Brian Campbell - VP, IR Mark Allin - President & CEO John Kritzmacher - CFO & EVP Technology & Operations.

Drew Crum - Stifel Nicolaus Daniel Moore - CJS Securities.

Good day, ladies and gentlemen. Welcome to Wiley’s Third Quarter Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Wiley’s Vice President of Investor Relations, Brian Campbell. Please go ahead..

Good morning, and welcome to Wiley’s third quarter fiscal 2016 earnings call. Before we begin, I’d just like to remind you that 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 10-K and 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 of you who prefer to listen to the call over the phone, but still want to view the slides, we recommend that you click on the Gears icon located on the lower portion of the left-hand side window and select Live Phone.

This will eliminate any delays in viewing the slide transitions, as well as remove any potential background noise if you prefer to ask questions. After the call, a copy of this presentation and the playback to the webcast will be available on our Investor Relations page. I’ll turn the call over to Mark Allin, Wiley’s President and CEO..

Thank you, Brian. Good morning. In addition to Brian, I am joined by John Kritzmacher, CFO and Executive Vice President, Technology & Operations. I will speak to business performance and John will follow with an update on operations, balance sheet, cash flow, cost savings initiatives and full year outlook.

Note that I’ll be excluding the impact of foreign exchange and the transitional non-cash impact of shifting to time-based journal subscriptions when commenting on all variances to give a consistent measure of our underlying operational performance. As expected foreign exchange remains a headwind.

Since half of our revenue is generated outside the United States, our reported results are adversely impacted by a stronger U.S. dollar, particularly with respect to the euro and the British pound. In the quarter, the unfavourable impacts to revenue and EPS were approximately $16 million and $0.06 respectively as compared to the year ago period.

Year-to-date, the revenue and EPS impacts were $57 million and $0.14 respectively. Also as previously announced, Wiley is transitioning from issue-based to time-based digital journal subscriptions for calendar year 2016 to simplify the contracting and administration of these agreements.

For the quarter and year-to-date the transitional adverse impact of the change in subscriber agreements was $29 million of revenue, $25 million in operating income, and $0.32 of EPS.

For full year 2016, the change in subscriber agreements would shift roughly $37 million of revenue and $0.40 of EPS for fiscal year ’16 to fiscal year ’17 with recurring effect annually thereafter. Please note that it's up from our prior estimate of $35 million of revenue and $0.35 of EPS. The change will not impact cash flow.

In certain instances, I will be excluding this transitional impact in my discussion referring to results on an operational basis. Now onto our third quarter highlights, and we are pleased with our progress. Revenue grew 3% operationally, thanks to solid growth in key areas, including journals, certain areas of publishing and solutions.

Revenue was boosted by $10 million backfile sale to a national consortium, which offset an unfavourable reporting comparison for corporate learning, where the prior period including two additional months of CrossKnowledge results. That unfavourable comparison was adverse to third quarter revenue by $5 million.

Adjusted earnings per share grew 6% operationally, due to a combination of revenue growth, cost reductions, and contribution from the large backfile sales. Partially offsetting the underlying earnings growth was investment in our ERP program and related systems.

Journals which make up about 50% of total Wiley revenue rose 5% operationally, due to the backfile sales and strong author-funded access growth. Journal subscription revenue was flat to prior year, partly due to a net loss in society journals and the final trading effect of the Swets bankruptcy.

Calendar year 2016 subscription renewals were up 1% with 79% of targeted business closed. As noted, third quarter reported performance reflects the shift to time-based journal subscriptions, which adversely impacted revenue by $29 million, operating income by $25 million and EPS by $0.32.

Excluding that transitional shift and the impact of currency, revenue grew 3%. Operating income grew 5% and EPS rose 6%. I’ll touch on each of our business segments in a moment.

Year-to-date, revenue growth on an operational basis is even with prior year, mainly due to declines in Higher Education print textbooks offsetting double-digit growth in our solutions businesses, while adjusted EPS is up 2%, primarily driven by restructuring savings and a lower effective tax rate.

In the Research segment, third quarter Journal revenue grew 5% operationally driven by a $10 million backfile sale to a national consortium and double-digit growth in digital books and author-funded access.

Journal subscriptions were neutral with prior year, due to a net loss in society publishing contracts in calendar year 2015, which overlapped into the first two months of the current quarter. Results were also modestly impacted by the trailing affects of the Swets bankruptcy. Swets will have no further impact on the business.

Calendar year 2016 Journal subscription billings were up 1% as of the end of January, with 79% of targeted business closed. In our Society business, Wiley renewed 66 society journals during the quarter, worth approximately 28 million in combined annual revenue. Six were not renewed worth $5 million annually. No new journals were signed.

Note that society journal win loss is modestly positive for calendar year 2016. Research books and references grew 13% on strong digital book sales, including a new digital book license worth $4 million. As a reminder, we have integrated our various book businesses to achieve operating synergies and increased focus on areas of growth.

Finally, adjusted contribution to profit on an operational basis rose 18% over prior year driven by the high margin contribution from the journal backfile sale and restructuring savings. Year-to-date, research revenue growth on an operational basis is even with prior year and adjusted CTP is up 2%.

For the quarter, professional development revenue declined 1%, primarily due to an unfavorable comparison with prior year to corporate learning, which makes up our CrossKnowledge business. As a reminder, CrossKnowledge results in the prior year included five months of operations as we unwound a temporary two month reporting lag for that acquisition.

The comparison was adverse to year-over-year results by $5 million. Operationally however, professional development revenue grew 4%. Corporate learning continues to show better than 20% operational growth and we feel very good about the market opportunity in that space.

Online test preparation had an exceptional quarter with CFA, CMA and CPAexcel products contributing to a 69% growth rate, as we continue to attract new students and add new courses.

The Assessment business rose 2% with solid post-hire assessment growth, offsetting a managed decline in pre-hire assessment revenue following portfolio actions to optimize longer term profitable growth. Book revenue declined 5% overall, due to planned portfolio adjustments and weaker retail trends in EMEA and Asia.

Finally, adjusted contribution to profit for this segment continues to improve, growing 47% over prior year from a combination of restructuring savings and efficiency gains. Excluding the two extra months of corporate learning in the prior period, professional development adjusted CTP grew 19%.

Year-to-date revenue growth for professional development is up 2% and adjusted CTP is up 89%. Education delivered better results this quarter than last, particularly in custom material and course workflow, which were up 20% and 6% respectively.

Course workflow growth was driven by solid performance in accounting and engineering programs, while custom material grew on increased Edition Binder sales. Print textbook revenue however declined at double-digit rates again, as students continues to navigate towards lower cost alternatives.

Online program management revenue grew 13% and is up 18% for the year. Wiley added six net new programs this quarter for a total program count of 222 programs, up from 192 programs in the year ago period.

As part of our ongoing portfolio review, we decided to retire a non-revenue generating partner in the quarter resulting in a total university partner count of 38. The opportunity to sign new partners is as strong as ever, but we remain disciplined and selected in our approach to the business.

Wiley’s unique position inside of academic institutions is not lost on potential partners, whether it’s providing research content to the academic library, course material to the classroom or administering graduate degree programs on behalf of the institution.

Adjusted contribution to profit for education declined 7% in the quarter reflecting lower print textbook revenue and long-term investments in new online program management. Year-to-date, revenue growth for education is down 3%, while adjusted CTP is down 16%.

John will now take you through our financial position, cost savings program, and fiscal 2016 guidance..

Thank you, Mark. Adjusted shared services costs for the quarter rose 9% over prior year, driven by a 17% increase in technology investment related to our ERP deployment, technology infrastructure and digital product enhancements.

For the year, we continue to expect the ERP and other systems investments to be more than $0.15 per share higher than the prior fiscal year. Note that other administration costs rose 14% or $3 million. This increase was mostly due to the higher legal provisions related to litigation of certain copyright matters.

And finally, as communicated last quarter, we are outsourcing our U.S. print textbook distribution operations to Cengage Learning to lower our fixed cost and shift to a more variable cost structure for print textbooks. The transfer of these operations is on schedule and we expect to close our U.S.

distribution center located in Somerset, New Jersey in April. Moving on to our balance sheet, we recently amended our revolving credit agreement, increasing its capacity to $1.1 billion and extending its term by five years to March 2021.

The facility will continue to be used for general corporate purposes, including seasonal operating cash requirements and for strategic acquisitions. Net debt-to-EBITDA on a trailing 12 month basis was 1.1 at the end of January, as compared to 1.0 in the year ago period, and 0.7 at fiscal year-end.

Cash from operations was down $38 million from prior year due to lower cash earnings and less favorable timing of cash collections. We expect to recover most of this shortfall in our fourth quarter. For the year, we expect cash from operations to be close to flat after setting aside the adverse impact of foreign exchange on our net income.

For the nine months ending in January, the adverse FX impact on net income was roughly 8 million. Free cash flow was 19 million for the first nine months of the year, compared to 80 million in the prior year period, reflecting lower cash from operations and higher capital spending.

The CapEx increase of 22 million reflects investment in our ERP and related systems, as well as the redesign of our global headquarters in Hoboken, New Jersey. As a reminder, we expect to spend a total of 75 million in fiscal years 2016 and 2017 on our ERP program with half of that expensed and half capitalized.

The initiative is expected to be completed during the first half of our fiscal 2018 and will result in significant efficiency gains. We expect to realize 25 million in run rate savings across our shared services operations in fiscal year 2018, with much of that enabled by our ERP implementation.

In addition, the headquarters office redesign will allow us to consolidate floors, lowering our ongoing operating cost and creating a far more productive and collaborative environment. Finally, we deployed $15 million in the quarter to repurchase 348,000 shares at an average cost per share of $43.11.

Year-to-date, we have deployed 60 million to repurchase 1.2 million shares at an average cost of $49.09 per share. 963,000 shares remain in the current repurchase authorization. As previously communicated, we’ve increased our focus on improving our operating efficiency and effectiveness. We are continuing to integrate our three books businesses.

We’re also outsourcing our U.S.-based print textbook distribution operations to Cengage Learning to lower our fixed cost and shift to a more variable cost structure for print textbooks. Finally, we are making good progress with our shared services cost benchmarking programs.

Our competitive reviews for technology and finance are complete and we are now moving towards the implementation of streamlined service delivery models for these important functions.

We expect these initiatives will substantially improve the effectiveness of our technology and finance functions, while achieving parity with competitive cost benchmarks. These initiatives gave rise to a third quarterly structuring charge of 14 million.

Consistent with our comments last quarter, we also expect to record a restructuring charge of approximately 8 million in the fourth quarter, primarily for real estate costs related to the winding down of our U.S. distribution operations.

As noted, we’re on-track to realize 25 million in run rate savings in fiscal year 2018, with half of that being realized in fiscal year 2017. And finally, I’d like to comment on our full year outlook.

Based on our performance for the first nine months and certain leading indicators, we are reaffirming our guidance of flat operational revenue growth and flat operational EPS growth. Our performance year-to-date is tracking in line on a revenue basis and slightly ahead on an adjusted earnings basis, with adjusted EPS up 2%.

Our guidance excludes the effect of currency and the transitional non-cash impact of shifting to time-based journal subscriptions. As a reminder, we expect 37 million of revenue and $0.40 of EPS to shift from fiscal 2016 into fiscal year 2017.

To-date, 29 million of revenue and $0.32 of EPS have moved, with the remainder of the shift to incur in the fourth quarter. Cash flow is not impacted by the shift. With respect to currency, the strong dollar versus the euro and British pound has resulted in adverse impacts to year-to-date revenue and adjusted EPS of 57 million and $0.14 respectively.

As a reminder, our EPS outlook includes an incremental expense of more than $0.15 for our ERP and related systems investments as compared to the prior year. And now let me pass the call back to Mark..

Thank you, John. This was a solid quarter for underlying revenue and adjusted EPS growth. Several key areas drove results including mid single-digit revenue growth in journals, strong growth in research books and custom education material, and double-digit growth in solutions.

We are encouraged by the steady growth we’re seeing in our calendar year 2016 Journal Subscriptions. We remain focused on our mission, to enable people to get skills and knowledge they need to be successful in research and in lifelong learning. We continue to expand the number of users for our products and services, as we grow our digital revenue.

Our effectiveness and efficiency initiative is showing good progress. We are integrating our books businesses, have begun to implement our cost benchmarking program and shared services, and we are on-track to outsource our U.S. print distribution to Cengage Learning and close our U.S. distribution center. The global headquarter redesign has commenced.

When it is completed, it will allow us to realize efficiency gains, the benefits of cross functional collaboration, as well as cost savings from floor consolidation.

Our balance sheet together with our new $1.1 billion credit facility gives us the flexibility and capacity to make meaningful strategic acquisitions and continue returning cash to shareholders in the form of dividends and share repurchases.

In summary, while the work continues in this year of investment, we are pleased with the underlying results for the quarter. We reaffirm our full year outlook of flat revenue growth and flat adjusted EPS growth on an operational basis. We welcome your comments and questions..

[Operator Instructions] We’ll take our first question from Drew Crum from Stifel Nicolaus..

So guys, I have a couple of clarification items on the research business. I guess first starting with the large digital book sales that you guys mentioned. $4 million to the government sponsor.

I take it that’s one-time, and can you talk about any other large deals that you may have in the pipeline that would swing the research business quarter-to-quarter or year-on-year? Thanks..

So that is a one-time deal, Drew. We are continuing to explore digital book sales including with national consortia and government, but these are necessarily large and therefore somewhat infrequent.

We continue to grow digital revenue for the business, mainly on a library-by-library, customer-by-customer basis, but continue to put resources into exploring those kinds of large digital deals, but certainly we are not able to forecast or predict those with any accuracy, given that they are largely national and depend on long-term negotiation..

And then you mentioned Mark, the expectation for calendar ’16 on the society journals was neutral in terms of wins versus loss.

Is that on a count basis or is that on a dollar basis or both?.

Drew, that is done on a -- this is John, good morning..

Good morning..

That’s on a dollar basis, wins versus losses..

And then moving onto the Education business, can you talk about what is contemplated in terms of number of adds around programs, university partners. I think you mentioned earlier that you expect to be selective going forward.

I just want to better understand as to how you intend to grow that business going forward? And on a related item, are you seeing any changes in terms of the economics you are getting or the splits I guess said differently with these contracts that you have with your university partners?.

Sure, so perhaps I’ll take the first part of the question and then John could comment on the second, Drew so the important metric to focus on in our Online Program Management business is the number of programs.

We’re increasingly selective in adding new partners and we’ll only contemplate adding partners where we believe we can really get scale in the number of programs that we offer, and it’s the addition of to right-size and scale of programs which really drives both the top-line and overtime the economic productivity of the business.

And amongst our existing partner base, those again where we believe and are adding new programs, you will see over the course for the last 12 months.

We’ve added around 30 programs with existing partners where we think there is the opportunity for us to go deeper in the partnership and to launch programs that get real scale in terms of student numbers.

And at the same time, I think as I mentioned we review the portfolio of partners and occasionally we will retire those partnerships, which is small or non-productive..

And then just to add on that, Drew I would just say in terms of the general characteristics of the business that we’re contracting the profitability profile if you will, the revenue sharing arrangements, they seem to be relatively stable I would say, no material changes over the last couple of years..

And then just last question and I’ll jump back into the queue. John just your comfort level and the Company’s ability to generate $250 million of free cash flow going forward excluding ’16 given you’ve got some one-time items.

But I think you mentioned would it impact the free cash flow performance year-to-date? But as I look at the numbers through the first nine months, you’re at 19 million whereas the 10 year average through the first nine months for this business is close to 160 million, so this feels like a drastic drop off in the cash flow generation for this Company.

So just want to gain better understanding as to how you think about the free cash flow power of the Company going forward?.

So, I made some comments about what we expect to see for the balance of this year.

So, when we talked about expectations for the year last June we said that we expected operationally that cash flow from operations would be essentially flat year-over-year and that we would then see about 35 million increase in CapEx, so that would have us close to the 200 level, 210 for free cash flow for fiscal ’16.

As we’ve made array along we’ve seen a bit of an impact from timing, which as I indicated in comments we expect will make up most of that improvement in cash from operations in the balance of the year.

I did note that there is an adverse impact to-date on our net income that it's cash from operations about $8 million and then if you look through to our investments, our investments are up year-to-date by about 22 million over last year and again we said that that would be something on the order of about 35 for the year.

So those are the overall characteristics, they’re falling in line with our expectations for the year albeit that some of the timing has its lagging to the fourth quarter.

So I still have confidence in what we’ve said about free cash flow for the business in the past and our ability to continue to drive strong free cash flow performance in the business going forward..

And we’ll take our next question from Daniel Moore from CJS Securities..

Just wanted to piggyback on that and I kind of missed your comments, I am afraid.

What John is your expectation at this stage for cash flow from operations for fiscal ’16?.

So we had said coming into the year that we expected for the year that cash from ops would be relatively flat operationally year-over-year. And our current expectation is that we will be close to flat excluding the impact of foreign exchange on our net income, which has been unfavorable by 8 million year-to-date.

So we’re still in the same sort of spot, but impacted a bit by the foreign exchange’s impact on cash..

Wanted to dig into a couple of business lines, WileyPLUS in particular has slowed a bit here this year, this fiscal year.

Just talk about the outlook for that and your confidence that we can start to generate positive growth once again as we look out into next school year and beyond?.

Sure, hi Dan it's Mark. Yes so we were pleased to see WileyPLUS restored to growth in the third quarter at 6% on a year-on-year basis. We continue to see that business impacted by some of the forces that were more obvious in the second quarter, particularly lower U.S.

enrollments, students finding lower cost alternatives, particularly renting second hand textbooks, and so on. And I think that there are channel issues there, there are some pricing issues there. But the long-term trend towards digital education and towards a kind of core solutions that we’re investing in, we remain very positive about.

Our team will continue to monitor enrollments in the overall growth in number of students carefully, but we’re pretty clear that universities are moving towards digital education, that the more that we invest in the functionality only the outcome, and the outcomes-based features of those products to better pick will get our strength in engineering and accounting in particular which are highly concentrated and highly suitable for -- the digital teaching have been encouraging as well.

So we see positive long-term digital trends with some questions we will answer along the way particularly around pricing and what’s happening in retail channels..

And you touched on in your prepared remarks and a little in Q&A, the online program management, growth has slowed a little bit and I know you’re being more selective.

Do you still see under the new sort of focus if you will, the ability to drive strong double-digit closer to 20% growth going forward? Or should we be thinking of that more as a kind of a 10% to 15% growth business relative to what your expectations were when you acquired the business?.

Yes, so we continue to see growth potential in that business around a level that it's growing now, 15 and towards 20%. We have become a lot more focused around the number of partners that we acquire.

And actually we’ve gained real traction and momentum from the fact that Wiley has strong relationships across campuses, with the right kind of larger university partners who can really create scale for us in that business going forward.

So we absolutely remain confident in the outlook for the business and confident in Wiley’s ability to continue to gain share and drive top-line growth..

And just remind us the impact on profitability right now and if you are maybe signing up fewer new partners where you have a significant amount of upfront investment spend, talk about how we should think about the ramp of earnings or profitability in online management over the next couple of years?.

So Dan it is John. So on a year-to-date basis, Deltak has been dilutive to our earnings by $0.15. And our expectation and that’s roughly even with where we were last year and that’s about where we will level off for this year.

We have not yet set a particular point in time, where we tend to drive Deltak to be accretive, and we’ll talk about that more again when we comeback around to our thinking on the year and our guidance for fiscal ’17.

We continue to believe that as that business matures and the relative mix of mature programs versus new programs starts, shifts the balance towards more mature programs then we will get our that part of the business up to operating margin rates that are at or above the average of the business..

I appreciate the color.

Is that a sort of three to five year timeframe or should we be thinking about longer?.

You should not be thinking about longer, but we’ll get more precise about this when we comeback around to talk about ’17..

Okay. And the Assessment business up 2% year-to-date, when we entered it I think we were looking at more like double-digit growth, I know there has been some puts and takes.

Can we get back to double-digit growth rates in the current environment and in the current economic environment and what types of initiatives it will take to get there?.

Yes, it’s Mark again Dan. So our post-hire Assessment business continues to expand at around that rate and we certainly feel good about that going forward. The 2% blended growth rate as talked about is the result of the portfolio actions that we took in our pre-hire Assessment business, so profile is international.

We’ve rationalized the channel approach of that business. It was a multi-channel business and that has created real pressure on both profitability and scale.

We focused on that as a reseller driven business, as we are in our post-hire business and that we can get both businesses to continue to be productive at a double-digit growth rate as we work through the next 12 months of restructuring in the pre-hire business..

And then maybe just lastly a reminder, capital allocation balance sheet continues to get better relatively under levered, particularly as you think about cash flow potential in ’17 and beyond. Talk about the balance of opportunities from an acquisition standpoint versus perhaps being more aggressive with repurchases et cetera..

I think Dan, I would generally describe for now that we’re continuing on the path where we have tried to strike and even balance between having capacity available to invest in the business including acquisitions and returning cash to shareholders in the form of repurchases, as well as dividend.

So I don’t see any near-term change in the pattern that we’ve had for the last couple of years here..

[Operator Instructions] And we do have a follow-up question from Dan Moore..

I’ll take one more crack and maybe once again talk about this journalism and the society businesses, but -- and I think our six society journals were not renewed.

Did you walk away from that business and just talk about the general overall environment for pricing in the competitive landscape for societies in particular?.

Yes, Dan, it’s Mark. So those were relatively small agreements and it’s in the natural rhythm of the business for some to go away as we continue to work towards acquiring and winning bigger society business, it is competitive. I think that’s pretty obvious.

That creates the need for us not only to be clearly providing the kind of broad service that society is looking for, both in publishing services, through membership services learning and education, but also to be competitive, and that competitiveness requires us equally to be focused on realizing efficiencies elsewhere in our Research business that allow us to continue to compete.

But we certainly feel good about our competitive strengths and our ability to win going forward..

[Operator Instructions] And it appears we have no further questions in the queue. I would like to turn the call back over to Mark Allin for any closing remarks..

So we thank you for joining us on the call today and look forward to speaking with you again at our June year-end earnings call..

And once again ladies and gentlemen, that concludes today’s conference. We appreciate your participation. Have a nice day..