Brian Campbell - Director of Investor Relations Stephen M. Smith - Chief Executive Officer, President, Director and Member of Governance Committee John A. Kritzmacher - Chief Financial Officer and Executive Vice President.

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division Arnold Ursaner - CJS Securities, Inc. John Helmer Ian Whittaker - Liberum Capital Limited, Research Division.

Good morning, and welcome to the Wiley's Second Quarter Earnings Call. As a reminder, this conference is being recorded. At this time, I would like to introduce Wiley's Director of Investor Relations, Mr. Brian Campbell. Please go ahead, sir..

Thank you. Hello, everyone, and thank you for participating in our call today. Before introducing Steve Smith, President and Chief Executive Officer, I'd like to remind you that 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 obligation to update or revise forward-looking statements to reflect subsequent events or circumstances.

For those who prefer to listen to the call over the phone but would like to still view the slides, we recommend clicking on the gears icon located on the lower portion of the left-hand side window and selecting Live Phone.

This will eliminate any delays you may experience in viewing the slide transitions, as well as remove any potential background noise should you ask a question on the call. A copy of this presentation will be available on our Investor Relations page at the conclusion of the call. Thank you. I would now like to turn the call over to Steve..

Good morning. In addition to Brian, I'm joined by John Kritzmacher, Wiley's Chief Financial Officer. We are pleased with our results for the quarter and through the first 6 months of the year.

As we stated back in June, fiscal year 2014 is a transitional year for us, with the implementation of our comprehensive restructuring program and the integration of recent acquisitions.

For the first 6 months, we have made significant progress towards our full year guidance and are on course to achieve our restructuring savings objectives for fiscal year 2015.

While we're only halfway through the year, Wiley's base business is performing solidly, our recent acquisitions continue to meet expectations and we are on track to achieve our short-term and long-term goals.

Adjusted revenue growth for the second quarter was solid, driven by continued growth in general subscriptions and open access revenue, contributions from Online Program Management in Education and Online Training and Assessment in Professional Development. Digital book growth across all 3 segments also contributed to results.

There were timing benefits, primarily due to the impact of Hurricane Sandy, which closed our New Jersey shipping facilities, delaying $4 million worth of print book revenue into the third quarter last year. This had a favorable impact on prior comparisons in our Education and Professional Development segments.

Adjusted earnings per share, or EPS, growth of 11% in the quarter was strong due to revenue performance, restructuring and other cost savings, lower taxes and lower distribution costs offsetting an increase in technology expense related to investments in our transformation and higher incentive accruals on the expectation of full year performance, in line with our plan for this year.

Our restructuring program continued to progress as expected. Through the first 6 months of this year, we have realized $10 million of restructuring savings and $4 million of other savings. As of October 31, Wiley had developed and approved plans to achieve $70 million of the $80 million expected run rate savings starting next fiscal year.

Besides closing the pension plan, we've taken significant steps to simplify and consolidate our organization. Second quarter adjusted revenue of $449 million was up 8%, excluding the impact of foreign exchange and the prior year operational results from the divested consumer businesses.

From this point forward, unless otherwise noted, I will excluded the impact of foreign exchange and the divested consumer business when commenting on all revenue variances, in order to give a clear measure of operational performance.

Also note that adjusted contribution to profit, adjusted operating income and adjusted EPS metrics exclude all restructuring charges, asset impairment charges, gains on the sale of the operating results from the divested consumer publishing program and deferred tax benefits arising from significant rate changes in the U.K.

Journal subscription revenue growth continued through the second quarter. We also realized higher growth from our solutions businesses in Education and Professional Development, including Online Program Management and WileyPLUS in Education; and talent management and test prep in Professional Development. Digital books were up 40% to $31 million.

And for the first 6 months, adjusted revenue is up 6%. Adjusted operating income grew 5% in the quarter to $70 million.

Contributions from revenue growth and restructuring and other cost savings were offset by a 25% increase in technology expense related to our transformation activities and higher incentive accruals related to our expected current year performance, tracking to our plan. Adjusted operating income for the first half of the year rose 3%.

Adjusted EPS for the quarter was up 11% to $0.84 and was up 6% for the first 6 months year-to-date. Organic revenue, which excludes the prior year operating results of the divested consumer programs and current year results of Deltak and ELS, rose 4% for the quarter and 2% for the first 6 months.

As a reminder, Wiley acquired Deltak and ELS in October and November of 2012, respectively. Research revenue was up 2% in the quarter to $253 million or 4% year-to-date. Journal subscription revenue grew 2% in the quarter and is up 3% for the first 6 months.

Journal subscriptions renewals are up over 3% for calendar year 2013 with 99% of business closed. We're in the very early stages of the renewal season for calendar year 2014, with activity so far tracking to expectations. Also, funded open access revenue doubled in the quarter to $4 million.

We signed 2 new society partners in the quarter, with combined annual revenue of $7.8 million, including the highly prestigious European Molecular Biology Organization, or EMBO. We also renewed 13 society agreements worth approximately $10.5 million per year. No society agreements were lost.

Demand for our content continues to increase with full text downloads up 28% over prior year. Digital books were up 45% for the Research business, partially offsetting a decline of 10% in print books. Wiley Research announced a licensing agreement with the global informatics company, Information Handling Services, or IHS, in August.

Under the agreement, IHS added Wiley digital books databases and major reference works to their collection of technical documents, spanning engineering standards and related industry and technical knowledge.

Adjusted contribution to profit after shared service allocations for Research was up 1% to $74 million, with revenue growth partially offset by higher society royalties. Year-to-date contribution to profit was up 6%. Adjusted Professional Development revenue was up 7% to $93 million and flat year-to-date.

Our Online Training and Assessment business, including Inscape and ELS, was up 44% in the quarter. Inscape's digital delivery platform, EPIC, saw a record usage in the quarter, with more than 238,000 learners receiving a personalized work profile assessment.

The accounting and finance test prep business was buoyed by new ELS CPA test prep revenue and the performance of our CFA partnership. Digital book revenue grew by 30%, offsetting a slight decline in print book sales.

However, the prior year impact of Hurricane Sandy on our print book fulfillment operations delayed approximately $2 million of print sales into the third quarter last year.

Growth in the business and finance category continued to offset a challenging year in technology, which is the result of market weakness related to a decline in commercial software launches.

Adjusted contribution to profit for the quarter after shared services allocations grew by $6 million to $9 million due to revenue performance, higher gross margin percentage related to the reshaping of the portfolio and restructuring savings. Year-to-date adjusted contribution to profit was up 93%.

Education grew 30% to $104 million in the second quarter and is up 22% year-to-date. Strong revenue growth in key areas, including Online Program Management, digital books and binder and custom products, helps drive results, offsetting the decline in print textbooks.

Print textbook alternatives, including WileyPLUS cost management, digital books and binder ready and custom products, grew at double-digit rates in the quarter and now represent a combined 39% of total Education revenue.

Binding also played a part in the second quarter, including the favorable impact of later orders in the current year, due to late semester starts in the U.S. and the shift to digital formats, which pushed revenue into the second quarter.

In addition, second quarter and year-to-date revenue comparisons include the favorable impact of $2 million of sales delayed in the prior year due to Hurricane Sandy, as well as earlier-than-usual orders in the Australian schools business in the current year.

Revenues for the Deltak Online Program Management business was $17 million in the quarter and $31 million in the first 6 months. Excluding Deltak, educational revenue performance over the first 6 months was essentially flat.

In the quarter, Deltak added another high-profile partner, the McCombs School of Business Foundation at University of Texas, Austin. And at the end of October, Deltak had 34 institutions under contract, with 107 programs generating revenue and 43 programs in development.

Global education adjusted contribution to profit after shared services allocations grew 43% in the quarter to $23 million, reflecting revenue growth, gross margin improvement from digital products and restructuring savings. Year-to-date adjusted contribution to profit was up 17%.

As in the first quarter, technology expense increased significantly over prior year, as we continue to invest in new technology-enabled products and systems. We expect that the rate of growth in technology expense will moderate in the second half of the year and likely finish up approximately 10% for the full year.

Distribution expense declined again in the quarter, as a result of lower print volumes and restructuring savings. Finance and other administration costs increased 5% and 7% in the quarter, respectively, mainly due to higher professional fees and employee-related costs.

In regards to our balance sheet, net debt fell $111 million to $498 million compared to $609 million a year ago when we acquired Deltak. Our balance sheet continues to be strong and offers significant flexibility to invest in our transformation. Our trailing 12 months net debt-to-EBITDA ratio was 1.2 at the end of the second quarter.

Deferred revenue grew 29% to $138 million from $107 million a year ago, driven by billing growth and cash collections. Journal subscription billings, Inscape Online Training and Assessment and WileyPLUS online course management all contributed to deferred revenue growth.

Finally, the change in our technology property and equipment assets was primarily due to an asset impairment charge of $4.8 million in the quarter related to the termination of a multiyear software development program or an internal operations application due to a change in our longer-term enterprise systems strategy.

Free cash flow improved to a use of $112 million compared to a use of $143 million in the prior year, mainly due to a $10 million tax -- German tax appeal deposit in the first 6 months of this year compared to a $30 million deposit last year. We have made all required deposits to date. Ultimately, we believe the outcome will be a positive one.

Excluding the deposit, free cash flow improved 10%. Note that free cash flow is negative in the first half of Wiley's fiscal year, principally due to the timing of annual journal subscription cash collection. Finally, for the quarter, Wiley bought back 85,000 shares in the quarter at an average price of $46.31 per share.

At quarter end, there were over 4 million authorized shares remaining in this program. Our broad-based cost restructuring is well on track. As a reminder, we expect to achieve $80 million of run rate savings starting in fiscal year 2015. More than 50% of the $80 million will fall to the bottom line.

The rest will be reinvested back into the business to fund high growth opportunities, such as those in front of Deltak. As of October 31, we have developed and approved plans to achieve approximately $70 million of the $80 million. Through the first 6 months of this year, we have realized $10 million of restructuring and $4 million of other savings.

We have taken a little over $47 million in charges since the program began in January, including $15 million in this quarter. The charges cover severance, consulting fees and facility relocations. We have closed our U.S.

pension plan and simplified and consolidated our operations, particularly in areas of IT, distribution, content management, marketing and facility services. Wiley expects to take an additional $10 million of restructuring charges in the second half of the year.

In summary, we are pleased with the performance in the quarter and through the first half of the year, particularly with journal subscriptions, the solutions businesses in Professional Development and Education and digital books across all 3 segments.

Timing played a role in the quarter's results, specifically in Professional Development and Education. Our adjusted earnings performance for the quarter was also strong, mainly due to revenue growth, lower taxes and restructuring savings.

And given our first half results and what we see for the remainder of the year, we are reaffirming our fiscal 2014 guidance of low single-digit adjusted revenue growth and adjusted EPS of $2.85 to $2.95. With that as background, we welcome your comments and questions..

[Operator Instructions] We'll take our first question from Drew Crum with Stifel..

So Steve, based on the first half performance, the annual guidance that you're reiterating this morning would imply some declines in the second half. And I wonder if you guys could just kind of walk us through the puts and takes as you see it in the second half of the fiscal year..

Sure, Drew. So I'll begin with a couple of comments, and I'll let John take over with some more of the detail. One of the big drivers of the change in the second half of the year will be around incentive compensation, which was a major expense in the second half of last year.

And as we said at the beginning of the year, although we will have restructuring savings building in the second half of the year, those are largely compensating for the increase in incentive costs on a year-to-year basis.

It's also important to note that a lot of the revenue growth that we have seen in the first half comes from the newly acquired businesses, particularly from Deltak and ELS, and they of course don't contribute positively to EPS growth in this fiscal year, given that both of those acquisitions remained dilutive.

I'll let John build out on that a little bit..

Sure, Steve. Thanks. Drew, so let me just expand on a little bit. So in line with what we've said previously, we continue to expect across the back half of the year that we're going to see low single-digit revenue growth across the business, including the acquisitions. And as Steve noted, the acquisitions don't contribute to the bottom line.

Noteworthy around revenue performance on the back half of the year, we'd just reiterate the impact of Sandy, which benefited the third quarter in the year ago, as well as in the comparables for this year, earlier ordering out of the Australia schools than we have seen in prior years. So some impact on revenue in the year-over-year comparison there.

And then in broad terms around impact on profitability, we will see further savings from restructuring as that continues to ramp a bit. Those savings from restructuring largely will be offset by higher incentive accruals.

And going back to what we've said previously about the accrued incentives, we should expect to see on the back half of the year that those accruals are about $20 million higher than what we saw in the prior year.

The incremental margin that we'll earn from revenue growth on the back half of the year will be offset by modestly higher spending on technology.

And we'll see some other discrete expense impacts on the back half of the year, including the partial winding down of long-term occupancy incentive that we have been recording annually for several years in our third quarter. So there's a bit of an impact from that item on expense in the third quarter..

Okay, very helpful, guys. And Steve, in your prepared remarks, you mentioned the calendar '14 journal subscription renewals tracking to expectation.

Can you expound upon that a little bit and give us a range of growth that you're expecting or what you're seeing early on?.

Yes. As you know, Drew, it is really very early at the end of our second quarter. And so we're in the peak season now in terms of bringing business in, but there are always timing swings that make it a little difficult to get a read on exactly where we are.

But overall, the licenses that we have already closed, the new business that has been completed shows signs of overall subscription growth. That is pretty consistent with prior year experience, and we're expecting overall 2014 to be fairly consistent.

But do remember that 2013 included the benefit also of some large society wins, larger than usual for us, particularly the American Geophysical Union that brought significant revenues -- new revenues to 2013. So it may not be quite at the level that it has been in 2013 net of society.

But net of society renewals, the overall subscription growth should be about the same. So we're in the same ballpark..

Okay. And last question for me, guys.

The tax deposit, $10 million year-to-date, should we expect additional tax deposits in the back half of the year or anything else going forward beyond fiscal '14?.

So we're continuing to make our tax payments now on the premise that we will pay without the stepped-up basis in Germany that is the subject of our dispute. So we are caught up in terms of retroactive tax deposits and we are now making payments at the higher rate until the dispute is resolved. So there are no catch-up payments any further.

We just continue to now pay at the higher rate..

[Operator Instructions] We'll take our next question from Dan Moore..

This is actually Arnie Ursaner, backing up Dan Moore today.

Just as a follow-up to the last question, could you remind us what tax rate is embedded in your EPS guidance for the year?.

So we're anticipating an effective tax rate in the range of 27% to 28% for the year. In the second quarter, we were a little bit lower than that. We had 1 discrete item that was a reversal of a reserve for contingent items that cleared. But you should expect that we'll have an effective tax rate that's in that 27% to 28% sort of range..

Okay. And then my second question is the EPS and margin impact, obviously Deltak is a high-growth area. You're in the development stage. Perhaps -- and you're incurring a lot of start-up expenses.

Can you remind us what the total of that might be for EPS impact this year? And equally, if not more importantly, what level or number of clients can you leverage the investment you've made in that, turning it to a more positive contributor in the upcoming year?.

So we've said previously that we expect Deltak in terms of the flow-through to bottom line all-in, including interest expense, will be dilutive to earnings for the year by approximately $0.10 a share. We're continuing down that track.

The actual performance in terms of delivery to the bottom line, as we continue to accumulate partners, of course, depends on mix and the pace at which we continue to invest and acquiring new partners and new programs. It is our expectation that the contribution to earnings will significantly improve going into fiscal '15.

And that's about as much as we're providing right now. We're continuing to look at the opportunity to establish a share position there, and that requires continued investment. We'll give you an update on how we are thinking about profitability for Deltak in '15 as we make our way into '15 guidance..

[Operator Instructions] It appears we have no further questions in queue at this time. I'd like to turn the conference back over to Mr. Steve Smith. I do apologize, we do have a couple more questions that came into queue. And we'll take our first question from John Helmer with Caldwell Securities..

About 2 years ago, I visited Ellis and asked him a question that had been prompted to me by an individual who had presided over the transfer of profit in the music publishing business. He said, "Find out if Wiley is writing its own code." And he says that if they're serious about going digital, they will be writing their own codes.

That was the first question I asked Ellis. I came back and told this guy, "Yes, they write their own code but they're doing it in Russia." And you made reference to a project that's been shut down, have to do with some kind of a strategic change.

Is there any connection there?.

No, none at all. So the -- this is Steve, John. The team in Russia are the developers for -- they've been the development team behind WileyPLUS, our very successful integrated online learning platform for the Education segment. That's a customer-facing technology that continues to power growth and is helping transform our Education business.

The impairment of a system that we referred to in the release and in my remarks is actually a transactional system that supports our journals business and it's an internal transactional system. And this was being developed. It's actually an external system, but we've taken a change of direction.

Recognizing a change in technology strategy, we need a more integrated infrastructural system. So those 2 things don't connect at all..

We'll take our next question from Ian Whittaker with Liberum..

Just a very quick one. I think you mentioned that if you just took out Deltak, the Education revenues would be flat, I think, for the first 6 months. Can you just say -- could you benefit from the timing of the Australian deal or Australian education? Could you just say what are the -- just for the pure U.S.

higher education side x Deltak?.

Yes. In the first half of the year, the Australian numbers are really tiny. So they wouldn't move the needle on that. You can take the comment about flat referring to the higher ed business excluding Australia..

We currently have no further questions in queue. Mr.

Smith?.

I think we set a new record for the beat of the call and the number of questions. But hopefully that reflects the quality of the materials and the information we provided. So thank you for participating in the call. We look forward to talking to you again at the end of our third quarter. Thank you..

This does conclude today's conference. We thank you for your participation..