first six months was a use of $88 million. $63 million greater than the prior year. Lower cash earnings as a result of the timing of subscription cash collections, higher non-cash subscription revenue and higher capital spending on technology were the major driver of the higher cash usage. Subscription cash collection delays relate to the timing of 2012 subscription renewal negotiations and are expected to recover in the third and fourth quarters.

Net debt was $428 million at the end of the quarter, down from $545 million a year earlier. During the quarter, Wiley repurchased 600,000 shares at a cost of $28 million. Now I would like to provide some information regarding performance of Wiley’s global businesses. STMS second quarter revenue of $251 million increased by 3% or 1% excluding the favorable effect of foreign exchange. Currency neutral journals revenue grew by 1.5% over prior year, reflecting solid underlying calendar year 2011 subscription and reprint sales growth. Partially offset by lower backfile sales and the adverse impact from the timing of issue publication.

Journal subscription revenue grew by 1.8% in the quarter and is up 3% year-to-date. The lower growth rate in the second quarter reflects the adverse impact of publication timing versus the second quarter of fiscal year 2011. It is still early in the calendar year 2012 journal subscription renewal process. And we are working closely with our customers on a large number of significant -- we have successfully negotiated approximately one third of our full year forecast subscription and license revenues which is ahead of where we were at this time last year. And early indications are that our growth rates will be similar to those experienced in calendar year 2011.

Cash collection typically follows licensing and invoicing by around 30 days. As a result of the expected timing of collections noted with respect to the second quarter, to be the cleared by the end of the third quarter. We have completed negotiations with members of several large consortia customers, such as JUSTICE, the Japan National and Private University consortium; the NESLI consortium in the U.K., the (inaudible) consortium in France, ANKOS in Turkey, the Bavarian consortium in Germany, the Statewide California Electronic Library consortium, Georgia University System consortium, among many others. In aggregate, the value of these licenses is growing in line with our expectations.

The STMS book business was down by 4% against prior year on a currency neutral basis, reflecting tight library budgets. Direct contribution to profit for the quarter of $107 million was 4% ahead of prior year or 2% ahead on a currency neutral basis. For the six months, STMS revenue increase 1.9% on a currency neutral basis to $504 million reflecting solid journal subscription income growth, growth in backfiles and corporate sales offset by a 6% decline in book sales. Excluding the impact of a large one-time sale to Saudi Arabia in the first quarter of the prior year, STMS book sales are flat with prior year.

Year-to-date their contribution to profit increased by 4%. In the quarter STMS signed new contracts with societies to published six new journals with combined annual revenue of $3 million and renewed or extended contracts of published ten journals with combined annual revenue of $11 million. Four journal contracts were lost with combined annual revenue of $560,000.

For the 12 months ending in October 2011, full text access on Wiley Online Library increased by 50% across all product types compared with the same period a year ago. In September, the company launched the Wiley Job Network designed to get corporate recruiters access to the highly coveted market of professional job seekers. The Wiley Job Network combines Wiley’s community of highly skilled professionals and researchers, must have content on Wiley Online Library and cutting edge job board technology into a digital offering that is unique in our market.

Six Wiley authors were named among the list of 2011 noble laureates. Wiley authors were joint winners of the 2011 Nobel Prize in Physics and the 2011 Nobel Prize in Physiology. Second quarter professional trade revenue of $112 million declined 1% or 2% excluding the favorable effect of foreign exchange. The decline is largely attributable to softness in consumer categories, particularly cooking and travel, which were greatly impacted by the loss of sales to Borders which contributed the sales growth in the prior year through December, combined with the impact of subsequent Borders liquidation sales that have negatively impacted sales through other accounts in the first half of fiscal year 2012.

We believe that these deep discounted sales were finally completed in mid-September. Sales of For Dummies titles grew strongly across multiple channels for the quarter and year-to-date. Revenues in the business, finance and technology categories continued to grow, powered by the rapid growth in sales of e-books and other digital products. E-book sales increased by $5 million to $9 million in the quarter. Strong global sales growth at Amazon, Barnes & Noble, and Apple contributed to the increase along with sales growth with a number of new e-book vendors.

The growth in e-book sales as a percentage of total P/T revenue is having a positive impact on gross margins. Gross profit at 63.3% of revenue reflected 2.1% improvement compared with the same quarter in the prior year, due to e-book growth and lower inventory provisions. Direct contribution to profit grew 6% to $31 million or 5% excluding foreign exchange, reflecting top line results higher gross margins from digital products and cost controls.

Second quarter, global education revenue was flat at $84 million, or down 1% excluding favorable foreign exchange. Factors negatively impacting revenue include the impact of college bookstore inventory buildup for rentals in the prior year, higher returns and the slowdown in several international markets. According to published industry data, the U.S. higher education market declined by 0.6% from January to October, during which period Wiley’s U.S. sales increased by 1.9%. Despite strong student demand, decreased public funding has slowed the growth in the number of available seats at two and four year public institutions. The higher education market has also been affected by the decline in for-profit enrollments resulting from a federal investigation into their recruitment practices.

Non-traditional and digital revenue, which includes WileyPLUS, e-books, digital content sold directly to institutions, binder editions and custom publishing, was up 10% to $27 million and accounted for 32% of total education revenue. WileyPLUS billings were down 7% for the six months year-to-date, mainly due to the lower for-profit college enrollments in the U.S. Outside the U.S., year-to-date sales in EMEA are down 8% on a currency neutral basis as a result of decline in the Middle East. Revenue in Australia, where we are about to enter the peak ordering season is running slightly behind.

In September, we executed an institutional license agreement with Indiana University. This agreement will enable the University to licensed access to Wiley’s e-book and WileyPLUS on behalf of its students for a per section fee. All eight Indiana University campuses, collectively serving over 100,000 students, are eligible to participate under this agreement, which begins in the spring semester of 2012. Global Education direct contribution to profit for the quarter was flat at $32 million or down 1%, excluding favorable foreign exchange. The decrease reflected top line results and higher direct operating costs, offset by improved gross profit margins.

In conclusion, our revenue performance at mid-year reflects the continuing softness we are facing in many of our markets, particularly for higher education. We continue to focus on sustaining our core business, while innovating to create new business opportunities and revenue streams that leverage Wiley’s unique combination of talent, rich content and enduring customer relationships. While continuing to invest in our future, we will manage costs prudently to protect bottom line expectations for the business as a whole in fiscal year 2012.

Based on our first half results and market conditions, particularly for higher education, we are lowering our full year revenue guidance from mid-single to low single digit growth, excluding foreign exchange. As a result of careful cost control to cover the revenue shortfall, we are reiterating our EPS guidance of $3.15 to $3.20 with possible currency related upside if the U.S. dollar remains at current levels. This excludes the $0.14 deferred tax benefit related to reduction in UK tax rates from the prior year.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Drew Crum with Stifel Nicolaus. Go ahead, please.

Drew Crum - Stifel Nicolaus

Okay. Thanks. Good morning everyone. So I want to go back to the guidance for fiscal ‘12. The EPS guidance implies a pretty significant uptick in EPS growth in the second half versus the first half. What do you attribute that to, or what are you assuming in the second half that drives that growth? And I guess, as a follow on to that, coming off the first quarter, you had mentioned an incremental $0.10 benefit coming from ForEx. Is that still the assumption embedded in the EPS guidance?

Steve Smith

Yeah, Drew, hi, this is Steve and I’m going to start and then, Ellis, I’m sure will chip in with some further remarks particularly on the foreign exchange impact. So, we have confidence in our EPS forecast for the balance of the year based on a number of factors and I’ll just reel off a few of them for you and we can talk about in greater detail as you wish. But first of all, we have improving comparables versus prior year in the second half of the year compared with the first half of the year. A number of factors there. First of all, obviously the presence of Borders in the first half of fiscal ‘12 whereas -- sorry, for the full fiscal ‘11 and the first half of fiscal ‘12 we will have a like-for-like comparison starting from December in the second half of the year, as well as the completion of those liquidation sales that I referred to.

Global Education had a strong first half in fiscal year 2011, but we saw the beginnings of a decline in that growth rate as of the end of October 2011. So, again we have better comparables in the second half of the year. We have some confidence on the results so far with 2012 journal subscription renewals, which will fuel growth in the last four months of the year, as well as the presence of that Saudi online book deal in the first half fiscal ‘11, which has made comparables for the year so far somewhat challenging.

All of those give us some confidence that we’ll see growth pick up a little bit in the second half of the year. We also expect to have the benefit of some very careful expense management that will kick in increasingly during the second half of the year. And some of that is the carry over timing benefits from the first half. And last but not least, to the extent that we miss our revenue targets there will be some incentive accrual adjustments in the second half of the year that would also provide favorability compared with prior. Ellis, add to that.

Ellis Cousens

Yeah, I can’t add anything to that. On your question about the foreign exchange piece, Drew, we said $0.10 at the end of the first quarter based upon what dollar rates were relative principally to sterling and the euros back at that point in time, and the assumption as stated was, if those rates stayed the same, we know they never will, it could go up or down or they could stay the same. So I actually shouldn’t say that we know they won’t, but the dollar as you probably know has strengthened a bit against both of those currencies, given some of the issues in Europe. And as a result I would lower that to something around $0.05 to $0.07 or so. I could tell you on a forecast based upon current rates that exist right now, I’d say $0.07, but I’m hedging a bit by saying I have some expectations dollar might strengthen a little bit further, so to be cautious I’d say $0.05 to $0.07 against prior year, as a benefit.

Drew Crum - Stifel Nicolaus

Got it. Okay. And just to follow-on. The expense management, any thoughts on the technology spend which was up pretty significantly in the quarter. Should we expect to see that moderate a little bit going forward?

Steve Smith

Yeah. So, Drew, as you know we’ve talked for many quarters now about this trajectory of technology expense growth and we have talked about how that is lumpy over points in time. So, the second quarter and the first half, quite frankly, was a bit of a lump. So whereas I don’t expect a decline in technology spend for the balance of the year, it will moderate a bit. Some of that has to do with the timing of what we are spending as planned, and some of that has to do with a reprioritization of some of that spending against what has been, as you can imagine change in our revenue guidance. A bit more difficult year than we imagined particularly in higher Ed.

So, we will be a bit higher and have to prioritize -- and have prioritized a little bit differently that will affect the second half. So, I would expect that to moderate a bit in the second half and as Steve said, that will contribute to some of the second half performance relative to the first half.

Drew Crum - Stifel Nicolaus

Okay. And shifting gears, the gross margin was up pretty significantly. I think, above 70%, it’s one of the highest, if not the highest, second quarter gross margin we have in our model, and I think we’ve seen out of your business for some time. Is that a fair run rate or a fair way to think about the business as it continues to transition from print to digital?

Steve Smith

Yeah. Again, Drew, we are pleased by that certainly. I wouldn’t use that as a run rate. Again, there’s some timing, but clearly a lot of our digital strategy is taking hold, so those investments are making sense. Those things, digital transformation and transitional are the things that are growing fastest in our business. So certainly, it’s one of those things in terms of managing the business. I can see the questions are completely legitimate and need explanation around the rates and levels of investment in technology. But clearly that is a major kind of fueler of growth so to speak, both in the present and into the future .So, again, it’s kind of investing a little bit ahead of revenue that is where you have -- one has the difficulty in terms of matching up perfectly investment with return.

So, a long answer to the short questions. I wouldn’t use it, but certainly the trajectory on gross margins overtime will continue to improve provided two things are true. One is that our technology investments continue to perform as we expect, and I would add one in there is that market conditions at some point will need to improve for us to see the full benefit of our investments in technology. And I am talking about out there. I am not talking about the next quarter or the quarter after that, but certainly some expectation of improvement in market conditions.

In the longer term, some of these investments as we’ve discussed are ones that have material benefits a couple of years out, two to three years out or so. So again, they make sense in the context of current market conditions but if we really want to see significant improvements that extend beyond gross margins, to a question you had before to operating margins, improving market conditions could certainly factor heavily into that.

Drew Crum - Stifel Nicolaus

Okay. And I just have one more question and I’ll jump back into the queue. It relates to the professional/trade, actually a two-part question. One is, have you seen any pickup in consumption amid the release of the Kindle Fire, which seems to be creating some buzz in the market? And then on a separate topic, the European Commission announced an e-book pricing probe the other day and I think the Justice Department also acknowledged that they are conducting a similar probe in the U.S. Are you guys in any way involved, or can you talk about how that impacts your business?

Steve Smith

Yeah. Drew, I’ll take both of those. So, we’ve seen, as I’ve mentioned in my remarks, a huge pickup in e-book sales, up over 100% in the quarter, up over 100% year-to-date. It’s fueled by a number of devices, including the Kindle and its various versions, as well as to the iPad, to the NOOK and a whole range of devices. And frankly, the more of these devices that are sold, the better it is for us and we are delighted to have those multiple channels and multiple devices. It’s too early for us to make any comment on the Fire and I would observe that the Fire looks like a great sort of multimedia entertainment device. It isn’t just a dedicated book reader and so what people actually will use that device for will be interesting to see. There are other tablets out there that have very similar features and functionality, including the Barnes & Noble tablet.

So, we’re looking forward to seeing the benefits from the holiday season of more and more devices in more and more hands, and we think that’s going to drive revenue. Interestingly, it does drive revenue later in the cycle whereas people used to buy the books before the holidays in order to give gifts to friends and loved ones. Now people turn on those devices on Christmas day, fire them up and the sales come a little later in the cycle for us. But it’s all a very positive trend and it’s exciting time in the world of e-books.

On the question of the e-books pricing probe, the Justice Department probe has actually been in progress for quite a while and the EU is following suit there. Wiley is not involved in that. The big general mass market and fiction publishers are those who are being investigated and the investigation is around this notion of agency pricing. Wiley does have agency pricing relationships with some vendors and we have more traditional vendor relationships with others, including Amazon. At this point, we are happy for those duel models to exist side-by-side, and I think we don’t feel any sense of risk around this issue of the investigation to pricing.

Operator

The next question is from Torin Eastburn from CJS Securities. Go ahead please.

Torin Eastburn - CJS Securities

Good morning. Can you provide any update on how you’re progressing with WileyPLUS Version 5?

Steve Smith

Sure. So, as you know, at the first quarter conference call we talked about the fact that we had delayed the launch of WileyPLUS 5.0. And we have made a lot of progress in the last quarter in terms of our plans to enhance WileyPLUS Version 4 for the spring semester. So, we will be launching a number of new courses based on an enhanced version of release 4, with a lot of the new functionality that was planned for version 5 in order to get that into our customers hands as quickly as possible. In particular, we made significant advances in the functionality of our very important accounting lists, we have also made improvements in the area of organic chemistry.

We are, in parallel, we are continuing to make advances with the development of WileyPLUS Version 5 to make sure that we have a fully functioning and very robust and stable system for our customers. We’ll have a beta launch by the spring of 2012, which will be in the hand of our customers. And we have contingency plans for our 2012 from this sales season to make sure that we have Version 4 title available for the fall of 2012. We have not yet announced a launch date of Version 5. We want to make sure that it’s rigorously tested and that we have everything in place before we made that announcement.

Torin Eastburn - CJS Securities

Do the issues you’re having with WileyPLUS explain some of the high technology spending so far this year?

Ellis Cousens

I’ll answer that, Torin, this is Ellis. There’s been a small increase in spend. As Steve described, we built some functionality or are building functionality into 4.0, that wouldn’t be a part of expense, that is capitalizable development. It will show up in depreciation eventually, there’s been more, a little bit more cash investment. We’re talking about a few hundred thousand dollars not a few million dollars here. So, we’re not talking about big numbers. But that will enhance the 4.0. And by the way when 5.0 does ultimately launch, it doesn’t mean that 4.0 gets shut down. Those two things run in parallel for a period of time because of the nature of courses and what’s required in certain types of course areas. So there’s not an abandonment of 4.0 when 5.0 ultimately launches.

I will say, just to add a little bit to what Steve described is, some of things that we did validate having to deal with 5.0, and you recall there was a performance issue not functionality and things like that, it was performance. And not wanting to turn a more slowly performing product into the hands of customers who are accustomed to a much more quickly or rapidly functioning product, so to speak, in somewhat layman’s terms. What we’ve done is validated the technical architecture and a lot of the components that would have contributed to that, we’ve made some minor tweaks. So the good news is, there is not a major overhaul required with respect to 5.0. So, it is, I would describe it as major tweaking, but tweaking nonetheless, not re-architecting and start from scratch kind of thing or back up 50% of the way and start over again.

So the good news is, so far from a technical perspective it looks very good. We’ve done some rigorous full load testing on it and found that it’s performing up to what we expect in terms of standards. So those are very positive outcomes as well. So, positive stuff on the front in terms of development. There is some additional investments. Some of the work in 5.0 to validate some of that activity is in the form of project and program management, so there is some additional expense related to 5.0, not so much related to 4.0. So, it’s not a key driver of technology investment. It really is driving what’s driving technology, what has been driving it all along, but there is some lumpiness associated with when you begin major initiatives and projects and where you invest and we talked a little bit about that.

Again, sorry for the long answer here, but I talked a bit about that, at the investor day that we had. We spoke a lot about our investment in technology, what we expect it to yield. We also talked about investing in some of the backend systems to support new business models. That’s beginning to -- those investments are beginning to ramp up a bit. Again, it’s not a vertical trajectory, but it is a trajectory that has some lumpiness associated with it. And it will be a little bit of time until we begin to shut down some of the legacy services that are being replaced by those new services and so forth. And I will say that, as part of that, there are adjustments in workflows that will be of benefit in direct expense and contribution to profits, so forth. So, the benefits will come not just in systems but also how we do the kinds of things that we do. Again, sorry for the long answer, but just wanted a little bit of context.

Torin Eastburn - CJS Securities

That’s alright. What, if any, has been the revenue impact?

Ellis Cousens

I’m sorry, I missed that?

Steve Smith

The revenue impact of that. We’ve lost a couple of courses. Overall, it’s a very modest impact. Most of our customers have stayed with Version 4 and are looking forward to those enhancements that I talked about. We could quantify it. It’s order of magnitude, it’s not much more than $1 million or thereabout, that’s what we know to date. And so, it is important, I think, that people understand that the challenge that we’re having with revenue in global education don’t relate to WileyPLUS. They relate much more to the overall market conditions. I referred to the market trajectory of the U.S. market as a whole being down 0.6% for the year-to-date, and we are outperforming that, we believe, and we’re outperforming most of our major competitors, although not all of them. And the revenue challenge really relates to the dramatic shortfall in for-profit enrollment first and foremost, as well as some other challenging factors within the distribution of higher education products.

Torin Eastburn - CJS Securities

Okay. And just one another quick one. I know M&A has been part of your strategy in global education. That seems to be an increasingly competitive space as far as deals are concerned. some of the multiples are a bit high. Have you changed your thinking or revised your thinking at all there?

Steve Smith

No. It’s not just been a feature of our strategy in global education, M&A. Acquisition opportunities are a constant focus for the company. We don’t look at target acquisitions as being the domain of one of our three global businesses exclusively. The whole area of learning and particularly online learning and e-learning is of huge interest to us for continuing professional education in that Professional/Trade segment. It’s of huge interest to us in terms of continuing professional development in STMS, particularly the fact that many of book learned society partners also see part of their mission is to provide continuing professional development opportunities for their membership.

So we’re looking at learning more broadly. You’re right that there’s a lot of competition for acquisitions in the e-learning space. But our ability to leverage investments across all three of our global businesses gives us some confidence that we can come up with credible business plans that would enable us to compete for acquisitions on sensible multiples, sensible pricing. Notwithstanding the fact that anything we do, we will make sure that the economics are sound and that the potential for return on our investment is there for the longer term.

Operator

Our next question is from Dave Lewis with JPMorgan. Go ahead please.

Dave Lewis - JPMorgan

Hey guys, good morning. The first question is, can you help us quantify the impact of Borders in the first half?

Ellis Cousens

Yeah, Dave, so there -- as it’s a little bit difficult, I mean, there was about $4.5 million worth of revenue sort of year-on-year. What is a little bit difficult to quantify is we know what sales we had last year in Borders, what we don’t know is sales that were foregone by customers that they may have made, that were offset by their liquidation sales affected all of the first half, and the second quarter as well at least through September. So, it’s kind of that -- I’d refer to this, Steve doesn’t, it’s not a custom to use this term in England, it’s called a double whammy. So we had the double whammy of last year’s sales plus this year’s liquidation. So, it’s a bit hard to quantify all of it.

Dave Lewis - JPMorgan

Okay. Thanks, Ellis. And then with regards to the margin guidance from investor day, flattish, the next two or three years. Ellis, can you just give us an update on what should be or how should we think about the base line from the traditional P/T retail businesses? I know, Borders is a bit of an outlier in terms of their performance recently, and many of the smaller retail distributors are very small with the exception of Barnes & Noble, of course. But with the speed of growth in e-books, I was just wanting to see if we get us an update on how we should think about the offset there between digital and the traditional retailers? Thanks.

Ellis Cousens

Yeah. I was digesting all of that, Dave, when I spoke to that at the investor conference, say about, sort of flattish margins, or I would characterize it as no worse than flattish margins. Again, not quarter-to-quarter, we are talking about over a two year horizon or so that I’d see us before we begin to see significant pickup in operating margins from some of the benefits of digital. We are certainly seeing them, as noted on some of the previous discussions and a question earlier in gross margins. It is the rate of technology spend, as we’ve discussed again, kind of offsetting that.

So, as kind of taken into and digested, some of the e-book transition from print to digital, I wouldn’t call that transformational, it’s part of the transition from print to digital. Some of those benefits are included within that assumption that we have margins that are roughly where they are today. It does exclude though some major things that may happen related to potential acquisitions. It may have -- what we might do with respect to -- and I did describe some of that in terms of continuing to change the cost structure of the business around off-shoring, some outsourcing of certain activities. We’ve certainly done it and talked about some of that in the past. We believe there’s more opportunity to do that.

So it’s not just digital transformation that’s affecting the operating margins. It’s a whole range of things. I just mentioned a little bit and did so at the discussion as well around some of these back-end systems and looking at sort of workflow dynamics in the business and how it is we support -- how we historically supported what was largely a print business with very little digital. And how workflows would be modified and they imply cost savings in direct expense as well in terms of how you support digital workflows. They are different, and they allow us to do some consolidation, whereas we might have managed our workforce somewhat differently in the past.

So, there’s opportunities that are throughout the business and we are being aggressive in taking advantage of those. So there’ll be more that we’ll talk about over the next quarters and couple of years or so. So it’s kind of good news. It’s exciting for us that there are opportunities to favorably change the cost structure of the business to offset more of the technology spend than we have in the past. So that’s a combination of all that and the margin contributions from moving from print to digital.

Dave Lewis - JPMorgan

Okay. Thanks, Ellis. And I’ll just ask one last two part question on higher Ed and I’ll hop off. Can you just give us an update on your -- on the for-profit impact, when do you think that might subside? And the second part of the higher-ed question is, you’ve discussed the IU, Indiana institutional model, that sounds interesting. Can you provide any color on what perhaps the uptick could be from some other major institutions, perhaps there’s so many schools, Ohio or California, those would be other big markets I would think. Are they pursuing this type of institutional relationship as well? Thank you.

Steve Smith

Thanks, Dave. So, let me take both of those. So far throughout 2011, it’s hard to get an exact number. We estimate that the for-profit enrollments have fallen off something like 20% versus the prior year. And the largest single player there has shown a decline of 110,000, I think, against a base of 490,000. So these are pretty substantial declines in enrollment. And they reflect, I think, the increased regulation around enrollment practices. But there’s also, I think, some rebalancing on the part of prospective students about the value of a college degree and whether there’s a return on investment there in terms of increasing employability.

Everything that I’ve read suggests that we are close to hitting the bottom of that trajectory. Certainly, Apollo are predicting a return to some low single-digit growth from about now onwards into 2012. It’s too early to call what will happen, I think, next fall, but we’ll be watching those enrollments very closely. And it has taken us a little bit by surprise, I think it’s taken the industry by surprise, frankly. I don’t think anybody called this exactly or there were, in fact some early warning signs that there may be some declines in those enrollments. So, our assumption is leveling out of that but not a return to rapid growth to the prior year numbers.

In terms of Indiana University, it’s a very interesting partnership that we have with them, the notion of an institutional license. What we like about that is obviously the fact that we can have books and products into the hands of every student, and that every student on the course has access to that and that helps sustain repeat business. It’s very much a pilot, but we’re working with IU and other publishers that have a similar license with them. And what we’ll be looking at and what the University will be looking at, is clearly the usage of this and what it delivers in terms of improved outcomes for students that are taking those courses.

We’re having conversations with a number of customers on multiple fronts about similar kinds of institutional licensing deals. You mentioned SUNY, Ohio, I think University of (inaudible) California. I won’t comment on individual university systems, but we are having conversations on multiple fronts. Both here in the U.S. and around the world. And in fact we think that some of the early successes we’re likely to have with these kinds of institutional sales may well be in developing parts of the world where universities are gearing up. There isn’t a legacy system for distributing and purchasing print products and we can skip that generation and go straight to institutional licenses.

The benefit for Wiley is we also have an institutional sales force selling Wiley Online Library for our research products in journals and books. So, it gives us an inroad to be able to have those conversations at high levels with the administrations of universities around the world.

Operator

The next question is from William Packer from Exane BNP Paribas. Go ahead please, your line is open.

William Packer - Exane BNP Paribas

Hi, thanks for taking my question. I’ve got some questions around the STM division specifically. So firstly what percentage of revenues are sourced from emerging markets and how do you think these will grow in 2012? Secondly, for the STM division, what portion of full-time equivalents are currently off-shored, and where do you think this number could be in 2015? And finally, just perhaps to firm up exactly why there was weakness within the book division, am I right in thinking it was purely phasing issues and library budgets, or am I mistaken? Thanks very much.

Steve Smith

Thank you, William. I got your first and third question, I didn’t pick up your second question exactly. You would mind -- let me deal with the first and the third and then you can re-ask the second. So the percentage of revenue from emerging markets obviously depends on how you define an emerging market. Asia is a mixture of emerging and mature markets, overall our business splits around it. Approximately 40%, 40%, 20% between North America, Europe, Middle East and Asia. So 20% from Asia. Asia has for a long time been the fastest growing segment, continues to be that. China, is it an emerging market, not really now for us. We’ve got a very substantial footprint there. So it’s not really a question I can answer without getting down to the granularity of individual countries, which I don’t think this is the right time to do that.

You asked about the decline book sales. Yes, it is a combination of timing and tight library budgets. I mentioned the difficult comparable we had in the first half because of the quite large Saudi Arabian online book deal that we had in first half of 2011. And we are in conversations with a very large number of customers around similar deals of varying sizes. When library budgets are tight, libraries tend to protect their journal subscriptions and their journal licenses first. And regarding purchase and other things including books and databases is somewhat more discretionary.

We often find that we have a lot of new orders coming in around the end of budget year for libraries and in many parts of the world that budget year’s end in March, rather than December. So, there’s a lot more for us to work on throughout the balance of the year and we hope to see some growth in the second half. Could you repeat your second question?

William Packer - Exane BNP Paribas

Sure. Just a quick follow-up on the first question. So, that 20% you identified as Middle East, Asia, would you be able to share a broad organic revenue growth rate you’d expect for 2012 there?

Steve Smith

I won’t. Not on this call.

William Packer - Exane BNP Paribas

And then, to my final question.

Steve Smith

Let me just correct for that, that 20% was Asia. So Europe and the Middle East is 40%, Asia is 20%.

William Packer - Exane BNP Paribas

Understood, thanks. And then the final question was around, the sort of moves in the industry towards off-shoring and I just wondered what percentage of your current full time equivalents are currently off-shored at the moment, and where did you think this could progress by 2015? (inaudible) the STM division?

Ellis Cousens

Yeah, well, I can’t isolate it for the STM division. What I will do is, say that we have a large, a very large hub of activity offshored in Singapore, based in Singapore. It supports principally our STMS business but not exclusively our STMS business. Those are Wiley colleagues and employees and then we outsource principally to the Philippines from there. So there’s a significant amount of support that is focused out of Singapore. I can’t tell you percentage of heads. Again, it’s mostly content management, support kinds of activities as opposed to editorial.

And then we have a very large in-shore for offshore. I kind of hate to use that term, but a large number of colleagues who are based in Russia, who support some of the content technologies associated with STMS, but principally support our higher education business. That’s a very large group. It’s a significant proportion of our technology staff and our web publishing technology group. And we do that because the costs associated with senior developers in that region are less than half the costs of just about anywhere else. They’re comparable to the cost of developers in India, but in fact it’s probably diverging at that lower costs or will soon probably be lower cost in India as well. So I can’t break it out by business unit or by region, but just to say that there’s a significant amount of activity and there’s opportunity to do more.

Operator

(Operator Instructions) Our next question is from Michael Corty with Morningstar. Go ahead, your line is open.

Michael Corty - Morningstar

Great. Thank you, good morning. I had a few questions on professional/trade. The first one is in terms of the e-book sales. Is it too early to know how your market share in e-books is compared to your traditional books, in terms of just market share versus your competition? And then on the gross margin, obviously the improvement you’ve mentioned, the digital migration, someone had asked a question about gross margin overall for the company. But in terms of professional/trade with the growth of e-books, how should we think about those gross margins or how do you think about them over the next, like three years?

Steve Smith

Okay. Michael, first of all, it’s difficult for us to benchmark our e-book trajectory versus competitors because it varies dramatically segment by segment within the professional/trade industry. And it depends on the type of book and the usage of book. For the big fiction publishers now they are seeing anything from 25% to 30% of their total revenues are coming from e-books. We have some product lines that are getting close to those kind of numbers. But the early pickup in e-books has been -- the fiction story has been the most dramatic. Actually, this year’s Frankfurt Book Fair was interesting, much of the talk was around the next wave being non-fiction. And we certainly see in some categories like business and technology, we’re getting rates that are certainly up around 20% of overall sales coming from e-books. But it’s less for other categories, and so overall, our percentage of total trade book revenues that come from e-books is in the low teens.

We expect that to continue to increase as I say they’ve doubled, e-books has already doubled this year to date. We expect, obviously, as the base grows the rate of growth will moderate but overall we expect e-books to continue to increase as a percentage of our revenue. And we expect that to have a very beneficial impact on margins. As Ellis said, this is transition This is migration away from print to digital and there’s a lot of waste in the print book, a lot of inefficiency in the print book distribution paradigm. We print in anticipation of demand, we send books to book stores in anticipation of demand, they send it back to us. Ultimately, there is a fair amount of wastage in the print book model, and all of that goes away in the e-book world. And so it will make the industry more efficient, it will make Wiley more efficient, it will help take out significant costs. And one of our priorities will be to manage the infrastructure base to support print in order to anticipate when print overall will start to decline.

I should emphasize that at this stage, although we are seeing most of our growth coming from e-books, we’re still seeing print books holding up at fairly consistent levels across most categories. And so, the question is when will print start to decline as e-books become even more entrenched. And there is also quite a bit of variability around the world. So e-books are much more established here in the U.S. The U.K. is running probably a year’s time lag behind the U.S., and the rest of the world further back still. So, we still haven’t seen the surge of e-books outside of North America. So as I said, overall, a positive story, it’s going to have a beneficial impact on margins.

Ellis Cousens

Yeah. Just to add a little bit, Michael. Quantitatively, roughly it depends on mix of products and what’s selling and what’s growing faster with respect to transitioning from print to digital to e-books, I should say. But there’s roughly 20 points of margin on average, kind of over time going from printed to e-books. So, if we kind of extrapolate that out, you can draw your own conclusions about what the effects will be. As how that sort of transitional trajectory kind of goes and as Steve just noted, when it begins to significantly erode print book sales. I mean, some of the e-book sales are incremental, and some of them are cannibalizing print. So, at this stage it’s hard to separate what’s what, quite frankly.

Michael Corty - Morningstar

Great. I really appreciate the insight there. And then a quick one on the higher education. Thanks for the comments on the licensing deal with Indiana University. That was very interesting. Can you comment on what do you see competitors doing in terms of trying to push through similar initiatives with universities, kind of what you see from competitors?

Steve Smith

Very briefly, Michael, because I don’t want to get drawn into a long conversation about competitors, obviously, our competitors are very active in doing many things, a lot of them are very interesting and we follow them with great interest. Several of our large competitors, but not all of them, are participating in the in the pilot with Indiana University. Several of our competitors are making significant acquisitions and investments in similar ways to Wiley, that are looking at opportunities to get closer to their customers, including changing the nature of the dialogue with institutions. Focusing around, I think, the potential outcome for using published education materials, whether traditional print books or enhanced learning vehicles. And it’s an interesting and dynamic time in the industry, let me just say that.

Operator

That is currently the last question. I will now turn the call back over to Mr. Steve Smith. Go ahead, please.

Steve Smith

So thank you for participating in the second quarter conference call. We look forward to talking to you again at the end of our third quarter. Thank you.

Operator

Thank you, ladies and gentlemen for joining today’s presentation. That will conclude the call. Have a wonderful afternoon.

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