Earnings Call Transcript - WLY Q4 2020

Operator, Operator

Good morning, and welcome to Wiley's Fourth Quarter Fiscal Year 2020 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, Brian Campbell. Please go ahead.

Brian Campbell, Vice President, Investor Relations

Good morning, and welcome to Wiley's fourth quarter and fiscal 2020 earnings update. On the call with me are Brian Napack, our President and Chief Executive Officer and John Kritzmacher, our 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 obligations to update or revise forward-looking statements to reflect subsequent events or circumstances. Wiley provides non-GAAP measures as a supplement to evaluate underlying operating profitability and performance trends. These performance trends do not have standardized meanings prescribed by U.S. GAAP and therefore, may not be comparable to the calculation of similar measures used by other companies. This should not be viewed as alternatives to measures under GAAP. Please see the reconciliation and explanations of all non-GAAP financial measures presented in the supplementary information included in our press release. Unless otherwise noted, we will refer to non-GAAP metrics on the call, and all variances 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 webpage. I'll now turn the call over to Wiley's President and CEO, Brian Napack.

Brian Napack, President & Chief Executive Officer

Thanks, and good morning, everyone. On behalf of all Wiley's colleagues, I'd like to extend our thoughts to the many whose lives have been impacted by the global health and economic crisis. The past hundred days have reminded us of the critical importance of community, and how much we all rely on each other. We've been uplifted by neighbors, essential workers and health professionals as they work to care for all of us. At Wiley, we've seen our community in action with scientists curiously developing testing, therapies and vaccines, with educators innovating and adapting to ensure that learners can continue their developmental journey through these difficult times. We stand in solidarity with those affected by the egregious acts of racial injustice in Minneapolis, Louisville and elsewhere in the world, and with those bringing awareness to this fundamental problem. The core values of community are essential to Wiley’s culture; everything that we do is to work to improve access and affordability in education, and to facilitate scientific progress, such as medical breakthroughs. Now more than ever, our work can help to heal, recover, and rebuild trust. Like most businesses, Wiley’s short term performance has been adversely impacted by the pandemic and the resulting economic dislocation. At the outset, our priority was, of course, to ensure the safety and wellbeing of our colleagues. We transitioned very smoothly to work from home worldwide. Throughout, we've continued to support our customers, partners and communities without interruption. From a performance perspective, we drove hard through the fourth quarter and finished the year ahead of our April 9 expectations. During this period, we also generated good momentum in our key strategic areas of focus. The company is fundamentally strong. We benefit from modest leverage and ample liquidity. Nonetheless, we do face near term uncertainty as universities and corporations work to adapt to new market and economic conditions. Consequently, we're stepping up our business optimization initiatives significantly in response to the pandemic, while carefully prioritizing the timing of investments to best serve our customers. Despite short term challenges brought on by COVID-19, our key businesses—peer reviewed research, online education, and corporate e-learning—continue to enjoy long-term positive trends. This is because each is an essential component of the global economy. In fact, many of the long-term trends driving these businesses, on which we've built our strategy, are accelerating in our favor as a result of the current situation. Given the limits of our near term visibility, we will not be providing annual guidance for fiscal ’21 at this time. We will, though, be transparent in the quarters to come about what we're seeing, and we will provide important data points and KPIs as we make our way through the recovery period. I want to recognize the tireless work of Wiley’s colleagues. They have kept Wiley's ship sailing strongly forward through the work from home transition, and have largely thrived in terms of productivity and engagement. The team has continued to hit our goals and milestones while mitigating any impact on our operations brought on by the pandemic. Through the period, we've been securing important subscription agreements even in the hotspot areas, increasing publishing output, supporting educators through their urgent transition online and driving strong cash flow collections. In our regular surveys, an overwhelming majority of our colleagues report feeling both happy and productive. My heartfelt thanks to the entire team for their accomplishments, dedication and comradery. I’m pleased to report that a few of our international offices have already begun to reopen, although we do anticipate an extended and careful period of transition as we go back to the office. Through the crisis, we’ve made large amounts of scientific and medical research, digital courseware and online education services freely available. We specifically opened up thousands of COVID-related research studies to help the search for effective testing, therapies and vaccines. And we've helped many universities, schools and companies go virtual as their physical operations have been disrupted. We're also working hard to keep the broader community supported wherever possible. Among other things, we are honored to have partnered with two organizations: GetUsPPE.org, with whom we've developed over a million face shields and other PPE for healthcare workers worldwide, and Digital US, which is focused on working to equip workers with essential digital skills over the next 10 years. This will be even more critical going forward given massive job dislocation. We've always been proud of what we do in research and education, but it's coming into crisp focus in the ongoing health concerns and economic insecurity caused by the coronavirus. Wiley is not immune to the disruption caused by the pandemic, but it's important to recognize that longstanding market trends remain highly favorable for Wiley’s businesses. Many of these are accelerating due to COVID-19. The value of peer reviewed research is unquestioned and the demand to publish and consume research continues to increase even through the crisis. The pandemic has caused colleges, universities and students to embrace online education with unprecedented speed. To date, educators have had to be more reactive and strategic but already the sudden shift to remote learning has made digital courseware delivered at a compelling price point obviously essential. Rising adoption and usage stats show this. Long-term, the wide scale transition to digital education will benefit our growing service businesses as people migrate to efficient, affordable, career-focused education to gain degrees and online credentials that they need to get jobs in an even more challenging labor market. On the corporate side, employers will continue to need help finding, training and upskilling employees with hard-to-find skills in areas such as information technology, and there's now increasing recognition of cost-effective and powerful solutions. We are well aligned with our content, platform and service offering to help universities and corporations address the persistent skill gaps that exist today and going forward. Let's turn to the quarter's results. Note that we'll be excluding the impact of currency when discussing performance. As I said earlier, COVID-19 had a significant impact on the fourth quarter with revenue, adjusted EPS and adjusted EBITDA down 2%, 44% and 23%, respectively. The challenges introduced by the pandemic include the shutdown of retail bookstores and the temporary prioritization of essential goods by online retailers which significantly impacted print book sales. The shutdown of testing sites for college entrance and certification exams impacted our sales of test prep courses. The closure of corporate offices naturally led to shutdowns in in-person corporate training, which impacted the sale of our corporate assessment and training programs. With university closures, there were delays in journal subscription agreements, although we did finish the quarter strongly. The GAAP EPS loss of $2.83 this quarter reflected two non-cash, non-recurring impairment charges. In education services, we recorded a non-cash goodwill impairment charge of $110 million. Performance below acquisition expectations and COVID-related headwinds contributed to a determination that the carrying value of the education services segment exceeded its fair value. That said, we remain fully confident in the strong revenue growth and profit potential of the business. Second, we recorded a non-cash trade name impairment of approximately $90 million related to the Blackwell brand. This reflects the decision to simplify our brand portfolio by unifying our research journals under the Wiley brand and will result in a sharp reduction in the use of the Blackwell trade name acquired in 2007. The charge is entirely unrelated to COVID-19 and reflects the already expected future performance of the research segment. We also recorded a restructuring charge of approximately $15 million related to our multi-year business optimization program. This was higher than prior estimates due to additional actions related to the impact of COVID-19. I'll say more about our efficiency measures, but I will say that we are controlling our expenses closely during the crisis, including temporary pay reductions for May for my direct reports and for other Wiley colleagues globally as we navigate this uncertain economic phase. Collectively, the three unusual charges for the quarter amounted to $3.49 a share. Despite the obvious financial impact of COVID-19 on Q4 performance, we had some significant accomplishments. We closed important journal subscription agreements and drove strong double-digit open access growth. We achieved impressive research supply-and-demand metrics, including article submissions and platform usage. We generated momentum for digital courseware adoption before and during the transition to remote learning. We added four new university partners in education services, and we recorded $168 million in free cash flow for the quarter. For the full year, we continue to see solid revenue and profit growth in our research and education services segment, while academic and professional learning was weighed down by challenging market conditions for print books and the fourth quarter impact of COVID-19. Revenue rose 3% while adjusted EPS and adjusted EBITDA declined 21% and 8%, reflecting the dilutive impact of acquisitions, investment in growth and the impact of COVID-19. Free cash flow was up 16% over prior year but below fiscal year expectations, primarily due to COVID-related customer payment delays. Across Wiley, we made strong progress in fiscal '20 on our most important strategic priorities. This included publishing more in research, driving growth and momentum in digital courseware and online education, and improving our operating efficiency. Today, nearly 80% of Wiley's revenue is generated from digital products and tech-enabled services, and this continues to rise. Finally, our acquisitions this year bolstered our positions in IT career skills training, digital courseware and corporate research products and platforms. The integration of prior acquisitions is proceeding as expected. Now, let's take a look at our business segments. Our research business had another good year with revenue up 2% and adjusted EBITDA up 4%, even after factoring in COVID-19. In the quarter, revenue declined 1% while adjusted EBITDA was flat. As noted, we continue to see strong double-digit growth in open access publishing, and calendar year 2020 journal renewals were steady. Demand metrics were exceptional in fiscal '20 with article submissions up 13% and Wiley Online Library usage up 25%. In the year, we continued to drive the market forward with comprehensive national agreements in the UK, Sweden and Finland. Finally, our add-on platforms business grew 11% with eight new clients and recorded a 97% retention rate, further extending our market leading position in the distribution of research content. Wiley research continues to hold a very strong market position with our strong portfolio of top-tier journals publishing and a growing volume of research. Our focus for fiscal ’21 is consistent with our stated strategy and recent momentum. We will continue to drive article volume growth and lead in open access. We must successfully navigate the calendar ’21 renewal season as COVID-19 uncertainty weighs heavily on universities. Our calendar ’20 subscriptions are locked in through December, and our calendar ’21 season kicks off in September. Our content remains essential to researchers inside these institutions, so we're cautious and confident. We will continue to expand our presence in China given the huge opportunity there to source and publish more high-quality research. We will continue to grow our research revenue streams in corporate solutions and in research platforms. We made a couple of small acquisitions that we're excited about in the corporate space, one for spectroscopy software and databases that allow researchers and companies to interpret data, and a SaaS career center platform for societies, associations and other organizations. Just last week, we announced the deal to manage the science careers job board for the American Association for the Advancement of Science (AAAS), the world's largest scientific society. This is just another example of Wiley consolidating its leading position with societies, enabling more upsell opportunities. In fiscal ’21, we also will continue to drive the optimization of our journal portfolio and our workflows to both improve our efficiency and to enhance the researcher experience. Despite the world's uncertainties, research remains a fundamentally strong business with a recession-tolerant profile and steady strategic momentum. As noted, academic and professional learning was severely impacted by the pandemic shutdowns of universities, workplaces and bookstores. The most affected sectors for Wiley have been book publishing, mainly due to bookstore closures; test prep due to testing site closures; and in-person corporate training programs due to corporate office closures. All of these have shown improvement in May but the near term remains challenged due to COVID-19. Academic and professional revenue and adjusted EBITDA for the year were down 6% and 28% respectively. We're down 16% and 49% for the quarter. On the bright side, the transition to remote learning has driven accelerated demand for digital courseware with strong fourth quarter momentum in our critical learning platforms, WileyPLUS, zyBooks and Alta. It's important to note that digital courseware and other digital content comprise 59% of Wiley higher education revenue in the year compared to 35% for print books and 6% for other products. We also saw good momentum in corporate e-learning with record usage for our CrossKnowledge SaaS learning platform and strong new corporate signings with three new logos signed this year compared to 43 in the prior year. The question marks for us in academic and professional for fiscal ’21 are fall university enrollments, pace of return to work and corporate training budgets; we expect to have more clarity in the fall. Near term uncertainty is evident across the segment due to COVID-19; long-term trends look favorable due to the increasingly robust migration to online learning in university and corporate settings. This move is being driven by the increasing market acceptance of the value proposition of digital learning platforms, which deliver strong learning outcomes at a reasonable price. We will continue to focus investment on high demand subject areas—business, technology, engineering, science and math—and we will continue to deliver the highest quality content on digital learning platforms to drive adoption, usage and education impact. We will leverage the accelerated shifts to digital courseware and e-learning by delivering a compelling value proposition and innovative pricing models. Across the segments, we have major efficiency initiatives underway to address the near-term headwinds by transforming our workflows and better aligning our operating models with customer segments. Education services delivered another solid year with revenue up 42%, 11% organically, and our EBITDA margin tripling from 3% to 9%. Growth was driven by strong double-digit growth in fee-based education services revenue. We added four new university partners in the quarter: Drake University in Iowa, the University of Iowa, Methodist University in North Carolina and Point University in Georgia. At the same time, we expanded our partner support during the COVID crisis, providing additional services, such as technology resources and assistance with course production to get schools online quickly. We continue to improve the efficiency of the ed services business by optimizing the student lifecycle from acquisition to graduation by fine tuning customer acquisition costs and by driving student retention rates. The business remains on track to realize our fiscal ’22 goal of 15% EBITDA margin. The integration of M3 is proceeding as planned, although COVID-19 does present a near-term challenge as companies adapt to these shutdowns and evaluate their hiring plans. As a reminder, M3 delivers job-ready IT talent to the world's leading corporations. We are mitigating the short-term demand issues with innovative programs that will help us accelerate out of the COVID pause by training and stockpiling high-potential talent so that it is ready to deploy when the market opens up. Since the acquisition, we've realized revenue and cost synergies across our growing tech education portfolio by integrating our two bootcamp businesses, by driving collaboration between M3 and our IT courseware group, and by developing joint go-to-market approaches for M3 and CrossKnowledge. As COVID-19 appeared, we saw a steep decline initially in new student lead volumes as the public focused on the crisis at hand. At the same time, colleges and universities closed and were forced to go online overnight. For us, the net result of this disruption remains an unclear picture of fall enrollment. Although lead volumes have generally rebounded and schools are increasingly clear about their fall plans, we expect to have a clearer view of enrollment as we get closer to the start of schools in the fall. While fiscal '21 is difficult to predict, we do see a continued acceleration of the movement toward online education by universities, by corporations and of course by students. This is reflected in the continued high interest in our education services. This trend will be helped by a challenging job market which typically, after delays, causes enrollment to rise. In short, post-COVID, people will be looking for ways to quickly and cost effectively get the education that can lead to better outcomes. Wiley continues to lead in the market in helping universities and corporations find, educate and develop talent. We're well positioned with 69 university partners, hundreds of degree programs and a growing list of corporate clients that look to Wiley to deliver work-ready talent. Key areas of focus in fiscal '21 for ed services include moving quickly to address changing conditions, adding new partners and programs through our high quality portfolio, continuing to optimize the cost of student acquisitions and making the entire student journey more efficient. We have reached an improved EBITDA margin and also finished the integration efforts while leveraging revenue and cost synergies across our portfolio. Near-term uncertainty is the reality but I think we're at an inflection point for effective, career-enhancing education in the form of online and hybrid degrees and nontraditional certifications that allow people to rapidly and affordably meet the specific and constantly changing needs of the labor market. I like where we sit. With that, I will pass the call over to John.

John Kritzmacher, Chief Financial Officer

Thank you, Brian. As a reminder, we issued our annual guidance last June and updated it for our Q3 earnings report on March 4 to reflect the impact of subsequent acquisitions and foreign exchange movements. On April 9, about three weeks or so into the pandemic shutdown across the U.S. and Europe, we lowered our revenue, adjusted EBITDA and adjusted EPS guidance and we revised our free cash flow guidance given the lack of visibility around the timing of customer payments. Our guidance as of March and then the April revisions are shown here. Our fiscal year actuals are shown in the right hand column. As you can see, our colleagues rose to the challenge in April, closing new business, ratcheting down expenses and collecting on our receivables. Overall, our results trended favorably to our COVID-adjusted guidance. In the end, we're estimating that the pandemic shutdown adversely impacted the quarter's revenue and EPS by $30 million to $35 million and $0.15 to $0.20 respectively. Our adjusted EBITDA margin for the year was 19.4%. Earnings for the full year reflect our investments in long-term growth initiatives and strategic acquisitions. The inorganic earnings impact of acquisitions was $0.33 per share of dilution for the year, including interest expense. Free cash flow of $173 million finished ahead of prior year by $24 million or 16%, primarily due to improved working capital performance. Nevertheless, we estimate that approximately $30 million of delayed customer payments slipped into fiscal year 2021. Our cash flow from operations was favorable to prior year by $37 million. As you can see, we continue to deliver solid cash flow performance over time. This foundational strength will enable us to stay the course in executing our strategic plans during the challenging period ahead. Our balance sheet continues to give us the flexibility and capacity to invest, acquire and return cash to shareholders. Our leverage ratio at year-end was 1.6, well below the 3.5 times cap under our revolving credit facility. In addition to our healthy cash flow and balance sheet, we have ample liquidity with $200 million of cash on hand and undrawn revolving credit in excess of $700 million at year-end. Our strong record of returning cash to shareholders continued with fiscal year share repurchases and dividends totaling $124 million. Our current dividend yield is over 3% and our next annual dividend review is scheduled for later this month. As a reminder, due to the economic downturn, we have suspended share repurchases until further notice. The next slide shows our capital allocation and how it's trended over time. We've consistently taken a balanced approach between returning cash to shareholders and investing for growth. In fiscal 2021, we expect to be opportunistic on the M&A front with continued focus on expanding our capabilities and scale in strategic areas. We project CapEx spend to be closer to $100 million, with investment focused on the development of tech-enabled services and platforms, as well as workflow and process redesign. We will resume share repurchases as the economic environment and our business improve. And as already noted, our annual dividend review will take place later this month. The pandemic uncertainty precludes us from issuing annual guidance at this time. We simply do not have sufficient clarity around the depth and duration of the ongoing healthcare crisis and the economic downturn. We are also withdrawing our fiscal '22 targets given such limited visibility. We are actively monitoring several key indicators to effectively manage the near-term performance of our business. On the research side of our business, research funding and university finances are fundamentally important. On the education side of our business, campus reopening, student enrollments and university finances, which are tightly intertwined, are driving factors. Our corporate training businesses are dependent upon office reopenings and the duration of reductions in corporate spending on professional development. Although our near-term visibility is limited, our financial position is very strong and we are well positioned to successfully navigate this downturn. Across our portfolio, our business models are predominantly digital and online and as Brian noted, we continue to see good momentum in key strategic areas. Broadly speaking, our performance largely depends on the timing and success of unwinding global social distancing measures. When that happens and clarity returns to the global economic environment, we expect to resume providing annual guidance. In the interim, we are responding quickly to reduce costs and accelerate our efficiency initiatives to mitigate the adverse impacts of the economic downturn. Among the actions we have recently implemented, we initiated incremental restructuring actions, incurring a charge of $15 million this quarter for actions that will generate run-rate savings of approximately $30 million annually. The executive leadership team and the board unanimously agreed to take six-month pay cuts ranging from 15% to 30%, which are not financially necessary for Wiley, but are important in demonstrating leadership's shared commitment to our colleagues across the company who will be impacted by deferred salary merit increases. We have implemented discretionary spending controls across the company. We're reviewing our real estate portfolio for rationalization given success to-date with working from home and the potential workforce benefits. We are significantly accelerating our process reengineering and technology and sourcing initiatives to enable our strategic plans and reduce costs. We're going well beyond belt tightening to simplify, standardize and automate our workflows for sustainable efficiency gains. To further mitigate the impact of the economic downturn, additional cost savings actions are anticipated as we make our way through the coming fiscal year. And with that, I'll now pass the call back to Brian.

Brian Napack, President & Chief Executive Officer

Thanks, John. For over 200 years, Wiley has navigated uncertainty with operational discipline, fiscal prudence and strategic focus, and we'll continue to do so through this one too. To recap today's main messages, Wiley’s fourth quarter performance was adversely affected by the pandemic. We ended the quarter ahead of our April 9th expectations while continuing to generate good momentum in our key strategic areas. Our business is fundamentally strong and is reinforced by modest leverage and ample liquidity, and we do face near-term uncertainty in our markets due to COVID-19 and its economic impact. Nevertheless, long-term trends remain very favorable for our core business in peer reviewed research, online education and corporate e-learning. Our strategic plans and investments are all focused in these areas, and we are carefully prioritizing the timing of our investments and accelerating our business optimization initiatives in response to COVID-19. Finally, our near-term visibility is just too limited to provide specific guidance at this time. Wiley is one of the most enduring companies in American history for a reason. Our financial position, cash generation and business fundamentals remain solid. We have a long history of adapting to a challenging and changing world. And while today's disruption across the globe presents challenges, our business as always remains essential to the global economy, our core strategies match very well with future market needs. Stating the obvious, it's been a difficult period for all. I wish you and your families good health and good luck as we continue to navigate through it and once again, I want to thank our Wiley colleagues around the world for their incredible work and commitment and for their remarkable accomplishments this quarter and this year. I'm grateful for the opportunity to work with such an extraordinary team. With that, we welcome your comments and questions.

Operator, Operator

Thank you. Our first question comes from Daniel Moore with CJS Securities.

Daniel Moore, Analyst, CJS Securities

I want to start with the journal subscriptions. Can you give us a sense of where we stand today in terms of calendar '20 versus calendar '19—up or down by how much—and roughly what percentage of business is closed to date?

John Kritzmacher, Chief Financial Officer

So with regard to subscriptions, Dan, as you know, we've got an evolving model where we are now entering into both pay-to-read and pay-to-publish models in some countries in Europe. So direct comparison across two subscription models signed versus prior year is a little bit different. But I would say in terms of our signing business for this year, inclusive of both the mixed models and our subscription agreements, we are even with prior year. We actually, as we noted in the comments earlier, made very good progress in April in closing additional agreements. And we expect to conclude most of our subscription agreements now during the balance of our first fiscal quarter. Again, this is all with regard to calendar year '20; the calendar year '21 subscription season gets underway in the September/October timeframe.

Daniel Moore, Analyst, CJS Securities

And on that note, what are you hearing from your university journal customers at this point? Obviously, most if not all are under pretty extreme financial stress. What are some of the dialogues and steps that you're taking, whether it’d be temporary price concessions, volume discounts, and/or maybe eliminating noncore titles, just as they navigate through these pretty unusual budget times? Any color there would be extremely helpful.

Brian Napack, President & Chief Executive Officer

So, as you said, we feel confident in the essential nature of our content, but you're right to point out that universities and university budgets have been under pressure, or expected to be under pressure. We expect that to be evident as we go forward, really more about next year than this year. To date we've been very close to the market. We've been speaking with our customers and we've closed a bunch of deals during the COVID period. We saw no excessive price pressure during that period or under the point as you might worry about. So, so far the signals are good. We continue to keep our ear to the ground. As far as actions, we've been very proactive: we went out early with a commitment to hold prices flat this year. We went public with it before anybody else did anything of the sort. And we were extremely well rewarded in the market for that; the market felt it as an act of good faith. As you know, we have taken the position as a good actor in this market that wants to make sure that the entire ecosystem is healthy and collaborative in support of research. So that was a bold move on our part and necessary, and we believe it is allowing us to get ahead of and secure the ’21 renewals with greater ease and greater confidence. That's basically the story.

Daniel Moore, Analyst, CJS Securities

I'll sneak in one more, switching gears to education services. Obviously, it seems to be in the catbird seat as it relates to the shift to online. Are there any impacts you're seeing from COVID? Clearly, you continue to sign new business. Do we expect to continue to grow at healthy rates in fiscal '21 and if not, why not?

Brian Napack, President & Chief Executive Officer

So '21 is unclear right now. It's easy to say that the COVID disruption is moving everything and everybody online. And in the long run, we believe we are at and beyond that inflection point where that's happening. We can see it in many ways. But we're in an unsettled period right now and we are not going to go out and say that that's going to come flowing through our enrollments immediately. What we do believe is that in the long-term, the trends are very much in our favor. And you see that in the interest level in our services that we're seeing right now. But today, most universities have been stunted by this. They're not making long-term strategic decisions; they're making short-term decisions on what to do to get their students through this term and to support instructors who are adapting to remote teaching. So to date it's been more tactical. I think these trends play out over time. Specifically, since the crisis we saw initially a significant decline in lead generation, which you don't want to see. But happily that fact has bounced back and right now we're at or above our three-year levels even at a time when people don't know left from right. So we're seeing reason for reasonable confidence, but it's really early days; we won't know until fall enrollment season. As that happens, we'll keep you posted. But we are optimistic and we see good tailwinds in this segment as soon as we get through the uncertainty and dislocation that is currently affecting our university partners and students.

Daniel Moore, Analyst, CJS Securities

But as of right now to be clear there's no change to the fiscal '22 targets on that side of the business?

John Kritzmacher, Chief Financial Officer

So Dan, I commented earlier that we're withdrawing the fiscal year '22 targets given the uncertainty ahead of us. What I should point out is while top-line performance is less clear in this environment, we're making a lot of progress on the profitability of that business and so the 15% EBITDA target that we set for that business is well in sight. We've made good progress against that this year. We've delivered 9% EBITDA margin on that business this year, and we see a clear path to getting to the 15% EBITDA margin target that we’ve set.

Operator, Operator

Our next question comes from David Tang with Stifel.

David Tang, Analyst, Stifel

What was the source of the goodwill impairment for the ed services segment? Was it Learning House or was it Deltak, and what drove the underperformance relative to expectations? And then secondly, can you talk about the inventory levels at college bookstores and what your expectations are for the ordering patterns for the upcoming fall semester? Thanks.

John Kritzmacher, Chief Financial Officer

So first, with respect to the impairment of goodwill in the education services business, our balance sheet carries about $200 million in goodwill associated with the combination of the original Deltak acquisition and the more recent Learning House acquisition. As we noted in our comments, the goodwill impairment reflects an underperformance against our acquisition case assumptions and that in particular relates to revenue growth. We had relatively aggressive revenue growth assumptions and over time we've not delivered on those. So in light of the lower performance historically in that business and given the economic headwinds that we see in the near-term, the impacts on universities and potentially on online enrollments, we modeled the business for lower revenue performance in the near-term. The comments I just made to Dan remain the case: we still expect the profitability of the business on the revenue base to be strong, and we are cautiously optimistic about future growth in the business. But given our track record and given what we've seen in the near-term in terms of COVID-related headwinds, we found that the carrying value was in excess of the book value, and so we made an adjustment to goodwill. We haven't attributed the impairment specifically to Deltak or Learning House as they are integrated now. I would note we paid a higher revenue multiple for the Deltak business at the time of that acquisition in 2012—about four times revenue—while Learning House was acquired at roughly three times revenue. With regard to inventory at bookstores, I would say that what we've observed in the last couple of months given the slowdown in retail is that inventories have remained relatively flat. Bookstores have tended to lower their ordering during this period that they've been shut down, because without retail traffic they're not doing much to restock shelves. Now that retail outlets are beginning to reopen, some have online business and all are slowly beginning to reopen, first with curbside and then moving to fully open. That is in early days and I won't necessarily claim that this is a sustainable trend yet. But in early days, we are seeing some improvements in ordering as the bookstores prepare to continue serving retail traffic. Again, it's early days. We still are just opening. It won't be fully unwound until bookstores are fully up and running and students are back on campuses.

Brian Napack, President & Chief Executive Officer

I'll add just a little bit to that answer. Interestingly and not surprisingly, consumer book sales industry numbers have continued relatively strong through this period. People at home go online and they buy books. The channel mix of course has changed, but volumes have been very good. That's especially true in the consumer business categories we focus on—business books and similar segments—which continue to grow. On the education side, it's a very thin period right now for book sales. This is not a time when college students are buying books in volume, which is understandable given campus closures. It will be very interesting to see what happens in August when bookstores typically stock up for the college fall season. That will be a function of fall enrollment because bookstores order against expected course enrollment. So that will be an important indicator to watch. Having said that, we are seeing significant movement toward digital materials. Digital courseware has been growing nicely for the last few years and has accelerated. As students and instructors move to digital materials, physical units may decline, but we gain multiple units of digital engagement and recurring value through courseware adoption and usage. So we like that shift and if we see inventory and sell-through issues this fall, some of the recovery will come back to us in digital. The key number to watch is fall enrollment.

Operator, Operator

Our next question comes from Daniel Moore with CJS Securities.

Daniel Moore, Analyst, CJS Securities

Just obviously doing everything that you can, John and Brian, to mitigate any near-term lost revenue via some of the restructuring efforts, taking aggressive cost actions even executive pay, et cetera. Netting that out, is there a way to think about potential margins to EBIT—maybe just a broad range—in the areas that maybe you're under more pressure from a revenue perspective in the short-term?

John Kritzmacher, Chief Financial Officer

Dan, in the absence of guidance, it's really hard to comment on margin ranges in the go-forward business. I think to get a handle though on what the go-forward business looks like, start with thinking about the different businesses we're in and how they're impacted by the slowdown. For example, in the research business as we talked earlier, most of the calendar year '20 subscription revenue and the mixed read-and-publish agreements have been signed, so they're effectively locked in through the calendar year and then we'll see what impacts we have around library budgets when we make our way through the renewal season in the fall. The incremental margins on research sales, as you can imagine, are quite strong. Across other businesses and academic and professional learning, which is where we've had most of the adverse impacts in terms of top-line performance, we see a combination of pressure on book revenue, which has reasonably strong variable margins but not on the order of the margins that we see in research. And within that segment, there are also some training services that have high margins. So modeling those out where we have the most impact, they have different margin profiles within the segment. In education services, as Brian said, the market ahead is a bit uncertain. Overall in that segment the overall profitability is relatively low and we're working on building that up, so we have confidence in bringing that back. But I think if you take a look at the mix of what we see in revenue performance, you can begin to interpret where margins for the business will head next year.

Daniel Moore, Analyst, CJS Securities

Maybe one or two more, and I'll let you get back. M&A, I think you said was dilutive by $0.33 to fiscal '20. Is that the right way to think about it?

John Kritzmacher, Chief Financial Officer

The inorganic impact for fiscal '20 was adverse to the tune of $0.33, yes.

Daniel Moore, Analyst, CJS Securities

And any commentary on the direction of that dilution as we get into '21? I know you're not giving guidance, but any color?

John Kritzmacher, Chief Financial Officer

Yes, Dan, I would only say that we expect all of that to improve. In particular, some of that dilution comes from the inorganic impact of Learning House. We're making good progress around the integration of Learning House into the ed services business and, as we've been saying, driving the EBITDA margin in the direction of 15%. So we'll see an improvement there next year. Also, some of the dilution comes from our Newton and zyBooks acquisitions. We're integrating and gaining ground rapidly in terms of sales of those products. So I also expect that the dilutive effects of those acquisitions will be substantially lower as well.

Daniel Moore, Analyst, CJS Securities

Lastly for me, just some really interesting commentary that Brian had around M3. I think you said you were continuing to train and stockpile high-potential talent for when demand increases. So just remind us of the revenue model: is that sort of on your dime if it requires incremental investment and you hope to be placing people later? Just the dynamics of that would be really helpful. Thank you.

Brian Napack, President & Chief Executive Officer

For those that don’t know, basically what M3 does is a terrific and innovative business model where it works with leading corporations and in the majority of cases their clients are the world's leading financial institutions—names you would know like Morgan Stanley, Bank of America, HSBC and so forth. They have developed a strong niche. They work with those companies to fulfill specific hiring needs. For example, a client may say they are opening a development center in a new location and they need a cohort of junior developers. M3 sources talent from universities and runs a training program to prepare and place those people directly into jobs. For a typical arrangement, for a period—often two years—those trainees are on our payroll and we charge them out to the client. After that period, they convert to employees of the client at a very high conversion rate. So that's the model. The revenue model is that we're getting paid from day one by the clients at a rate comparable to what they would ordinarily pay for an entry-level employee, and we pay the trainees as they ramp. Historically, M3 did a lot of in-person training. Since the acquisition, we've integrated M3 with our online bootcamp capability, so M3 can now deliver training virtually with much lower fixed costs. Now what has happened with COVID is that many clients have paused new hiring orders. We have retained virtually none of our existing client relationships; alumni programs continue, and the number of trainees in those programs has been steady and we've added some new ones. But new bespoke orders have slowed. To mitigate that, we are recruiting and training cohorts of students even without a specific placement order; we are effectively stockpiling talent. We are doing that on our investment—on our dime—but because training is virtual, costs are relatively low. When client demand resumes, we'll have cohorts of trained developers ready to place. So we are balancing short-term investment in training against longer-term placement revenue. We remain excited about that business and how it extends our education services portfolio and builds on our career strategy. Bad timing, of course—nobody expected this—but we think we're dealing with it well.

Daniel Moore, Analyst, CJS Securities

Yes, absolutely. It's helpful. I appreciate it.

Brian Napack, President & Chief Executive Officer

We remain really excited about that business and how it extends our education services portfolio, builds on our career focus and our strategy. When we acquired M3, they did most of their trainings in person. We had an internal online bootcamp that we merged with M3, so now M3 can do all of its training virtually and doesn't need the fixed infrastructure that was required for in-person training. That's an example of the integration and synergy that we like to drive—acquisitions that benefit from our existing capabilities.

Operator, Operator

Our next question comes from Matilda Darsana with Barclays.

Matilda Darsana, Analyst, Barclays

I was wondering: research publishing was down on a constant currency basis 2% in the fourth quarter. I was wondering because you mentioned delays in renewal subscriptions due to COVID-19. Isn't it the case that usually the subscription renewals are taken at the end of the prior year? So I was just wondering how exactly COVID-19 impacted the research and publishing segment?

John Kritzmacher, Chief Financial Officer

So the subscription base in the research journals business is recognized ratably over time for the majority of the subscription models that we deliver. In particular, our digital model is recorded ratably over the 12-month calendar year. In the quarter, we had delays in signing some of those subscription agreements. Subscription agreements are typically closed between the months of October and March and April. Those that are recorded in March and April can have a three- or four-month effect depending on when they're recorded for the calendar year, because their revenue recognition goes retroactive to the first of the year. So having some small delays in the month of April has a multi-month timing effect on that period. Some of those subscriptions were delayed into the next period. Of course, we'll see the benefit of signing those agreements in the months of May and June, but that's the sort of timing factor you would see: revenue recognized over time and a delay in signing translates to a timing impact on the quarter.

Matilda Darsana, Analyst, Barclays

Okay, thank you.

Operator, Operator

I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Napack for closing remarks.

Brian Napack, President & Chief Executive Officer

All right. Well, thank you all for joining us today. We will look forward to giving you updates and news, and presenting our first quarter results in September. Thanks everybody.

Operator, Operator

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.