Earnings Transcript for WLY - Q3 Fiscal Year 2023

Operator: Good morning, and welcome to Wiley's Third Quarter Fiscal 2023 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: Thank you, and welcome, everyone. Joining me today are

Brian Napack: Hello, everyone, and thanks for joining us. First, I'll state the obvious. Wiley's Q3 results and revised full year outlook are simply not what we expect to deliver to our shareholders. As you know, we've been navigating a mix of unpredictable macro and market-specific headwinds. High inflation, low consumer confidence, a tight job market and ongoing geopolitical disruption have all taken a toll. And in our markets, we've seen demand pressure in education, driven by lower consumer spending in university enrollment. Our results in Research were challenged unexpectedly this quarter by our decision to pause Publishing in a high-growth part of Hindawi, which I'll talk about later. All of these dynamics contributed to our revenue and earnings underperformance. Absent the pause in Hindawi, Wiley's core growth engines of Research and Talent remains strong. For the quarter, Research revenue, excluding Hindawi, was up 2.4%. Our strategies remain tightly aligned with the trends driving the knowledge economy, and we're making good progress in executing them. We continue to see good demand for our transformational publishing models and each quarter, we're adding dozens of corporate partners to our research solutions network. We're also seeing strong upsell demand from our existing solutions partners, validating the overall Research strategy. We will see this revenue opportunity begin to materialize in fiscal '24. Looking ahead, we're targeting substantial improvement in our performance and profit by reducing the drag of our own complexity and by improving our cost structure. We've made steady progress on simplification and optimization, including realigning our segments, restructuring parts of the organization, streamlining key processes and reducing real estate. The actions we've taken already this year will yield run rate savings of over $60 million annually and we're accelerating these efforts. We've talked in past calls about how a simpler Wiley is a better Wiley. And today, Christina will talk about some of the things we're doing to address this. Notably, we've just divested the test prep business. It was nonstrategic for Wiley and subscale, so we made the choice to exit. This was a small transaction. But it was a key step in our ongoing work to simplify the portfolio and focus our attention on our strategic growth areas. There's no sugar-coating it, Q3 was a disappointing quarter in a challenging and unpredictable year. We need to deliver better results and accelerate the operational improvement work already underway. I'm fully confident in our future and why we will continue to make the moves needed to drive consistent performance and increasing profitability. As we reported last quarter, we've now realigned our education segments around the customer. The new segments, Academic and Talent replaced the former Academic and Professional Learning and Education Services segments. The goal of this realignment is to better serve the customer and to do so more efficiently by aligning product development, go-to-market and infrastructure. This will help us to unlock synergy while eliminating overlap and redundancy in our processes and in our systems. Our new Academic segment consists of two business lines

Christina Van Tassell: Thank you, Brian. We are obviously disappointed by our results this quarter and our revised outlook. It has been a highly unusual and unpredictable time for Wiley on several fronts, but we have a path forward, and we are moving with urgency and focus. Let's begin with our segment performance, starting with Research. Research Publishing revenue declined 3% this quarter, primarily due to the Hindawi special issues pause. As Brian noted, we continue to execute on our strategy to convert legacy read-only models to our transformational read and published models while building on our cascade strategy of finding rejected articles another more appropriate home within the Wiley portfolio. Research Solutions revenue rose 6% or 4% organically, driven by our platform services and science databases. We continue to make great progress here in expanding our partnership network, signing 77 society and corporate partners for services ranging from research consulting and production to delivery platforms, corporate events and education. An important note here, it does take time to onboard these partners. So in many cases, the revenue from these signings will not materialize until fiscal year '24. Solutions is a growth driver for us. And so in Q2, we increased our investment in the space. Adjusted EBITDA in Research declined 7%, primarily due to Hindawi revenue decline and investments to expand our editorial capabilities and scale our solutions offerings to meet partner demand. A quick note, the unusually strong currency fluctuations this year brought to light that our adjusted EBITDA in Research was being adversely impacted by royalty expenses denominated in British pounds, but derived from U.S. dollar revenue. We normalize for this FX impact, resulting in an adjusted EBITDA benefit of $2 million for this quarter. We also amended Q1 and Q2 adjusted EBITDA by $3 million each quarter. The currency impact was insignificant in prior year. We believe this change more adequately reflects our true operating performance. Year-to-date, Research revenue was up 2%, while adjusted EBITDA was down 5%. Our adjusted EBITDA margin was 33.9% through 9 months versus 35.6% in the prior period. This is primarily due to the in-year investment to scale Research Solutions. Let's turn to Academic. The current environment remains challenging. Academic Publishing revenue was down 8%, driven by declines in both print and e-books. Digital courseware remains a bright spot with zyBooks revenue growing over 30%, with strong institutional demand and large course wins in STEM and business disciplines. University Services revenue declined 11%, driven by ongoing enrollment headwinds and lower revenue share in our long-term renewals. Spring enrollment in our programs was lower than anticipated, down 6%. We recorded a material impairment for University Services this quarter due to the market-related challenges we've been discussing. Adjusted EBITDA was down 20%, mainly due to the revenue decline. Year-to-date, Academic revenue was down 9% and adjusted EBITDA was down 27%. Our adjusted EBITDA margin was 18.3% through 9 months versus 22.9% in the prior year period. While margins are down mainly due to the revenue performance and mix, we have made good progress this year in reducing our expense base. And as Brian noted, we divested our test prep business and we'll continue to identify additional cost savings and operational improvements. Let's turn to Talent, where we saw good growth in talent development and corporate training. Revenue for the quarter was up 18%, driven by strong placement and robust volume in our assessment and learning solutions. As mentioned, Wiley Edge added five new multinational corporate clients this quarter and grew placements by 38% over prior year. Let me say a few words on our corporate training line. This has been a consistent performer and contributor to Wiley. Before COVID, our training was largely done in person. COVID forced it online and now is even more compelling as a hybrid solution. Here, we're providing high-demand soft skills training and workplace assessment tools. They are delivered to employees through digital platforms and through an authorized distributor network of independent consultants, trainers and coaches. Our brands include Everything DiSC, The Five Behaviors, Leadership Practices Inventory as well as pre-hire assessment tool called PXG Select. These solutions help organizations hire and develop highly effective managers, leaders and teams. Companies continuously invest in team development, so it remains a strong growth engine with very attractive margins. Back to our results in talent. Adjusted EBITDA for the quarter was 2% due to investments to scale talent development and some inflationary pressure on placement costs. Year-to-date, talent revenue rose 28% and adjusted EBITDA 21%. Our adjusted EBITDA margin was 21.2% through 9 months versus 22% in the prior year period. Now let's review our financial position. Free cash flow year-to-date was a use of $22 million versus a prior year source of $77 million. The large variance reflects quarter-to-quarter working capital fluctuation, lower cash earnings and restructuring payments. The latter is related to targeted workforce reductions and real estate optimization. Importantly, we expect the working capital issues to resolve in Q4. We'll talk about our cash flow outlook on the next slide. CapEx was $75 million through 9 months, $6 million lower than prior year, and there were no material acquisitions. We remain active but patient on the acquisition front, primarily focused on adding scale and capabilities in Research. As of January, we had $126 million of cash on hand, an undrawn revolving credit of $553 million. As a reminder, we amended our revolving credit agreement in Q2 to extend more than $1.3 billion in credit capacity through November of 2027 with approximately $200 million in existing credit commitments to remain through the current maturity date of May 2024. Our total credit facility size remains at $1.5 billion. Net debt-to-EBITDA ratio was 2.1 at the end of January compared to 1.9 in the prior year. Finally, we allocated $58 million year-to-date to dividends and $24 million to share repurchases on par with prior year. Our current dividend yield is over 3%, and we've acquired 540,000 shares at an average cost of $44.47 per share. On to our outlook. In Q2, we began to see material headwinds in Academic, namely enrollment and consumer spending. As a reminder, we revised our revenue guidance downward in December, given what we knew then. At that time, we also reaffirmed adjusted EBITDA and free cash flow and guided towards the lower end of the range for adjusted EPS. In Q3, Academic headwinds were worse than expected, driven by the combination of macroeconomic challenges and the strong labor markets impact on enrollment. In addition, the Q3 emergence of the Hindawi publishing interruption has pulled down our full year expectation by up to $30 million in revenue and up to $25 million in EBITDA. With these unexpected challenges in Q3 and Q4, we are taking our revenue outlook down by an additional $45 million to $60 million. This leads us to reduce our adjusted EBITDA guidance by $30 million to $40 million to a range of $395 million to $410 million. We're lowering our adjusted EPS outlook by $0.40 to $0.50 to a range of $3.30 to $3.55. This reflects lower projected EBITDA and higher interest expense. Finally, we're lowering our free cash flow outlook to a range of $160 million to $185 million. The primary drivers are lower projected cash earnings and higher payments for restructuring, particularly the closing of our tech development center in Russia. Our CapEx range remains $110 million to $120 million. In terms of FX impact on our outlook, currency is a $60 million headwind at the revenue line. Since most of our global business is denominated in U.S. dollars and given our large expense base in Europe, we remain largely self-hedged from an earnings and cash flow standpoint. On to our critical simplification and business optimization work. We are well underway in our multifaceted multiyear plans. Our objective is to drive both performance and profitability, and our plans are built on the ongoing review and active rapid rationalization of our business portfolio. Our commitment is to focus Wiley on its core growth and profit engines while improving the economics of our product portfolios. Beyond just realigning our segments, we continue to reallocate investment to our best growth and profit opportunities such as those in Research and Talent and prune our portfolio where it makes the most sense. We recently restructured parts of education, rightsizing them to reflect the market realities and generating important savings. As noted, we recently sold our test prep business with further reviews underway. Organizationally, the alignment of our segments is improving both the speed and execution while eliminating redundancy and waste. Around the company, we are streamlining our core processes and workflows with tech-enabled solutions. One example of this is the reengineering of our highly strategic but costly area of research content development and publication. This initiative is enhancing our publication process end-to-end by driving automation and intelligence from submission to publication. As a result, we can significantly reduce the cost and labor intensity of the whole process while increasing quality, data, capacity, speed and customer engagement. It's early days here, but we are encouraged by our progress to date, and we're already starting to share these advances as solutions to our clients. On the restructuring front, we recorded a $9 million charge in Q3, stemming from the official closure of our Russia tech development center. Our year-to-date restructuring charges totaled $45 million. Elsewhere, we've continued to reduce our global office footprint by 22% this year and 1/3 since 2020. Combined, these actions are expected to yield a run rate savings of approximately $60 million, $30 million of that is expected this fiscal year and is reflected in our current outlook. We will continue to identify permanent cost savings as we relentlessly focus on operational excellence. All of this is freeing up capital to support both improved profit and growth. While our margins have declined this year due to revenue shortfalls and investments in Research Solutions and Talent, we've also made steady progress in our optimization efforts. We see many opportunities to expand this program and then engage outside advisers to help identify additional improvements that will drive future performance and materially increase our operating margin over time. We'll update you further on our progress in June. And with that, I'll pass the call back to Brian.

Brian Napack: Thanks, Christina. Let me quickly summarize the key takeaways for the quarter before we go on to Q&A. Above all, our Q3 results and full year outlook were below expectations and simply not good enough. Like many, we're facing strong and unusual market headwinds this year, and these unexpectedly increased in the quarter, especially in education. Add to this, the publishing pause in a high-growth program in Research and the result is a surprising and unsatisfactory quarter and lower expectations for the year. We're committed to meaningfully improving Wiley's performance and profitability and are both executing and accelerating our simplification and optimization plans. We'll provide more detail on this in June. And as always, Wiley's strong balance sheet and annual cash flow continue to allow us to reinvest in profitable growth while also rewarding long-term shareholders with dividends and share repurchases. All that said, we are very confident in Wiley's future. Our core growth engines are strong, our strategies remain well aligned with the long-term positive market trends and we continue to execute our strategic commitments. Today's unusual environment demands that we act decisively to fuel our best opportunities while also driving structural and operational improvements that ensure we grow more profitably. We expect to share meaningful progress in the quarters to come as we make our way to our October Investor Day. As always, I want to thank our colleagues around the world for their exceptional efforts and continued execution through this very challenging period. This global team's steadfast commitment to our mission, our customers and our colleagues is simply remarkable. This community is special, and I'm thankful to be part of it. With that, I'll now open the floor to any comments and questions.

Operator: [Operator Instructions]. We'll take our questions from Daniel Moore with CJS Securities.

Daniel Moore: A lot to unpack. I'm going to focus on Hindawi, one, and some of the cost restructuring and how that might drive a rebound in profitability, two. Starting with Hindawi, the $30 million revenue impact for fiscal '23, $25 million in EBITDA is very helpful. What would Hindawi revenue have been without the impact for the full year? In other words, what are special issue programs kind of as a percentage of Hindawi on a run rate basis today?

Brian Napack: Yes. We were on track to achieve about $85 million in revenue with Hindawi. The special issue program is a significant part of the Hindawi program. It's been very successful for us and that represents over half of Hindawi's revenue for the year. So it's important to know that when we shut this down, which we did because we had to protect the integrity of our brands and need to get ahead of it, we were also putting the pause on a significant part of the program. Of course, only a small part of that was actually affected of the Hindawi program, but we needed to clamp down.

Daniel Moore: Makes sense. And then just of the $30 million and $25 million, maybe you gave it, I apologize, just trying to cut it up between Q3 and Q4. What was the impact on revenue and EBITDA in Q3? And then that can imply the remainder for Q4.

Christina Van Tassell: I can take that. The impact on Q3 was approximately $15 million. Yes.

Daniel Moore: $15 million revenue?

Christina Van Tassell: Yes, about half and half. Yes.

Daniel Moore: Got it. And about half and half the same for EBITDA?

Christina Van Tassell: Yes. Yes.

Daniel Moore: Perfect. Okay. So just talk, Brian, to the 2- to 3-year -- I guess, is there a time frame or a pathway to backfilling that, recognize that it might spill into '24. But has the 2- to 3-year revenue and EBITDA outlook for Hindawi been impaired in your view?

Brian Napack: Well, I mean, look, the answer is we're still unpacking. And I'm not going to provide forward projections for Hindawi for the business overall. We'll be very happy to talk about all that in June. But this issue relates to the specific program. We put the fixes in place. We feel very good about what we've done. We are reopening the programs. And we are moving forward to clear the backlog and drive forward with our publishing program. As you know, the underlying trends in Open Access and in Research Publishing remained really strong due to consistent funding levels as we always say, and also due to the continuing growth in output in Research. There is no reason to believe that, that consistent demand will not translate into growth rates in Open Access consistent with what we've seen before. And as you know, Wiley continues to gain more than its share of -- due to our strong brands and are really successful and aggressive posture toward Open Access. So we expect to get back to that trajectory. But right now, I'm not going to talk about exactly the timing thereof, we happy to. But again, just to be clear, we've -- we stanch the problem. We shut down the program. We're now reopening again. So you can look at this as a temporary speed bump rather than anything that affects our long-term trajectory.

Daniel Moore: Very helpful. And then maybe, can you provide as it relates to -- I think last quarter was $50 million. In run rate cost savings, up to $60 million. Any more specificity in terms of the biggest buckets of those cost savings in personnel versus platforms? Just kind of how we break those up. And I'm assuming about half of the $60 million falls in '23 with the remainder in '24. Is that -- the '24 is that earmarked for profitability? You can see some of that being reinvested. Just trying to get a sense for how quickly we can rebound in terms of margins and profitability.

Christina Van Tassell: Sure. I'll take that one, Dan. Thanks. Yes, about approximately half of that restructuring is people-related costs, and the other half are things like real estate and other measures. And yes, for next year, $60 million run rate. We have $30 million this year. You're $30 million in the future. And we are in the process of -- in our planning and our guidance and all of that, looking at how much of that we do want to reinvest and how much we want to -- and obviously, when we're reinvesting, we're looking to -- we're looking to invest towards long-term margin accretion and also how much you want to actually drop in the short term.

Brian Napack: Yes. And on top of that, I'll give a little bit more broad color. I did this pretty well in my prepared comments, but we are leaning in and accelerating our programs in both simplification and optimizations. We feel very confident and are seeing the evidence of the effectiveness of our strategies, and we're executing against them like we always said, but we're not comfortable with the way yet that we are converting that into cash and profitability. And so these programs are right now being accelerated, and we're looking forward to talking to you more about that in June as we flesh out those plans and lock in those, what's going to come in terms of savings and when, some of which, of course, will be in '24, but a lot of it will be in the longer term as we move forward.

Operator: [Operator Instructions]. And there are no further questions. I would like to turn the call back over to Mr. Napack.

Brian Napack: All right. Look, thanks for joining the call today. I think it was a good call. We look forward to sharing Q4 and full year results in June and having a good, rich and robust discussion then. Until then, again, thank you very much for attending.

Operator: And that does conclude today's presentation. Thank you for your participation, and you may now disconnect.