Brian Campbell - IR, Director Steve Smith - President, CEO John Kritzmacher - CFO, EVP.

Daniel Moore - CJS Securities Drew Crum - Stifel.

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

Thank you. Good morning, everyone, and thank you for participating in our call today. Before introducing Steve Smith, President and Chief Executive Officer, I would like to just 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 obligations 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 on 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. I'm pleased to provide you with our report on Wiley's second quarter financial performance today including commentary on our expanding solutions businesses and our expected performance for the balance of our fiscal year.

Second quarter revenue rose 6% on constant currency basis driven by growth in journals, contributions from our two newly acquired Talent Solutions businesses, CrossKnowledge and Profiles International, and double-digit growth in online test preparation, education services formerly Deltak and WileyPLUS Workflow Solutions.

Journal subscriptions revenue continued to increase steadily with 2% growth in the quarter. Journal performance overall was enhanced by a $10 million in revenue from a non-recurring backfile license with the large European consortium.

This quarter, we reached an important milestone in our transition to digital solutions with 60% of our revenue now coming from digital products and services up from 53% a year ago. Adjusted operating income rose 10% at constant currency due to revenue growth and restructuring savings.

Adjusted EPS grew 8% at constant currency to $0.90 a share, note that adjusted operating income and adjusted EPS exclude the impact of restructuring charges, impairment charges and a U.K. deferred tax benefit in the prior year.

Our performance in the first half of the year closely mirrors what we have reported for the second quarter with revenue growth of 5% at constant currency and EPS up 8%. From this point forward, I will exclude the impact of foreign exchange when commenting on all variances in order to give a clear measure of our operational performance.

Adjusted EPS, adjusted contribution to profit and adjusted operating income metrics exclude all prior year restructuring charges or credits, impairment charges and the aforementioned tax benefit.

Research revenue rose 5% to $265 million growth was fueled by Research Communication revenue, with Journal subscriptions raising 2% and Funded Access growing 30%. As noted earlier, we recorded $10 million in revenue from a non-recurring backfile license with a national consortium in Europe, which is reported as other Journal revenue on this slide.

As background, a backfile license provides the perpetual access to historical collection of Wiley Journal for a one-time fee. Setting aside these unusually large backfile license, total Research Communication revenue increased by 4%.

Calendar year 2014 Journal subscriptions were up 1.8% as at the end of November, nearly all of the full year expected businesses closed.

While it is too early in the cycle to provide projection for calendar year 2015 renewals, the overall environment remains consistent with recent years with expectations of growth in low-single digit in Journal subscriptions and strong double-digit growth rate coming from complementary revenues in Funded Access.

In 2015, Journal subscription revenues will be modestly impacted by the bankruptcy of the subscription agent Swets Information Services which was declared in September. We anticipate that the Swets bankruptcy will negatively impact calendar year 2015 Journal subscription revenue by around $5 million.

As background, subscription agents facilitate the subscription ordering process between libraries and publishers. Cash is generally collected in advance by the subscription agents and is usually remitted to the company between the month of December and April.

Subscription agents account for about 24% of total consolidated Wiley revenue in fiscal year 2014. While we do not foresee any further disruption with agents, we continue to closely monitor their financial health and implement safeguards.

Also in the quarter, we signed three new society journals worth $900,000 annually; two journals were not renewed worth $400,000. Research books had a challenging quarter down 9% overall. Digital growth was not enough to offset the decline in print.

We recently announced a reorganization of our research segment all journals and journal related business will now be consolidated under the leadership of Philip Carpenter, Senior Vice President of Research Communications, who will report in to me.

And the Research Books business will be aligned with Professional Development Books under Mark Allen, Executive President, Professional Development. Steven Miron steps down from his role as Executive Vice President of Global Research and retired from the company on November 30th.

We thank him for his significant contributions to Wiley over 20 years with the company.

The reorganization is intended to prioritize new business and technology investments across our Journals business, improve our flexibility and decision-making, create a more consistent approach to portfolio management and drive processed work flow and cost improvements in our Books business.

Finally, adjusted contribution to profit grew by 9% driven primarily by revenue growth. For the first six months research revenue rose by 2% and adjusted contribution to profit by 5%. Professional development revenue grew 14% in the quarter to $106 million.

Our newly acquired businesses CrossKnowledge and Profiles International contributed a combined $17 million in revenue this quarter. Excluding those contributions revenue was down 4%.

Our consolidated results for the quarter include three months of performance of CrossKnowledge as indicated in our first quarter report; we are reporting CrossKnowledge on a two-month lag pending the implementation of financial reporting process improvements.

We are making good progress on those improvements and we fully expect to report those additional two months in the second half of the year. Online test preparation certification had a strong quarter growth of 30% was driven by our CPAexcel product. Other knowledge services which include licensing, advertising and agencies revenue rose by 10%.

The make up of the professional development segment continue to shift with print books falling to 50% of revenue and Talent Solutions growing to 25% of revenue. Finally, adjusted contribution to profit was up 2% with restructuring savings offsetting the diluted impact of recent acquisitions.

For the first six months, professional development revenue rose 12% and adjusted contribution to profit by 48% mainly due to savings from restructuring partially offset by lower print book revenue and dilution from acquisitions. Education revenue grew 3% in the quarter to $107 million.

Double-digit growth for custom products, which include binder additions and content customized by instructors WileyPLUS course workflow solutions and Deltak Education Services, was partially offset by a 7% decline in books. For the year books revenue grew by 1%.

We are pleased with the strong pace of growth for our WileyPLUS workflow solution, students and instructors are recognizing the value of bringing [inventive] [ph] course management, improved performance and analytics.

The Education Services business formerly known as Deltak grew 19% in the quarter, we announced the University of Birmingham as our first European partner. The student body of 19,000 undergraduates and 9000 post graduates, Birmingham is the 11th largest institution in the U.K.

In addition to its importance as a prestigious international university partner, the relationship with Birmingham will serve as a springboard from which we can reach out to other institutions in Europe and around the world.

The addition of Birmingham brings our total partner count to 37 at the quarter end and after net additions of two programs in the quarter, a total program count of 181. Of these 156 are revenue generating and 25 are in development.

Education adjusted contribution to profit fell 11% in the quarter as investment in new Deltak partnerships and programs more than offset the margin contributed by modest overall revenue growth. For the first six months, Education rose 7% and adjusted contribution to profit increased 2%. Shared services costs were down 1% compared to prior year.

Distribution and operation services saw a 12% decline driven by restructuring savings including a more variable cost structure from outsourcing to track the declining print volumes. Technology and content management spend fell 1% in the quarter, but was up 1% in the first six months.

Technology excluding content management increased 7% for the quarter to $50 million and 9% year-to-date. We continue to anticipate full year technology spend to be 10% higher than last year. Finally, higher other administration expenses reflect the added operating costs of recent acquisitions.

In November, we announced a reorganization of our research segment with a dual objective of consolidating journal related products and services and moving research books under professional developments to achieve better operating synergies.

We expect to record a third quarter restructuring charge of approximately $18 million, approximately half of that is related to the real estate consolidation enabled by the restructuring actions taken during our fiscal year 2014.

The remainder of the charge is the severance related to the research reorganization and plan to further operating synergies related to the Books business. The severance portion of the charge is expected to be fully recovered by the end of our fiscal year 2016.

Also Wiley recently received an unfavorable decision from a lower court in Germany regarding its previously reported tax dispute. This was fully anticipated and we are in the process of appealing that decision.

As we and our tax advisors remain confident in our position and continue to believe, but the outcome would be a successful one no charge was recorded. As a reminder, Wiley has deposited a total of $64 million with German tax authorities related to the tax dispute.

The resolution of the appeal is uncertain regards to timing and could take a few months or several years. If we are successful, the tax deposits will be returned with 6% simple interest based on current German legislation.

Turning to the balance sheet, net debt grew $102 million over prior year principally due to approximately $227 million spend on acquisitions. Our net debt to EBITDA ratio on a trailing 12-month basis remains low at 1.4. Our strong balance sheet continues to provide considerable flexibility for investments and the return of capital to shareholders.

Free cash flow use of $141 million this year compared to a use of $112 million in the prior year, note that free cash flow is seasonally negative in the first half of Wiley's fiscal year principally due to the timing of annual journal subscription cash collections.

The variance to last year's results is principally due to a higher fiscal year 2014 annual incentive compensation payments, which are paid each year in July and higher payments related to restructuring. We returned $76 million to shareholders in the first six months on dividend payments of share repurchases up from $48 million in the prior year.

In the quarter, Wiley repurchased 532,000 shares at a cost of $29 million for an average $55.19 per share. This is up from the previous quarter's total of 200,000 shares. Note that 2.5 million shares remained in the current annual authorization.

In summary, we are pleased with our second quarter and year-to-date performance, revenue growth continues to be fueled by double-digit growth in our solutions business and steady performance out of journals.

Digital products and services now make up over 60% of our revenue up from 53% year earlier, this transition has created new opportunities to augment growth and improve overall efficiencies. Margin growth has been further enhanced by restructuring savings.

Based on how we are tracking and what we see for the rest of the fiscal year, we are reaffirming our fiscal year 2015 outlook of mid-single digit revenue growth and EPS in a range of $3.25 to $3.35. With that as background, we welcome your comments and questions..

[Operator Instructions] We will have our first question from Drew Crum, Stifel..

All right, good morning everyone. Thanks. So first question pertains to Deltak, 19% growth in the quarter had accelerated as you suggested it would from the first quarter.

But, want to get a sense as to how you are thinking about the pace of growth in the second half of fiscal 2015, I guess we haven't seen the sequential growth from your fiscal fourth quarter where you had significantly fewer revenue generating program. So maybe there was a mixed issue there.

But, just want to get a sense as to how you are thinking about the growth in the second half of the business?.

Sure, Drew. Thanks for the question. Let me start and maybe John can jump in with any further color around that. So as we said on the first quarter call, there is a phasing in of during the course of the year of new programs as those new programs come on stream that has made a difference looking at second quarter.

The first quarter, we expect to continue to benefit from the addition of new revenue generating programs through the year as those come on stream and begin to attract enrolment.

And just speaking about the growth of Deltak overall and we feel encouraged about where we stand today, we have a strong pipeline, would remain you that growth in Deltak comes from a combination of growth in enrolments with existing programs.

Growth of new programs in existing partners and the addition of further new partners and as we look forward to that pipeline we see conditions continuing to be very strong for growth and the uptake of the Deltak business model remains very attractive with new and existing partners..

Okay.

And then returning to the topic of restructuring, I think you said about half of that was severance and other, what is the impact we should expect on the cash flow statement and kind of a follow-on are you anticipating any cost savings or subsequent revenue synergies from the action?.

So Drew its John. Good morning..

Hi, John, good morning..

Breaking the part into two pieces, so first the real estate portion of this is about half of the anticipated charge of $18 million.

The restructuring charges related to our exit from facilities that were enabled by the restructuring actions that were implemented across the last six quarters so that was – work that's been underway for some time and the charge comes when you have actually exited the properties. So we will be completing that in this quarter.

In fact, there are three principal properties involved and we have already exited two that are involved in the charge and one will be done in a few weeks and those are Singapore, Oxford – one of our facilities in Oxford and part of our San Francisco Office.

So those were in motion, essentially those are charges for net expenditures that we anticipate on those leases that might not be recovered through sub-letting. The remainder of the charge relates to severance.

Severance being as Steve described principally related to our research reorganization and consolidation and since expected synergies around our operations related to books. Our expectation is that the recovery on those charges will occur by the end of our fiscal 2016.

So it's again about half of the 18, in the way of severance charges and we expect to pay back on that to be pretty short..

Got it. Okay. And then just last question, as far as CrossKnowledge and Profiles are concerned, I think going into the fiscal year you were guiding to about $0.10 of dilution from all the investment spending there.

How are you tracking that? It looks like the second quarter contribution to profit was down a little bit, but you are up significantly year-to-date. Just want to get a sense as to where you are relative to that prior guidance? Thanks..

Go ahead, Steve. And I will follow..

Actually Drew – so the CrossKnowledge and Profiles businesses have – we have been continuing the work to consolidate those with our other assessment business that consolidation is on track and we are now poised to launch a fully integrated Talent Solutions business for all of Wiley's acquisitions.

The performance of the business in fiscal year 2015 is expected to align with our expectations including that $0.l0 dilution, which is still what we expect from a combined basis across CrossKnowledge and Profiles.

And again, the pipeline is building in terms of new customers for that business and we feel great about where it is and prospects as an important engine for growth for Wiley in the future..

Okay, great. Thanks guys..

[Operator Instructions] We will go next to Daniel Moore, CJS Securities..

Good morning. Thanks for taking the question..

Hey, Dan..

Just quickly on guidance for the full year, the $10 million backfile license sale, was that contemplated or anticipated when you initially give guidance for the year?.

Good morning, Dan. First, I would point out that backfile sales are part of the normal flow of our business, so to lead people on the call to believe that this is out of the flow of our business in general. That said, the reason we are calling out this particular backfile sale is unusually large.

So within revenues each year there are typically a number of smaller transaction this one just individually happens to be large. That said this particular opportunity had been in works for quite a long time. And it was in our guidance, we anticipated that it would occur during this fiscal year. So yes, it was assumed in our plan for the year..

Perfect, appreciate it. And then switching back to Deltak a little bit. With the new agreement in the U.K. and Birmingham, maybe just talk about landscape in Europe where it is versus the U.S.

in terms of adoption of online higher ed programs, what the competitive landscape looks like and what your expectations are for ramping that growth opportunity in the next few years?.

Sure. So Dan, this is Steve. In my remarks I think I described it as a springboard for future growth. We do see further opportunities in the EMEA region, in Europe, Middle East and Africa for the online program management business model. There are not as many partners working with online private management providers in the U.K.

and Europe as there are in the U.S. today. So it's fair to say the market lags a behind a little. But institutions like the University of Birmingham see – the same opportunity as U.S.

universities to the extent the reach to attract new students to generate new profitable revenue streams and to leverage their brand globally by offering online education with high-quality programs with partners like Wiley and Deltak. So we have other European customers in the pipeline, we see other opportunities in the U.K.

as you probably know it takes – we need to build a bit of – build a team around each partner and having the base now to build from gives us an opportunity to really explore further growth opportunities. I would say that the early opportunities are likely to also be in the U.K.

but we also see opportunities in other European countries as well as in some of the countries in the Arabian Gulf area..

Got it.

And then in professional development you mentioned CrossKnowledge, talk about the – how the integration process is going with Profiles and Inscape into a more seamless offering and how that is being received in the market?.

So I don't want to get into too much detail around that. But, the Profiles business is built around primarily pre-higher assessment tools that were sold both direct to corporations and through a reseller network.

Inscape primarily post higher assessment tools and although there is some overlap between Profiles and the Inscape portfolio and with Inscape selling its post higher assessments primarily through a reseller network.

We first of all, started by looking at sales channels to make sure that we are upselling to all existing Profiles customers, the Inscape network and vice versa. We are also integrating the whole thing with our direct sales capability that came to with cross-selling.

But to provide a network of different sales models and selling – our sales channel opportunities combining the global reach of CrossKnowledge, the strength of Profiles and Inscape in the U.S. and the strong reseller network that's been selling both Wiley and Inscape products for several years.

And actually that's helping us to identify significant revenues synergies. We are also aligning the management of Profiles and CrossKnowledge and Inscape into a single team.

And are looking at the opportunities to rollout business models that offer an end-to-end solution to corporates to help them manage their talent base and resolve the challenges of how to develop a competitive work force to today's environment..

In terms of the full cross-selling capabilities that still obviously in progress at this stage..

Yes. I think as we move into calendar year 2015 that capability will become – it will become cemented into the way that we work. But we – as you suggest, we are not all the way there yet. But we are making very good progress..

Prefect.

And then just lastly, just in terms of the capital allocation, talk about the acquisition landscape for professional development and then you stepped up buybacks in Q2 absent significant acquisitions, would you likely be similarly aggressive in buying back stock in coming quarters?.

As always we will continue to use our cash focusing on our main priorities, first priority is to continue to invest in organic growth wherever we can see opportunities to drive profitable revenue growth from innovation around our core and existing businesses.

We will continue to use cash to make acquisitions particularly around that Talent Solutions business where we see gaps, an opportunity to round out the portfolio into a total end-to-end Talent Solutions offerings provided that we can identify targets and consummate bills at an attractive economics.

And to the extent that we still have additional opportunities to deploy cash flow beyond that we will continue to focus on buyback and dividend as ways to return capital to shareholders..

Thank you, again, and we look forward to seeing at our conference in January..

Thank you..

Thanks Dan..

[Operator Instructions] It appears we have no further questions in the queue. I will turn the conference back over to Mr. Smith to offer any additional or closing remarks..

Well, we thank you for joining us on the call today. And we look forward to speaking with you again at the end of our third quarter..

That does conclude today's conference. Thank you for your participation..