John Wiley & Sons, Inc. (WLY) Q1 2022 Earnings Call Transcript

Good morning, and welcome to Wiley's First Quarter Fiscal 2022 Earnings Call. As a reminder, this conference is being recorded. At this time, I'd like to introduce Wiley's Vice President of Investor Relations, Mr. Brian Campbell. Please go ahead.

Hello, everyone, and thanks for joining us. With me are Brian Napack, President and Chief Executive Officer; and John Kritzmacher, Executive Vice President and Chief Financial Officer. A few reminders to start. The call is being recorded and may include forward-looking statements. You shouldn't rely on these statements as actual results may differ materially and are subject to factors discussed in our SEC filings. The company does not undertake any obligation to update or revise forward-looking statements 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 U.S. 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 the impact of currency. After the call, a copy of this presentation and a playback of the webcast will be available on our Investor Relations web page. I'll now turn the call over to Wiley's President and CEO, Brian Napack.

Good morning, everyone, and welcome to our Q1 earnings call. Today, Wiley is reporting another quarter of solid revenue growth across all segments. We continue to take advantage of strong demand for scientific research and career-connected education throughout the global economy. Our performance underscores the tight alignment of our strategy to prevailing trends in the market and now more than ever, the critical importance of the work we do in powering discovery and learning worldwide. Simply stated, the more researchers and learners that Wiley can help to succeed, the greater the positive societal impact. One point of example of this is in our talent development business, where today, we are filling the critical technology skill gap while also actively targeting the acute lack of diversity in the technology space overall. In partnership with our clients, we target underrepresented populations and train them so that they can get great jobs and succeed in those high-demand, high-paying jobs with leading corporations. As a result of this specific focus on diversity and equity, the representation of people of color in our tech career placement programs is far above the national average. From ensuring equity and hiring to making education more accessible through facilitating breakthrough climate research, Wiley continues to have an outsized impact on society. Across Wiley, we're making substantial progress on ESG and sustainability. Wiley's diversity disclosure in our annual report was cited as a top example by a leading corporate governance authority, we recently earned a silver rating from EcoVadis a leading sustainability ratings firm. This placed Wiley in the top 25% of all companies assessed. After achieving carbon neutrality in fiscal '20, we've kicked off our fiscal '21 carbon measurement initiative and have engaged a third party to guide us through the process of committing to and achieving science-based targets. Despite lots of progress, we've got a long way to go in this journey, and we look forward to updating you regularly. Now on to our Q1 results. The team continues to execute well, and our performance reflects that, with revenue up 9% overall and 7% organically. This revenue growth drove a 12% increase in adjusted EBITDA and a 17% increase in adjusted EPS. Revenue growth was strong across all segments, with Research up 10%, Academic & Professional up 7% and Ed Services up 13%. As a reminder, all variances exclude the currency impact. Simply stated, our strategy is on the mark for where the market is headed, and this was reflected in our Q1 performance. The long-term trends that we're pursuing continue to advance. Here, of course, I'm talking about the shift toward open research, hybrid and online education and digital learning tools and courseware. Further, the drive of corporations to fill the talent gap continues to create a significant demand for Wiley's career-connected learning products and programs. In fact, we're seeing great momentum in our corporate offerings across research and education. Corporations alone showed strong demand for our research products to fuel innovation and they rely on our learning products and platforms to upskill their teams. Increasingly, corporate leaders are coming to Wiley for their talent development needs. And in fact, for job-ready talent to fill their critical skill gaps. Looking ahead, the corporate customer is a clear and compelling opportunity. Earnings growth this quarter was largely fueled by strong profit performance in Research and APL, mainly driven by revenue growth. This performance offset a profit decline in Ed Services due to higher marketing costs and university services and investment to expand client relationships in talent development. Overall, we're pleased with how we started the year. However, COVID-related uncertainty remains a reality for now, particularly as it relates to university enrollment and related customer buying behavior as students and schools adapt to changing market conditions. That said, we're confident in the ongoing strength and expansion of our core markets. At its core, Wiley does three things: we enable discovery, we power life-changing education, and we shape workforces. These three important areas of impact are central to human advancement, and we're deriving strong growth from each. We're enabling discovery through our leadership in open research, where we're making record volumes of new research freely available to the public. The rise of open research publishing has accelerated research revenue growth overall. Our strong growth this year is based on both the enduring draw of our journal brand and the execution of our open research strategy, including our multiyear read and publish agreements. This performance has been augmented by strong growth in our corporate lines of business, which include career centers, science databases, and advertising to our very valuable audiences. We're powering education by delivering high-impact learning experiences and online degree programs that connect education directly to career outcomes. Wiley is helping institutions plan and deliver career-connected education and this is driving growth in our University Services and digital courseware lines of business. And Wiley is shaping the workforce by working with leading corporations to find, train and develop the talent they need to overcome the widening skill gap. Demand for our Talent Development Services is particularly strong now as corporations remain challenged by the war for talent and the persistent shortage of critical tech skills. Our professional learning lines of business that deliver corporate training and professional publishing are seeing a strong recovery as corporations and professionals alike focus on upskilling to differentiate themselves in a highly competitive market. Let's take a look at our Q1 performance by segment. Wiley Research delivered another good quarter with revenue up 10%, 5% of which was organic. Our performance was driven by open research publishing, research platforms, and corporate sales. Adjusted EBITDA rose 12% for a Q1 EBITDA margin of 37%. Research article output continues to grow nicely, although as expected, article submissions have slowed a bit from last year's COVID-related spike. Notably, underlying OA revenue growth was over 50%, including Hindawi, our OA revenue nearly doubled. Our multiyear read and publish agreements, often referred to as transformational agreements, continued to drive incremental volume growth this quarter. The pipeline remains strong for these mixed model deals, which provide full access for a client community to read and publish Wiley's journals. We continue to expand our major society partnerships, delivering a broad range of products and services that help them succeed, including research publishing, research platforms, author services, and career services for the society's constituents. In August, we announced a landmark agreement with the Society of Hospital Medicine to publish its industry-leading publications and to grow its career center. SHM has more than 15,000 hospitalists as members. We recently launched a knowledge hub for Gilead Sciences that targets HIV specialists. We also signed new career center partnerships with LexisNexis and with the Institute of Physics among others. Going forward, there is a significant opportunity to upsell additional products, platforms, and services to our unmatched network of societies and corporations. In summary, for research, there continues to be very good momentum and lots of opportunity for growth as we drive the transition to open research and expand our portfolio of partner solutions. I'm very pleased to report 7% organic growth this quarter for the Academic & Professional Learning segment. This was driven by 13% growth in Professional Learning compared to a COVID-impacted last year. Adjusted EBITDA for the quarter rose 37% for Q1 EBITDA margin of 19%. This is up from 15% in the prior year period. Education Publishing revenue rose modestly with continued strong growth in digital courseware and modest growth in print and digital content, both offsetting ongoing COVID-related challenges in test prep. As noted, COVID continues to hinder visibility on full enrollment and student buying behavior. Industry projections for enrollment range from flat to modestly down. The data remains limited thus far as we drive through the busy back-to-school season. Note that in June, we sold our world languages publishing list to Vista Higher Learning, a specialist in language learning. This sale, although a small one, is a reflection of our important strategy to focus on highly-demand skills and careers such as STEM and business. Professional Learning saw strong growth in both professional publishing and corporate training, benefiting from favorable comparisons to the prior year. Corporate training continued to see a very strong recovery through both virtual and class delivery with revenue growth of 46% against the locked down Q1 last year. Finally, our cloud-based CrossKnowledge corporate learning platform also grew this quarter, albeit modestly, while signing 10 new corporate clients. In summary, we're encouraged by our return to growth in APL as we continue to scale our digital courseware offerings and leverage our strong corporate relationships and professional learning brands. Ed Services reported 13% growth for the quarter, with University Services up 8% and Talent Development up 34%. As a reminder, University Services was formerly reported as OPM and talent development as mthree. Adjusted EBITDA for the segment was down 21% due to higher marketing costs in University Services as competition increased for student leads and increased investment in talent development to accelerate the expansion of client relationships. In our smallest quarter of the year for University Services, adjusted EBITDA margin was 9%. University Services growth was driven by 8 new partners we added last year, along with student enrollment growth. While no new partners were signed this quarter, we recently signed important renewals and added 13 new degree programs with existing partners. Online enrollment was up 9% for the quarter, down from 14% we saw for the full fiscal year '21. We are seeing slower online enrollment growth compared to last year's COVID-related spike. Over the summer term, for example, we saw a lower rate of re-enrollment compared to historical patterns and expect some of that to continue into the fall. This variability in enrollment pattern is to be expected as the system adapts to the ongoing impact of COVID. As expected, we are seeing great momentum in talent development, where, as you know, Wiley helps corporations identify, train, place, and retain hard-to-find talent. In the quarter, we signed 3 more multinational clients, including a leading financial services firm, a leading industrial services company, and a global retailer. These new clients are on top of the 7 we signed in the previous 2 quarters. We also delivered record talent placements to our existing Fortune 100 customers, such as Morgan Stanley, Bank of America, and many others. In a great example of our business model having an impact, we recently launched a program with Amazon Canada to reskill warehouse workers and truck drivers with software development skills. The goal of this program is to provide great new career path opportunities for these workers, even if this means that they gain skills that allow them to leave Amazon to pursue higher potential careers. Amazon, like many leading companies, knows that they need to provide career development opportunities to both attract and retain high-quality workers. We truly appreciate this forward-thinking socially positive partnership, and we're seeing real impact already. This is another clear example of the significant corporate opportunity that Wiley is now tapping into. The pipeline in talent development is strong, and we're expanding our reach into international markets such as India and Australia. We're also making great progress in industries outside of our core financial services vertical. In summary, we're pleased with the growth of Ed Services as we continue to drive online enrollment growth and launch new degree programs in University Services and as we sign major corporations and deliver record placements in talent development. Again, we do anticipate some moderation of online enrollment growth this year as students return to physical campuses and focus on their personal career paths. Overall, it was a good quarter in which all 3 segments of Wiley contributed to our revenue growth and to the achievement of our mission to unlock human potential. I'll pass the call over to John to take you through our financial position and outlook.

Thank you, Brian, and good morning, everyone. As Brian noted, the Wiley team continues to make good progress in executing our growth strategies and driving operational gains. Free cash flow for the quarter was 25% better than prior year, driven by higher cash earnings and favorable working capital timing, partly offset by higher annual incentive compensation payments for our fiscal year '21 performance. CapEx was $24 million for the quarter, modestly lower than prior year, and there were no acquisitions of note this quarter. We continue to be active on the M&A front as we seek our capabilities in key strategic areas of research and career-connected education. Our improved cash flow for the quarter complements a healthy balance sheet with more than $82 million of cash on hand and undrawn revolving credit capacity of more than $518 million at quarter end. Our net debt-to-EBITDA ratio was 2.0 at the end of July, consistent with prior year, even after funding the $298 million acquisition of Hindawi last January. We allocated $27 million to dividends and share repurchases this quarter, up from $19 million in the prior year. In June, we raised our dividend payout for the 28th consecutive year, and our current dividend yield is around 2.4%. After taking a pause on share repurchases in the year-ago quarter, we acquired 130,000 shares this quarter at an average cost per share of $56.88, for a total spend of $7.4 million. Our fiscal year '22 business plan provides for important investments in our growth strategies and business optimization initiatives. In research, we will publish more to meet global demand, taking full advantages of our Hindawi acquisition to advance our leadership position in open research. We will also broaden our research publishing platform and service offerings for societies and corporations. In career-connected education, we will continue to expand our online degree programs, drive online enrollment, scale our digital courseware portfolio, and expand the reach of our Talent Development Services for corporations. We are also investing to drive operational excellence across the organization. We will continue to streamline, standardize, and automate our workflows, particularly for publishing and for our back office operations. On the customer-facing side, we will drive improvements in student acquisition and enhance our direct-to-consumer capabilities, including our e-commerce experience. As we noted in our earnings release, we are modifying our adjusted EPS metric to exclude the impact of certain non-cash items directly related to acquisitions, particularly the amortization of acquired intangibles. We do not consider these non-cash amortization charges to be indicative of our ongoing operating and underlying performance. Amortization of acquired intangibles amounted to $22 million in the first quarter or $17 million on a tax-adjusted basis, resulting in the newly defined adjusted EPS of $0.85 per share compared to $0.54 as it was formerly defined. For fiscal '21 and fiscal '20, Wiley's adjusted EPS, as it is newly defined, was $4 and $3.30, respectively. Going forward, we will only report on and guide to this newly defined adjusted EPS metric. And finally, now onto our outlook, given the first quarter performance and leading indicators, we are reaffirming our fiscal '22 guidance. Total Wiley revenue is expected to be up by mid- to high single digits to a range of $2.07 billion to $2.1 billion. Adjusted EBITDA is expected to range between $415 million and $435 million, with profit gains on higher revenue tempered by investments to accelerate growth initiatives. Adjusted EPS, as it is newly defined, is anticipated to range between $4 and $4.25, reflecting investments and a higher effective tax rate. Again, this is a reaffirmation of our EPS guidance, but now excludes the non-cash amortization of acquired intangibles totaling $1.20 per share. Free cash flow is expected to range between $200 million and $220 million. While cash earnings are expected to be strong, we see certain headwinds compared to fiscal '21, including higher CapEx, higher net cash taxes, and higher annual incentive compensation payments for fiscal '21. And one final note, current FX rates are relatively unchanged from the prevailing rates when we issued our guidance in June. And now I'll pass the call back to Brian.

Thanks, John. Let me quickly summarize key takeaways, and then we'll open it up to Q&A. Q1 was a good quarter for Wiley, with strong revenue and earnings growth, driven by good performance across all segments. The long-term favorable trends that have defined our markets continue to march forward, including the shift to open research, the migration to hybrid and online education in both university and corporate settings, and the increased adoption of digital tools and courseware for learners. Also, the ever-growing need of corporations to fill critical skill and talent gaps. Wiley's growth strategies are tightly aligned with these trends, and this is reflected in our current performance and full-year outlook. Some variability remains from the pandemic as our global markets adapt to the new realities. Nonetheless, we remain confident in our expanding markets and in Wiley's outlook as we continue to meet the growing global need for research and education. As always, we remain close to our customers so we can rapidly adapt to market developments and new opportunities. We continue to make significant progress in ESG and sustainability. As an impact company, Wiley is working to unlock human potential by enabling discovery, powering education, and shaping workforces. The engagement of our Wiley team is very high, and we're all energized by our mission as we work to increase the success of millions of learners and researchers worldwide. I want to thank our colleagues everywhere for their continued accomplishments, their dedication to each other and to our mission. I remain grateful to work with each and every one of them. One final note, we have targeted an Investor Day for late October, but we've now decided to push it back by 6 to 9 months. We want our Investor Day to be substantive and in person and to provide additional long-term clarity. The current COVID-affected environment is not conducive to a productive long-term discussion, but we do expect better visibility as we make our way through the fiscal year. In the meantime, we'll continue to be active in our investor outreach and provide regular updates on our continued progress in executing our growth strategies and driving improvements in sustainability. I will now open the floor to any comments and questions.

And our first question comes from Mr. Daniel Moore of CJS Securities.

I want to start with research. As we look to calendar '22, and I realize it gets blurred as you sort of expand, read and publish in OA, but maybe update us on renewal rates and pricing trends related to the core journal subscription business? Any sense for what percentage of business is booked today and how we're looking for '22?

Sure. Absolutely. You always ask a good question, Dan. Thanks a lot. As we look ahead for the year, the breakdown of our business across each segment has followed its current trend. In the first quarter, open access has risen to 21% of our research revenue, compared to 13% last year, marking a significant and positive change. Our subscription revenue has decreased from 62% last year to 55% this year, indicating a continued shift. Renewal rates remain strong, though it's still early in the year, and we haven't yet entered the renewal season, which will start next quarter. We anticipate significant growth in open access, along with a gradual moderation in the subscription business. I should mention that our subscription business remains robust, and any decrease has been minor.

Understood. Very helpful. And certainly...

Hey, Dan, this is John.

Yes, go ahead, John.

This is John. I just wanted to add, since you asked about pricing as well. I just wanted to add, as you know, traditionally, we've had relatively moderate price increases from year to year, and we took a pause on that in the last year given the impacts of COVID and some of the budget challenges that our university customers were facing. So we took that pause. But as we now make our way into the next season, we're expecting to resume the nominal increases that we've seen historically for those customers to our traditional subscription customers.

Got it. And it certainly sounds like it, but how is Hindawi performing relative to your expectations? And any concrete examples of that, how that's opening up growth opportunities faster for you?

Absolutely. Hindawi is performing exceptionally well with strong double-digit growth, and we anticipate this trend will continue throughout the year. Recently, we experienced our largest month ever for submissions and publishing at Hindawi. This serves as a validation of our strategy and the rationale behind acquiring it. A significant portion of Hindawi's growth, while still a small part overall, is attributed to the influx of articles from the total Wiley submission pool across the Wiley network, which has also positively impacted Hindawi. Everything is proceeding smoothly; the integration has been successful with minimal disruption, and we are genuinely pleased with our progress. Hindawi is leading the way in terms of growth.

Very helpful. Maybe one more and I'll jump back in queue. But thanks for the increased transparency into your cash flow with the new adjusted EPS calculation. You started to buy back a few shares this quarter once again. The stock kind of 13x that this year's adjusted EPS guide and leverage at 2x, are you considering being more aggressive on that part of your capital allocation budget going forward?

I would say that we will increase our share repurchases compared to last year. In the first half of last year, we held back on the market to conserve cash and assess the uncertain situation with Hindawi, but we resumed purchases in the second half of the year. We are currently on a pace that we feel comfortable with and plan to continue buying throughout the year, being opportunistic when the opportunities arise. Overall, I would say we are at the expected pace for the year.

And our next question is coming from Greg Pendy of Sidoti.

Can you clarify if you are maintaining the free cash flow guidance? It appears to be strong this quarter, possibly due to CapEx-related items that might balance out over the year. Are there any other factors influencing your decision to maintain this guidance that we should know about?

Greg, I would say it's early on in the year. The quarter was favorable, partly driven by strong cash earnings, which we anticipated and significantly driven by working capital timing. So some of that may unwind later in the year. So we're comfortable for sure with the guidance level that we're at. And to the extent that we need to adapt as we make our way through the year, we will. But I would say there's not a lot of evidence in the first quarter that we should change the position we've taken on the year.

Okay. Very helpful. Moving on to Education Services, it seems to be getting a bit more competitive. Can you elaborate on that? Are you noticing that selling individual services is becoming more favorable? Please provide some insight into the situation, especially as enrollments begin to normalize.

Absolutely. The long-term trend we've been discussing is still in effect. The current performance reflects what occurred last year rather than indicating future developments. We are experiencing significant interest from our clients in both traditional revenue share and fee-for-service models. As the financial landscape becomes more challenging, the revenue share model is proving effective, as we leverage our financial strength to help schools meet their objectives. We believe that the enrollment trends towards online and hybrid education will persist, presenting a vast global opportunity that remains largely untapped. Notably, we're seeing significant growth in Educational Services from our partnership with La Trobe University in Australia, where we are assisting 36,000 students in accessing their programs online. The education market is evolving, reflecting changing needs, with consistent demand for our traditional programs and increasing interest in non-traditional offerings. The current situation can be viewed as a natural consequence of the high demand seen last year when many transitioned online. Currently, some students are shifting back to on-campus learning, returning to their jobs, or taking a break, yet demand remains robust.

And to continue now, our next question is from Mr. Daniel Moore of CJS Securities.

Yes. You gave great detail around professional corporate learning and great to see the rebound. Still not quite back to pre-COVID levels. Just talk about the momentum you're seeing there and what type of growth is reasonable to expect from this if this is a new base or run rate? Or if we're still sort of in recovery mode right now?

Great question. It's a very interesting time because what we observed last year, which we found encouraging, is that as the Professional and Corporate Learning businesses adapted to COVID, there was a significant shift in our corporate clients' behaviors that aligns closely with our strategy. One key aspect we noted was the transition of corporate training from in-person to digital formats. Even now, with many workplaces reopened, over 70% of training is still delivered digitally, which is impressive and opens up many opportunities for us. Additionally, as I mentioned earlier, corporations are actively competing for talent, and to attract that talent, they must take various measures. Our offerings play a role in developing that talent, which we find promising. In that segment's results, we have noticed some lingering issues with aspects like test preparation that are struggling to normalize. However, overall, we believe that the performance in this segment is on the right path and supports our long-term strategies, and we are witnessing growth in all the areas necessary to further our strategy.

And if we see digital delivery remaining, the lion's share, is there a meaningful differential in terms of profitability versus those kind of legacy or historic in-person delivery models?

Yes. I'll ask John to comment on that in a moment. Moving forward, the digital delivery enables us to reach significantly larger audiences. In-person training might only occur for one or two days, but digital training is available 365 days a year. This approach also addresses the limitations of training new talent in person, as it allows us to engage with much larger audiences. John, would you like to comment on profitability?

I would just add, Dan, what this is really doing is it's helping to support the recovery of the revenue base and then grow it for the longer term. The fundamental product line is still, at the end of the day, largely a digital product. And so it's essentially building more demand for our current product line, which is largely a digital product. I wouldn't expect it to materially change the margin performance of that business, but it certainly will help improve the volume of that business.

I'd like to discuss the profitability of the two businesses in Education Services. In talent development, we're seeing strong growth and you're reinvesting in that area. What is the path forward to achieving more normal margins over time, such as double-digit or low teens?

So Dan, while we typically don't delve too deeply into the performance of individual product lines, I will mention that the MThree business is currently in a growth phase, specifically within the talent development sector. At this early stage, it is operating at a breakeven level on an EBITDA basis and is growing. This growth is somewhat dilutive to the segment overall when compared to the margin rate within the OPM business due to scale. We are experiencing significant growth during this period, which is a crucial part of our investment strategy for this year. This is contributing to the decrease in profitability for the segment overall this year, but we are confident that it will grow as we establish this business globally.

And lastly, on the University Services side, with re-enrollment slowing somewhat, does it take a little bit longer to get back to those operating margins? Or is this more of just a normalization as you described for this 1, 2, 3 quarter period?

I'm anticipating that over the long term, we will return to the performance levels we have been discussing. We expect the EBITDA margin in that business to be 17% or higher, and we believe we will reach that target. However, I want to highlight that this is a year of investment for us in that area, as we strive to enhance our ability to attract students with improved student acquisition costs and better services. Consequently, we will experience lower margins in the OPM business this year. We have indicated that this situation is primarily due to our investments and some additional challenges related to marketing costs in the short term.

Currently, we don't have any questions in the queue. At this point, I'd like to hand it over to our President and CEO, Mr. Brian Napack.

Great. Well, thanks for the great questions, and thanks, everyone, for joining today. We look forward to sharing our second quarter results in December. Thank you again.

And this concludes today's conference call. Thank you, everyone, for your participation. You may now disconnect.