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Edited Transcript of JW.A earnings conference call or presentation 11-Jun-20 2:00pm GMT

·47 min read

Q4 2020 John Wiley & Sons Inc Earnings Call HOBOKEN Jul 5, 2020 (Thomson StreetEvents) -- Edited Transcript of John Wiley & Sons Inc earnings conference call or presentation Thursday, June 11, 2020 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Brian Campbell John Wiley & Sons, Inc. - VP, IR * Brian A. Napack John Wiley & Sons, Inc. - President, CEO & Director * John A. Kritzmacher John Wiley & Sons, Inc. - Executive VP of Operation, CFO & Interim CAO ================================================================================ Conference Call Participants ================================================================================ * Daniel Joseph Moore CJS Securities, Inc. - MD of Research * David Pang Stifel, Nicolaus & Company, Incorporated, Research Division - Associate ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning. And welcome to Wiley's Fourth Quarter Fiscal Year 2020 Earnings Call. As a reminder, this conference is being recorded. At this time, I'd like to introduce Wiley's Vice President of Investor Relations, Brian Campbell. Please go ahead. -------------------------------------------------------------------------------- Brian Campbell, John Wiley & Sons, Inc. - VP, IR [2] -------------------------------------------------------------------------------- Good morning. And welcome to Wiley's Fourth Quarter and Fiscal 2020 Earnings Update. On the call with me are Brian Napack, our President and Chief Executive Officer; and John Kritzmacher, our Chief Financial Officer. A few reminders to start. The call is being recorded and may include forward-looking statements. You shouldn't rely on these statements as actual results may differ materially and are subject to factors discussed in our SEC filings. The company does not undertake any obligations to update or revise forward-looking statements to reflect subsequent events or circumstances. Wiley provides non-GAAP measures as a supplement to evaluate underlying operating profitability and performance trends. These performance trends do not have standardized meanings prescribed by U.S. GAAP and therefore, may not be comparable to the calculation of similar measures used by other companies. They should not be viewed as alternatives to measures under GAAP. Please see the reconciliation of all non-GAAP financial measures presented in the supplementary information included in our press release. Unless otherwise noted, we will refer to non-GAAP metrics on the call, and all variances will exclude the impact of currency. After the call, a copy of this presentation and a playback of the webcast will be available on our Investor Relations web page. I'll now turn the call over to Wiley's President and CEO, Brian Napack. -------------------------------------------------------------------------------- Brian A. Napack, John Wiley & Sons, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thanks, and good morning, everyone. On behalf of all Wiley's colleagues, I'd like to extend our thoughts to the many lives -- many whose lives have been impacted by the global health and economic crisis. The past 100 days have reminded us of the critical importance of community and that how much we all rely on each other. We've been uplifted by neighbors, essential workers and health professionals as they work to care for all of us. At Wiley, we've seen our community in action with scientists furiously developing, testing therapies and vaccines and with educators innovating and adapting to ensure that learners can continue their developmental journeys through these difficult times. We stand in solidarity with those affected by the egregious acts of racial injustice in Minneapolis, Louisville and elsewhere in the world, and with those bringing awareness to this fundamental problem. The core values of community are central to Wiley's culture. Everything that we do is we work to improve access and affordability and education and to facilitate scientific progress, such as medical breakthroughs. Now more than ever, our work can help to heal, recover and rebuild and thrive. Like most businesses, Wiley's short-term performance has been adversely impacted by the pandemic and the resulting economic dislocation. At the outset, our priority was, of course, to ensure the safety and well-being of our colleagues. We transitioned very smoothly to work from home worldwide. Throughout, we've continued to support our customers, partners and communities without interruption. From a performance perspective, we drove hard through the fourth quarter and finished the year ahead of our April 9 expectations. During this period, we also generated good momentum in our key strategic areas of focus. The company is fundamentally strong. We benefit from modest leverage and ample liquidity. Nonetheless, we do face near-term uncertainty as universities and corporations work to adapt to new market and economic conditions. Consequently, we're stepping up our business optimization initiatives significantly in response to the pandemic, while carefully prioritizing the timing of investments to best serve our customers. Despite short-term challenges brought on by COVID-19, our key businesses: peer-reviewed research, online education and corporate e-learning, continue to enjoy long-term positive trends. This is because each is an essential component of the global economy. In fact, many of the long-term trends driving these businesses, on which we built our strategies, are accelerating in our favor as a result of the current situation. Given the limits of our near-term visibility, we will not be providing annual guidance for fiscal '21 at this time. We will, though, be transparent in the quarters to come about what we're seeing, and will provide important data points and KPIs, as we make our way through the recovery period. I want to recognize the tireless work of our Wiley colleagues. They have kept the Wiley ship sailing strongly forward through the work-from-home-transition and have largely thrived in terms of productivity and engagement. The team has continued to hit our goals and milestones while mitigating any impact on our operations brought on by the pandemic. Through the period, we've been securing important subscription agreements, even in hotspot areas, increasing publishing output, supporting numerable educators through urgent transition online and driving strong cash collection. In our regular surveys, an overwhelming majority of our colleagues report feeling both happy and productive. My heartfelt thanks to the entire team for their accomplishments, dedication and comradery. I'm pleased to report that a few of our international offices have already begun to reopen, although we do anticipate an extended and careful period of transition as we go back to the office. Through the crisis, we've made large amounts of scientific and medical research, digital courseware and online education services freely available. We specifically opened up thousands of COVID-related research studies to help the search for effective testing therapies and vaccines. And we've helped many university schools and companies go virtual as their physical operations have been disrupted. We're also working hard to keep the broader community supported wherever possible. Among other things, we are honored to have partnered with 2 organizations, GetUsPPE.org, which is the (inaudible) deliver over 1 million face shields and other PPE to health care workers worldwide, and Digital US, which is focused on working to equip workers with essential digital skills over the next 10 years. This will be even more critical going forward given the massive job dislocations. We've always been proud of what we do in research and education, but it's come into Chris' focus amid the ongoing health concerns and economic insecurity caused by the coronavirus. Wiley is not immune to the disruption caused by the pandemic, but it's important to recognize that long-standing market trends remain highly favorable to Wiley businesses. Many of these are accelerating due to COVID-19. The value of peer-reviewed research is unquestioned and the demand to publish and consume research continues to increase even through the crisis. The pandemic has caused colleges, universities and students to embrace online education with unprecedented speed. To date, educators have had to be more reactive than strategic, but already, a sudden shift to remote learning has made digital courseware delivered at a compelling price point, obviously, essential and rising adoption and usage stats show this. Long term, the wide-scale transition to education will benefit our growing service businesses as people migrate to efficient, affordable career-focused education to gain the degrees and online credentials that they need to get jobs in an even more challenging labor market. On the corporate side, employers will continue to need help finding training and upskilling employees with hard to find skills in areas such as information technology, and there is now increasing recognition (inaudible) and cost effective and powerful solutions. We are well aligned with our content platform and service offerings to help universities and corporations address the persistent skill gaps that exist today and going forward. Let's turn to the quarter's results. Note that we'll be excluding the impact of currency when discussing performance. As I stated earlier, COVID-19 has had a significant impact on the fourth quarter with revenue, adjusted EPS and adjusted EBITDA down 2%, 44% and 23%. The challenges introduced by the pandemic include the shutdown of retail bookstores and the temporary prioritization of essential goods by online retailers, which significantly impacted print book sales. The shutdown of testing sites for college entrants and certification exams impacted our sales of test prep courses. The closure of corporate offices naturally led to the shutdown of in-person corporate training, which impacted the sale of our corporate assessment and training programs. And university closures delayed some journal subscription agreements, although we did finish the quarter strongly. The GAAP EPS loss of $2.83 this quarter reflected 2 noncash, nonrecurring impairment charges. In Education Services, we recorded a noncash goodwill impairment charge of $110 million. Performance below acquisition expectations and COVID-related headwinds contributed to a determination that the carrying value of the Education Services segment exceeded its fair value. That said, we remain fully confident in the strong revenue growth and profit potential on our Education Services business. Second, we recorded a noncash trade name impairment charge of approximately $90 million related to the Blackwell brand. This reflects the decision to simplify our brand portfolio by unifying our research journals under the Wiley brand. This approach will result in a sharp reduction in the use of the Blackwell trade name acquired in 2007. The charge is entirely unrelated to COVID-19 or the expected future performance of the Research segment. We also recorded restructuring charge of approximately $15 million related to our multiyear business optimization program. (inaudible) both prior estimates due to additional actions related to the impact of COVID-19. I'll talk more about our efficiency measures, but I will say that we are controlling our expenses closely during the (inaudible) includes temporary pay reductions for me and for my direct report, leadership and our Wiley colleagues globally as we navigate through this uncertain economic phase. Collectively, the 3 unusual charges for the quarter amounted to $3.49 a share. Despite the obvious financial impact of COVID-19 on Q4 performance, we had some significant accomplishments. We closed important journal subscription agreements and drove strong double-digit open access growth. We achieved impressive research supply and demand metrics, including article submissions and platform usage. We generated momentum for digital courseware adoption before and during the transition to remote learning. We added 4 new university partners in Education Services, and we recorded $168 million in free cash flow for the quarter. For the full year, we continue to see solid revenue and profit growth in our Research and Education Services segments, while Academic & Professional Learning was weighed down by challenging market conditions for print books and the fourth quarter impact of COVID-19. Revenue rose 3%, while adjusted EPS and adjusted EBITDA declined 21% and 8%, reflecting the dilutive impact of acquisitions, investment in organic growth and the impact of COVID-19. Free cash flow was up 16% over prior year, but below fiscal year expectations, primarily due to COVID-related customer payment delays. Across Wiley, we made strong progress in fiscal '20 on our most important strategic priorities. This included publishing more in Research, driving growth and momentum in digital courseware and online education and improving our operating efficiency. Today, nearly 80% of Wiley's revenue is generated from digital products and tech-enabled services, and this continues to rise. Finally, our acquisitions this year bolstered our positions in IT career skills training, digital courseware and corporate research products and platforms. The integration of prior acquisitions are all proceeding as expected. Now let's take a look at our business segments. Our Research business had another good year, with revenue up 2% and adjusted EBITDA up 4%, even after factoring in COVID-19. In the quarter, revenue declined 1% while adjusted EBITDA was flat. As noted, we continue to see strong double digit growth in Open Access publishing. And calendar year 2020 journal renewals were steady. Demand -- metrics were exceptional in fiscal '20 with article submissions up 13% and Wiley online library usage up 25%. In the year, we continue to drive the market forward with comprehensive national agreements in the U.K., Sweden and Finland. Finally, our Atypon platforms business grew 11% with 8 new clients and recorded a 97% retention rate, further extending our market-leading position in the distribution of research content. Wiley Research continues (inaudible) a very strong market position with our strong portfolio of top-tiered journals publishing a growing volume of research. Our focus for fiscal '21 is consistent with our stated strategy and recent momentum. We will continue to drive article volume growth in Lead and Open Access. We must successfully navigate the calendar '21 renewal season as COVID-19 uncertainty weighs heavily on universities. Our calendar '20 subscriptions are locked in through December, and our calendar '21 season kicks off in September. Our content remains essential to researchers inside these institutions that were cautious but confident. We will continue to expand our presence in China, given the huge opportunity there to source and publish more high-quality research. We will continue to grow our research revenue streams in corporate solutions and in Research platforms. We made a couple of small acquisitions that we're excited about in the corporate space, one for spectroscopy software and databases that allow researchers and companies to interpret data, and a SaaS career center platform for societies, associations and other organizations. Just last week, we announced the deal to manage the science careers job for the Association for the Advancement of Science, AAAS, the world's largest scientific society. This is just another example of Wiley consolidating its leading position with societies enabling more upsell opportunities. In fiscal '21, we also will continue to drive the optimization of our journal portfolio and our workflows to both improve our efficiency and to enhance the researcher experience. Despite the world's uncertainties, research remains a fundamentally strong business with a recession tolerant profile and steady strategic momentum. As noted, Academic & Professional Learning was severely impacted by the pandemic shutdowns of universities, workplaces and bookstores. The most affected sectors for Wiley have been book publishing, mainly due to book store closures, test prep due to testing site closures and in-person corporate training programs due to corporate office closures. All of these have shown improvement in May, but the near-term remains challenged due to COVID-19. Academic & Professional revenue and adjusted EBITDA for the year were down 6% and 28%, respectively or down 16% and 49% for the quarter. On the bright side, as noted, the forced transition to remote learning has driven accelerated demand for digital courseware with strong fourth quarter momentum in our critical learning platforms, WileyPLUS, zyBooks and Alta. It's important to note that digital courseware and other digital content comprised 59% of Wiley higher ad revenue in the year compared to 35% for print books and 6% for other products. We also saw a good momentum in corporate e-learning with record usage for our cross knowledge SaaS learning platform and strong new corporate signings, with 60 new logos signed this year compared to 43 in the prior year. The question marks for us in Academic & Professional for fiscal '21 are fall university enrollments, pace of return to work and corporate training budget. We expect to have more clarity in the fall. Near-term uncertainty is evident across this segment due to COVID-19, long-term. Trends look favorable due to the increasingly robust migration to online learning in university and corporate settings. This move is being driven by the increasing market acceptance, value proposition of digital learning platforms (inaudible) deliver strong learning outcomes at a reasonable price. (inaudible) strategies and Academic & Professional Learning is unchanged for fiscal '21. We will continue to focus investing on high demand career areas, business, technology, engineering, science, math, and we will continue to deliver the highest-quality content on digital learning platforms that drive adoption, usage and education impact. We will leverage the accelerated shift to digital courseware and e-learning by delivering a compelling price value proposition in innovative pricing models. Across the segment, we have major efficiency initiatives underway to address the near-term headwinds by transforming our workflows and better aligning our operating models with customer segments. Education Services delivered another solid year, with revenue up 42%, 11% organically and EBITDA margin -- and our EBITDA margin tripling from 3% to 9%. The growth was driven by strong double digit growth in fee-based Education Services revenue. We added 4 new university partners in the quarter: Drake University in Iowa, University of Iowa, Methodist University in North Carolina and Point University in Georgia. At the same time, we expanded our partner support during the COVID crisis providing additional services, such as technology resources and addition -- and assistance with course perfection to get schools online quickly. We continue to improve the efficiency of the Ed Services business by optimizing the student life cycle from acquisition to graduation by fine-tuning customer acquisition costs and by driving student retention rates. The business remains on track to realize our fiscal '22 goal of the 15% EBITDA margin. The integration of mthree is proceeding as planned, although COVID-19 does present a near-term challenge as companies adapt to these shutdowns and evaluate their hiring plans. As a reminder, mthree delivers job ready IT talent to the world's leading corporations. We are mitigating the short-term demand issues with innovative programs that will help us accelerate out of the COVID pause by training and stockpiling high potential talent, so that it is ready to deploy when the market opens up. Since the acquisition, we've realized revenue and cost synergies across our growing tech education portfolio by integrating our 2 boot camp businesses, by driving collaboration between mthree and our IT courseware group and by developing joint go-to-market approaches for mthree and CrossKnowledge. As COVID-19 appeared, we saw a steep decline initially in new student lead volumes as the public focused on the crisis at hand. At the same time, colleges and universities closed and were forced to go online overnight. For us, the net result of this disruption remains an unclear picture for fall enrollment, although lead volumes have generally rebounded and schools are increasingly clear about their fall plans. We expect to have a clearer view of enrollment as we get closer to the start of school in the fall. While fiscal '21 is difficult to predict, we do, as you said, see a continued acceleration of the movement toward online education by universities, by corporations and, of course, by students. This is reflected in the continued high interest in our Education Services (inaudible). And with this trend -- and this trend will be helped by a challenging (inaudible) market, which typically after delay causes enrollment to rise. In short, post-COVID, people will be looking for ways to quickly and cost effectively get the education that can lead to better jobs. Wiley continues to lead in the market in helping universities and corporations find, educate and develop talent. And we're well positioned with 69 university partners, hundreds of degree programs and a growing list of corporate clients that look to Wiley to deliver (inaudible) talent. Key areas of focus in fiscal '21 for Ed Services include moving quickly to support (inaudible) university partners, adapt to changing conditions, adding new partners and programs to our high-quality portfolio, continuing to optimize the cost of student acquisition and to make the entire student journey more efficient. We have (inaudible) EBITDA margin. It also finished the integration (inaudible) while leveraging revenue cost synergies across our portfolio. Near-term uncertainty is the reality, but I think we're at an inflection point for effective career enhancing education in the form of online and hybrid degrees and nontraditional certifications that allow people to rapidly and affordably meet the specific and constantly changing needs of the labor market. I like where we sit. With that, I will pass the call over to John. -------------------------------------------------------------------------------- John A. Kritzmacher, John Wiley & Sons, Inc. - Executive VP of Operation, CFO & Interim CAO [4] -------------------------------------------------------------------------------- Thank you, Brian. As a reminder, we issued our annual guidance last June and updated it for our Q3 earnings report on March 4 to reflect the impact of subsequent acquisitions and foreign exchange movements. On April 9, about 3 weeks or so into the pandemic shutdown across the U.S. and Europe, we lowered our revenue, adjusted EBITDA and adjusted EPS guidance, and we withdrew our free cash flow guidance, given the lack of visibility around the timing of customer payments. Our guidance as of March and then the April revisions are shown here. Our fiscal year actuals are shown in the right hand column. As you can see, our colleagues rose to the challenge in April, closing new business, ratcheting down expenses and collecting on our receivables. Overall, our results trended favorably to our COVID-adjusted guidance. In the end, we're estimating that the pandemic shutdown adversely impacted the quarter's revenue and EPS by $30 million to $35 million and $0.15 to $0.20, respectively. Our adjusted EBITDA margin for the year was 19.4%. Earnings for the full year reflect our investment in long-term growth initiatives and strategic acquisitions. The inorganic earnings impact of acquisitions was $0.33 per share of dilution for the year, including interest expense. Free cash flow of $173 million finished ahead of prior year by $24 million or 16%, primarily due to improved working capital performance. Nevertheless, we estimate that approximately $30 million of delayed customer payments slipped into fiscal year 2021. Our cash flow from operations was favorable to prior year by $37 million. As you can see, we continue to deliver solid cash flow performance over time. This foundational strength will enable us to stay the course in executing our strategic plans during the challenging period ahead. Our balance sheet continues to give us the flexibility and capacity to invest, acquire and return cash to shareholders. Our leverage ratio at year-end was 1.6, well below the 3.5x cap under our revolving credit facility. In addition to our healthy cash flow and balance sheet, we have ample liquidity, with $200 million of cash on hand and undrawn revolving credit in excess of $700 million at year-end. Our strong record of returning cash to shareholders continued with fiscal year share repurchases and dividends totaling $124 million. Our current dividend yield is over 3%, and our next annual dividend review is scheduled for later this month. As a reminder, due to the economic downturn, we have suspended share repurchases until further notice. The next slide shows our capital allocation and how it's trended over time. We've consistently taken a balanced approach between returning cash to shareholders and investing for growth. In fiscal 2021, we expect to be opportunistic on the M&A front with continued focus on expanding our capabilities and scale in strategic areas. We project CapEx spend to be closer to $100 million with investment focused on the development of tech-enabled services and platforms as well as workflow and process redesign. We will resume share repurchases as the economic environment and our business improve. And as already noted, our annual dividend review will take place later this month. The pandemic uncertainty precludes us from issuing annual guidance at this time. We simply do not have sufficient clarity around the depth and duration of the ongoing health care crisis and the economic downturn. We are also withdrawing our fiscal '22 targets given such limited visibility. We are actively monitoring several key indicators to effectively manage the near-term performance of our business. On the Research side of our business, research funding and university finances are fundamentally important. On the Education side of our business, campus reopenings, student enrollments and university finances, which are tightly intertwined, are driving factors. Our corporate training businesses are dependent upon office reopenings and the duration of reductions in corporate spending on professional development. Although our near-term visibility is limited, our financial position is very strong, and we are well positioned to successfully navigate this downturn. Across our portfolio, our business models are predominantly digital and online, and as Brian noted, we continue to see good momentum in key strategic areas. Broadly speaking, our performance largely depends on the timing and success of unwinding global social distancing measures. When that happens and clarity returns to the global economic environment, we expect to resume providing annual guidance. In the interim, we are responding quickly to reduce costs and accelerate our efficiency initiatives to mitigate the adverse impacts of the economic downturn. Among the actions we have recently implemented, we initiated incremental restructuring actions incurring a charge of $15 million this quarter for actions that will generate run rate savings of approximately $30 million annually. The executive leadership team and the Board unanimously agreed to take 6-month pay cuts ranging from 15% to 30%, which are not financially necessary for Wiley but are important in demonstrating leadership's shared commitment to our colleagues across the company who will be impacted by deferred salary merit increases. We have implemented discretionary spending controls across the company. We are reviewing our real estate portfolio for rationalization, given success to date and working from home and the potential workforce benefits. We are significantly accelerating our process reengineering and technology in-sourcing initiatives to enable our strategic plans and reduce costs. We're going well beyond belt-tightening to simplify, standardize and automate our workflows for sustainable efficiency gains. To further mitigate the impact of the economic downturn, additional cost savings actions are anticipated as we make our way through the coming fiscal year. And with that, I'll now pass the call back to Brian. -------------------------------------------------------------------------------- Brian A. Napack, John Wiley & Sons, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Thanks, John. For over 200 years, Wiley has navigated periods of uncertainty, operational discipline, fiscal prudence and strategic [oversight] and we will continue to do so through this one, too. To recap today's main messages, Wiley's fourth quarter performance was adversely affected by the pandemic. We drove hard through the pandemic and ended ahead of our April 9 expectations, while continuing to generate good momentum in our key strategic areas. Our business is fundamentally strong and has reinforced a modest leverage and ample liquidity, but we do face near-term uncertainty in our markets due to COVID-19 and its economic impact. Nevertheless, long-term trends remain very favorable for our core businesses in peer-reviewed research, online education and corporate e-learning. Our strategic plans and investments are all focused in these areas, and we are carefully prioritizing the timing of our investments and accelerating our business optimization initiatives in response to COVID-19. Finally, our near-term visibility is just too limited to provide specific guidance at this time. Wiley is one of the most enduring companies in American history for a reason, our financial position, cash generation and business fundamentals remain solid. We have a long history of adapting to a challenging and changing world. And while today's disruption across the globe presents challenges, our business, as always, remains essential to the global economy, our core strategies matched very well as the future markets needs. Stating the obvious, it's been a difficult period for all. I wish you and your families good health and good luck as we continue to navigate through it. And once again, I want to thank our Wiley colleagues around the world for their incredible work and commitment, and for their remarkable accomplishments this quarter and this year. I'm grateful for the opportunity to work with such an extraordinary team. With that, we welcome your comments and questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Daniel Moore with CJS Securities. -------------------------------------------------------------------------------- Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [2] -------------------------------------------------------------------------------- I wanted to start with journal subscriptions. Can you give us a sense of where we stand today in terms of calendar '20 versus calendar '19, up or down by how much? And roughly what percentage of business is closed at this -- to date? -------------------------------------------------------------------------------- John A. Kritzmacher, John Wiley & Sons, Inc. - Executive VP of Operation, CFO & Interim CAO [3] -------------------------------------------------------------------------------- Sure. I'll take that, Brian. So with regard to subscriptions, Dan, as you know, we've got an evolving model where we are now entering into both pay-to-read and pay-to-publish models in some countries in Europe. So a direct comparison across 2 subscriptions signed versus prior year is a little bit different. But I would say in terms of our signing on business for this year, inclusive of both the mixed models and our subs agreements, we are even with prior year. We actually, as we noted in the comments earlier, made very good progress in April in closing additional agreements, and we expect to conclude most of our subscription agreements now during the balance of our first fiscal quarter. Again, this is all with regard to calendar year '20. The calendar year '21 subscription season gets underway in the September-October time frame. -------------------------------------------------------------------------------- Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [4] -------------------------------------------------------------------------------- Understood, extremely helpful. And on that note, what are you hearing from your university journal customers at this point, obviously most, if not all, are under pretty extreme financial stress. What are maybe some of the dialogues and steps that you're taking, whether it be temporary price concessions, volume discounts and then maybe eliminating noncore titles, just as they navigate through this interest -- pretty unusual budget times? Any color there would be extremely helpful. -------------------------------------------------------------------------------- Brian A. Napack, John Wiley & Sons, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Absolutely. So as you said, we feel confident in the essential nature of our content, but you're right to point out that universities and university budgets have been under pressure or will -- or expected to be under pressure. We expect that to be evident as we go forward, really more about next year than this year. To date, we've been very close to our -- very close to the market. Obviously, you would expect us to be. We've been speaking to them. We've closed a bunch of deals in the -- during the COVID period. We saw no excessive price pressure during that period or (inaudible) as you might worry about. So far, the signals are good. We continue to keep our ear to the ground, as far, have just not been -- not seen the pressure you would expect. Having said that, we're really early in this, Dan. The -- as I would say about many of our businesses, the world and the university world in particular, is still trying to sort out (inaudible) librarians are very protective about their collections. They want to keep it. They know the value of it. Universities understand the value (inaudible) peer-reviewed to their research activities, which are key to their university rankings on a global basis. So this is important stuff. To be clear, we've seen no material price pressure, no material unbundling or anything of this sort. I wouldn't be surprised to see some. You also asked about specific actions that we've taken. We went out early with a commitment to hold prices flat this year. We went public with it before anybody else did anything of the sort, and we were extremely well rewarded in PR for that. The (inaudible) in good faith. As you know, we have taken the position as a good actor who in this market that wants to make sure that the entire ecosystem is healthy and collaborative in supportive research. So that was a bold move on our part to support the necessary, and we believe it is allowing us to get ahead (inaudible) secure the '21 renewals with greater ease and greater confidence. So that's basically the story. -------------------------------------------------------------------------------- Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [6] -------------------------------------------------------------------------------- That's perfect. Great color. I'll sneak in one more. Switching gears to Education Services. Obviously, it seems to be in the catbird seat as it relates to the shift to online. Are there any impacts you're seeing from COVID? Clearly, you continue to sign new business. We expect to continue to grow at healthy rates in fiscal '21, and if not, why not? -------------------------------------------------------------------------------- Brian A. Napack, John Wiley & Sons, Inc. - President, CEO & Director [7] -------------------------------------------------------------------------------- Yes. So '21 is unclear right now. It's easy to say that COVID disruption is moving everything and everybody online. And in the long run, we believe we are (inaudible) beyond that inflection point where that's happening, and we can see it in many ways. But we're in an unsettled period right now, and we are not going to go out and say that, that's going to come flowing through our enrollments immediately. What we do believe is that in the long term, the trends are very much in our favor. And you see that in the interest level in our services that we're seeing right now. But to date, most universities have been actually stunted by this. They're not making long-term strategic decisions. They're making short-term decisions on, what the hell do I do to get my students back on campus? And what do I do with my teachers who don't want to go into the classrooms because of the fear of getting infected. So to date, it's been more tactical. I think these trends play out over time. Again, specifically, what we've seen since the crisis is initially a significant decline in (inaudible) generation, which you don't want to see. But happily, that's back -- that bounced back. And right now, we're at or above our 3-year levels, even at a time when people don't know (inaudible) left from right. So we're not -- we're seeing reasonably -- reasonable confidence (inaudible) but it's still really early days. We won't know -- as you know, the fall season, the fall enrollment is what really matters. And we won't have a good beat on that for a few months. So as that happens, we'll keep you guys posted. But we are optimistic and we see good tailwinds in this segment as soon as we get through the uncertainty and dislocation that currently is affecting our university partners and students and sorts of stuff. -------------------------------------------------------------------------------- Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [8] -------------------------------------------------------------------------------- That makes perfect sense. But as of right now, to be clear, no change to the fiscal '22 targets on that side of the business? -------------------------------------------------------------------------------- John A. Kritzmacher, John Wiley & Sons, Inc. - Executive VP of Operation, CFO & Interim CAO [9] -------------------------------------------------------------------------------- So Dan, I commented earlier that we're going to -- we are withdrawing the FY '22 targets given the uncertainty ahead of us. What I should point out is while top line performance is less clear in this environment, we're making a lot of progress on the profitability of that business. And so the 15% EBITDA target that we set for that business is well in sight. We made good progress against that this year. We delivered 9% EBITDA margin on that business this year. And we see a clear path to getting to the 15% EBITDA margin target that we set. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from David Pang with Stifel. -------------------------------------------------------------------------------- David Pang, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [11] -------------------------------------------------------------------------------- What was the source of the goodwill impairment for the Ed Services segment? Was it Learning House or was it Deltak? And what drove the underperformance relative to expectations? And then secondly, can you talk about the inventory levels at college bookstores and what your expectations are for the ordering patterns for the upcoming fall semester? -------------------------------------------------------------------------------- John A. Kritzmacher, John Wiley & Sons, Inc. - Executive VP of Operation, CFO & Interim CAO [12] -------------------------------------------------------------------------------- Sure. David. So first, with respect to the impairment of goodwill in the Education Services business, our balance sheet carries about -- had carried about $200 million in goodwill associated with the combination of the original Deltak acquisition and the more recent Learning House acquisition. As we noted in our comments, the goodwill impairment reflects an underperformance against our acquisition case assumptions, and that, in particular, relates to revenue growth. We had particularly aggressive revenue growth assumptions. And over time, we've not delivered on those. So in light of the lower performance historically in that business and given the economic headwinds that we see in the near term, the impacts on universities and potentially online enrollments, we model the business for lower revenue performance in the near term. To the comments I just made to Dan, we still expect the profitability of the business on the revenue base to be strong, and we are cautiously optimistic about future growth in the business. But given our track record and given what we see in the near-term in terms of COVID-related headwinds, we found that the carrying value was in excess of book value. And so we made an adjustment to goodwill. I would not distribute it particularly to the Deltak or the Learning House businesses. They're integrated now. We did pay a higher revenue multiple, I should notice. For the Deltak business at the time that we acquired Deltak back in 2012, we paid about 4x revenue. Learning House was acquired for 3x revenue, so at a significantly lower premium. With regard to inventory at bookstores, I would say that what we've observed in the last couple of months given the slowdown in retail is that the inventories have remained relatively flat. What bookstores have tended to do is lower their ordering during this period but they've been shut down because without the retail traffic, they're not doing much to restock shelves. They don't have much volume that's passing through them for the most part. Now that's true. While the retail outlets have been fully closed, they are beginning to reopen. Some have some online business, but not the smaller us. But others have -- the larger retailers have online business. And all are slowly beginning to reopen first with curbside and then they'll move to be fully open for retail. That is in early days. And so I won't necessarily claim that this is a sustainable trend. But in early days, we are seeing some improvements in ordering as the bookstores prepare to continue serving their retail traffic. But again, it's early days. We still are just opening. And so there's some lingering effect here, and it won't be fully unwind until bookstores are fully open, up and running. And along with that would be beneficial to have students back on campuses at the university bookstores. -------------------------------------------------------------------------------- Brian A. Napack, John Wiley & Sons, Inc. - President, CEO & Director [13] -------------------------------------------------------------------------------- Yes. So I'll add just a little bit to that answer, which is an excellent answer. Interestingly, and not surprisingly, the consumer book sales numbers, industry numbers, have been -- point of purchase inventory numbers have continued relatively strong through this period of time. I'm not surprised when people at home they go online, they buy books. The channel mix of course has changed, but the volumes have been very good. And that's very hearty. People like books. They keep buying them, and particularly in the categories that we are in, the segments we focus on in the consumer business, business books and that sort of thing are strong categories that continue to grow. On the Education side, it's a very, very thin period right now for book sales, right? This is not a time when college books -- when college students are buying books, which is good, right? It means that during the peak of the COVID period, you're not worried about losing the bulk of the year. But it -- I will point back to -- from an inventory perspective, what will be very interesting to see what happened in August because that's when bookstores stock up for the college fall season. So that will be an interesting thing to watch. And that will be completely a function of the enrollment that they've secured between now and then, right? because that's what -- that's how it works. They basically say we're going to have this many students in the classroom, and we're going to order this many books. So really small enrollments that will drive that, and we won't have any sense of inventory until we get to August. But that will be a good indicator for -- a very good indicator for us to look at. Having said that, we are seeing significant movement, as I indicated in my remarks, toward the digital materials, the digital courseware that have been growing nicely for the last few years and that have accelerated now. So there may be an enhanced shift, which if you've been following (inaudible) that we've been talking about or the story that we've been talking to for the last couple of years, as we move to those digital materials, we may lose a unit at a relatively high price in physical print. But as we do, we gain multiple units of digital because the sell-through is 3x as high because of the lack of substitutes for the digital courseware. And so we like that shift. And so if we see some inventory and ultimate sell-through problems in this fall, some of that will come back to us. We're hoping a lot of it will come back to us in digital. So the key number to look at, and as we think about leading indicators is fall enrollment. It's all about the fall enrollment in the college business. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- The next question comes from Daniel Moore with CJS Securities. -------------------------------------------------------------------------------- Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [15] -------------------------------------------------------------------------------- Just, obviously, kind of doing everything that you can, John and Brian, to mitigate any near-term loss revenue as far as some of the restructuring efforts, taking aggressive cost actions, even executive pay, et cetera, netting that out, is there a way to think about kind of decremental margins in the -- to EBIT maybe just a broad range in the areas that maybe you're under the more pressure from a revenue perspective in the short term? -------------------------------------------------------------------------------- John A. Kritzmacher, John Wiley & Sons, Inc. - Executive VP of Operation, CFO & Interim CAO [16] -------------------------------------------------------------------------------- Dan, in the absence of guidance, it's really hard to comment on margin ranges in the go-forward business. I think to get a handle, though, on what the go-forward business looks like, start with thinking about the different businesses we're in and how they're impacted by the slowdown. So for example, in the Research business, as we talked earlier, most of the calendar year '20 subscription revenue and the mixed read and published agreements have been signed. And so they're effectively locked in through the calendar year, and then we'll see what impacts we have around library budgets when we make our way through the renewal season in the fall. But the margin -- the incremental margin on research sales, as you can imagine, is quite strong. Look across other businesses in Academic & Professional Learning, which is where we've had most of the adverse impact in terms of top line performance. We see a combination of pressure on book revenue, which has some reasonably strong variable margins, but not on the order of the margins that we see in research, and there are -- also within that segment, there are some corporate training services that have high margins. So modeling those out where we have the most impact, they're slightly different margins, but they're in that marginal range that we see around Academic & Professional Learning. And then in Education Services, as Brian said, it's -- we're looking into the market ahead. It's a bit uncertain overall in that segment. As you know, the overall profitability is relatively low and we're working on building that up. So we have a lot of confidence on sort of bringing that back. But I think if you take a look at the mix of what we see in revenue performance, you can begin to interpret where margins for the business will head next year. -------------------------------------------------------------------------------- Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [17] -------------------------------------------------------------------------------- Very helpful. 1 or 2 more, and I'll like to get back. M&A, I think you said was dilutive by $0.33 to fiscal '20, is that the right way to think about it? -------------------------------------------------------------------------------- John A. Kritzmacher, John Wiley & Sons, Inc. - Executive VP of Operation, CFO & Interim CAO [18] -------------------------------------------------------------------------------- The (inaudible) impact for fiscal '20 was adversed into the tune of $0.33, yes. -------------------------------------------------------------------------------- Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [19] -------------------------------------------------------------------------------- And any commentary on the direction of that dilution as we get into '21. I know you're not giving guidance, so if that falls under that category, that's fine? -------------------------------------------------------------------------------- John A. Kritzmacher, John Wiley & Sons, Inc. - Executive VP of Operation, CFO & Interim CAO [20] -------------------------------------------------------------------------------- Yes. I would only say, Dan, that we are expecting all to improve where, in particular, some of that dilution comes from the inorganic impact of Learning House. We're making good progress around the integration of Learning House into the Ed Services business, and as we've been saying, driving the EBITDA margin in the direction of 15%. So we'll see an improvement there next year. Also some of the dilution comes from our Knewton and zyBooks acquisitions. And again, we're integrating, and we're gaining ground rapidly in terms of sales of those products. So I also expect that the dilutive effects of those acquisitions will be substantially lower as well. -------------------------------------------------------------------------------- Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [21] -------------------------------------------------------------------------------- Perfect. Lastly for me. Just some really interesting commentary that Brian had around mthree. I think you said you were kind of continuing to strain and stockpile high potential talent for when demand increases. So just maybe remind us of the revenue model, how that -- if that's sort of on your dime if it requires incremental investment from -- it hopes to be placing people later? Just the dynamics of that would be really helpful. -------------------------------------------------------------------------------- Brian A. Napack, John Wiley & Sons, Inc. - President, CEO & Director [22] -------------------------------------------------------------------------------- Got it. Absolutely. I figure (inaudible) So for those that don't know, basically what mthree does is a terrific and innovative business model where it works with leading corporations and dominant number of their clients are the leading -- world's leading financial institutions, so Morgan Stanley and Bank of America, names that you would know, HSBC and so forth. And they really have developed an incredible niche. They work with those companies who, I'll say, at the beginning, at the end, have dramatic and increasing needs for our tech talent. And they take orders from them, basically. So Morgan Stanley says, I'm opening up a development center in Mumbai or in Toronto, which we've done both of those for them, it's, Toronto or Montreal, correct me, it was 1 of those 2, and (inaudible) first basically, they go to leading universities, they take the best students of those universities after graduation, (inaudible) bespoke training program to place those people based upon those orders, those specific orders from the client directly into jobs. For a 2-year period, they are on our payroll, and we charge them out to the client. And after that 2-year period, they become employees at a very high rate of the clients. So that's the model. The revenue model there for us is that we're getting paid from day 1 of -- by the clients at a -- at what they would normally charge for an entry-level employee, and we are charging a significant -- excuse me, we are paying that employee a significantly lower amount as they get up to speed to be a full time. So that's the full-time employee. Terrific model, very lucrative and very consistent. So now what's happened is we have a situation where the economy is taking a shot on the side of the head, and the clients have basically -- are trying to adapt like everybody else. So they're not putting in new orders right now for students, I won't say none, they've significantly declined. We've lost virtually none of the, what we call alumni -- alumnus program that we're charging out to the clients. So that the number of students is absolutely steady, we've seen virtually no decrement in that, and we've added some new ones. But it has become -- but we responded on new demand, new orders, basically for this period of time, although, again, we've got a good pipeline of the like. And so now to get to the specific answer to your question, so instead now of building to a specific order, we've got this capacity. We've got an online boot camp capacity to train students. And so we are still recruiting those students who desperately want these jobs, and you've got these great institutions that we can tell the students that we can get them jobs at. But instead of having them bespoke to us or attached to a specific job, we are taking -- we are basically telling those students, we will make you available to those clients once you get through the program and they start hiring again. So we are putting cohorts of students through same training that they would get otherwise. We're doing it on our dime, meaning that we're not being paid for it, but because we are doing this virtually, the costs are very low to get those students up and running. And so we are basically -- as I said in my remarks, we're stockpiling talent. And so when Morgan Stanley opens the door again, we'll have a cohort of 25 developers that we can put into their development shop. So that's basically -- Dan, is that a satisfactory answer? -------------------------------------------------------------------------------- Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [23] -------------------------------------------------------------------------------- Perfect. Yes, absolutely. That's helpful. Appreciate it... -------------------------------------------------------------------------------- Brian A. Napack, John Wiley & Sons, Inc. - President, CEO & Director [24] -------------------------------------------------------------------------------- Really -- we remain really excited about that business and how it extends our Education Services portfolio, built on our career mentality and our strategies. Bad timing, I suppose, nobody knew this thing was coming, but I think we're dealing with it pretty well. -------------------------------------------------------------------------------- Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [25] -------------------------------------------------------------------------------- But again, as you described, a very low fixed cost base to get through that... -------------------------------------------------------------------------------- Brian A. Napack, John Wiley & Sons, Inc. - President, CEO & Director [26] -------------------------------------------------------------------------------- Very low, yes, absolutely. Absolutely. And just to give you a sense, I hate to keep going on about it because I think that's probably enough of an answer. But when we acquired mthree, they did most of their trainings in person. We had internally an online boot camp that we have merged with mthree. So now mthree can do all of its training virtually and doesn't need the fixed (inaudible) in these situations. So the reason I point that out is the case of great integration, a great synergy right off the bat, which is what you guys want to see, right? You want to see us not acquire things that are out in left field, but things that benefit from our existing infrastructure and our existing capabilities. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- (Operator Instructions) Next question comes from [Matilda Darsana] with Barclays. -------------------------------------------------------------------------------- Unidentified Analyst, [28] -------------------------------------------------------------------------------- I just had one. I was wondering, research publishing was down on constant currency, 2% of the fourth quarter. I was wondering because you mentioned delays in reviewing subscriptions due to COVID-19, isn't that the case where usually the subscription, as you mentioned before, are taken at the end of 2019 for the first quarter. So I was just wondering how exactly COVID-19 impacted the Research and Publishing segment? -------------------------------------------------------------------------------- Brian A. Napack, John Wiley & Sons, Inc. - President, CEO & Director [29] -------------------------------------------------------------------------------- And so -- go ahead, John. -------------------------------------------------------------------------------- John A. Kritzmacher, John Wiley & Sons, Inc. - Executive VP of Operation, CFO & Interim CAO [30] -------------------------------------------------------------------------------- Yes. So I probably say that the subscription base in the Research Journals business is recognized ratably over time for the majority of the subscription models that we deliver. So in particular, our digital model is recorded ratably over the 12-month calendar year. In the quarter, we had delays in signing some of those subscription agreements. So subscription agreements are typically being closed between the months of October and March and April, and those that are recorded in March and April, get a 3- or 4-month effect depending on when they're recorded for the calendar year because the revenue recognition goes retroactive to the first of the year. So having some small delays in the month of April has a 4-month effect, if you will, on that period of time. So some of those subscriptions just being delayed into the next period have that effect. Of course, we'll see the benefits of signing those agreements in the months of May and June. But that's the sort of timing factor that you would absorb. It's revenue recognized over time and that delay, given the challenges of remotely selling in a socially distance environment and getting contracts signed and the disruption that we were experiencing at universities around adapting to the current environment, slowed things down a little bit. Overall, we did a very good job of mitigating that impact, but we did have some activity that moved into the month of May and June. -------------------------------------------------------------------------------- Brian A. Napack, John Wiley & Sons, Inc. - President, CEO & Director [31] -------------------------------------------------------------------------------- And I'll just add a little bit -- I'll just add a tiny bit to what John said, and that is that we also have some other businesses in the Research segment that are more cash on the barrel, such as our reprint business of articles for the pharmaceutical industry. And there are other pieces of it that are not subscription related. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Napack for closing remarks. -------------------------------------------------------------------------------- Brian A. Napack, John Wiley & Sons, Inc. - President, CEO & Director [33] -------------------------------------------------------------------------------- All right. Well, thank you all for joining us today, and we will look forward to giving you updates on news and presenting our first quarter results in September. Thanks, everybody. -------------------------------------------------------------------------------- John A. Kritzmacher, John Wiley & Sons, Inc. - Executive VP of Operation, CFO & Interim CAO [34] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference. Thank you for participating, you may now disconnect.