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

Hello, everybody, and welcome to the 2020 Morningstar Management Behind the Moat Conference. My name is Zain Akbari. I'm an equity analyst on the consumer team. And we're very happy to have CEO, Brian Napack; and CFO, John Kritzmacher, here with us this morning from John Wiley & Sons. We've awarded Wiley a Wide Moat rating based on the switching costs and intangible assets inherent in its Research Publishing, Academic & Professional Learning and Education Services segments. Brian, John, thanks for being with us this morning.

And we're very happy to be here. Thank you.

So I'll start off with some questions. But for those with me -- and please do send in questions using the online tool. I'll be working those in, especially during the last 10 to 15 minutes of the session. But to start, I thought I'd touch on the Research Publishing & Platforms business, which constitutes about half of revenue and is dominated by Wiley's Research Journals business. I guess, first question, on your most recent earnings call, you indicated some possible near-term price pressure as Wiley works with journal subscribers considering the pandemic's pressures. How do you balance the tension between keeping those relationships with research libraries and other subscribers strong on the one hand and the fact that you have an arguably essential product that clients would be hard-pressed to forgo on the other?

It's a great question. The COVID crisis has hit universities around the world financially. And they're all struggling to find ways to offset revenue losses. And so that may translate. We expect to see a little bit of price pressure as we move into the second half of the year, as you indicated. We do believe that we'll be able to offset any of that price pressure notably with growth elsewhere in the business. And that price pressure would come through in our subscription business. So with regard to how we manage that conversation, which is really what you're getting at, Wiley has a position in the marketplace where, as you know, we do have very important product that the universities must have in order to continue to advance their positions as research institutions, and thus, advance their global ranking. So there's really no question about whether they need our product. The question is how do we maintain our relationships in the long run in the face of the needs of our customers increasing or changing. And the answer is, it's a dialogue. We have taken a position over the last few years that we are an ally of this marketplace, that we want a healthy and vibrant ecosystem, which means that we're dedicated to researchers as our North Star, and we're dedicated to the work of those researchers getting to the -- into the public view so that other researchers can advance their research and so that discoveries can be made. For example, we published the first antibody test study, which is now, of course, being used everywhere on the COVID results. And so we really want to advance the interest of research. But we're in a complex dialogue where we are providing a product that has a certain value, and we need to be compensated for it and we always have been. We expect always to be. But the halo that we have gotten over the last couple of years from being a leader in the market of helping to advance Open Access toward a price times quantity model, which helps us, and it helps the universities and the researchers by getting their research out into the public's hands faster and more broadly. We believe that by being a leader through our European transformational agreements with Germany, with the U.K., with other areas, we have gotten the right to have a reasonable dialogue. And we are having reasonable dialogues everywhere across the marketplace. In no cases have we taken a conflict-oriented or hostile approach. We believe that, that's the right approach to take for the longer run for Wiley and for the industry. Wiley has a long history of being a partner to the market, not an adversary. We're the leading society publisher in the world, which means that we partner with the world's leading societies, academic societies, to help them succeed. We partner with tens of thousands of universities worldwide. And that's a very productive relationship that spans our research and our education businesses. And based upon that trust, we have reasonable negotiations. And as I said, to come back to the net upshot of it, we believe that the price pressure that we will see in our subscription business will be offset by the growth we are seeing in our Open Access business and in our platforms business and in our corporate solutions businesses in the research areas.

I see. I see. And actually I'm glad you touched on Open Access because that certainly does remain a concern for many investors, but it certainly doesn't seem to have affected you negatively. Over the long term, how does changing the payer model affect the Journals business' pricing dynamics considering on the one hand, the subscription model has been selling access to quality research that can't really be found elsewhere, while on the other hand, the Open Access has been selling authors on leadership and platform and research dissemination that one might think are a bit easier to find?

Well, look, the dynamic of the business has been changing over time. And I will say, to be clear, we are working hard to accelerate our Open Access businesses because we like them. Why do we like them? We like the old business, too. Make no mistake, it's a good business, a very profitable business. We like the model a lot. But over time, it became harder and harder for universities to justify the prices of these large subscriptions. And so while they continue to pay for them, they weren't necessarily happy about it. You flip to the -- and that's one price, and you get all this research, and people have access to it. And that's -- again, it's a very nice subscription-oriented business model. We don't see it going away, just to be clear. But alongside of that, we have this growing Open Access business that is fundamentally different in the decision-making processes and the paying processes and in the pricing dynamics, which is the core of the questions that you were asking. So it moves from a situation where a librarian on behalf of the university is buying access to things that they themselves are not using to a model where a researcher and a funder are paying to get into the best quality brand that they can so that they can advance their careers and they can advance the interest of the funding body. Researchers have no option. They don't want an option. They want to publish in our journals because they're among the best journals in the world. And when they do so, they pay. There is a transaction fee. That transaction fee is a strong transaction fee, and -- which is profitable, just as profitable as the old business. And that transaction fee is increasing. Why can that transaction fee increase? That transaction fee can increase because the researcher's career depends on being in the high-quality journal brand. They -- for $1,000, one way or another, that researcher wants their study to be published in one of the best brands. And we have a portfolio of 1,650 of the best journal brands in the world. So the pricing dynamic is actually positive. So once we move from the one-size-fits-all subscription model to the price-times-quantity model, we have 2 benefits. One is the pricing dynamic that I just mentioned. You want to be in the journal, you have to pay the price. And the second dynamic is just as important, which is all of a sudden, the volume of publishing determines your revenue growth. And if you are a high-quality publisher publishing high-quality journals and attracting the authorship that wants to publish in your journals, you get rewarded. It's what we call the P x Q model, price times quantity. And if both of them have healthy dynamics, it makes you feel pretty good about the business in the long run. So we're feeling pretty positive about where that's going. And what I would say is as the world moves toward more of an Open Access model, the volumes have increased significantly. And we are gaining more than our share because we are a publisher of choice and the publisher of choice for many researchers. So we very much like the dynamic, and we're seeing significant double-digit growth in the volumes of publishing across our business in subscription model, in Open Access model, and that leads to volume increases elsewhere in our business. So we're seeing -- and volume allows us to continue to gain the revenue from our subscription model because the more that's in there, the better the value proposition is, seeing significant growth there. And on the Open Access side, it translates directly into revenue. And as I say, the price dynamic is actually very favorable because if you are the quality publisher, you get -- the customers are willing to pay.

I see. I see. And you touched on a number of article submissions. And as research budgets and article submissions rise, while demand for top-notch research also moves higher, is there an opportunity to monetize your article output in some different ways, perhaps on the corporate and platform sides?

Absolutely. So the first answer to the question is back in the traditional business. You asked about the platforms and corporate sides of the business, which together represent about 20% of revenue already and are growing significantly. But in the core business, we currently publish a very small proportion of the articles that we receive. So we have the opportunity to publish significantly more, generating more of the value in the subscription model and more revenue in the P x Q model. So your question was about as we move toward more articles published, that helps our revenue model dramatically in the core business, which is 80%. Now as we move to the platforms businesses, the more research that's published, the more demand there is for platforms. The more organizations that require those platforms to publish and to push and to promote research, the more revenue opportunity there is. And so we're absolutely seeing significant growth and significant growth in usage, dramatic growth in usage right now of research. And as we always remind people, through our research platform, Literatum, we now distribute, not publish but distribute half of the world's research: The leading platform, the dominant platform in research distribution. And that is an important place to be because it gives us enormous insight into what's going on in the marketplace. And beyond that, this increase in volume as the research ecosystem gains more funding and more researchers putting out more research, there are consequently more consumers of that research trying to capitalize on that research. That includes corporations. And so we're working very closely with corporations to both access the audiences that we have access -- that we serve and also to monetize the research in new and different ways. So I could go into great detail on the nature of those businesses. But the premise of your question is, are there opportunities that the increase in revenue to -- into the ecosystem translate to beyond our publishing business? The answer is yes.

I see. I see. And to what extent are the relationships that you develop in that research unit crossover with the academic publishing side and the Education Services? Do clients ultimately see you as one Wiley? Or is it more about the individual businesses on their own?

It's a very important question. The Wiley brand name is 213 years old, and it has stood for quality in publishing throughout that period. It has stood for the advancement of knowledge and learning throughout that period. And we are a great partner with the marketplace through the world's leading universities in multiple ways through the world's leading corporations, and that overall provides a halo effect to all of our businesses. So to be clear, if you take the example of George Mason University, which is one of our very valued publishers, university of about 36,000 students in the D.C. area. George Mason, which is a large university, George Mason turns to Wiley to be their OPM provider, their services provider because of the Wiley halo. Because of the -- they -- because George Mason is also our R1 University, research one, one of the leading research universities in the world. And when they wanted a partner, they wanted a partner that would -- that had -- that would be around for the long run, that shared their value system. So from a branding perspective, it's extremely valuable. The decision-making processes, however, across our businesses are typically different. So a university President may make a -- or a -- the Dean of a school may make an Education Services partner decision, a professor may make a curriculum decision for a classroom, a librarian may make a decision about the Research subscriptions. So decision-making is disaggregated, but the brand of Wiley is extremely strong worldwide across these businesses, and that helps us -- it helps us universally, and that is a calculable number. It's not ethereal. As analysts watching the company know, we do publish a tremendous amount of book content that comes out of our research unit. We publish that on the education side because the customers tend to be more education customers. And there are opportunities to go from our education businesses back into our service businesses, which -- back into our publishing businesses, which we could go into in great depth. There are these opportunities, but primarily at this point in time, it is the Wiley brand, the Wiley partnership approach that works for all of our businesses.

I see. That makes sense. Well, perhaps taking that as an opportunity to segue into your Academic & Professional Learning segment, which is about 35% of revenue and includes Wiley's academic textbook, alternative learning material, corporate training, development and assessment businesses, test prep and a few other businesses. Textbook sales have obviously been strained for a long time with digital and rentals and used sales. How should investors think about a floor associated with the textbook and other legacy publishing businesses, particularly in light of the use of alternative nonbook learning materials in the classroom?

It's a great and a very, very important question for anybody watching this segment. I have for -- I've been the CEO of Wiley for 3 years. And during that period of time, I have seriously avoided predicting bottom, and I'm not going to do so now. But what I will tell you is that the book portion of Wiley now represents 13% or less of Wiley's revenue overall. That -- a significant portion of that is in our -- all of that basically is in our Academic & Professional Learning segment. And it is declining significantly as a proportion of sales. We believe that we're now at the point where our digital businesses are, which -- in which we are seeing -- digital product lines, in which we are seeing significant growth, are at a stage where we're able to offset -- almost able to offset the decline. COVID, quite interestingly, has significantly impacted the print book part of the business and not surprisingly. Book stores have been closed, universities closed in the spring, and students were migrated abruptly online, which helped us in a great many ways. But nonetheless, businesses that required physical product or physical in-person interactions suffered. A smaller part of our business, but significant, nonetheless. But what it has done is it has forced the students and forced the professors online. And that doesn't mean just to digital materials. It does mean to digital materials because there isn't a textbook, a physical text book online. But it's forced them to digital course -- materials, but more importantly, it's forced them to our courseware product. And so all of us -- because as a professor, you need in a digital world to be able to assign things without telling the students in an in-person classroom. You need to track their homework. You need to make sure they're reading. The students need to access not just the content but each other and the professor. So our courseware products, which are an ecosystem of learning, were tailor-made for this COVID moment in time. The reason I'm pointing this out right now is clear: COVID has proven to the world that the digital materials are as good or better, and the research all support this. And it has shown them that they can get that improved product for a cheaper price because the digital products are, by and large, cheaper. And so that works for everybody, great price/value proposition. So in answer to your question about how to think about it, we start with the premise that our job was always to provide a high price -- high value-to-price proposition to students. And now we're seeing that. And that growth is coming through -- the evidence is coming through quite strongly. So we're seeing strong double-digit growth in our digital product lines in courseware -- content and courseware. We are continuing to see the declines in print, but we -- honestly, we like where that business is going in the long run.

I see. And -- as a part of that digital side of things, very interesting, the acquisition of zyBooks, in particular, and how that addresses the cost of textbooks and Wiley's position into the future. For those types of alternative digital learning materials, how has the need to keep content current at a more regular interval than what might have happened with print text while keeping costs low changed Wiley? And how have you been able to inject more dynamism into the firm to ensure that, that momentum is kept?

Yes. So the truth is, as we moved to digital courseware, and zyBooks is a fantastic example, and it's growing extremely well. As we moved to digital content and courseware, we moved from a model where every 3 years, we revise the textbooks at great cost and never reuse that content to one where we are continuously publishing. Continuously publishing just means that we keep the content fresh at all times. There's -- and that is a much lower cost proposition than these large capital-intensive new additions and revisions. In the zyBooks model, there is no textbook. In the zyBooks model, you get your hands on, on the work itself, and you start working, and you access content as you need it. The content doesn't become obsolete until the world changes. And at that point, we can make minor changes and continue to publish. It's transparent to the student and to the professor. That improves the economics of this business significantly because we're -- we don't have these ups and downs of our capital investment, we also don't have the ups and downs of our revenue. It's continuous and it's growing. In the old model, we publish a textbook. And in the first year, we might sell a bunch of them. But in the second and third year, we did very poorly on that book because it was in the use of rental markets or out in a PDF. There's no PDF of zyBooks that can be downloaded online. And so we really like the dynamic. And from the customer's perspective, we are providing them with a lower cost product, higher value, greater engagement. And these products have very high Net Promoter Scores from students, not just professors. So that model is great. And so you asked me, how does that model inform the rest of our publishing business? The answer is directly. We're putting more and more products into the zyBooks model, more titles into the zyBooks model to become continuously published, to become -- to take all the lessons that zyBooks has brought to us. And we are taking those lessons of continuous publishing and migrating to the rest of our list. So we're transforming the way we publish, which leads to a business where the student is happier, the professor is happier, and we're happier because we have continuous revenue off of these products based upon high engagement and good results.

I see. I see. And perhaps this question crosses over into the Education Services segment as well. Your education business has historically been countercyclical, considering the relationship between student enrollments and the economy. But the pandemic is obviously quite different from past recessions. What have you been seeing and hearing from your partners early in this academic year?

Yes. You're right. Traditionally, the postsecondary education has been countercyclical. Typically, that has been on a sort of an 18-month lag from when the economy goes south. In this case, we're seeing it sooner. What we're -- and when you ask what we're hearing from our partners, it's really, if you think about how the education service business works, it's what they're hearing from us. And the reason I say that is that we are -- among the primary sources of value that we provide for universities is we help them to find new students, new students that work for their programs, new students that fit so that they stay and they get a graduate -- they get their degrees, and which we do at a very high rate. In other words, very high graduation rates. But we kind of [indiscernible] for these universities. And so we are the leading indicator. In other words, we have our finger on the pulse of what's going on in the marketplace. And here's what we saw. Initially, when COVID hit, the market was a bit stunted. Everyone was confused and concerned. And so we saw a significant decline in leads. In other words, the amount of students interested in potentially attending one of the programs. It didn't take long, though, for that to bounce back to historic levels and then to higher than historic levels. And so what we're seeing now -- and that has persisted through today. So what we're seeing now is we're seeing an elevated demand for postsecondary education of an online form. What we expect to see, and this is quite public, we expect to see -- because a lot of people are studying it, we expect to see some level of decline in enrollment overall in university education, postsecondary enrollment. That decline is variously reported to be upward -- up to 10%. We think it might be less than that. Early indicators are that it will be. But from Wiley's perspective, what has happened is everyone has gone at least hybrid and many have gone fully digital. So in other words -- and how does that benefit us? Well, first is the direct answer to the question that you've seen. So the -- so we're seeing an elevated level of interest and enrollment in our online programs as students have viewed that as a very good alternative in an uncertain world right now. So instead of going physical or going to a university in a traditional sense, they're going digitally. And that's working out very, very well. But in addition to that -- so in addition to that benefit to Wiley from an enrollment perspective with our services businesses, it has also been that -- a key catalyst in accelerating the adoption of digital courseware, as I was talking about earlier. So while the pandemic has had a negative effect on some of our smaller businesses, and certainly our traditional print businesses, our strategic businesses, our digital content and courseware business in education, our education service businesses where we find, enroll, matriculate and graduate students with postsecondary degrees on the education side, these have -- it has benefited us significantly. So we don't see the countercyclical nature of the business playing through uniformly because we expect to see some level of decline overall in enrollment. We do expect the increase to come later overall as we expect this traditional countercyclical thing to continue. But in the short term, we're seeing benefit, and we think that benefit is a lasting benefit, meaning that there -- it's not just, hey, there's a pandemic going on, and say, online education is actually a pretty great way to get a high-quality degree from a high-quality brand.

I see. So a real change in the way people are starting to think about things and perhaps moving more formally to that Education Services segment. It's only about 15% of sales, but contains what should be your main growth engines long term, I would think, and Online Program Management, where you help universities run their online to create programs, then M3, in early career talent, training and development. So let's -- perhaps sticking with the pandemic to start. So it's obviously early and there's a near-term need versus a potential long-term acceleration in distance and online learning. But what signs are you seeing about the pandemic's impact on online learning's long-term future? And what does that do to change your development plans, if at all?

Good question. We believe that the pandemic is having a very positive effect on the adoption of online degrees. And so we feel very good about that. We see that. It's not just a sense. We see that in our lead generation, in our conversion to enrollments, in our fall enrollments. We actually have a window straight into it and we believe that we're on a very good track. From a long-term perspective, we believe that we have been -- have set ourselves up across our businesses, but most certainly in the education service business, to be in the place where the market is going to be. So in other words, skating to where the puck is, to use the hockey metaphor. And we skated to where the puck is, and we believe that we have the right set of services, of business models, very high quality, the Wiley brand name, the connection to this long history that we will continue to be the partner of choice. We need to be clear that universities don't really have the -- tend to not have the core capability to deliver education in an online world. They have the ability to manage an infrastructure, physical infrastructure. They have the ability to hire professors. But recruiting students online, supporting them through a digital educational experience over the course of months, years, they don't have those abilities. They need companies -- partners like Wiley to help them do that. So we think we're particularly well positioned. There's no pivot in our strategy necessary because we were there, and we are very confident we were there already. And we're confident that we're positioned properly. And so that's, I guess, the -- what I would say about it. We'll see that play out in the years to come.