John Wiley & Sons, Inc. (NYSE:WLY) Q2 2024 Earnings Call Transcript
John Wiley & Sons, Inc. (NYSE:WLY) Q2 2024 Earnings Call Transcript December 6, 2023
John Wiley & Sons, Inc. beats earnings expectations. Reported EPS is $0.73, expectations were $0.56.
Operator: Good morning. And welcome to Wiley's Second Quarter Fiscal 2024 Earnings Call. As a reminder, this conference is being recorded. At this time, I would like to introduce Wiley's Vice President of Investor Relations, Brian Campbell. Brian, please go ahead.
Brian Campbell: Thank you. And welcome, everyone. With me today are Matt Kissner, Wiley’s Interim President and CEO; and Christina Van Tassell, Executive Vice President and CFO. Also with us is Jay Flynn, Executive Vice President and General Manager of Research and Learning. He will be participating in our Q&A session along with Matt and Christina. Note that our comments and responses to your questions reflect management's views as of today and will include forward-looking statements. Actual results may differ materially from those statements. The company does not undertake any obligation to update them to reflect subsequent events or circumstances. Also, Wiley provides non-GAAP measures as a supplement to evaluate underlying operating profitability and performance trends.
These measures do not have standardized meanings prescribed by US GAAP and therefore, may not be comparable to similar measures used by other companies, nor should they be viewed as alternatives to measures under GAAP. Unless otherwise noted, we will refer to non-GAAP metrics on the call and variances are on a year-over-year basis and will exclude held-for-sale assets and the impact of currency. Additional information is included in our filings with the SEC. A copy of this presentation and transcript will be available on our Investor Relations web page at investors.wiley.com. I will now turn the call over to Matt Kissner.
Matt Kissner: Thank you, Brian, and thank you all for joining. I'm pleased to be here with Christina and Jay. We and the rest of the leadership team are moving decisively on our value creation plan, which I'll talk about in a bit. I'll give you an update on my first 60 days and discuss my role in the transition. And of course, we'll review our second quarter performance and how we see the year shaping up. I'd like to speak a few moments about the interim CEO role in my first 60 days. The Board of Directors and I think about my role as a transition more than an interim. My responsibility is to execute the plans previously approved by the Board and improve the company's operating performance and profitability. From a personal perspective, it's a privilege to be back at Wiley during this critical juncture in our evolution.
As a result of my long association with Wiley in various roles, I have an in-depth knowledge of the company's businesses, operations and markets. And I have strong relationships with Wiley colleagues across the globe. Frankly, I know our strengths and I know the areas requiring improvement. And I am in an excellent position to help drive the changes needed to significantly improve our performance. We are moving decisively to streamline the organization, divest noncore assets and rightsize Wiley for future success. During my first 60 days, we continue to execute on our reorg, announced the sale of University Services and moved aggressively on our cost base. While the leadership team and I are focused on executing, the Board is carefully considering various options for the future leadership of the company.
In that regard, an important objective of mine is to assist the Board by assessing and enabling internal talent. We previously characterized fiscal '24 as a transition year, a period in which we would be keenly focused on our core businesses. That has not changed. I'm now responsible for leading us through this transition and laying the foundation for the next CEO. In summary and for the avoidance of any doubt whatsoever, we are not in a holding pattern. We are moving forward with conviction. I hope these thoughts on my role are helpful. Finally, I recently met with colleagues in our European offices and in our Hoboken headquarters. And while it's early days, I find the culture to be reinvigorated by our renewed focus and our improvement initiatives.
It's pretty obvious to colleagues that we have to improve how we operate and make it much easier to get things done. I also participated in listening sessions with a few of our largest shareholders and found their observations very helpful. I am a long term shareholder myself, of course, and personally bought more shares. All to say, after listening intently, our goals are aligned. As a reminder, we're now reorganized into two operating segments, down from three. The two segments, Research and Learning complement one another as they both deliver high value content and solutions in related markets and verticals, including science and medicine, technology and innovation and business and finance. As a quick reminder, Research is our largest and most profitable business and it's at the core of our strategy.
The market for new scientific, technical, medical and scholarly research grows steadily and Wiley has one of the world's leading journal portfolios and the industry's most widely used delivery platform. The business has large recurring revenue base that is 95% digital. Learning includes academic and professional publishing and platforms in business and finance, technology, management, team development and reference. Our competitive advantage in learning includes our brands, author relationships, category leadership and reputation. As a reminder, we recently coupled these businesses into one team under Jay Flynn. Jay is already identifying and acting upon synergies across these businesses. And with this change, we expect to drive much greater operating and capital efficiency.
Let's talk about how we're progressing with our value creation plan. I'm pleased that we are driving this plan forward on multiple fronts. During the quarter, as noted, we reorganized from three business units to one market facing research and learning team. We also consolidated our marketing teams to leverage our capabilities and offer relationships and realize potential synergies. As noted, we recently announced an agreement to sell University Services, our largest divestiture for up to $150 million in total consideration, including $110 million base price and $40 million in potential earnouts plus a 10% equity stake in the combined company. The transaction is expected to close in early 2024. We're working diligently on our remaining divestitures, but I want to emphasize that it remains a challenging environment.
We're moving aggressively on our cost base as noted by our restructuring actions this quarter. Christina will talk to what we're doing there. We centralized our global operations team under one leader to drive toward a lighter infrastructure, simplified processes and improved analytics and insight. Finally, we will hold an investor update on Thursday, January 25th. It will be virtual and will include myself, Cristina and Jay. It's an opportunity for us to share more detail on our performance, profit improvement plans, our fiscal '26 targets and field any questions you might have. Let's turn to our performance for the quarter as we make our way through this transition year. I will be excluding our held for sale or sold assets in my commentary unless otherwise noted.
Overall, Q2 was largely in line with expectations but mixed in terms of Research versus Learning. In Research, we saw year-on-year revenue declines, reflecting the Hyundai disruption and a soft market for recruiting. Excluding Hindawi's $18 million impact, Research revenue was flat. In Learning, we saw growth in our academic and professional publishing lines, including print and digital content and courseware in the business and technology categories. GAAP EPS was a loss of $0.35, reflecting $52 million of additional impairment charges related to our held for sale assets and $25 million of restructuring charges as we execute on our rightsizing plans. Adjusted EBITDA declined by 13% to $92 million. Hindawi's EBITDA impact was $14 million, offsetting restructuring savings.
Adjusted EPS was down 25% due to lower adjusted operating income and higher interest expense. In the quarter, the held for sale businesses collectively generated $86 million of revenue, down 18% driven by declines in University Services and cross knowledge due to challenging market conditions and adjusted EBITDA of $19 million, up 4%. As indicated, we are reporting on this as a separate segment and you can find this in the tables attached to our earnings release. I'd like to provide a brief update on research publishing given the near term dynamics. We continue to see healthy demand to publish driven by growth in global R&D spend. Year-to-date, article submissions in our core are up 9%. This is an important demand indicator as we recover from the COVID demand spike and snap back.
However, there was a natural lag between submission and publication. So output is only up 1% ex-Hindawi. We expect output to improve in the second half as submissions flow through our publishing pipeline. That said, largely due to this timing issue, we now expect research revenue to fall modestly below expectations. For the full year, we expected research revenue to be flat overall and now anticipate it to be flat to down low single digits. For our core, excluding Hindawi, we expected 3% revenue growth and now project it to be up 2%. As a reminder, the Hyundai recovery is expected to take time as we turn around impacted journals and finalize historical retractions. This year, we project the revenue impact to be $35 million to $40 million. In fiscal '25, we expect revenue to begin to recover as we prioritize our impact journals and improve our marketing efforts.
To that end, we feel that now is the time to sunset the Hindawi brand and begin to fully integrate its 200 journals into Wiley's 2,000 journal portfolio. This reflects the now close alignment of the practices and infrastructure behind the two portfolios and enables a much wider audience. We anticipate the Hindawi transition to conclude in mid-calendar 2024. I'll now turn it over to Christina to discuss our segment performance, cost savings initiatives and outlook.
Christina Van Tassell: Thank you, Matt, and hello, everyone. We continue to move effectively through this transition year, a significant part of which is executing on our plans to make us a stronger and more profitable company. We made meaningful progress this quarter but there's still a lot of work in front of us. Let's turn to our Q2 performance for Research. Research Publishing revenue declined 7%, mainly due to Hindawi. Excluding Hindawi, Research Publishing revenue was up slightly. As Matt noted, we're seeing a pickup in submissions but output remained muted due to publication timing. Important to note, it takes on average about six months for an article submission to turn into a published article. Overall, we continue to benefit from a mixed model publishing environment that includes read only subscriptions, transformational read and publish agreements and gold open access.
Models vary by customer and by region. During the quarter, we announced a new five year nationwide transformational agreement in Germany, involving more than 900 academic institutions. This agreement includes read access to all Wiley general content while providing authors at these institutions with open access publishing options. To date, Wiley has signed transformational agreements with over 80 partners worldwide covering several thousand institutions. This quarter, we continue to see double digit growth in gold OA. As a reminder, gold OA, including Hindawi, makes up about 10% of our Research Publishing revenue and is our fastest growing area in Research segment. Turning to Research Solutions. Revenue declined 3% this quarter due to softness in our recruiting business.
This decline in corporate revenue offset growth in our Publishing Services business where we provide software and services to help society partners and other publishers managing peer review and other publishing processes. Adjusted EBITDA in Research this quarter declined 17% weighed down by Hindawi's $14 million EBITDA impact. Excluding this, adjusted EBITDA for research declined by 4%. Our Q2 adjusted EBITDA margin, including Hindawi, was around 32%, down from 36% in the prior period. We expect Research revenue improvement in the second half as submission growth converts to output and gold OA revenue growth and Hindawi comps become less challenging. Even with this improvement, we are projecting modest underperformance in research with offset coming from outperformance and learning.
Let's turn to our Learning segment. Academic Publishing revenue in this quarter was up 8%, driven by growth in print and digital content and courseware. Of note, US fall enrollment grew for the first time since the beginning of the pandemic up 2.1% compared to 2022. Specifically, academic performance was driven by continued double digit growth in our zyBooks STEM courseware and good uptake of our institutional models such as Inclusive Access. Inclusive Access is an institutional sales model that adds the cost of digital course content into student tuition and fees. Professional is up 3%, driven by an improved retail channel environment and fewer returns. Our Dummies franchise also saw growth this quarter. We're also seeing increased momentum in new title signings as a result of our renewed focus on our core.
Adjusted EBITDA for learning this quarter was up 13% with revenue growth and restructuring savings as the primary drivers. Our Q2 adjusted EBITDA margin was 36%, up from 34% in the prior year period. Let me provide an update on our multiyear cost savings and optimization plans. We’ve talked about driving towards a leaner organization and more agile workforce. Of note, around 20% of our workforce is attached to divestitures or around 1,300 FTEs. We expect to close on University Services in early '24. We also executed on major restructuring actions in Q2, notably in corporate but also related to our business reorg. This resulted in a $25 million charge in Q2 that's expected to yield $65 million of run rate savings. Let me walk you through it.
Of the $65 million of savings, around $30 million will be realized this fiscal year and is executed as part of our plans and guidance. Note the $30 million is not included in our $100 million run rate savings goal for fiscal '26, which I introduced earlier this year. As previously mentioned, any in-year savings reflected in our fiscal year '24 guidance does not count towards that $100 million. However, the remaining $35 million of run rate savings will be incremental in fiscal '25 and will be part of the $100 million. So we're already about a third of the way towards that goal. We'll provide more details around our multiyear plans at our January investor update. We've talked a lot about improving operating efficiency over the last year. During the quarter, we reorganized into one go-to-market team under one business leader and consolidated all of our global operations together under one ops leader.
We're starting to see the benefits of this change already in driving prioritization, organizational and go-to-market synergy and effectiveness as well as improved culture. We've talked about transitioning to a lighter, more modern infrastructure. We continue to make good progress on unifying our research end-to-end publishing operation where we're transitioning from three publishing platforms to one platform that will handle everything from submission to peer view to customer support. The revenue and cost benefits of one platform are many and include further increased auto retention, faster turnaround times and optimize article transfer and reduced cost per article. Finally, we launched real estate optimization Phase 3 with four reductions in existing office footprints, including floor consolidation at our Hoboken corporate headquarters and three office closures.
Let me quickly turn to ongoing corporate expenses. We saw a $3 million increase this quarter due to the costs related to the CEO transition and lower incentive accrual than prior year, offsetting savings related to prior year restructuring. We expect corporate expenses to be up moderately this transition year as we're still carrying costs related to held for sale assets. As we transition out of these assets, our cost ratios will come back in line. We also have the higher employee costs related to the incentive compensation reset and overall wage inflation this year as discussed in June. To refresh, about 80% of employees are part of the incentive compensation plans and we saw a significantly lower payout accrual in fiscal '23 due to underperformance.
Given all these near term dynamics, fiscal '24 remains a transition year. The benefit of the work we're doing now will be fully realized in fiscal years '25 and '26. Turning to our cash flow and balance sheet. Free cash flow for the six months was a use of $132 million compared to a use of $126 million in prior year. The variance is primarily driven by lower cash earnings. As always, our cash flow is normally a use in the first half of the year due to the timing of collections for general subscription, which are concentrated in the third and fourth quarters. Of note, we do not provide an adjusted cash flow metric, so numbers include the businesses held for sale or sold. CapEx of $48 million was moderately lower than prior year and there were no material acquisitions to date.
Our focus right now is executing on our divestitures and our cost savings plans. Through the half, we allocated $61 million towards dividends and share repurchases. We spent $23 million or $5 million more in this half to acquire 669,000 shares at an average cost per share of $33.64. This compares to 382,000 shares repurchased in the prior year. Our current dividend yield is around 4.5%. Net debt-to-EBITDA ratio was 2 at the end of October compared to 2.1 in the prior year. While we're in a good financial position, our priority during this transitional period is to further reduce our debt and manage our interest expense, while continuing to invest to scale in research and repurchase shares opportunistically. Note, we've reduced our net debt by over $40 million compared to the prior year period.
On to our transition year outlook, which excludes the businesses held for sale. We're reaffirming our guidance. On revenue, performance is mixed within our segments but in line overall. We're projecting Research revenue to be flat to down low single digits versus just flat in our original guidance given the lag between submissions and publications and continued market softness in recruiting. Revenue excluding Hindawi is now projected to grow 2% compared to a 3% original projection. In Learning, we're now seeing an improved environment for academic and professional publishing, driven by better execution in our channels and continued uptake of our inclusive access model in zyBooks courseware. So research is tracking a little behind plan and learning tracking ahead.
We look forward to sharing our fiscal 2016 targets in late January. Adjusted EBITDA, excluding the divestitures, is anticipated to be in the range of $305 million to $330 million with an EBITDA margin of 19% to 20%. This is down from 23.3% in fiscal '23. To refresh, we continue to expect to more than recover our fiscal '23 EBITDA margin of 23.3 as we exit fiscal '24 and expand from there. On adjusted EPS, we continue to anticipate a range of $2.05 to $2.40. We have the nonoperational items weighing on EPS, including higher tax interest expense and lower pension credits. With regard to free cash flow, our visibility continues to be limited with continued [indiscernible]. So we're unable to provide a meaningful cash flow outlook at this time.
As you know, we don't report in adjusted free cash flow metric, so it includes the held for sale assets. We're actively working through these divestitures and can adequately project the timing and scope of related restructuring programs. That said, we do expect free cash flow to be materially lower this transition year, given the combination of lower projected cash earnings, higher restructuring payments and higher interest payments. We consider these to be largely temporary given this year's structural improvements. As we make our way into fiscal '25 and '26, we're fully confident in our margin trajectory and in the cash generation of the core business. We will provide a fiscal ‘26 free cash flow target at our January investor update. And with that, I'll pass it back to Matt.
Matt Kissner: Thank you, Christina. To summarize, before I open it up for questions, Q2 and year-to-date performance was mixed, but largely as expected. And we anticipate a better second half as Research output grows, comps get less challenging, Learning carries forward some of its Q2 momentum and restructuring savings kick in. We are relentlessly focused on execution and moving with certainty on our value plans, our operational improvements, our reorg and our culture. We are going to block and tackle better than we have before. We're going to look for synergies and uncover new pockets of growth within our core. I feel a real sense of energy in the place and a commitment to move forward with urgency. That said, fiscal '24 remains a transition year as we work through our structural improvements and rightsizing and as our core drivers rebound.
We fully expect to deliver performance and margin improvement in fiscal '25 and '26. And finally, as a reminder, January 25 will be our virtual investor update. I want to thank all of our Wiley colleagues for their hard work and dedication, especially over these past six months. I wish them and all of you a very joyful holiday season and a happy and healthy 2024. I'll now open the floor to any comments and questions.
Operator: [Operator Instructions] Your first question comes from the line of Daniel Moore from CJS Securities.
See also 15 Best Safe Dividend Stocks For 2024 and 15 Best Colognes for Men Under $50.
To continue reading the Q&A session, please click here.
